Sales, Distribution and Supply Chain Management

Unit 8

Unit 8

Introduction to Supply Chain Management

Structure 8.1 Introduction Learning Objectives 8.2 Meaning and definition of supply chain Self Assessment Question I 8.3 Components of supply chain Self Assessment Questions II 8.4 Supply Chain Management & School of thoughts Self Assessment Questions III 8.5 The process of supply chain management Self Assessment Questions IV 8.6 Objectives of supply chain management Self Assessment Questions V 8.7 Summary 8.8 Terminal Questions 8.9 Answers to Self Assessment Questions and Terminal Questions

8.1 Introduction
Since the beginning of last decade of the twentieth century, there has been a metamorphic environmental change in the business world, which resulted into tremendous growth opportunities ion one hand ad more complicated business problems threatening to even survival on the other. Numerous brands of cars, two wheelers, and consumer goods are available against an at least six years back where consumers were left with very few brands for their choice. With the growth in the industrialization, companies nowadays, are increasing their product portfolio with a focus on quick information, prominent display, ready and intact delivery etc in order to satisfy their consumers with a difference. To attain all of the above goals, companies have to present best quality product at a reasonably least price as and when required, avoiding a stock out situation which has given impetus to the concept of Supply Chain and Logistics Management.

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Objectives of the study: To learn the concept and nature of Supply chain management To understand various objectives To examine briefly about the history of supply chain To develop knowledge about the process and system of supply chain To examine various components of supply chain

8.2 Meaning and Definition of Supply Chain

Supply chain management (SCM) is the combination of art and science that goes into improving the way your company finds the raw components it needs to make a product or service and deliver it to customers. American Production and Inventory Control Society define it as the organistions that successively transform raw materials into intermediate goods, then to final goods and deliver them to customers. Supply Chain Management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption (supply chain). Harland defines Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers. Cooper defines it as an integrative philosophy to manage the total flow of distribution channel from supplier to ultimate user. In simple words, SCM is an integrated management of various functions in the areas of materials, operations, distributions, marketing and services after sales with a customer focus in perspective so as to synergize various processes in the organisation with a view of optimising the total cost. Above definitions of explain us about some of the important features of Supply Chain Management such as Customer focus Retaining existing customers Streamlining of operations Minimum Fixed Cost Elimination of paper work
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Just in time inventory Transparency at all levels of management decisions Developing multiple supply sources for a multiple components Customer value enhancement and cost reduction

Self Assessment Question I 1. Supply Chain Management (SCM) is the combination of ____________________ 2. Cooper defines as _____________ ______________ to manage the total flow of distribution channel from supplier of ultimate user . 3. _____________ ______________ supply sources for a multiple components

8.3 Components of Supply Chain

Companies across the world are looking forward to value innovation as the strategic logic for high growth. Today, it would be difficult to find an organisation, large or small that does not understand the importance of supply chain management and how successful implementation of these principles can have a positive impact on the overall success of the organisation. The following are five basic components of SCM 1. Plan: This is the strategic portion of SCM. One needs a strategy for managing all the resources that go towards meeting customer demand for your product or service. This may include developing a set of metrics to monitor the supply chain so that it is efficient, costs less and delivers high quality and value to customers in the most cost-effective manner. 2. Source: Choose the suppliers who will deliver the goods and services you need to create your final product or service. This involves developing a set of pricing, delivery and payment processes with suppliers and create metrics for monitoring and improving the relationships. And also involves together processes for managing the inventory of goods and services you receive from suppliers, including receiving shipments, verifying them, transferring them to your manufacturing facilities and authorizing supplier payments.
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3. Make: This is the manufacturing step. This involves making schedule for the activities necessary for production, testing, packaging and preparation for delivery. This phase is the most metric-intensive portion of the supply chain, as it requires measurement of quality levels, production output and worker productivity. 4. Deliver: This is the part that many insiders refer to as logistics. It involves coordination of the receipt of orders from customers, developing a network of warehouses, picking carriers to get products to customers and set up an invoicing system to receive payments. 5. Return: This refers to the reverse flow of goods from the customer back to the producer. This is the problem part of the supply chain. It involves creating a network for receiving defective and excess products back from customers and supporting customers who have problems with delivered products. The payment or discount procedures need to be established. Following are other important components of supply chain: 1. Customer service management: Includes the customer relationship management, customer redressal committee, customer quire, order taking, order fulfillment, order delivery, collection of money etc. 2. Product development and commercialization: Includes components such as Product Data Management (PDM), product line development, product launch, product supply, market share, customer satisfaction, profit margins, and returns to stakeholders. 3. Physical distribution, manufacturing support and procurement: Includes components such as enterprise resource planning (ERP), warehouse management, material management, manufacturing planning, personnel management, 4. Performance measurement: Includes the primary level component of logistics performance measurement, which is correlated with the information flow facility structure within the organization. Secondary level components may include four types of measurement such as: variation, direction, decision and policy measurements. More specifically, in
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accordance with these secondary level components, total cost analysis (TCA), customer profitability analysis (CPA), and asset management could be concerned as well. 5. Outsourcing: Includes the primary level component of management methods, and the strategic objectives for particular initiatives in key areas of information technology, operations, manufacturing capabilities, and logistics. Self Assessment Questions II State whether following statements are true or false: 1. Plan is strategic position of SCM 2. Schedule of activities in manufacturing do not involve production, testing, etc 3. Delivery is part of logistics 4. Customer service management is one of the important components of supply chain

