upply chain management (SCM) has gained considerable importance in recent years in the

Vices sector of our manutacturing and ser-

economy. Good supply chain management helps organizations secure high quality input mate-
rials and purchase
goods at competitive prices. It also allows organizations to respond to customer orders faster.
Often, with good management, organizations have benefited from reduced costs throughout the supply chain.

5.1 WHAT IS A SUPPLY CHAIN?

in
Every organization is engaged
turing firm, they begin this
providing
with
somegoods and services to its chosen set of customers. In a typical manufac-
process sourcing raw materials, converting them into intermediatecomponents, and later
into finished goods. The goods are finally delivered to the customer. Similar activities occur in the case of many service
102 Operations Management

industries also. Typical examples include hotels, healthcare, and automotive repair and maintenance.In the case of hotels
raw materials and specialized services procured are converted into useful service offerings and finally distributed to
customers. Therefore, in every organization, materials flow through a continuous chain, beginning from raw material
suppliers, through intermediate manufacturers to the final assembler, and to the distributors and retailers before it reaches
the end customer.
Supply chains are equally relevant to service organizations. Let us consider an example to understand this. Consider the
personal finance sector and a product such as fixed deposits marketed by a firm such as Sundaram Finance Limited (SFL).
Offering fixed deposits and servicing various customer requirements involves several players, both within and outside SFL.
Typically, there are four major external players in SFL's supply chain. Brokers play a key role in providing reach and aiding
SFL in business development by taking care of the distribution aspect of the overall chain. Moreover, since they come into
direct contact with customers, their performance plays a significant role in overall customer satisfaction.
Banks play the role of handling financial transactions in the system. They also influence the
A supply chain supply chain costs by providing additional features for the company in transferring funds
Includes the chain
from one location to another. The registrar's role in this business is crucial. The Reserve Bank
of entities involved
in the planning, of India and other government regulations require that systems for processing fixed-deposit
procurement, and application forms, printing fixed-deposit receipts and interest warrants, and maintaining rel-
production and evant information are adequately robust and foolproof. Finally, the Indian postal service and
distribution of
products and services.
private courier companies also form a part of the supply chain. They provide logistics support
to the entire operation.
Another service example is the dabbawala network in the metropolitan city of Mumbai.
The forward supply chain begins at the households, where home-prepared food packed in "tiffin boxes" is collected from
housewives and ends at the point of delivery at the respective customer's office. Similarly, collecting the empty boxes from
the customers' office and delivering them back at the respective household constitutes the reverse supply chain. In both
these cases, all issues of supply chain management need to be addressed. These include designing the distribution net-
work and appropriate capacities for the supply chain, demand
management and forecasting, development of appropriate
metrics for supply chain performance, and cost and quality control. Material flow, information flow and funds flow are
characteristic features of such supply chains, as is the case in any manufacturing supply chain.
Figure 5.1l presents a schematic representation of this idea. As shown in the figure, procurement of input material and ser
vices, production of goods and services, and distribution to the end customers are the three
chain. A supply chain, as the name suggests, includes a chain of these entities involved in
major processes in any supply
to the end customer. Consider Liberty, the well-known shoe manufacturer. The
delivering products and services
dummy foot for the shoes is created in Italy,
Korea, Spain, or Germany. The mould for soles also comes from Italy and Germany. The upper portion is designed using the
company's own CAD/CAM facility and some specialized designs are bought from design studios in Europe. The final manulac-
turing is done at their factory and marketing is done by the company's exclusive dealers as well as through other retail outlets.
Central to our definition of supply chains is the fact
that every organization is just one entity in a continuous
External External External chain of the
Supplier 3 supplier 2 supplier 1
Internal
value-creation process. Such a perspective
supplier3
helps every organization to understand the complex
interactions across organizationally and
rated operating units and the need to
physically sepa-
collaborate with
Internal them in order to create value for the ultimate customer.
External
Customer 1 Customer Internal Supply chain management principles require every
Supplier 1 entity that makes up the chain to work in collaboration
with the other entities rather than in isolation. In the

