Supply Chain Management

Chapter 1
Umar Farooq
Management Sciences Department
9/11/2019
GIK Institute 1
 Class Rules
• Students shouldn’t be late more than 5 minutes from class. You
will mark absent from class in case of late arrival.
• Once door is locked you are not allowed to knock the door.
• Switch off your Cell phones in class. You are not allowed to
operate cell phones in class in any condition. In case of emergency,
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• There will be no re-checking of your quizzes, assignments and
papers. Only recounting will be allowed.
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 Course Outline
Grading Policy

Announced/ Surprised Quizzes 10%

Assignments 5%

Class Participation 5%

Mid Term Exam 30%

Final Exam 40%

Project 10%

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 Course Outline
Text and Reference Books

Text Book:

Wisner, J. D., Tan, K.-C., & Leong, G. L. Principles of Supply Chain Management: A Balanced
Approach (3rd ed.). Mason, OH: South-Western

Reference Books:

Chopra, Sunil, and Peter Meindl. Supply chain management. Strategy, planning & operation. Gabler,
2007. 9/11/2019 4
 Denotation
• What is Supply Chain Management?
Supply Chain Management
• Supply Chain:
 Network of integrated activities and/or processes
used to deliver products and services, from raw
material to final product, to the final consumer.
• Management: (What should we manage?)
Effectively manage back and forth flows;
 Material flow
 Information flow
 Cash flow
• For one common purpose reduce cost and increase
profit
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 Supply Chain
Raw Material
Supplier
Customer
Information Flow, Material Flow,
Cash Flow

Producer

Retailer Distributor
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 General Composition of Supply Chain
Three Main Channel entities/Actors
• Supplier
 A provider of raw goods or services.
 e.g. Raw material, Energy, Services, Components. Farmers, Ore
mines, Spare parts manufacturers etc.
• Manufacturer
 Receives raw materials and components to convert it into
finished products
 e.g. Finished Goods manufacturer, Denim industry, Aerospace
Industry, Automobile Industry, Cement Industry, Sugar Industry etc.
• Distributor
 Receives and distribute finished products to final consumers
 e.g. Macy’s, Wall Mart, Nestle, Nike, Cash & Carry etc.
• Customer
9/11/2019
Consume to utilize the final product or services. 7
 General Composition of Supply
Chain…Cont.
• Supply Chain includes four main Flows

o Material and services flow

 From suppliers toward customer
o Information Flow
 Information flows both ways
o Cash Flow
 Payment flows from customers toward suppliers

o Reverse Flow????
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 General Composition of Supply
Chain…Cont.

Information Flow

Reverse Flow
Rejected or Defected
products

Supplier Manufacturer Distributor Customer

Downstream flow
Upstream flow

Product Flow
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Cash Flow
 Main Supply Chain Structures
• Companies require their supply chain to guarantee a steady flow
of supply while at the same time reduce their supply chain costs.
• They can improve operating efficiency by employing the right
supply chain structure.

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 Main Supply Chain Structures
• Stable Supply Chain:
 Constant stability between demand and supply.
 Less variability in product’s demand.
 Produced in bulk quantities.
 A heavy focus on execution, efficiencies, and cost performance.
 Slight focus on communication technologies.
 Strong relationship with business partners.
• Reactive supply chain:
 Seasonal or On-demand manufacturing.
 Required minimal communication technologies.
• Efficient reactive supply chain:
 Acts as an efficient, low-cost provider of goods and services.
 Operate in highly competitive environment.
 Required highly efficient communication and automation systems to
reduce lead time and operational costs.
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 Origin of Supply Chain Management
• 1930-1950s (Early years SCM)
 Mass Production age
 Women induction into industries
 Pallet, Pallet Lift and Unit Load Concepts
 Set the stage for supply chain globalization.
Fredrik Taylor
• 1950s & 1960s (Quality Era)
 More focus on cost reduction.
 Improve productivity
 Less focus on quality
 Systems innovation
• 1960s-1970s (Integration Era)
 Introduction of computer technology
 Development of software like MRP-I & MRP-II
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Origin of Supply Chain Management
1980s & 1990s (Globalization Era)
 Personal Computers
 Intense global competition led manufacturers to adopt efficient methods
such as,
o Just-In-Time (JIT)
o Total Quality Management (TQM), and
o Business Process Reengineering (BPR) practices

