Supply Chain Management

1.
Understanding the Supply Chain

 „Supply Chain is essentially a global network
used to deliver products and services from raw
materials to end customers through an
engineered flow of information, physical and
cash.‟
 Supply chain consists of all stages involved
directly or indirectly in fulfilling a customers
request/ requirement. It includes not only the
manufacturer and suppliers but also
transporters, warehouses, retailers and
customers themselves.
1. Understanding the Supply Chain
•A typical Supply chain
• A typical supply chain may involve many participants. But

some orders may pass through only a few. Not all
participants will be in all supply chains. It will depend on
the needs of the customer and the roles of the
participants fulfilling these needs.
•The supply chain in reality looks like a web :-
 The three flows in a supply
chain are:
 Product
 Information
 Funds
 The product flow includes
the movement of goods
from a supplier to a
customer, as well as any
customer returns or service
needs. The information flow
involves transmitting orders
and updating the status of
delivery. The financial flow
consists of credit terms,
payment schedules, and
consignment and title
ownership arrangements.
 All organizations have supply chains of varying
degrees, depending upon the size of the organization
and the type of product manufactured
 The core purpose of any supply chain is to satisfy
customer needs and generating profits for itself.
 The objective of every chain is to maximize the overall
value generated through –
 Faster and timely delivery
 Improved quality and services.
 Reduced cost
 The value generated by a supply chain = (Worth of
the final product to the end customer) – (the effort
spent by the supply chain in fulfilling the customer‟s
need
 The strength of a supply chain is determined by
its weakest link.
 So for an individual company, both upstream
supplier network and the downstream
distribution should be strong.
 All functions within an organisation contribute
to the success or failure of a supply chain.
These internal functions include the different
processes used in transforming the inputs
provided by its suppliers to outputs needed by
its customers.
 Supply chain is a series of processes and

flows between different supply chain
stages.
 There are two ways to view the processes
involved in a supply chain
 Cycle view
 Push/pull view.
 Push/Pull View:
 In push processes the manufacturer anticipates the
demand and produces to stock. So at the initiation
of a push process the demand is not known. In this
the finished good inventory carried by the
manufacturer is high but the response time to
execute the order is low.
 In pull processes the manufacturer initiates the
execution only after he gets a firm order from the
customer. The material dispatched immediately
after the manufacturing is completed. In this case
the finished good inventory carried is low but the
order execution time is obviously higher.
2. Supply chain management
 „Supply chain is defined as the systematic, strategic
coordination of the traditional business functions and
the tactics across these business functions within a
particular company and across businesses within the
supply chain, for the purposes of improving the long
term performance of the individual companies and
supply chain as a whole.‟
 In other words SCM is about the coordination of
supply chain flows (product, information, money)
across functions and across companies to achieve
competitive advantage for individual companies in the
supply chain and supply chain members collectively.
 “SCM is a set of approaches utilized to efficiently
integrate suppliers, manufacturers, warehouses and
stores, so that merchandise is produced and
distributed at right quantities, to the right locations,
and to the right time, in order to minimize systemwide
costs while satisfying service level requirements” -
Simchi-levi, Kaminsky et all.
All the facilities that effects the cost and contributes
towards meeting the customer requirement are in
the ambit of SCM.
Total systemwide cost ( transportation/ distribution/
inventory/ WIP/ finished goods costs) in totality
needs to be minimized.
It integrates of all components in supply chain from
strategic / tactical / operational point of view.
 Few characteristics of SCM to be noted
 SCM strategies are linked to other strategies of the
company. It should be aligned to the overall strategy
of the company. Development chain (new product
introduction) impacts SC.
 Conflicting objectives of members within SCM needs
to be resolved
 SCM is challenging due to the inbuilt uncertainties
and risks in SC.
 Supply Chain Challenges
 Achieving Global Optimization
 Conflicting Objectives
 Complex network of facilities
 System Variations over time
 Managing Uncertainty
 Matching Supply and Demand
 Demand is not the only source of uncertainty
 Key issues in SCM
 Distribution network configuration
 Inventory control
 Production sourcing
 Supply Contracts
 Distribution strategies
 Supply Chain Integration and strategic partnering
 Outsourcing and off-shoring strategies
 Product design
 Information Technology and Decision support
systems (DSS)
 Customer Value
 Smart pricing
 Local issues
3. Decision making in Supply chain
 Decision Phases in Supply Chain
 Strategy & Design
 Supply Chain Planning Strategy & Design
 Supply Chain
Operations Planning
Operations
• Supply Chain Strategy & Design involves:

 Location & capacity of production and warehouses
 Products to manufacture and in which locations
 Mode of transportation
 Types of information systems to be used
 Strategic sourcing decisions

