UNIT 3

KEY SUPPLY CHAIN BUSINESS PROCESSES

5 Components of SCM
SCM encompasses a wide range of activities that generally fall into one of five buckets:
planning, sourcing, manufacturing, delivery and returns. Let’s take a more detailed look at
each component:
Planning: SCM starts with planning. A company must first determine the quantity of
supplies or products it needs, typically by using supply chain and inventory management
software that helps build accurate forecasts and provides detailed analytics. As part of this
process, SCM must figure out the labor, capital and partners it will need to meet expected
demand.
Sourcing: This is when a business identifies the suppliers, manufacturers and distributors
that can provide the goods or services it needs based on its plan. In an effort to build supply
chain resilience, a manufacturer might have multiple suppliers for an important component,
in case one supplier shuts down or has reduced capacity. That adds redundancy but may come
at the cost of more complexity. Managing redundant relationships falls into this part of SCM,
as well.
Manufacturing: Even for companies that outsource manufacturing or buy fully or partially
finished products, this is a key step. The company must acquire finished goods or all the parts
and materials it needs to produce goods based on its demand plan, inspect them for quality,
then package items for direct shipment or distribution.
Delivery: Delivery is the final step in the forward supply chain and entails getting goods or
services to customers, whether another business or consumers. The company must organize
and prioritize orders to ensure it can meet promised delivery timelines and avoid downstream
issues, like high-demand SKUs going out of stock. This component includes invoicing and
collecting payments from customers, as well.
Returns: The product lifecycle doesn’t always end when the end user receives an item.
Sometimes products are sent back, whether due to customer dissatisfaction, defects, excess
inventory or a warranty claim. The item then moves through the reverse supply chain until it
reaches the company responsible for issuing a refund or replacement. That company then
either scraps the item, repairs it or returns it to available inventory.
Managing Material flow and Distribution:
Supply chain management can be defined as a systematic flow of materials, goods, and
related information among suppliers, companies, retailers, and consumers.
There are three different types of flow in supply chain management −

 Material flow
 Information/Data flow
 Money flow
Material Flow
 Material flow includes a smooth flow of an item from the producer to the consumer.
This is possible through various warehouses among distributors, dealers and retailers.
 The main challenge we face is in ensuring that the material flows as inventory quickly
without any stoppage through different points in the chain. The quicker it moves, the
better it is for the enterprise, as it minimizes the cash cycle.
 The item can also flow from the consumer to the producer for any kind of repairs, or
exchange for an end of life material. Finally, completed goods flow from customers to
their consumers through different agencies. A process known as 3PL is in place in this
scenario. There is also an internal flow within the customer company.