2000s and Beyond (SCM 2.0)

 Industrial buyers will rely more on third-party service providers to
improve purchasing and supply management.
 Wholesalers/retailers will focus on transportation and logistics more as
quick response service

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 Supply Chain Models

• Vertical integration

• Horizontal Integration

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 Supply Chain Models
• Vertical integration is a
strategy to gain control
over its suppliers or
distributors in order to
increase the firm’s power
in the marketplace, reduce
transaction costs and
secure supplies or
distribution channels.

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 Supply Chain Models
• Examples(Vertical
Integration):
 Ford, Hyundai, Bosch,
Apple, Google,
Microsoft

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 Supply Chain Models
• Examples: Apple
• They are completely vertically
integrated. They own the OS, the
hardware and the ecosystem. The
result of this vertical integration is that
they have complete control of their
future.
• Samsung
• They do their own design, their own
chips, and in their case they even do
their own screens and manufacture
their own products.
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 Supply Chain Models
• Horizontal
integration is a
strategy where a
company acquires,
mergers or takes over
another company in
the same industry
value chain.

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 Supply Chain Models
• Examples (Horizontal
Integration):
• PepsiCo, Pfizer, HP,
AT&T, T-Mobile,
Unilever

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 Supply Chain Models

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 Important Factors for Supply Chain
Growth

• Globalization and Global Competition

• Shorter Product Life Cycle
• Low Cost Distribution Channels
• Well informed Customers

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Importance of Supply Chain Management
Profit
Supply Chain
• Supply Chain Cost 20% Cost

• Marketing Cost 25% Marketing

Cost

• Manufacturing Cost 45%

Manufacturing
• Other Costs 10% Cost

Effort spent for supply chain activities are invisible to the

customers.

$3 trillion
• 9/11/2019 spent domestically for SC activities. 23
 What can Supply Chain Management
do?
• If you cannot bring big change, Start doing small changes.
• Cost savings and better coordination of resources are reasons to
employ Supply Chain Management.
• Some Examples:
• The grocery industry could save $30 billion (10% of operating cost)
by using effective logistics and supply chain strategies.
 A typical box of cereal spends 104 days from factory to sale.
 A typical car spends 15 days from factory to dealership.
• National Semiconductor
• used air transportation and closed six warehouses,
– 34% increase in sales and 47% decrease in delivery lead time.

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 Benefits For Effective Supply Chain
Management
• "The biggest issue enterprises face today is intelligent
visibility of their supply chains-both upstream and
downstream" (AMR Research)

• Compaq lost $0.5 B to $1 B in sales because laptops were not available

when and where they needed.

• P&G (Proctor&Gamble) estimates it saved $65 M (in 18 months) by

collaboration with retailers resulting in a better match of supply and demand

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 Benefits For Effective Supply Chain
Management
• When a firm, its customers and suppliers all know
each other future plans and are willing to
coordinate,
 It can reduce cost significantly
 Much easier planning and scheduling
 Quality improvement
 More Productivity
• All leads to more profit and customer satisfaction

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 Bullwhip Effect
• Lack of communication and coordination and
disorganization within supply chain can result one
of the most common problem of supply chain.
• This common problem is known as the bullwhip
effect or whiplash effect.
• Bullwhip effect is a phenomenon in Forecast
driven distribution channels

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 Bullwhip Effect
• The bullwhip effect on the supply chain occurs
when changes in consumer demand causes the
companies in a supply chain to order more goods to
meet the new demand.
• The bullwhip effect usually flows up the supply
chain, starting with the retailer, wholesaler,
distributor, manufacturer and then the raw materials
supplier.
• It occurs because the demand for goods is based on
the poor demand forecasts from companies, rather
than actual consumer demand.
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 Causes of Bullwhip Effect
• The main causes of bullwhip effect are;
 Disorganization
 Lack of communication
 Wrong Demand Forecasting
 Longer Lead-Time
 Overstock

