3.6.

SUPPLY CHAIN MANAGEMENT PRACTICE IN APPAREL INDUSTRY

3.6.1Definition of Supply chain management:
Supply chain is a simple process by which goods transform from supply to buyer in garments
industry against order & payment. Supply chain side two ways, one is domestic side and the
other is international side. In domestic side it contains supplier to garments and in international
side it contains garments to buyer.
A supply chain consists of all parties involved, directly or indirectly, in fulfilling a custom
Request. The supply chain includes not only the manufacturers and suppliers, but also
transporters, warehouses, retailers, and even customer themselves. Each stage in a supply chain
is connected through the flow of products, information and fund. These flows often occur in both
directions and may be managed by one of the stages or an intermediary. Here we can see raw
materials supplier supply industrial product to the manufacturer, and make the product sale to
distributor, distributor sale this product to he retailer by small lot, and final consumer get the
product from the retailer
3.6.2.Importance Of Supply Chain Department:

It is important for customer satisfaction

It is the success of supplier, delivery the goods right time
In garments industry 80% procurement depends on by row materials
To get Quality of goods
In-house inventory report
Multi storage
Material requirement

3.6.3Object Of Supply Chain department:

Yet starting a business anywhere is notoriously risky. More than half fail within the first four
years. Significant hurdles, in particular, confront small businesses in inner cities:

Minimum price
Minimum Time
In time delivery
Good Quality
Minimum Use Warehouse

3.6.4Steps Of Supply Chain Management

Create a data bank on the basic of information related with supplier.

Asking for sample for buyer approvals
Taking approval from buyer or buyer representative

138

Asking for price quotation for negotiation

Preparing for CS
Invitation to supplier for meeting in office
Sending minutes to supplier for price conformation
Sending purchase order for PI
Sending BB L/C to supplier
Production monitoring
Receiving in time delivery

3.6.5Concept OF Supply Chain Management:

Payment

Payment

RM

CMT
Ware

F
R

Suppliers

House

Garments
GM

Order

OUT
Store

Buyer
M

Order

Domestic part

International Part

It is a process by which suppliers send the raw materials or finished goods to the garments in
exchange of order and payment.
Garments Industry Send the garments to the Buyer in exchange of order and payment and then
go to the departmental store.
Sourcing Fabric:

Trimmings

Product Buyer

Fabric
Labels, Tickets,
hangers and bags.
138

Fabric: Grey Stock, Finished fabric

Trimmings: Button Zippers, Interlining
Labels: Back-neck logo, Country of origin, care-levels, fiber content labels
Tickets: Marketing sewing tags
Hangers: Unbranded, retailer own branded
Bags: Protective covers for individual or groups of garments
Boxes: Flat packed garments such as T-shirts and Knitwear
3.6.6Simple Supply Chain Process In The Eyes Of Buyer:
Identifies the different components that buyers must potentially source. It is true to say that one
supplier could be responsible for sourcing all the components which buyer must potentially
source. But Buyers are looking towards newer Cheaper and more exciting sources of supply. If
the suppliers dont take to improve new creative design and product development than the
younger and fashionable buyer tend to change their suppliers frequently.
3.6.7Comparative Statement:
Name
of Price
company
A
$ 5 kg
B
$ 4.5 kg
C
$ 5.5 kg
D
$ 3 kg

Quality
Approved
Approved
Approved
Approved

Delivery
Date
10-12
15-12
11-12
10-12

Capacity

Management Remarks

5 ton/Month
7 ton/Month
6 ton/Month
5 ton/Month

B
A+
AA

Buyer who is fully experienced about Business So HE/She will sack the right company to
continue the business.
Here CS means A, B, C, D the 4 company and buyer will contact all of the companies this chart
shows that all of the companies price, quality, capacity, company status.
1. 1st companies price $ 5kg, capacity and quality ok and status.
2. Second companies price $4.5 kg capacity and quality ok and status A+.
Same way, compare and select one ore two ,and inviting for meeting in office and negotiation
process will start,

138

3.6.8Negotiation Skills:
One of the most important skills a buyer and a seller must muster is the ability to negotiate. As
most high street fashion selling prices are very competitive. The greatest scope for improving
profit in a product is the reduction of cost price. There are many factors that influence the final
cost price of a product including fabric. Garment construction, order volume, lead time, and
delivery terms. These particular issues are discussed in more detail throughout the book.
Negotiation is a process of communication and exchange through which the interested parties
make a series of demands and compromises; it involves the trading of benefits between parties.
The basic principal is to trade what is of low value to you but of greater value of the other party,
thereby reducing the cost of success to you. However the aim of a negotiation should be to
ensure that both parties are happy with the final outcome or agreement .otherwise one or the
other will not continue to participate.
The old scenario of the retailer always winning and supplier always losing result in both parties
effectively losing. Traditionally, the dominant fashion retail groups have seen the availability of
large number of supplies as a means of trading one off against another to achieve a cheaper cost
price consequently many of the suppliers who lost out ceased to do business with those retailers
again. Short-time cost price gains resulted in short term relationships with many suppliers. With
the end result being a large unwieldy and diverse supplier base operating as efficiently as it
should.
3.6.9The Process of Negotiation:
A Successful negotiation outcome does not generally occur through luck. by following a clear
process. The Process reflects the different levels of knowledge of the subject of Negotiation,
Various parties and the way they communicate at various stages in the Negotiation. The
following is an outline of steps essential to effective negotiation.
Flow Up procedure for out side fatuities for accessories & fabric
Definition of outsourcing:
In simple sense of view it means, to source something. But in apparel sense of view it
means, the process of selecting suppliers for manufacturing and delivering products and their
components.
Importance of outsourcing:
The importance of outsourcing in the apparel industry is beggar description. Successful
sourcing in a fast moving apparel industry requires excellent planning and co-ordination. The
importance is given below:

To complete a garment based on buyer requirements.

138

To compare different supplier price list.

To review the past export order list & capacity.
To visualize all orders and status of suppliers for availability of information.
Improved communication and coordination with suppliers, to improved 'on time'
delivery performance.
To reduce lead times through improved control.

Types of outsourcing:
Normally there are two types of outsourcing. Such as:

Local outsourcing
International outsourcing

1. Local outsourcing: When the sourcing comes from local area called local outsourcing.
Which is also two types:
I.
II.

Vendor Nominated
Buyer Nominated

Vendor Nominated:
But if sourcing information is not restricted by buyer than garments needs to find the supplier to
source the materials based on buyer requirements. In that case after collecting samples of
materials he needs to take approved from buyer. If fails to take approved 1 st time than he needs to
recollect that samples from supplier by developing based on buyer requirements.
Fabric:
When fabric needs to buy garments representative should be approved from buyer. Before
buying raw material some analysis should be done from supplier and their company profile, past
export order, present export order process, capacity and main important part of price and some
data. Before buying fabric garment should judge also couple of things like fabric characteristics,
lab dip sample test.
Yarn:
When yarn needs to buy garments representative should be approved from buyer. Before buying
raw material some analysis also should be done from supplier and collect their company profile,
past export order, present export order process, capacity and main important part of price and
some data. To select the quality full yarn like: 1. Comb yarn 2. Carded yarn.
Accessories:

138

When accessories needs to buy garments representative should be approved from buyer. Before
buying accessories some analysis also should be done from supplier and collect their company
profile, past export order, present export order process, capacity and main important part of price
and some data.
Buyer Nominated:
If sourcing process restricted by buyer called buyer nominated sourcing. In that case garments
need not recheck or developed or approved his materials from buyer. In this case, it is buyer who
takes the responsibility to develop or approved.
International outsourcing:

To collect different countries export order.

To increase the business of new item with new buyer.
To find new export oriented country.
To get some facility from E.U, U.S.A & Canada.

3.6.10Researching The Needs Of Both Parties:

The Greater the knowledge a buyer has of their own and the suppliers requirements. The better
able they are to construct an acceptable solution. The buyer must be clear about both the
department mark-up to be placed on the product cost price and the intended retail selling price so
that she or he can judge the viability of the suppliersproducts. She or He should also have
sufficient product construction knowledge to understand how changes can be made to achieve
better value in the product.
Frequently the supplier will make suggestion to try to bring the cost price closer to the buyer
target. However an experienced buyer can speed up the process by making suggestion which will
be acceptable to her. Lead-time is another lever for negotiation with differing operational issues
for both parties. If the buyer starts the sourcing process early enough she may have enough time
in hand to use ended lead-time as a bargaining tool.
The process of researching needs does not stop once the negotiation is underway as the body
language and facial expression of both parties will signal their reactions of the ongoing
discussion. Successful buyers will listen to and watch suppliers carefully, making judgments
about how to proceed when meeting a supplier. Closed questions can be used to generate specific
responses.
Cost Management
What has just been established for Supply Chain Management is also true for Cost Management.
In earlier years, both students at universities and practitioners in their companies had a set of
instruments that evolved from management accounting. Data was put together and figures were
calculated. As the competitive environment of companies changed, it was not sufficient any
more, to arrange past data. Instead, accomplished cost information is needed to manage the
future. This has led to the introduction of the term cost management, which can be defined in this

138

way: Cost management encompasses all (control) measures that aim to influence cost structures
and cost behavior precociously. Among these tasks the costs within the value chain have to be
assessed, planned, controlled, and evaluated.6 The proactive management of costs7 extends
much further than management accounting and has lead to the establishment of a full set of new
concepts, such as target costing, activity-based costing, life cycle costing and Many more.8
Cost Management in Supply Chains
As both cost management and supply chain management are rather platforms for a wide variety
of methods, concepts and instruments, it cannot be expected, that looking at the intersection will
lead to a single, clear concept. This volume brings together many of the exiting approaches to
cost management in supply chains. As given by Seuring, the issue addressed can be defined as
methods or concepts allowing analysis and control of all costs within a supplychain.While this is
a wide definition, originally used for Supply Chain Costing, it covers all approaches taken and
does not limit practices used to a certain set. In a particular context, it might be necessary to limit
the assessment to a certain set of parameters, i.e. costs, resulting in a meaningful analysis of the
model. Taking into account the SCM definition given above, it becomes evident, that costs are
not only created by material and information flows along the supply chain, but also by the
relationships with the supply chain itself. The papers that are put together in this book aim to
illustrate this. The remainder of this chapter will provide an overview of the papers presented
inthe book. They are arranged according to four tracks, explained subsequently
It is important that result will be win/win situation of both parties.
3.6.11Supply Chain Stages:

Supplier

Raw material supplier

Manufacturer
Wholesaler/distributor
Retailer
Customer

Manufacturer

Distributor

Retail

Custom

Figure: An example of supply stage.

Supply Chain:
A supply chain consists of all parties involved, directly, in fulfilling a customer request. The
Supply chain includes not only the manufacture and supplier, but also transporters, warehouses,
retailers, and even customer themselves. Within each organization, such as a manufacturer, the
supply chain includes all function involved in receiving and filling a customer request. These
function includes .but are not limited to new, product development, marketing, operations,
distributions, finance and customer service.
The Objective of supply chain:

138

The objective of every supply chain should be to maximize the overall value generated. The
value a supply chain generates is the difference between what the final product is worth to the
customer and the costs the supply chain incurs in filling the customer request. For most
commercial supply chains, Value will be strongly correlated with supply chain profitable. The
difference between the revenue generated from the customer and the overall cost across the
supply chain. Having defined the success of a supply chain in terms of supply chain profitability.
3.6.12Process Views Of A Supply Chain:
A supply Chain is a Sequence of process and flows that take place within and between different
stage and combined to fill a customer need for a product.There are two different ways two view
the process performed in a supply chain.
Cycle View:
The process in a supply chain is divided in to a series of cycle, each performed at the interface
between two successive stages of a supply chain.
Push/pull view:
The process in a supply chain is divided into two categories depending on whether they are
executed in response to a customer order or anticipation of customer order.
Cycle view of supply chain Process:
Customer order cycle
Replenishment cycle
Manufacturing cycle
Procurement cycle
Each cycle occurs at the interface between two successive stages of the supply chain. The five
stages thus in result in four supply chain process cycle. Not every supply chain will have all four
cycles clearly separated. For example: a grocery supply chain in which a retailer stocks finished
goods inventories and places replenishment orders with a distributor is likely to have all fours
cycles separated.
Managing the supply chain of the future
If these business transformation are to be successfully achieved then not only must the
organization be open to change, but the skills available to it must be significantly enhanced.
It has been said that if the external environment is changing faster than the internal environment
is changing faster than the internal environment then there is a good chance that the company
will soon be in trouble. Creating a climate that welcomes change should be one of the prime
tasks of any business leader.
Since it is through people that change is created, attention must be paid to how the organization
develops a set of skills and competencies that are appropriate to the constantly changing external
environment. Table 9.1 suggests that the management skills and competencies needed to cope

138

with the business transformations we have described are much broader than those traditionally
encountered in the business.

3.6.13Table Managing The Supply Chain Of The Feature

Paradigm shift
From functions to processes, from products to customers, from revenue to performance, from
inventory to information, from transactions to relationships.
Leading to
Integral management of materials of goods flow, focus on markets and the creation of customer
value, focus on the key performance drivers of profit, demand-based replenishment and quick
response systems, supply chain partnership.
Skills required
Cross-functional management planning skills, ability to define, measure and manage service
requirements market segment i.e. perfect order achievement, understanding of the costs- to-serve
and time-based performance indicators, information system and information technology,
relationship management and win-win orientation.
3.6.14.The Extended Enterprise And The Virtual Supply Chain:
The nature of business enterprise is changing. Todays business is increasingly bounderyless,
meaning that internal functional barriers are being eroded in favour of horizontal process
management and externally the separation between vendors, distributors, customer and the firm
is gradually lessening. This is the idea of the extended enterprise which is transforming our
thinking on how organizations compete and how value chains might be reformulated.
Underpinning the concept of the extended enterprise is a common information highway. It is
the use of shared information that enables cross-functional, horizontal management to become a
reality. Even more importantly it is information shared between partners in the supply chain that
makes possible the responsive flow of product from one end of the pipeline to another. What has
now come to be termed the virtual enterprise or supply chain is in effects a series of relationships
between partners that is based upon the value-added exchange of information.
The notion that partnership arrangements and a mentality of co-operation are more effective than
the traditional arms-length and often adversarial basis of relationship is now gaining ground.
Thus the supply chain is now becoming a confederation of organizations that agree common
goals and bring specific strengths to the overall value creation and value delivery system. This
process is being accelerated as the trend towards out-sourcing should not be confused with
subcontracting where a task or an activity is simply handed over to a specialist. In a way it
would be better to use the term in-sourcing or re-sourcing, when we refer to the quite different
concept of partnering that the virtual supply chain depends upon. These partnerships may not be
for all time quite possible they exist only to exploit a specific market opportunity but they
will be seamless and truly synergetic.
The role of cycle inventory in a supply chain:

138

A lot or batch size is the quantity that a stage of a supply chain either products or purchases at a
time. Consider, for example , a computer store that sells an average of four printers a day. The
sore manager, however , orders 80 printers from the manufacturer each time he places an order.
3.3.16determining Appropriate Level Of Safety Inventory
The lot or batch size in this case is 80 printers. Given daily sales of four primters, it takes an
average of 20 days before the store sells the entire lot and purchases a replenishment lot. The
computer store holds an inventory of printers because the manager purchases a lot size larger
than the stores daily sales. Cycle inventory is the average inventory in a supply chain due to
either production or purchases in lot sizes that are larger than those demanded by the customer.
In the rest of this chapter we use the following notation:
Q. Quality in a lot or bath size.
D. Demand per unit time.
In this chapter, we ignore the impact of demand variability and assume that demand is stable. In
chapter 11, we introduce demand variability and its impact on safety inventory.
Let us consider the cycle inventory of jean-Mart, a department store. The demand for jeans is
relatively table at D= 1,000 pairs of jeans per day. The store manager at jean-Mart currently
purchases in lots of Q= 1,000 pairs. The inventory profile of jeans at jean-Mart is a plot depicting
the level of inventory over time, as shown in
Because purchases are in lots of Q= 1,000 units, whereas demand is only D=100 units per day, it
takes 10 days for an entire lot to be sold. Over these 10 days, the inventory of jeans at jean-Mart
declines steadily from 1,000 units ( when the lot arrives ) to 0 (When the last pair is sold). This
sequence of a lot arriving and demand depleting inventory until another lot arrives repeats itself
every 10 days, as shown in the inventory profile in
When demand is steady, cycle inventory and lot size are related as follows :
Cycle inventory = lot size/2 = Q/2
For a lot size of 1,000 units , jean-Mart carries a cycle inventory of Q/2 = 500 pairs of jeans.
From equation 10.1 , we see that cycle inventory is proportional to the lot size. A supply chain in
which stages produce or purchase in larger lots has more cycle inventory than a spply chain in
which stages purchases in lot sizes of 200 pairs of jeans, it will carry a cycle inventory of only
100 pairs of jeans.
Lot sizes and cycle inventory also influence the flow time of material within the supply chain.
Recall from Littles law that
Average flow time = average inventory/ average flow rate
Cycle inventory at the jean-Mart store thus adds five days to the average amount of time that
jeans spend in the supply chain. The lerger the cycle inventory, the longer is the lag time between
when a product is produced and when it is sold. A lower level of cycle inventory is always
desirable, because long time lags level a firm vulnerable to demand changes in the marketplace.
A lower cycle inventory also decreases a firm s working capital requirement. Toyota, keeps a
cycle inventory of only a few hours of production between the factory and most suppliers. As a
result, Toyota is never left with unneeded parts and its working capital requirements are less than
those of its competitors. Toyota also allocates very little space in the factory to inventory.
Before we suggest actions that a manager can take to reduce cycle inventory, it is important to
understand why stages of a supply chain produce or purchase in large lots and how lot size
reduction affects supply chain performance.

138

3.3.17Managing Safety Inventory In A Multiechelon Supply Chain

Cycle inventory is held to take advantage of economics of scale and reduce cost within a supply
chain. To understand how the supply chain achieves these economics of scale we first identify
supply chain costs that are influenced by lot size.
The average price paid per unit purchased is a key cost in the lot sizing decision. A buyer may
increase the lot size if these action results in a reduction in the price paid per unit purchased. For
example, if the jeans manufacturer charges $ 20 per pair for orders under 500 pairs of jeans and
$18 per pair for larger orders, the store manager at jean-Mart gets the lower price by ordering in
lots of at least 500 pairs of jeans. The price paid per unit is referred to as the material cost and is
denoted by C. it is measured in $/unit. In many practical situations, material cost displays
economies of scale and increasing lot size decreases material cost. The fixed ordering cost
includes all costs that do not vary with the size of the order but are incurred each time an order is
placed. For example, there may be a fixed administrative cot to place an order, a trucking cost to
transport the order, and a labor cost to receive the order. Jean-Mart, for example, incurs a cost of
$400 for the truck regardless of the number of pairs of jeans shipped. If the truck can hold up to
2,000 pairs of jeans, a lot size of 100 pairs results in a transportation cost of $ 4/pair, whereas a
lot size of 1,000 pairs results in a transportation cost of $0.40/pair. Given the fixed transportation
cost per batch, the store manager can reduce transportation cost per unit by increasing the lot
size. The fixed ordering cost per lot or batch is denoted by S (commonly though of as a setup
cost) and is measured in $/lot. The ordering cost also display economies of scale, and increasing
the lot size decreases the fixed ordering cost per unit purchased.
Holding cost is the cost of carrying one unit in inventory for a specified period of time, usually
one year. It is a combination of the cost of capital, the cost physically storing the inventory, and
the cost that results from the product becoming obsolete, the holding cost is denoted by H and is
measured in $/unit/year. It may also be obtained as a friction h of the unit cost of the product.
Given a unit cost of C, the holding cost H is given by
H=hC
The total holding cost increases with an increases in lot size and cycle inventory.
To summarize, the costs that must be considered in any lot sizing decision are
Average price per unit purchashed, $C/unit
Fixed ordering cost incurred per lot, $S/lot
Holding cost incurred per unit per year, $H/unit/year =hC
Later in the chapter, we discuss how the various cost may be estimated in practice. However, for
the purposes of this discussion, we assume they are already known.
3.3.18.The Role Of Safety Inventory In A Supply Chain:
Safety is inventory carried to safety demand that exceeds the amount forecasted for a given
period. Safety inventory is carried because demand is uncertain and a product storage may result
if actual demand exceeds the forecast demand. Consider, for example, Bloomingdales a highend department store. Bloomingdales sells purses purchased from Gucci. an Italian manufacture.

138

Given the high transportation cost from Italy, the store manager a Bloomingdales orders in lots
of 600 purses. Demand for purses at Bloomingdales averages 100 a week. Gucci takes three
weeks to deliver the purses to Bloomingdales in response to an order. If there is no demand
uncertainty and exactly 100 purses are sold each week. The store manager at Bloomingdales can
place an order when the store has exactly 300 purses remaining. In the absence of demand
uncertainty. Such a policy ensures that the new lot arrives just as the last purse is being sold at
the store.
However given demand flections and forecast errors, actual demand over the three weeks may be
higher to lower than the 300 purses forecasted. If the actual demand at Bloomingdales is higher
than 300 some customers will be unable to purchase purses resulting in a potential loss of margin
for Bloomingdales. The store manager thus decides to place an order with Gucci when the store
now runs out of purses only if the demand over the three weeks exceeds 400. Given an average
weekly demand of 100 purses, the store will have an average 100 purses remaining when the
replenishment lot arrives. Safety inventory is the average inventory remaining when the
replenishment lot arrives. Thus Bloomingdales carries a safety inventory of 100 purses. Given a
lot of size of Q= 600 purses, the cycle inventory, the focus of the previous chapter is Q/2=300
purses, the inventory profile at Bloomingdales in the presence of safety inventory at
Bloomingdales is the sum of the cycle and safety inventories.
This example illustrated a trade-off that a supply chain manager must consider when planning
safety inventory, on one hand, raising the level of safety inventory increases product availability
and thus the margin captured from customer purchases. On the other hand, raising the level of
safety inventory increases inventory holding costs. This issue is particularly significant in
industry in which product life cycle are short demand volatile. Carrying excessive inventory can
help counter demand volatility but can really hurt if new products come on the market and
demand for the product in inventory dries up. The inventory on hand then becomes worthless. In
todays business environment, it has become easier for customers to search is out of a title, a
customer can easily check to see if Barnes and Noble.com has the title available. The increased
ease of searching puts pressure on firms to improve product availability. Simultaneously, product
variety has grown with increased customization. As a result, markets have become increasingly
heterogeneous and demand for individual products is very unsuitable and difficult to forecast.
Both the increased variety and the greater pressure for availability push firms to raise the level of
safety inventory they hold. Given the product variety and high demand uncertainty in most highteach supply chain, a significant fraction of the inventory carried is safety inventory.
As product variety has grown, however, product life cycles have shrunk. Thus it is more likely
that a product that is hot today will be obsolete tomorrow, which increases the cost to firms of
carrying too much inventory. Thus a key to the success of any supply chain is to figure out ways
to decrease the level of safety inventory carried without hurting the level of product availability.
The importance of importance of reduced safety inventories is emphasized by the experience of
Dell and Compaq in the early part of 1988, when pries dropped. Compaq carried 100 days of
inventory compared to Dell, which carried only 10 days of inventory. Declining prices hurt
Compaq much more, given the extra inventory that it carried. In fact, this situation resulted in
Compaq not making any profits in the first quarter of 1998.
A key to Dells success has been its ability to provide a high level of product availability to
customer while carrying very low levels of safety inventory in its supply chain. This fact has also
played a very important role in the success of wall-Mart and seven-Eleven Japan..

