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Total Supply Chain Management BSCIT SEM VI
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TOTAL SUPPLY CHAIN MANAGEMENT
(TSCM)
Total Supply Chain Management BSCIT SEM VI
www.bscit.org
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Objective
Maximise the overall value generated – is the difference between what the final
product is worth to the customer and the effort the supply chains expends in
filling the request of the customer
Supply chain profitability is the difference between the revenue generated from
the customer and the overall cost across the supply chain
It is the total profit to be shared across all supply chain stages
Supply chain success is measured in terms of supply chain profitability and not in
terms of the profits at an individual stage
Revenue is from customer – positive cash flow
All other cash flows are simply fund exchanges that occur within the supply chain
given that different stages have different owners
All flows of information, product or funds generates costs within the supply chain
Supply chain management involves the management of flows between and
among stages in a supply chain to maximise total supply chain profitability
Decision Phases
Three categories - Depending on the frequency of each decision and the time frame over
which a decision has an impact,
1. Supply chain strategy or design
2. Supply chain planning
3. Supply chain operation
4. Supply chain strategy
Decides how to structure the supply chain over the next several years
o chain configuration,
o resource allocated and
o process at each stage should perform
Decisions include
o location and capacities of production and warehousing facilities,
o the products to be manufactured or stored at various locations,
o the method of transportation to be made available along different shipping
legs,
o the type of information system to be utilised
Supply chain planning
Under the given configuration decisions are made which has impact on a time
frame of quarter to a year
Starts with a forecast the coming year or a comparable time frame
Planning decisions include
o which market will be supplied from which locations,
o the subcontracting for manufacturing,
o the inventory policies to be followed, and
o the timing and size of marketing promotions
Companies in the planning phase try to incorporate any flexibility built into the
supply chain in the design phase and exploit it to optimise performance
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Companies define a set of operating policies that govern short-term operations
Supply chain operation
Decisions are taken regarding individual customer order and the time frame is
week or days
Configuration is fixed and policies are defined
Objective is to handle incoming customer orders in the best possible manner
Decisions related with
o allocation of inventory or production to individual orders,
o set a date that an order is to be filled,
o generate pick lists at a warehouse,
o allocate an order to a particular shipping mode and shipment,
o set delivery schedules of trucks, and
o place replenishment order
Exploit the reduction in uncertainty and optimize performance
Expanding Strategic Scope
• Scope of strategic fit refers to the function and stages that devices an integrated
strategy with a shared objective
• One extreme - operation within a function devices independent strategy
• Other extreme - all functional areas within all stages of the supply chain device
strategy jointly with a common objective Intracompany intraoperation scope:
minimises local cost view
• Strategic fit is considered in one operation within a functional area within a
company
• Resulting collection of strategies will most likely not come close to maximising
supply chain profit – conflicting local objectives
• Practices during 1950s and 1960s Intracompany intrafunctional scope: minimise
functional cost view
• Given that many operations together form each function within a firm, managers
recognised the weakness of the intracompany intraoperation scope
• With the intracompany intrafunction scope, the strategic fit is expanded to include
all operations within a function
• The scope of strategic fit expands to an entire function within a stage of the
supply chain
Intracompany interfunctional scope: maximise company profit view
• Different functions may have conflicting objectives
• Functional strategies are developed to support both each other and the
competitive strategy. Intercompany interfunctional scope: maximise supply chain
surplus view
• Intracompany interfunctional scope leads to each stage of the supply chain trying
to maximise its own profits, which does not necessarily result in the maximisation
of supply chain surplus
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• When company uses speed as their primary competitive advantage to succeed in
the marketplace, intracompany interfunctional strategy performs badly The
impediment to create level of speed that customers are demanding lies to a
degree within their own boundaries Managing these interfaces becomes a key to
providing speed to customers
• Intercompany scope forces every stage of the supply chain to look across the
supply chain and evaluate the impact of its action on other stages as well as on
the interfaces
• This means treating stages in the supply chain that a company does not own as
belonging to the company
• Till now the discussion was on strategic fit under static context – players in supply
chain and customers do not change over time
• Dynamics exits – product life cycle get shorter and companies try to satisfy the
changing needs of individual customers
• In such situations, a company may have to partner with many different firms
depending on the product being produced and the customer being served –
strategic fit should have agile intercompany scope
• SCM is an industry term for management of materials, information and finances,
as they more along the supply chain from the supplier of the raw materials, to the
wholesaler, to the retailers and then to the consumer.
