UNIT IV

SUPPLY CHAIN MANAGEMENT

Supply Chain: Supply chain consists of all party involve directly or indirectly in fulfilling
customer request. The supply chain not only includes the manufacturer and supplier but also
transporters, warehouses, retailers and customers themselves.
The supply chain represents the interlinkage of an organization with other organization.

Supply chain Management: SCM is integrated process wherein suppliers, manufacturers,

distributers, and retailers work together in an effort to acquire raw materials, convert it into
specified final products and deliver this final product to customers.

The main objective of SCM is to minimize uncertainty and risk associated with supply chain.
 Supply chain management (SCM) is the centralized management of the flow of goods
and services and includes all processes that transform raw materials into final products.
 By managing the supply chain, companies can cut excess costs and deliver products to
the consumer faster and more efficiently.
 Good supply chain management keeps companies out of the headlines and away from
expensive recalls and lawsuits.
 The five most critical elements of SCM are developing a strategy, sourcing raw
materials, production, distribution, and returns.
 A supply chain manager is tasked with controlling and reducing costs and avoiding
supply shortages.

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Elements of Supply Chain Management:

 Planning
 Sourcing raw materials
 Manufacturing
 Delivery
 Returns.

 Planning: To get the best results from SCM, the process usually begins with planning to
match supply with customer and manufacturing demands. Firms must predict what their
future needs will be and act accordingly. This relates to raw materials needed during
each stage of manufacturing, equipment capacity and limitations, and staffing needs
along the SCM process. Large entities often rely on ERP system modules to aggregate
information and compile plans.

 Sourcing: Efficient SCM processes rely very heavily on strong relationships with
suppliers. Sourcing entails working with vendors to supply the raw materials needed
throughout the manufacturing process. In general, SCM sourcing includes ensuring:

 The raw materials meet the manufacturing specification needed for the production of
goods.
 The prices paid for the goods are in line with market expectations.
 The vendor has the flexibility to deliver emergency materials due to unforeseen
events.
 The vendor has a proven record of delivering goods on time and in good quality.

 Manufacturing: At the heart of the supply chain management process, the company
transforms raw materials by using machinery, labor, or other external forces to make
something new. This final product is the ultimate goal of the manufacturing process,
though it is not the final stage of supply chain management.

 Delivering: Once products are made and sales are finalized, a company must get the
products into the hands of its customers. The distribution process is often seen as a brand
image contributor, as up until this point, the customer has not yet interacted with the
product. In strong SCM processes, a company has robust logistic capabilities and
delivery channels to ensure timely, safe, and inexpensive delivery of products.
 This includes having a backup or diversified distribution methods should one method of
transportation temporarily be unusable

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 Returning: The supply chain management process concludes with support for the
product and customer returns. Its bad enough that a customer needs to return a product,
and its even worse if its due to an error on the company's part. This return process is
often called reverse logistics, and the company must ensure it has the capabilities to
receive returned products and correctly assign refunds for returns received. Whether a
company is performing a product recall or a customer is simply not satisfied with the
product, the transaction with the customer must be remedied.

Drivers in Supply Chain: Supply chain capabilities are guided by the decisions make regarding
the five supply chain drivers. Each of these drivers can be developed and managed to
emphasize responsiveness or efficiency depending on changing business requirements. The five
drivers provide a useful framework for thinking about supply chain capabilities.