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 Example: Bullwhip Effect
• Lets say;
• Actual demand from a customer = 8 units
• The retailer order from distributer = 10 units
– (Extra 2 units are to ensure they don’t run out of stock)
• Distributer orders to manufacturer = 20 units
– (To ensure that they should have enough stock to
guarantee timely shipment of goods to the retailer)
• Manufacturer order raw material for = 40 units
– (In order to balance the economy of scale in production)

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 Fundamental Elements of Supply
Chain Management

• Supply/Purchasing Elements
• Operations Elements
• Logistics/Transportation Element
• Integration Elements

Supplier Manufacturer Distributor Customer

Important Elements of Supply Chain
Management Cont….
Important Elements of Supply Chain
Management Cont….
Supply- Supplier alliances, supplier management,
strategic sourcing

Operations- Demand management, MRP, ERP, JIT, TQM

Distribution- Transportation management, customer

relationship management, network design,

Integration- Coordination/Integration activities, global

integration problems, performance
measurement
 Important Elements of Supply Chain
Management Cont….
Supply/Purchasing Element
 Traditional Purchasing Approach:
o Many Suppliers (Supply-Base)
o Short-term contracts
o Purchase price based seller-buyer relationship

• Over the past two decades shift towards more

strategic approach to purchasing known as supply
management.
 Important Elements of Supply Chain
Management Cont….
• Supply/Purchasing Elements
 Raw material quality, delivery timing,
reliability and purchase price are important
factors….
 Supplier Management
 Supplier evaluation: Determining the
capabilities of suppliers
 Supplier certification: Third party or internal “If we truly want to be
certification to assure product quality world-class, we have to be
requirements. in tune with our suppliers.
 i.e. ISO certifications: ISO 9000, ISO 14001 If we cannot respond
 Long-term Relationship because we don’t have the
right materials at the right
 To get a reliable supplier time, we will fail,”
 Better quality of material Harvey Kaylie president of
 Better payment terms and discounts Mini-Circuits.
 Priority manufacturing status
Important Elements of Supply Chain
Management Cont….

Islamabad—Qatar Gas recently signed 15 years long term agreement

Important Elements of Supply Chain
Management Cont….
 The Supplier can benefits from the closer
relationship by getting bulk and consistent orders
from customers.
 Such kind of long-term trading partnership is
called Strategic Partnership.
• Suppliers can have a significant impact on a
firm’s reputation.
• Ethical and Sustainable sourcing:
• Purchasing from suppliers that
are governed by environmental
sustainability and social and ethical
practices.
The Dark Side of Chocolate
 Important Elements of Supply Chain
Management Cont….
• After Delivery…….
• Once raw material has delivered to buyer, the
internal operations begin, to convert raw
material into final product.
• Operation Element
 Demand Management
 During a calendar year, seasonal demand If forecast is wrong
variations commonly occur. then firm is left with
• Firms can predict these variations, using too much inventory or
historic demand patterns, and forecasting. too little inventory.
• Over-Stock and Out-of-Stock situations are
costly and can result in lose of business.
 Important Elements of Supply Chain
Management Cont….
• Using Demand Forecasting to minimize these costs (Out of stock &
Over stock).
 Linking buyers & suppliers via MRP-Material Requirement
Planning (for managing inventory) and ERP-Enterprise
Resource Planning. To create better visibility
 Provide sales data, inventory and production information related
to all business units to supplier.
 Quality of the incoming purchased items and sub-assemblies
• Firms and supply chains employing concepts of lean
 Use Lean/JIT to improve the “pull” of materials to reduce
inventory levels.
 Employ TQM or Six Sigma to improve quality compliance
among suppliers
 Important Elements of Supply Chain
Management Cont….
• How the Large Super-Store keep track of their inventory?
• Wal-Mart MRP System: At Wal-Mart retail stores, scan the
barcodes of the products purchased, causing the local store’s MRP
system to deduct units from inventory until a preset reorder point is
reached.
• When this occurs, the local computer system automatically
contacts Wal-Mart’s regional distribution center’s MRP system and
generates an order.
• At the distribution center, the order is filled and sent along with
other orders to the particular Wal-Mart. Eventually, the distribution
center’s MRP system automatically generates an order with the
manufacturer who sells the product to Wal-Mart, reducing the
likelihood of stock outs or excess inventories.
 Important Elements of Supply Chain
Management Cont….
Deliver at Right Time, Right
Distribution Trends: Quality and Right Amount
– Transportation management- Motor carriers (trucks), are
tradeoff decisions between cost & more expensive than rail but
provide more flexibility for
timing of delivery/customer short routes.
service via trucks, rail, water & Air carriers are most expensive
but fastest mode.
air Water carriers are least
expensive
– Customer relationship But also slowest.
management (CRM)- strategies
National Semiconductor
to ensure deliveries, resolve used air transportation and
complaints, improve closed 6 warehouses, 34%
communications, & determine increase in sales and 47%
decrease in delivery lead
after sales service requirements time.
California-based clothing company
Anchor Blue, was having many problems
a few years ago with its distribution
center and inventory management
system, leading to problems stocking its
retail stores. Consequently, they
outsourced their logistics function to
UPS Supply Chain Solutions, resulting in
a 40 percent decrease in unit processing
costs and a 37 percent increase in
merchandise pieces moved per year.
According to Richard Space, senior vice
president for logistics at Anchor Blue,
“We have increased delivery to stores
and seen better fill rates. What used to
take ten days from DC to stores now
takes two. And that means improved cash
flow.” In the end, Space says the keys to
a successful outsourcing arrangement are
communication and trust with partners.
 Important Elements of Supply Chain
Management Cont….
• Network design- creating distribution networks based
on tradeoff decisions between cost & customer services.
– Large number of Warehouses: The transportation
cost from factory to warehouse, the inventory holding
cost and the cost to build and operate warehouses
would be quite high, but the payoff would be better
customer service.
– Few Warehouses: Low transportation cost from
factory to warehouse, low construction and operating
cost but limited customer services.
 Important Elements of Supply Chain
Management Cont….
Integration Trends:
– Supply Chain Process Integration- If one key activity fails or is
when supply chain participants work for performed poorly, then the
flow of goods moving along the
common goals. Requires intra-firm supply chain is disrupted,
functional integration. Based on efforts to jeopardizing the effectiveness
change attitudes & adversarial of the entire supply chain
relationships
– Firms act together to maximize total
supply chain profits.
– Supply Chain Performance
Measurement- Crucial for firms to know
if procedures are working as expected—
or not before they become financial
drains.
 Future Trends in Supply Chain
Management
Expanding (and Contracting) the Supply Chain

 Today, firms are increasing their partnerships with foreign firms

and building foreign production facilities to accommodate their
market expansion plans.

 The expansion involves:

• breadth- foreign manufacturing, office & retail sites, foreign
suppliers & customers
• depth- second and third tier suppliers & customers
 Future Trends in Supply Chain
Management
 Increasing Supply Chain Responsiveness

 Firms will increasingly need to be more flexible and responsive

to customer needs
 Supply chains will need to benchmark industry performance
and, meet and improve on a continuous basis
 Responsiveness improvement will come from more effective
and faster product & service delivery systems
 Future Trends in Supply Chain
Management- Cont.

 The Greening of Supply Chains

 Sustainability: Based on three pillars
 Social, Economical, Environmental
 Supply chains will work harder to reduce
environmental degradation
 Large majority (75%) of U.S. consumers
influenced by a firm’s environmental
friendliness reputation
 Recycling and conservation are a growing
alternative in response to high cost of
natural resources.
 Future Trends in Supply Chain
Management- Cont.
 Reducing Supply Chain Costs
• Cost reduction can be achieved throughout the supply chain by
reducing waste by reducing purchasing and product distribution
costs.
• By reducing excess inventories and non-value-adding activities
among the supply chain participants.

 Cost reduction achieved throughout the supply chain:

• Reduced purchasing costs
• Reducing waste
• Reducing excess inventory
• And reducing non-value added activities
 Continuous Improvement through
• Benchmarking- improve over competitors’ performance
• Trial & error
• Increased knowledge of supply chain processes