1.

1 Concept of Supply Chain

1.2 Growth of Supply Chain
1.3 Functions of Supply Chain Management
1.4 Value Chain
1.5 Bullwhip Effect
1.6 Supply Chain Drivers
 WHAT IS A SUPPLY
CHAIN?
• A supply chain consists of all parties involved,
directly or indirectly, in fulfilling a customer
request.
• The supply chain includes not only the
manufacturer and suppliers, but also
transporters, warehouses, retailers, and even
customers themselves.
• A supply chain is dynamic and involves the
constant flow of information, product,
and funds between different stages.
 Role of
Customer
• The customer is an integral part of the supply
chain.
• The primary purpose of any supply chain is to
satisfy customer needs and, in the process,
generate profit for itself.
 Supply Chain
Stages
A typical supply chain may involve a variety of
stages, including the following:
• Customers
• Retailers
• Wholesalers/distributors
• Manufacturers
• Component/raw material suppliers
THE OBJECTIVE OF A SUPPLY
CHAIN
• The objective of every supply chain should be to maximize the
overall value generated.
• The value(also known as supply chain surplus) a supply chain
generates is the difference between what the value of the final
product is to the customer and the costs the supply chain incurs i
filling the customer’s request.
• Supply Chain Surplus = Customer Value –
• Supply Chain Cost
 THE IMPORTANCE
OF SUPPLY CHAIN
DECISIONS
• Supply chain design, planning, and operation
decisions play a significant role in the success
or failure of a firm.
• To stay competitive, supply chains must adapt
to changing technology and customer
expectations.
Contd...
• There is a close connection between the
design and management of supply chain flows
(product, information, and funds) and the
success of a supply chain.
• Wal-Mart, Amazon are examples of companies
that have built their success on superior
design, planning, and understanding the
supply chain operation of their supply chain.
 Wal-Mart Strategy
• Wal-Mart has been a leader at using supply
chain design, planning, and operation to
achieve success.
• From its beginning, the company invested
heavily in transportation and information
infrastructure to facilitate the effective flow of
goods and information.
Contd...
• Wal-Mart designed its supply chain with clusters
of stores around distribution centers to facilitate
frequent replenishment at its retail stores in a
cost-effective manner.
• Frequent replenishment allows stores to match
supply and demand more effectively than the
competition.
• Wal-Mart has been a leader in sharing
information and collaborating with suppliers to
bring down costs and improve product
availability.
Growth of Supply
Chain
Introduction
• Supply chains not static–they evolve and
change
are in size, shape and configuration.
• New supply may emerge for
reasons–for
chains example,many
in response to a
technological breakthrough, the emergence of a
new product or market niche or new
geographical markets.
• Supply chains also decline and may disappear
when demand is no longer sufficient to drive the
chain
Factors influencing
supply chain evolution
Technology and innovation
• Technology influences on the supply chain are
strongly evident in high “clockspeed” supply
chains such as consumer electronics.
• Technological and infrastructural “lock-in”
influences the speed and transition patterns
and the likelihood of disruptive change in
supply chain configurations.
• Process technologies also influence the birth
of new supply chains.
• Some“indirect” process technologies such as
ICT are influencing and changing many supply
chains in different ways, for example by
eliminating process stages, reconfiguring
supply processes and enabling direct demand-
driven processes
Economic
s
• Cost-related factors have always
influenced supply and sourcing decisions.
• However, it is not just the economics of labour
that influence supply chains but broader
economic including
water, and
considerations transportation,
resource costs, energy,
and the other costs of
investment, currency exchange capacity
rates and local
inducements.
Markets and competition

• The growth and decline in markets may result in supply ch

changing or developing quickly.
• The needs of the market may demand higher levels of variety
customization requiring new supply and fulfilment solutions.
• Firms like Volkswagen and Toyota have sought to develop gl
product platforms that can be adapted and produced regionally.
Policy and
regulation
• The expansion in international trade through
bodies such as WTO and the growth of free
trade areas in North and Latin America,
Europe and Asia have influenced existing
supply chains, as well as the emergence of
new supply routes.
• Industrial politics and national industrial
policies help to shape supply chains.
• In the case of the aerospace industry, “offset”
clauses require firms like Boeing and Airbus to
carry out some production locally in countries
that make product purchases.