1. PRODUCTION – This driver can be made very responsive by building factories that
have a lot of excess capacity and use flexible manufacturing techniques to produce a wide
range of items. To be even more responsive, a company could do their production in
many smaller plants that are close to major groups of customers so delivery times would
be shorter. If efficiency is desirable, then a company can build factories with very little
excess capacity and have those factories optimized for producing a limited range of
items. Further efficiency can also be gained by centralizing production in large central
plants to get better economies of scale, even though delivery times might be longer.
2. INVENTORY – Responsiveness can be had by stocking high levels of inventory for a
wide range of products. Additional responsiveness can be gained by stocking products at
many locations so as to have the inventory close to customers and available to them
immediately. Efficiency in inventory management would call for reducing inventory
levels of all items and especially of items that do not sell as frequently. Also, economies
of scale and cost savings can be gotten by stocking inventory in only a few central
locations such as regional distribution centers (DCs).
3. LOCATION – A location decision that emphasizes responsiveness would be one where
a company establishes many locations that are close to its customer base. For example,
fast-food chains use location to be very responsive to their customers by opening up lots
of stores in high volume markets. Efficiency can be achieved by operating from only a
few locations and centralizing activities in common locations. An example of this is the
way e-commerce retailers serve large geographical markets from only a few central
locations that perform a wide range of activities.
4. TRANSPORTATION – Responsiveness can be achieved by a transportation mode that
is fast and flexible such as trucks and airplanes. Many companies that sell products
through catalogs or on the Internet are able to provide high levels of responsiveness by
using transportation to deliver their products often within 48 hours or less. FedEx and
UPS are two companies that can provide very responsive transportation services. And
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now Amazon is expanding and operating its own transportation services in high volume
markets to be more responsive to customer desires. Efficiency can be emphasized by
transporting products in larger batches and doing it less often. The use of transportation
modes such as ship, railroad, and pipelines can be very efficient. Transportation can also
be made more efficient if it is originated out of a central hub facility or distribution center
(DC) instead of from many separate branch locations.
5. INFORMATION – The power of this driver grows stronger every year as the
technology for collecting and sharing information becomes more wide spread, easier to
use, and less expensive. Information, much like money, is a very useful commodity
because it can be applied directly to enhance the performance of the other four supply
chain drivers. High levels of responsiveness can be achieved when companies collect
and share accurate and timely data generated by the operations of the other four drivers.
An example of this is the supply chains that serve the electronics market; they are some
of the most responsive in the world. Companies in these supply chains, the
manufacturers, distributors, and the big retailers all collect and share data about customer
demand, production schedules, and inventory levels. This enables companies in these
supply chains to respond quickly to situations and new market demands in the high-
change and unpredictable world of electronic devices (smartphones, sensors, home
entertainment and video game equipment, etc.).

Reverse Supply Chain:

A reverse supply chain is the series of activities required to retrieve a used product from a
customer and either dispose of it or reuse it. And for a growing number of manufacturers, in
industries ranging from carpets to computers, reverse supply chains are becoming an essential
part of business.

In some cases, companies are being forced to set up reverse supply chains because of
environmental regulations or consumer pressures. Reverse supply chain can divide the chain
into its five key components :

1. Product Acquisition/Process the Return: The quality, quantity, and timing of product
returns need to be carefully managed. Otherwise, companies may find themselves
flooded with returned products of such variable quality that efficient remanufacturing is
impossible. Companies often will need to work closely with retailers and other
distributors to coordinate collection.
2. Deal with Returns: Once a returned product arrives at your location or centralized
processing center, inspect it and determine its return category. (Note: If you have
optimized reverse logistics, you should know where the product should go before it
arrives.) Sort products into the disposition options: fix, resell as new, resell as a return,
recycle, scrap or refurbish.
3. Inspection and Disposition. The testing, sorting, and grading of returned products are
labor-intensive and time consuming tasks. But the process can be streamlined if a
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company subjects the returns to quality standards and uses sensors, bar codes, and other
technologies to automate tracking and testing. In general, a business should seek to make
disposition decisions—based on quality, product configuration, or other variables—at the
earliest possible stage in the returns process. That can eliminate many logistics costs and
get remanufactured products to market faster.
4. Repair/ Reconditioning: Companies may capture value from returned products by
extracting and reconditioning components for reuse or by completely remanufacturing the
products for resale. After reviewing the returned item/equipment and determining
whether it can be repaired, move it to the repair area. If not possible, sell any sellable
parts.
5. Recycle and sell the recycle product: Any parts or products that you cannot fix, reuse or
resell should be sent to the area for recycling. If a company plans to sell a recycled
product, it first needs to determine whether there is demand for it or whether a new
market must be created. If it’s the latter, the company should expect to make heavy
investments in consumer education and other marketing efforts. Potential customers for
remanufactured products or components include not just the original purchasers but also
new customers in different markets.

PULL and PUSH Supply Chain

PULL supply Chain: Under the pull supply chain, the process of manufacturing and supplying
is driven by actual customer demand. In this type of supply chain logistics, inventory is acquired
on a need-basis. The benefits of this type of planning include less wastage in the case of lower
demand. The problem, however, is that the company might not have enough inventory to meet
rising demands due to unforeseen factors. For example, an auto repair shop that only orders parts
that it needs. In this case, the business waits until it gets an order to procure the parts required for
the repair.

Push Supply Chain: Under the push supply chain, the logistics are driven by long-term
projections of customer demand. For example, at the end of the summer season, clothing brands
start to manufacture more warm clothes. This type of planning becomes valuable to companies

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as it helps plan them for events in the future and be prepared when winter comes. This gives the
companies time to meet their needs in time and also gives them time to figure out other logistics
like where to store the inventory.