138

3.3.19Managing Safety Inventory In A Multiechelon Supply ChainIn our discussion so far, we have assumed that each stage of the supply chain has a well-defined
demand and supply distribution that it uses to set its safety inventory levels. In practice, this is
not true for multiechenelon supply chains. Consider a simple multiechelon supply chain with a
supplier feeding a retailer who sells to the final customer. The retailer needs to know demand as
well as supply uncertainty to set safety inventory levels, supply uncertainty, however, is
influenced by the level of safety inventory the supplier chooses to carry. If a retailer order arrives
when the supplier has enough inventory, the supply lead time is short. In contrast, if the retailer
order arrives when the supplier is out of stock, the replenishment lead time for the retailer
increases. Thus if the supplier increase its level of safety inventory, the retailer can reduce the
safety inventory it holds. This implies that the level of safety inventory at all stages in
multiechelon supply chain should be related.
All inventory between a stage and the final customer called the echelon inventory. Echelon
inventory at a retailer is just the inventory at the retailer or in the pipeline coming to the retailer.
Echelon inventory at a distributor, however, includes inventory at the distributor and all retailers
served by the distributor. In a multiechelon setting, recorder points and order-up to levels at any
stage should be based on echelon inventory and not local inventory. Thus a distributor should
decide its safety inventory levels based on the level of safety inventory carried by all retailers
suppler by it. The more safety inventory retailers carry the less safety inventory the distributor
needs to carry. As retailers decrease the level of safety inventory the distributor needs to carry. As
retailers decrease the level of safety inventory they carry. The distributor has to increase its
safety inventory to ensure regular replenishment at the retailers.
If all stages in a supply chain attempt to manage their echelon inventory, the issue of how the
inventory is divided among various stages becomes important. Carrying inventory upstream in a
supply chain allows for more aggregation and thus reduces the amount of inventory required.
Carrying inventory upstream, however, increases the probability that the final customer will have
to wait because product is not available a stage close to him. Thus in a multicolumn supply chain
a decision must be made with regard to the level of safety inventory carried to different stages, if
inventory is very expensive to hold and customers are willing to tolerate a delay. It is better to
increase the amount of safety inventory carried upstream, far from the final customer, to explore
the benefits to aggregation, if inventory is inexpensive to hold and customers are very sensitive,
it is better to carry more safety inventory downstream, closer to the final customer.
3.3.20improveing Forecasts
Summary of learning Objectives:
1. Understand the role of safety inventory in a supply chain: Safety inventory helps a supply
chain provide customers a high level of product availability in spite of supply chain and
demand variability. It is carried just in case demand exceeds the amount forecasted or
supply arrives later than expected.
2. Identify factors that influence the required level of safety inventory: Safety inventory is
influenced by demand uncertainty, replenishment lead times, lead time variability, and
desired product availability. As any one of them increases, the required safety inventory

138

also increases. The required safety inventory is also influenced by the inventory policy
implemented. Continuous review policies require less safety inventory than periodic
review policies.
3. Describe different measures of product availability: The three basic measures of product
availability are product fill rate, order fill rate, and cycle service level. Product fill rate is
the fraction of demand for a product that is successfully filled. Order fill rate is
thefraction of orders that are completely filled. Cycle service level is the fraction of
replenishment cycles in which no stock outs occur.
4. Utilize managerial levers available to lower safety inventory and improve product
availability. The required level of safety inventory may be reduced and product
availability may be improved if a supply chain can reduce demand variability,
replenishment lead times and the
3.3.21.Tailored Transportation By Product
Learning objectives:
1. Identify the factors affecting the optional level of product availability and evaluate the
optional cycle service level.
2. Use managerial levers that improve supply chain profitability through op0tional
service levels.
In this chapter, we explore the process of determining the optional level of product availability to
be offered to customers. The chapter examines the components that go into the calculation of the
optional service level and the various ways that this calculation can be performed. We discuss
and demonstrate how different managerial levers can be used to improve supply chain
profitability by increase the level of product availability while reducing inventories.
3.3.22demand And Value
Information is a key supply chain driver because it serves as the glue that allows the other supply
Chain drivers to work together with the goal of creating an integrated, coordinated supply chain .
Information is crucial to supply chain performance because it provides the foundation on which
supply chain processes execute transactions and managers make decisions. Without information,
A manager cannot know what customers want , how much inventory is in stock, and when more
Product should be produced or shipped. In short, without information, a manager can only make
Decisions blindly. Therefore, information makes the supply chain visible to a manager. Without this
visibility,
a manager can make decisions to improve the supply chains performance.
Given the role of information in a supply chains success, managers must understand how
Information is gathered and analyzed. this is where IT comes into play. IT consists of the hardware,
software and people throughout a supply chain that gather, analyze, and execute upon information.
IT serves as the eyes and ears (and sometimes a portions of the brain) of management in a supply
Chain, capturing and analyzing the information necessary to make a good decision. For instance ,
An IT system at a PC manufacturer may tell a manager how many processors are in stock. IT is also
used to analyze the information and recommend an action. In this role , an IT system could take the
number of processors in inventory, look at demand forecasts, and determine whether to order more
processors from Intel.

138

Using IT systems to capture and analyze information can have a significant impact on a firms
3.3.23the Role Of It In Transportation
Performance. For example, a major manufacturer of computer workstations and servers found that
Most of its information on customer demand was not being used to set production schedules and
Inventory levels. The manufacturing group lacked this demand information, which essentially
Forced them to make inventory and production decisions blindly. By installing a supply chain
Software system, the company was able to gather and analyze demand data to produce recommended
Stocking levels. Using the IT system enabled the company to cut its inventory in half, because
Managers could now make decisions based on customer demand information rather than manufactureinks educated guesses. Large impacts like this underscore the importance of IT as a driver of supply
chain performance.
Information is the key to the success of a supply chain because it enables management to make decisions
Over a board scope that crosses both functions and companies. As discussed in chapter 2, successful
supply
Chain as a whole rather than looking only at the individual stages. By considering a global scope across
the Entire supply chain, a manager is able craft strategies that take into account all factors that affect the
supply chain rather just those factors that take into account all factors are affect the supply chain rather
than just those
Factors that affect a particular stage or function within the supply chain. Taking the entire chain into
account maximizes the profits of the total supply chain.
How does a manager get this broad scope? The supply chain scope is made up entirely of information,
And the breadth of this information determines whether the scope is global or local. To obtain a global
scope of the supply chain ,a manager needs accurate and timely information on all company functions
and organizations in the supply chain .For example,, in trying to determine production schedules, it is
not enough for.
3.3.24risk Management In Transportation
The workstation manufacturer mentioned earlier to know how much inventory is on hand within the
Company. The manager also needs to know the downstream demand and even the upstream supplier
lead times and variability. With this broader scope, the company is able to set production schedules and
Inventory levels that maximize profitability. Information must have the following characteristics to be
useful when making supply chain decisions:
3.3.25Information Must Be Accurate:
Without information that gives a true picture of the state of the supply chain, it is very difficult to make
good decisions. That is not to say that all information must be 100 percent correct, but rather that the
data available paint a picture that is at least directionally
Correct.
3.3.26Information Must Be Accessible In A Timely Manner:
Often, accurate information exists, but by the time it is available, it is either out of date or, if it is
current, it is not in an accessible form. To make good decisions, a manager needs to have up-to- date
information that is easily accessible.

138

3.3.27.Information Must Be The Right Kind:

Decision makers need information that they can use. Often companies have large amounts of data that is
not helpful in making a decision. Companies must think about what information should be recorded so
that valuable resources are not wasted collecting meaningless data while important data goes
unrecorded. Information is a key ingredient not just at each stage of the supply chain, but also within
each phase
Of supply chain decision making-from the strategic phase to the planning phase to the operational
Phase (see chapter 1). For instance, information and its analysis play a significant role during the
Formulation of supply chain strategy by providing the basis for decisions such as the location of the
Push/pull boundary of the supply chain. Information also plays a key role at the other endof the
Spectrum, in operational decisions such as what products will be produced during todays production
Run. Managers need to be able to understand hoe to analyze information to make good decisions. Much
Of this book deals with just that idea- how to identify a supply chain problem that needs to be solved,
Obtain information, analyze it, and then make a good decision to act on that information.
For example, Wal-Mart has been a pioneer not only in capturing information, but also in understanding
to analyze that information to make good supply chain decisions. Wal-Mart collects data in real time on
what products are being purchased at each of its stores and then sends these data to the
Manufacturers. Wal-Mart analyzes this demand information to determine how much inventory to hold
at each store and to decide when to order new loads of product from the manufacturer. The manufacturer
Uses this information to set its production schedules to meet Wal-Mart s demand on time. Both
Wal-Mart and its key suppliers do not just capture the information they have ; they analyze it and base
their actions on this analysis.
Information is used when making a wide variety of decisions about each of the supply chain drivers,
as discussed here.
3.3.28.Facility:
Determining the location, capacity and schedules of a facility requires information
on the trade-offs among efficiency and flexibility, demand , exchange, rates, taxes, and so on(see
Chapter
4, 5 and 6). Wal-Marts suppliers use the demand information from Wal-Marts store to set their
production schedules. Wal-Mart uses this information to determine where to place its new stores and
cross-docking
facilities.
3.3.29Inventory:
Setting optimal inventory policies requires information that includes demand patterns,cost of carrying
inventory , costs of stocking out and costs of ordering
. For Example, Wal-Marts collects detailed demand, costs, margin, and supplier information to make
these inventory policy decisions.
3.3.29Transportation:
Deciding on transportation networks, routings, modes shipments, and vendors
requires information including costs, customer location and shipment sizes to make good decisions(see
Chapter 13).Wal-Mart uses information to tightly integrate its operation with those of its suppliers.

138

This integration allows Wal-Mart to implement cross-docking in its transportation network saving on
both inventory and transportation costs.
3.3.30Pricing And Revenue Management:
To set pricing policies, one needs information demand, both its volume and various customer segments
willingness to pay, as well as many supply issues such as the product margin, lead time and availability.
Using this information firms can make intelligent pricing decisions to improve their supply chain
profitability.
In summary, information is crucial to making good supply chain decisions at all three levels of decision
making (strategy, planning, and operation) and in each of the other supply chain drivers (facilities,
inventory ,transportation, sourcing and pricing). IT enables not only the gathering of data to create
supply chain visibility, but also the analysis of these data so that the supply chain decisions made will
maximize Profitability.
The supply chain is framework
Given the wide realm of information we have discussed, it is important to develop a framework that
helps a manager understand how this information is utilized by the various segment of IT within the
supply chain. Our vision of this framework is presented in the next several sections of this chapter . It is
important to note that the use of information in the supply chain has increasingly been enabled by
enterprise software. Enterprise
Software collects transaction data, analyzes these data to make decisions, and executes on these
decisions both within an enterprise and across a supply chain. Certainly other parts of IT beyond
enterprise software
, such as hardware, implementation services and support are all crucial to make IT effective. Within a
supply chain, however, the different capabilities provided by IT have as their most basic building block
the
capabilities of the supply chains enterprise software .In many ways, software shapes the entire industry
of enterprise IT as the other components follow the software lead .It is for this reason that we use
enterprise software and its evolution as the primary guide in analyzing IT and its impact on the supply
chain. The evolution of enterprise software provides insights not only into the future of IT but also into
what the key supply chain processes are. We now discuss this evolution and its impact on companies
supply chain processes.
The enterprise software landscape became increasingly overpopulated during the late 1990s. The
Unprecedented flow of venture capital into new software companies led not just to an increase in the
Number of software companies but also to the proliferation of entire categories of software. The growth
of the number of software companies, the emergence of new categories and the expansion of software
product lines combined to create an enterprise software landscape that was not only much more crowded
Than in the past but also much more dynamic. It was an environment ripe for significant evolutionary
change. The downturn in technology spending in the early 2000s brought about this evolutionary
pressure causingMany software companies to cease operations or merge with existing software firms.
Some entire software categories are now extinct or close to it, with many recently created categories
landing on this endangered Species list. What drives this evolution of the enterprise software landscape?
Why are some categories of software Companies headed for a profitable long-term future where as

138

others have failed? Certainly there are a wide variety of factors that affect the natural selection of
software companies. We propose, however, that three of the main drivers of the evolution taking place in
enterprise software are the three major groups of supply chain processes, which we call supply chain
macro processes. The successful categories of software will be those that focus on the macro processes.
The failures on the other hand will not have such a focused.
3.3.32..Managing The Supply Chain Of The Future
The supply chain macro processes
The emergence of supply chain management has broadened the scope across which companies make
decisions. This scope has expanded from trying to optimize performance across the division to the
Enterprise and now to the entire supply chain. This broadening of scope emphasizes the importance of
including processes all along the supply chain when making decisions. From an enterprises
Perspective all processes within its supply chain can be categorized into three main areas processes
focused downstream, processes focused internally and processes focused upstream. We use this
classification to
Define the three macro supply chain processes (see Chapter 1) as follies.
Customer relationship management (CRM) processes that focus on downstream interactions between the
enterprise and its customers.
Principles of Supply Chain Management
1 Introduction
Supply Chain management has received a lot of attention and the terminology has been used
(sometimes misused) by companies to describe the set of manufacturing and logistics processes
that result in delivering a product to their customers. What is a supply chain? Some broader
definitions are preferable if you want to maximize the opportunity to improve performance of
your company:
The supply chain encompasses all activities associated with the flow and transformation of goods
from the raw materials stage, through to the end user as well as the associated information flows.
Supply chain management is the integration of these activities through improved supply chain
relationships, to achieve a competitive advantage.
A supply chain extends from your customer's customer to your supplier's supplier and includes:
developing, planning, sourcing, making and delivering.
2 Principle 1: Supply chains extend beyond your immediate customer and supplier.
If your company produces many products, which have different customers, suppliers and
delivery methods, how do you deal with the complexity of your supply chain? One approach
used in the DAMA Project 3 was to pick a specific product, like a men's nylon parka and trace all
the process steps for the product from raw materials to its purchase by a consumer. The graphic
below depicts the findings of a team made up of the retailer, an apparel manufacturer, 2 textile
mills, and 2 fiber suppliers involved in the production.

138

In this supply chain, the total time from the nylon fiber to the consumer buying the jacket was 45
weeks. There was 9 weeks of process time and the actual assembly (cutting and sewing) of the
parka took only 55 minutes. Why did it take so long for the raw materials to reach the consumer
in a product? The primary reasons are due to the uncertainty in the retail forecast. There was a lot
of "just in case inventory" in the supply pipeline. From the fiber supplier to the retailer, none of
the players wanted to disappoint their immediate customer. In addition, there were 15
inspections, 10 transportation steps and the goods spent 24 days in trucks. The supply chain in
total was not synchronized and only a few business processes between companies were
integrated. In addition, it is not unusual for companies in the supply chain to be changed because
of better service or pricing from a competitor.
3 Principle 2: Supply chains are not constant.
Knowing that integration is difficult to accomplish, why would the companies want to spend the
resources to synchronize their business processes? The study below shows why. There are big
rewards for the successful partnerships!

138

One of the easiest improvements to make is to share demand data. Most retailers today offer to
share the point of sale data and forecasts with their suppliers. How much of it is used is
questionable and it is probably not passed up the supply chain to the manufacturer's suppliers.
The graphic below shows why parallel visibility to data is better than sequentially. Everyone is
seeing the same view of demand at the same time. This improves forecasting and planning for all
the partners, which will increase responsiveness and decrease just in case inventory. Making
demand data available is the first step, and doing something with it is the next and most
important step.

4 Principle 3: Parallel data sharing is better than serial.

There is a somewhat obvious relationship between forecasting and lead-time that is frequently
overlooked in supply chain planning. If a company could produce near perfect forecasts, the
lead-time to acquire the forecasted product would be unimportant. The lead-time could be very
long, although the dilemma is in reality; the further out the selling period, the less accurate that

138

forecast is likely to be. The other half of the principle is if a company's lead-time to acquire
product were very short, the forecast accuracy would not be as important because the company
could respond to whatever the current demand was in a very short time.
5 Principle 4: Forecasting and lead-time are symbiotic.
The globalization of the US soft goods industry has caused many companies to examine the total
cost of procurement. In general, the further the product is made from the US market, the lower
the manufacturing cost and the higher the logistics cost. A source on the other side of the world
may have the cheapest manufacturing cost, but it will cost more to deliver. Keeping the correct
balance will pay off at the company's bottom line.
6 Principle 5: Manufacturing and logistics cost have inverse relationship.
The Voluntary Interindustry Commerce Standards group has developed a set of business
processes called Collaborative Planning, Forecasting and Replenishment (CPFR) which starts
with the premise that there should be one agreed upon view of demand. CPFR pilots between
retailers and their suppliers have shown that sharing views of demand data and collaborating on
the differences result in increased sales, higher in-stock positions and lower inventory. This is
accomplished because forecasting and planning processes increase in accuracy, which makes the
supply chain more responsive to the consumer.

CPFR is a set of business processes that are established and empowered by a formal agreement
to cooperate on strategy, tactics and execution by resolution of exceptions. This agreement is the
first of a nine-step process defined by the VICS CPFR committee.
1. Front end agreement
2. Joint business plan
3. Create sales forecast
4. Identify exceptions

138

5. Resolve exceptions
6. Create order forecast
7. Identify exceptions
8. Resolve exceptions
9. Generate order
Although there are specified processes, they have been kept general enough so that
implementations can be tailored to support the partners agreed on business goals.

To date, the CPFR pilot companies have seen significant benefits. The buyers have seen a
higher service level to their customers, higher in-stock performance and lower inventory. The
sellers have seen an increase in sales, lower inventory and faster cycle time.

138

7 Principle 6: Defined exceptions to the supply chain agreement save expediting.

The CPFR initiative has engendered deeper thinking to include collaborative

transportation management and going beyond a 2-tier partnership to n-tier.
8 Principle 7: Collaboration improves forecasting.
Another industry initiative, the Demand Activated Manufacturing Architecture (DAMA) Project,
began in 1994 with a holistic view of the softgoods supply chain (fiber, textile, sewn products,
retail, and consumer). The DAMA researchers proposed that if Cooperative Business
Management could be agreed upon among the companies in the softgoods supply chain, a higher
degree of synchronization would occur. With more synchronization, the time from raw materials
to consumer in a supply chain such as, the Men's Nylon Supplex Parka, could be reduced by
50%. This would place the decision making of what to manufacture closer to the consumer's
decision of what to buy and all participants would benefit. To enable this collaborative supply
chain, the researchers developed the DAMA Information Architecture.

138

9 Principle 8: Supply chain synchronization yields consistent results.

As the Project worked on prototypes and pilots to implement this Architecture, it became evident
that the infrastructure was going to be the Internet with its rapidly evolving commercial
technologies. The data would be specific to the participants and applications would be developed
by commercial software companies. The business processes would need to be defined in some
detail using standard business process models. The advantages of business process modeling are:
Take a very large problem and break it down into manageable chunks
- An industry
- N-tiers of suppliers
- Multiple companies
Develop a standard model of the business
Develop a semantic representation of the Industry
Adapt a modeling standard like IDEF0 (Information Definition Modeling)
The result is an as-is business process of the softgoods supply chain. The model, published on a
CD, depicts the business processes of fiber, textile, sewn products, retail and logistics
companies.5 The processes were defined in collaboration with the American Apparel and
Footwear Association, the American Textile Manufacturers Institute and the VICS Logistics
Committee. The figure below shows the first level of the model, which is decomposed, into
hundreds of supporting activities.

138

Having described the supply chain in its as-is state, the next step was to propose an improved tobe model. A portion of this model, shown below, has incorporated the CPFR process.6

In the To-Be Model for Collaboration, business planning agreements are developed and a supply
chain utility6 is established so that products can be defined, forecast and plan commitments are
known, production schedules and delivery times are visible and exceptions can be identified. An
illustration of the supply chain utility shows that all players can input and access information
relevant to their role in the supply chain.

138

The initial population of the utility would require each trading partner to provide information in
the following areas:
manufacturing (lead times, process times, and transport times),
capacity allocation to the partnership,
manufacturing capability (product lines, bill of materials for products, product specifications
and boundary constraints), and
exception criteria
The information supplied to the Supply Chain Utility must be absolutely secure in the agreed on
terms of the partnership. The partners need to agree on the type and frequency of updates to the
data repository and a common vocabulary or ontology.
Collaborative supply chains will not be successfully implemented overnight. It will require
changes in business practices and implementation of systems to support the collaborative
environment. Small-scale pilots will be necessary to ensure the synchronization and integration
of technology with new processes before large-scale implementations are attempted.
Information technologies and techniques have evolved and developed to the point where most of
the designs, raw materials, yarn, fabric, findings, and finished product can be kept in digital
form. If the supply chain can be synchronized to convert the materials from digital form to
analog form at the time when demand is known, the whole supply chain process becomes more
responsive and less costly. Digital inventory can be stored, changed, moved around the world,
and presented faster and at much less cost than the analog forms.

138

The Dynamics of the Supply Chain

Article I.
Article II.

Traditional Planning Approach

138

Article III.
Principles of supply chain management
The most requested article in the 10-year history of Supply Chain Management Review was one
that appeared in our very first issue in the spring of 1997. Written by experts from the respected
Logistics practice of Andersen Consulting (now Accenture), The Seven Principles of Supply
Chain Management, layed out a clear and compelling case for excellence in supply chain
management. The insights provided here remain remarkably fresh ten years later.
Principle 1: Segment customers based on the service needs of distinct groups and adapt
the supply chain to serve these segments profitably.

138

 Principle 2: Customize the logistics network to the service requirements and profitability
of customer segments.
Principle 3: Listen to market signals and align demand planning accordingly across the
supply chain, ensuring consistent forecasts and optimal resource allocation.
Principle 4: Differentiate product closer to the customer and speed conversion across the
supply chain.
Principle 5: Manage sources of supply strategically to reduce the total cost of owning
materials and services.
Principle 6: Develop a supply chain-wide technology strategy that supports multiple
levels of decision making and gives a clear view of the flow of products, services, and
information.
Principle 7: Adopt channel-spanning performance measures to gauge collective success in
reaching the end-user effectively and efficiently.
Managers increasingly find themselves assigned the role of the rope in a very real tug of war
pulled one way by customers' mounting demands and the opposite way by the company's need
for growth and profitability. Many have discovered that they can keep the rope from snapping
and, in fact, achieve profitable growth by treating supply chain management as a strategic
variable.
These savvy managers recognize two important things:
1.

They think about the supply chain as a wholeall the links involved in managing the

flow of products, services, and information from their suppliers' suppliers to their customers'
customers (that is, channel customers, such as distributors and retailers).
2.

They pursue tangible outcomesfocused on revenue growth, asset utilization, and cost.

Rejecting the traditional view of a company and its component parts as distinct functional
entities, these managers realize that the real measure of success is how well activities coordinate
across the supply chain to create value for customers, while increasing the profitability of every
link in the chain.