• Supply Chain Planning involves:
 Markets to be supplied & from which
location
 Planned build-up of inventory
 Subcontracting of manufacturing
 Timing and size of market promotion
 Handling uncertainty in demand, foreign
exchange fluctuations
 Establishing production plan under fixed
strategic parameters
• Supply Chain Operations involves:
 Decisions over individual customer
orders (daily, weekly)
 Less uncertainty about demand
information
 Exploit reduction of uncertainty to
optimize performance
 Establish deliver dates
 Establish order fill rate

 A visual framework for structuring drivers:
Competitive strategy
Supply Chain Strategy
Efficiency Responsiveness
Supply chain structure
Inventory Transportation Facilities Information
Drivers
 Competitive strategy: It defines the set of
customer needs the company seeks to satisfy
through its products and services. E.g.:- Wal-
Mart seeks to provide high availability of a
variety of reasonable quality products at low
prices.
For the execution of the company‟s
competitive strategy each function, such as
Marketing, Manufacturing, Finance and
Logistics, has its own strategies known as
functional strategies.
 A Supply Chain Strategy: It specifies the way the following are
done to fulfill its competitive strategy:
 procurement of Raw materials
 Transportation of materials to & from the company
 Manufacture of the product or operation to provide the

service.
 Distribution of the product to the customer along with any
follow-up service that may be required.
 Decisions regarding the Supply Chain drivers are part of Supply
Chain Strategy. Supply Chain drivers are:
 Inventories,
 Transportation,
 Operating Facilities
 Information flows.
 Responsiveness of Supply Chain: This is the supply
chain‟s ability to respond to the following needs of the
customer:
 Wide range of quantities demanded
 Short lead time
 Wide variety of products
 Highly innovative products
 High service level.
 Supply Chain efficiency : This indicates the cost of

making and delivering a product to the customer.
Responsiveness comes at a cost. Increasing
responsiveness increases cost. So a „strategic fit‟
between responsiveness and efficiency is to be struck.
 Supply Chain Structure: This is formed by the four drivers -
Inventory, transportation, Facilities and Information.
 Inventory: This includes Raw material, WIP, Finished Goods
within a supply chain.
Increase in inventory leads to increase in Responsiveness
but decreases Efficiency.
 Transportation: This means moving of material/ inventory
from point to point.
Quicker mode ( Air vs Road/Rail) increases Responsiveness
but decreases Efficiency.
 Facilities: These are created to facilitate operations like
Production sites, storage sites.
More number warehouses increases Responsiveness but
decreases Efficiency.
 Information: This includes data and analysis regarding the
customers or the other three drivers of the supply chain.
4. Inventory – in supply chain structure
 In a supply chain the presence of inventory is due to
mismatch between supply and demand.
 The inventory plays the role of „decoupler‟. It brings
about a smoothening effect and reduces the cost due
to shortage of supply.
 It helps in economies of scale. Larger lots can be
manufactured and stored for future supply.
 Inventory is also used to increase the amount of
demand that can be satisfied by having product ready
and available when customer wants it. It plays a
significant role to support a firm‟s competitive strategy
 Inventory increases responsiveness but lowers the
supply chain efficiency by adding cost (inventory cost)
in the supply chain.Hence „inventory decisions‟ are
critical for an organisation.
 Inventory decisions are related to the following :
 Cycle Inventory: This is due to the purchase/ production/
transportation of material in large lots to use the advantage
of economies of scale. But with increase in lot size the
carrying cost increases. For instance a retailer has to decide
how much to order for replenishment and how often to
place these orders.Here the trade off is between carrying
cost and ordering cost.
 Safety Inventory: This held in order to take care of two
eventualities. 1. The actual demand rate exceeding the
expected demand rate during the lead time. 2. The actual
lead time exceeding the expected lead time. (Lead time is
the gap between when the order is placed and when it is
received.)The Trade off here is between stock-out cost and
cost of holding the buffer stock for such eventualities.
 Seasonal inventory: This is relevant when there are
phases of low and high demand. A company may
decide not to reduce rate of production during the
phase of low demand and carry seasonal inventory
or it may decide to lower the rate of production to
match the low demand. The decision will be a trade
off between the cost of changing the rate
production and the cost of holding inventory. If the
cost of changing the rate of production to match
the demand is higher than the cost of carrying the
seasonal inventory then the company will decide to
smoothen the production rate and carry seasonal
inventory.
 In a supply chain inventory can be in three forms
 Raw material
 WIP (Work in progress)
 Finished product
 Inventories are held at various stages of supply chain

due to following reasons:
 Unexpected change in customer demand
 Uncertainty in -
 availability (in terms of quantity and quality) ,
 price
 Delivery lead times
 Economy of scale during transportation.