But instead of responding to actual demand, a push strategy relies on predictions that are often
wrong. High variable expenses, divestments, discounting, missed sales, stock shortages, high
levels of debt, and rescheduled production cycles are other drawbacks of this approach.

Push and Pull Strategies in Practice

In real life, no businesses rely entirely on either push or pull logistics, but instead employ a
mixture of the two to make the best use of them. Modern-day supply chain operations are very
complex and consist of some steps from getting the raw materials to the delivery of the final
product to the end consumer. The process roughly consists of the following steps:
 Determining the availability of raw materials. Even before the product can begin to be
made, it is important to plan where and how the raw materials can be acquired cheaply.
 Processing the raw materials in a factory to yield the final products. This step varies from
company to company like food-based products, cloth-based products, etc.
 Then the finished product is taken to a storage facility or a distribution facility.
 The packaged product is taken to a retail store or shipped directly to the customer as
needed.
 Most supply chains in the world resemble this basic outline. Now, push and pull
strategies can be employed by planners by taking into account the expected demand and
other factors. The most successful shipping companies like Walmart and Amazon
conduct a lot of research into the various factors that determine demand and incorporate
that knowledge into their supply chain.
Bullwhip effect ( Demand Distortion): The bullwhip effect is the demand distortion that travels
upstream in the supply chain. Upstream in the supply chain consists of the retailer through to the
wholesaler and manufacture. The distortion is created by the variance of orders which may be larger
than sales. The bullwhip effect is a supply chain phenomenon describing how small fluctuations
in demand at the retail level can cause progressively larger fluctuations in demand at the
wholesaler, distributor, manufacturer and raw material supplier levels.

What is the bullwhip effect: The bullwhip effect can be explained as an occurrence detected by
the supply chain where orders sent to the manufacturer and supplier create larger variance then
the sales to the end customer. These irregular orders in the lower part of the supply chain
develop to be more distinct higher up in the supply chain. This variance can interrupt the
smoothness of the supply chain process as each link in the supply chain will over or
underestimate the product demand resulting in exaggerated fluctuations.

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Example of the bullwhip effect

The actual demand for a product and its materials start at the customer, however often the actual
demand for a product gets distorted going down the supply chain. Let’s say that an actual
demand from a customer is 8 units, the retailer may then order 10 units from the distributor; an
extra 2 units are to ensure they don’t run out of floor stock.

The supplier then orders 20 units from the manufacturer; allowing them to buy in bulk so they
have enough stock to guarantee timely shipment of goods to the retailer. The manufacturer then
receives the order and then orders from their supplier in bulk; ordering 40 units to ensure
economy of scale in production to meet demand. Now 40 units have been produced for a

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demand of only 8 units; meaning the retailer will have to increase demand by dropping prices or
finding more customers by marketing and advertising.

Reasons of bullwhip effect

1. Forecasting Errors
When companies enter new products into the marketplace, they estimate the demand of the good
based on current market conditions. Most companies in the supply order more than they can sell,
attempting to prevent shortages and lost sales of goods. This "extra" inventory begins to increase
or decrease during the normal market fluctuations of supply and demand. When demand
increases, the companies closest to the consumer will increase inventory to meet the consumer
demand. When the demand falls, the front-end of the supply chain will decrease inventory,
amplifying the extra inventory on each company up the supply chain.

2.Behavioral Causes
One cause of the bullwhip effect is normally driven by management behavior at the front-end
companies of the supply chain. Retail management never wants to have a stock-out on a popular
good, leading to higher orders from the wholesalers. This eventually squeezes each company in
the supply chain and creates decreases in inventory.

Another major behavioral effect is the ordering of too much inventory when consumer demand
has fallen for an item. Retailers may have raised their inventory levels to avoid a stock-out but
are now met with goods that cannot be sold quickly. This creates overstock of inventory for each
supply chain company.

3. Operational Causes
The main operational cause of the bullwhip effect comes from individual demand forecasts from
each company in the supply chain. This causes an increase in demand from companies in the
supply chain, but not the actual consumers who will purchase the goods. A lack of
communication is also prevalent during operational causes; companies may not supply
information up the supply chain regarding current market conditions, causing improper levels of
inventory.

4. Disorganization between each supply chain link; with ordering larger or smaller amounts of a
product than is needed due to an over or under reaction to the supply chain beforehand.

5. Too many Discounts & Promotion: This is because they disrupt larger demand trends and
cause trouble with forecasting. Suppliers become accustomed to fulfilling orders at a high rate and
this can quickly become a problem when the sales end and seasonal trends return. special discounts
and other cost changes can upset regular buying patterns; buyers want to take advantage on
discounts offered during a short time period, this can cause uneven production and distorted
demand information.