138

Our analysis of initiatives to improve supply chain management by more than 100
manufacturers, distributors, and retailers shows many making great progress, while others fail
dismally. The successful initiatives that have contributed to profitable growth share several
themes. They are typically broad efforts, combining both strategic and tactical change. They also
reflect a holistic approach, viewing the supply chain from end to end and orchestrating efforts so
that the whole improvement achievedin revenue, costs, and asset utilizationis greater than
the sum of its parts.
Unsuccessful efforts likewise have a consistent profile. They tend to be functionally defined and
narrowly focused, and they lack sustaining infrastructure. Uncoordinated change activity erupts
in every department and function and puts the company in grave danger of dying the death of a
thousand initiatives. The source of failure is seldom management's difficulty identifying what
needs fixing. The issue is determining how to develop and execute a supply chain transformation
plan that can move multiple, complex operating entities (both internal and external) in the same
direction.
To help managers decide how to proceed, we revisited the supply chain initiatives
undertaken by the most successful manufacturers and distilled from their ex
PRINCIPLE 1:
Segment customers based on the service needs of distinct groups and adapt the supply chain to
serve these segments profitably. Segmentation has traditionally grouped customers by industry,
product, or trade channel and then taken a one-size-fits-all approach to serving them, averaging
costs and profitability within and across segments. The typical result, as one manager admits:
We don't fully understand the relative value customers place on our service offerings.
But segmenting customers by their particular needs equips a company to develop a portfolio of
services tailored to various segments. Surveys, interviews, and industry research have been the
traditional tools for defining key segmentation criteria.

138

Viewed from the classic perspective, this needs-based segmentation may produce some odd
couples. For the manufacturer in Exhibit 1, innovators include an industrial distributor
(Grainger), a do-it-yourself retailer (Home Depot), and a mass merchant (Wal-Mart).
Research also can establish the services valued by all customers versus those valued only by
certain segments. Then the company should apply a disciplined, cross-functional process to
develop a menu of supply chain programs and create segment-specific service packages that
combine basic services for everyone with the services from the menu that will have the greatest
appeal to particular segments. This does not mean tailoring for the sake of tailoring. The goal is
to find the degree of segmentation and variation needed to maximize profitability.

Of
course, customer needs and preferences do not tell the whole story. The service packages must
turn a profit, and many companies lack adequate financial understanding of their customers' and
their own costs to gauge likely profitability. We don't know which customers are most profitable

138

to serve, which will generate the highest long-term profitability, or which we are most likely to
retain, confessed a leading industrial manufacturer. This knowledge is essential to correctly
matching accounts with service packageswhich translates into revenues enhanced through
some combination of increases in volume and/or price.
Only by understanding their costs at the activity level and using that understanding to strengthen
fiscal control can companies profitably deliver value to customers. One successful food
manufacturer aggressively marketed vendor-managed inventory to all customer segments and
boosted sales. But subsequent activity-based cost analysis found that one segment actually lost
nine cents a case on an operating margin basis.
Most companies have a significant untapped opportunity to better align their investment in a
particular customer relationship with the return that customer generates. To do so, companies
must analyze the profitability of segments, plus the costs and benefits of alternate service
packages, to ensure a reasonable return on their investment and the most profitable allocation of
resources.
To strike and sustain the appropriate balance between service and profitability, most companies
will need to set prioritiessequencing the rollout of tailored programs to capitalize on existing
capabilities and maximize customer impact.
PRINCIPLE 2:
Customize the logistics network to the service requirements and profitability of customer
segments. Companies have traditionally taken a monolithic approach to logistics network design
in organizing their inventory, warehouse, and transportation activities to meet a single standard.
For some, the logistics network has been designed to meet the average service requirements of
all customers; for others, to satisfy the toughest requirements of a single customer segment.
Neither approach can achieve superior asset utilization or accommodate the segment-specific
logistics necessary for excellent supply chain management. In many industries, especially such
commodity industries as fine paper, tailoring distribution assets to meet individual logistics

138

requirements is a greater source of differentiation for a manufacturer than the actual products,
which are largely undifferentiated.
One paper company found radically different customer service demands in two key segments
large publishers with long lead times and small regional printers needing delivery within 24
hours. To serve both segments well and achieve profitable growth, the manufacturer designed a
multi-level logistics network with three full-stocking distribution centers and 46 quick-response
cross-docks, stocking only fast-moving items, located near the regional printers.
Return on assets and revenues improved substantially thanks to the new inventory deployment
strategy, supported by outsourcing of management of the quick response centers and the
transportation activities.
This example highlights several key characteristics of segment-specific services. The logistics
network probably will be more complex, involving alliances with third-party logistics providers,
and will certainly have to be more flexible than the traditional network. As a result, fundamental
changes in the mission, number, location, and ownership structure of warehouses are typically
necessary. Finally, the network will require more robust logistics planning enabled by real-time
decision-support tools that can handle flow-through distribution and more time-sensitive
approaches to managing transportation.
PRINCIPLE 3:
Listen to market signals and align demand planning accordingly across the supply chain,
ensuring consistent forecasts and optimal resource allocation.
Forecasting has historically proceeded silo by silo, with multiple departments independently
creating forecasts for the same productsall using their own assumptions, measures, and level
of detail. Many consult the marketplace only informally, and few involve their major suppliers in
the process. The functional orientation of many companies has just made things worse, allowing
sales forecasts to envision growing demand while manufacturing second-guesses how much
product the market actually wants.

138

Such independent, self-centered forecasting is incompatible with excellent supply chain

management, as one manufacturer of photographic imaging found. This manufacturer nicknamed
the warehouse the accordion because it had to cope with a production operation that stuck to a
stable schedule, while the revenue-focused sales force routinely triggered cyclical demand by
offering deep discounts at the end of each quarter. The manufacturer realized the need to
implement a cross-functional planning process, supported by demand planning software.
Initial results were dismaying. Sales volume dropped sharply, as excess inventory had to be
consumed by the marketplace. But today, the company enjoys lower inventory and warehousing
costs and much greater ability to maintain price levels and limit discounting. Like all the best
sales and operations planning (S&OP),
this process recognizes the needs and objectives of each functional group but bases final
operational decisions on overall profit potential.

Excellent supply chain management, in fact, calls for S&OP that transcends company boundaries
to involve every link of the supply chain (from the supplier's supplier to the customer's customer)

138

in developing forecasts collaboratively and then maintaining the required capacity across the
operations.
Channel-wide S&OP can detect early warning signals of demand lurking in customer
promotions, ordering patterns, and restocking algorithms and takes into account vendor and
carrier capabilities, capacity, and constraints.
Exhibit 2 illustrates the difference that cross supply chain planning has made for one
manufacturer of laboratory products. As shown on the left of this exhibit, uneven distributor
demand unsynchronized with actual end-user demand made real inventory needs impossible to
predict and forced high inventory levels that still failed to prevent out-of-stocks. Distributors
began sharing information on actual (and fairly stable) end-user demand with the manufacturer,
and the manufacturer began managing inventory for the distributors. This coordination of
manufacturing scheduling and inventory deployment decisions paid off handsomely, improving
fill rates, asset turns, and cost metrics for all concerned.

Principle 4:

Differentiate product closer to the customer and speed conversion across the supply chain.
Manufacturers have traditionally based production goals on projections of the demand for
finished goods and have stockpiled inventory to offset forecasting errors. These manufacturers
tend to view lead times in the system as fixed, with only a finite window of time in which to
convert materials into products that meet customer requirements.
While even such traditionalists can make progress in cutting costs through set-up reduction,
cellular manufacturing, and just-in-time techniques, great potential remains in less traditional
strategies such as mass customization. For example, manufacturers striving to meet individual
customer needs efficiently through strategies such as mass customization are discovering the
value of postponement. They are delaying product differentiation to the last possible moment and
thus overcoming the problem described by one manager of a health and beauty care products
warehouse: With the proliferation of packaging requirements from major retailers, our number
of SKUs (stock keeping units) has exploded. We have situations daily where we backorder one

138

retailer, like Wal-Mart, on an item that is identical to an in-stock item, except for its packaging.
Sometimes we even tear boxes apart and repackage by hand!

The hardware manufacturer in Exhibit 3 solved this problem by determining the point at which a
standard bracket turned into multiple SKUs. This point came when the bracket had to be
packaged 16 ways to meet particular customer requirements. The manufacturer further concluded
that overall demand for these brackets is relatively stable and easy to forecast, while demand for
the 16 SKUs is much more volatile. The solution: make brackets in the factory but package them
at the distribution center, within the customer order cycle. This strategy improved asset
utilization by cutting inventory levels by more than 50 percent.
Realizing that time really is money, many manufacturers are questioning the conventional
wisdom that lead times in the supply chain are fixed. They are strengthening their ability to react
to market signals by compressing lead times along the supply chain, speeding the conversion
from raw materials to finished products tailored to customer requirements. This approach
enhances their flexibility to make product configuration decisions much closer to the moment
demand occurs.
The key to just-in-time product differentiation is to locate the leverage point in the
manufacturing process where the product is unalterably configured to meet a single requirement
and to assess options, such a postponement, modularized design, or modification of
manufacturing processes, that can increase flexibility. In addition, manufacturers must challenge

138

cycle times: Can the leverage point be pushed closer to actual demand to maximize the
manufacturer's flexibility in responding to emerging customer demand?
3.3.33.The Extended Enterprise And The Virtual Supply Chain
PRINCIPLE
Manage sources of supply strategically to reduce the total cost of owning materials and services.
Determined to pay as low a price as possible for materials, manufacturers have not traditionally
cultivated warm relationships with suppliers. In the words of one general manager: The best
approach to supply is to have as many players as possible fighting for their piece of the pie
that's when you get the best pricing.
Excellent supply chain management requires a more enlightened mindsetrecognizing, as a
more progressive manufacturer did: Our supplier's costs are in effect our costs. If we force our
supplier to provide 90 days of consigned material when 30 days are sufficient, the cost of that
inventory will find its way back into the supplier's price to us since it increases his cost
structure. While manufacturers should place high demands on suppliers, they should also realize
that partners must share the goal of reducing costs across the supply chain in order to lower
prices in the marketplace and enhance margins. The logical extension of this thinking is gainsharing arrangements to reward everyone who contributes to the greater profitability.
Some companies are not yet ready for such progressive thinking because they lack the
fundamental prerequisite. That is, a sound knowledge of all their commodity costs, not only for
direct materials but also for maintenance, repair, and operating supplies, plus the dollars spent on
utilities, travel, temps, and virtually everything else. This fact-based knowledge is the essential
foundation for determining the best way of acquiring every kind of material and service the
company buys.
With their marketplace position and industry structure in mind, manufacturers can then consider
how to approach supplierssoliciting short-term competitive bids, entering into long-term
contracts and strategic supplier relationships, outsourcing, or integrating vertically. Excellent
supply chain management calls for creativity and flexibility.

138

 PRINCIPLE 6:
Develop a supply chain-wide technology strategy that supports multiple levels of decision
making and gives a clear view of the flow of products, services, and information.
To sustain reengineered business processes (that at last abandon the functional orientation of the
past), many progressive companies have been replacing inflexible, poorly integrated systems
with enterprise-wide systems. Yet too many of these companies will find themselves victims of

the powerful new transactional systems they put in place.

Unfortunately, many leading-edge information systems can capture reams of data but cannot
easily translate it into actionable intelligence that can enhance real-world operations. As one
logistics manager with a brand-new system said: I've got three feet of reports with every detail
imaginable, but it doesn't tell me how to run my business. This manager needs to build an
information technology system that integrates capabilities of three essential kinds. (See Exhibit
4.)

138

 For the short term, the system must be able to handle day-to-day transactions and
electronic commerce across the supply chain and thus help align supply and demand by
sharing information on orders and daily scheduling.
From a mid-term perspective, the system must facilitate planning and decision making,
supporting the demand and shipment planning and master production scheduling needed
to allocate resources efficiently.
To add long-term value, the system must enable strategic analysis by providing tools,
such as an integrated network model, that synthesize data for use in high-level what-if
scenario planning to help managers evaluate plants, distribution centers, suppliers, and
third-party service alternatives.
Despite making huge investments in technology, few companies are acquiring this full
complement of capabilities. Today's enterprise wide systems remain enterprise-bound, unable to
share across the supply chain the information that channel partners must have to achieve mutual
success.
Ironically, the information that most companies require most urgently to enhance supply chain
management resides outside of their own systems, and few companies are adequately connected
to obtain the necessary information. Electronic connectivity creates opportunities to change the
supply chain fundamentallyfrom slashing transaction costs through electronic handling of
orders, invoices, and payments to shrinking inventories through vendor-managed inventory
programs.
efforts to improve stock usage. Fashion retailers have recognized that supplier performance can
have a big impact on profits.
Managing the supply chain of the future
If these business transformation are to be successfully achieved then not only must the
organization be open to change, but the skills available to it must be significantly enhanced.
It has been said that if the external environment is changing faster than the internal environment
is changing faster than the internal environment then there is a good chance that the company
will soon be in trouble. Creating a climate that welcomes change should be one of the prime
tasks of any business leader.

138

Since it is through people that change is created, attention must be paid to how the organization
develops a set of skills and competencies that are appropriate to the constantly changing external
environment. Table 9.1 suggests that the management skills and competencies needed to cope
with the business transformations we have described are much broader than those traditionally
encountered in the business.
Table managing the supply chain of the feature
Paradigm shift
From functions to processes, from products to customers, from revenue to performance, from
inventory to information, from transactions to relationships.
Leading to
Integral management of materials of goods flow, focus on markets and the creation of customer
value, focus on the key performance drivers of profit, demand-based replenishment and quick
response systems, supply chain partnership.
Skills required
Cross-functional management planning skills, ability to define, measure and manage service
requirements market segment i.e. perfect order achievement, understanding of the costs- to-serve
and time-based performance indicators, information system and information technology,
relationship management and win-win orientation.
The extended enterprise and the virtual supply chain:
The nature of business enterprise is changing. Todays business is increasingly bounder less,
meaning that internal functional barriers are being eroded in favor of horizontal process
management and externally the separation between vendors, distributors, customer and the firm
is gradually lessening. This is the idea of the extended enterprise which is transforming our
thinking on how organizations compete and how value chains might be reformulated.
Underpinning the concept of the extended enterprise is common information highway. It is the
use of shared information that enables cross-functional, horizontal management to become a
reality. Even more importantly it is information shared between partners in the supply chain that
makes possible the responsive flow of product from one end of the pipeline to another. What has
now come to be termed the virtual enterprise or supply chain is in effects a series of relationships
between partners that is based upon the value-added exchange of information.
The notion that partnership arrangements and a mentality of co-operation are more effective than
the traditional arms-length and often adversarial basis of relationship is now gaining ground.
Thus the supply chain is now becoming a confederation of organizations that agree common
goals and bring specific strengths to the overall value creation and value delivery system. This
process is being accelerated as the trend towards out-sourcing should not be confused with
subcontracting where a task or an activity is simply handed over to a specialist. In a way it
would be better to use the term in-sourcing or re-sourcing, when we refer to the quite different
concept of partnering that the virtual supply chain depends upon. These partnerships may not be
for all time quite possible they exist only to exploit a specific market opportunity but they
will be seamless and truly synergetic.
The role of cycle inventory in a supply chain:

138

A lot or batch size is the quantity that a stage of a supply chain either products or purchases at a
time. Consider, for example, a computer store that sells an average of four printers a day. The
sore manager, however, orders 80 printers from the manufacturer each time he places an order.
The lot or batch size in this case is 80 printers. Given daily sales of four primers, it takes an
average of 20 days before the store sells the entire lot and purchases a replenishment lot. The
computer store holds an inventory of printers because the manager purchases a lot size larger
than the stores daily sales. Cycle inventory is the average inventory in a supply chain due to
either production or purchases in lot sizes that are larger than those demanded by the customer.
In the rest of this chapter we use the following notation:
Q. Quality in a lot or bath size.
D. Demand per unit time.
In this chapter, we ignore the impact of demand variability and assume that demand is stable. In
chapter 11, we introduce demand variability and its impact on safety inventory.
Let us consider the cycle inventory of jean-Mart, a department store. The demand for jeans is
relatively table at D= 1,000 pairs of jeans per day. The store manager at jean-Mart currently
purchases in lots of Q= 1,000 pairs. The inventory profile of jeans at jean-Mart is a plot depicting
the level of inventory over time, as shown in
Because purchases are in lots of Q= 1,000 units, whereas demand is only D=100 units per
day, it takes 10 days for an entire lot to be sold. Over these 10 days, the inventory of jeans at
jean-Mart declines steadily from 1,000 units ( when the lot arrives ) to 0 (When the last pair is
sold). This sequence of a lot arriving and demand depleting inventory until another lot arrives
repeats itself every 10 days, as shown in the inventory profile in
When demand is steady, cycle inventory and lot size are related as follows :
Cycle inventory = lot size/2 = Q/2
For a lot size of 1,000 units , jean-Mart carries a cycle inventory of Q/2 = 500 pairs of jeans.
From equation 10.1 , we see that cycle inventory is proportional to the lot size. A supply chain in
which stages produce or purchase in larger lots has more cycle inventory than a spply chain in
which stages purchases in lot sizes of 200 pairs of jeans, it will carry a cycle inventory of only
100 pairs of jeans.
Lot sizes and cycle inventory also influence the flow time of material within the supply chain.
Recall from Littles law that
Average flow time = average inventory/ average flow rate
Cycle inventory at the jean-Mart store thus adds five days to the average amount of time that
jeans spend in the supply chain. The lerger the cycle inventory, the longer is the lag time between
when a product is produced and when it is sold. A lower level of cycle inventory is always
desirable, because long time lags level a firm vulnerable to demand changes in the marketplace.
A lower cycle inventory also decreases a firm s working capital requirement. Toyota, keeps a
cycle inventory of only a few hours of production between the factory and most suppliers. As a
result, Toyota is never left with unneeded parts and its working capital requirements are less than
those of its competitors. Toyota also allocates very little space in the factory to inventory.
Before we suggest actions that a manager can take to reduce cycle inventory, it is important to
understand why stages of a supply chain produce or purchase in large lots and how lot size
reduction affects supply chain performance.
Cycle inventory is held to take advantage of economics of scale and reduce cost within a
supply chain. To understand how the supply chain achieves these economics of scale we first
identify supply chain costs that are influenced by lot size.

138

The average price paid per unit purchased is a key cost in the lot sizing decision. A buyer may
increase the lot size if these action results in a reduction in the price paid per unit purchased. For
example, if the jeans manufacturer charges $ 20 per pair for orders under 500 pairs of jeans and
$18 per pair for larger orders, the store manager at jean-Mart gets the lower price by ordering in
lots of at least 500 pairs of jeans. The price paid per unit is referred to as the material cost and is
denoted by C. it is measured in $/unit. In many practical situations, material cost displays
economies of scale and increasing lot size decreases material cost. The fixed ordering cost
includes all costs that do not vary with the size of the order but are incurred each time an order is
placed. For example, there may be a fixed administrative cot to place an order, a trucking cost to
transport the order, and a labor cost to receive the order. Jean-Mart, for example, incurs a cost of
$400 for the truck regardless of the number of pairs of jeans shipped. If the truck can hold up to
2,000 pairs of jeans, a lot size of 100 pairs results in a transportation cost of $ 4/pair, whereas a
lot size of 1,000 pairs results in a transportation cost of $0.40/pair. Given the fixed transportation
cost per batch, the store manager can reduce transportation cost per unit by increasing the lot
size. The fixed ordering cost per lot or batch is denoted by S (commonly though of as a setup
cost) and is measured in $/lot. The ordering cost also display economies of scale, and increasing
the lot size decreases the fixed ordering cost per unit purchased.
Holding cost is the cost of carrying one unit in inventory for a specified period of time, usually
one year. It is a combination of the cost of capital, the cost physically storing the inventory, and
the cost that results from the product becoming obsolete, the holding cost is denoted by H and is
measured in $/unit/year. It may also be obtained as a friction h of the unit cost of the product.
Given a unit cost of C, the holding cost H is given by
H=hC
The total holding cost increases with an increases in lot size and cycle inventory.
To summarize, the costs that must be considered in any lot sizing decision are
Average price per unit purchashed, $C/unit
Fixed ordering cost incurred per lot, $S/lot
Holding cost incurred per unit per year, $H/unit/year =hC
Later in the chapter, we discuss how the various cost may be estimated in practice. However, for
the purposes of this discussion, we assume they are already known.

3.3.34supply Chain Management Activities

Managing multiechelon cycle inventory:
A multiechelon supply chain has multiple stages and possibly many players at each stage. The
lack of coordination in lot sizing decisions across the supply chain results in high costs and more
cycle inventory than required. The goal in a multiechelon system is to decreases total costs by
coordinating order across the supply chain.
The global network used to deliver products and services from raw materials to end customers
through an engineered flow of information and physical distribution.

138

An integrative philosophy to manage the total flow of a distribution channel from the supplier to
the ultimate user greater coordination of business processes and activities across the entire
channel and not just between a few channel pairs
Definitions can be grouped into three major categories: 1) The management of the flow of goods
from supplier to final user; 2) The system-wide coordination of product and information flows;
and 3) The development of relationships and the integration of all activities that provide
customer value throughout the distribution channel. Managing the entire chain of raw material
supply, manufacture, assembly, and distribution to the end customer
A network of entities that starts with the suppliers' suppliers and ends with the customers'
customers for the production and delivery of goods and services
All of those activities associated with moving goods from raw materials through the end user:
sourcing and procurement, production scheduling, order processing, inventory management,
transportation, warehousing, and customer service. Importantly, it also embodies the information
systems to monitor these activities.
A process for designing, developing, optimizing, and managing the internal and external
components of the supply system, including material supply transforming, materials and
distributing finished products or services to customers, that is consistent with overall objectives
and strategies.
The integration of business processes from end user through original suppliers that provides
products, services and information that add value for customers.
A supply chain is a network of facilities that procure raw materials, transform them into
intermediate goods and then final products, and deliver the products to customers through a
distribution system.
This figure:2 shows an example of a supply chain. Materials flow downstream, from raw
material sources through a manufacturing level transforming the raw materials to intermediate
products (also referred to as components or parts). These are assembled on the next level to form
products. The products are shipped to distribution centers and from there on to retailers and
customers.