Procurement and sourcing
• The sourcing of products and raw materials
has shaped supply chains for centuries.
• When supply is scarce or in industries with
low margins and high competition, sourcing
policies and decisions may fully explain supply
chain configuration.
• Understanding the distribution of potential
sources and the best use of these are
omnipresent concerns in many firms.
Supply chain strategies and
re-engineering
• These refer to deliberately induced reengineering
of supply chains undertaken when there is an
imperative to change, often driven by a changing
competitive landscape.
• Mergers and acquisitions may be the spur for a
supply chain reengineering initiative.
• The power of the prime network entities, be they
producers, retailers or service providers, may be
instrumental in shaping contemporary global
supply networks.
Conclusion
s
• Supply chains are critical for the world economy
and essential for modern life.
• Understanding the supply chain lifecycle and how
supply chains evolve provides new perspectives
for contemporary supply chain design and
management.
• The six factors that interact and may affect a
supply chain over its lifecycle– technology and
innovation, economics, markets and competition,
policy and regulation, procurement and sourcing,
supply chain strategies and re-engineering.
FUNCTIONS OF
SUPPLY CHAIN
MANAGEMENT
• Supply chain management maintains the
balance between the demand and supply and
involves activities right from procurement of
materials and converting them into finished
goods to ensuring delivery at the right time to
reach the end-consumer.
• Supply chain management is the lifeline of an
organization.
• It needs to be efficient to keep the operations
running like a well-oiled machine.
• A streamlined supply chain management can
enhance customer relationships, lower down
operational costs.
 Centers
SupplyFive
Around Chain
MainManagement
Functions:
• Purchasing
• Operations
• Logistics
• Resource Management
• Information Workflow
Purchasin
g
• Purchasing is one of the first functions of
supply chain management.
• It pertains to procuring raw materials and
other resources that are required to
manufacture the goods.
• It involves coordination with suppliers to
deliver the materials without any delay.
• It is not a simple act of buying things.
• There are various aspects one needs to
consider when purchasing raw materials or
other items needed to manufacture finished
goods.
• All purchasing activities can have a significant
impact on the sales and profitability of a
company.
• When sourcing raw materials, it is necessary to ensure
that they are of a quality that is most suitable for that
company.
• It is a function of SCM to ensure that only such
materials are purchased.
• It is not enough to check this once. They must regularly
test these items to ensure consistency. Raw materials
of inconsistent quality could adversely affect finished
goods production. This can result in the product losing
its salient features.
• A small error in purchasing can damage an
organization’s reputation.
• The timely arrival of materials is necessary to
ensure that all order fulfillment occurs as
required by customers.
• It is necessary to ensure no disruption in supply
of materials to have continuous production
without any interruption.
• Purchasing in excess can result in unnecessary
blocking of money and usage of space. Hence,
purchase managers must have up-to-date
information about orders and what materials will
be needed to execute them on time.
Operations
• The operation team engages in demand
planning and forecasting.
• Accordingly, it further sets the ball rolling for
inventory management, production, and
shipping.
• Before giving a raw material purchase order, the
organization must anticipate the possible
demand for a product and the number of units it
needs to produce.
• If the demand is over anticipated, then it could
result in excess inventory cost.
• If the demand is under anticipated, the
establishment wouldn’t be able to meet
customer demand, thereby leading to revenue
loss. So, the operation is a critical function of
supply chain department.
• Operation managers are responsible for
planning production in relation to demand.
• These officials will have to arrange for raw
materials and ensure that manufacturing will
be done on time to ensure prompt delivery of
goods to customers.
• The other important function of SCM that falls
under operations is the organizing of space.
• Storage space is a costly commodity considering
that real estate is very expensive in most Indian
cities.
• SC managers must manage available storage
space very efficiently to ensure that they store
only essential goods in company warehouses.
Logistic
s
• Logistics is the part of supply chain management
that coordinates all aspects of planning,
purchasing, production, warehousing, and
transportation so that the products will reach the
end-consumer without any hindrances.
• It is helpful to have adequate communication
between multiple departments so that products
can be shipped to customers quickly and at the
lowest cost.
Resource Management
• Production consumes raw materials,
technology, time, and labor.
• Resource management ensures that the right
resources are allocated to the right activities
in an optimized manner.
• This will ensure that an optimized production
schedule is created to maximize the efficiency of
the operations.
