UNIT I

SUPPLY CHAIN MANAGEMENT

SUPPLY CHAIN MANAGEMENT

Supply Chain Management can be defined as the management of flow of products and services,
which begins from the origin of products and ends at the product’s consumption. It also
comprises movement and storage of raw materials that are involved in work in progress,
inventory and fully furnished goods.
The main objective of supply chain management is to monitor and relate production,
distribution, and shipment of products and services. This can be done by companies with a very
good and tight hold over internal inventories, production, distribution, internal productions and
sales.

In the above figure, we can see the flow of goods, services and information from the producer to
the consumer. The picture depicts the movement of a product from the producer to the
manufacturer, who forwards it to the distributor for shipment. The distributor in turn ships it to
the wholesaler or retailer, who further distributes the products to various shops from where the
customers can easily get the product.
Supply chain management basically merges the supply and demand management. It uses
different strategies and approaches to view the entire chain and work efficiently at each and
every step involved in the chain. Every unit that participates in the process must aim to
minimize the costs and help the companies to improve their long term performance, while also
creating value for its stakeholders and customers. This process can also minimize the rates by
eradicating the unnecessary expenses, movements and handling.
Here we need to note that supply chain management and supply chain event management are
two different topics to consider. The Supply Chain Event Management considers the factors that
may interrupt the flow of an effective supply chain; possible scenarios are considered and
accordingly, solutions are devised for them.

Supply Chain Management - Advantages

In this era of globalization where companies compete to provide the best quality products to the
customers and satisfy all their demands, supply chain management plays a very important role.
All the companies are highly dependent on effective supply chain process.
The key benefits of supply chain management are as follows −
 Develops better customer relationship and service.

 Creates better delivery mechanisms for products and services in demand with minimum
delay.
 Improvises productivity and business functions.

 Minimizes warehouse and transportation costs.

 Minimizes direct and indirect costs.

 Assists in achieving shipping of right products to the right place at the right time.

 Enhances inventory management, supporting the successful execution of just-in-time

stock models.
 Assists companies in adapting to the challenges of globalization, economic upheaval,
expanding consumer expectations, and related differences.
 Assists companies in minimizing waste, driving out costs, and achieving efficiencies
throughout the supply chain process.
These were some of the major advantages of supply chain management. After taking a quick
glance at the concept and advantages on supply chain management, let us take a look at the
main goals of this management.
Supply Chain Management - Goals

Every firm strives to match supply with demand in a timely fashion with the most efficient use
of resources. Here are some of the important goals of supply chain management −
 Supply chain partners work collaboratively at different levels to maximize resource
productivity, construct standardized processes, remove duplicate efforts and minimize
inventory levels.
 Minimization of supply chain expenses is very essential, especially when there are
economic uncertainties in companies regarding their wish to conserve capital.
 Cost efficient and cheap products are necessary, but supply chain managers need to
concentrate on value creation for their customers.
 Exceeding the customers’ expectations on a regular basis is the best way to satisfy them.

 Increased expectations of clients for higher product variety, customized goods, off-
season availability of inventory and rapid fulfillment at a cost comparable to in-store
offerings should be matched.
 To meet consumer expectations, merchants need to leverage inventory as a shared
resource and utilize the distributed order management technology to complete orders
from the optimal node in the supply chain.
Lastly, supply chain management aims at contributing to the financial success of an enterprise.
In addition to all the points highlighted above, it aims at leading enterprises using the supply
chain to improve differentiation, increase sales, and penetrate new markets. The objective is to
drive competitive benefit and shareholder value.

SUPPLY CHAIN MANAGEMENT PROCESS (SCM- An Organization

Spanning Activity)
Supply chain management is a process used by companies to ensure that their supply chain is
efficient and cost-effective. A supply chain is the collection of steps that a company takes to
transform raw materials into a final product. The five basic components of supply chain
management are discussed below −

Plan

The initial stage of the supply chain process is the planning stage. We need to develop a plan or
strategy in order to address how the products and services will satisfy the demands and
necessities of the customers. In this stage, the planning should mainly focus on designing a
strategy that yields maximum profit.
For managing all the resources required for designing products and providing services, a
strategy has to be designed by the companies. Supply chain management mainly focuses on
planning and developing a set of metrics.

