SCM Chapter 1: Understanding the Supply Chain

A supply chain consists of different parties involved directly or indirectly to fulfill the customer’s
demand. A flow of products, information and funds within the chain happens to fulfill the customer
request. The only objective of a SCM is to maximize the supply chain surplus as the customer is the
only source of positive cashflow in the supply chain.

The three major things that impact the supply chain are the design, planning and operations of
supply chain. Any decisions or changes related to these three aspects can impact the business in
varied amounts of time in decreasing order from design to operations.

Based on the decisions made in the design phase effective planning takes place which in turn allows
impacts the operations on daily basis.

There are two types of process views in supply chain. They are Cycle view and Push/pull view.

 In cycle view each process is defined in series of cycles between the two consecutive stages of
supply chain based on the operations taking place.
1. Customer cycle (Customer and retailer)
2. Distribution Cycle (Retailer and Distributor)
3. Manufacturing cycle (Distributor and Manufacturer)
4. Procurement Cycle (Manufacturer and Supplier)

 A process in supply chain is defined as push or pull view based on whether the process to fulfill
customer demand is initiated after receiving an order from customer which is pull view or
manufactured in anticipation customer demand and stored in inventory which is known as push
view.
A process can be operated in completely push view or a combination of push and pull view but not
pull view only.

All supply chain processes can be classified into three macro processes, namely

1. CRM (Customer Relationship Management): Generally, a firm’s marketing team handles all
the responsibilities that comes under the ambit of CRM.
2. ICSM (Internal Supply Chain Management): The firm’s manufacturing department handles
the obligations in this segment.
3. SRM (Supplier Relationship Management): Purchasing department of a firm is responsible
for procuring raw materials from the suppliers.

We come across different real time examples of supply chain designing, planning and operating
decisions and their impact on firms. Some firms due to their effective Supply chain make wonders
and on the other hand firms not being in compliance with either the changing trends or their
customer’s demand have to fold their business.
 SCM Chapter 2: Supply Chain Performance
In this chapter supply chain performance, we will study the competitive strategy, supply chain
strategy and the necessity of the both being in line to achieve strategic fit.

A competitive strategy is designed in a way such that the company tries to stands out from it’s
competitors and fulfill the targeted customers priorities.

A supply chain strategy includes strategies in various stages of supply chain like supplier strategy,
operation strategy, logistics strategy etc., should be designed in a way that it is in line with the
competitive strategy.

A Strategic fit is obtained only when the competitive strategy and strategies at different functional/
operational areas have aligned goals thus working with a common strategy. Going down the
strategic fit tree every functional/operational area must have a structured process and have
appropriate resources to execute the overall strategy successfully.

The three steps involved in achieving strategic fit are

1. Understanding customer demand and supply chain uncertainty: The customer demand is
uncertain at times based on many situations like festive season, holiday season etc., Also when a
new product is launched in market whose demand is not stable till it is mature, the supply chain
will be responsible to fulfill the portion of demand that needs to be fulfilled other than the
predicted demand and creates implied demand uncertainty. This kind of uncertainty is majorly
seen in new products in the market which have a buzz created for them and has very less impact
on products we use regularly or have a decent understanding of. Based on different attributes
and capabilities of supply chain implied demand uncertainty either increases or decreases.

2. Understanding the supply chain capabilities: After identifying uncertainties in demand the
company then focuses on their supply chain capabilities fulfill the customers demand either by
being responsive or effective according to their competitive strategy.

3. Achieving strategic fit: In this step after we know the customer demands and the capabilities of
our supply chain, we try to allot different roles to each functional areas of the supply chain to
ensure appropriate responsiveness trying to fit in the “zone of strategic fit”.

Tailoring of supply chain to Achieve strategic fit

When a firm is focusing on multiple customer segments with a large range of products in their
basket then “one size fits all” supply chain does not help in achieving strategic fit and hence we need
to make alterations and tailoring of supply chain plays an important role in such situations to achieve
strategic fit.

Many times, different operation heads in a particular functional area and different functional areas
in a supply chain work to minimize their local costs without working as a team. Also working in
accordance to their individual functional areas strategies without aligning to the competitive
strategy can be harmful. In order to increase the supply chain surplus every stage of supply chain
should work in accordance with the competitive strategy and should work to increase the overall
supply chain surplus which would ultimately benefit all the involved parties and make the supply
chain more competitive.
Also, in reality a company has to partner with many other firms to produce various products and
serve their customers which demands agility in their strategies and operations to achieve strategic
fit.