• A more basic definition of Supply Chain Management (SCM), is supplying the
correct product or service, to the correct place in the correct quantity, at the
correct time and at the correct cost.
• SCM is to manage the entire flow of information, material, and services from raw
material suppliers through factories and warehouse to the end product.
Benefits
• The benefits of SCM to organizations are as follows :
Improved delivery performance – quicker customer response and fulfillment rates
• With the help of SCM the delivery process is improved and in turn the customer
satisfaction is higher and response is quicker and therefore there are fulfillment
rates.
• Greater productivity
• Since the customer response is faster, therefore the productivity is greater.
• Reduced inventory throughout the chain
• The inventory process is reduced throughout the network facility i.e. the chain,
because of greater productivity as per the customer response.
• Improved forecasting precision
• Fewer suppliers and shorter planning cycles
• By selecting few suppliers with respect to higher customer satisfaction, the cycle
SCM also becomes shorter.
• Improved quality and products that are more technologically advanced
• SCM also helps in improving the quality of enhanced inter-operational
communication and cooperation.
• More reliable financial information.
• Material management
Material Handling can be defined as the “art and science of moving, packaging
and storing of substance in any form.”
It mainly deals with as how to handle the material carefully.
It gives us the technical aspects of transporting or moving the goods from one
place to another without actually damaging the goods.
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It covers the whole material cycle having the components such as purchasing,
receiving and inspection, inventory control, material handling and physical
distribution.
The main aim in material handling is to handle the goods with care so that it may
not get broken.
Packaging plays an important role in material handling. A proper packaging with
respect to the type of goods is necessary.
• Example An electronic good is always supported with a thermacol and a box so
that it is not damaged.
Next is storing of goods i.e. there are some goods with less life. So they are to be
stored under deep freezing.
Grains and other food materials must be kept in dry place and then it must be
transported in a dry & clean containers or boxes.
A proper handling of goods leads to better safety and avoidance of damage.
Objectives Of Material Management
• There are many elements that make up a successful material handling. There are
primary 4 objectives as follows :
• Movement
• Time
• Quantity
• Space
Movement
The movement of product to the warehouse and also out of the warehouse is
important.
By moving the goods from the warehouse at the time, when demanded must be
supplied.
Due to this there will be availability of product in the market which satisfy the
consumer.
It also improves services by quicker delivery of goods.
Time
• The raw materials or the other parts must be made available when demanded
otherwise the production process is affected.
• The product must be made available at the right place and right price.
• The time is the most important factor. Any delay in either production,
manufacturing or delivery of goods might affect the entire product cycle or
distribution cycle.
• Moreover the actual aim should be the implementation of JIT for quicker service
when ordered by the customer.
Quantity
• The goods must be delivered in the right quantity as specified by the customer.
• The movement of goods must be correct between the stations and the customer.
• Quantity is the important factor because the total number of goods ordered by
the customer must be accurate otherwise the inventory of stock will not match if
more number of goods are delivered than it is specified and the customer will not
be satisfied by goods are missing.
Space
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• Space is nothing but a area that is provided on hire in a warehouse for storing
goods.
• Since the cost of space is very high, proper utilization of the place must be done.
• We have to store goods in warehouse in such a way that maximum use of given
space is utilized.
• Inefficient use of space can lead to loss of money & storage of less goods.
Principles Of Material Management
• Applying the “ten principles of material handling” can overcome many material
handling problems.
• These principles offer commonsense approaches to moving products more
efficiently and effectively. The ten principles of material handling are as follows:
Planning Principle:
• All material handling should be the result of a deliberate plan(course of action i.e
defined in advanced) where the needs and functional specifications of the
proposed methods are completely defined at the outset.
