Chapter 1

Understanding the Supply Chain

Dr S K Sharma, BITS Pilani 1

 Supply Chain Management: Success Stories
• Dell: Inventory turn-over ratio of 58.7 compared to industry average of
12 (Net Profitability of 5.3.%) ( Drop from 7.8% in 2006)

• Wal-Mart: Inventory turn-over ratio of 9.9 compared to industry average

of 5.5 ( Net profitability of 3.5%)

• Zara Corporation: Lead-time from new product to stores is 15 to 20 days

compared to industry average of six months ( Net profitability of 11.3%)

• Toyata

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Supply Chain Management: Horror Stories
• Cisco: Cisco wrote off 2.2 $ billion worth of inventory in May
2001. Biggest write-off in history.
• Sony: PlayStation II–a lost opportunity
– SONY could supply only 25% of the potential demand for
Christmas market
– Nintendo Wii Game Console : Shortage expected in year
2007
• Kmart Launched supply chain initiative in May 2000 worth $1.4
billion in software and services. In 2001-02, announced that it
was abandoning most of the software purchased and taking
$130 million write-off
• Nike- i2 Technology Controversy: Lost $100 in sales in last
quarter of 2000 i2 Technologies was blamed. “ This is what we
get for our $400 million”—Nike Chairman
• Wal-Mart: RFID Initiative
-
 What is a Supply Chain?

• All stages involved, directly or indirectly, in fulfilling a customer request.

• Includes manufacturers, suppliers, transporters, warehouses, retailers, and

customers.

• Within each company, the supply chain includes all functions involved in
fulfilling a customer request (product development, marketing, operations,
distribution, finance, customer service).

Contd…

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Supply Chain Management: A Pictorial Representation
C1

C2

C3

C4

C5

C6

VENDOR INBOUND INTERFACILITY DISTRIBUTION OUTBOUND

PLANTS CUSTOMERS
TRANSPORTATION TRANSPORTATION CENTERS TRANSPORTATION
What is a Supply Chain?

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 What is a Supply Chain?

• Customer is an integral part of the supply chain

• Includes movement of products from suppliers to manufacturers to distributors,

and information, funds, and products in both directions.

• May be more accurate to use the term “supply network” or “supply web”.

• Typical supply chain stages: customers, retailers, distributors, manufacturers,

suppliers.

• All stages may not be present in all supply chains (e.g., no retailer or distributor for
Dell).

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Flows in a Supply Chain

Figure 1-2

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 The Objective of a Supply Chain

• Maximize overall value created

Supply chain surplus = Customer value – Supply chain cost

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 The Objective of a Supply Chain

• Example: A customer purchases a wireless router from Best Buy for $60
(revenue).

• Supply chain incurs costs (information, storage, transportation, components,

assembly, etc.).

• Difference between $60 and the sum of all of these costs is the supply chain
profit.

• Supply chain profitability is total profit to be shared across all stages of the
supply chain.

Contd…

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 The Objective of a Supply Chain
• Success should be measured by total supply chain profitability, not by profits
at an individual stage.

• Customer is the only source of revenue.

• Sources of cost includes flows of information, products, or funds between

stages of the supply chain.

• Effective supply chain management is the management of flows between

and among supply chain stages to maximize total supply chain surplus.

• Impact of supply chain decisions on supply chain surplus i.e. role of

distributors in US and India.
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 What is SCM
• As defined by Ellram and Cooper (1993), supply chain management is “an
integrating philosophy to manage the total flow of a distribution channel
from supplier to ultimate customer”.

• Simichi Levi and Kaminsky (2006) defined 'SCM is a set of approaches

utilized to efficiently integrate suppliers, manufacturers, warehouses, and
stores so that merchandise is produced and distributed at the right
quantities, to the right location, and at the right time, in order to minimize
system wide costs while satisfying service level requirements'

• 'SCM integrates the supply and demand management within and across
companies‘ (CSCMP)

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 Historical development
Physical distribution (Before 1950)

Business Logistics (1950 to 1990)

Supply chain management (After 1990)

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Historical Evolution of the Supply Chain
• First Revolution: (Ford Motor Co. 1910–1920)
Single product, that is, no product variety
Vertical integration
• Second Revolution: (Toyota Motor Co. 1960–1970)
Wide Variety
Long-term relationship with suppliers
• Third Revolution: (Dell Computers 1995–Current)
Customized products
Medium-term relationship with suppliers
Suppliers have to maintain technology and cost
leadership
 Decision Phases of a Supply Chain

• Supply chain strategy or design

How to structure the supply chain over the next several years

• Supply chain planning

Decisions over the next quarter or year

• Supply chain operation

Daily or weekly operational decisions

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 Supply Chain Strategy or Design

• Decisions about the structure of the supply chain and what processes each
stage will perform.

• Strategic supply chain decisions

Locations and capacities of facilities
Products to be made or stored at various locations
Modes of transportation
Information systems.