 There are basically two systems followed in inventory
control
- Fixed order quantity system ( follows Continuous
review policy)
- Periodic review system ( follows Periodic review
policy)
 Fixed order quantity inventory system (Economic lot size
model ):
In Fixed order quantity system the stock of an item is
continuously reviewed. A reorder level is decided on.
Whenever the stock of the item equals the reorder level,
a new order is placed. The time between orders can
vary. In this system, the order quantity ordered is
always fixed (i.e. same) and is equal to the EOQ. EOQ
(Economic Order Quantity) is calculated by a formula
which ensures that the total cost is minimum.
• Lead time is the lapsed time between the placement of an

order and its actual delivery.
 The effect of uncertainty:
 In
the model previously described two assumptions have
been made :
 it has been assumed that the demand is uniform but in reality
it is not so.
 It has been assumed that lead time is constant but in reality it
is not so.
 Because of the above two fluctuations ( demand and
lead time) a Safety stock (buffer stock) is held.
 The safety stock for uncertainty in demand =
Where z = safety factor , STD = standard deviation of

daily demand, L = Lead time.
 Safety stock for lead time fluctuation =
 In Periodic review (P) system the stock position is

reviewed periodically rather than continuously. A new
order is always placed at the end of each review and the
time between order is fixed. The quantity that is
required to replenish the stock back to a fixed
predetermined level, is the order quantity for the review
point. Demand between two orders varies so the order
quantity varies. So in this system the order quantity
varies but the time between orders remains fixed.
5. Transportation –in supply chain structure
 In recent times, improved transportation system has
resulted in
 Greater competition in wide spread market place.
 Deeper market penetration
 Desired/ optimum volume sourcing.
 Shorter lead times.
 Reduced prices due to increased competition and
transportation cost.
 There are five basic transportation modes (service
choices):
 Rail
 Road
 Air
 Water
 Pipeline
5. Transportation –in supply chain structure
 Factors considered while making a transportation
service choice:
 Price
 Transit time
 Transit time variability
 Safety (Chances of Loss and damage).
 General Characteristics of Single service Choices
1. Rail: long hauler, - bulk hauler, - carrier of low valued
goods, - may be slow, - cheap.
2. Road (truck): smaller shipment sizes than rail, -door to
door service, -„one haul‟ service for FTL, -Wider spread
availability, - frequency advantage, -penetration/ access
better. – owned/hire/contract options available, -
limitations in size/weight and due to safety rules.
5. Transportation – in supply chain structure
 Air: Speed of origin to destination very high (but

overall delivery time should be considered), -
costliest mode, –dependability is good, -weight
and volume constraints, - Loss and damage risks
are low, - existence of cargo carriers/ air taxis/
regular airlines/ international carriers.
 Water: Inland service is limited, - limited access, -
containerised form movement.
 Pipeline: Limited range of service, - innovative
ideas being explored, - generally slow movement,
- transit time variation is low.
 Intermodal Transfer Services:
 Intermodal transportation is the use of more than one mode
of transport to move a shipment to its destination.
 There is an increase in the use of intermodal services.
 Major feature is free exchange of equipment between
modes, -container portion of the trailer being carried by
airplane or railcar being hauled by water carrier.
 Though several combinations are possible. But now only
Piggy back ( rail-truck) and Fishy back (Truck-water) are
seen in international movements. (Truck-air and rail water
may be feasible but have limited application)c .
 Commonly seen form is Piggy back ( Rail-truck). In this
truck trailers are put on rail and transported.This uses
flexibility of trucking and long-haul economy of rail.
 Containerised freight is a very popular form. Containers are
carried by rail, ships also by aircrafts (but has space/ weight
limitations).
 The main type of transport decisions that require to