Apart from having appropriate strategies in place a company needs to be ready to face challenges
from their competitors, adapting to changing trends and technologies, regulations framed by the
local govt. bodies, environmental and sustainability challenges to gain competitive advantage and
succeed.

SCM Chapter 3: Supply Chain Drivers and Metrics

After understanding the supply chain and its performance we are here in the 3 rd chapter to analyze a
few important financial metrics in business and the drivers of supply chain that effects the financial
performance of a supply chain.

Some of the important financial parameters are

1. ROE (Return on Equity): This parameter defines the return on the investment done by the
shareholders.
2. ROA (Return on Assets): This parameter defines the returns received on each dollar spent by the
company for building its assets.
3. ROFL (Return on Financial Leverage): It is the difference of ROE and ROA and provides us with
the data like the amount of data from ROE that can be attributed to financial leverage.
4. APT (Accounts Payable Turnover): Helps us with information like how many days we can
operate business using the amounts we owe to suppliers.
5. ART (Accounts Receivables Turnover): It is the time after which the firm collected the money
after the sale of their products.
6. C2C (Cash to cash cycle): It is the average time measured from the entry of cash in the process
as a cost and the time when the company actually received the receivables after a sale as
revenue costs. We have also noticed that the CSC cycle time varies for different industries.

We had financial data of Amazon.com and Nordstrom Inc. referring to them we understood the
above-mentioned financial jargons used in companies.

Also had a decent understanding of the supply chain’s performance in terms of responsiveness and
effectiveness by the interaction between logistical and cross-functional drivers. The goal is to
achieve strategic fit, improve the overall supply chain surplus using the important drivers.

The important logistical drivers are 1. Facilities 2. Inventory and 3. Transportation.

The important cross-functional drivers are 1. Information 2. Sourcing and 3. Pricing.

In accordance with each driver, we have components listed and any decisions relating to these
components impacts the supply chain in the firm. We also have understood other metrics which a
manager should keep a track on, which can influence on the supply chain performance.

Cases related to companies mentioned wherever necessary according to the situations have helped
better understand the concepts and visualize the operations to certain extent.
Chapter 4: Designing Distribution Networks and Applications to Online Sales

In this chapter we learn about the role of distribution network and designing an appropriate
distribution network.

Distribution refers to the steps taken to move and store a product from the supplier stage to a
customer stage in the supply chain. Distribution occurs between every pair of stages in the supply
chain. Distribution is a key driver of the overall profitability of a firm because it affects both the
supply chain cost and the customer value directly. Many companies like Walmart, 7 eleven Japan are
leading in business as they have designed an appropriate distribution network which helps them
achieve a variety of supply chain objectives ranging from low cost to high responsiveness.

Performance of a distribution network should be evaluated along two dimensions:

1.Value provided to the customer 2. Cost of meeting customer needs

Although customer value is affected by many factors, we focus on measures that are influenced by
the structure of the distribution network:

Response time: Time taken for a customer to receive an order after placing it.
Product variety: The no. of different products or configurations offered by the distribution network.
Product availability: The probability of having a product in stock when a customer order arrives.
Customer experience: Includes the ease with which customers can place and receive orders and the
extent to which this experience is customized. It also includes purely experiential aspects, such as
the possibility of getting a cup of coffee and the value that the sales staff provides.
Time to market: The time it takes to bring a new product to the market.
Order visibility: Ability of customers to track their orders from placement to delivery.
Returnability is the ease with which a customer can return unsatisfactory merchandise and the
ability of the network to handle such returns.

In order to fill the customer demand in the preferred lead times accepted by customers a firm must
design their distribution network and make changes wrt efficiency and responsiveness. Ex: A person
who is willing to wait for a book for 2-3 days can receive it at his doorstep from amazon where as the
same person if needs to have the book for their immediate requirements should reach the retail
store like Barnes and noble to have the book provided the book is available in stock at the retail
store. In a way companies can make changes to bear the extra costs that incur and improve if they
are estimating good no. of sales which can cover up for the extra costs bearing by them.

Changing the distribution network design affects the following supply chain costs

• Inventories • Transportation • Facilities and handling • Information

In this area we analyze different parameters, to reduce the costs involved in supply chain, such as

1. No. of facilities
2. Response time
3. Inventory cost
4. Transportation Cost and
 5. Total Logistics cost

As the no. of facilities increase it would be easy to service customers in and around the facility which
would reduce the response time. So many distribution centers generally store slow and fast moving
items at nearest locations and very slow products at a distinct facility to save on inventory costs.
Thus the no. of facilities also bring up the need to store them with the required inventory there by
increasing the inventory costs.