3.6.34.Supply Chain Management Activities:

Specific dimensions of SCM can be identified. Each dimension may contain multiple activities
and the adoption levels of chain members can be assessed.
Eleven points of the characteristics of SCM. Main focuses refer to efforts for reduction of
redundant inventories and cost in the supply chain, amount of information sharing and
monitoring, amount of coordination and time horizon to endure relationships between multiple
levels of the channel, channel leadership, compatibility of corporate philosophies, breadth of
supplier base, and speed of operations. In a study on a sports clothing manufacturer, presented a
diagnostics guide by which a company's growth through SCM can be assessed. The level of

138

seamless movement of information throughout the supply chain via electronic links, accurate
demand forecasting with every chain members' involvement, information sharing with customers
and suppliers, efficiency of measurements to monitor supply chain performance, and
coordination of processes to minimize inventories and cycle times indicate how much a company
can grow through SCM. Alber and Walker introduced methods to synchronize supply and
demand for better balanced SCM. These methods include processes to align run cycles with
customer demand cycles, have batch sizes equal the batch size necessary to meet customer
demand, identify demand characterization, be able to manage demand, compare the actual
throughput and the capacity utilization against the customer demand profile, communicate pointof-sales (POS) information, eliminate the traditional manufacturing strategy, disseminate
information rapidly, and have better planning and control. The use of SCM techniques varied in
extent and between industries. The authors identified common techniques of SCM from the
literature. Those techniques included developing strong relationships with chain members,
developing high quality products and services, sharing information, building commitment to
SCM, reducing the number of suppliers and carriers, and minimizing inventory levels and cycle
times across the chain. In a trade article, Copacino (1998) analyzed the data from eight-industry
segments which consists of several rounds of group discussions with experts in the industries.
The author identified characteristics and capabilities of leaders who have shown successful
performances in SCM. Those characteristics are deep functional excellence in key functional
areas such as procurement, manufacturing, transportation and distribution, and customer care;
management of unexpected surge and uncertainty caused by poorly planned promotions, product
proliferation, product-line complexity, and poorly coordinated new product introductions; worldclass information technology; virtual logistics; and ability to integrate channel partners with
collaboration across the channel.
In the discussion, I suggested the percentage of complete orders shipped on customers' requested
dates as a better metric to measure customer satisfaction, which is the ultimate goal of SCM. The
importance of finding manufacturing flexibility as a key breakthrough in supply chain efficiency.
In brief, lack of top management commitment and leadership, information sharing system, and
coordination between chain members are main barriers for companies to grow through SCM.
When barriers are identified as such, the effort to remove the barriers of the company can be part
of the SCM activities. From the previously reviewed research and conceptual articles, the
multiple activities can be grouped into six SCM dimensions. The level of SCM activities can be
determined by the extent to which supply chain members understand the characteristics and key
issues implement techniques of SCM, and are willing to eliminate the barriers.
The first dimension is the collaborative partnership with chain members. Partnership is defined
as "an agreement between a buyer and a supplier that involves a commitment over an extended
time period, and includes the sharing of information along with a sharing of the risks and reward
of the relationship. A close partnership is not only a prerequisite for SCM, but it can also result
from successful SCM. Consolidation in supplier base is one sub-issue required for better quality
management, focused business, and long-term relationship. Under a traditional relationship, the
biggest concern for buyers is cost reduction and they select the suppliers who offer the lowest
cost. Multiple suppliers' competition on cost conceals the quality defect problem because
thorough quality inspection adds cost. And, the nature of the relationship with buyers tends to be
short-term and adversarial because buyers will switch to other suppliers who offer lower cost to

138

them. Therefore, activities which can enhance the long-term relationship through collaboration
between chain members such as joint planning and demand forecasting, accurate and timely
information sharing throughout the chain, and technology sharing are required activities to
advance to a partnership.
As these activities increase the dependency on each member, a company is less likely to switch
to alternative supplier or customer.
The utilization of information technology is the second characteristic to be measured. Examples
of the information technology are computer-to-computer communication, electronic data
interchange (EDI), POS data communication, and bar coding. Electronic links between suppliers
and carriers or customers are critical for information sharing. Technologies at each stage of the
supply chain should be compatible with their partners' to better streamline the information. Types
of information fed into this electronic links are data on sales, usage, product changes,
promotions, discontinuations, and product and process.
Flexibility of operations is the third dimension. Agile manufacturing is achieved by flexible
operations which can handle frequent style changes in the production line. The effect of SCM
practices on operational flexibilities and manufacturing agility with 75 purchasing managers in
various industries, focused on volume flexibility, modification flexibility, and delivery flexibility
as key features of operational flexibility. These three flexibilities can be described as an ability to
vary production volumes economically in response to market demands, to implement minor
changes in product design for customization purposes, and to reduce delivery lead times,
respectively. Increasing the agility of manufacturing operations, just-in-time (JIT)
manufacturing, procurement of raw materials on a JIT basis from suppliers, and JIT distribution
are required for successful SCM.
Service and performance measurements established for each stage of the supply chain is the
fourth dimension. Performance measurements, as well as financial information, are needed to
monitor SCM performances. Examples of key performance indicators are supplier reliability and
supplier lead-time to monitor the supply performance. Process reliability, changeover time, and
schedule attainment can be measured to monitor the production. Perfect order completion, order
fill rate, on-time delivery, and replenishment lead time are used to measure the delivery
performance. To monitor demand management, total supply chain inventory and total cycle time
are used.
Importance of metrics to facilitate change or to adopt an innovation in apparel manufacturing is
noted. The fifth dimension is top management's commitment and leadership. For the success of
any new management initiative, top management's awareness of benefits, willingness to
implement, and desire to continue change are required to be a better participant in SCM. Top
management is responsible for creating the culture of the company. When the outcome of a chain
is uncertain to a company, strong leadership relieves employees from insecurity and motivates
them to act toward the new direction. The most important barrier to reengineering is people, not
systems or technology.
The final and sixth dimension is the knowledge of demand characteristics. Knowledge of
demand characteristics determines the success of SCM. Characteristics of demand such as

138

certain and uncertain, dependent or independent, seasonal or staple, are closely associated with
key operational decisions. Characterizing demand patterns, aligning supply capabilities with
demand cycles, and understanding the operational implications of surge or uncertainty caused by
product proliferation and product-line complexity issues are related activities to this dimension.

Inventory Management:
Inventory management includes a company's activities to acquire, dispose, and control of
inventories that are necessary for the attainment of a company's objectives. The management of
inventories concerns the flow to, within, and from the company and the balance between
shortages and excesses in an uncertain environment. In apparel manufacturing, "inventory
management systems are designed to obtain concise and accurate information for control and
planning of planned goods, issues, cuts, projections, WIP and finished goods." Inventory
management has been a concern for academics as well as practitioners, in that overall investment
in inventory accounts for relatively large part of a company's assets. Inventory may account for
20 to 40% of total assets. Inventories tie up money, and success or failure in inventory
management impacts a company's financial status. Having too much inventory can be as
problematic as having too little inventory. Too much inventory requires unnecessary costs related
to issues of storage, markdowns and obsolescence, while too little results in stock out or
disrupted production. Besides, long-run production associated with a high level of inventory
conceals production problems (e.g., quality), which can damage a company's long term
performance. Therefore, the primary goal of inventory management has been to maximize a
company's profitability by minimizing the cost tied up with inventory and at the same time
meeting the customer service requirements.
Traditionally, inventories caused conflicts between functional units within a company or between
companies. For example, within a company, purchasing, production, and marketing people want
to build a high level of inventory for raw material cost reduction, efficient production run, and
customer service level, while warehousing and finance people want to reduce the inventory level
for storage space and economic reasons. As global competition between suppliers in the open
markets has increased, power has been shifted from suppliers to customers. Therefore, the
customers' need to reduce the inventory based on frequent small lot orders has resulted in their
partners holding the inventory.

Definition and Type of Inventory:

Inventory can be defined as any idle resource or tangible asset which can be seen, weighed, and
counted. This includes supplies, raw materials, work in process (WIP), and finished goods. The
system invests in things that it intends to sell: materials waiting to be processed, work in process,
and finished goods, raw materials, WIP, finished goods and supply. Raw materials are items

138

purchased from suppliers to be used as inputs into the production process and modified or
transformed into finished goods. WIP refers to partially completed final products that are still in
the production process. Finished goods are final products available for sale, distribution, or
storage. Supplies are items for maintenance, repair, and operating supplies. Supplies are
excluded from this study's discussion because they are not a part of the final product. Of the
three classes of inventory that become final products, poor finished goods present the worst
problem because finished goods contain the most value and require the highest inventory holding
cost. As manufacturing begins, value is added to the finished goods. At the end of the
manufacturing processes, transforming or modifying finished goods into another form is almost
impossible or very costly.
Inventory turnover and fill rate are examples of popular indicators for measuring an
organization's performance in inventory management. Inventory turnover is the velocity of
inventory passing through an organization calculated by dividing the annual sales by the average
on hand inventory. Fill rate is the percentage of units available when requested by the customer.

3.3.35.Roles of Inventory:
Traditionally, a relatively high level of inventory has been kept in a company. The reasons for
building inventory can be found in inventory's five functional roles: economies of scale, balance
of supply and demand, specialization in manufacturing, protection from uncertainties, and
inventory as buffer.
1. Purchasing or producing a bulk of items (i.e., economies of scale) enables a company
to cut costs by allowing setup cost reduction, price discounts, and spreading the factory overhead
expenses.
2. Inventory provides balance between supply and demand. Supply and demand do not
always match at any given time for reasons such as seasonal demand pattern or seasonal supply
pattern. To maintain a stable workforce and production scheduling, and to avoid problems due to
capacity limits, production can be used to build inventory. Peak demand can be anticipated by
building inventories in excess of current demand.
3. Inventory enables a manufacturer to specialize in the item by obtaining focused
factory and learning-curve effects. Focused factory is a small factory dedicated to a specific
product with a single product line to maximize productivity and quality. According to learning
curve effect, a worker can gain skill and efficiency from their own experience from the
repetitious practice with the long product runs.
4. Inventory serves to protect uncertainties in demand and supply. Inventory is necessary
in case demand for finished goods fluctuates or if the suppliers' ability to meet the buyers'
demand is not reliable. Raw material inventory is required in case of supply shortage and price
increases. WIP inventory is needed to avoid a shutdown and stabilize workflow. Finished goods
inventory improves customer service levels by avoiding stock outs due to variability in demand
and manufacturing lead-time.

138

5. Inventory is used as buffer in the supply chain. It takes time to transit inventory from
one operation to another within a company or one node to another in the supply chain (i.e.,
supplier to manufacturer, manufacturer to distributor, and distributor to customer). A certain
amount of inventory throughout the chain ensures the independence of each operation team or
channel member. Raw materials inventory isolates the supplier from the user, in-process
inventory isolates production departments from each other, and finished goods inventory isolates
the customer from the manufacturer.
Overview of Inventory Control Model:
To help solve the problems of inventory, mathematical models which describe the inventory
situation have been developed and applied in many industries. Inventory control models can be
used to describe either replenishment from an outside vendor or internal production. Therefore,
inventory control and production planning are often synonymous.
Examples of these models are Simple Economic Order Quantity (EOQ) model, EOQ with
quantity discounts, Material Requirements Planning (MRP), Newsboy model, Lot size - Reorder
point (Q, R) model, and Periodic-Review system. Which model to apply is determined by several
factors: order repetitiveness (i.e., single order vs. repeat order), order quantity (i.e., fixed quantity
vs. variable quantity), knowledge of demand (i.e., constant demand vs. variable demand,
independent demand vs. dependent demand), and inventory review frequency (i.e., periodic vs.
continuous review), and knowledge of lead time (i.e., constant lead time vs. variable lead time)
The models are built to answer the basic questions: when to place a reorder and how large an
amount to order.
An order can be placed only once if the item is a high fashion item with a very short life cycle.
For many products, most items are basic goods and are restocked through repeat orders. When
repeating orders, a fixed quantity can be ordered whenever the inventory level drops below a
certain point (simple EOQ model). Different quantities can be ordered to raise the inventory to a
certain level every constant unit of time. If an item is a raw material or a component of which
demand is dependent upon finished goods, the order quantity and order timing is determined by
the production schedule of the finished goods (MRP). The production schedule is based on a
company's own demand forecasting method or demand from customers' orders. Newsboy model
and (Q, R) model take uncertainties in demand and lead-time into consideration. The inventory
control models mentioned above assume that the inventory levels are reviewed continuously.
Periodic-Review system is used when the inventory levels are known only at discrete points in
time.
In the late 1970s and early 1980s, just-in-time (JIT) manufacturing practice was introduced,
which also revolutionized inventory management. Many large manufacturers operate on JIT
delivery of piece goods in order to reduce inventory carrying costs. A core concept of JIT pursues
waste elimination and zero-inventory by practicing small lot orders on a daily basis and
increasing communication between suppliers and customers. JIT impact on inventory
performance revealed that a significant relationship exists between JIT implementation and
reduction in inventory level. JIT and other inventory control models provide direction for

138

inventory management; however, not all U.S. companies have found the answer for the inventory
problems. A study with the annual logistics survey conducted by KPMG and University of
Tennessee reported that 43% of U.S. companies carry as much or more inventory than they did
five years ago (Inventories point, Dec. 1996). Despite the optimistic interpretation that the
remaining 57% of companies have achieved remarkable progress in inventory management,
differences among industries was not reported in detail. Inventory turnover in the Fortune 500
industrial companies for the years of 1986 through 1995 revealed that although inventory
turnover ratios have increased by an average of 14.7%, the extent of changes in inventory
turnover ratios were significantly different among industries. The oil and gas extraction industry
performed best with a 44% increase in the ratio, while the textile mill products industry had a
12% decrease. Vergin (1998) also suggested that the dramatic improvements reported in previous
studies through a case study method in a certain company or industry may not be true to another
company or industry. These results from a few studies on one inventory metric indicate that more
empirical studies with companies or industries, of various characteristics, are needed to
generalize the findings.
Decisions on Production and Inventory Management:
Management should consider for better inventory management. The importance of in-plant
throughput time reduction because throughput time is the ultimate constraint on inventory
turnover ratio (inventory turnover ratio = annual cost of goods sold/average on hand inventory),
which is one of the major performance indicators in inventory management. The author's
interpretation of the in-plant throughput time is the time span from the point of raw material
receipt to final assembly. Tersine (1988) pointed out the factors for better inventory management
as better forecasting, improved transportation, improved communication, improved technology,
better scheduling, and standardization. I suggested that management should start the process of
improving inventory management by determining the manufacturing type, benchmarking the
inventory control performance, validating strategy (i.e., make-to-order, make-to-stock, build-toforecast), determining underlying causes through the use of an operational review, and
implementing corrective action. Higginson and Alam (1997) suggested specific techniques for
inventory management by focusing on cycle time. Improved communication, suppliers'
involvement in forecasting and inventory management, supplier relationships, production
scheduling, and cross-functional approach within a company are the factors for improving
inventory management. For better performance in inventory management most of the authors
pay attention to production activities and time-based strategies, which are the main interests of
this study. Production activities are closely related to production volume and timing and
consequently raw material purchasing.
Inventory Management in the Supply Chain:
Inventory management is one aspect of SCM. The main goal of SCM is to better manage
inventory throughout the chain via improved information flow aimed at improved customer
service, higher product variety, and lower costs and used the term "Networked Inventory
Management" (p.16) for the inventory aspect of SCM. The efficiency of SCM can be measured
by inventory performance such as the speed of inventory passing through the chain and the load

138

of inventory throughout the chain. Inventory of various forms from raw materials through WIP to
finished goods is fed into the chain from suppliers, production, and subsequently distribution
centers to customers. This flow of inventory requires responsibilities of channel members for the
planning, acquisition, storage, movement, and control of materials and final products. High
levels of inventory are found when the chain members less communicates due to lack of
information sharing between chain members and inefficiency of SCM.
Whether a supply chain is efficiently managed or not well managed can be determined by
looking at the indicators of inventory management such as inventory turnover ratio. Inventory
turnover ratio has been a useful indicator to measure the efficiency of inventory management of
an industry. If other information such as absolute value of total sales volume and on hand
inventory is given together, inventory turnover ratio can tell more about the efficiency of a
company's performance Manufacturers, the main interest of this study, have the most difficult
and complex inventory problem as they deal with raw material acquisition, transformation of the
material into final finished goods, and movement to the customer. These consecutive activities
require manufacturers to control production scheduling and timing that are not easily
accomplished due to uncertainties in supplier performance, manufacturing process, and customer
demand. Manufacturers could not reduce their buffer stocks without trusting in their partnerships
and sharing forecasting information on actual demand at retail level because of the "bullwhip
effect" which means the effect of retail sales fluctuation grows larger as it traverses to upstream
chain members. More customer requirements for broader product coverage and greater delivery
capabilities escalate manufacturers' problem in production process complexity and forecasting of
future demand. When customers are trying to operate on fewer inventories, manufacturers can
respond in two ways:
1. Carrying more inventories to compensate for the shorter lead times.
2. Improving the management of the supply chain.
Manufacturers tend to respond to their customers' requirement by building more finished goods
inventory instead of working to improve their manufacturing capabilities. Increased attention to
managing inventory has led to larger manufacturer inventories for some companies because the
retailers' demands for manufacturers' self-monitoring and replenishing of the retailer inventory
are obtained at the expense of manufacturers' storage burden.
A trade article reported that a supplier's decision to cut inventory quantities of raw materials also
results in high inventories in manufacturing sites (Good Business, Apr.3, 1997). In case raw
materials are available only in a certain period, manufacturers need to order enough to meet the
anticipated peak demand of finished goods, which causes the excessive inventory level of raw
materials. For these reasons, manufacturers have not only internal problems with inventory, but
also problems caused by trading partners on both ends of the supply chain.

As shown in Figure there are three inventories in the model: The raw product inventory
(RPI), the work in process (WIP), and the finished goods inventory (FGI). The RPI is the
inventory for incoming parts ready to enter assembly, the WIP are the products that are in the
assembly, and in the FGI we find the finished products ready for shipment to customers.

138

Figure: 7, The entities and material flow in the Simple Model.

A safety stock is the stocking level desired at any time for a given part in a given inventory.
Holding inventory is costly and the ideal situation would therefore be to have no parts in stock
when they are not immediately needed. In the real world however materials and production
planners meet many uncertainties. A safety stock superior to zero is therefore in general required
for the RPI and FGI.

Time and Material Flow:

Time is measured in weeks. When a month is used this signifies four weeks. When arriving from
the suppliers the parts enter the RPI (see Fig. From the RPI the parts enter assembly (WIP), and
are now referred to as products. A set of one unit of each of the nine parts makes up one product.
The parts have different lead times from suppliers. These are shown in Table Parts of index 1
have 6 weeks lead time, index 2 parts have 10 weeks, and index 3 parts 14 weeks. All parts are
delivered according to lead time, and there are no damaged parts.

138

Figure: 8, Timeline of materials flow.

Figure shows a timeline for the material flow in the Simple Model. Week 0 on the line is set to
the week when a customer order arrives. To build a customer order, parts of index 1 (14 weeks
lead time) most be ordered 13 weeks prior to the arrival of the order. Parts can enter assembly
instantaneously when they arrive in the RPI. The figure shows an assembly time of two weeks.
Once out of assembly, the products enter the FGI, from where they are shipped to customers.
Products are ready for shipment the moment they enter the FGI. Transport time to customer is
one week. The plant quotes an order to delivery time of 4 weeks.
Processes:
This section deals with the processes necessary to receive materials, assemble these to form
products, and ship the products to customers.
Issuing a Demand Forecast:
Since materials orders must be ready up to 13 weeks prior to the arrival of orders, it is impossible
for the company to base the materials planning on incoming orders. A demand forecast is
necessary. The demand forecast gives the expected product quantity ordered for a set number of
weeks. In the model we assume the forecasted demand to be as is shown in Figure: 9.

138

Figure: 9, Issuing a Demand Forcast.

Production Planning:
The production planning is done in two stages, each bringing knew information:
The first stage:
Of the planning results in a ship plan, defining the number of products that the plant should
dispatch the next set number of weeks. It is based on the demand forecast, but also takes into
account the current backlog. To meet a delivery time of four weeks, orders must be shipped after
three weeks in the backlog. For this week and the next three weeks, the amount to ship is
determined by the backlog. For future weeks beyond this, the demand forecast must be trusted.
The second stage:
This is a build plan. The build plan gives the targeted quantity for which to start production. It is
based on the ship plan, and takes into account the stocking level in the FGI, safety stock of the
FGI, and the WIP.
Materials Ordering and Delivery:
The materials orders are calculated based on the build plan (targeted production is exploded to
parts via the BOM). The current stocking levels in the RPI, the RPI safety stocks, and the
materials on-order data base are taken into account. Materials arriving this week are delivered as
orders are sent.
Customer Ordering:
Customer orders come in at the beginning of every week. The ordered amount will be
proportional to the forecasted demand. Orders are added to the current backlog.
Production:
The duration of production is two weeks. Unlimited capacity is assumed, i.e. an infinite number
of units can be started each week.
Filling Orders and Dispatching:
Orders are filled and shipped at the end of the week. Orders will not be filled before their due
date, i.e. initially three weeks after order date. When orders that are due can not be filled this
week because of FGI stock-out, these will stay in the backlog and have higher priority next
week.
Designing a Multi-Agent System:
The functions of the company of the Simple Model and their responsibilities are already
identified these are:

138

Marketing
order processing

planning

shipping

production

R&D

vendors and customers.

When identifying agents, these functions were used. Basically one agent was made for each
function. This supports the statements in Section (on motivation) regarding the ease of
conceptualizing when using a multi-agent approach. Some alterations were made: a materials
agent was added, shipping was renamed to dispatching and vendors were gathered in one
suppliers agent. This results in a solved setup of nine active agents (as is seen in Figure:10):

Marketing, Order-processing
Planning, Materials

Production

Dispatching

Purchasing

Customers

And Statistics.

138

Figure: 10, The agents in the Simple Model.

Marketing:
Has knowledge of the assumptions of future demand and issues the demand forecast. The
demand forecast is sent to Planning.
Order-processing:
Manages the backlog. It enters incoming customer orders, and removes shipped orders. It also
provides backlog data to other agents upon request.
Planning:
Takes care of stage two of the planning process. It requests backlog levels from Orderprocessing, and calculates the ship plan for the week. It also calculates the RPI and FGI safety
stocks. The ship plan and FGI safety stock is sent to Production, and the RPI safety stock is sent
to Materials.

138

Production:
Makes a build plan. The FGI data needed is requested from Dispatching. Build plan is sent to
Materials. Production also requests RPI levels when starting production. The number of units
started is the minimum of lowest RPI level and the planned production. Materials is notified of
units started, and Dispatching is notified of finished products.
Materials:
Calculates the requirements of parts for the planned production (as defined by the build plan).
The resulting materials orders are sent to Purchasing and recorded in the on-order data base.
Since all parts are assumed to arrive according to lead times, material arrivals are simply
modeled as Materials moving ordered quantities from on-order to RPI when orders are due (=
order week + lead time).
Dispatching:
Updates the FGI. It fills and ships orders based on the backlog (requested from Orderprocessing). Order-processing is notified of shipped orders.
Customers:
Send customer orders to Order-processing.
Statistics:
Is described in the Simulation section below.

Table: A, The agents' process responsibilities.

Simulation and Statistics
Time as the Sequence of Processes:
The simulation is run with discrete time intervals. The granularity is one week. A simulation
starts with an initial 20 weeks before any customer orders arrive, i.e. the first customer orders
arrive in week 21. The simulations start with all inventories empty, and no materials ordered.

138

Figure: 11, The sequence of processes within a week.

The Statistics agent is responsible for the weekly progress of the simulation. Through the
running of a week it is the sequence of processes that keeps track of time. This is shown in
Figure. The week starts with customer orders coming in. Next the production planning (demand
forecast, ship plan, and build plan) takes place, ending in the ordering of materials. Before
production starts, the materials due this week arrive. Production runs till Friday afternoon, when
due orders are shipped. The sequence of processes is assured by coordinating the conversations
as will be shown below figure:11.
Statistics uses two conversation classes, the simulation-conversation and the run-simulationconversation. When starting a simulation a simulation-conversation is initiated. This
conversation will remain active through the whole simulation. At the beginning of each week a
run-simulation-conversation is initiated. A message is sent to Marketing telling it to issue a
demand forecast. The forecast is sent to Planning. Upon receiving the forecast Planning sends a
ship plan to Production. Upon receiving the ship plan, Production sends a build plan to Materials,
triggering it to send materials orders to Purchasing. In this manner the correct sequence of
processes is assured during the materials and production planning.
When Materials have sent orders, it checks the on-order data base for incoming materials. When
this is done, we are ready for production. Materials will give Production the current RPI-levels,
and Production simulates the movement of products from the RPI, through the WIP, and into the
FGI. Dispatching is notified on finished products, and Materials of raw product usage. At this
point, the week's production is finished, and we could say it is Friday afternoon. Dispatching fills
and ships orders.