Material flow, a model used in supply chain management, represents the transportation of
raw materials, parts, work-in-progress inventory, and final products as a flow; flow is how
work progresses through a system. When a company has a “good” material flow, materials at
different stage moves steadily and predictability, but a “bad” flow means there is a lot of
stops and starts in the process, ultimately resulting in an inefficient system. If a company is
looking to go Lean, the material flow is a great place to start.
Distribution and Planning Strategy:
Distribution strategy is the method used to bring products, goods and services to customers or
end-users. You often gain repeat customers by ensuring an easy and effective way to get your
goods and services to people, depending on the item and its distribution needs. Organizations
consider which distribution strategy is best while being cost-effective and increasing overall
profitability. You can even use multiple or overlapping distribution strategies to reach target
audiences and meet company goals and objectives. For example, a product might sell better
online to one demographic and via a mail-to-order catalog to another target audience group.
Consider basing distribution on your ideal customer, thinking about where and how they buy
products and what you can do to make purchasing your goods or services easier. The item
itself is often key to determining the right distribution strategy, type and channel. For
example, if your product is a high-end designer line of furniture, buying directly from the
manufacturer may be worth the customer's time. Or if your product is a routine, everyday
item like a bottle of water, buying through convenient and nearby shops may be more
appealing to the customer.
When planning your distribution strategy, there are several factors to consider, including:
Product type
Depending on the type of product or service you offer, your distribution strategy may vary.
For example, the distribution strategy for a luxury car brand may differ from that of a paper
towel manufacturer. Most consumer purchases get categorized into these three groups:
 Routine: A routine purchase is typically a low-cost item or service a customer
chooses quickly, like gum, soda and paper products
 Limited: A limited purchase is a moderately priced item a customer spends more
time selecting than a routine purchase, like a refrigerator, couch or computer
 Extensive: An extensive purchase is often an expensive item a customer intensively
thinks about before buying, like a vehicle, house or college education
Customer base
Another factor to consider is your user, or customer, base. Depending on where your
customers typically shop, your distribution strategy varies, and often advances in technology
influence distribution, too. For example, if your target customer base for your paper towel
product is a middle-aged woman buying at a grocery store, you may choose to distribute to
various brick-and-mortar storefronts, like grocery store chains and warehouse companies. If
your ideal customer base for your customizable furniture is a high-tech affluent customer,
distributing directly from the manufacturing warehouse via online sales may work best.
Types of shopping methods preferred by consumers can include:
 E-commerce websites
 Direct mail ordering
 Storefronts, booths and shops
 Door-to-door sales
Warehouse and transportation logistics:
The capabilities and costs associated with running a warehouse and delivery logistics are
another consideration when building a distribution strategy. For example, it is a large
financial investment to have a warehouse for storing goods, a fleet of transportation vehicles
like trucks and vans and personnel to staff the warehouse and deliver the items. Depending on
the storage and delivery needs for your product or service, picking an alternative distribution
strategy may lead to higher cost savings and increased revenue.
What are the types of distribution strategies?
There are primarily two types of distribution strategies, known as direct and indirect, and
depending on the product or service, the two strategies offer different benefits and cost
savings to a company. Here's a definition of direct and indirect distribution strategy:
 Direct distribution strategy: Direct distribution is when manufacturers sell and send
their products directly to consumers without the use of other parties and entities. It
often requires having a warehouse to store products and a delivery process to get them
to customers.
 Indirect distribution strategy: Indirect distribution strategy is when manufacturers
use intermediary businesses and entities to help logistically get products to customers.
It's often most helpful for large amounts of routine products and can create cost
savings for a company.
Within these two main types of distribution strategy are more specific options, including:
 Exclusive: Exclusive distribution is when a manufacturer picks a few sales outlets to
create a level of exclusivity for an item or brand, like luxury goods or exotic vehicles.
 Intensive: Intensive distribution is when a manufacturer wants to penetrate the
market by selling its goods to as many sales outlets as possible to reach customers,
most often for affordable routine items like candy bars, household products and drink
items.
 Selective: Selective distribution is a mix of exclusive and intensive distribution,
giving you more locations to sell a product while still being choosy in which stores or
partnerships to sell within, like a high-end rug manufacturer selecting a specific retail
department store to reach more customers.
 Dual: Dual distribution combines direct and selective distribution strategies to grow
market influence and also maintain direct sales with customers.
 Reverse: Reverse distribution is often less common, where an item flows from the
customer back to a company, typically for recycling or refurbishing of goods, like
used computers or other electronics.
Warehousing and Operations Management:

Warehouse management refers to the oversight of operations in a warehouse. This includes

receiving, tracking, and storing inventory, as well as training staff, managing shipping,
workload planning, and monitoring the movement of goods.
Inventory Management vs Warehouse Management

Before getting into the details of warehouse management, it may help to understand a few
common terms. For example, the terms inventory management and warehouse management
are often used interchangeably, but there are key differences:

Inventory management
Inventory Management is cantered on efficiently and effectively ordering, storing, moving,
and picking the materials needed to make products or fulfill orders.

Warehouse management
Warehouse Management is a broader term that includes other aspects of warehouse
operations, such as warehouse organization and design, labor, order fulfilment, warehouse
monitoring and reporting.