Standardization Principle:
• Material handling methods, equipments, controls and software‟s should be
standardized within the limit of achieving overall performance objectives and
without sacrificing needed flexibility and throughput.
• Work Principle:
• Material handling work should be minimized without sacrificing productivity of the
level of service required of the operation.
Ergonomic Principle:
• Human capabilities and limitations must be recognized and respected in the
design of material handling tasks and equipment to ensure safe and effective
operation.
Unit Load Principle:
• Unit Loads shall be appropriately sized and configured in a way that achieves the
material flow and inventory objectives at each stage in the supply of chain.
• Space Utilization Principle:
• Effective and efficient use must be made of all available space.
• System Principle:
• Material movement and storage activities should be fully integrated to form a
coordinated operational system that spans receiving, inspection, storage,
production, assembly, packaging, utilizing, order selection, shipping,
transportation and the handling of returns.
Functions of Materials Management:
• Every person, organization or a distinct part of an organization has to perform a
set of tasks in order to deliver customer expectations satisfactorily. These sets of
tasks are called functions. Materials Planning & Control –
• This is the primary function of Materials Management. The market forecast is
converted into production schedules by production planning and control. Materials
management prepares the materials plan to meet the production schedule. The
plan is then implemented and controlled.
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Procurement:
• Procurement function begins with sourcing the supply after short listing suppliers.
An effective method is to rate the vendors on the basis of performance and
choose the best. Purchase order is placed on the source and the material is
procured from the source. Procurement activity includes preparation placement of
purchase order, follow up, transportation and handling.
Handling:
• The material which reaches the company premise is to be unloaded, moved and
positioned as per the storage plan.
Storage & Preservation:
• The procured material is to be stored and preserved against internal and external
deterioration. Against the authorized demand the material from the store is
retrieved and issued.
Inventory control
• Inventory control function controls the inventory levels.
Vendor development:
• The company makes the chosen vendors effective and efficient by providing
necessary inputs of training and information. A good vendor is an asset as he
makes his customer more effective and efficient.
Vendor rating:
• This system is used continuously to assess strengths and weaknesses of short
listed vendors for their effective development.
Waste control:
• Procuring standard material and continuously trying to improve yield is waste
reduction. When a product is processed two types of wastes are generated. One
type of waste is called as standard scrap. This is accepted as unavoidable.
Product that is not right first time is scrap and thereby waste. Non moving
obsolete material is another waste. Material management should address these
wastes and not only should control but reduce the wastes.
Value Analysis:
• Continuously trying to improve the value of the product mainly by material
substitution is a function of the materials management .
Scope of Material Management
• Material Planning: which includes forecasting the material requirement.
• Purchasing: which includes vendor selection, negotiation, ordering.
• Storage, Store Keeping and Store accounting: which covers accommodating
material, protecting and preserving them, maintain them.
• Inventory control: includes ordering quantity, setting inventory levels.
• Material handling: which covers internal movement and transfer of material.
• Disposal of wastes and obsolete material.
• Physical distribution: which covers the process of moving finished goods to the
ultimate customer.
• PURCHASE MANAGEMENT
• Purchase Management is a function of materials management in a company.
Their basic function is procuring the inputs for production function.
Importance of purchase management:
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• As the purchase decisions commit a very large portion of financial resource of the
company purchase function is said to be highly important.
• Purchase personnel deal with large number of external agencies while performing
their functions. Hence they represent company‟s reputation in the out side world.
• As they negotiate and finalize deals worth lot of money for the company their
integrity is of utmost importance for the organization.
Objectives or goals of purchasing:
primary objective or goal of purchasing function is making inputs available to the
conversion process at minimum cost to the final output of the company.
• The inputs to be made available are raw materials, semi finished items, bought
out items etc. There are certain parameters to be monitored for fulfilling the
system objectives. We can call them goals of purchasing. These goals are
popularly known as 5Rs of purchase namely, right price, right quantity, right
quality, right place and right time.
• Right material: The material should be purchased at right time so that it may
not result in either excess investment in the stocks.
• Right price: Right price is determined by allowing reasonable profit for the
supplier and insisting and helping to reduce cost. Tender system should be used
to identify lowest responsible bidder rather than lowest bidder. It should be noted
that the low bidder is not always the best bidder.