be taken are:
Transport service selection decision:
For this the following need to be considered :
1.Freight rates
2. Reliability
3. Transit time
4. Loss damage – claims processing
5. Customer‟s preference / patronage
6. Carrier considerations .
Though freights are important considerations transit time
and reliability often are the most important factors.
 Vehicle routing and scheduling decision:
Several soft ware packages based on quantitative
techniques/ tools are available to help decision making .
 Shipment consolidation decision:
Material to be dispatched to several consignees
often need to be clubbed together for efficient
use of the space in a carrier. They need to be
unloaded at various points. Solutions regarding
consolidation need to be worked out together
with the vehicle routing and scheduling decisions.
6. Facilities – in supply chain structure
 Facilities in a supply chain are in the form of
production facilities, storage facilities (warehouse) etc.
 Facility decisions generally are location and capacity
related. Typical decisions are:
 Where should facilities be located?
 What should be the capacity of each of these facilities?
 What markets should each facility serve? - capacity
allocation.
 Which supply sources should feed each facility? – Market
and supply- source allocation.
 Location and capacity decisions have a long time
impact on a supply chain performance. It is expensive
to move or shut down a facility. Market and supply-
source allocation to facilities affects total production,
inventory and transportation costs incurred by the
supply chain to satisfy customer demand.
 Factors influencing facility decisions are the following:
 Strategic factors : Companies focusing on cost leadership will
tend to locate their plants in lowest cost locations. While
companies focusing on responsiveness will tend to locate
facilities closer the market.
 Technological factors: If economy of scale has a significant
role in the production technology of a product then having a
few high –capacity plants is meaningful.
 Macroeconomic factors: these include taxes, duties,
exchange rates. There are tax incentives in specific areas.
There are free trade zones where duties are relaxed for export
promotion.
 Political factors: It is related to political stability of a location
 Infrastructure factors
 Competitive factors: Whether to locate the facilities close to
competitors or away from them. ( Gas stations and retailers
often locate themselves close to each other because doing so
increases overall demand.
 A Popular facility location technique is Factor Rating
Method. The steps of factor rating method are:
1. Relevant factors are listed . Eg:- Proximity to suppliers,
Availability of labour, Cost of land and construction,
Wage rates, Transportation, Suitability of climate etc.
2. Each factor is rated according to its relative importance.
- Factor rating
3. Each location is rated on each facto. – Location rating.
4. Factor rating is multiplied by location factors i.e.

Weighted scores are calculated.
5. The total score is calculated for each location (by
adding up the weighted scores)
The location with the highest total score is the location of
choice.
7. Information – in supply chain structure
 Information is crucial to supply chain performance
because it provides the facts that supply chain
managers use to make decisions.
 Without information flowing effectively up and down
the supply chain it is impossible to meet customer's
expectation or to incorporate efficiency in the supply
chain.
 Information technology consisting of hardware and
software is used through out the supply chain to
gather and analyse information. It not only analyses
but recommends action.
 In the present business environment it is imperative
for a company to choose and use the right IT option
to be competitive.
 The basic components of the information flow are:
 Supplier information – What products can be purchased
from the supplier, at what price, lead time, payment
arrangements and status, order status etc.
 Manufacturing information – What products can be
made, how many, by what facilities, with what lead time, at
what cost, at what batch size etc.
 Distribution and retailing information – What is to be
transported where, in what quantity, in what mode, at what
price, how much is to be stored at each site etc.
 Demand information - Who is buying what, at what price,
where, and in what quantity. Demand information includes
forecasting and demand distribution information.
 Information is used while making decisions about:
 Inventory: Setting optimal inventory requires information –
 Demand pattern
 Inventory carrying cost
 Ordering cost
 Stock out cost
 Transportation: Information needed to decide on modes,

routing and shipment consolidation are:
 Costs
 Customer location
 Shipment sizes
 Facility: Decisions regarding location, capacity, scheduling

requires information on –
 Trade offs on efficiency and flexibility
 Demand
 Taxes/ Duties/ Exchange rates etc.

 ERP ( Enterprise Resource Planning) is an IT system which
monitors material, orders, schedules, finished goods inventory
and other information through out the entire organisation.
 ERP systems have several interrelated modules, each covering
different functions within a company. The modules are:
 Finance – related to revenue and cost data.
 Logistics – The module often has sub modules such as

transportation, inventory management and warehouse
management.
 Manufacturing: related to flow of the product through
manufacturing process.
 Order fulfillment: This keeps track of the progress of the
order in satisfying the demand.
 Human resources: The module deals with Human resource
related data requirement.
 Supplier management: The module tracks the delivery of
supplier products and monitors supplier performance.
 E- Business is execution of business in internet.
 Now firms are using the internet
 to provide information across the supply chain
 to negotiate prices/ contracts with customers and suppliers
 To enable customers to place and track orders
 To send bills to customers
 To receive payment from customers.
 The revenue is increased due to the E-Business because:

 Direct sales – helps in reducing intermediaries.
 24 Hrs service
 Effective and faster diffusion of innovation
 Flexible pricing possible because pricing information can be

relayed faster
 Auction sites help in business.
 Efficient fund transfer possible – much faster than cheques.

