Evolution of the Supply Chain Concept
Lack of connectivity
among separate business Inefficiency by duplication of
functions (Purchasing,
Production, Marketing,
Financing, and Logistics)
organizational efforts and
resources
Need an integrated system
to synchronise interrelated
business process to
• Create demand for
products
• acquire raw materials
and parts
• transform these raw
materials and parts into
finished products
• add value to these
products;
• distribute and promote
these products to either
retailers or customers
• facilitate information
exchange among various
business entities (e.g.,
suppliers, manufacturers,
distributors, third-party
logistics providers, and
retailers).
The Supply Chain Process
A supply chain is characterized by a forward flow of goods and a
backward flow of information, as illustrated by Figure 1.1
 Two Main Business Processes
Typically, a supply chain is composed of two main business processes:

Material management
(inbound logistics)

Physical distribution
(outbound logistics)
 Material Management

1 Material management is concerned with the

acquisition and storage of raw materials, parts,
and supplies
Supports the complete cycle of material flow—
from the purchase and internal control of
2 production materials, to the planning and
control of work-in-process, to the warehousing,
shipping, and distribution of finished products
Physical Distribution
• Encompasses all outbound logistics activities related to providing
customer service.
• These activities include order receipt and processing, inventory deployment,
storage and handling, outbound transportation, consolidation, pricing,
promotional support, returned product handling, and life-cycle support
 a web of multiple business
networks and

Supply relationships

Chain multiple stakeholders,

composed of various
suppliers, manufacturers,
distributors, third-party
logistics providers,
retailers, and customers
Example of Supply Chain
 Benefits of Integration of Supply Chain Process

Improved customer service and value

added—Customer service can be
improved through increased
inventory availability, better on-time
delivery performances, higher order
fill rates, and lower post-sales costs.
Enhanced fixed capital—Fixed
capacity is maximized through a
strategic partnership and joint
planning that can increase overall
capacity and throughput.

Increased sales and profitability—The

ability to assess outcomes due to
Utilized asset—Asset utilization can
price changes, promotional events,
be maximized by increasing inventory
and new product development can
turns and closely aligning supply with
be enhanced through increased
demand.
visibility resultant from information
sharing among supply chain partners
Challenges in Supply Chain
• Forecasting Errors
• The bullwhip effect is generally referred to as an inverse ripple effect of
forecasting errors throughout the supply chain that leads to amplified supply
and demand misalignment, where orders (perceived demand) to the
upstream supply chain member tend to exaggerate the true patterns of end-
customer demand because each chain member’s view of true demand can be
blocked by its immediate downstream supply chain member
 delayed new
product
development
constant
excessive
shortages
pipeline
and
inventory
backorders
Common
Symptoms of
The Bullwhip
Effect
frequent
chronic
order
overcapacity
cancellations
problems
and returns
erratic
production
scheduling
Supply Chain Disruptions Led To:
• Significant reduction in stock returns relative to their benchmarks
(e.g., 33% to 40% reduction over a three-year period)
• Increased share price volatility (e.g., 13.5% increase in share price
volatility one year after supply chain disruptions)
• Decline in profitability (e.g., 107% drop in annual operating income,
7% decline in annual sales growth, and 11% annual total cost increase)
• Debilitating firm performances (e.g., at least two consecutive years of
lower performances after supply chain disruptions)
Value Chain
• focuses on the customer’s value by connecting the customer’s needs
to every aspect of the value-adding business activities encompassing
sourcing, manufacturing, logistics, and marketing across the
organizational boundary. The value chain is often driven by four key
imperatives:
• Reduced uncertainty, which minimizes asset intensity through the reduction
and elimination of inventory
• Increased speed, which minimizes the risk of obsolescence
• Increased revenue resultant from the maximization of customization and the
subsequent customer loyalty
• Increased productivity through multiple asset productivity
The Supply Chain Benefit May Be Maximized By Following The Seven Principles

Manage logistics assets such as

Understand the customer values Organize the customer
warehouses, terminals,
and requirements so that the management in such a way that
transportation equipment, and
firm can identify how to align its the firm can provide a single
pipeline inventory across the
operations to meet its point of contact to the customer
supply chain with the help of
customers’ requirements and for information and post-sales
both the downstream and
needs follow-ups.
upstream supply chain partners.