Stock Management
Stock management is often used as another term for inventory management, but it’s
important to recognize the difference between “stock” and “inventory,” particularly for
companies involved in manufacturing products. Stock generally refers to finished product
ready for sale or distribution. Inventory, however, includes everything in the warehouse: raw
materials, materials that are in the process of being built into products and finished products
(stock).

Warehouse Management Processes

Warehouse management includes six core processes. Each process influences the efficiency
of the next, so every step must be optimized for the warehouse operation to run like a well-
oiled machine:

 Receiving. Check in and log incoming items. Verify that you’re receiving the right
quantity, in the right condition, at the right time.
 Put-away. Move items from the receiving dock to their correct storage locations.
 Storage. Safely store and logically arrange inventory to enable fast and accurate
picking.
 Picking. Collect the items needed to fulfill sales orders.
 Packing. Prepare the picked items for shipment. They must be safely packed into the
correct packaging with an accurate packing slip.
 Shipping. Send out the finalized sales orders, ensuring that they are on the right
vehicle, at the right time, with the correct documentation, so customers receive their
orders on time.

Warehouse operations: It covers a number of important areas, from the receiving,

organization, fulfillment, and distribution processes. These areas include:

 Receiving of goods
 Cross-docking of goods
 Organizing and storing inventory
  Attaching asset tracking solutions (like barcodes) to assets and inventory
 Integrating and maintaining a tracking software, like a warehouse management
system
 Overseeing the integration of new technology
 Selecting picking routes
 Establishing sorting and packing practices
 Maintaining the warehouse facility
 Developing racking designs and warehouse infrastructure

Transportation Management:

A transportation management system (TMS) is a logistics platform that uses technology to

help businesses plan, execute, and optimize the physical movement of goods, both incoming
and outgoing, and making sure the shipment is compliant, proper documentation is available.
This kind of system is often part of a larger supply chain management (SCM) system.

TMS and the supply chain

TMSes play a central role in supply chains. SCM is the process of planning, controlling and
executing the flow of a product through the various stages of its lifecycle, from raw materials
to production and distribution. Transportation is usually required in all of the major steps.

Raw materials, for example, need transporting from their original location -- perhaps a mine
or a farm -- to the supplier's processing plant. While the materials' ultimate destination is
likely to be a manufacturer, there may be intermediate locations along the way. The
manufacturing process itself might require additional shipments if, for example,
subassemblies need to be moved between the manufacturer's facilities or to those of a
subcontractor.

Distribution of the final product typically requires several steps that may involve more than
one mode of transportation -- say, when products made in China are shipped overseas,
received in a port and placed on trucks. Even the final shipment to the retail store or the
customer's home isn't the end of it. In reverse logistics, the product is returned to the
distributor or manufacturer for servicing or refurbishment only to be shipped back to the
customer or store for resale, or the product might be transported to a recycling facility or
landfill.

There are two main user groups of TMS:

 Shippers, manufacturers, and distributors; and

 Third-party logistics providers (3PLs).

Inventory Management:
Inventory management helps companies identify which and how much stock to order at what
time. It tracks inventory from purchase to the sale of goods. The practice identifies and
responds to trends to ensure there’s always enough stock to fulfill customer orders and proper
warning of a shortage.

Once sold, inventory becomes revenue. Before it sells, inventory (although reported as an
asset on the balance sheet) ties up cash. Therefore, too much stock costs money and reduces
cash flow.

One measurement of good inventory management is inventory turnover. An accounting

measurement, inventory turnover reflects how often stock is sold in a period. A business does
not want more stock than sales. Poor inventory turnover can lead to deadstock, or unsold
stock.