Procurement, Building & Managing Supplier
Relationships
 Purchasing is one of the key functions in the operation of a
modern manufacturing concern.
 Profits of manufacturers are affected by good purchasing
practices based on sound principles.
 Objectives of Purchasing function:
 The primary objective is to contribute toward the profits of

the manufacturing activity.
 Another important objective is to ensure the availability of
materials so that delivery schedules can be maintained, thus
keeping the customer satisfied.
 Specific objectives that support these goals are:
1. Procurement of the right material, in the right quantity,

and of the right quality.
2. Receipt or delivery of this material at the right place at the
right time.
3. Purchase of material from right source at the right price.
Relationships
 To fulfill the purchase objectives activities needed are :
 To ensure right source:
 Vendor selection ( - involving vendor evaluation system)
 Vendor development.
 Vendor relation support
 Vendor performance monitoring / rating.
 To ensure right quality:
 Inspection/ quality control / quality assurance procedures
 To ensure right cost:
 Price negotiation
 Inventory control
 Make or buy decision
 Value analysis
 To ensure right time and right place
 Material planning and scheduling
 Close follow-up and tracking.
Relationships
 Vendor selection and certification:
 The major factors considered for selecting a new supplier/
vendor are:
Quality. – QA system
Price and terms of supply of the merchandise.
Supplier‟s reputation
Supplier‟s production, infrastructure & financial capability.
Location of the supplier.
Record of timeliness and consistency of supplies.
Risks of discontinuity (for political, legal, IR reasons)
Capability to respond to emergencies.
 After the evaluation process is over an authorized body of
the organization certifies the supplier to be enrolled in a
„certified list of suppliers‟.
Relationships
 Vendor evaluation and monitoring:
 Vendors/suppliers to organized retailers are subjected to
regular evaluation or continual monitoring to ensure that
their standards do not fall.
 The buying department may carry out this analysis or it may
be the task of a separate department.
 The most common method of supplier evaluation is the
weighted multiple attribute evaluation system. The
performance is expressed in terms of quality rating, delivery
rating, price rating & service rating. These are summed up
to obtain the supplier‟s composite rating.
 If the rating of a vendor starts to fall in a significant way,
remedial or corrective steps are taken by the vendor.
Otherwise penalties are incurred.
Relationships
 QMS – ISO 9000
 ISO 9000 is a procedure for the international quality
certification of suppliers
 Many companies around the world require that the
companies that they do business with have ISO 9000
certification. In that way, despite possible language,
technology and cultural differences, a company can be sure
that its supplier meets uniform standards.
 ISO-9000 series of standards is related to Quality Assurance.
It is basically a Quality Management System. The objective
is to ensure integration of all disciplines and techniques for
proper and scientific management of quality of goods and
services.
 First ISO 9000 series of standards was published in March
1987 . It was revised in 1994 . Again in 2000 - ISO
9001:2000. TQM (Total Quality Management) principles are
incorporated in this QA standard. In the year 2005, revised
ISO 9000:2005 standard has been published.
Relationships
 ISO 9000 calls for documentation of its QMS. The
QMS documentation pyramid is shown below:
Why Define What
will be done
Policy
Who
Procedures when
Where
How
Work instructions
/ practices
Evidences
Records
Relationships
 QMS audit and certification
 It evaluates the conformance, of an operating quality
system, to the laid down requirements of ISO: 9000
 There are three categories of system audit:
 First party audit:– This is undertaken by the
organisation itself – Internal audits.
 Second party audits:- This is conducted by the
customer.
 Third party audits:- This is carried out by an
independent organisation. Accredited certification
bodies ( called accredited registrar) such as BVQI, DNV,
TUV etc conduct these audits and issue certificates (for
a fee) to those organizations whose QMS are found
compliant to ISO 9000 requirements.
 ISO – 9000 Certification assures the customer that the
supplier has a scientific quality Management System in
compliance with ISO 9000 standards.
Relationships
 Supplier relationship management:
While dealing with its suppliers, a company can adopt two
types approaches : 1. Transactional approach 2. Partnership
approach.
 The characteristics of „Transactional approach‟ are:
• Short term or one off.
• Many suppliers.
• Disloyalty and lack of commitment.
• Low switching costs, a little or no investment made in

relationships.
• Loose or no procedures.
• Exchange centered on single person in firm
• Changes in customer/supplier make little difference.