Formulate joint sales and • Focus on the synergies of

operations plans as the basis for strategic alliances and
• Leverage manufacturing and
a more responsive supply chain relationship management by
sourcing flexibility by utilizing
by sharing real-time demand building the sense of mutual
postponement strategies
and forecast information within trust and the spirit of gain
and across the supply chain sharing.

Develop customer-driven
performance measures to drive
the behavior of all supply chain
members across the supply
chain
The Characteristics of Supply Chain Links
• Managed business process links - where the firm (typically a primary supply chain
partner or a channel captain) integrates a supply chain process with one or more
customers/suppliers.
• Monitored business process links - not fully controlled by a firm (typically a primary
supply chain partner), but the firm is involved in monitoring or auditing how the links
are integrated and managed.
• Unmanaged business process links - the firm neither actively manages nor monitors.
With these links, the firm fully trusts its partners’ ability to manage the process links
appropriately and consequently leaves the management responsibility up to them
• Non-member business links - the ones between both partners and non-members of
the company’s supply chain. Such links are not integral parts of the firm’s supply chain
structure, but can dictate the performance of the firm
Supply Chain Drivers

Customer
Service Monetary Value
Initiatives

Risk Elements Info/knowledge

transactions
Customer Service Initiatives – Typical Service Elements in a Supply Chain

• Due to random fluctuations in the

Product demand pattern, downstream
Availabilit supply chain partners often fail to
meet the real-time needs of
y customers

Response • Time to market, on-time delivery,

order processing time, cash-to-cash
Time cycle time, downtime
 Monetary Value
• Net Asset Turns,
Asset • Inventory Turns
Utilization • Cube Utilization

Return on • Ratio of Net Profit to Capital

Investment • Ratio of Earnings

Cost • Activity Based Costing

Behaviour • Cost of Quality
 Info/knowledge Transactions
Real-time Communication
• The establishment of collaborative relationships among supply
chain partners is a prerequisite to information sharing.
Collaborative relationships cannot be built without mutual trust
among supply chain partners and technical platforms

Technology Transfers
• A firm, which initiated technology development, can pass its
technology or innovative know-how to its supply chain partners,
thereby saving R&D cost and time. Therefore, a successful transfer
of technology can help supply chain partners enhance their overall
profitability
 Risk Elements

Risk of quality failure

• The consequences of failing to ensure quality failure at the
upstream supply chain can be enormous. This is due to the
interdependence of supply chain partners

Risk of information failure

• A well-known consequence of information failure in the
supply chain is the bullwhip effect, where orders at the
upstream supply chain members tend to exaggerate the
true consumption of end customers. The bullwhip effect
will create phantom demand and subsequent
overproduction and overstock, its risks should be assessed
prior to the development of the supply chain network.
Interfaces among Purchasing, Production, Logistics, and Marketing
– 3 Dimensions of Supply Chain Management
• which administers the
Intrafunctional activities and processes
within the particular
coordination function (e.g., logistics) of
a firm

• between logistics and

Interfunctional purchasing, logistics and
production, and logistics
coordination and marketing among the
functional areas of the firm

• which takes place between

Interorganizational legally separated firms
coordination such as manufacturers and
their suppliers
 Theory of
Constraints (TOC)
for Supply
Management

Buffer – like Rope – symbolic

Drum – sets the inventory which
beat for the entire link between
buys time to recover upstream and
supply chain from distruption
downstream
supply chains
 Use TOC To Optimise The Supply Chain Benefits
Decide what to do to get
the most out of the
Identify the weakest link in weakest link (constraint)
the supply chain without committing to
potentially expensive
changes

Adjust the rest of the

supply chain processes to a Take whatever action is
“setting” that would enable required to eliminate the
the constraint to operate at constraint.
the maximum effectiveness

Once the current constraint

is broken, keep on looking
for other constraints to
continuously improve the
supply chain performances.