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Ways to improve bullwhip effect

1. Collaborate with customers and suppliers

Another strategy to improve supply chain effectively is through better collaboration with
customers and suppliers. When companies work with customers to understand their plans and
forecasts, they can build promotions and seasonality into the forecast and then provide more
insight to their suppliers to help prevent the buildup of unnecessary inventory due to the
bullwhip effect.
Supply chain management software often has capabilities to aid in collaboration. Supplier
portals, EDI transactions, event alerts and project portals are some of the most common ways to
increase visibility and collaboration.
2. Improve forecast accuracy
Even if a company tries to become more demand driven, it still need a forecast to plan long lead
time items or to cover demand from new customers, new products or in-house promotions. While
it’s a given that a forecast will be inaccurate, there are steps that can improve accuracy. Ensuring
that you use the right algorithm to project demand is one way to increase accuracy; taking input
from sales and customers is another.

3. Enable fast decisions with visibility and insight

The most important benefit of supply chain management applications is the visibility and insight
they provide. Without the right degree of insight, a supply chain manager must rely on
guesswork or rules of thumb to make decisions. The result will nearly always be sub-
optimization of the supply chain that results in higher costs, excess inventory, and slow
deliveries.
4. Adopt a demand driven supply chain management approach
Demand driven supply chain management is one of the most effective ways to reduce the
bullwhip effect. It is a known fact that most forecasts are inaccurate, so when actual demand
materializes it is almost certain to differ from forecast quantities. This causes companies to place
emergency orders on suppliers. Without effective communication, those suppliers’ supply chain
management systems will overreact, setting off a chain reaction of excess inventory that
increases cost and slows velocity. In contrast, a demand driven supply network will have less
overall inventory and be more responsive.
5. Improve the flow of information along the supply chain. Improving communication and
forecasting end-user needs greatly assists in reducing the bullwhip effect, states Forio.com. In
addition, look to day-to-day operations along the supply chain to observe trends and better
predict customer demands. Supply chain managers should develop a forecasting system
consisting of customer demands and supplier inventory, in concert with market fluctuations.
6. Reduce delays in the supply chain. it recommends that small businesses use computer aided
ordering to better track products along the supply chain. Cutting order to delivery time also
greatly decreases fluctuations along with lessing inventory levels and operating costs.

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7. Pay closer attention to point of sale purchases made by customers. Using your point of sale
system to create reports that track customer preferences and ordering behavior. This helps to
identify future trends as well as bettering communication along the supply chain.
8. Reduce your order sizes. In the retail industry, this refers to the economic order quantity--
what Investopedia calls the "optimum order quantity"--meaning the purchaser of goods from a
supplier gets a better price for ordering more of a particular product. While this provides a
discounted price, it unnecessarily increases inventory levels and ties up more inventory purchase
money. Ordering according to customer need instead of ordering for promotional discounts also
assists in attenuating the bullwhip effect.
Lean Manufacturing:

Lean manufacturing is a production process based on an ideology of maximising productivity

while simultaneously minimizing waste within a manufacturing operation. The lean principle
sees waste is anything that doesn’t add value that the customers are willing to pay for.

The benefits of lean manufacturing include reduced lead times and operating
costs and improved product quality.

Also known as lean production, the methodology is based on a specific manufacturing principles
that have influenced production systems across the world as well as those of other industries
including healthcare, software and various service industries.

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Importance of Lean Manufacturing

 Eliminate Waste: Waste is a negative factor for cost, deadlines and resources. It
provides no value to products or services
 Improve Quality: Improved quality allows companies to stay competitive and meet the
changing needs and wants of customers. Designing processes to meet these expectations
and desires keep you ahead of the competition, keeping quality improvement at the
forefront
 Reducing Costs: Overproduction or having more materials than is required creates
storage costs, which can be reduced through better processes and materials management
 Reducing Time: Wasting time with inefficient working practices is a waste of money
too, while more efficient practices create shorter lead times and allow for goods and
services to be delivered faster

Lean Manufacturing Principles:

1. Value: Value is determined from the perspective of the customer and relates to how
much they are willing to pay for products or services. This value is then created by the
manufacturer or service provider who should seek to eliminate waste and costs to meet
the optimal price for the customer while also maximising profits.
2. Map the Value Stream: This principle involves analysing the materials and other
resources required to produce a product or service with the aim of identifying waste and
improvements. The value stream covers the entire lifecycle of a product, from raw
materials to disposal. Each stage of the production cycle needs to be examined for waste
and anything that doesn’t add value should be removed. Chain alignment is often
recommended as a means to achieve this step.
3. Create Flow: Creating flow is about removing functional barriers to improve lead times.
This ensures that processes flow smoothly and can be undertaken with minimal delay or
other waste. Interrupted and disharmonious production processes incur costs and creating
flow means ensuring a constant stream for the production or service delivery.
4. Establish a Pull System: A pull system works by only commencing work when there is
demand. However, due to the inaccuracy of many forecasts, this can result in either too
much or not enough of a product being produced to meet demand. This can lead to
additional warehousing costs, disrupted schedules or poor customer satisfaction. A pull
system only acts when there is demand and relies on flexibility, communication and
efficient processes to be successfully achieved.
5. Perfection: Perfection via continued process improvements is also known as ‘Kaizen’.
Lean manufacturing requires ongoing assessment and improvement of processes and
procedures to continually eliminate waste in an effort to find the perfect system for the
value stream. To make a meaningful and lasting difference, the notion of continuous
improvement should be integrated through the culture of an organisation and requires the

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measurement of metrics such as lead-times, production cycles, throughput and

cumulative flow.

Agile Manufacturing:

Agile manufacturing is a manufacturing methodology that places an extremely strong

focus on rapid response to the customer – turning speed and agility into a key competitive
advantage. It represents a very interesting approach to developing a competitive
advantage in today’s fast-moving marketplace. An agile company is in a much better
position to take advantage of short windows of opportunity and fast changes in customer
demand.
Agile manufacturing is effective because it acknowledges the realities of the modern
marketplace and transforms them into a competitive advantage. It directly addresses the
following issues:

 Consumers love instant gratification. They are increasingly getting used to it

and they are often willing to pay for it. For example, have you ever ordered a
product with overnight shipping…waiting in eager anticipation?
 Consumers love choice. They prefer to get a product exactly as they want
it…without compromise.
 Consumers are fickle. Their interests shift and move in unpredictable ways.

4 KEY AGILE MANUFACTURING ELEMENTS

There are four key elements for agile manufacturing:

1. Modular Product Design: designing products in a modular fashion that enables

them to serve as platforms for fast and easy variation
2. Information Technology: automating the rapid dissemination of information
throughout the company to enable lightning fast response to orders
3. Corporate Partners: creating virtual short-term alliances with other companies
that enable improved time-to-market for selected product segments
4. Knowledge Culture: investing in employee training to achieve a culture that
supports rapid change and ongoing adaptation

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Role of IT in Supply Chain Management

IT integrates various operations carried out by different companies in the supply chain.
It speeds up the business processes and prevents bottlenecks. Companies are closer to achieving
on-time procurement, shorter inventory, and better efficiency, especially in manufacturing. IT
allows companies in the supply chain to meet the needs of consumers.
The advancement of inter organizational information system for the supply chain has three
distinct benefits. These are −
 Cost reduction − The advancement of technology has further led to ready availability of
all the products with different offers and discounts. This leads to reduction of costs of
products.
 Productivity − The growth of information technology has improved productivity because
of inventions of new tools and software. That makes productivity much easier and less
time consuming.
 Improvement and product/market strategies − Recent years have seen a huge growth
in not only the technologies but the market itself. New strategies are made to allure
customers and new ideas are being experimented for improving the product.

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Importance of IT in SCM:

1. Effective Information Management: Effective information management can help

ensure that a firm meets the logistical needs of its customers. Firms need to place
priorities on logistical elements such as on-time delivery, stockout levels, order status,
shipment tracking and expediting, order convenience, order completeness, creation of
customer pick up, and backhaul opportunities and product substitution.

2. Useful Combination of Software and Hardware: Logistics information systems

combine hardware and software to manage, control, and measure logistics activities that
occur within specific firms as well as across the overall supply chain. Hardware includes
computers and servers, internet technologies, ancillary technologies such as barcode and
RF devices, communication channels, and storage media.

3. Digital Order Processing System A customer order provides the communication

message to set the logistics process in motion.The cost and efficiency of the entire
communication can result in loss of customers or excessive transportation, inventory,
and warehousing costs together with possible manufacturing inefficiencies caused by
frequent changes in the production line. The order processing and information systems
form the foundation for logistics and corporate management information systems.

4. Computerization of Firm Activities: Computers are used in order entry, order

processing, finished goods inventory control, performance measurement, freight
audit/payment, and warehousing.

5. Competitive Advantages: Computer-based decision support systems (DSS) support the

executive decision-making process in logistics and supply chain management.To support
time-based competition, firms are increasingly using information technologies as a source
of competitive advantages.

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