Many times we observe transportation costs to reduce as the no. of facilities increase till a certain
level and once the optimum level is reached the costs tend to increase, this is because when there
are many facilities in a particular location they may have the facility capacity which just needs the
customer demands in the location, thereby facilities many times do not have the capacity to
accommodate stocks of a fully loaded truck. In that case transportation cost increases as to make
multiple halts in replenishing the goods.

Before considering different distribution network for a company a manager should first analyze a
couple of things like if the customers is willing to get the products delivered to their doorstep or
from a prearranged pickup location. Will there be any intermediary layers/ locations in the logistics
process so as to have a proper structure for flow of information and resources to fulfill the customer
order.

Some of the distribution networks and their key advantages are mentioned below

Manufacturer Storage with Direct Shipping: The inventory cost here can be kept low in case of any
postponements of orders as the products can manufactured when required and avoiding any
storage for longer periods. There would be good scope for Product variety, availability and almost
immediately the product can be marketed to customers once we have the finished good out from
the production line.

Manufacturer Storage with Direct Shipping and In-Transit Merge: In this network design we can
reduce transportation cost by avoiding delivery of partial goods to the customer and making use of
the in transit merge facility. Doing this however increases the inventory cost at the in transit location
but provides good customer satisfaction. Proper mechanism in order visibility and structure to share
information are needed for this network to function appropriately.

Distributor Storage with Carrier Delivery : Delivering products using carrier will improve the
response time and there by increase the customer satisfaction. Costs maintaining inventories at
manufacturer and distributor would be increased as to respond quickly. Order visibility and
returnability would be more easier than other models which includes manufacturers.

Distributor Storage with Last-Mile Delivery : Involves very quick response time, sometimes even
same day deliveries are possible, which allows to have less robust order visibility mechanism and in
order to be highly responsive have to bear a very higher transportation costs. Response time being
an advantage returnability would be much easier.

Manufacturer or Distributor Storage with Customer Pickup: In this network transportation and
inventory costs can be maintained low but costs which involve processing of the orders and mapping
them to a particular customer at pickup points and having a sophisticated information infrastructure
is essential and would cost high.
Retail Storage with Customer Pickup: Best response time can be achieved in this network as the
customer can physically come to the store and collect their desired product. Also brings with it a
simpler returnability mechanism maintaining lowest transportation costs. However a good
information infrastructure is needed to handle both online and phone orders.

A network designer needs to consider product characteristics as well as network requirements when
deciding on the appropriate delivery network. The various networks considered earlier have
different strengths and weaknesses in response to customer requirements.

Only niche companies end up using a single distribution network. Most companies are best served
by a combination of delivery networks. The combination used depends on product characteristics
and the strategic position that the firm is targeting.

An excellent example of a hybrid network is that of W.W. Grainger, which combines all the
aforementioned options in its distribution network.

We now look at online sales and the impact of online sales on 1.Value provided to the
customer(customer service) and 2. Cost of meeting customer needs (Supply chain Costs)

Impact of Online Sales on Customer Service

Response time while selling information goods is instantaneous which only requires internet to
access them compared to physical goods which may take some time to reach the customer.

Improved, Product variety and availability can be achieved using online sales when compared to
brick and motor stores as offering the same availability at retail stores requires a large warehouses
and huge amount of money involved.

Online sales affect customer experience in terms of access, customization, and convenience. Unlike
most retail stores that are open only during business hours, the Internet allows a customer to place
an order at any convenient time.

A firm can introduce a new product much more quickly online as they can sell the new product as
soon as it is available in the market unlike the retail stores who have to stock their inventories
before they start selling the product.

In online sales the internet makes it easy to make successful transactions and provides greater order
visibility.

Impact of Online Sales on Supply chain Cost

Online sales can lower inventory levels by aggregating inventories far from customers if most
customers are willing to wait for delivery. It can lower a firm’s inventories if it can postpone the
introduction of variety until after the customer order is received.

Having centralized facilities which can reasonably suffice the customer demand helps in reduction of
facility costs rather than having huge no. of facilities across area of business.
Performing outbound deliveries to customers once their orders are confirmed involves a huge
amount of transportation costs in online sales and can be reduced by designing appropriate
distribution network.

Information sharing plays an important role in online sales as the seller is bound to share demand
information throughout its supply chain to improve visibility. The Internet may also be used to share
planning and forecasting information within the supply chain, further improving coordination. This
helps reduce overall supply chain costs and better match supply and demand.