• When calculating the available capacity, you
should consider the capabilities of each resource
and determine whether they can perform the
work that is scheduled on it.
• This will ensure that you are not over-promising
orders and that your production schedule is
feasible and accurate.
Information Workflow
• Information sharing and distribution is what
keeps all of the other functions of supply
chain management on track.
• If the information workflow and
communication are poor, it could break apart
the entire chain.
• Many disruptions that arise in supply chains
can be prevented by increased visibility and
communication.
• Having a consistent system that is used by all
departments will ensure that everyone is
working with the same set of data and will
prevent miscommunications and time spent
updating everyone on new developments.
Value Chain
• Within a typical enterprise the three areas,
physical distribution, manufacturing support,
and procurement overlap to provide
integrated management of materials, semi-
finished components, and products moving
between locations, supply sources, and
customers of the enterprise.
• Viewing each as an integral part of the overall
value-adding process creates an opportunity
to capitalize on the unique attributes of each
while facilitating the overall process.
• One of the key features of modern industrial
system is that organizations use specialist
services, incorporate proprietary items into
products, and develop ancillaries to support
their product and services.
• Very rarely does a single company perform all
activities from product design, production of
components, and final assembly to delivery to
the final user by itself.
• There is usually specialization of role and a
number of organizations are involved in the
creation of the final product.
• Therefore, all the organizations connected
with delivering the product or services to the
final consumer are elements of a value chain
system of the supply chain.
• The value a supply chain generates is the difference
between what the final product is worth to the
customer and the effort the supply chain expends in
filling the customer’s request.
• Therefore, the profitability of the supply chain is based
on the flows between and among stages in a supply
chain, unlike the traditional measure of organizational
success in terms of the profits at an individual stage.
• The final price of the goods should be such that it
covers all of the costs involved, with a profit share for
each participant in the chain.
• Within the whole value system, there is only a
certain value of profit margin available.
• This is the difference of the final price the
customer pays and the sum of all costs incurred
with the production and delivery of the
product/service (e.g. raw material, energy etc.).
• The structure of the value system will determine,
to a large extent, how this margin is distributed
between the various elements of the value
system.
• Each member of the value chain will use its
standing in the value chain, market position
and negotiating power to get a higher
proportion of this margin.
• A successful value chain is developed when
each member of the value chain believes that
it obtains value from the relationship.
• The ability of an organization to influence the
performance of other organizations in the
value chain is often a core capability and a
source of competitive advantage.
• Many organizations have special functions
that are involved in ancillary development,
dealer and distributor training, etc.
• Value chain analysis should cover the whole value
system in which the organization operates.
• A value chain is one of the most common sources
of increasing the technological competence of
organizations.
• Knowledge is spread between members in the
value chain through the process of diffusion.
• This results in adding competencies both to the
provider and receiver of the knowledge.
Value Chain
Analysis
• A typical value chain analysis can
be performed in the following steps:
1. Analysis of own value
chain
• Identify the primary and support activities.
• Each of these activity categories needs to be broken up into its b
components and costs are allocated to every single activ
component.
2. Analysis of customers value
chains
• Examine how does our product fit into
the value chain of the customer.
• 3. Identify activities that differentiate the firm
and the potential cost advantages in
comparison with competitors.
4. Identify potential value added
for the customer
• How can our product add value to the
customers value chain (e.g. lower costs or
higher performance) – where does the
customer see such potential?
• 5. The final step is to identify those activities
that provide a differential advantage
compared to competitors.
• These are the competencies or the core
competencies of the organization.
Bullwhip
Effect
What is the Bullwhip Effect
in supply chain?
• The Bullwhip Effect is a phenomenon in
• inefficiencies.
the
supply chain and distribution channels
• This mostly occurs when retailers become highly reactive to consu
in which forecasts reveal supply chain
demand, and in turn, intensify expectations around it, causin
domino effect along the chain.
• The bullwhip effect was named for the way the
amplitude of a whip increases down its length.
Here, the end customers have the whip handle,
and as they a little movement,
createamplifies travelingup,
whip increasing
the buffer
between the customer and the manufacturer.
• On average, there are 6 to 7 inventory points
between the end customer and raw material
supplier.
• Better communication among supply chain
partners, better forecasting methods, and a
highly demand-driven approach can help
reduce inventory waste or over-stocking that
result out of the bullwhip effect.