138

Through the running of each week, the agents have sent statistical data to Statistics this is usually
done at the end of the agent's main conversation class. Statistics knows that the week is ended
when it has received all the week's statistical data from the agents. The run-simulationconversation saves the statistics and terminates. The simulation-conversation advances the week
counter, and initiates a new run-simulation-conversation.
Inventory vs. Customer Service: A Trade-Off:
If we assume lead times to be constant, the ability to fill orders is directly dependent on the
inventory levels in a supply chain. As long as there are products in the finished goods inventory
(FGI), from which products are taken, orders can be satisfied. Other inventories, such as raw
product inventories will have a more indirect effect on customer satisfaction. Stock-outs in any
of these will obstruct production and may eventually lead to stock-out in the FGI. For this
reason, it is common in supply chain management to keep exaggerated inventory levels. But as
mentioned above inventory holding costs are often calculated as high as 30-40% of inventory
values.
While oversized inventories are a costly inventory management strategy, low fill rates are also
costly. Business may be lost through cancelled orders, and the company's reputation may be
severely damaged. It is therefore in a company's interest to balance inventory holding cost and
the cost of imperfect customer satisfaction. The trade-off inventory vs. customer satisfaction is
one of the classic issues of logistics and supply chain management.
Pitfalls in Inventory Management:
Based on knowledge and experience from supply chain management in garment industry eight of
which are found relevant to this project:
Pitfall 1. No Supply Chain Metrics:
In a supply chain with multiple sites, each site will often have its fairly autonomous management
team. The objectives of the various teams may differ, and even be conflicting. Inventory may for
example be reduced at a Site A of a supply chain, and thereby, seen from a local perspective, the
performance is enhanced. But the inventory decrease may also decrease Site A's flexibility.
Because Site A now responds more slowly to changes, Site B, which is Site A's customer will
have to increase its inventory (of Site A parts) in order to maintain its flexibility and level of
customer service. The lack of supply chain metrics has prevented managers at Site A to see that
their local improvements has not lead to improved overall performance of the supply chain. The
objective of supply chain metrics is to give the basis for evaluations of the performance of the
whole supply chain as one system.
THERE ARE SIX KEY ELEMENTS TO A SUPPLY CHAIN:

Production
Supply

138

Inventory
Location
Transportation, and
Information

The following describes each of the elements:

1.Production
Strategic decisions regarding production focus on what customers want and the market demands.
This first stage in developing supply chain agility takes into consideration what and how many
products to produce, and what, if any, parts or components should be produced at which plants or
outsourced to capable suppliers.
These strategic decisions regarding production must also focus on capacity, quality and volume
of goods, keeping in mind that customer demand and satisfaction must be met. Operational
decisions, on the other hand, focus on scheduling workloads, maintenance of equipment and
meeting immediate client/market demands. Quality control and workload balancing are issues
which need to be considered when making these decisions.
2.Supply
Next, an organization must determine what their facility or facilities are able to produce, both
economically and efficiently, while keeping the quality high. But most companies cannot provide
excellent performance with the manufacture of all components. Outsourcing is an excellent
alternative to be considered for those products and components that cannot be produced
effectively by an organizations facilities. Companies must carefully select suppliers for raw
materials. When choosing a supplier, focus should be on developing velocity, quality and
flexibility while at the same time reducing costs or maintaining low cost levels. In short, strategic
decisions should be made to determine the core capabilities of a facility and outsourcing
partnerships should grow from these decisions.
3.Inventory
Further strategic decisions focus on inventory and how much product should be in-house. A
delicate balance exists between too much inventory, which can cost anywhere between 20 and 40
percent of their value, and not enough inventory to meet market demands. This is a critical issue
in effective supply chain management. Operational inventory decisions revolved around optimal
levels of stock at each location to ensure customer satisfaction as the market demands fluctuate.
Control policies must be looked at to determine correct levels of supplies at order and reorder
points. These levels are critical to the day to day operation of organizations and to keep customer
satisfaction levels high.
4.Location
Location decisions depend on market demands and determination of customer satisfaction.
Strategic decisions must focus on the placement of production plants, distribution and stocking
facilities, and placing them in prime locations to the market served. Once customer markets are
determined, long-term commitment must be made to locate production and stocking facilities as
close to the consumer as is practical. In industries where components are lightweight and market

138

driven, facilities should be located close to the end-user. In heavier industries, careful
consideration must be made to determine where plants should be located so as to be close to the
raw material source. Decisions concerning location should also take into consideration tax and
tariff issues, especially in inter-state and worldwide distribution.
5.Transportation
Strategic transportation decisions are closely related to inventory decisions as well as meeting
customer demands. Using air transport obviously gets the product out quicker and to the
customer expediently, but the costs are high as opposed to shipping by boat or rail. Yet using sea
or rail often time means having higher levels of inventory in-house to meet quick demands by the
customer.
It is wise to keep in mind that since 30% of the cost of a product is encompassed by
transportation, using the correct transport mode is a critical strategic decision. Above all,
customer service levels must be met, and this often times determines the mode of transport used.
Often times this may be an operational decision, but strategically, an organization must have
transport modes in place to ensure a smooth distribution of goods.
6.Information
Effective supply chain management requires obtaining information from the point of end-use,
and linking information resources throughout the chain for speed of exchange. Overwhelming
paper flow and disparate computer systems are unacceptable in today's competitive world.
Fostering innovation requires good organization of information. Linking computers through
networks and the internet, and streamlining the information flow, consolidates knowledge and
facilitates velocity of products. Account management software, product configurations,
enterprise resource planning systems, and global communications are key components of
effective supply chain management strategy.

The Issues
The supply chain has also been called the value chain and the service chain, depending on the
"fad of the moment", or sometimes, we think, the weather, or sun spot activity. Just like anything
else, supply chain management is no panacea, nor should it be embraced as a religion. It is an
operational strategy that, if implemented properly, will provide a new dimension to competing:
quickly introducing new customerized high quality products and delivering them with
unprecedented lead times, swift decisions, and manufacturing products with high velocity.

f) Outsourcing/partnerships
This is not just outsourcing the procurement of materials and components, but also outsourcing
of services that traditionally have been provided in-house. The logic of this trend is that the
company will increasingly focus on those activities in the value chain where it has a distinctive

138

advantage and everything else it will outsource. This movement has been particularly evident in
logistics where the provision of transport, warehousing and inventory control is increasingly
subcontracted to specialists or logistics partners. Also, to manage and control 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 being best managed at a local level.
g) Performance measurement
Experts found a strong relationship from the largest arcs of supplier and customer integration to
market share and profitability. By taking advantage of supplier capabilities and emphasizing a
long-term supply chain perspective in customer relationships can be both 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. According to
experts internal measures are generally collected and analyzed by the firm including1.
2.
3.
4.
5.

Cost
Customer Service
Productivity measures
Asset measurement, and
Quality.

Components of Supply Chain Management are 1. Standardization

2. Postponement
3. Customization

THE MANAGEMENT COMPONENTS OF SCM:

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. The literature on business process buyer-supplier
relationships and SCM suggests various possible components that must receive managerial
attention when managing supply relationships.
The following components which are:
Planning and control

Work structure

138

Organization structure

Product flow facility structure

Information flow facility structure

Management methods

Power and leadership structure

Risk and reward structure

Culture and attitude

However, a more careful examination of the existing literature will lead us to a more
comprehensive structure of what should be the key critical supply chain components, the
"branches" of the previous identified supply chain business processes, that is what kind of
relationship the components may have that are related with suppliers and customers accordingly.

3.3.36.Overview Of Inventory Control Model

The following supply chain components1. For customer service management: Includes the primary level component of customer
relationship management, and secondary level components such as benchmarking and
order fulfillment.
2. For product development and commercialization: Includes the primary level component
of Product Data Management (PDM), and secondary level components such as market
share, customer satisfaction, profit margins, and returns to stakeholders.
3. For physical distribution, Manufacturing support and Procurement: Includes the primary
level component of enterprise resource planning (ERP), with secondary level components
such as warehouse management, material management, manufacturing planning,
personnel management, and postponement (order management).
4. For performance measurement: This includes the primary level component of logistics
performance measurement, which is correlated with the information flow facility
structure within the organization. Secondary level components may include four types of
measurement such as: variation, direction, decision and policy measurements. More
specifically, in accordance with these secondary level components total cost analysis
(TCA), customer profitability analysis (CPA), and Asset management could be concerned

138

as well. In general, information flow facility structure is regarded by two important

requirements, which are a) planning and Coordination flows, and b)operational
requirements.
5. For outsourcing: This includes the primary level component of management methods and
the company's cutting-edge strategy and its vital strategic objectives that the company
will identify and adopt for particular strategic initiatives in key the areas of technology
information, operations, manufacturing capabilities, and logistics (secondary level
components).
a) SUPPLY CHAIN DIAGRAM:
Yarn supplier

Fabric
supplier

Dyed
fabric
supplier

Accessories
raw material
Supplier

Accessories
Supplier

KCL
Production

Distributo
r

Retailer

Carton
Customer
Paper
Paper
supplier
manufactur
distributor
er
Each stage in a supply chain is connected through the flow of products, information and fund.
These flows often occur in both directions and may be managed by one of the stages or an
intermediary. Here we can see raw materials supplier supply industrial product to the
manufacturer, and make the product sale to distributor, distributor sale this product to he retailer
by small lot, and final consumer get the product from the retailer.
During this phase, given the marketing and pricing plans for the product, a company decides how
to structure the supply chain over the next several years. It decides what the chains configuration
will be allocated, and what process each stage will perform.
Order confirmation than collect industrial goods from the several raw material suppliers, then
they make the product according to buyers specification and send it to the buyer through Sea
mood.

PROCESS VIEW OF A SUPPLY CHAIN:

138

There are two views of supply chain:

1. Cycle View: The processes in supply chain are divided into series of cycle, each performed as
the interface between two successive stages of a supply chain.
2. Push/Pull View: Pull processes are ignited by a customer order, whereas push processes are
initiated are performed in anticipation.
In case of Process view of a supply chain, only using cycle view of supply chain. So in this case,
order is come from the customer to Retailer, retailer informs it to the distributor. Distributor
inform to the manufacturer. Collect raw materials from the different raw material suppliers. So
this stage is shown below:

Customer order cycle

Replenishment cycle
Manufacturing cycle
Procurement cycle

SUPPLY CHAIN MACRO PROCESS:

Customer Relationship Management (CRM): All process that focus on the interface
between the firm and its customers.
Internal Supply Chain Management (ISCM): All process those are internal to the firm.
Supplier Relationship Management (SRM): All process that focus on the interface
between the firm and its suppliers.

COMPETITIVE AND SUPPLY CHAIN STRATEGIES:

A companys competitive strategy defines relative to its competitors, the set of customer needs
that it seeks to satisfy through its products and services.
A supply chain strategy determines the nature of procurement of raw materials, to and from the
company, manufacture of the product of operation to provide the service, and specifications of
whether this process will be performed in-house or outsourcers. Product development strategy
specifies the portfolio of new products that a company will try to develop. Marketing and sales
strategy specifies how the market will be segmented and how the product will be positioned,
priced promoted.

138

ACHIEVING STRATEGIES FIT:

Strategic fit means that both the competitive and supply chain strategies have align goal. It refers
to consistency between the customer prioritys that the competitive strategy hopes to satisfy and
the supply chain capabilities that the supply chain strategy aims to build. This is a good
combination of commercial section and merchandising section, because commercial section
totally involved with transport system and merchandising section involved with competitive or
buyers requirements/satisfaction.

ROLE OF DISTRIBUTION IN SUPPLY CHAIN:

Distribution refers to the steps taken to move and store a product from the supplier stage to the
customer stage in the supply chain. Raw materials and components are moved from supplier to
manufacturer, whereas finish products are moved from the manufacturer to the end consumer.
Distribution is the key driver of the overall profitability of a firm, because it affects both the
supply chain cost and the consumer experience directly. Distribution related cost makeup about
10.5% of the U.S. economy and about 20% of the cost of manufacturing. For commodity
products, distribution forms an even higher fraction the product cost. In the outbound distribution
cost of cement is about 30% of the cost producing and sealing cement.
e forecast before a season starts. It also includes collaborative planning throughout the execution
of the selling period. This means that there is no duplication of effort or additional processing of
demand information in the supply chain. Once an order is sent from Retail, it is visible to all
partners. This allows Textile and Fiber Partners to see fluctuations in demand immediately. Also,
the primary functions of Demand Planning, Corporate Resource Planning, and Order Fulfillment
are consolidated into the Supply Chain Utility and receive input from all sectors but are not
duplicated within each sector.
The TISS and CISS models use the logic from the original models with added functionality to
account for inventory levels. The logic required was added to several functional areas within the
models. In Order Fulfillment, incoming order quantities are compared to the forecast and then
either added or subtracted from current production orders. In the finished goods warehouse,
inventory is added from Production and relieved to fill orders. This running inventory is recorded
and could be used for cost calculations. The same process of managing inventory is performed in
the raw material warehouse as well with inventory increased from deliveries from the preceding
partner and then relieved to fill production orders.
s 4 weeks).
The apparel manufacturer receives the rolling quarterly forecast that is updated monthly and
orders by store every week.

138

The textile manufacturer receives a weekly order for the fabric for 28,000 yards with quantities
distributed among the three colors and a quarterly forecast that is updated monthly.
The fiber supplier receives weekly orders for 21,000 pounds of polyester fiber and cotton along
with a quarterly forecast that is updated monthly.

Challenges of Measuring Efficiency of an Apparel Supply Chain

If we define supply chain as an extended enterprise then efficiency measurement of a supply
chain will mean efficiency measurement of multiple organizations in synchronization. One of the
major strategic objectives of supply chain planning and management is to maximize total profit
in the chain rather than maximizing profit of an organization in isolation. The typical adversarial
relationship between upstream and downstream players in the apparel supply chain is still
prevalent making the job more difficult than saying. Can you imagine if the buying organization
you are dealing with, is sharing the profit with you or you have to share your profit and loss with
your fabric supplier! Can you blindly trust your fabric supplier that the fabric developed for you
will not be shown to another apparel manufacturer? Information that potentially influence the
bottomline of an organization is kept so confidential, no trust, or partnership can penetrate that. It
is not impossible, but difficult and not yet common in marketplace.
.
The Supply Chain Councils SCOR Model
The Supply Chain Council (SCC) was set up between 1996 and 1997, with members
representing most industries and global geographies, including BASF, Bayer, Colgate-Palmolive,
Lucent technologies, Procter & Gamble, Unilever and Siemens, as well as consulting
organisations. The SCC designed SCOR model, which is designed and maintained to support
supply chains of various complexities and across multiple industries. It spans all customer
interactions (order entry through paid invoice), all physical material transactions (suppliers
supplier to customers customer, including equipment, supplies, spare parts, bulk product and
software) and all market transactions (from understanding of aggregate demand to the fulfillment
of each order).
This model is finally adopted to develop the measurement framework, and will be discussed in
detail in part II of this article.
What measurement approach is right for apparel manufacturers?
In a platter full of so many options it is obviously difficult for apparel manufacturers to select the
right approach. While listing a comprehensive list of supply chain measures Lapide noted (lapide
2000) that most performance measurement systems are functionally focused. For example SCOR
model is a typical function based supply chain performance measure, often lead to functional
silos and conflicting functional goals. A balanced supply chain measurement system should

138

cover function based, process based, cross enterprise and alignment of executives to management
level measures. Measuring performance in a department as though it operates in a vacuum can
have a negative effect on other departmentsand on the bottom line (Barnard 2000).
We have first highlighted the measurement parameters in the following table from a clothing
manufacturers perspective. While almost all manufacturing related measures are theoretically
measurable by a manufacturer, only selected measures are possible in customer service, logistics
and sales related parameters. It is of pertinent importance to understand the secrecy and
confidentiality issues perceived by every typical manufacturer working as CMT supplier or fullyfactored clothing supplier to any high street retailer in EU or US. An organization of $ 25 million
turnover is typically self financed and the operational efficiency horizon for such manufacturer
spans between order receipts till goods trucked out of factory. The objective was to develop easy
and simple metrics to measure such organizations supply chain efficiency. After a thorough
investigation of all measures SCORE model was selected for final adaptation. Last, but not the
least the measurement parameters are chosen based on the functional link between upstream and
down stream players in the supply chain and not merely in house functions of an apparel
manufacturer.

Table: Lists of Possible Supply Chain Measures

Customer
Measures

Service Process, Cross-Functional Purchasing

Measures
Measures

Order
Fill
Rate
Line
Item
Fill
Rate
Quantity
Fill
Rate
Backorders/stockouts
Customer
satisfaction
% Resolution on first
customer
call
Customer
returns
Order track and trace
performance
Customer
disputes
Order entry accuracy
Order entry times

Forecast
accuracy
Percent
perfect
orders
New product time-to-market
New product time-to-first
make
Planning process cycle time
Schedule changes

Extended
Enterprise
Measures
Total
landed
cost
Point
of
consumption
product
availability
Total supply chain inventory

Manufacturing
Measures

Material
inventories
Supplier
delivery
performance
Material/component quality
Material
stockouts
Unit
purchase
costs
Material acquisition costs
Expediting activities

Related Logistic Related Measures

Product
quality
WIP
inventories
Adherence-to-schedule
Yields

138

Related

Finished
turns
Finished
days

goods

inventory

goods
of

inventory
supply

Retail
shelf
display
Channel
inventories
EDI
transactions
Percent of demand/supply
on
VMI/CRP
Percent
of
customers
sharing
forecasts
Percent of suppliers getting
shared
forecast
Supplier
inventories
Internet
activity
to
suppliers/customers
Percent automated tendering

Cost per unit produced

Setups/Changeovers
Setup/Changeover
costs
Unplanned stockroom issues
Bill-of-materials
accuracy
Routing
accuracy
Plant
space
utilization
Line
breakdowns
Plant
utilization
Warranty
costs
Source-to-make cycle time
Percent
scrap/rework
Material
usage variance
Overtime
usage
Production
cycle
time
Manufacturing productivity
Master schedule stability

Administration/Financial
Measures

Marketing
Measures

Cash
flow
Income
Revenues
Return on capital employed
Cash-to-cash cycle time
Return
on
investment
Revenue per employee
Invoice
errors
Return on assets

Market
share
Percent of sales from new
products
Time-to-market
Percent
of
products
representing 80% of sales
Repeat versus new customer
sales

On-time
delivery
Lines
picked/hour
Damaged
shipments
Inventory
accuracy
Pick
accuracy
Logistics
cost
Shipment
accuracy
On-time
shipment
Delivery
times
Warehouse space utilization
End-of-life
inventory
Obsolete
inventory
Inventory
shrinkage
Cost of carrying inventory
Documentation
accuracy
Transportation
costs
Warehousing
costs
Container
utilization
Truck
cube
utilization
In-transit
inventories
Premium freight charges
Warehouse receipts

Related Other Measures

APICS trained personnel
Patents
awarded
Employee
turnover
Number
of
employee
suggestions

Source: Lapide 1999

Developing efficiency measurement framework in Apparel Supply Chain

Supply chain efficiency measurement framework is developed in terms of efficiency shown by
the chain with respect to key functional parameters spanning four different operation domains
namely source, plan, make and deliver. There are about five primary key performance indicators

138

(KPI) identified in each operation domain and some primary KPI have multiple secondary KPIs
to measure. Each KPI is expressed in percentage. Once all KPI are measured, weighted averages
of all KPI would indicate the overall supply chain efficiency of the organization. While a 100
percent supply chain efficiency index would mean perfect organization, there is a possibility of
any organization having KPI value more than 100 percent.
Operation domain

KPIs
1) Inward Material Quality

Source
2) Quantity and Timely Delivery
3) Procurement Unit Cost
4) Material Inventory Level
5) Vendor Development Capability

1) Adherence to Production Target

Plan
2) Sample Conversion Rate
3) Material Utilization
4) Cost Adherence
5) Planned T&A v/s Actual T&A

1) Capacity Utilization
Make
2) Production Cost Efficiency
3) Quality Capability
4) Change Over Time
5) Operator Training Effectiveness

138

1) On Time Shipment
Deliver
2) Order Fulfillment
3) Claims and Discounts
4) Quality at Delivery
5) Transit time

Conclusion
It is obvious from above parameters that all KPI neither have equal weight in final measurement
nor all KPI are equally important for all organizations. Organizations can decide priorities and
weight at their will to finally arrive at the supply chain efficiency of an organization as a whole.
In next part we will discuss how the above measurement parameters were used in a pilot case
study.
The Apparel World:
Lagging Behind the Supply Chain Curve
Some of the most advanced uses of Supply Chain Management (SCM) technologies and
methodologies can be found in the retail industry. From the early uses of planning and
optimization software and Electronic Data Interchange (EDI) to more recently the Internet, the
retail sector showcases many examples of successful SCM technologies. The apparel sector of
this industry, however, has been unable to use solutions that have shown widespread success in
other industries when executing its supply chain plans. It has paid a high price. Imagine the
profitability of other industries, even the retail industry in general, without advanced supply
chain strategies and the software technology to enable them. Apparel industry companies must
begin to address this issue to regain their profitability.
Supply Chain Simulation
1 Supply Chain Traditional and Collaborative Simulations
A major focus of the DAMA Project was developing models to prove that a collaborative supply
chain would provide superior performance in responsiveness and inventory control. In an effort
to provide this simulation capability, multiple models were developed to simulate the supply
chain alternatives. These models include all of the planning, production, and distribution
functions that exist in the current business process. Production is driven by forecasts that are
developed through Demand Planning, Corporate Resource Planning and Product Resource
Planning. Incoming orders are processed through Order Fulfillment and into the Warehouse for
shipping to customers.

138

The first models developed focused on improving lead-time through the supply chain. These
simulation models, the Traditional Industry Supply-Chain Simulation - Lead Time (TISS-LT)
and Collaborative Industry Supply-Chain Simulation - Lead Time (CISS-LT), were developed to
show the direct impact that collaborative business processes have on lead-time through the
pipeline. As expected, the effects on lead-time were dramatic and showed clearly that CISS-LT
was indeed more responsive to fluctuations in consumer than demand than TISS-LT (see results
on page 12).
Once these initial models were proven, more detailed models were developed to show that
collaboration had positive effects on both lead-time and inventory costs. Using the original
models as a foundation, the Traditional Industry Supply-Chain Simulation (TISS) and
Collaborative Industry Supply Chain Simulation (CISS) models were developed. These models
include additional logic to model both lead-time and inventory cost. The CISS and TISS models
are used to demonstrate the broader impact of building a supply chain based on the DAMA
Architecture.
3.3.37decisions On Production And Inventory Management
2 The DAMA N-Tier Collaboration Models
The DAMA N-Tier Collaboration Model is a product of the DAMA project, and was developed
over a period of time. The contributions of the many companies involved in the pipeline
analyses, documentation of the business process models, prototype tools and pilots has been a
key factor in developing both the DAMA N-Tier Collaboration Business and Detail Models.
Before the DAMA N-Tier Collaboration Models were developed, the DAMA Model for Supply
Chain Collaboration was published. And in order for DAMA to understand the complete supply
chain, it was necessary to understand the "As-Is" information model of the textile industry today.
Typically, a textile supply chain consists of several manufacturers, each representing a sector of
the industry; i.e. fiber, textile, apparel (sewn products) and retail. A model of the industry was
documented that shows the flow of information between these sectors, and is represented in
Figure 1.