• Supply chain design must support strategic objectives.

• Supply chain design decisions are long-term and expensive to reverse—must

take into account market uncertainty.
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 Supply Chain Planning

• Definition of a set of policies that govern short-term operations.

• Fixed by the supply configuration from previous phase.

• Starts with a forecast of demand in the coming year

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 Supply Chain Planning

• Planning decisions:
Which markets will be supplied from which locations
Planned buildup of inventories
Subcontracting, backup locations
Inventory policies
Timing and size of market promotions

• Must consider in planning decisions—demand uncertainty, exchange

rates, competition over the time horizon

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 Supply Chain Operation

• Time horizon is weekly or daily.

• Decisions regarding individual customer orders.

• Supply chain configuration is fixed and operating policies are determined.

• Goal is to implement the operating policies as effectively as possible.

• Allocate orders to inventory or production, set order due dates, generate pick lists
at a warehouse, allocate an order to a particular shipment, set delivery schedules,
place replenishment orders.

• Much less uncertainty (short time horizon).

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 Process View of a Supply Chain

• Cycle view: processes in a supply chain are divided into a series of cycles,
each performed at the interfaces between two successive supply chain
stages.

• Push/Pull view: processes in a supply chain are divided into two categories
depending on whether they are executed in response to a customer order
(pull) or in anticipation of a customer order (push).

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Cycle View of Supply Chain Processes

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Cycle View of Supply Chain Processes

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Push/Pull View of Supply Chains

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 Push/Pull View of Supply Chain Processes

• Supply chain processes fall into one of two categories depending on the
timing of their execution relative to customer demand.

• Pull: Here execution is initiated in response to a customer order (reactive).

• Push: Here execution is initiated in anticipation of customer orders

(speculative).

• Push/pull boundary separates push processes from pull processes.

Contd…

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Push/Pull View of Supply Chain Processes

• Useful in considering strategic decisions relating to supply chain design –

more global view of how supply chain processes relate to customer
orders.

• Can combine the push/pull and cycle views

L.L. Bean
Dell

• The relative proportion of push and pull processes can have an impact on
supply chain performance.

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Push/Pull View—L.L. Bean

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Push/Pull View—Dell

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Supply Chain Macro Processes

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 Examples of Supply Chains

• Gateway and Apple

• Zara

• W.W. Grainger and McMaster-Carr

• Toyota

• Amazon

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 Gateway and Apple

• Why did Gateway choose not to carry any finished-product inventory at its
retail stores? Why did Apple choose to carry inventory at its stores?
• Should a firm with an investment in retail stores carry any finished-goods
inventory? What are the characteristics of products that are most suitable
to be carried in finished-goods inventory? What characterizes products
that are best manufactured to order?
• How does product variety affect the level of inventory that a retail store
must carry?
• Is a direct selling supply chain without retail stores always less expensive
than a supply chain with retail stores?
• What factors explain the success of Apple retail and the failure of Gateway
country stores?

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 Zara

• What advantage does Zara gain against the competition by having a very
responsive supply chain?
• Why has Inditex chosen to have both in-house manufacturing and
outsourced manufacturing? Why has Inditex maintained manufacturing
capacity in Europe even though manufacturing in Asia is much cheaper?
• Why does Zara source products with uncertain demand from local
manufacturers and products with predictable demand from Asian
manufacturers?
• What advantage does Zara gain from replenishing its stores multiple times
a week compared to a less frequent schedule? How does the frequency of
replenishment affect the design of its distribution system?
• Do you think Zara’s responsive replenishment infrastructure is better
suited for online sales or retail sales?

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 W.W. Grainger and McMaster-Carr

• How many DCs should be built and where should they be located?
• How should product stocking be managed at the DCs? Should all DCs
carry all products?
• What products should be carried in inventory and what products should
be left with the supplier to be shipped directly in response to a customer
order?
• What products should W.W. Grainger carry at a store?
• How should markets be allocated to DCs in terms of order fulfillment?
What should be done if an order cannot be completely filled from a DC?
Should there be specified backup locations? How should they be
selected?
Contd…

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 W.W. Grainger and McMaster-Carr

• How should replenishment of inventory be managed at the various

stocking locations?

• How should Web orders be handled relative to the existing business? Is it

better to integrate the Web business with the existing business or to set
up separate distribution?

• What transportation modes should be used for order fulfillment and

stock replenishment?

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 Toyota

• Where should plants be located, what degree of flexibility and what capacity
should each have?

• Should plants be able to produce for all markets?

• How should markets be allocated to plants?

• What kind of flexibility should be built into the distribution system?

• How should this flexible investment be valued?

• What actions may be taken during product design to facilitate this flexibility?
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 Amazon.com

• Why is Amazon building more warehouses as it grows? How many

warehouses should it have and where should they be located?
• What advantages does selling books via the Internet provide over a
traditional bookstore? Are there any disadvantages to selling via the
Internet?
• Should Amazon stock every product it sells?
• What advantage can bricks-and-mortar players derive from setting up an
online channel? How should they use the two channels to gain maximum
advantage?
• What advantages/disadvantages does the online channel enjoy in the sale
of shoes (diapers) relative to a retail store?
• For what products does the online channel offer the greater advantage
relative to retail stores? What characterizes these products?

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 Gopaljee

• How can Gopaljee’s supply and distribution model be extended to other

business lines in the Indian and South Asian context?

• What all socio-economic features of South Asian societies can be identified

as the foundations for building sustainable supply chains?

• How can the existing distribution channels in the South Asian region be
transformed to maximize the value delivered to the customer?

• How can such indigenously developed SCM models integrate with and
expand into global supply chains?
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 How SCM has shifted the business focus
• From cross functional integration to cross enterprise
integration

• From physical efficiency to market mediation

• From supply focus to demand focus

• From single company product design to collaborative product,

process design

• From cost reduction to breakthrough business models

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Top 25 supply chain

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Top 25 supply chain (Cont.)

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 Summary of Learning Objectives

• Discuss the goal of a supply chain and explain the impact of supply chain
decisions on the success of a firm.

• Identify the three key supply chain decision phases and explain the
significance of each one.

• Describe the cycle and push/pull views of a supply chain.

• Classify the supply chain macro processes in a firm.

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 Supply-chain operations reference-model
(SCOR)
• Supply-chain operations reference-model (SCOR) is a process
reference model developed by the management consulting firm PRTM,
now part of PricewaterhouseCoopers LLP (PwC) and endorsed by the
Supply-Chain Council (SCC) as the cross-industry de facto standard
diagnostic tool for supply chain management. SCOR enables users to
address, improve, and communicate supply chain management practices
within and between all interested parties in the extended enterprise.

• SCOR is a management tool, spanning from the supplier's supplier to the

customer's customer. The model has been developed by the members of
the Council on a volunteer basis to describe the business activities
associated with all phases of satisfying a customer's demand.

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 Three major pillars
• Process modelling

• Performance measurements

• Best practices

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 Distinct management processes
• Plan – Processes that balance aggregate demand and supply to develop a
course of action which best meets sourcing, production, and delivery
requirements.
• Source – Processes that procure goods and services to meet planned or
actual demand.
• Make – Processes that transform product to a finished state to meet
planned or actual demand.
• Deliver – Processes that provide finished goods and services to meet
planned or actual demand, typically including order management,
transportation management, and distribution management.
• Return – Processes associated with returning or receiving returned
products for any reason. These processes extend into post-delivery
customer support.
• Enable - New process since Version 11 (Dec 2012).

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Dr S K Sharma, BITS Pilani 45
• SCOR provides three-levels of process detail. Each level of detail assists a
company in defining scope (Level 1), configuration or type of supply chain
(Level 2), process element details, including performance attributes (Level
3). Below level 3, companies decompose process elements and start
implementing specific supply chain management practices. It is at this stage
that companies define practices to achieve a competitive advantage, and
adapt to changing business conditions.
• M1 equals a “Make build to stock” scenario. Products or services are
produced against a forecast. M2 equals a “Make build to order”
configuration. Products or services are produced against a real customer
order in a just-in-time fashion. M3 stands for “Make engineer to order”
configuration. In this case a blueprint of the final product is needed before
any make activity can be performed.
• Level 3 processes, also referred to as the business activities within a
configuration, represent the best practice detailed processes that belong to
each of the Level 2 “parents”.
• The example shows the breakdown of the Level 2 process “Make build to
order” into its Level 3 components identified from M2.01 to M2.06. Once
again this is the SCOR syntax: letter-number-dot-serial number.
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Level-1 performance metrics

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 The best-practices pillar
• Once the performance of the supply chain operations has been measured and
performance gaps identified, it becomes important to identify what activities should
be performed to close those gaps. Over 430 executable practices derived from the
experience of SCC members are available.
• The SCOR model defines a best practice as a current, structured, proven and
repeatable method for making a positive impact on desired operational results.
• ƒ Current – Must not be emerging (bleeding edge) and must not be antiquated
• ƒ Structured – Has clearly stated Goal, Scope, Process, and Procedure
• ƒ Proven – Success has been demonstrated in a working environment.
• ƒ Repeatable – The practice has been proven in multiple environments.
• ƒ Method- Used in a very broad sense to indicate: business process, practice,
organizational strategy, enabling technology, business relationship, business model,
as well as information or knowledge management.
• ƒ Positive impact on desired operational results The practice shows operational
improvement related to the stated goal and could be linked to Key Metric(s). The
impact should show either as gain (increase in speed, revenues, quality) or reduction
(resource utilizations, costs, loss, returns, etc.).

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SCOR Level 3 best practice

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