Causes of Bullwhip
Effect
Some of the factors contributing to
the bullwhip effect are
 Lack of communication and disorganization
 Order batching
 Variation in pricing
Lack of communication
and
disorganization
• This can happen between each supply chain
link when managers reduce product demand
differently within different links of the supply
chain and order different quantities, smaller
or larger amounts than what is required.
• Such miscommunication leads to
disorganization and hinders the smooth
working of supply chain processes.
Order batching
• Companies sometimes don’t place orders with
the supplier after receiving an order.
• They wait for the demand to accumulate first.
• This alters the variability in demand because
sometime there could be a surge while other
times there could be a dip in demand.
Variation in
pricing
• Promotional discounts, special offers can
disrupt the usual demand for products.
• Since buyers want to make the most out of
this hiked demand in a short period, it could
lead to inaccurate demand forecasting and
consequently over-production.
Example of Bullwhip
Effect
• The actual demand for a particular product
and its materials begin with the customer
demand and requirements.
• However, there are times when the actual
demand for the product gets distorted or
disturbed going down the supply chain.
• Let’s assume for a while that the actual
demand of the customer is 8 units, and the
retailer may then order, say 10 units from the
distributor – here the extra 2 units are to
ensure there is safety stock in place and the
retailer is not running out of floor stock.
• Coming back to the supplier, he, then orders
20 units from the manufacturer, allowing the
retailer to buy in bulk so that there is always
enough stock to guarantee the timely delivery
of goods to them.
• Now, the manufacturer makes sure that there
is enough quantity to ship to the supplier, so
they manufacture 40 units to stay on a safer
side.
• What happened here is clear.
• There are 40 units manufactured for
something that has a demand of 8; meaning
the retailer now has to push himself when it
comes to increasing the demand by either
dropping the prices or finding more and more
customers via marketing or advertising.
Ways to Minimize the Bullwhip
Effect
• The nature of the supply chain and inventory
management practices differs from each
industry.
• Below are some of the ways in which you can
minimize the bullwhip effect in your supply
chain and distribution channel.
Improve inventory planning
process
• Inventory planning involves a careful
amalgamation of different functions like
analyzing sales history for accurate demand
forecasting, seasonal inventory demand
planning, new product launches, and stock
planning of currently selling items and
discontinuation of older products.
 Better communication between managers
• Since managers of different supply chain links
perceive demand differently, it can lead to
discrepancies while ordering from suppliers.
• To avoid such a circumstance, establish a
better system of collaboration between
managers.
• Focusing more on common company
objectives will direct the flow of information
equally.
 Collaboration between customers and
suppliers
• You can improve supply chain efficiency by
encouraging more collaboration between
customers and suppliers.
• When companies about
demand, they
know customer that
can
forecasting, and conveywork into
insights their
to suppliers to
prevent them from stocking extra inventory.
 Demand-driven supply chain management
• It is obvious that forecasts are rarely 100% accurate.
• When the demand actually arises, it is mostly different
from what had been predicted.
• This makes companies order extra stock from suppliers.
• Lack of communication and information sharing among
managers and suppliers results in an over-reaction
towards forecasted demand, subsequently setting off a
chain reaction of having excess inventory higher up the
supply chain.
• A demand-driven supply chain system will be more
proactive and hold less inventory.
Conclusio
n
• The strategy for an efficient supply chain and
distribution channel is open communication
and collaboration between customers and
suppliers, and information sharing within the
management of the company.
• These small but essential improvements will
streamline the supply chain process and
prevent risk and loss associated with excess
inventory.
Supply Chain
Drivers
 Introduction
• To understand how a company can improve
supply chain performance in terms of
responsiveness and efficiency, we must
examine the logistical and cross functional
drivers of supply chain performance: facilities,
inventory, transportation, information,
sourcing, and pricing.
• A firms ability to satisfy customer
requirements in a timely manner is referred to
as Responsiveness, while efficiency is a firm's
ability to deliver goods in accordance with the
customer's expectations with least wastage in
terms of raw materials, labour and cost.
• The goal is to structure the drivers to achieve
the desired level of responsiveness at the
lowest possible cost, thus improving the
supply chain surplus and the firm’s financial
performance
1.
Facilities
• Facilities are the actual physical locations in
the supply chain network where product is
stored, assembled, or fabricated.