138

Figure 1. AS-IS Model of U.S. ITC

Information is passed between sectors in the form of Electronic Data Interchange (EDI)
transactions, and typically each sector is customer focused (fiber focuses on the textile
customer), rather than consumer focused (all sectors focus on consumer demand). Internal to
each company there are a number of business processes that occur (forecasting, planning,
scheduling, purchasing, etc.). And typically, the customer and supplier in the supply chain have
little knowledge of those transactions that are occurring within the other Trading Partner
Company(s).
In order for all members of the supply chain to respond to consumer demand, a new
collaborative paradigm was required. This new paradigm will provide supply chain visibility to
critical information for all members of the supply chain. The DAMA Model for Supply Chain
Collaboration has been developed to show how all sectors of the supply chain would participate
collaboratively in the major business processes that traditionally have occurred only within the
four walls of a particular company. This model suggests that retail, apparel, textile and fiber
companies within a particular supply chain share information and collaboratively make decisions
about forecasting, planning, scheduling, product delivery and expediting orders. The DAMA
Model for Supply Chain Collaboration is a high-level model for collaboration to achieve
Demand Activated Manufacturing as shown in Figure 2. There are six collaborative activities
that may be employed in this model:
1. Develop Business Planning Agreements,
2. Define Products,
3. Forecast and Plan Capacity Commitments,
4. Schedule Product and Product Delivery,
5. Expedite Production and Delivery Exceptions, and
6. Populate Supply Chain Utility.

138

Figure 2. DAMA Model for Supply Chain Collaboration

For each of the first five collaborative activities, the trading partners must populate the Supply
Chain Utility, the sixth activity in this model. The Supply Chain Utility is a set of applications
implemented to support collaborative product definition, forecast visibility, planning, scheduling,
and execution.
This model assumes a collaborative supply chain, with multiple trading partners, working
collaboratively to meet consumer demand. Trust must exist between all trading partners, and
technical data security must be implemented. Working together, the trading partners share
information about their products, manufacturing capabilities, allocations of capacity to the
partnership, and day-to-day operational status. Each of these collaborative activities will be
discussed in detail in the following sections.
The DAMA Model for Supply Chain Collaboration was published, and presented to the VICS
CPFR Committee as a recommendation for N-Tier Collaboration. The CPFR N-Tier committee
has identified the DAMA Model for Supply Chain Collaboration as a basis for documenting
alternative business models that N-Tier CPFR will support.
This DAMA Model for Supply Chain Collaboration led to the development of the DAMA N-Tier
Collaboration Business Model (see Figure 3). The DAMA N-Tier Collaboration Business Model
describes a collaborative paradigm that will provide simultaneous visibility to critical
information for all members of the supply chain. The model illustrates how retail, sewn products,
textile and fiber companies within a particular supply chain share a single demand plan and
collaboratively make decisions about forecasting, production planning and scheduling, and
product delivery whenever an exception from the original collaborative forecast occurs.
The value of having a single demand plan visible to all members of the chain is to better
coordinate process activities across the supply chain. Not only will trading partners better
manage the development of a single shared forecast of consumer demand, but they will also

138

leverage that shared view of the forecast by using it to plan production schedules, inventory
levels, manufacturing capacity, and ship dates throughout the chain.
The principles described above are embedded in the DAMA N-Tier Collaboration Business
Model (Note: the activities below are numbered in Figure ). The primary activities in the model
include:
Collaborative Planning (1),
Collaborative Forecasting (2),
Generate Forecasts (3),
Generate Production Orders (4),
Generate Ship Orders (5),
Collaborate To Resolve Exceptions (3b, 4b, 5b), and
Identify Front-End Agreement Changes (6).

Figure 3. DAMA N-Tier Collaboration Business Model

3.3.38.Aligning The Supply Chain To Anticipate Developing Market Trends

138

Companies Provide Business Planning Data (1a) to establish the guidelines and rules for the
collaborative relationship. The Voluntary Inter-industry Commerce Standards (VICS)
Collaborative Planning, Forecasting and Replenishment (CPFR) process has provided
guidelines for this step. As described by CPFR, the front-end agreement addresses each party's
business goals and the actions and resources necessary for success.
Inputs to the process for planning multiple manufacturing partners (N-Tier Collaboration) would
include not only strategy and goals for the partnership, but also specifications for the product
being delivered, and inventory and capacity allocations to the partnership.
Collaborative Forecasting (2) requires several key inputs from the trading partners which, taken
together, comprise the framework within which the forecast will be managed. Companies
Provide Forecast Information (2a) for this step such as market projections, internal forecasts, and
historical data. The output of the collaborative forecasting step is a collaborative forecast, and a
commitment by each of the trading partners to meet that forecast according to the plan
established by the partnership.
Once the initial collaborative forecast has been decided upon by the partnership, Corporate
Resource Planning (3a) in each company provides periodic forecast updates, which should be
evaluated and processed to determine if the original forecast stands, or if an exception has
occurred. The updates are used to Generate Forecasts (3). When an exception occurs, Companies
Collaborate to Resolve Exceptions, and a Forecast Resolution (3b) is created. The Forecast
Resolution is then processed to provide new Forecast updates to each of the Corporate Resource
Planning (3a) organizations in the trading partner companies.
Within a specified time period (established during the Collaborative Planning (1) phase, and
defined in the FEA (1b)), the Supply Chain Utility interprets the forecast, and produces
production orders. These production orders incorporate lead times required throughout the
product life cycle in the supply chain, and are distributed to Product Resource Planning and
Production (4a) in each company unless an exception has occurred. Exceptions might include
changes in lead-time, or product specifications (e.g. change in color, or size, as a result of
previous forecast updates (3a), or inventory status updates (5a). Again, exceptions require that
Companies Collaborate to Resolve Exceptions and create a Production Order Resolution (4b).
The Production order resolution is then processed to provide new Production Orders to each of
the Product Resource Planning and Production (4a) company organizations.
A second time period (established during the collaborative planning phase, and defined in the
front-end agreement) is defined to establish when the updated forecasts are used to Generate
Ship Orders (5). If the Ship Orders are within the variance defined by the front-end agreement,
they are translated by the bill of materials into individual Company Ship Orders, and sent to each
company for processing by the Warehouse, Order Fulfillment and Transportation organization
(5a). If a Ship Order is outside the variance, the Ship Order is flagged, then Partners Collaborate
to Resolve Exceptions, and a Ship Order Resolution (5b) is used to generate a new Ship Order
for each company. Exceptions might occur to a significant change in one of the company's
inventory status, thus requiring an increase/decrease in upstream or downstream shipments, or as
a result of earlier resolutions for forecast updates, or production orders.

138

At any time when Partners Collaborate To Resolve Exceptions (3a, 4a, or 5a), and the Resolution
Requires Changes to the Front End Agreement (FEA) (6), then those Collaboration Agreement
Revisions will require the companies to re-enter Collaborative Planning (1), and revise the Front
End Agreement (1b).
3.3.39.supply Chain Planning
3 Validation of DAMA Architecture
Although the DAMA Architecture was developed based on sound concepts, it required validation
to support the perceived benefits. In this effort, simulation models were written to compare the
performance of proposed supply chain solutions and the traditional supply chain operations. The
measure of success is shown as improvements in lead-time and inventory levels while
maintaining a level of service.
Since most complex, real-world systems with stochastic elements cannot be accurately modeled
mathematically, a simulation is often the only type of investigation possible. Stochastic
simulation uses computer techniques to imitate or evaluate a model numerically in order to
estimate the desired true characteristics of a system having random input components. With a
model that mimics a system's behavior, one avoids the risk and cost of trial-and-error
experimentation on the real world system and can perform "what-if" analysis to evaluate
performance and identify existing or potential problem areas.
There are many simulation languages that can be used to develop such process simulations.
However, the specific modeling requirements for the DAMA Supply Chain models fit into the
capabilities of Rockwell Software's Arena modeling language. The Arena graphics simulation
system (4) is designed for building computer models that accurately represent an existing or
proposed application, such as schedule optimization, increased throughput, inventory reduction,
delivery performance, and resource utilization. Arena integrates all simulation-related functions-animation, input data analysis, model verification, and output analysis--into a single simulationmodeling environment.

138

Figure 4. Arena Simulation Programming Environment

Arena is a complete and flexible modeling environment and was combined with an easy-to-use
graphical user interface using Microsoft Access. This flexibility allowed for rapid development
of the models, and a graphic user interface for data entry (Figure 5). The user interface is
completely external to the modeling environment and provides a tailored data entry environment.

138

Figure 5. Sample of Graphic User of Interface

4 Description of Arena Models
In order to validate the DAMA Architecture, multiple models were required to handle the various
supply networks and business processes. The first of the models developed was called the
Traditional Industry Supply-Chain Simulation - Lead Time (TISS-LT) and focused on accurately
modeling the current supply chain and calculating lead times for the various partners in the
supply chain. Subsequent models were built on this framework and added functionality to
support the DAMA Architecture. The Collaborative Industry Supply-Chain Simulation - Lead
Time (CISS-LT) added the logic for collaboration between the supply chain partners. It resulted
in a dramatic decrease in lead-time because it eliminated duplication of effort in the planning and
other administrative departments. Once these models were developed, logic was added to
determine inventory levels for each of the partners. These two models were simply named TISS
and CISS and include the lead-time calculations, as well as, the inventory information.
The first model, TISS-LT, was developed to simulate traditional business processes and included
all applicable business functions in the current supply chain. The flow of information in the
supply chain begins with retail merchandising generating sales forecasts for the season. This
information is sent to the Demand Planning department of the Apparel partner. Demand Planning
performs two primary functions. The first is to process the incoming forecasts and generate new
forecasts that are sent to the Textile Partner.

138

The second function is processing the forecasts into manageable monthly "buckets" for
Corporate Resource Planning to distribute between manufacturing facilities. Corporate Resource
Planning completes this task and transmits the information to Product Resource Planning to
generate weekly production orders for the plants.
The other function of Product Resource Planning is to send the raw material requirements that
correspond to the production order to Purchasing. Purchasing will send orders for raw materials
from the Apparel partner to the Textile partner. These raw materials are eventually received in the
Raw Material Warehouse and held for consumption by production orders.
The production orders are sent to the Production area that manufactures the defined quantities of
product in weekly batches. Once the manufacturing is complete the product is transported to the
finished goods warehouse and is entered into stock to be relieved by incoming orders.
The orders arrive to Apparel from Retail and are processed through Order Fulfillment. If the
orders are in line with the forecasted quantities they are simply passed through to the warehouse
for shipment. If the order does not fall within the expected tolerances of the forecast, then a
notification is sent to Product Resource Planning to produce additional quantities and then the
order is sent to the Finished Goods Warehouse to be processed.
In the Finished Goods Warehouse, an order is pulled from stock and then sent through
Transportation to the Retail Partner. These same processes are executed for all of the partners.
This causes long planning times and slow reaction to fluctuations in consumer demand.
The CISS-LT model incorporates most of the information and product flow that was developed
in the TISS-LT model. However, the CISS-LT model includes collaborative planning for the
supply chain partners. This planning begins with defining a business agreement and a
collaborative forecast before a season starts. It also includes collaborative planning throughout
the execution of the selling period. This means that there is no duplication of effort or additional
processing of demand information in the supply chain. Once an order is sent from Retail, it is
visible to all partners. This allows Textile and Fiber Partners to see fluctuations in demand
immediately. Also, the primary functions of Demand Planning, Corporate Resource Planning,
and Order Fulfillment are consolidated into the Supply Chain Utility and receive input from all
sectors but are not duplicated within each sector.
The TISS and CISS models use the logic from the original models with added functionality to
account for inventory levels. The logic required was added to several functional areas within the
models. In Order Fulfillment, incoming order quantities are compared to the forecast and then
either added or subtracted from current production orders. In the finished goods warehouse,
inventory is added from Production and relieved to fill orders. This running inventory is recorded
and could be used for cost calculations. The same process of managing inventory is performed in
the raw material warehouse as well with inventory increased from deliveries from the preceding
partner and then relieved to fill production orders.

138

Supply Chain Integrated Analysis

One such tool developed by the DAMA project is the Supply Chain Simulation for mid- and
high-level planners. Supply Chain Simulation is a computer-based tool for supply and demand
analysis that uses supply chain information exchanged among strategic business partners in a
customer-supplier relationship. The goal is to benefit the supply chain partnership by analyzing
the trade-offs among demand forecasts, material availability, lead times and resource capacity, in
order to reduce the product time in the supply chain pipeline and to meet inventory and safety
stock targets. Supply Chain Simulation will help planners make collaborative business decisions
by managing the interaction of production and inventory supply chain management to meet
forecasted and unexpected demand for produced goods.
A major focus of the DAMA Project was developing models to prove that a collaborative supply
chain would provide superior performance in responsiveness and inventory control. In an effort
to provide this simulation capability, multiple models were developed to simulate the supply
chain alternatives. These models include all of the planning, production, and distribution
functions that exist in the current business process. Production is driven by forecasts that are
developed through Demand Planning, Corporate Resource Planning and Product Resource
Planning. Incoming orders are processed through Order Fulfillment and into the Warehouse for
shipping to customers.
The first models developed focused on improving lead-time through the supply chain. These
simulation models, the Traditional Industry Supply-Chain Simulation - Lead Time (TISS-LT)
and Collaborative Industry Supply-Chain Simulation - Lead Time (CISS-LT), were developed to
show the direct impact that collaborative business processes have on lead-time through the
pipeline. As expected, the effects on lead-time were dramatic and showed clearly that CISS-LT
was indeed more responsive to fluctuations in consumer than demand than TISS-LT.
Once these initial models were proven, more detailed models were developed to show that
collaboration had positive effects on both lead-time and inventory costs. Using the original
models as a foundation, the Traditional Industry Supply-Chain Simulation (TISS) and
Collaborative Industry Supply Chain Simulation (CISS) models were developed. These models
include additional logic to model both lead-time and inventory cost. The CISS and TISS models
are used to demonstrate the broader impact of building a supply chain based on the DAMA
Architecture.

138

Aanalyzes a supply chain for cooperative solutions by passing demand-related information

backward through the pipeline, and by passing manufacturing constraints and other
supply-related information forward toward retail.
"What if" Capability
With TISS and CISS, a planner can perform "what if" analyses to assess the impact of various
decisions in order to enhance supply chain performance for all strategic business partners.
Potential "what if" analyses can assess alternative partnership scenarios or even the percentage of
plant capacity reserved for a designated product line or preferred customer. This "what if"
capability gives planners a way to examine possible outcomes of a business change without
making costly investments.
The planner interacts with TISS and CISS through an easy-to-use graphical interface to construct
a simulated supply chain, design a business-case scenario, run the analysis, then view the
graphical output results showing the performance of the entire supply chain. Different choices
can be made for an alternative scenario and the analysis repeated. TISS and CISS can be used at
the supply chain level to identify potential improvements and to develop supply chains to meet
quick response goals for all partners.
To learn more about how TISS and CISS can help strengthen the links in your supply chain,
contact [TC]:

138

The Demand Activated Manufacturing Architecture (DAMA) Project defined the soft goods
supply chain from fiber raw materials to textile, to apparel manufacturing to retailing and
produced tools and techniques to analyze the supply chain processes, their linkages and lead
times. This presentation will show which of the results of the DAMA Project are useful for
streamlining supply chain processes. A case study comparing collaborative supply chain planning
to the traditional processes will demonstrate the physical reduction in lead times and inventories
which then leads to financial and service level improvements. Several of the DAMA research
concepts have been embodied in the ongoing work of the VICS Collaborative Planning and
Forecasting (CPFR) and Collaborative Transportation Management (CTM) industry standards
committees.
Supply Chain Management is an approach that represents integration of many links of the supply
chain by optimizing each link while attempting to control change. Today, organizations must
move beyond Supply Chain Management and strive to achieve the Six Levels of Supply Chain
Excellence. We must learn to move from one level to the next while helping those around us
move as well.
It is critical that we understand what tools will allow for a completely integrated supply chain.
This presentation will inform you of the application tools you need to make it happen and
identify where you are within the Six Levels of Supply Chain Excellence. Learn how to
incorporate seamless operations practices and technological advances in planning and execution
software packages to make Supply Chain Synthesis a reality for your organization..
Economic pressure has increasingly forced manufacturers to out-source part or all of their
operations, in many cases looking off-shore for cheaper sources of labor and infrastructure.
This virtual factory has created an environment where managing information has replaced
physical activities. In addition to the challenges of balancing supply with demand, channel
management, category management, profit management etc., it is now necessary to understand
the dynamics of a virtual supply chain. These demands are felt by all supply chain participants
all the way from retailers to n-tier suppliers.
Chainlink Research will share the global supply chain research that we have conducted in three
major supply chains, examining the linkages, trading partner expectations, practices and results
as well as the implications of these on a soft goods supply chain.
.
In Search of the Holy Grail Software Applications that Facilitate True Inter-enterprise
Integration and Supply Chain Collaboration
Carla Reed - Principal - New Creed
Responding to demands to reduce manufacturing costs, enterprises are increasingly outsourcing
part or all of functions that previously took place in a four-walls environment. Gone are the days
when raw materials came in one door and finished product exited out of another. Today, meeting
market demand includes managing information related to supply chain processes, versus actually
performing these functions internally. This creates many challenges and requires a new approach,

138

one in which supply chain partners act in unison, sharing information in a seamless manner, real
time, irrespective of time zones or physical boundaries. True visibility requires a truly
collaborative environment that enables information sharing with external entities, to include
carriers, forwarders, suppliers, customer and intermediaries. Despite all the hype surrounding
web-based technologies and so-called collaborative applications, there are few enterprises who
have mastered the challenges of managing this extended enterprise.
This presentation explores how the combination of enterprise independent applications and webenabled communications, built upon the solid foundation of a harmonized ERP environment, can
facilitate this Holy Grail of supply chain integration.
.
Re-engineering Supply Chain Management
at Liz Claiborne
While many manufacturers are still trying to hang on to business as usual, Liz Claiborne Inc.
recognized in the early 90's that fissionability, quality and price value would be the cost of entry
in the new millennium. As Paul R. Charron, Chairman and chief executive officer of Claiborne
identified, "The differentiators for the new millennium are customer service, logistics
sophistication and information technology." Convinced that customer and consumer intimacy is
the way of the future, the company is in its rollout phase of an IT reorganization designed to
establish information technology as a core competency.
It is with this mission statement in mind, that the company in January 97 launched the
Transformation 2000 systems conversion, a project that that evolved from four major principles.
The first of these was to deliver Liz Claiborne Inc. technology into the year 2000 with no
business interruption. This meant no disruption in the production of over 100 million units per
year while maintaining sales volume of $2.5 billion per year and providing continuity for more
than 6500 employees.
The second principle of the implementation strategy was to create a company collaborative effort
that encompassed technology, process and people. According to John R. Thompson, Sr. VP and
Chief Information Officer for Claiborne, this was a critical step in their 3-year plan, during which
they spent considerable time and money reviewing and designing business processes. The
question to be answered across the board was "How do we do what we do and why?" This step
created a conference room pilot that engaged their employees in software review and selection.
The third principle was to implement integrated system solutions that not only contributed to
business strategies, but also provided superior service to all constituencies. This principle
supported several key decisions. The conference room pilot had determined that there wasn't any
singular software application that fit the business processes needed to support the company's
multiple divisions and diverse product lines, including womens and mens clothing and
accessories, cosmetics and fragrances. Opting to replace patchwork homegrown applications

138

with an integration of "best-of-breed" software, the company now had its statement of direction.
The company has some aggressive goals, which they expect will be facilitated by their
technology investments. These goals include cycle time reduction in major business processes,
improved responsiveness to customers as measured by timeliness, accuracy and completeness of
shipments, and $75 Million in costs removed from the business.

much at stake, what supply chain complexities have prevented adoption of solutions proven in
other industries? The increased profit potential for the industry is enormous.

Links in the Chain: Manufacturing Competence, but little IT infrastructure

When money is no object, supply chain processes can be optimized using analytical tools such as
ERP or SCM solutions to improve performance. If every tier or factory had such tools, they
could be integrated together either on a point-to-point basis or using a Supply Chain Events
Management (SCEM) system throughout the supply chain. However, ERP and SCM products are
not designed to handle style, size and color specifications for apparel, and width for footwear.
The costly and time consuming customizations required to make these solutions, such as demand
planning, work are a barrier to their adoption and represent a large risk.
Many factories, however, do not have the capital to invest in any IT infrastructure such as ERP
and SCM; capital that does exist may be better invested in equipment to perform additional
manufacturing operations. Additionally the global nature and distribution of their supplier base
makes even normal communications difficult at times. As noted, the supply chains in the apparel
industry are very volatile, changing from season to season and style to style. Verbal
communications are insufficient to knit together the multiple tiers of a global supply chain into a
cohesive, managed supply chain where delays are identified and communicated to all
downstream participants in time to address them.

138

A Powerful Solution for Multi-tier Supply Chain Execution

Apparel retailers and manufacturers need the right tools to address their unique challenges. They
need a solution that allows each distributed, global, multi-tier supply chain to function as if it
were a single, local virtual factory. This type of supply chain execution system would use
technologies, like the Internet, to overlay the entire supply chain for each project/product and
would require no investment by the suppliers, which is especially important due to the number of
suppliers in the chain. The solution must allow sourcing professionals to identify and prioritize
problems so they can be addressed on a management by exception basis cannot require intensive
training or significant capital at supplier sites.
THE AGILE SUPPLY CHAIN:
In recent years there has been a growing interest in the design and implementation of agile
supply chain strategies (Christopher, 2000). The idea of agility in the context of supply chain
management focuses around responsiveness. Conventional supply chains have been lengthy
with long lead-times and hence, of necessity, have been forecast-driven. By contrast, agile supply
chains are shorter and seek to be demand-driven. A further distinction is that because
conventional supply chains are forecast-driven that implies that they are inventory-based. Agile
supply chains are more likely to be information-based.
By their very nature, fashion markets are volatile and difficult to predict. Hence the need for
agility. It has been suggested that an agile supply chain has a number of characteristics.
Specifically the agile supply chain is:
market sensitive it is closely connected to end-user trends
virtual it relies on shared information across all supply chain partners
network-based it gains flexibility by using the strengths of specialist players
process aligned it has a high degree of process interconnectivity between the network
members
Figure 14 suggests that there are a number of practical ways in which these four key dimensions
can be brought into play to create an agile supply chain for organizations competing in fashion
industries.

138

Figure: 14, The foundations for agility in a fashion business.