• Right quantity: right quantity of purchase is the one that ensures no excess and
no shortage. The right quantity can be determined on the basis EOQ analysis to
determine the right quantity for purchase. It describes the size of the order at
which the ordering cost and the inventory cost will be minimum.
• Right place: is the one where the item is going to enter. If the item is not
available here, when needed, it is in short supply for the process.
• Right source: The suppliers are not only supplying the required material but
they also supply the information such as probable market condition , general
industrial climate and business envt.
• Right time: is as decided by production schedule for meeting customer‟s
requirements.
• Right terms of contracts: terms in a contract are legally implemented. In case
of dispute between supplier and customer, courts will go by the terms decide who
is wrong. Hence right terms are those, which protect the interests of the
company. At the same time right terms ensure that neither parties do anything
illegal.
Fundamentals of Purchasing:
• Raw material: are the items which are purchased in their natural state which
need further processing.
• Components: Components are the finished product which are assembled to form
finished product.
• Consumable stores and supplies: These are the items which are normally requires
in the manufacturing operations but which do not enter into the finished product.
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• Office supplies: They are the indirect material which are consumed in the office.
E.g stationery, pencils etc.
• Office appliances: PCs, calculator, air condition etc.
• Spares and tools: they include tools and parts required for repair, maintenance
such as nuts, bolts etc.
• Machines and equipments: Various types of machines and equipments which are
required for different types of manufacturing operations e.g truck, driller etc.
Objectives of Purchasing
• To avail the materials, supplies and equipment at the min. possible cost.
• To ensure the continuous flow of production. Purchasing dept helps in ensuring
the uninterrupted production flow through continuous flow of raw material.
• To increase the asset turnover. The efforts of purchase dept result in the
formation of fixed asset and maintenance of certain level of investments in
inventories. The investment of both should be kept min.
• To develop the alternate source of supply.
• To established and maintain the good relation with the suppliers.
• To achieve max. integration with the other department of the company.
• Production dept.
• Engineering dept.
• Marketing dept.
• Finance dept.
• Efficient recordkeeping and management recording.
• Steps of purchasing
Recognition of need.
Selection of the supplier.
Placing the purchase order.
Follow up[ the order.
Receiving and inspection of the material.
Payment of the invoice.
Maintenance of the record.
Maintenance of the vendor relation
Purchase Systems
• In an organization all activities are carried out according to systems and
procedures for reducing variations and errors. This makes performing the function
simple and less prone to errors. These systems are pre purchase system,
ordering system, post purchase system.
Pre purchase System
• This system lays down how purchase activity is initiated. Various activities
controlled by this system are requisitioning, selection of suppliers and obtaining &
evaluating quotations.
• Requisitions: Requisition(demand) for an item may be made by anyone in the
organization.
• Requisition for an item shall be made in a standard format. This format ensures
all relevant information like quantity, specifications etc. and gets the purchase
authorized by competent authority in the organization. Thereby making purchase
activity easier and less time consuming.
• Traveling requisitions: in an inventory system where an item is made a stock item
to be perpetually(continually) maintained at a minimum level, purchase activity is
triggered by stores function based on ROL. The requisition is a permanent
document with specification, authorization and quantity required permanently
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marked on it. The traveling requisition returns to indenting department after
purchase is initiated.
• Inquiries: pre purchasing system prescribes standard formats for making inquiries
in the market for supply of a particular product. These are standard forms boldly
declaring that they are not explicit or implicit purchase orders.
Ordering system
• Purchase order is the most important element in ordering system. Purchase
manager releases the purchase order after selecting the supplier and finalizing
the price and other conditions of sale. Once the purchase order is raised and
accepted it becomes a legal document. Contents of the purchase order are:
• purchase order reference(quotation, recommendation) number
• description of materials and specifications
• quantity required and delivery schedule
• price and discounts
• shipping instructions
• location where the material is to be shipped
• signature of the authorized officer
• detailed terms and conditions
• several number of copies made to be forwarded to various recipients.