• The two major types of facilities are
production sites and storage sites.
• Decisions regarding the role,
location, capacity, of
andfacilities have a
flexibility
significant impact on the supply chain’
performance. s
• For example, in 2009, Amazon increased the
number of warehousing facilities located close to
customers to improve its responsiveness.
• In contrast, Blockbuster tried to improve its
efficiency in 2010 by shutting down many
facilities even though it reduced responsiveness.
• Facility costs show up under property, plant and
equipment, if facilities are owned by the firm or
under selling, general, and administrative if they
are leased.
2.Inventory
• Inventory encompasses all raw materials,
work in process, and finished goods within a
supply chain.
• The inventory belonging to a firm is reported
under assets.
• Changing inventory policies can dramatically
alter the supply chain’s efficiency and
responsiveness
• For W.W. Grainger itself
example,
responsive makes
stocking large amounts of
by inventory satisfying customer
and stock evendemand
from though the high inventory
levels reduce efficiency.
• Such a practice makes sense for Grainger
because its products hold their value for a
long time.
• A strategy using high inventory levels can be
dangerous in the fashion apparel business where
inventory loses value relatively quickly with
changing seasons and trends.
• Rather than hold high levels of inventory, Spanish
apparel retailer Zara has worked hard to shorten
new product and replenishment lead times.
• As a result, the company is very responsive but
carries low levels of inventory.
• Zara thus provides responsiveness at low cost.
3. Transportation
• Transportation entails moving inventory from
point to point in the supply chain.
• Transportation can take the form of many
combinations of modes and routes, each with
its own performance characteristics.
• Transportation choices have a large impact on
supply chain responsiveness and efficiency.
• For example, a mail-order catalog company can use a faster
mode of transportation such as FedEx to ship products,
thus making its supply chain more responsive, but also less
efficient given the high costs associated with using FedEx.
• W.W. Grainger, have structured their supply chain to
provide next-day service to most of their customers using
ground transportation.
• They are providing a high level of responsiveness at lower
cost.
• Outbound transportation costs of shipping to the customer
are typically included in selling, general, and administrative
expense, while inbound transportation costs are typically
included in the cost of goods sold.
4.Information
• Informatio consists of data and
n analysis facilities, inventory,
concerning
costs, prices,
transportation,
and customers throughout the
supply chain.
• Information is potentially the biggest driver of
performance in the supply chain because it
directly affects each of the other drivers.
• Information presents with
management opportunity to make chains the
responsive
supply and more efficient. more
• For example, Seven-Eleven Japan has used
information to better match supply and demand
while achieving production and distribution
economies.
• The result is a high level of responsiveness to
customer demand while production and
replenishment costs are lowered.
• Information technology–related expenses
typically
are included under either operating expense
(typically under selling, general, and
administrative expense) or assets.
5.Sourcin
g
• Sourcing is the choice of who will perform a
particular supply chain activity such as
production, storage, transportation, or the
management of information.
• At the strategic level,these decisions
determine what functions a firm performs and
what functions the firm outsources. Sourcing
decisions affect both the responsiveness and
efficiency of a supply chain.
• After Motorola outsourced much of its
production to contract manufacturers in China, it
saw its efficiency improve but its responsiveness
suffer because of the long distances.
• To make up for the drop in responsiveness,
Motorola started flying in some of its cell phones
from China even though this choice increased
transportation cost.
• Sourcing costs show up in the cost of goods sold,
and monies owed to suppliers are recorded under
accounts payable.
6.
Pricing
• Pricing determines how much a firm will charge for the goods
services that it makes available in the supply chain.
• Pricing affects the behavior of the buyer of the good or service,
affecting supply chain performance.
• For example, if a transportation company varies its
charges based on the lead time provided by
customers, it is likely the that customers
efficiency will order earlywho
and customers
value who value
responsiveness will be willing to wait and order just
before they need a product transported.
• Differential pricing provides responsiveness to
customers that value it and low cost to
customers that do not value responsiveness as
much.
• Any change in pricing impacts revenues
directly but could also affect costs based on
the impact of this change on the other drivers.
 Conclusio
n
• It is important to realize that these drivers do
not act independently but interact to deter-
mine the overall supply chain performance.
Good supply chain design and operation
recognize this interaction and make the
appropriate trade-offs to deliver the desired
level of responsiveness.