Considering each of these four dimensions in turn, a number of observations can be made.
Market Sensitivity:
Being close to the customer has always been a goal of any market-oriented business, but in
fashion retailing it is vital. Successful fashion retailers capture trends as they emerge using a
variety of means. Point-of-sale data is analyzed daily and is used to determine replenishment
requirements where the intention is to continue to make the product available. Often though the
selling season is only intended to be short and product will not be replenished, in such situations
the data is used to analyses trends. Beyond point-of-sale data are real consumers and identifying
their preferences and changing requirements should be a continuing priority. Zara, the Spanishbased fashion retailer, has teams of fashion scouts who seek out new ideas and trends across the
markets in which they compete. They also use their own salespeople to identify customers likes
and dislikes and to feed this information back to the design team. Using computer aided design
and computer aided manufacturing (CAD/CAM), these ideas can quickly be converted into
tangible products and be in the marketplace in a matter of weeks.
Virtual Integration:
The agile supply chain is virtual in the sense that it is connected and integrated through shared
information on real demand so that all the players in the chain, from the fabric manufacturers to
138

the garment makers to the retailer, are all working to the same set of numbers. Retailers and their
suppliers need to be more closely connected through shared information than was the case in the
past. Until very recently, few retailers in any sector would share point-of-sale data with their
suppliers. Now, however, there is a growing realization that shared information can enable higher
levels of on-the-shelf availability to be achieved with fewer inventories. Simultaneously,
transaction costs can be reduced particularly if the co-operating parties are prepared to move to
co-managed inventory (CMI). CMI is a process through which the supplier collaborates with the
retailer to manage the flow of product into the customers distribution system. The supplier and
the customer jointly agree the desired stock levels that need to be maintained in the retailers
operation. The customer feedback sales data is sent on a regular basis to the supplier who then
uses that information to plan replenishments. Typically such arrangements work best where the
demand for the product is relatively stable and replenishments within the season are possible.
Network Based:
A distinguishing feature of agile companies is their use of flexible arrangements with a wide
supply base. Zara and Benetton are two fashion companies that have achieved high levels of
customer responsiveness by working closely with specialist, often small, manufacturers. The
strategy at Zara is that only those operations which enhance cost efficiency through economies of
scale are conducted in-house (such as dyeing, cutting, labeling and packaging). All other
manufacturing activities, including the labor-intensive finishing stages, are completed by
networks of more than 300 small subcontractors, each specializing in one particular part of the
production process or garment type. These subcontractors work exclusively for Zaras parent,
Inditex S.A. In return, they receive the necessary technological, financial and logistical support
required to achieve stringent time and quality targets. The system is flexible enough to cope with
sudden changes in demand. Benetton, likewise, have long used a myriad of small manufacturers
to give them additional capacity in activities such as knitting and final assembly. The principle
behind an agile network in some ways runs counter to the prevailing idea that organizations
should work with a smaller number of suppliers, but on a longer term basis. Instead in an agile
network there is a tendency for the focal firm to act as the orchestrate of the network, the
membership of which will change according to requirements. There is a good analogy with the
director of a theatre play. For the specific season during which the play is being performed, the
director will work very closely with a relatively small group of actors and actresses. Probably he
or she has chosen this team from a much bigger pool of players who he or she has also worked
with in the past. However, for the next play or season, that team will be disbanded and a new one
assembled from the pool. Even though these relationships are not permanent, they are close.

Process Alignment:
Responsive supply chains require a high level of process alignment both within the company and
externally with upstream and downstream partners. By process alignment is meant the ability to
create seamless or boundary less connections, in other words there are no delays caused by
hand-offs or buffers between the different stages in the chain and transactions are likely to be
paperless. The underpinning processes will also probably be managed by horizontal and crossfunctional teams. In an agile network, process alignment is critical and is enabled by the new

138

generation of web-based software that enables different entities to be connected even though
their internal systems may be quite different. Now it is possible for organizations that are
geographically dispersed and independent of each other in terms of ownership to act as if they
were one business.
In the fashion business there can often be many different entities involved in the process that
begins with product design and ends with the physical movement of the product onto the
retailers shelf. Co-coordinating and integrating the flow of information and material is critical if
quick response to changing fashion is to be achieved. In conventional fashion supply chains, it
can take twelve months from product design to the final sale. By contrast by creating virtual
teams across the network where information is shared in real-time, a much higher degree of
synchronization can be achieved (see for example Johnson, 2002). We now turn to a particular
approach that has gained much popularity in fashion industries as a method by which to seek
agility and speed of response. It is also a strategy that has begun to challenge the accepted
wisdom of sourcing goods and other inputs from less well-developed economies.
The Road to Quick Response (QR) in Fashion Industries:
Today, QR is recognized as an operations strategy (Lowson, 2002) and as such, it attracts
considerable interest for two additional, yet closely related reasons. First, the ability of this
strategy to cope with the complexity of fashion logistics; and, second, as a method to combat the
relentless shift toward offshore sourcing from low wage economies. In all fast moving industries,
demand is now more fragmented and the consumer more discerning about quality and choice.
There is also an increasing fashion influence; no single style or fashion has dominated for any
length of time. For many consumer sectors, demand is approaching the chaotic in its insatiable
appetite for diverse services and goods. Masscustomisation and individualized products with
shorter season lengths; micro merchandising and markets segmented at the individual level; large
numbers of products chasing a diminishing market share; are all evidence of the inexorable
movement toward a sea change and mark the folly of firms expecting to operate as they have in
the past. One of the most fundamental Quick Response philosophies is the ability to compress
time in the supply system. If the pipeline is condensed to about one third of its traditional length,
not only does the design of goods better reflect more accurate consumer information, it is
possible for the retailer to re-assess the demand for products while the season is under way and
receive small, frequent reorders from the supplier, provided reorder lead times are short.
Quick Response (QR) can be defined as:
A state of responsiveness and flexibility in which an organization seeks to provide a highly
diverse range of products and services to a customer/consumer in the exact quantity, variety and
quality, and at the right time, place and price as dictated by real-time customer/consumer
demand. QR provides the ability to make demand-information driven decisions at the last
possible moment in time ensuring that diversity of offering is maximized and lead-times,
expenditure, cost and inventory minimized. QR places an emphasis upon flexibility and product
velocity in order to meet the changing requirements of a highly competitive, volatile and
dynamic marketplace. QR encompasses an operations strategy, structure, culture and set of
operational procedures aimed at integrating enterprises in a mutual network through rapid
information transfer and profitable exchange of activity.

138

QR has a number of strategic implications for the organization. Research has shown that mere
implementation of technology or particular procedures without the strategic underpinning leads
to sub-optimal performance,
The alignment of organizational activity to demand. This is a fundamental principle of QR. All
activities within an enterprise should be paced to demand and customer behaviour. Products and
services are produced and delivered in the variety and volume that match demand. The activity
within a company moves to the beat of this drum.
Linkages between demand and supply. Given the importance of the alignment activity above, a
strategic understanding of the drivers of demand and its synchronized connection with supply is
imperative for QR.
Demand Relationships. QR recognizes that both customers/consumers and products are dynamic
and place unique demands on the organization. Identical products will have unique product flows
depending upon customer/consumer buying behaviour and QR needs similarly, product attributes
will vary by product type.
Resource Configuration. In the QR world, this strategic architecture is inter-organizational.
Strategy and strategic thinking are at a network level, encompassing many external
interconnections. In addition, within this configuration must fit the mapping of
customer/consumer values and perceived benefits onto operations, in order to underpin the link
between demand and activity (as above).
Time. Time as a strategic weapon is vital to QR operation, but like any weapon its effectiveness
depends upon the circumstances of its use. As with demand, time-based competition requires
careful assessment as to where best it can serve customers/consumers. Fast and accurate
adaptation to market change is perhaps the most important element of the QR strategy.
Primacy of information. Data and information are the foundation of QR every business is an
information business. Timely and accurate flows will enable fast and accurate responses without
waste and unnecessary cost.
Partnerships and Alliances. Perhaps one of the most significant developments in recent
management and business thinking has been externalization; the recognition that performance
relies increasingly upon a series of alliances and relationships with other enterprises in the
environment as the most effective way to deal with constantly changing market conditions. Apart
from the strategic implications, Quick Response also requires a number of operational building
blocks that have to be integrated and aligned for efficient and effective reaction to real-time
demand. Mere possession, however, of the various technologies, processes and activities will be
insufficient for an agile response; close linkages are required across the whole supply system in
order to provide a QR capability.

Quick Response and the Costs of Offshore Sourcing:

Quick Response operations strategy offers a high degree of speed, flexibility and responsiveness
in supply pipelines. This has substantial implications for sourcing decisions; particularly offshore
sourcing. Empirical research has established that sourcing offshore to secure lower cost inputs
(typically from low wage, underdeveloped regions) can have negative consequences; once the
hidden and inflexibility costs are quantified, Hidden costs are those that are not typically
anticipated by the buying organization, but almost always occur. Some examples include: the

138

various initial investments to establish the new source of supply, control of quality and delivery
variables; high initial training costs, coupled with a high staff turnover affecting both throughput
and quality; significantly lower operator efficiency offshore; irrevocable letters of credit charges;
delays at the port of entry, last minute use of air freight and other logistics costs; expensive
administrative travel to correct problems; process inefficiencies and quality problems; long lead
times and the need for large buffer inventories; and finally, the not insubstantial human cost
involved in the conditions endured in many foreign factory environments often employing child
labour and overusing natural resources.
Inflexibility costs are the costs of using suppliers that are inflexible and unresponsive to changes
in demand (before, during and after a product selling season), leading to disproportionate levels
of demand amplification across a longer supply network and a number of considerable cost
implications.
It is only when these two cost categories can be properly quantified that the advantages and
disadvantages of low wage, foreign purchasing can be fully understood and a method for their
true representation becomes apparent. Once the hidden costs are categorized, sourcing on the
basis of low cost alone becomes far less attractive. Further, when the costs of inflexibility are
added, it becomes clear that using a domestic Quick Response supplier may be a far better option
due to the added velocity and flexibility that is provided. Collapsing the product pipeline can
reduce time and provide a more efficient response to rapidly changing consumer demand. In this
way, a QR operations strategy will encourage the cross-enterprise re-engineering of business
processes, from product development to replenishment, with resulting improved stocking points,
lower inventory, lower cost and increased sales. The value chain is reconfigured to reflect speed
of response, flexibility and differentiation. Table 2 compares two different sourcing alternatives:
the Quick Response domestic supplier and the offshore counterpart.

In this initial scenario two possible buying decisions are reviewed using QR and then offshore
sources of supply. First, end-consumer purchases, whether bought from a retailer or
manufacturer, are assumed to be one hundred thousand pounds. It is then assumed that the
customer (a manufacturer or retailer) has bought the goods for the same price (60k). An
averaged gross margin is also assumed of 40% on these sales. The only difference between the
two sourcing alternatives is the flexibility and speed of response. The ability of the QR supplier

138

to rapidly replenish the stock of the customer (manufacturer or retailer) to real-time consumer
demand allows the customer to turn inventory of the product 6 as opposed to 2.5 times a year.
This faster turnover rapidly increases the customers gross margin return1 on each pound
invested in inventory from 1.67 to 4.00, more than twice that of the offshore competition.
Because of this inventory turnover advantage the manufacturer or retailer could afford to pay a
premium for the product and still get a better return (Table 3).

In the table the price paid for goods by the customer has increased by almost one-third, but
because of the flexibility and responsiveness of the supplier, the return on inventory has
increased by 1.2 percent or from 167% to 169%.
Table 4 views the sourcing decision from another perspective. The decision to move sourcing
offshore to a competitor with lower unit cost but a slower response

In this situation the foreign supplier would need to reduce the purchase price by nearly 35% to
retain a comparative GMROI to that of the QR supplier. The more flexible and higher velocity

138

supplier proves more competitive than the lower-cost; even without taking into account the other
hidden and inflexibility costs.
Product velocity also produces other benefits. Replenishing stock in response to real-time
demand ensures that the right goods are available reflecting what is being demanded. Revenue
will rise as products in demand are sold at the expected price rather than marked down as
unwanted. Table 5 shows the shows the combined effect of velocity, faster inventory turns and
reduced markdowns.

As product velocity increases so too will revenue as there is less need to sell goods below
optimum price points. The customers (manufacturer or retailer) return on investment grows to
over 3-times that of a competitor.
Finally, Quick Response also has an impact upon strategic pricing decisions. Velocity and
flexibility in the supply system will allow an original equipment manufacturer (OEM) or retailer
to reduce the price of the finished good below that of the competition and capture greater market
share.

138

Because of QR flexibility and responsiveness, the retailer or manufacturer can reduce the
purchase price to the consumer by 32% and still earn a slightly better return in terms of GMROI
than competitors.
This paper has provided a conceptual focus upon the main logistical issues involved in fashion
retailing. The peculiar nature of the industry was discussed in terms of its volatility, complexity
and dynamism. It is with these factors in mind, that the need for agility and responsiveness in the
logistics pipeline has been identified.
Fashion supply systems are characterized by three critical lead-times: time to- market, time-toserve and time-to-react. All three of these factors stress the importance of agility in fashion
supply networks. Agility does, however, necessitate radical changes in organizational structures
and strategies and a move away from forecast-driven supply. Market sensitivity, virtual
integration, networked logistical systems and process alignment all become fundamental
prerequisites to achieving the ultimate agility, a Quick Response capability. Quick Response
(QR) offers a new dimension in fashion retailing. For both retailers and manufacturing suppliers
it provides a new operational approach, one that is alien to many firms still operating with
structures designed for a mass production era. The paper provided a review of QR, the agility it
provides, its strategic implications and the building blocks necessary for its implementation. The
final section of this work demonstrated how a Quick Response operations strategy provides a
more viable and attractive sourcing option compared to the use of low cost inputs from underdeveloped economies. Once the various costs (hidden and inflexibility) are properly understood
and computed, the impact of agility, flexibility and responsiveness in fashion supply systems
becomes paramount.
3.3.38.Aligning The Supply Chain To Anticipate Developing Market Trends
Aligning the Supply Chain to Anticipate Developing Market Trends:

138

Supply chain management (or mismanagement) has a substantial impact on the successfulness of
business strategies. Yet, too often companies look at the tools of supply chain management as
operation-based only and not as an integral part of the enterprise planning process. A companys
supply chain must support the business and marketing strategy of an organization, and ensure the
most efficient use of providing valued goods and services to the customer. In the textile and
garment industries, it is becoming increasingly apparent that without a well-thought business and
supply chain plan, companies will not be able to survive in the global market place.
Key Components of Supply Chain Management
Supply chain management is an enormous topic covering multiple disciplines and employing
many quantitative and qualitative tools.
The twelve categories we define are
location
transportation and logistics
inventory and forecasting
marketing and channel restructuring
sourcing and supplier management
information and electronic mediated environments
product design and new product introduction
service and after sales support
reverse logistics and green issues
outsourcing and strategic alliances
metrics and incentives
Global issues
3.3.39.Supply Chain Planning
Supply Chain Planning:
To understand how crucial supply chain management is for implementing a business strategy,
there first must be a common understanding of the definition of supply chain management.
Descriptions and definitions of supply chain management are numerous. Stanford Universitys
Global Supply Chain Management Forum states the following, Supply chain management deals
with the management of materials, information and financial flows in a network consisting of
suppliers, manufacturers/producers, distributors and customers. Krajewski and Ritzman, 1999,
write that supply chain management, seeks to synchronize a firms functions and those of its
suppliers to match the flow of materials, services and information with customer demand (pg.
453). Supply chain management does deal with all of the aforementioned issues, but a simpler
way of defining supply chain management is managing the resources necessary to provide
valued goods or services to customers. To be truly effective, supply chain management must be
incorporated into the early processes of company strategic planning. Long-range planning for
supply chain activities must link with the planned activities of marketing and sales to ensure that
the necessary resources and processes are in place to support anticipated customer demand.

138

Sales and Operations Planning (S&OP) provides the means to incorporate the supply chain
management, sales and marketing into a cohesive operational strategy that supports the
companies business strategy. S&OP provides a single, integrated and communicated company
plan that is based on schedules and forecasts that are both realistic and achievable. Without the
S&OP, companies are missing a vital link between the longer-range business strategy and the
operational activities that must support the strategy. When companies undertake supply chain
management activities without a long-term strategy coordinated with other functional areas in the
organization, it is really supply chain reaction that is taking place. Companies simply react to
different situations in a bid to meet customer orders and requirements, resulting in missed
deliveries, bloated inventories, excessive shipping costs and poor quality. Simply put, planning is
an indispensable step in supply chain management and execution. The S&OP requires good
forecasting on the part of sales and marketing to enable the operations function to balance the
resources available in the supply chain against the anticipated demand. Forecasting is used to
plan, predict and anticipate future demand from customers in the market. Good forecasting
means reasonably accurate predictions of market demand (as the first rule of forecasting is that
forecasts are always wrong). As customers expect more out of supplier organizations, so to must
they provide more information to the suppliers. Schedules and forecasts must be shared well in
advance to enable suppliers to plan to meet customer demand in a structured and organized way
rather than reacting as information is fed piecemeal to the suppliers sales group and planners.
Additionally, utilizing a customers forecasted schedule enables suppliers to eliminate some of
their own forecasting activity and avoid what is known as the Bull Whip Effect. The Bull Whip
Effect is the distortion of true end-customer demand that comes from lack of coordinated and
shared information in the supply chain, and is amplified when suppliers forecast on customers
forecasts. Because the original forecast is not going to be correct 100% of the time, forecasting
on it will only serve to increase the inaccuracy and further distort the anticipated demand.
Supply Chain Execution:
Once a planning process (S&OP) is in place, the company can concentrate on the execution
phase of its strategy. (As a caveat, the planning process is similar to the business plan in that it is
never completed and needs to remain current to changes and trends in the market). Supply chain
management is the means by which companies execute their overall business strategy, and will
dictate the necessary operations and processes to enable the company to compete effectively in
the marketplace. Production planning and scheduling, procurement of raw materials, production
of goods and delivery to customer comprise the operational portion of supply chain management.
By having more effective planning in the beginning of the supply chain process (at the S&OP
level), a company can more efficiently utilize its resources to meet the demand from customers.
Poor asset utilization, bloated inventories, poor on time deliveries, high shipping and storage
costs and low quality are usually indications of poor planning rather than poor execution. True
supply chain execution should be a management by exception system, meaning significant
intervention by planners and others should only occur in a relatively small number of cases with
the rest of transactions and processes performing smoothly according to plan. Lean
manufacturing, Just-In-Time, Total Quality Management, cellular manufacturing, and strategic
inventory management are just some of the many tools that can be used to ensure an efficient and
responsive production system. The idea behind all of these concepts is that you use and have no

138

more than what you need at any given time. Instead of producing long runs of products to better
utilize assets and avoid downtime from changeovers, the focus is on reducing change-over times
in order to be able to produce smaller lots without substantial cost difference. Textile and
garment companies should sit-up and take notice.
Many of the largest company consumers such as JCPenney, Levis and Tommy Hilfiger are
evaluated on how well they manage their inventories, or more accurately, on how well they
manage their cash flows (on which inventories have a negative effect). As a result, these
companies and others like them are likely to seek more flexibility from their suppliers in
purchasing smaller lot sizes as they seek to minimize their on hand inventories. Allen Questrom,
Charimen and Chief Executive Officer of JCPenney commenting on recent JCPenney operating
results commented that, Improvements in inventory productivity were the most important
contributor to free cash flow. In fact, most companies are actively trying to reduce inventories
to free up precious cash resources.
This approach also gives companies the ability to adjust their forecasts and schedules to
changing market conditions. Rather than ordering an entire seasons supply of goods, retailers
are ordering much smaller lots and are forcing suppliers to either hold inventory to meet their
delivery requirements or drastically reducing lead times and minimum quantities. L.L. Bean
pursued a strategy of domestic sourcing in 1995, after a forecasting error with an overseas
supplier based in Portugal caused them to be stuck with huge inventories that resulted in poor
cash flow and large inventory markdowns. According to the study by Carolyn Wimple and Ernest
Vosti of the Lawrence Livermore National Laboratory in 1997, L.L. Bean was able to find a
domestic partner that changed their operations processes to meet L.L. Beans desire for smaller
lot sizes and more frequent deliveries. The domestic sourcing strategy allowed L.L. Bean to take
more than a month out of the supply delivery time and enabled them to adjust their orders as the
season progressed. The supplier benefited because their overall operations became more efficient
and they were awarded with a significantly larger share of L.L. Beans overall business. Typical
inventory carrying costs (the costs associated with holding inventory such as capital, storage,
material handling, theft, obsolescence and damage) hover around 20-30% of the value of the
inventory for most companies. Because of this, it is not difficult to understand why there is such
a focus on reducing inventories, leaning out supply chains and more efficiently using cash and
resources. Garment assembly companies in Asia and particularly in Thailand are already feeling
these pressures, but textile companies still remain shielded from matching their operations with
the changing market needs of their direct and indirect customers. Other industries provide
examples of how effective supply chain management can allow certain companies to turn a
market on its head. Dell Computers used a strategy that relied completely on simplifying its
supply chain enabling it to sell directly to customers at a far lower price than its competitors. By
rationalizing its supply base to less than 100 suppliers and concentrating on planning, forecasting
and designing a flexible manufacturing system Dell is able to hold only 5 days of inventory at
any one time, versus over 30 days for Compaq computers and more for its other competitors.
This frees up Dells cash and resources to use on capital projects, research and development and
acquisitions to grow the business. More importantly, it results in higher quality and lower prices
to its customers. As a result, Dell Computers is now the leading computer company in the world
and some companies have had to exit the personal computer market in part or completely
(Packard-Bell, IBM-for desk tops, Gateway for international sales). Dell Computers used its

138

supply chain as a weapon to implement its marketing plan and business strategy based on
offering the lowest-cost, shortest delivery and highest quality product offering. As it has
progressed, Dells fundamental supply chain strategy has remained solid in the face of an
uncertain economy, increased competition and more demands from customers. Dell has
successfully incorporated information technology, especially taking advantage of the Internet, to
augment and support an already sound business and supply chain strategy.
Among the other industries that have attempted to lean out their supply chains with varying
degrees of success are the automotive and the aerospace industries. Toyota pioneered the use of
JIT and lean production in its manufacturing systems and was able to take significant marketshare away from the American automotive companies. Toyotas total production costs were much
smaller because they effectively partnered with suppliers and using Total Quality Management
(TQM) drove quality principles into their suppliers and their suppliers suppliers. By ensuring
only quality products were delivered to their assembly lines, the amount of inventory Toyota had
to carry to address quality defects was significantly reduced. Quality in the cars at the same or
cheaper prices is what initially allowed Toyota to steal market share and develop brand value in
the United States. Boeing and to some extent Airbus have tried to emulate the automotive model
of production. Boeing has tried to push quality up the supply chain to its suppliers. In larger
suppliers such as Honeywell Aerospace, this has even led to the formation of on-site supplier
development teams that assist suppliers in reducing costs, lead-times and quality defects in
exchange for long-term agreements, year over- year price reductions and cost savings sharing
from the direct work of the consulting teams. The result has been that suppliers who have
participated in this program have seen higher volumes, revenues and more predictable demand
while Honeywell (and Boeing) have seen lower costs, better quality and better delivery.
Technology plays an increasingly important role in the execution of company operations.
Electronic Data Interchange (EDI), Enterprise Resource Planning (ERP), Manufacturing
Resource Planning (MRPII) and Material Requirements Planning (MRP) have all changed the
fundamental nature of how business is conducted. One needs look no further than the automotive
industry for the effective integration of technology to improve supply chain management and
increase value to the customer. Chrysler, Ford and General Motors have collaborated on a
common platform for EDI that mandates the sharing of schedules (both from the automobile
company to the supplier and from the supplier to the automobile company) as well as extremely
tightly coordinated delivery schedules. This tight communication link is necessary because most
major automobile assemblers require hourly deliveries by suppliers for high value components
such as doors, seats, engines and modular dashboard units to minimize on-floor inventory and
cash outflow. Textile and garment manufacturers have been slow to incorporate new information
technology into their processes. As customers place more emphasis on leaner production, smaller
lot sizes and more frequent deliveries, suppliers will need to align their technologies and their
processes to meet customer requirements.
Textile manufacturers have long relied on capital spending for equipment that is designed to
produce only in large volumes. Processes must be put into place to support the requirements of
customers and customers customers or risk losing business to more forward-thinking and lowercost competitors. Adidas and Nike have already incorporated sophisticated supply chain software
and tools to manage their supply networks and minimize non-productive inventories. Adidas has

138

mandated that its suppliers be able to receive a planning schedule from them via EDI. This
enables suppliers to see real-time scheduled demand from Adidas (but not Adidass actual
customer demand), and allows for advance planning to respond accordingly. Other textile and
garment consuming companies have similar systems in place or a plan to add them in the near
future. More and more, information and the ability to receive and send it are being seen as an
absolute necessity to being a player in the global marketplace. However, the addition of
information technology will not fix dysfunctional or antiquated processes. Information
technology enables users to speed up the processes that they performtherefore if a process
usually yields poor information or results, information technology will allow it to yield the same
poor information and results many times faster. To effectively utilize information technology to
better manage supply chains, companies must first look inward and fix or change their internal
processes before identifying ways in which they can be automated and supported by technology.
The process of planning, preparation and execution; plan the activities of the enterprise, prepare
the necessary resources to execute the plan and then execute to the plan is a fundamentally
necessary way to run a business that is commonly integrated into the operations of many of
todays best-performing companies. Of course, none of these strategies and partnerships can be
very effective without the sharing of information, building of trust and the use of systems to
enable information to be exchanged and managed without an undue burden on participants.
A word of caution is warranted in regards to those who are tempted to view supply chain
management only as a cost cutting tool. Cost cuts without direction can sometimes directly affect
services that are valued by a customer. Too often, companies have set a goal of managing costs
and improving operations, without first determining what is truly valued by the customer. The
recent cutback in services by all U.S. airlines except Continental in the wake of the September 11
bombings demonstrate that cutting costs too much can outweigh the expected cost-savings
benefits. While most U.S. domestic airlines cut amenities such as meals, pillows, blankets and inflight movies, Continental Airlines retained these services and added more, such as self-check-in
kiosks and expanding a terminal in Newark New Jersey. (McCartney, Scott. Continental
Airlines Keeps Little Things, And It Pays Off Big. Wall Street Journal, February 5, 2002: 1, 14.)
Continentals load factor (% of occupied seats on each flight) was down much less than any of its
competitors. As a result, Continental Airlines reported a narrow loss of only $95 million for the
year, versus losses of $2.1 billion for United Airlines and losses of over $1 billion for three of the
other of the six largest airlines. (Id.) The lesson to be learned, a company uses supply chain
management solely as a cost cutting tool at its own peril.