8.4 Supply Chain Management & School of Thoughts

Theories of Supply Chain Management Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. Marketing objective of high customer service and maximum sales revenue, conflicts with manufacturing and distribution goals. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan for the organization there were as many plans as businesses. Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such integration can be achieved. Supply chain management is typically viewed to lie between fully vertically integrated firms, where the entire material flow is owned by a single firm and
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those where each channel member operates independently. Therefore coordination between the various players in the chain is key in its effective management. Few authors such as Halldorsson, Ketchen and Hult and Lavassani, had tried to provide theoretical foundations for different areas related to supply chain with employing organizational theories. These theories include: Resource-based view (RBV) Transaction Cost Analysis (TCA) Knowledge-based view (KBV) Strategic Choice Theory (SCT) Agency theory (AT) Institutional theory (InT) Systems Theory (ST) Network Perspective (NP) School of Thoughts: The close inter-relationship between marketing and logistics, i.e. the marketing logistics activities in a marketing channel. Experts acknowledge that marketing and logistics were united in the beginning of the twentieth century, but the two disciplines were in part separated from each other during the evolution of last century. The topic is a business philosophy that may contribute to the re-integration of the research disciplines. Usually, from logistics perspective, the disciplines are treated as separate from each other. Developments in Supply Chain Management Six major movements can be observed in the evolution of supply chain management studies: Creation, Integration, and Globalization, Specialization Phases One and Two, and SCM 2.0. 1. Creation Era The term supply chain management was first coined by an American industry consultant in the early 1980s. However the concept of supply chain in management, was of great importance long before in the early 20th century, especially by the creation of the assembly line. The characteristics of this era of supply chain management include the need for large scale changes, reengineering, downsizing driven by cost reduction programs, and widespread attention to the Japanese practice of management.
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2. Integration Era This era of supply chain management studies was highlighted with the development of Electronic Data Interchange (EDI) systems in the 1960s and developed through the 1990s by the introduction of Enterprise Resource Planning (ERP) systems. This era has continued to develop into the 21st century with the expansion of internet-based collaborative systems. This era of SC evolution is characterized by both increasing value-added and cost reduction through integration. 3. Globalization Era The third movement of supply chain management development, globalization era, can be characterized by the attention towards global systems of supplier relations and the expansion of supply chain over national boundaries and into other continents. Although the use of global sources in the supply chain of organizations can be traced back to several decades ago (e.g. the oil industry), it was not until the late 1980s that a considerable number of organizations started to integrate global sources into their core business. This era is characterized by the globalization of supply chain management in organizations with the goal of increasing competitive advantage, creating more value-added, and reducing costs through global sourcing. 4. Specialization Era Phase One Outsourced Manufacturing and Distribution In the 1990s industries began to focus on core competencies and adopted a specialization model. Companies abandoned vertical integration, sold off non-core operations, and outsourced those functions to other companies. This changed management requirements by extending the supply chain well beyond the four walls and distributing management across specialized supply chain partnerships. This transition also refocused the fundamental perspectives of each respective organization. OEMs became brand owners that needed deep visibility into their supply base. They had to control the entire supply chain from above instead of from within. Contract manufacturers had to manage bills of material with different part numbering schemes from multiple OEMs and support customer requests for work -in-process visibility and vendormanaged inventory (VMI).
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The specialization model creates manufacturing and distribution networks composed of multiple, individual supply chains specific to products, suppliers, and customers who work together to design, manufacture, distribute, market, sell, and service a product. The set of partners may change according to a given market, region, or channel, resulting in a proliferation of trading partner environments, each with its own unique characteristics and demands. 5. Specialization Era Phase Two Supply Chain Management as a Service Specialization within the supply chain began in the 1980s with the inception of transportation brokerages, warehouse management, and non asset based carriers and has matured beyond transportation and logistics into aspects of supply planning, collaboration, execution and performance management. At any given moment, market forces could demand changes within suppliers, logistics providers, locations, customers and any number of these specialized participants within supply chain networks. This variability has significant effect on the supply chain infrastructure, from the foundation layers of establishing and managing the electronic communication between the trading partners to the more-complex requirements, including the configuration of the processes and work flows that are essential to the management of the network itself. Supply chain specialization enables companies to improve their overall competencies in the same way that outsourced manufacturing and distribution has done; it allows them to focus on their core competencies and assemble networks of best in class domain specific partners to contribute to the overall value chain itself thus increasing overall performance and efficiency. The ability to quickly obtain and deploy this domain specific supply chain expertise without developing and maintaining an entirely unique and complex competency in house is the leading reason why supply chain specialization is gaining popularity. Outsourced technology hosting for supply chain solutions debuted in the late 1990s and has taken root in transportation and collaboration categories most dominantly. This has progressed from the Application Service Provider (ASP) model from approximately 1998 through 2003 to the On-Demand
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model from approximately 2003-2006 to the Software as a Service (SaaS) model we are currently focused on today. 6. Supply Chain Management 2.0 (SCM 2.0) Building off of globalization and specialization, SCM 2.0 has been coined to describe both the changes within the supply chain itself as well as the evolution of the processes, methods and tools that manage it in this new "era". Web 2.0 is defined as a trend in the use of the World Wide Web that is meant to increase creativity, information sharing, and collaboration among users. At its core, the common attribute that Web 2.0 brings is it helps us navigate the vast amount of information available on the web to find what we are looking for. It is the notion of a usable pathway. SCM 2.0 follows this notion into supply chain operations. It is the pathway to SCM results the combination of the processes, methodologies, tools and delivery options to guide companies to their results quickly as the complexity and speed of the supply chain increase due to the effects of global competition, rapid price commoditization, surging oil prices, short product life cycles, expanded specialization, near/far and off shoring, and talent scarcity. SCM 2.0 leverages proven solutions designed to rapidly deliver results with the agility to quickly manage future change for continuous flexibility, value and success. This is delivered through competency networks composed of best of breed supply chain domain expertise to understand which elements, both operationally and organizationally, are the critical few that deliver the results as well as the intimate understanding of how to manage these elements to achieve desired results, finally the solutions are delivered in a variety of options as no-touch via business process outsourcing, mid-touch via managed services and software as a service (SaaS), or high touch in the traditional software deployment model. Self Assessment Questions III 1. SCM is a ________________ through which integration can be achieved. 2. KBV refers to _________________________________
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3. Experts acknowledge that _______________ and logistics were united earliar. 4. SCM 2.0 refers to building of __________________ and specialisation.