Develop (Source)

After planning, the next step involves developing or sourcing. In this stage, we mainly
concentrate on building a strong relationship with suppliers of the raw materials required for
production. This involves not only identifying dependable suppliers but also determining
different planning methods for shipping, delivery, and payment of the product.
Companies need to select suppliers to deliver the items and services they require to develop
their product. So in this stage, the supply chain managers need to construct a set of pricing,
delivery and payment processes with suppliers and also create the metrics for controlling and
improving the relationships.
Finally, the supply chain managers can combine all these processes for handling their goods and
services inventory. This handling comprises receiving and examining shipments, transferring
them to the manufacturing facilities and authorizing supplier payments.

Make

The third step in the supply chain management process is the manufacturing or making of
products that were demanded by the customer. In this stage, the products are designed,
produced, tested, packaged, and synchronized for delivery.
Here, the task of the supply chain manager is to schedule all the activities required for
manufacturing, testing, packaging and preparation for delivery. This stage is considered as the
most metric-intensive unit of the supply chain, where firms can gauge the quality levels,
production output and worker productivity.

Deliver

The fourth stage is the delivery stage. Here the products are delivered to the customer at the
destined location by the supplier. This stage is basically the logistics phase, where customer
orders are accepted and delivery of the goods is planned. The delivery stage is often referred as
logistics, where firms collaborate for the receipt of orders from customers, establish a network
of warehouses, pick carriers to deliver products to customers and set up an invoicing system to
receive payments.
Return

The last and final stage of supply chain management is referred as the return. In the stage,
defective or damaged goods are returned to the supplier by the customer. Here, the companies
need to deal with customer queries and respond to their complaints etc.
This stage often tends to be a problematic section of the supply chain for many companies. The
planners of supply chain need to discover a responsive and flexible network for accepting
damaged, defective and extra products back from their customers and facilitating the return
process for customers who have issues with delivered products.
DISTRIBUTION MANAGEMENT in SCM

What is a Distribution Channel?

A distribution channel (also called a marketing channel) is the path or route decided by the
company to deliver its good or service to the customers. The route can be as short as a direct
interaction between the company and the customer or can include several interconnected
intermediaries like wholesalers, distributors, retailers, etc.
Hence, a distribution channel can also be referred to as a set of interdependent intermediaries that
help make a product available to the end customer.

Functions of Distribution Channels

In order to understand the importance of distribution channels, you need to understand that it
doesn’t just bridge the gap between the producer of a product and its user.

 Distribution channels provide time, place, and ownership utility. They make the product
available when, where, and in which quantities the customer wants. But other than
these transactional functions, marketing channels are also responsible to carry out the
following functions:
 Logistics and Physical Distribution: Marketing channels are responsible for assembly,
storage, sorting, and transportation of goods from manufacturers to customers.
 Facilitation: Channels of distribution even provide pre-sale and post-purchase services
like financing, maintenance, information dissemination and channel coordination.
 Creating Efficiencies: This is done in two ways: bulk breaking and creating
assortments. Wholesalers and retailers purchase large quantities of goods from
manufacturers but break the bulk by selling few at a time to many other channels or
customers. They also offer different types of products at a single place which is a huge
benefit to customers as they don’t have to visit different retailers for different products.
  Sharing Risks: Since most of the channels buy the products beforehand, they also share
the risk with the manufacturers and do everything possible to sell it.
 Marketing: Distribution channels are also called marketing channels because they are
among the core touch points where many marketing strategies are executed. They are in
direct contact with the end customers and help the manufacturers in propagating the brand
message and product benefits and other benefits to the customers.

Types of Distribution Channels

Channels of distribution can be divided into the direct channel and the indirect channels. Indirect
channels can further be divided into one-level, two-level, and three-level channels based on the
number of intermediaries between manufacturers and customers.

Direct Channel or Zero-level Channel (Manufacturer to Customer)

Direct selling is one of the oldest forms of selling products. It doesn’t involve the inclusion of an
intermediary and the manufacturer gets in direct contact with the customer at the point of sale.
Some examples of direct channels are peddling, brand retail stores, taking orders on the
company’s website, etc.  Direct channels are usually used by manufacturers selling perishable
goods, expensive goods, and whose target audience is geographically concentrated. For example,
bakers, jewellers, etc.

Indirect Channels (Selling Through Intermediaries)

When a manufacturer involves a middleman/intermediary to sell its product to the end customer,
it is said to be using an indirect channel. Indirect channels can be classified into three types:

 One-level Channel (Manufacturer to Retailer to Customer): Retailers buy the product

from the manufacturer and then sell it to the customers. One level channel of distribution
works best for manufacturers dealing in shopping goods like clothes, shoes, furniture, toys,
etc.
 Two-Level Channel (Manufacturer to Wholesaler to Retailer to
Customer): Wholesalers buy the bulk from the manufacturers, breaks it down into small
 packages and sells them to retailers who eventually sell it to the end customers. Goods
which are durable, standardised and somewhat inexpensive and whose target audience isn’t
limited to a confined area use two-level channel of distribution.
 Three-Level Channel (Manufacturer to Agent to Wholesaler to Retailer to
Customer): Three level channel of distribution involves an agent besides the wholesaler
and retailer who assists in selling goods. These agents come handy when goods need to
move quickly into the market soon after the order is placed. They are given the duty to
handle the product distribution of a specified area or district in return of a certain
percentage commission. The agents can be categorised into super stockists and carrying and
forwarding agents. Both these agents keep the stock on behalf of the company. Super
stockists buy the stock from manufacturers and sell them to wholesalers and retailers of
their area. Whereas, carrying and forwarding agents work on a commission basis and
provide their warehouses and shipment expertise for order processing and last mile
deliveries. Manufacturers opt for three-level marketing channel when the userbase is spread
all over the country and the demand of the product is very high.

Dual Distribution
When a manufacturer uses more than one marketing channel simultaneously to reach the end
user, he is said to be using the dual distribution strategy. They may open their own showrooms to
sell the product directly while at the same time use internet marketplaces and other retailers to
attract more customers.

A perfect example of goods sold through dual distribution is smartphones.

Distribution Channels for Services

Unlike tangible goods, services can’t be stored. But this doesn’t mean that all the services are
always delivered using the direct channels.

With the advent of the internet, online marketplaces, the aggregator business model, and the on-
demand business model, even services now use intermediaries to reach to the final customers.
The Internet as a Distribution Channel
The internet has revolutionised the way manufacturers deliver goods. Other than the traditional
direct and indirect channels, manufacturers now use marketplaces like Amazon (Amazon also
provide warehouse services for manufacturers’ products) and other intermediaries like
aggregators (uber, Instacart) to deliver the goods and services. The internet has also resulted in
the removal of unnecessary middlemen for products like software which are distributed directly
over the internet.

Factors Determining the Choice of Distribution Channels

Selection of the perfect marketing channel is tough. It is among those few strategic decisions
which either make or break your company.

Even though direct selling eliminates the intermediary expenses and gives more control in the
hands of the manufacturer, it adds up to the internal workload and raises the fulfilment costs.
Hence these four factors should be considered before deciding whether to opt for the direct or
indirect distribution channel.

Market Characteristics
This includes the number of customers, their geographical location, buying habits, tastes and
capacity and frequency of purchase, etc.

Direct channels suit businesses whose target audience lives in a geographically confined area,

who require direct contact with the manufacturer and are not that frequent in repeating
purchases.
In cases of customers being geographically dispersed or residing in a different country,
manufacturers are suggested to use indirect channels.

The buying patterns of the customers also affect the choice of distribution channels. If customers
expect to buy all their necessaries in one place, selling through retailers who use product
assortment is preferred. If delivery time is not an issue, if the demand isn’t that high, the size of
orders is large or if there’s a concern of piracy among the customers, direct channels are suited.

If the customer belongs to the consumer market, longer channels may be used whereas shorter
channels are used if he belongs to the industrial market.

Understanding consumer behaviour is essential for deciding the most effective marketing

channel for the business.

Product Characteristics
Product cost, technicality, perishability and whether they are standardised or custom-made play a
major role in selecting the channel of distribution for them.

Perishable goods like fruits, vegetables and dairy products can’t afford to use longer channels as
they may perish during their transit. Manufacturers of these goods often opt for direct or single
level channels of distribution. Whereas, non-perishable goods like soaps, toothpaste, etc. require
longer channels as they need to reach customers who reside in areas which are geographically
diverse.

If the nature of the product is more technical and the customer may require direct contact with
the manufacturer, direct channels are used. Whereas, if the product is fairly easy to use and direct
contact makes no difference to the number of sales, longer channels are used.

The per unit value of the product also decides whether the product is sold through a direct
channel or through an indirect channel. If the unit value is high like in the case of jewellery,
direct or short channels are used, whereas products like detergents whose unit value is low use
longer channels of distribution.
Competition Characteristics
The choice of the marketing channel is also affected by the channel selected by the competitors
in the market. Usually, the firms tend to use a similar channel as used by the competitors. But
some firms, to stand out and appeal to the consumer, use a different distribution channel than the
competitors. For example, when all the smartphones were selling in the retail market, some
companies partnered with Amazon and used the scarcity principle to launch their smartphone as
Amazon exclusive.

Company Characteristics
Financial strength, management expertise, and the desire for control act as important factors
while deciding the route the product will take before being available to the end user.

A company having a large amount of funds and good management expertise (people who have
sufficient knowledge and expertise of distribution) can create the distribution channels of its own
but a company with low financial stability and management expertise has to rely on third-party
distributors.

The companies who want to have tight control over the distribution prefer direct channels.
Whereas, those companies to whom such control doesn’t matter or those who are just interested
in the sales of their products prefer indirect channels.
 STRATEGIC FIT CONCEPT OF SCM
Strategic Fit:

Strategic fit expresses the degree to which an organization is matching its resources and

capabilities with the opportunities in the external environment. The matching takes place
through strategy and it is therefore vital that the company has the actual resources and
capabilities to execute and support the strategy. Strategic fit can be used actively to evaluate the
current strategic situation of a company as well as opportunities such as M&A and divestitures of
organizational divisions. Strategic fit is related to the Resource-based view of the firm which
suggests that the key to profitability is not only through positioning and industry selection but
rather through an internal focus which seeks to utilize the unique characteristics of the
company’s portfolio of resources and capabilities.[1] A unique combination of resources and
capabilities can eventually be developed into a competitive advantage which the company can
profit from. However, it is important to differentiate between resources and capabilities.
Resources relate to the inputs to production owned by the company, whereas capabilities
describe the accumulation of learning the company possesses.

SCM

Supply chain management is the management of the flow of goods and services and includes all
processes that transform raw materials into final products. It involves the active streamlining of a
business's supply-side activities to maximize customer value and gain a competitive advantage in
the marketplace.

SCM represents an effort by suppliers to develop and implement supply chains that are as
efficient and economical as possible. Supply chains cover everything from production to product
development to the information systems needed to direct these undertakings.

Achieve a strategic fit in supply chain management

A company needs to take some steps to achieve a strategic fit between the supply chain and
competitive strategies. These strategies may be implicated or explicated or one or more customer
segments. So that the company can satisfy these segments. At first, a company should ensure its
supply chain capabilities to satisfy the needs of the targeted customer segments.

Now, we are going to learn three major steps to achieving strategic fit. Have a look –

1. Understanding the customer and supply chain uncertainty

Primarily, a company must understand the customer needs for each targeted segments. After
understanding this, the company also tries to understand the uncertainty of these needs of the
supply chain. However, these needs help to understand the desired cost and service requirement
for these. Besides, we also see that uncertainty identifies the extent of the unpredictability of
demand and supply. This helps the company to prepare for the desired supply chain.

Before selecting a segment, a company needs to understand the customer needs. For example, if
your customers are very price sensitive, you can’t charge higher for them. On the other hand, if
your customers are ready to pay for higher quality then you have to fulfill them.

In general, customer demands are varying from different segments along with several attributes.
Such as –

 Quantity of the product needed in each lot

It means that customers want a one-stop solution in which they can purchase everything.

 Response time that customers are willing to tolerate

It is the main factor. Because customers are more sensitive at the response time. It is more
obvious in the restaurant. Some customers prefer quick delivery and others may not.

 Variety of products needed

A growing number of customers present here, their need, want and demand is not the same at all.
All of them want different types of goods to fulfill their desire.

 Service level required

The restaurant is the best example of it. In an emergency order, they need to respond to fast
otherwise they will lose consumers as well as reputation.

 Price of the product

Usually, a high-quality product has a higher price than fewer quality goods. Besides, an
emergency order can charge more than construction order.

 The desired rate of innovation in the product

In a departmental store, customers want different types of innovative products and new designs
in their store.
 Each customer in particular segment has similar needs and in a different segment has different
needs. However, our key goal is to identify the main measure that can satisfy their different
needs. Through this way, a company is able to achieve a strategic fit.

2. Understanding the supply chain capabilities

Here, many types of supply chains are designed for performing different tasks quickly. That’s
why a company needs to understand its supply chain design well.

However, there is a big question that how the firm best meets customer’s demand in the
uncertain situation. Now, we are going to see different characteristics of the supply chain that
influence their responsiveness and efficiency.

At first, we will learn the supply chain ability that means responsiveness. Let’s see –

 Respond to wide ranges of quantities demanded

 Meet short lead times
 Handle a large variety of products
 Build a highly innovative level
 Handle supply uncertainty
These are similar characteristics among several firms to maintain demand and supply.

3. Achieve  a strategic fit

If any mismatch exists between supply chain and consumer needs, then the company needs to
restructure its supply chain or select an alternative course of action to change its competitive
strategy.

After understanding the uncertainty level, the final step is to ensure supply chain responsiveness.
It ensures supply chain responsiveness is consistent with the implied uncertainty. However, its
main goal is to maintain high responsiveness for a supply chain. Besides, it tries to identify
whether there is any mismatch or not.
Supply Chain Strategy for a Competitive Advantage
Historically, supply chain and logistics functions were viewed primarily as cost centers to be
controlled. It is only in the past 20 years or so that it has become clear that it can be used for a
competitive advantage as well.

To accomplish this, an organization should establish competitive priorities that their supply chain
must have to satisfy internal and external customers. They should then link the selected
competitive priorities to their supply chain and logistics processes.

Krajewski, Ritzman, and Malhotra (2013) suggest breaking an organization’s competitive

priorities into cost, quality, time, and flexibility capability groups:

 Cost strategy: Focuses on delivering a product or service to the customer at the lowest

possible cost without sacrificing quality. Walmart has been the low-cost leader in retail by
operating an efficient supply chain.
 Time strategy: This strategy can be in terms of speed of delivery, response time, or even
product development time. Dell has been a prime example of a manufacturer that has
excelled at response time by assembling, testing, and shipping computers in as little as a
few days. FedEx is known for fast, on-time deliveries of small packages.
 Quality strategy: Consistent, high-quality goods or services require a reliable, safe
supply chain to deliver on this promise. If Sony had an inferior supply chain with high
damage levels, it wouldn’t matter to the customer that their electronics are of the highest
quality.
 Flexibility strategy: Can come in various forms such as volume, variety, and
customization. Many of today’s e-commerce businesses, such as Amazon, offer a great deal
of flexibility in many of these categories.