Relationships
 The characteristics of a „partnership approach‟ are:
Long term and ongoing .
Few suppliers.
Loyalty and commitment.
High switching costs, significant investments are made on
the partnership.
Strict procedural guidelines.
Many people and departments involved in exchanges.
Change in customer/supplier causes disruption.
 In the recent years there has been an increasing awareness
of the benefits of a long- term oriented relationship between
a retailer and its vendors. So more and more retailers are
adopting „Partnership approach‟ towards their suppliers.
 To achieve competitive advantage it is essential to focus on
alliances, networks and supply chain management (SCM).
The supply chain consists of all the parties that participate in
the retail logistics process.
Relationships
 The partnership approach leads to higher supply chain
profitability resulting in competitive advantage. This is
achieved by quality at low cost, value engineering, less
paper work, lesser inventories, shorter lead time etc. In
short, the partnership approach makes the supply chain
faster, more flexible and reliable. It also makes it leaner.
 It should be noted that partnership approach is not bereft of
risks and limitations. Too much dependence on a supplier
without a good monitoring system may breed complacency.
 To have a closer logistical relationship with the suppliers, the
retailers are adopting a technique known as CPFR
(collaborative planning, forecasting and replenishment). The
CPFR model provides a basic framework for the flow of
information, goods, and services among the the trading
partners.
Relationships
o Strategic Sourcing
• Drivers of Strategic Sourcing
•Reduce costs and delivery cycle times
•Improve quality and long-term financial performance
•Increase number of global competitors
•Increase customer focus
•Reduce high costs of globalization and materials,
•Deliver more innovative products more frequently &
cheaply than competitors
Relationships
 Successful Sourcing Strategies are different for
functional products and for innovative products.
 Functional Products are MRO items and other commonly low
profit margins with relatively stable demands and high levels
of competition. MRO (maintenance, repair, operations) items
are supplies consumed in the production process but which
do not either become part of the end product. MRO items
include consumables (such as cleaning, laboratory, or office
supplies), industrial equipments (such as compressors,
pumps, valves) and plant upkeep supplies (such as gaskets,
lubricants, repair tools), and computers, furniture, etc.
 Innovative Products are characterized by short product life
cycles, volatile demand, high profit margins, and relatively
less competition.
Relationships
 The following is a framework for supply chain sourcing
strategy:
Step 1 The firm‟s suppliers are classified as belonging
either to the innovative or functional category.
Step 2 The goals and strategies of the inbound portion of
the supply chain are developed.
Step 3 Supply chain capabilities are evaluated & compared
to required performance.
Step 4 Set goals for improving capabilities.
Step 5 Implement work plan.
Step 6 Monitor progress & adjust the work plans.
Relationships
 Important initiatives in sourcing :
 Supply base reduction is most often the initial supply
chain management effort. Buyer-supplier partnerships are
easier with a reduced supply base. It results in:
 Reduced purchase prices
 Fewer supplier management problems
 Closer and more frequent interaction between buyer

and supplier
 Greater levels of quality and delivery reliability.
 Key Supplier evaluation & selection is conducted by a

cross functional team wherein purchasing staff, primary
users, product designers, and manufacturing personnel
participate. While evaluating suppliers for strategic
partnering, purchase cost becomes relatively less important.
Relationships
 Supplier certification programs are one way to identify
strategic alliance candidates. Firms often develop their own
formal certification programs, & most require ISO 9000 or
similar certifications as one part of the certification process.
A site audit is conducted using a cross-functional team to
identify a supplier‟s process capabilities, materials and
methods monitors base-line management practices
 Early supplier involvement (ESI) is perhaps one of the
most effective supply chain integrative techniques.
Under ESI, key suppliers become more involved in the
internal operations of the firm, particularly with respect to
new product and process design
Information sharing and Coordination
in supply chain
Bullwhip Effect :
 The bull whip effect is the
uncertainty caused due to
distorted information
flowing up and down the
supply chain.
 The bullwhip effect is the
phenomenon of orders and
inventories getting
progressively larger (more
distorted) moving
backwards through the
supply chain. Which means
variation of stocks and
orders increases up the
supply chain from customer
to supplier.
Information sharing and
Coordination in supply chain
the
in supply chain
Some of the causes of variability that leads to
the bullwhip effect :
 Demand forecasting Many firms use the min-
max inventory policy. This means that when the
inventory level falls to the reorder point (min) an
order is placed to bring the level back to the max ,
or the order-up-to-level. As more data are
observed, estimates of the mean and standard
deviation of customer demand are updated. This
leads to changes in the safety stock and order-up-
to level, and hence, the order quantity. This leads
to variability.
 Lead time As lead time increases, safety stocks
are increased, and order quantities are increased.
This leads to more variability.
in supply chain
 Batch ordering. Many firms use batch ordering
such as with a min-max inventory policy. Their
suppliers then see a large order followed by periods
of no orders followed by another large order. This
pattern is repeated such that suppliers see a highly
variable pattern of orders.
 Price fluctuation. If prices to retailers fluctuate,
then they may try to stock up when prices are
lower, again leading to variability.
 Inflated orders. When retailers expect that a
product will be in short supply, they will tend to
inflate orders to insure that they will have ample
supply to meet customer demand. When the
shortage period comes to an end, the retailer goes
back to the smaller orders, thus causing more
variability.
in supply chain
 Adverse impact of Bull whip effect
When a supply chain is plagued with a bullwhip effect and
demand information is distorted, it results in:
 excessive inventory in the supply chain
 poor product forecasts
 insufficient or excessive capacities
 poor customer service
 increase in manufacturing costs.
 high costs for corrections (expedited shipments and