• Original and a copy is sent to the supplier for acknowledgment of the original
order. This acknowledgment is acceptance of terms and conditions of purchase
order.
• One copy is sent to the receiving department for making necessary receiving
arrangement.
• One copy is sent to the indenting department for information.
• One copy is sent to finance department for organizing payment to the supplier.
Post purchase system
• This system includes follow up procedures, receipt and checking invoices.
• Follow up procedures: follow up is an expensive activity for an organization.
Hence this should be minimized and made more effective. A sound procedure for
follow up is required to eliminate duplication and ineffectiveness.
• Follow up responsibility is assigned to buyers responsible for areas in which
suppliers are situated.
• Receipt: A systematic record of all receipts, carrier details and descriptions is
maintained. This record is in chronological sequence of arrival of supplies. The
system ensures that inspection of consignments received is arranged in time and
payment to suppliers for accepted consignments is organized. In many
organizations a receipt section handles this activity centrally.
• Invoice checking supplier sends his invoice to customer‟s finance department for
payment for the goods supplied. Invoice checking system ensures that the invoice
is checked against the PO terms, receipt details, quantity received, inspection
reports [accepted quantity and rejected quantity], losses, damages etc. this
system helps materials management to coordinate with finance department for
payment to suppliers.
Special purchasing systems
• Forward buying: when an organization enters into a contract with another
company for buying an item for a period as long as a year or more it is called
forward buying. Forward buying is a commitment for a long period. This
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commitment is made after studying availability of the item, financial position,
EOQ for that item, discounts, etc.
• Tender buying: There are two types of tendering systems in practice. One is
called open tendering system that is adopted by public sector companies. In this
case bids are invited by advertisements in papers. On the day of opening the
tenders the lowest bidder is chosen for awarding the contract of purchase. This
method is time consuming and expensive.
• Private companies make a list of well known and serious bidders known in the
market and invite tenders from these bidders. When the tenders are opened
lowest bidder is identified.
• Blanket orders: order covers a long period like a year. Price is fixed. Delivery is as
and when customer desires. Supplier to hold inventory. Benefits are no of orders
are less, inventory is passed on to the supplier.
• Zero stock: Supplier holds the stock for the buyer. Supplier and customer are
close to each other. Suppliers production schedule is as per customers. Dedicated
supplier and customer.
• Rate contract: after finalizing the rates through negotiations for a definite period,
customer shall buy required quantity from the specified supplier. Railways and
other government organizations practice this method. Price shall not be
negotiated once again. Rate contracts normally do not specify lead time. Hence
suppliers demand higher rates for early delivery.
Reciprocity
• Organizations resort to reciprocal buying when they find it difficult to do business
in highly competitive environment. Reciprocal buying is buying form one‟s own
customers. If this is done in conditions of competition, there should not be
anything wrong about this. But, in this situation one tries to take care of the
other as each one keeps changing the role of customer & supplier. This leads to
over all deterioration of product quality and downfall of the pair.
Systems contract
• Purchase order is used as a single document during the course of completing
entire transaction. Same document is used as delivery challan at the time of
delivery. The document is updated at every stage of the process. Reduction in
number of documents and documents preparation is major saving in
administration expenses. This results in cost reduction to the value chain.
Importance of source
• Source is the place from where we procure our inputs. These inputs may be in the
form of raw material or semi finished items.
• As outsourcing is gaining importance in business, importance of source is
becoming high.
• Following reasons are considered to be making source an important element in
materials management.
• Source of market intelligence: source is a window through which the buyer
organization looks at the world outside. Information about current trends and
industrial climate is obtained from the sources.[market conditions, industrial
climate, what is new?
• Crucial for product quality: buyer organizations depend on out sourced
components for producing the product which central to the objectives business.
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Reliance on capabilities of supplier to meet tough quality standards is very high
in current business environment.
• Member in the value chain: supply source is an important element in the value
chain. Any cost added to the value chain reaches the end user as price. Hence
effectiveness and efficiency of the source becomes vital to business.