8.5 The Process of Supply Chain Management

Supply chain process consists of all parties involved directly or indirectly in fulfilling a customer request. It not only includes the manufacturer and suppliers but also transporters, warehouses, retailers and customers themselves. Within each organization such as manufacturer, the supply chain includes all functions involved in receiving and filling a customer request. The supply chain encompasses all activities associated with the flow and transformation of goods from the raw materials stage through to the end user as well as the associated information flows. Supply chain extends from customers customer to suppliers suppliers. In todays rapidly changing business environment, even greater demands are being placed on business to provide right products and services quicker with greater added value to the correct location with no relevant inventory position. A simple model of supply chain process is depicted below.

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A typical supply chain may involve a variety of stages. These supply chain stages include: Customers Retailers Wholesalers/Distributors Manufacturers Component/Raw material suppliers Each stage need not be presented in a supply chain. The appropriate design of the supply chain will depend on both the customers needs and the roles of the stages involved. Following figure represents a simplified form of supply chain process

All process in supply chain fall into one of the two categories: i) Push Process and ii) Pull Process. In pull process, execution is initiated in response to a customer order.
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In push process; execution is in anticipation of customer order. At the time of execution of a pull process, demand is known with certainty whereas at the time of execution of a push process demand is not known but forecasted. Self Assessment Questions IV Match the following: 1. Supply Chain Process 2. Delivery of a superior value 3. Pull Process 4. Supply Chain Involves 5. Push Process

a) b) c) d)

demand is not known fulfilling customer request Flexibility, Innovation & Value Execution of order in response to customer e) Wholesalers/Distributors