CustoEmxeterrna2l ML
Ultimate
Procurement
Production
absence of collaboration, the value created in one part
of the value chain is
unwittingly destroyed in some other
Customer part of the value chain. Therefore, planning is a major
Distribution process in supply chain management.
Recent competitive pressures have made several
FIGURE 5.1 Schematic representation of a supply chain Indian organizations realize that individual companies
 Supply Chain Management 103

hr themselves cannot face up to

competition. A well-designed product and sound manu- A unique combination
facturing technology may not uitimately deliver value to the customer. These strengths may
of several business
sometimes be offset by a poor set of suppliers or an inefficient distribution network. The key entities engaged in
various stages of the
requirement of supply chain management is the ability to network with several other business Supply chain provides
entities having complimentary skill sets. This unique combination of several business entities a value stream tothe
provides a value stream to the ultimate customer. ultimate CUstomer
For instance, consider Chennai-based Lucas TVS and Bangalore-based Bosch Limited, which
are manufacturers of auto-electrical components. It is well known that
Lucas TVS and Bosch
think that Lucas
market competitive offerings in a certain range of electrical components. Due to this, it is customary
to

transformed this impression. Lucas

TVS competes with Bosch. However, principles of supply chain management have
TVS competes with Bosch not on the basis
merely it does in its factory but also on the basis of its relationship with
of what
Suppliers and customers and the strength of its distribution system. In this case, the supplier, the customer, the logistics
value stream. Therefore, it is reasonable
partner, and Lucas TVS together constitute the supply chain and provide a unique
to assume that the value stream provided by
Lucas TVS competes with the value stream provided by Bosch.
 d e v e l o p a basIS for addressing these questions.

Information and Material Flows in the Supply Chain

igure s.2 Shows the three entities and the nature of material and information flow across the supply chain. Material flow
rom the raw material and component suppliers (back end) through the production system and the distribution chain to
the ultimate customers (front end), whereas information flows in both directions. Information pertaining to the market
demand and the actual order entry status flows from the front end ofthe supply chain in the reverse direction. For instance
when a customer buys a 500-gram refill pack of a beverage such as Boost from a retail chain of stores such as Foodworld
the information is captured by the point-of-sale system and immediately fed into the centralized planning and warehous.
ing division located in the city.
The information is further processed and sent backwards towards the factory to schedule production and subsequenty
to order material from suppliers. Continuing our example, the centralized planning system at Foodworld will aggregate
this information from all retail outlets in the city and schedule an order with the
beverage distributor or the manufac-
turer. This constitutes information flow in the reverse direction
(from the front end to the back end of the supply chain)
Similarly, information pertaining to the actual supply of material by the supplier to Foodworld, actual scheduling, and
dispatch of goods to all the retail outlets of the chain in the city constitutes information flow in the forward direction.
However, the information ftlow is not only bi-directional but also more
when a customer modifies a confirmed sales order by
complex in any supply chain. For instance
amending the delivery schedule and/or quantity, it triggers a host of
information flows in the supply chain and may also call for
be modifhed, material
major changes in the material flow. Production planning may
requirement planning may require updating, and some of the impending deliveries from the
pliers may be moved forward or backward. Collaborative planning and sup-
information flow in the supply chain. SCM involves information-sharing practices will streamline the
three flows are smooth.
developing a set of management practices that will ensure that these

>Material flow > Information flow

---

Purchasing (Planning

Suppliers
M
Stores
Factory

Sales
--Production
-

Warehouse

Distributors Petailers Customer

FIGURE 5.2 Information and material flows in the

supply chain
 Supply Chain Management 105

In the future, sustainable operations may demand that used products are taken back by the manufacturers. Thererore
one can expect a reverse material flow (from the customer to the manufacturer). This is called reverse supply chain. we
discuss this issue in Chapter 3 of the book.