• Import substitution, cost reduction, value improvement: as indigenization of sub
assemblies, components and spare parts is necessary to reduce the cost of
product in competition, buyer organizations turn to supply sources to develop
these items. Several trials and corrections may be required to finalize the
substitute. In house capacity is generally not available for this kind of trials. A
resourceful supplier is very useful in this process. Same logic holds good in other
exercises for cost reduction and value improvement. It is quite logical that entire
process is not outsourced but isolated developmental activities are invariably
done. It is common knowledge that many small scale companies do not have full
fledged tool rooms but rely on sources for all tool room activities
Integration
Definition and scope:
• Definition: Coordination and planning of all functions for controlling materials in
an optimum manner to meet customer expectations at minimum cost.
scope
Materials management works closely with Production, Finance, Engineering and
Quality control in the process of performing the functions to meet the objectives
of customer satisfaction.
Materials management and Production:
• As we saw earlier JIT system needs very reliable procurement and delivery
systems for inputs and outputs. Hence very close interaction with production
department is primary to meet internal customer expectations and customer
delight. Only this ensures unfailing satisfaction and delight of the external
customer.
• Scope of materials management function decisions includes suppliers, production
support warehouses, transportation service providers and internal departments
subordinate to the function.
Materials management and Finance:
• Timely payment to suppliers is important for the smooth working of the supply
chain which is fundamental system. Close interaction with finance function is
needed to ensure the above.
Materials management and Engineering:
• Materials Management in the course of discharge of their functions plan activities
involving change in material inputs. This obviously has an impact on design of the
product and process of manufacturing. Hence a close working is necessary
between Materials management and Engineering.
Materials management and Quality control:
• For the same reasons that as above, close working is necessary between
Materials management and Quality control.
• Organization & control
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• Materials Management is growing in height on account of changes in management
thought process. Materials function has moved into board rooms which is an
evidence of its importance in corporate structures.
Materials Management & Corporate Organization structure:
• A materials director is usually on the board to give overall directions to the
material function in corporate bodies. This provides unity of command and
thereby uniform direction.
Concept of Centralization & De centralization:
• As we were discussing earlier it is the need of the organization triggered by
product, process and market that ultimately decides how the control should be
exercised on the material function. The control may be centralized or
decentralized fully or in parts keeping in mind overall need.
• Centralized control keeps most of the decision making at headquarters level
delegating only routine level decision making.
• Decentralized control delegates decision making to unit level enabling the units to
respond to their respective environment.
Advantages of Centralization:
• Combining the requirements of all units to buy in bulk and gain benefits of bulk
buying.
• Interplant transfer of material to deal with emergencies in individual plants. And
interplant transfer to utilize excess material available at some plant and thereby
reduce overall inventory cost for the company.
• Buying needs skills specific to the commodity in market specially buying is in
large quantities. Knowledge of the market is essential to anticipate market trends
in terms of price and availability.
• Benefits of unity of command.
• Centralized material research resulting in savings for the company.
Advantages of Decentralization:
• Decentralization overcomes problems posed by significant physical separation
between Plants and Central Office. These problems can occur due to information
flow.
• When individual plants are engaged in production of different products, their
requirement is product specific and thereby unique. Decentralized control can
deal with the requirements effectively, independently.
• Better coordination with production & other functions of the plant: Production is
the internal customer of material management function. Decentralized control
enjoys the benefit of being close to the customer. There is also the need to
interact with various other functions in the plant. Decentralized control can take
decisions based on these interactions effectively.
Inventory Management:
What is Inventory?
• Inventory is an unused asset, which lies in stock without participating in value
adding process.
• Unused equipment, raw material, Finished goods, consumables , spare parts,
bought out parts, tools, etc.
Types Of Inventory
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• Manufacturing: manufacturer‟s commitment to inventory is deep and duration is
long.
• MRO: Maintenance, repairs and operating supplies.
• Location inventory: inventory at a fixed location
• Tools and fixtures
• Inspection gauges and instruments
Stores Management:
• Normally it is assumed that store is a place where excess material is kept which
will be used as and when required. Loss of items, deterioration, inadequacy of
what is stored to what is needed are treated as „part of life‟.