Benefits of Inventory Management

The two main benefits of inventory management are that it ensures you’re able to fulfill
incoming or open orders and raises profits. Inventory management also:
 Saves Money:
Understanding stock trends means you see how much of and where you have
something in stock so you’re better able to use the stock you have. This also allows
you to keep less stock at each location (store, warehouse), as you’re able to pull from
anywhere to fulfill orders — all of this decreases costs tied up in inventory and
decreases the amount of stock that goes unsold before it’s obsolete.
 Improves Cash Flow:
With proper inventory management, you spend money on inventory that sells, so cash
is always moving through the business.
 Satisfies Customers:
One element of developing loyal customers is ensuring they receive the items they
want without waiting.
Inventory Management Challenges
The primary challenges of inventory management are having too much inventory and not
being able to sell it, not having enough inventory to fulfill orders, and not understanding what
items you have in inventory and where they’re located. Other obstacles include:
 Getting Accurate Stock Details:
If you don’t have accurate stock details,there’s no way to know when to refill stock or
which stock moves well.
 Poor Processes:
Outdated or manual processes can make work error-prone and slow down operations.
 Changing Customer Demand:
Customer tastes and needs change constantly. If your system can’t track trends, how
will you know when their preferences change and why?
  Using Warehouse Space Well:
Staff wastes time if like products are hard to locate. Mastering inventory management
can help eliminate this challenge.
13 Types of Inventory
1. Raw Materials: Raw materials are the materials a company uses to create and finish
products. When the product is completed, the raw materials are typically
unrecognizable from their original form, such as oil used to create shampoo.
2. Components: Components are similar to raw materials in that they are the materials a
company uses to create and finish products, except that they remain recognizable
when the product is completed, such as a screw.
3. Work In Progress (WIP): WIP inventory refers to items in production and includes
raw materials or components, labor, overhead and even packing materials.
4. Finished Goods: Finished goods are items that are ready to sell.
5. Maintenance, Repair and Operations (MRO) Goods: MRO is inventory — often
in the form of supplies — that supports making a product or the maintenance of a
business.
6. Packing and Packaging Materials: There are three types of packing materials.
Primary packing protects the product and makes it usable. Secondary packing is the
packaging of the finished good and can include labels or SKU information. Tertiary
packing is bulk packaging for transport.
7. Safety Stock and Anticipation Stock: Safety stock is the extra inventory a company
buys and stores to cover unexpected events. Safety stock has carrying costs, but it
supports customer satisfaction. Similarly, anticipation stock comprises of raw
materials or finished items that a business purchases based on sales and production
trends. If a raw material’s price is rising or peak sales time is approaching, a business
may purchase safety stock.
8. Decoupling Inventory: Decoupling inventory is the term used for extra items or WIP
kept at each production line station to prevent work stoppages. Whereas all companies
may have safety stock, decoupling inventory is useful if parts of the line work at
different speeds and only applies to companies that manufacture goods.
9. Cycle Inventory: Companies order cycle inventory in lots to get the right amount of
stock for the lowest storage cost. Learn more about cycle inventory formulas in the
“Essential Guide to Inventory Planning.”
10. Service Inventory: Service inventory is a management accounting concept that refers
to how much service a business can provide in a given period. A hotel with 10 rooms,
for example, has a service inventory of 70 one-night stays in a given week.
 11. Transit Inventory: Also known as pipeline inventory, transit inventory is stock that’s
moving between the manufacturer, warehouses and distribution centers. Transit
inventory may take weeks to move between facilities.
12. Theoretical Inventory: Also called book inventory, theoretical inventory is the least
amount of stock a company needs to complete a process without waiting. Theoretical
inventory is used mostly in production and the food industry. It’s measured using
the actual versus theoretical formula.
13. Excess Inventory: Also known as obsolete inventory, excess inventory is unsold or
unused goods or raw materials that a company doesn’t expect to use or sell, but must
still pay to store.

Sourcing and Supplies Management:

Sourcing is the process of vetting, selecting, and managing suppliers who can provide
the inputs an organization needs for day-to-day running. Sourcing is tasked with
carrying out research, creating and executing strategy, defining quality and quantity
metrics, and choosing suppliers that meet these criteria.

Supplier management is the process that ensures maximum value is received for the money
that an organization pays to its suppliers. Because these supplies play a part in the smooth
running of an organization, it’s important for both supplier and organization to engage
properly and effectively.