5.2 SUPPLY CHAIN cOMPONENTS

Supply chains are made up of three distinctive entities: the inbound supply chain, the in-house
supply chain, and the outbound supply chain. The inbound supply chain includes a host of raw The supply chain
Is made of three
material and component suppliers. These suppliers respond to the production plan of thee distinctive entities
manufacturer by supplying raw materials and components. The in-house supply chain engages the inbound supply
in the conversion process through which the raw material and components supplied by the chain, the in-house
vendors are scheduled for production and final assembly. Finally, the outbound supply chain com- supply chain, and
th outbound supply
prises the distribution network. This may involve third-party logistics providers, distributors chain.
and retailers.

The Inbound Supply Chain

The inbound supply chain pertains mainly to providing raw materials and components to an
organization. For example, a manufacturer of machine tools may require several varieties of The inbound supply
rolled steel, steel chain pertains
ingots, and steel bars. It may also require several semi-finished components, mainly to providing
castings, forgings and moulded plastic components. Several other input materials include raw materials and
finished sub-assemblies such as motors and drives, pneumatic and servo control systems, and Components to an
electro-mechanical items. In several cases, suppliers provide machining capabilities that are organization.
either not available in-house or are insufficient. Similar examples exist in the case of service
organizations too. In the case of the hospitality industry such as a chain of hotels, suppliers provide transportation facili-
ties, ticketing and reservation, laundry facilities to the guests, and even professional shows and special skills such as medi-
care to handle emergency requirements.
One method to organize the inbound supply chain is to create tiers of suppliers. Figure 5.3 provides an illustration of the
tiers in an inbound supply chain in the case of the automotive industry. Tier 1 consists of OEM suppliers who supply key

Auto-electrical
Wiring harnes Subsystems
Upholstery Transmission Tier 1

Spindles and Insulators and Castings Gears

armatures bushes
Tier 2

Copper plates Spindles and Forging

and wires shafts blanks
A

Copper Iron and steel

Tier 3
manutacturers manufacturers

FIGURE 5.3 Inbound supply chain: an example from the automotive industry
 106 Operations Management

harnesses, upholstery
will be a lew suPpliers providing wiring
One method to
subsystems. For instance, there At Tier 2, there will be a set of component

Organize the inbound transmission, and auto-electrical subsystems. there will be suppliers of
In the case of transmissions,
Supply chain is suppliers related to each subsystem. coordinate with
Tier-1 suppliers and
and shalts. Tier-2 suppliers
to create tiers of castings, forgings, spindles, often source their requirements from metal
suppliers respond their production plans. Tier-2 suppliers
to
the Tier-2 manufactur
firms. In the case of transmissions,
manufacturing and ore-processing and steel manufacturers.
rods. They obtain these from iron
steel in the form ofingots, rolled coils, and
ers
may require alloy manufacturers provide the basic material
for Tier-2 suppliers,
Similarly, in the case of auto-electrical subsystems,
copper
between the manufacturing, planning
and procurement functions in an
A greater degree of coordination is required inbound SCM primarily deals with
an inbound supply
chain. This is due to the fact that
organization to effectively manage and creating competi-
relationships with these sources,
issues related to identifying
sources
of supply, developing strategicshall discuss these issues in detail.
on the basis of these relationships.
In Chapter 7, we
tive positions

The In-house Supply Chain

to the physical configuration of the
The in-house component of the supply chain relates
The in-house conversion process. The raw materials and components sourced from various suppliers are
component of the launched into the production system and converted into useful inished goods. Managing this
Supply chain relates
of the manufacturing system, facilities man
to the physical component of the supply chain involves designing
contiguration of the material handling. The in-house supply chain
Conversion process.
agement, layout and location of resources and
can be broadly divided into the core manufacturing layer and manuBacturing support layer.
chain.
Figure 5.4 is a schematic representation of a typical in-house supply
The core manufacturing layer consists of various physical
resources for the conversion process. The hrst operation is
Core Manufacturing Layer
done in pre-manufacturing where the raw material is cut to
Pre-manufacturing Machining the required shapes and some pre-processing is done. In sev-
eral cases, the conversion process involves some fabrication
Fabrication Assembly Testing and machining activity before the various components are
assembled and tested. An appropriate organization of these
resources is required for the conversion process, and mainte-
Manufacturing Support Layer nance of these resources is part of the in-house supply chain
management.
Marketing Information technology
Since the conversion process is a critical link in the entire
supply chain, it will assume the central role in the overall
Maintenance Planning Quality supply chain collaboration. For instance, the manufacturer
of a consumer durable will have to initially estimate the
demand for the product and communicate this information
Material Design Costing to the rest of the supply chain to devise a strategy for meet-
ing the demand. This may include directing the inbound
FIGURE 5.4 A typical configuration of an in-house supply chain to schedule delivery of certain components
supply chain and raw materials, ensuring the manufacture of the
product
according to plan, and scheduling dispatch of the product
through logistics infrastructure to the appropriate parts of the outbound supply chain. The manufacturing layer support
in an organization performs these activities.
Apart from the physical location of the resources for the conversion process, planning is a crucial aspect of the in-house
supply chain. The first major activity is demand management. It includes forecasting and demand estimation, order entry
and customer order fulfilment. In order to meet
delivery promises, a host of production planning and control activities
will be required as part of the in-house supply chain. Since the in-house
supply chain plays the major role of collaboration
both within and outside the organization, several functional areas are involved in the
process. The cooperation of several
functional areas, including planning, materials and procurement,
aspect of the working of an in-house supply chain.
marketing, production, and logistics will be a critical
The Outbound Supply Chain
s ottbound supply chain pertains to the distribution of goods and services to end custom-
The outbound
This includes distributiorn network design, warehousing, logistics planning, channel man-
supply chain pertains
nent, channel coordination, and Customer interface management. Consider Asian Paints, for to the distribution of
n l e . In the decorative paints business, the critical factors for success are the availability of aa goods and services to
examp
ange of shades and an extensive distribution network. Asian Paints has four manufacturing the end customers.

facilities and more than 8 0 0 stock-keeping units. These are supported by six regional distribu-
centres, which cater to 55 depots. Each depot has a branch manager for supervision ofseveral salespersons who cater to
tion c

more than 14,500 dealers in more than 3500 big and small cities all over the country. Moreover, Asian Paints has consistently
improved its IT systems over the years. It has already linked all of its factories and 55 depots through V-SAT terminals, which
in turn has helped in streamlining the distribution channel. Inter-functional coordination between manutacturing, planning
and marketing is an important aspect of outbound supply chain management in organizations.
Figure 5.5 is a typical outbound supply chain for fast-moving consumer goods, such as soaps and detergents, which
consist of four levels. The first level is the factory warehouse where the finished goods are stocked. At the next level, there
will be regional distribution centres (DCs) that cater to a wide geographical area. Each DC will, in turn, serve a number ot
sales depots or regional stock points. For instance, the South Zone DC will cater to the requirements of Tamil Nadu, Kerala,
Karnataka, Pondicherry and Andhra Pradesh. At the fourth level, the sales depots will serve the retail outlets. The sales
retail outlets finaly
depot located in Bangalore may, for example, serve over 500 retail outlets in and around the city. The
sell the product to the customers.

VIDEO INSIGHTS 5.1

A large chunk of the Indian population lives in rural areas. Therefore, building supply chainsthat can reach deep rural
pockets can help organizations expand market share as well as address the needs of the rural folk. To know more about
the initiatives of Hindustan Unilever in addressing the last mile problem of the rural supply chain network, find the video
links (Video Insights) in the Instructor Resources or Student Resources under section Downloadable Resources(http:|
www.pearsoned.co.in/BMahadevan/) subsections Bonus Material.

Soap-manufacturirg
factory

Factory
warehoue

Distribution
North Eas West South Central
centres

Sales depots

2 Sales outlets

End customers

Sales depots Retail outlets

FIGURE 5.5 A typical example of an outbound supply chain