overtime)
 poor relationship among supply chain members due to loss
of trust
in supply chain
 How to cope with the bullwhip effect?
 Reducing uncertainty by centralizing demand
information. This occurs when customer demand
information is available to all members of the supply chain.
This information can be used to better predict what products
and volumes are needed and when they are needed such
that manufacturers can better plan for production. However,
even though centralizing demand information can reduce the
bullwhip effect, it will not eliminate it. Therefore, other
methods are needed to cope with the bullwhip effect.
 Reducing variability. This can be accomplished by using a
technique made popular by Wal-Mart and then Home Depot
called everyday low pricing (EDLP). EDLP eliminates
promotions and thus spurts in demand that accompany
them.
 Reducing lead time. Order times can be reduced by using
Corss Docking and EDI (electronic data interchange). Lead
time consists of order lead time (Production + shipping time)
and information processing lead time.
in supply chain
EDI reduces the information processing lead time.
While Cross-docking reduces order lead time. Cross-docking
involves unloading goods arriving from a supplier and
immediately loading these goods onto outbound trucks bound
for various retailer locations. This eliminates storage at the
retailer‟s inbound warehouse, cuts the lead time, and has
been used very successfully by Wal-Mart and Xerox among
others.
Order lead time can be shortened by „Delayed differentiation‟.
This involves adding differentiating features to standard
products late in the process. For example, Benetton makes
all of their wool sweaters in un-dyed yarn and then dye the
sweaters when they had more accurate demand data.
Another term for delayed differentiation is postponement.
in supply chain
Direct shipping is another method of reducing lead time.
This allows a firm to ship directly to customers rather than
through retailers. This approach eliminates steps in the
supply chain and reduces lead time. Reducing one or more
steps in the supply chain is known as disintermediation.
Companies such as Dell use this approach. Push-pull
strategy also reduces lead time.
 Strategic partnerships: When there is strategic
partnership between supplier and retailer the information is
shared seamlessly. Information sharing eliminates/
substantially reduces bull whip effect. For instance in VMI
(vendor managed inventory) the supplier manages the
inventory and is not dependent on order placed by retailer
to manage the inventory of the item he supplies.
in supply chain
 Major obstacles to coordination in supply chain:
The information distortion and variability within the
supply chain is due to lack of coordination. The major
obstacles to coordination can be categorised as
follows:
 Incentive obstacles.
 Information processing obstacles.
 Operational obstacles
 Pricing obstacles
 Behavioural obstacles.
in supply chain
 Incentive obstacles:
Incentives that are offered to participants in various stages of
supply chain is an obstacle that causes variability within supply
chain.
 Such incentives result in local optimisation. For instance if
the performance of a transportation manager is gauged by
the transportation cost per unit there will be a tendency on
his part to reduce the transportation cost even if the
inventory cost increases or reduces the customer service.
These reasons lead to sub-optimisation.
 Sales force incentives often lead to variability. Because
incentives are calculated based on a month‟s/quarter‟s
sales, the salesmen often urge the distributors to buy more
at the end of the month/quarter. This results in order
variability to be more than the actual demand variability.
Information sharing and Coordination in
supply chain
 Information processing obstacles:
The way the information are processed increases variability and
causes bullwhip effect.
 Forecasting is based on orders and not on the actual
customer demand: -
Each stage views its demand to be the series of orders
received by it. This forms the basis for the forecast.
Any small change gets magnified as it goes up the supply
chain. A random increase in customer demand can be
interpreted as a growth trend by the retailer. This may lead
him to order higher than the observed quantity to take care
of the anticipated growth. The higher order placed on the
wholesaler leads the wholesaler to place even higher order to
the manufacturer.
 Lack of information sharing:-
Information is not shared among the supply chain members
effectively and this causes Bull whip effect. For instance, if a
retailer orders more because of a planned promotion and
in supply chain
 Operational obstacles:
This may be due to :-
 Orders are often placed in larger lots than the lot sizes in
which demand arises to take advantage of quantity
discounts or FTL (Full truck load) or high ordering cost.
Order batching causes large order followed by no-order
period. This variability gets magnified up the supply chain.
 Longer lead time causes more variability. When a random
change is wrongly interpreted by a retailer then he
incorporates the changed rate over the lead time. So longer
the lead time higher will be the mistake.
 Incase of a rationing situation (when supply is in shortage),
the retailers try to place inflated orders to get more
allocation ( or quota). If the manufacturers use these
inflated requirements to expand its capacity, it may end up
building excess capacity when the supply position becomes
normal.
in supply chain
 Pricing Obstacles:
Pricing policy often leads to variability of orders placed.
 High-Low pricing policy by manufacturers lead to variability.
Trade promotions and short term discounts results in
forward buying by retailers. That is they buy in large lots to
avail of the lower prices during discounting periods. This is
followed by very low order quantities in subsequent periods.
 Quantity discount schemes by manufacturers lead to
variability.
 Behavioural obstacles:
 These refer to the reasons which inhibits learning and
eventually results in Bull whip effect. Major reasons are:
 Lack of trust among supply chain members.
 Each supply chain member views its action locally and also
reacts to current local situation. (does not view holistically)
 Blames other members for the Bull whip effect.
Managing Demand and supply in
supply chain
 Role of forecasting:
 In a supply chain forecasting forms the basis for all
planning activities . It is used for both long range
plans and short range plans It is the study of
internal and external forces that shape demand and
supply.
 Long range planning decisions related to strategic
planning like capacity expansion, location/relocation
of facilities use forecasting.
 Short range planning also requires demand
forecasting. This helps in inventory planning and
control for instance.
supply chain
 Characteristics of Forecasts
 Forecasting is a difficult process because of the
uncertainties involved. More the number of factors
influencing a situation more complex and
inaccurate the forecasting tends to be. The
difference between the forecast and the actual is
the „forecast error‟. The objective is to minimize it.
 Long term forecasts are more error prone than
short term forecasts.
 Aggregate forecasts are more accurate than
disaggregate (individual) forecasts.
supply chain
 Few types of forecasting methods are given below :
 Qualitative / Judgmental methods
 Panel of expert method: In this the experts ( external/
internal) assemble and discuss among themselves. A
coordinator helps in reaching a consensus.
 Delphi Method: Here the experts work on the forecast
separately to avoid one influencing the other. A
coordinator gets the opinions in writing and summarizes.
The experts can change/ modify the opinion after going
through the summary. Process is repeated till an
consensus is reached.
 Marketing research methods
 Market testing – focus group technique is used
 Market survey – interviews, Questionnaires etc.