Establishing a proper relationship, managing the requirements, and communicating clearly

with suppliers is essential to the organization, which means a comprehensive supplier
management policy is required.
Types of supplier relationship

 Buy the market – Typically, an “arm’s length”-style relationship, that’s a

straightforward, commonly-found buyer/seller transactional arrangement for
named goods or services. Usually, it involves contractual fulfillment only, with
little or no interaction beyond communicating the requirement and fulfillment.
 Ongoing relationship – A formally - or informally - recognized status where one
supplier is selected in preference over others. There tends to be more sharing of
information and a comparatively solid relationship between both parties.
 Partnership – Traditionally, a longer-term contract than the above, partnerships
are defined by their increased trust and extensive sharing of information and
commercial goals, especially compared to ongoing relationships.
 Strategic alliance – A long-term relationship in which both parties have agreed to
work together, usually with some sort of exclusive arrangement, with defined
commercial objectives and targets. Whether the arrangement is formal or informal,
there may also be incentives between the two. Requires a close degree of
collaboration in order to realize potential, typically day-to-day interaction.
 Backward integration – This relationship involves the organization owning the
supplier outright as part of their business. As a result, there is a unified culture and,
ideally, full sharing of information and plans. Essentially, supplier and
organizations are one and the same.

Outsourcing

The very definition of outsourcing is in its name: it’s the outsourcing of an entire function or
aspects of a function to a third party. In the context of the workforce, outsourcing comes in
two different versions.

 Business Process Outsourcing (BPO) / Statement of Work (SoW): where a third

party takes complete responsibility and management of a function, or element of a
function. An example would be a production line, where a third-party is responsible
for sourcing all workers, decides which are employed and then manages them. In this
example a function is wholly outsourced. A full-service SOW solution will also fall
under this bracket.
 Managed Service Programs (MSP) / Recruitment Process Outsourcing
(RPO):where a third party takes responsibility for managing the process and certain
aspects of a function’s recruitment. For example, supplier contract management and
payment to suppliers, amongst many others. The crucial difference is that the client
makes the decision on which workers to hire, and then is responsible for the
management of the worker once selected – the client is much more involved and has
more control even though much of the sourcing process has been outsourced. MSP’s
and RPO’s are, by far, more prevalent and applicable within large organisations.

Global Sourcing:

Global sourcing refers to buying the raw materials, components, or services from

companies outside the home country. In a flat world, raw materials are sourced from
wherever they can be obtained for the cheapest price (including transportation costs) and
the highest comparable quality. Information technology and communications have
enabled the outsourcing of business processes, enabling those processes to be performed
in different countries around the world.

Supply chain Performance:

Supply chain performance measure can be defined as an approach to judge the performance
of supply chain system. Supply chain performance measures can broadly be classified into
two categories −
 Qualitative measures − For example, customer satisfaction and product
quality.
 Quantitative measures − For example, order-to-delivery lead time, supply
chain response time, flexibility, resource utilization, delivery performance.
Here, we will be considering the quantitative performance measures only. The performance
of a supply chain can be improvised by using a multi-dimensional strategy, which addresses
how the company needs to provide services to diverse customer demands.

Quantitative Measures

Mostly the measures taken for measuring the performance may be somewhat similar to each
other, but the objective behind each segment is very different from the other.
Quantitative measures is the assessments used to measure the performance, and compare or
track the performance or products. We can further divide the quantitative measures of supply
chain performance into two types. They are −

 Non-financial measures
 Financial measures

Non - Financials Measures

The metrics of non-financial measures comprise cycle time, customer service level,

inventory levels, resource utilization ability to perform, flexibility, and quality. In this
section, we will discuss the first four dimensions of the metrics −
Cycle Time
Cycle time is often called the lead time. It can be simply defined as the end-to-end delay in a
business process. For supply chains, cycle time can be defined as the business processes of
interest, supply chain process and the order-to-delivery process. In the cycle time, we should
learn about two types of lead times. They are as follows −