Supply Chain Management practice at ABL

ABL is one of the leading producers of medical instrumentation. It produces equipment for the use in hospitals. These large, high-tech machines cost significant amount. Each machine is tailored to the hospitals requirements and installed n a specially prepared space. These units are manufactured n ABLs plant in UK and shipped for installation to hospitals all around the world. ABLs supply chain manager has a passion for integrated supply chain management. Their supply chain objectives are: Bringing the order-to-delivery cycle time down below three weeks, while improving the quality and lowering cost. Involving product designers to change the design for easier manufacturing and customization. Reducing the supplier base so that 20 key suppliers provide about 90% of the supplier volume (one among is the full transport provider) Obtaining the same performance from internal suppliers that is expected of external Involving suppliers in evaluation, design and analysis process Using simple order transactions based on electronic media Enhance customer satisfaction. Measure, monitor and improve the same systematically. Currently, ABL is using a state-of-art ERP software coupled with SCM functions. It has also developed information systems for their suppliers. It has also lined with ExpressWay, a leading logistic company by which the delivery times are monitored continuously. ABL believes in delivering a perfect order i:e right mach9ine for right customer at right place, right price, right quality, right paper work and with right training to the end users.

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8.6 Objectives of Supply Chain Management

The main objective of Supply Chain Management is 'Customer Satisfaction' and to achieve this, all roadblocks are eliminated in between ultimate customer and the raw material supplier. The traditional objectives of SCM is To minimize total supply chain cost to meet fixed and given demand, To maximize the overall value generated. To maximize net revenue this is gross revenues minus total cost. To have the right products in the right quantities (at the right place) at the right moment at minimal cost.

The total cost is composed of raw material and other acquisition costs, inbound transportation costs, facility investment costs, direct and indirect manufacturing costs, direct and indirect distribution center costs, inventory holding costs, inter-facility transportation costs, and outbound transportation costs. The objective of every supply chain is to maximize the overall value generated. The value a supply chain generates is the difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customers request. For most commercial supply chains, value will be strongly correlated with supply chain profitability, the difference between the revenue generated from the customer and the overall cost across the supply chain. For example, a customer purchasing a computer from Dell pays $2,000, which represents the revenue the supply chain receives. Dell and other stages of the supply chain incur costs to convey information, produce components, store them, transport them, transfer funds, and so on.
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The difference between the $2,000 that the customer paid and the sum of all costs incurred by the supply chain to produce and distribute the computer represents the supply chain profitability. Supply chain profitability is the total profit to be shared across all supply chain stages. The higher the supply chain profitability, the more successful the supply chain. Supply chain success should be measured in terms of supply chain profitability and not in terms of the profits at an individual stage. Having defined the success of a supply chain in terms of supply chain profitability, the next logical step is to look for sources of revenue and cost. For any supply chain, there is only one source of revenue i: e the customer. Supply chain management involves the management of flows between and among stages in a supply chain to maximize total supply chain profitability. Along with the traditional objectives, an organization can pursue some of other objectives to achieve its traditional objectives in Supply chain management. Each criterion represents a supply chain issue facing by the firm. The other objectives are Location Transportation and logistics Outsourcing and logistics alliances Sourcing and supplier management Marketing and channel restructuring Inventory and forecasting Service and after sales support Reverse logistics and green issues Product design and new product introduction Information and electronic mediated environment Metrics and incentives Global issues 1. Location: Location decisions are one of the vital decisions for a firm. The main objective here is to cut down the cost of transportation of material flow to the organisation and finished flow of goods to the market. Decisions in this area have perhaps the longest time horizon. Decisions at this level set the physical structure of the supply chain and thus create constraints for more tactical decisions such as transportation, logistics and inventory planning. Engineering tools such,
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as mathematical models of facility location and geographic information systems are very useful in sorting the location choices. 2. Transportation and logistics: It includes all issues related to the physical flow of goods through the supply chain, including transportation, warehousing and material handling. This category addresses many of important choices related to transportation management including vehicle routing, dynamic fleet management with global positioning systems and merge-in-transit etc. 3. Outsourcing and logistics alliances: It examines the supply chain impact of outsourcing logistics services. With the rapid growth in third party logistics providers, there is a large and expanding group of technologies and services to be examined. These include fascinating initiatives such as supplier hubs managed by third parties. 4. Sourcing and Supplier management: This category addresses the issue of outsourcing components and the management of the suppliers who provide them. Make/buy decisions fall into this category. These decisions should involve top managers and strategic thinkers because they can literally define the future of the firm. For example, IBM can outsource its Personal Computers operating software from Microsoft and its central processing unit from Intel. 5. Marketing and Channel restructuring: It includes critical decisions related to getting the products from a firm's factories all the way into the customer's hands. As with facility location, these decisions impact the supply chain structure as well as define an interface with marketing. 6. Inventory and forecasting: It includes techniques for ongoing inventory management and demand forecasting. Stochastic inventory models can identify the potential cost savings from sharing information with supply chain partners, but more complex models are required to coordinate multiple locations. 7. Service and after sales support: This category covers the important issue of providing service and service parts. Some leading firms, such as Saturn and Caterpillar, build their reputations in this area, and this area and this capability generates significant sales. 8. Reverse logistics and green issues: This area examines both reverse logistics issues of product returns and environmental impact issues.
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Growing regulatory pressures in many countries are forcing managers to consider the most efficient and environment friendly way to deal with product recovery. Product recovery includes the handling of all used and discarded products, components and materials. 9. Product design and new product introduction: It deals with design issues for mass customisation, delayed differentiation, modularity and other issues for new product introduction. Traditionally, products destined for world markets would be customized at the factory to suit local market tastes. The customized product is desirable and managing worldwide. Thus if the French version of goods are selling well, but not the German version, then German products can be quickly shipped to France and can be customized for the French market. 10. Information and electronic mediated environments: This category addresses the impact of information technology to reduce inventory and the rapidly expanding area of electronic commerce. It focuses attention on integrative ERP software such as SAP and Oracle as well as supply chain offerings such as Manugistics, i2's Rhythm and Peoplesoft's Red pepper. 11. Metrics and Incentives: It refers to the measurement of both engineering and organisational processes and the related economic motivations. Several recent articles concentrate on the link between performance management and supply chain management. 12. Global issues: It considers the issues beyond local country specific operating environments to encompass issues related to cross-border distribution and sourcing. For example, currency exchange rates, duties and taxes, freight forwarding, customs issues, government regulation and country comparisons are all included. Hence, Supply chain management is indeed a large and growing field for both engineers and managers. Nearly all major manufacturing consulting firms have developed large practices in the supply chain field. Firms can pursue collectively the above mentioned objectives to achieve its cost minimization and revenue maximization objective.

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Self Assessment Questions V State whether the following statements are True or False: 1. The traditional objective is to minimize total supply chain cost 2. The objective of every supply chain is to minimize the overall value generated 3. The higher the supply chain profitability, the more successful the supply chain 4. For any supply chain, there is only one revenue. i.e. customer 5. Reverse logistics means issues concerning manufacturing cost

8.7 Summary
The need for supply chain management has raised due to several business challenges including shrinking product lifecycle, mass customization, increasing outsourcing and most importantly the process of globalization. Todays customer has become very much demanding. Business alliances have to be forged on a global basis to derive the optimum benefits from strategic locations in terms of factors like cost, quality and proximity to raw material or markets so as to respond to the demanding class of customers. The goal of a supply chain should be to maximise overall supply chain profitability. Supply chain decisions have a large impact on the success or failure of an organization because they significantly influence both the revenue generated as well as the cost incurred. Successful supply chain manages flows of product, information and funds to provide a high level of product availability to the customer while keeping costs low. SCM involves developing a set of management practices that will ensure the material, information and cash flows are smooth. Faster material flow will greatly improve responsiveness to customer requirements and will in turn ensure faster money flow back into the supply chain. Collaborative planning and information sharing practices will streamline the information flow in the supply chain. A supply chain management will provide superior value to the ultimate customer.

8.8 Terminal Questions

1. Define Supply Chain Management 2. Discuss five components of supply chain
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3. Discuss evolution of supply chain management 4. Discuss Model of Supply Chain Process 5. Explain with diagram the traditional objectives of SCM

8.9 Answers to SAQs and TQs

SAQ I 1. Art & Science 2. integrate philosophy 3. Developing Multiple SAQ II 1. True 2. False 3. True 4. True SAQ III 1. Strategy 2. Knowledge based view 3. Marketing 4 Globalization SAQ IV 1-b, 2-c, 3-d, 4-e 5-a SAQ V 1. True 2. False 3. True 4. True 5. False Answers to Terminal Questions: 1. Refer to Section 8.1 2. Refer to Section 8.2 3. Refer to Section 8.3 4. Refer to Section 8.4 5. Refer to Section 8.5

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