Using the above discussed concepts we understood different distribution networks adapted by
companies and after analysing the process involved and the performance we could suggest which
among online or retail stores better worked for companies.

SCM CH-5 Network design in the Supply Chain

Network Design decisions can be classified into the following parameters

 Facility Role: Decisions made regarding the facility roles and process are very significant because
once made it is very difficult to change and can have a huge on the entire supply chain.
 Facility Location: It has major impact on supply chain performance and once we establish a
facility it involves huge amounts of money and cannot be moved easily.
 Capacity Allocation: It helps us to identify the no., of workforce to have at a particular facility. It
is appropriate to have the optimum workforce according to the demand. The decision made to
capacity is something that stays for long time but however can be altered based on requirement
at times.
 Revisiting design networks from time to time plays a crucial role after market changes, mergers
to be profitable in business. For ex: Netflix after the start of their digital content using internet
have closed 20 distribution centers in year 2013 to minimize the transportation costs.

Factors Influencing Network Design Decisions

 Strategic factors: It helps companies to make decisions whether to outsource their production
line, focus on responsiveness or effectiveness etc., which align to their competitive strategy of
fulfilling the targeted customer base.
 Macro Economic factors: Today every business is impacted by globalization and compete with
companies to gain market share globally. Many countries need to have their plants in different
countries and for that they need to negotiate with the local governments to have some
incentives to open their plant in the countries. For Ex: recently Tesla has started to establish
their business in India to open a EV manufacturing plant which would be a win-win situation for
both the company and the local govt. creating many jobs.
 Political stability of a country is considered a key factor while setting up a facility to improve the
distribution network.
 Competitive factors: Positive externalities between firms occur when firms find beneficial being
located closely to each other which will lead to increase in demand and everyone will be
benefitted from that. For ex: retail outlets in malls.
 Customer response time and local presence is another key factor in network design decisions.
For ex: dominos provides their pizzas within 30 mins or else they claim to give the pizza for free.
This is possible as they are centralized in many locations where they operate.

Models For Facility Location Capacity Allocation:

 Maximize the overall profitability of the supply chain network while providing customers with
the appropriate responsiveness and maintaining a balance between cost and effectiveness.
 So there are many trade-offs that need to be made during network design. For ex: if a company
wishes to provide high responsiveness to customers they will need to have more no., of facilities
which reduces the transportation cost but increases the facility and inventory costs.
 While designing networks managers should use models to decide on locations and capacities.
Should also current demand to facilities and identify optimal transportation routes.

Phase 2:

Capacitated Plant Location Model

We have few mathematical models that can be used in various phases. In defining regional facility
configuration network optimization models could be useful. One ex of this model is the Capacitated
Plant Location Model which uses a set of inputs and decision variables to calculate the fixed and
variable costs of producing a specific no., of units using mathematical functions.

Phase 3

Gravity location models are generally used while making decisions about potential locations. We
have a set of input functions like “xn,yn” which are coordinate market locations, “x,y” which are
coordinates of a preferred location of facility, “dn” is the distance from the facility to the market.
Using these inputs and the mathematical formulae we find the total transportation cost and identify
a optimum location for setting up a facility.

Phase 4

Allocation demand to production facilities

Here we look at location and capacity allocation at each facility after identifying potential locations
for setting up facilities. We have a set of model inputs and have a decision variable “xij” which is
quantity shipped from facility “i” to market “j”. The objective is to minimize the total cost of shipping
the items from facility “i“ to market “j”. We also have two constraints which makes sure that all
demand is satisfied and makes sure that the facility’s production is less than or equal to capacity.

Capacitated Model with single source

There are many companies that want to design supply chain networks in such a way that the market
is supplied from only one facility which is called single source. This design basically helps in reducing
complexity and improves coordination and has a lot of benefits.
A more general although a very complex model will be where we have an entire supply chain
network including suppliers, manufacturing plants, warehouses and markets. There are several
model inputs such as m, n, l.. etc., which are no. of markets, facilities, suppliers respectively,
mentioned using which we need to identify plants, warehouse locations and quantities shipped that
minimize the total fixed and variable costs. We also have some decision variables such as yi, ye, xej..
etc., In the mathematical equation we have constraints relating to variable cost associated with
suppliers to plants, plants to warehouses, warehouses to customers respectively.

Do’s and Don’ts while Making network design decisions

 Do not underestimate the life span of facilities as the production facilities are something which
are to be there for long time.
 Do not gloss over the cultural implications
 Do not ignore quality-of-life issues in order to attract workforce that find working at that facility
rewarding.
 Focus on tariffs and tax incentives when locating facilities.