Process View of Supply Chain
A supply chain is a sequence of processes and flows that take place within and
between different stages and combine to fill a customer need for a product
Two ways to view the processes performed in a supply chain
1. Cycles view and
2. Push/pull view
Cycle view
Defines the processes involved and the owners of each process
Process in a supply chain are divided into a series of cycles
Cycles are performed at the interface between two successive stages of a supply
chain
Supply chain process can be broken down into four process cycles such as
o Customer order cycle
o Replenishment cycle
o Manufacturing cycle
o Procurement cycle
Each cycles occurs at the interface between two successive stages of the supply
chain
A cycle view of the supply chain is very useful when considering operational
decisions
It clearly specifies the roles and responsibilities of each member of the supply
chain
It helps the designer to consider the infrastructure required to support the
processes
Push/Pull View
Categorises processes in a supply chain based on whether they are initiated in
response to a customer order (pull) or in anticipation of a customer order (push)
Categorisation is based on the timing of process execution relative to end
customer demand
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At the time of execution of a pull process customer demand is known with
certainty
In case of push process at the time of execution of a process demand is not
known and must be forecasted
Pull process – reactive process
Push process – speculative process
Push/pull boundary in a supply chain separates push process from pull process
Very useful when considering strategic decisions relating to supply chain
Forces more global consideration of supply chain processes as they relate to a
customer order
More the pull process better the supply chain
Competitiveness And Supply Chain Strategies
• Competitive strategy of a company defines the set of customer needs that it
seeks to satisfy through its products and services
• Defined based on how customer prioritises product cost, delivery time, variety
and quality
• Targets one or more customer segments and aims to provide products and
services that satisfy these customer‟s needs
• Some company‟s competitive strategies are defined around the following
• High availability of a variety of reasonable quality
products at low prices – eg: Wal-Mart
o Better customer convenience, availability and
responsiveness – eg: McMaster Carr – MRO items -
over 200,000 items through catalog and web site
– Better customisation, and variety at reasonable cost eg: Dell
• To execute a competitive strategy of a company, all the functions play a role and
each must develop its own strategy
• Supply chain strategy determines
– the nature of procurement of raw materials,
– transportation of materials to and from the company,
– manufacture of the product or operations to provide the service, and
– distribution of the product to the customer, along with any follow-up service
• This strategy includes what many traditionally include
– Supplier strategy
– Operations strategy, and
– Logistics strategy
• Decisions regarding inventory, operating facilities, transportation, and information
flows in the supply chain are all part of supply chain strategy
Achieving Strategic Fit
• Strategic fit means that both the competitive and supply chain strategies have
the same goal
• It refers to consistency between
– The customer priorities that the competitive strategy hopes to satisfy and
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– The supply chain capabilities that the supply chain strategy aims to build
• Major task of chief executive officer (CEO) is aligning all of the core strategies
with the overall competitive strategy to achieve strategic fit
• During the supply chain design a key consideration is the strategic fit
• A company‟s success or failure closely linked to the following
The competitive strategy and all functional strategies must fit together to form a
coordinated overall strategy
Different functions in a company must appropriately structure their process and
resources to be able to execute these strategies successfully
• Basic steps to achieve strategic fit
Understanding the customer, and supply chain uncertainty
Understanding the supply chain capabilities
Achieving strategic fit
• Understanding the Customer and Supply Chain Uncertainty
• To understand the customer, a company must identify the needs of the customer
segment being served
• Customer demand from different segments may vary along several attributes:
The quantity of the product needed in each lot
The response time that customers are willing to tolerate
The variety of products needed
The service level required
The price of the product
The desired rate of innovation in the product
Implied Demand Uncertainty
• Demand uncertainty reflects the uncertainty of customer demand for product
• Implied demand uncertainty is the uncertainty in meeting a portion of customer
demand and it is the uncertainty the supply chain faces.
• It is mainly due to the attributes the customer desires Illustration
As a supply chain raises its service level, it must be able to meet a higher and
higher percentage of actual demand, forcing it to prepare for rare surges in
demand. Thus raising the service level increases the implied demand uncertainty
even though the product‟s underlying demand uncertainty does not change.