 Supply chain lead time

 Order-to-delivery lead time
The order-to-delivery lead time can be defined as the time of delay in the middle of the
placement of order by a customer and the delivery of products to the customer. In case the
item is in stock, it would be similar to the distribution lead time and order management time.
If the ordered item needs to be produced, it would be the summation of supplier lead time,
manufacturing lead time, distribution lead time and order management time.
The supply chain process lead time can be defined as the time taken by the supply chain to
transform the raw materials into final products along with the time required to reach the
products to the customer’s destination address.
Hence it comprises supplier lead time, manufacturing lead time, distribution lead time and the
logistics lead time for transport of raw materials from suppliers to plants and for shipment of
semi-finished/finished products in and out of intermediate storage points.
Lead time in supply chains is governed by the halts in the interface because of the interfaces
between suppliers and manufacturing plants, between plants and warehouses, between
distributors and retailers and many more.
Lead time compression is a crucial topic to discuss due to the time based competition and the
collaboration of lead time with inventory levels, costs, and customer service levels.
Customer Service Level
The customer service level in a supply chain is marked as an operation of multiple unique
performance indices. Here we have three measures to gauge performance. They are as
follows −
 Order fill rate − The order fill rate is the portion of customer demands that
can be easily satisfied from the stock available. For this portion of customer
demands, there is no need to consider the supplier lead time and the
manufacturing lead time. The order fill rate could be with respect to a central
warehouse or a field warehouse or stock at any level in the system.
 Stockout rate − It is the reverse of order fill rate and marks the portion of
orders lost because of a stockout.
 Backorder level − This is yet another measure, which is the gauge of total
number of orders waiting to be filled.
 Probability of on-time delivery − It is the portion of customer orders that are
completed on-time, i.e., within the agreed-upon due date.
In order to maximize the customer service level, it is important to maximize order fill rate,
minimize stockout rate, and minimize backorder levels.
Inventory Levels
As the inventory-carrying costs increase the total costs significantly, it is essential to carry
sufficient inventory to meet the customer demands. In a supply chain system, inventories can
be further divided into four categories.
 Raw materials
 Work-in-process, i.e., unfinished and semi-finished sections
 Finished goods inventory
 Spare parts
Every inventory is held for a different reason. It’s a must to maintain optimal levels of each
type of inventory. Hence gauging the actual inventory levels will supply a better scenario of
system efficiency.
Resource Utilization
In a supply chain network, huge variety of resources is used. These different types of
resources available for different applications are mentioned below.
 Manufacturing resources − Include the machines, material handlers, tools,
etc.
 Storage resources − Comprise warehouses, automated storage and retrieval
systems.
 Logistics resources − Engage trucks, rail transport, air-cargo carriers, etc.
 Human resources − Consist of labor, scientific and technical personnel.
 Financial resources − Include working capital, stocks, etc.
In the resource utilization paradigm, the main motto is to utilize all the assets or resources
efficiently in order to maximize customer service levels, reduce lead times and optimize
inventory levels.

Financial Measures

The measures taken for gauging different fixed and operational costs related to a supply chain
are considered the financial measures. Finally, the key objective to be achieved is to
maximize the revenue by maintaining low supply chain costs.
There is a hike in prices because of the inventories, transportation, facilities, operations,
technology, materials, and labor. Generally, the financial performance of a supply chain is
assessed by considering the following items −
 Cost of raw materials.
 Revenue from goods sold.
 Activity-based costs like the material handling, manufacturing, assembling
rates etc.
 Inventory holding costs.
 Transportation costs.
 Cost of expired perishable goods.
 Penalties for incorrectly filled or late orders delivered to customers.
 Credits for incorrectly filled or late deliveries from suppliers.
 Cost of goods returned by customers.
 Credits for goods returned to suppliers.
In short, we can say that the financial performance indices can be merged as one by using key
modules such as activity based costing, inventory costing, transportation costing, and inter-
company financial transactions.

Supply Chain Performance: