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Lecture 3. Supply Chain Management

Lecturer:

Prof. Anatoly Sachenko

Informatics in Logistics Management

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Lecture Overview

DefinitionsSCM Evolution - Six major movements Problems and Activities/functionsSCM Operations – General and Functional

StructureSupply Chain business process integrationKey critical supply business processesSupply chain sustainabilitySupply chain value and improving

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Definition

Harland, 1996-Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by customers

It’s includes all activities associated with the flow and transformation of goods and services from raw materials stage to the end user (the customer),as well as the associated information flows

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Definitions

According to the Council of Supply Chain Management Professionals(CSCMP), SCM encompasses the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management It also includes the crucial components of coordination

and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers

In essence, SCM integrates supply and demand management within and across companies

More recently, the loosely coupled, self-organizing network of businesses that cooperate to provide product and service offerings has been called the Extended Enterprise

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SCM - Structure

Products and Services

Products and Services

Products and Services

Customers

Total satisfaction with quality, price, delivery, and service

Distributors

Package and delivery

Inventory

Producers

Finished goods, end products and services

Inventory

Suppliers

Inventory

Materials, parts, sub-assemblies, and services

Information

Cash

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SCM Evolution – Creation and Integration Eras

1. creation eraearly 1980s - a term SCM was first coined in U.S.

industrySCM concept was of great importance in early 20th

century, especially with the creation of assembly line2. integration eraIt highlighted with the development of EDI in the

1960sdeveloped through the 1990s by ERP introductiondeveloped into the 21st century with the expansion of

internet-based collaborative systemsThis era is characterized by both increasing value-

adding and cost reductions through integration

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SCM Evolution – Globalization and Specialization(Phase 1) Eras

3. globalization eraIn the late 1980s many organizations started to

integrate global sources into its core business, andExpand the SC over national boundaries with the goal

of increasing competitive advantage, value-adding, and reducing costs through global sourcing

4. specialization era— phase one: outsourced manufacturing and distribution

In the 1990s, industries began to focus on “core competencies” and adopted a specialization model

Companies abandoned vertical integration, sold off non-core operations, and outsourced those functions to other companies distributing management across specialized supply chain partnerships

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SCM Evolution – Specialization and SCM 2.0 Eras

5. specialization era-phase2: SCM as a serviceOutsourced technology hosting for SC solutions debuted

in late 1990s and used in transportation and collaboration It progressed from Application Service Provider from

‘98 through ‘03 to On-Demand,2003-06 to the currently in focus today SW as a Service (SaaS) model

6. supply chain management 2.0 (SCM 2.0)It was coined to describe globalization and specialization

as well as the evolution of processes & methods Web 2.0 is a trend in of WWW use to increase creativity,

info sharing, and collaboration among users, and help navigate the vast amount of info available on the Web

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Problems addressed by SCM

Distribution Network Configuration: number, location of suppliers, production facilities, distribution centers, warehouses and customers

Distribution Strategy: questions of operating control, delivery scheme, mode and control of transportation

Trade-Offs in Logistical Activities: The above logistical activities must be well planned(using a system approach) and coordinated to achieve the lowest total logistics cost

Information: Integration of processes through SC to share valuable info

Inventory Management: Quantity and location of inventory

Cash-Flow: Arranging the payment terms and methodologies for exchanging funds

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Activities/functions

Supply chain management is a cross-function approach including managing the movement of raw materials into an organization, certain aspects of the internal processing of materials into finished goods, and the movement of finished goods out of the organization and toward the end-consumer

As organizations strive to focus on core competencies and becoming more flexible, they reduce their ownership of raw materials sources and distribution channels

These functions are increasingly being outsourced to other entities that can perform the activities better or more cost effectively

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Activities/functions (cont-d)

Several models have been proposed for understanding the activities required to manage material movements across organizational and functional boundaries

The most common is the SCM Model proposed by the Global Supply Chain Forum (GSCF)

Supply chain activities can be grouped into strategic, tactical, and operational levels ( see next four slides)

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Activities/functions - Strategic level

Strategic network optimizationStrategic partnerships with suppliers, distributors, and

customers, creating communication channels for critical info and operational improvements

Product life cycle management, so that new and existing products can be optimally integrated into SC

Information technology chain operationsWhere-to-make and make-buy decisionsAligning overall organizational strategy with supply

strategyIt is for long term and needs resource commitment

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Activities/functions - Tactical level

Sourcing contracts and other purchasing decisionsProduction decisions, including contracting,

scheduling, and planning process definitionInventory decisions, including quantity, location, and

quality of inventoryTransportation strategy, including frequency, routes,

and contractingBenchmarking of all operations against competitors

and implementation of best practices throughout the enterprise

Milestone paymentsFocus on customer demand and Habits

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Activities/functions - Operational level

Daily production and distribution planning, including all nodes in the supply chain.

Production scheduling for each manufacturing facility in the supply chain (minute by minute).

Demand planning and forecasting, coordinating the demand forecast of all customers and sharing the forecast with all suppliers.

Sourcing planning, including current inventory and forecast demand, in collaboration with all suppliers.

Inbound operations, including transportation from suppliers and receiving inventory.

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Operational level (cont-d)

Production operations, including the consumption of materials and flow of finished goods

Outbound operations, including all fulfillment activities, warehousing and transportation to customers

Order promising, accounting for all constraints in the supply chain, including all suppliers, manufacturing facilities, distribution centers, and other customers

From production level to supply level accounting all transit damage cases & arrange to settlement at customer level by maintaining company loss through insurance company

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SCM Operations – Inbound and Outbound Logistics

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SCM Operations – Functional Structure

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Supply Chain business process integration

Successful SCM requires a change from managing individual functions to integrating activities into key supply chain processesExample scenario: the purchasing department

places orders as requirements become knownThe marketing department, responding to

customer demand, communicates with several distributors and retailers as it attempts to determine ways to satisfy this demand

Info shared between supply chain partners can only be fully leveraged through process integration

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Supply Chain business process integration

Supply chain business process integration involves collaborative work between buyers and suppliers, joint product development, common systems and shared information

Operating an integrated supply chain requires a continuous information flow

However, in many companies, management has reached the conclusion that optimizing the product flows cannot be accomplished without implementing a process approach to the business

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Key Supply Chain processes

Customer relationship managementCustomer service managementDemand management styleOrder fulfillmentManufacturing flow managementSupplier relationship managementProduct development and commercializationReturns management

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Key critical supply business processes

Customer service managementProcurementProduct development and commercializationManufacturing flow management/supportPhysical distributionOutsourcing/partnershipsPerformance measurementWarehousing management

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a) Customer service management process

Customer Relationship Management concerns the relationship between the organization and its customers

Customer service is the source of customer infoIt also provides the customer with real-time info on

scheduling and product availability through interfaces with company's production and distribution operations

Successful organizations use the following stepsdetermine mutually satisfying goals for organization

and customersestablish and maintain customer rapportproduce positive feelings in the organization and the

customers

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b) Procurement processStrategic plans are drawn up with suppliers to support the

manufacturing flow management process and the development of new products

In firms where operations extend globally, sourcing should be managed on a global basis

The desired outcome is a win-win relationship where both parties benefit, and a reduction in time required for the design cycle and product development

Purchasing function develops rapid communication systems, such as EDI and Internet linkage to convey possible requirements more rapidly

Activities related to obtaining products and materials from outside suppliers involve resource planning, supply sourcing, negotiation, order placement, inbound transportation, storage, handling and quality assurance

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c) Product development and commercialization

Customers and suppliers must be integrated into the product development process to reduce time to market

As product life cycles shorten, the appropriate products must be developed and successfully launched with ever shorter time-schedules to remain competitive

Managers of the product development and commercialization process must:coordinate with customer relationship management to

identify customer-articulated needs;select materials and suppliers in conjunction with

procurement, anddevelop production technology in manufacturing flow to

manufacture and integrate into the best supply chain flow for the product/market combination.

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d) Manufacturing flow management process

The manufacturing process produces and supplies products to the distributors based on past forecasts

Manufacturing processes must be flexible to respond to market changes and accommodate mass customization

Orders are processes operating on a JIT basis Changes in manufacturing flow process lead to shorter

cycle and improved efficiency to meet customer demand

Activities related to planning, scheduling and supporting manufacturing operations, such as work-in-process storage, handling, transportation, and max flexibility

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e) Physical distribution

This concerns movement of a finished product/service to customers

In physical distribution, the customer is the final destination of a marketing channel, andthe availability of the product/service is a vital

part of each channel participant's marketing effort

It is also through the physical distribution process that the time and space of customer service become an integral part of marketing, thus it links a marketing channel with its

customers

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f) Outsourcing/partnershipsIt’s also outsourcing of services that traditionally have been

provided in-houseLogic of this trend is that the company will increasingly

focus on those activities in the value chain where it has a distinctive advantage, and outsource everything else

This movement has been particularly evident in logistics where the provision of transport, warehousing and inventory control is increasingly subcontracted to specialists

Also, managing and controlling this network of partners and suppliers requires a blend of both central and local involvement

Hence, strategic decisions need to be taken centrally, with the monitoring and control of supplier performance and day-to-day liaison with logistics partners

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g) Performance measurement

Experts found a strong relationship from the largest arcs of supplier and customer integration to market share and profitability

Taking advantage of supplier capabilities and emphasizing a long-term SC perspective in customer relationships can both be correlated with firm performance

As logistics competency becomes a more critical factor in creating and maintaining competitive advantage, logistics measurement becomes increasingly important because the difference between profitable and unprofitable operations becomes more narrow

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g) Performance measurement

According to experts, internal measures are generally collected and analyzed by the firm includingCostCustomer ServiceProductivity measuresAsset measurement, andQualityExternal performance measurement is examined

through customer perception measures and "best practice" benchmarking, and includes:1) customer perception measurement, and2) best practice benchmarking

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h) Warehousing management

As a case of reducing company cost & expenses, warehousing management is carrying the valuable role against operations

In case of perfect storing & office with all convenient facilities in company level, reducing manpower cost, dispatching authority, loading & unloading facilities with proper area, area for service station, stock management system etc.

Components of SCM are as follows: 1. Standardization 2. Postponement 3.Customization

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Components of SCM management integration - Management Components

The SCM components are the third element of the four-square circulation framework

The level of integration and management of a business process link is a function of the number and level, ranging from low to high, of components added to the link

Consequently, adding more management components or increasing the level of each component can increase the level of integration of the business process link

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SCM Management Components

Planning and controlWork structureOrganization structureProduct flow facility structureInformation flow facility structureManagement methodsPower and leadership structureRisk and reward structureCulture and attitude

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Supply chain sustainability

SC sustainability is a business issue affecting an organization’s SC or logistics network and is frequently quantified by comparison with SECH ratingsSECH ratings are defined as social, ethical,

cultural and health footprintConsumers have become more aware of the

environmental impact of their purchases and companies’ SECH ratings and, along with non-governmental organizations(NGOs), are setting the agenda for transitions to organically-grown foods and locally-produced goods that support independent and small businesses

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Three Tiers of Sustainability

In 2008 a ranking system was produced for the different levels of sustainability being achieved by organizationsThis was called the Three Tiers of

Sustainability:Tier 1: Getting the basics rightTier 2: Learning to think sustainablyTier 3: The science of sustainability

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Three Tiers of Sustainability

Tier 1: Getting the basics rightThis is the base level and is the stage in which the

majority of organizations are atCompanies employ simple measures such as

switching lights and PCs off when left idle, recycling paper, and using greener forms of travel with the purpose of reducing the day-to-day carbon footprint

Some companies also employ self-service technologies such as centralized procurement and teleconferencing

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Three Tiers of Sustainability

Tier 2: Learning to think sustainablyThis is the second level, where companies

begin to realize the need to embed sustainability into supply chain operations

Companies tend to achieve this level when they assess their impact across a local range of operations

In terms of SC, this could involve supplier management, product design, manufacturing rationalization, and distribution optimization

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Three Tiers of Sustainability

Tier 3: The science of sustainabilityIt uses auditing and benchmarks to provide a

framework for governing sustainable SC operationsThis gives clarity around the environmental impact of

adjustments to SC agility, flexibility, and cost in the SC network

Moving towards this level means being driven by the current climate (in which companies recognize cost savings through green operations as being significant) as well as pushing emerging regulations and standards at both an industry and governmental level

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Supply chain systems and value

Supply chain systems configure value for those that organize the networks

Value is the additional revenue over and above the costs of building the network

Co-creating value and sharing the benefits appropriately to encourage effective articipation is a key challenge for any supply system

Tony Hines defines value as follows: “Ultimately it is the customer who pays the price for service delivered that confirms value and not the producer who simply adds cost until that point”

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Improving the Supply Chain Through IT

Centralized coordination of information flowsIntegration of transportation, distribution,

ordering, and productionDirect access to domestic and global

transportation and distribution channelsLocating and tracking the movement of every

item in the supply chain

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Improving the Supply Chain Through IT

Consolidation of purchasing from all suppliersIntercompany and intercompany information

accessData interchangeData acquisition at the point of origin and

point of saleInstantaneous updating of inventory levels

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Global supply chain management

Global SC pose challenges regarding quantity and value:Supply and value chain trends

GlobalizationIncreased cross border sourcingCollaboration for parts of value chain with low-

cost providersShared service centers for logistical and

administrative functionsIncreasingly global operations, which require

increasingly global coordination and planningComplex problems involve also midsized

companies to an increasing degree

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References

Hines, T. 2004. Supply chain strategies: Customer driven and customer focused. Oxford: Elsevier.