• Product demand uncertainty and various customer needs that the supply chain
tries to fill affect implied demand uncertainty
• The following customer needs increases implied demand uncertainty
– Range quantity required increases
– Lead time decreases
– Variety of products required increases
– Number of channels through which product may be
acquired increases
– Rate of innovation increases
– Required service level increases
Correlation between implied demand uncertainty and other attributes
Low Implied High Implied
Uncertainty Uncertainty
Product margin Low High
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Average forecast error 10% 40% to 100%
Average stockout rate 1 % to 2% 10% to 40%
Average forced season
End markdown 0% 10% to 25%
• Following supply source capabilities increase the supply uncertainty and hence
high implied demand uncertainty
Frequent breakdown
Unpredictable and low yields
Poor quality
Limited supply capacity
Inflexible supply capacity
Evolving production process
• Implied uncertainty spectrum shows in one end predictable supply and demand,
and in the other end highly uncertain supply and demand
Understanding the supply chain
• Important supply chain characteristics are responsiveness and efficiency
• Supply chain responsiveness includes a supply chain‟s ability to do the following
• Respond to wide range of quantities demanded
• Meet short lead time
• Handle a large variety of products
• Build highly innovative products
• Meet a very high service level
• Handle supply uncertainty
• Supply chain efficiency is the cost of making and delivering a product to the
customer
• Cost-responsiveness efficient frontier is the curve showing the lowest possible
cost for a given level of responsiveness
• Shows the cost-responsiveness performance of the best supply chain
• Firms on the efficient frontier are also continuously improving their processes and
changing technology to shift the efficient frontier itself
Responsiveness
High Low Cost
Responsiveness efficient frontier
• Responsiveness spectrum - Supply chains range from those that focus solely on
being responsive to those that focus on a goal of producing and supplying at the
lowest possible cost
Achieving Strategic Fit
• Strategic fit is achieved if what the supply chain does particularly well is
consistent with the targeted customer‟s needs and the uncertainty of the supply
chain
Finding the zone of strategic fit
• For high level of performance, companies should move their competitive strategy
(and resulting implied uncertainty) and supply chain strategy (and resulting
responsiveness) towards the zone of strategic fit
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• To achieve complete strategic fit, a firm must consider all functional strategic
within the value chain
Comparison of efficient and responsive supply chains
Primary goal lowest cost Respond quickly
Product design Max. performance Modularity-
Strategy at a min. cost postponement
Pricing strategy Lowe margin High margin
Mfg. Strategy Lower cost Capacity flexibility
Inventory Strategy Minimize Buffer inventory
Lead time strategy Reduce Not the Aggressively
Expense of cost reduce
Supplier strategy cost and quality Speed, flexibility, reliability, quality
Other Issues Affecting Strategic Fit
• Multiple products and customer segments
• Product life cycle
• Competitive change over time
Multiple Products and Customer Segments
• Firms often sells multiple products and serves customer segments with very
different needs
• Different products and segments have different implied demand uncertainty
• Key issue for company is to create a supply chain that balances efficiency and
responsiveness given its portfolio of products, customer segments and supply
sources
• Several possible routes a company can take
One route – set up independent supply chains for each different product or
customer segment
• Feasible if each segment is large enough to support a dedicated supply chain
• Preferable strategy is to tailor the supply chain to best meet the needs of each
product‟s demand
• Tailoring the supply chain requires some links in the supply chain with some
products, while having separate operations for other links considering efficiency
and responsiveness
Product Life Cycle
• As product go through their life cycle, the demand characteristics and the needs
of the customer segments being served change
• As product mature, the corresponding supply chain strategy should, in general,
move from being responsive to being efficient
Product Implied Product
Maturity Uncertainty Introduction
Spectrum
Changes in supply chain strategy over a product life cycle
Competitive Change Over Time
• Competitor can change the landscape of the market
Growth of mass customisation – competitors flood the marketplace with product
variety, customers are becoming accustomed to having their individual needs
satisfied
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Competitive focus today is on producing sufficient variety at a reasonable price
• As competitive landscape changes, a firm is forced to alter its competitive
strategy result in change in supply chain strategy