Strategic Procurement:
Strategic Procurement is an area that is frequently undervalued by companies. It is often
interpreted as a mission to hammer suppliers to get the lowest price possible. This is usually not
only ineffective, but also counterproductive. Companies have begun to realize that there is a limit
to how much can be generated in savings by such tactics. Companies that have focused on
developing relationships with only a few strategic suppliers have saved significantly more in the
long run. In addition, many companies procurement personnel spend more than half of their
time filling out paperwork such as requisitions, requests for quotations, quality reports, forms for
accounting and finance, forms for production and dealing with internal requests for purchases.

138

This seems rather unproductive and potentially costly. In 1992, Golden Gate University in
California conducted a study of Californian manufacturing companies and predicted that by the
year 2000, 80% of product costs will be from purchased materials. (From APICS, Basics of
Supply Chain Management, citing a Golden Gate University 1992 Study of Northern California
Manufacturing Enterprises). And a study by Chapman, Dempsey, Ramsdell and Reopel of
McKinsey, 1997, found that purchased goods and services could account for 50 to 80 percent of
a companys expenditure. With so much product value tied up in the costs of procurement, an
effective and planned strategy for partnering with suppliers is a must for implementing a lean
supply chain strategy no matter what the industry. When companies look to implement a strategic
procurement program, they should again look at what their customers will truly value and try to
shape the supply chain within their influence to meet those value expectations as efficiently as
possible.
The benefits to a strategic procurement program are many:
Lower total costs
Higher quality
Better delivery
Fewer suppliers
Able to outsource more non-core operations to trusted suppliers.
Of course, nothing comes for free. Some of the obstacles and risks of strategic procurement are:
Fewer suppliers may result in less bargaining power (depending upon the % of a suppliers
business your company represents)
It is more difficult to respond to quality issues by utilizing other sources
The per piece or per order price may be more (again highlighting the need to look at total
system cost versus price)
Delivery problems can significantly affect operations
The functional and technical capability of suppliers sometimes limits the quantities and types of
parts that can be purchased.
Already, many manufacturers are seeing order sizes shrink, and frequency of delivery increase.
To meet these customer requirements a companys suppliers must be similarly aligned to meet
the needs of the marketplace and the customer. In the aerospace and automotive industries, a tier
system has been developed consisting of many levels of suppliers, assemblers and an end
assembler/marketer. Each tier works with its immediate suppliers to operate as efficiently as
possible. As the textile and garment industry further develop, it is very possible that a similar
system will emerge, and to some extent already has begun to take form. The branded apparel
companies would mirror the OEM assemblers in the automotive and aerospace industries (e.g.
Nike = Boeing). The garment assemblers would represent the 1st tier automotive and aerospace
suppliers such as Honeywell, Johnson Controls, Delphi, Visteon, etc. As the branded apparel
marketers become increasingly concerned with excess costs and inventories in the supply chain,
they will seek partners who understand their needs and can provide the lowest total cost product
and service. This does not necessarily mean the lowest price as high-quality; fast delivery, low
inventories and research and development capabilities can also have significant influence on the
total costs of providing a product to a customer.

138

A strategic procurement program should not be taken on lightly, and should be given the
necessary resources and skilled personnel to perform its role. To highlight the risks of engaging
in strategic procurement without the necessary skills, research or controls look at Ford motor
companys recent purchasing fiasco as reported by Gregory White in the Asian Wall Street
Journal. In January of 2002, Ford shocked analysts and investors with a $1 billion U.S. write-off
of their stockpile of precious metals (used primarily in catalytic converters). Fords purchasing
group used the same techniques they had used in buying commodities such as steel and copper.
While Fords procurement group was stockpiling large amounts of the precious metals (primarily
palladium), their engineering group had been working to shrink the need for it. This is an
example of failed planning and internal communication more than a failed execution of strategy,
and as a result Ford lost about $1 billion. Although most industries typically dont deal in
precious metal bought in such large volumes, similar planning and execution mishaps have
happened all over the world in many different companies and industries.
3.3.40.Monitoring The Supply Environment
Monitoring the Supply Environment:
Supply managers are responsible for protecting their firms from unexpected threats or shocks
from their supply world in the form of price increases or supply disruptions. These threats
include material shortages which effect one or more industries that supply the firm. Shortages
will affect both the price & availability of purchased materials & supplies. The firm should take
actions to minimize the impact of such shortages by monitoring changes in the supply
environment such as follows:
Changes in legislation that may affect the workplace. Such changes can impact both
price & availability. An example is a new Environmental Protection Agency regulation
on toxic wastes that affects one or more suppliers.
War or other conflicts, which may disrupt the availability of materials the firm or its
supplier require. Firms that proactively monitor the environment take defensive action in
anticipation of the resulting material shortages & price increases.
A consolidation among suppliers. The extreme case is consolidation to the point of
monopoly. Such changes may require a change in the firms supply strategy.
Supply manager should have early information that will allow them to take advantage of
favorable market conditions. Opportunities result both from additional capacity coming on-line
& from reductions in demand for required materials, equipment or services. The responsibilities
of protecting their firms from unexpected threats or shocks motivate supply professionals to
develop supply monitoring systems. One of the challenges confronting todays supply
professional in monitoring is the abundance of data. Monitoring supply markets is a fascinating
& challenging activity. The out lines of six-step environment monitoring strategy:
Determine the cost, supply & technology drivers of the materials & services that a
supply manager is watching.
Identify the major suppliers & customers of the materials & services.
Determine the sources of information for those drivers.

138

 Build a model that predicts the material (or service) behavior.

Monitoring the model to determine its accuracy.
Continuously make improvements as new relationships are understood & additional
data becomes available.
Supply environment monitoring coupled with timely reaction to the threats & opportunities that
are identified is a key strategic activity, which has significant impact on the firms success &
survival.
Supply Research / Data Analysis:
Once the needed data or information has been collected & identified which is related to my
project is being research & analysis those data which need to be functionally described, and
when the size of the contemplated supply management research & analysis should be conducted
to investigate the availability to meet the needs of the merchandising department. By this
research & analysis also should provide information to aid in selecting a strategy appropriate to
the situation. From the data analysis I found some functional involvement in the merchandising
department with supply chain management system those are as follows:
The availability of standard strategic plans suitable to meet the needs (with or without
modification).
The terms, conditions & prices under which such products are sold.
Any applicable trade provisions or restrictions or controlling laws.
The performance characteristics & quality of available products, including quality
control & test procedures followed by the manufacturers.
Information on the satisfaction of other users having similar needs.
Industry merchandising supply chain management practice, such as continuous, periodic
& batch time schedule.
The distribution & support capabilities of potential suppliers.
Manufacturing requirements for functional characteristics, workability of materials &
manufacturability.
Supply managements requirement to procure material without difficulty & with
adequate competition from reliable sources of supply.
Monitoring system to follow up by the merchandising department of the firms supply
environment.
Collaboration with the organizations IT function to develop a data management system
which facilitates strategic supply planning.
Designing & managing the firms supply base in line with its strategic objectives.
Identifying the advantages of specific potential supply alliances & then developing &
managing them.
The development procedure of managing the firms supply chain & supply network.
Study methods of the understanding of the industries which provide key materials,
equipments & services; their cost structure, technologies, competitive nature & their
culture.
Early involvement in the development of requirement which reduces risk & time
schedule.
Strategic sourcing or supply base management system.

138

Evaluation of sourcing strategies & suppliers capability.

Structure the supply relationship jointly with suppliers & develop action plans to build
the required infrastructure.
Implement the plan & organize for continuous improvement.

3.3.41.Supply Chain Management Problems

Supply chain management must address the following problems:

Distribution Network Configuration: Number and location of suppliers, production

facilities, distribution centers, warehouses and customers.

Distribution Strategy: Centralized versus decentralized, direct shipment, Cross docking,

pull or push strategies, third party logistics.

Information: Integrate systems and processes through the supply chain to share valuable
information, including demand signals, forecasts, inventory and transportation etc.

Inventory Management: Quantity and location of inventory including raw materials,

work-in-process and finished goods.

Cash-Flow: Arranging the payment terms and the methodologies for exchanging funds
across entities within the supply chain.

Supply chain execution is managing and coordinating the movement of materials, information
and funds across the supply chain.

3.3.42.Supply Chain Business Process Integration

PRINCIPLE 7:

138

Adopt channel-spanning performance measures to gauge collective success in reaching the enduser effectively and efficiently.
To answer the question, How are we doing? most companies look inward and apply any
number of functionally oriented measures. But excellent supply chain managers take a broader
view, adopting measures that apply to every link in the supply chain and include both service and
financial metrics.
First, they measure service in terms of the perfect orderthe order that arrives when promised,
complete, priced and billed correctly, and undamaged. The perfect order not only spans the
supply chain, as a progressive performance measurement should, but also view performance
from the proper perspective, that of the customer.
Second, excellent supply chain managers determine their true profitability of service by
identifying the actual costs and revenues of the activities required to serve an account, especially
a key account. For many, this amounts to a revelation, since traditional cost measures rely on
corporate accounting systems that allocate overhead evenly across accounts. Such measures do
not differentiate, for example, an account that requires a multi-functional account team, small
daily shipments, or special packaging. Traditional accounting tends to mask the real costs of the
supply chainfocusing on cost type rather than the cost of activities and ignoring the degree of
control anyone has (or lacks) over the cost drivers.
Deriving maximum benefit from activity-based costing requires sophisticated information
technology, specifically a data warehouse. Because the general ledger organizes data according
to a chart of accounts, it obscures the information needed for activity-based costing. By
maintaining data in discrete units, the warehouse provides ready access to this information.
To facilitate channel-spanning performance measurement, many companies are developing
common report cards. These report cards help keep partners working toward the same goals by
building deep understanding of what each company brings to the partnership and showing how to
leverage their complementary assets and skills to the alliance's greatest advantage. The
willingness to ignore traditional company boundaries in pursuit of such synergies often marks the
first step toward a pay-for-performance environment.

138

A critical step in the process is setting explicit outcome targets for revenue growth, asset
utilization, and cost reduction. (See Exhibit 5.) While traditional goals for costs and assets,
especially goals for working capital, remain essential to success, revenue growth targets may
ultimately be even more important. Initiatives intended only to cut costs and improve asset
utilization have limited success structuring sustainable win-win relationships among trading
partners. Emphasizing revenue growth can significantly increase the odds that a supply chain
strategy will create, rather than destroy, value.
Implementing the seven principles of supply chain management will mean significant change for
most companies. The best prescription for ensuring success and minimizing resistance is
extensive, visible participation and communication by senior executives. This means
championing the cause and removing the managerial obstacles that typically present the greatest
barriers to success, while linking change with overall business strategy.
Many progressive companies have realized that the traditionally fragmented responsibility for
managing supply chain activities will no longer do. Some have even elevated supply chain
management to a strategic position and established a senior executive position such as vice
president-supply chain (or the equivalent) reporting directly to the COO or CEO. This role
ignores traditional product, functional, and geographic boundaries that can interfere with
delivering to customers what they want, when and where they want it.
The merging of collaborative processes and e-commerce has created the concept of c-commerce.
"C-Commerce will become a standard way of conducting business, and companies that do not
pursue it may find their very existence threatened."
"C-Commerce yields a more synchronized supply chain, which yields better customer service,
higher quality, lower inventory, and faster delivery". Gartner Group, May 2000
"The new supply chain game is becoming a competition between effective supply networks
rather than individual corporations, and the gap between the leaders and followers is growing
rapidly." Charles Poirier, CSC
James L Lovejoy has been the Project Director for the AMTEX (American Textile Partnership)
DAMA (Demand Activated Manufacturing Architecture) Project since the research began in
January 1994. In this capacity, Jim manages the project office, sets direction for the supply chain
research and development and coordinates the industry participation. At Textile Clothing

138

Technology Corporation in Cary, NC, Jim is managing the DAMA Project's knowledge transfer
and advising companies on how to obtain benefit from the research.
Sourcing and Supply chain Management:
Sourcing and supply chain management explain how supply chain management has emerged as
critical function in improving the effectiveness of the suppliers used by buyers in fashion rating
Effectiveness in this context is judged by a number of criteria, which are discussed in detail
letter in the chapter, but which ultimately must result in increased overall profitability, in their

3.3.38.Supply Chain Management In Apparel Industry

Supply chain is a process by which goods are transferred from supplier to buyer in garment
industries in exchange of order, L/C and payment.
Payment

R
M

F
G

Payment

R
M

Ware
House

F
GMTS good

Buyer

out
let dep

Suppliers

Order

Order

L/C

Advanced applications of Supply Chain Management (SCM) can be seen in the retail industry,
especially in the apparel sector. It adds value to the business by reducing the total costs spread
across the trading process by manipulating the speed and certainty of reply to the market. It
enables the industry to remain competitive both at the domestic and global markets.
To capture good profits, the apparel industry must bring adequate change in its supply chain
system. Managing the supply chain requires a balancing act, meeting multiple needs. Retailers
must focus in delivering high service levels, and also keep low costs so as to remain competitive.

138

Since the supply chain involves a hefty expenditure, remodeling, or modifying their existing
networks will help the business to reduce their inventory costs, and increase operating
efficiencies thereby ultimately gain more profits.

In today's world of business, the environment has undergone drastic changes, and has become
more competitive than ever before. With the increasing reach of media, and globalization of
business, one countrys products are available in other countries in a wink. SCM aids the
organization to evaluate their entire operation, and restructure it in such a way, that, they can
focus on its core competencies.
It also aids the business in outsourcing those processes, which is out of bounds of their core
competencies. Selecting the appropriate system of SCM will not only enhance the companys
market position, but also provide them with strategic decisions in choosing the right partners,
manpower and resources.

138

The apparel industry has practiced the philosophy of SCM in the name of Quick Response (QR).
QR was originally initiated by the need to reinforce the U. S. domestic apparel manufacturers'
competitive advantages against the global competition from low labor wage countries in the
1980s (Dickerson, 1995). Depending on how QR is defined, one can argue that SCM is a more
sophisticated and evolved form of QR. Some researchers regard QR as identical with SCM
(Byrne & Young, 1995). According to the definition repeated by researchers, QR is a concept
that requires three key philosophical aspects:
communication of information between trading partners
reduction of time in the soft goods pipeline
and consumer responsiveness
"QR is a new strategy to optimize the flow of information and merchandise between channel
members in order to maximize consumer' satisfaction. This strategy is accomplished by close
working partnership and new processes (e.g., electronic reorder) in the manufacturing and
reorder. QR emphasizes the importance of timely flow information and merchandise between
trading partners, and the reduction of lead-time and inventory throughout the chain to maximize
the value-added activities in the chain. With these concepts, QR is one example of SCM already
executed by the apparel industry; however, the range of the involved members of QR as noted in
previous studies is rather focused on the linkage between apparel manufacturers and retailers.
This does not include second tier suppliers such as fiber producers or primary textile producers

138

(i.e., yarn, fabric). With QR implementation, the apparel industry has reported many benefits in
the supply chain which are identical to the benefits of efficient SCM. Despite the many advances
due to QR, the apparel industry still has problems due to the length of the chain and its
traditional culture. These factors have created long lead-times and poor Co-ordination among
trading partners. Long lead-time has been the typical problem in many studies. From the point
fiber is produced and transformed into yarn, fabric, and finished products and delivered to the
retail shop a product takes 56 to 66 weeks. To be more specific, production lead-time from yarn
to finished garments typically ranges from approximately 6 to 16 weeks, depending on product
complexity and the planning process (Sorrell, 1984). Between the retail and manufacturing
channels, lead-time from a retailer's order placement to the delivery by manufacturer is also very
long, approximately 24 to 36 weeks. The time span needed to source materials, convert them into
products, and move them into the marketplace is not in line with most consumers' expectations.
This excessive lead-time results in too much of the wrong inventory and too little of the right
inventory at retailers, and consequently a profit loss due to stock outs and increased markdowns.
QR's emphasis on information sharing about actual customer demand enables chain members to
better understand the process at each segment, eliminate non-value activities, and improve endto-end chain visibility. Those retailers take advantage of reduced lead-times through QR
implementation traditionally in the apparel industry; each chain member runs its business from
separate concerns and interests, sometimes causing conflicts in the relationships with chain
partners. In the apparel industry, there was very little coordination among the companies. Each
segment built production schedules based on their own forecasting method, which may not
accurately represent the actual demand. Lack of information sharing on actual demand between
chain members creates long lead times and high levels of inventory with consequent risks of
obsolescence at each segment. This practice is still prevalent in the apparel industry.
CREATING AGILE SUPPLY CHAINS IN THE FASHION INDUSTRY:
Fashion markets are synonymous with rapid change and, as a result, commercial success or
failure in those markets is largely determined by the organizations flexibility and
responsiveness.
Responsiveness is characterized by short time-to-market, the ability to scale up (or down)
quickly and the rapid incorporation of consumer preferences into the design process. In this
paper it is argued that conventional organizational structures and forecast-driven supply chains
are not adequate to meet the challenges of volatile and turbulent demand which typify fashion
markets today. Instead, the requirement is for the creation of an agile organization embedded
within an agile supply chain
actual consumer demand.

138

Figure: 13, Inventory hides demand.

The fundamental problem that faces many companies - not just those in fashion industries - is
that the time it takes to source materials, convert them into products and move them into the
market place is invariably longer than the time the customer is prepared to wait. This difference
between what might be called the logistics pipeline and the customers order cycle time is
termed the lead-time gap. Conventionally, this gap was filled with a forecast-based inventory there was no other way of attempting to ensure that there would be product available as and
when customers demanded it.
These lengthy supply pipelines often result in revenue losses in the final market. Table 1
provides an indication of the size of these losses and of note is the cost of carrying inventory. The
biggest item is forced markdowns - mainly at retail - with the total losses amounting to over 14%
of retail sales. A distinction is made between promotional markdowns, e.g., special sales, and the
marking-down that occurs out of necessity when a season ends and unwanted goods must be
moved to make way for new merchandise forced markdowns.

138

Manufacturer Wholesaler Retailer:

It is against this background that the Quick Response (QR) movement originated in 1984 from a
textile industry research programmer in the US. Studies at the time revealed a clothing industry
pipeline in which inventories and work-in-progress had reached alarming levels and it is a
situation that can still be seen in many industries. The nature of Quick Response will be explored
later.

SUPPLY CHAIN MANAGEMENT IN MERCHANDISING:

A supply chain is the stream of processes of moving goods from the customer order through the
raw materials stage, supply, production, and distribution of products to the customer. All
organizations have supply chains of varying degrees, depending upon the size of the organization
and the type of product manufactured. These networks obtain supplies and components, change
these materials into finished products and then distribute them to the customer.
Managing the chain of events in this process is what is known as supply chain management.
Effective management must take into account coordinating all the different pieces of this chain
as quickly as possible without losing any of the quality or customer satisfaction, while still
keeping costs down.
The first step is obtaining a customer order, followed by production, storage and distribution of
products and supplies to the customer site. Customer satisfaction is paramount.

138

Included in this supply chain process are customer orders, order processing, inventory,
scheduling, transportation, storage, and customer service. A necessity in coordinating all these
activities is the information service network.
In addition, key to the success of a supply chain is the speed in which these activities can be
accomplished and the realization that customer needs and customer satisfaction are the very
reasons for the network. Reduced inventories, lower operating costs, product availability and
customer satisfaction are all benefits which grow out of effective supply chain management.
The decisions associated with supply chain management cover both the long-term and shortterm. Strategic decisions deal with corporate policies, and look at overall design and supply
chain structure. Operational decisions are those dealing with every day activities and problems of
an organization. These decisions must take into account the strategic decisions already in place.
Therefore, an organization must structure the supply chain through long-term analysis and at the
same time focus on the day-to-day activities.
Furthermore, market demands, customer service, transport considerations, and pricing
constraints all must be understood in order to structure the supply chain effectively. These are all
factors, which change constantly and sometimes unexpectedly, and an organization must realize
this fact and be prepared to structure the supply chain accordingly.
Structuring the supply chain requires an understanding of the demand patterns, service level
requirements, distance considerations, cost elements and other related factors. It is easy to see
that these factors are highly variable in nature and this variability needs to be considered during
the supply chain analysis process. Moreover, the interplay of these complex considerations could
have a significant bearing on the outcome of the supply chain analysis process.

138