supply chain
 Time series methods:
 Moving average and weighted moving average methods.
 Exponential smoothening: It is a modified version of
weighted average with recent data being given higher
weightage than old data. Here we have a smoothening
constant.
 Methods for data with trend – regression analysis.
 Methods for Seasonal data.
 Causal methods:
 In this correlation is found between demand and other
factors ( pricing for instance)

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1.

Understanding the Supply Chain

• A typical supply chain may involve many participants. But

 Supply chain is a series of processes and

• Supply Chain Strategy & Design involves:

 Types of information systems to be used

 Strategic sourcing decisions

 Establish order fill rate

Supply Chain Strategy

 Transportation of materials to & from the company

 Manufacture of the product or operation to provide the

 Short lead time

 Wide variety of products

 Highly innovative products

 High service level.

 Supply Chain efficiency : This indicates the cost of

 WIP (Work in progress)

 Inventories are held at various stages of supply chain

 availability (in terms of quantity and quality) ,

 Delivery lead times

 Economy of scale during transportation.

• Lead time is the lapsed time between the placement of an

Where z = safety factor , STD = standard deviation of

 In Periodic review (P) system the stock position is

 Air: Speed of origin to destination very high (but

 The main type of transport decisions that require to

4. Factor rating is multiplied by location factors i.e.

 Inventory carrying cost

 Stock out cost

 Transportation: Information needed to decide on modes,

 Facility: Decisions regarding location, capacity, scheduling

 Taxes/ Duties/ Exchange rates etc.

 Logistics – The module often has sub modules such as

 to negotiate prices/ contracts with customers and suppliers

 To enable customers to place and track orders

 To send bills to customers

 To receive payment from customers.

 The revenue is increased due to the E-Business because:

 Effective and faster diffusion of innovation

 Flexible pricing possible because pricing information can be

 Efficient fund transfer possible – much faster than cheques.

 The primary objective is to contribute toward the profits of

1. Procurement of the right material, in the right quantity,

• Short term or one off.

• Disloyalty and lack of commitment.

• Low switching costs, a little or no investment made in

• Exchange centered on single person in firm

• Changes in customer/supplier make little difference.

 Fewer supplier management problems

 Closer and more frequent interaction between buyer

 Key Supplier evaluation & selection is conducted by a

 poor product forecasts

 insufficient or excessive capacities

 poor customer service

 increase in manufacturing costs.

 high costs for corrections (expedited shipments and

 Market testing – focus group technique is used

 Market survey – interviews, Questionnaires etc.

 Methods for Seasonal data.

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