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• 1
•• Fundamentalsof
•• Supply Chain Management
•• Module 1 - Book 1 of 2
•• 2012 APICS CSCP Exam Content Manual (ECM)

•• Course Overview
Section A: Supply Chain Management Concepts

•• Section B: Supply Chain Alignment with Business Strategy

Section C: Supply Chain Design and Improvement Considerations

•• Section D: Inventory Management

Preparing for the Certification Exam
Studying the APICS CSCP Learning System combined with on-thc-joh knowledge. professional experience,
and other APICS learning tools. such as the .·lJ>ICS Dictionarv. is the most effective way to prepare for the
APICS CSCP certification examination. The APJCS CSCP Leaming System is intended to cover the body of
knowledge tested by the APICS CSCP certification examination; however, the APICS CSCP Learning
System docs not "teach the test." The I.earning System focuses on acquiring knowledge, whereas the exam
tests the candidate ·s abi Ii ty to apply that know ledge in accordance with accepted industry standards. ••
Content on the exam is based on real-world scenarios and requires candidates to apply the concepts in the
APICS CSCP Learning System, While both the APICS CSCP Learning System and the APICS CSCP ••
certification examination arc based on the APICS CSCP Exam Content Manual (which is availablefor
fin! download al 111t'iJ'.L~ai]J_(SCl>.s!J11J_>
developed independently
J<e,1011rce Center > Certification Exam Resources], they arc
of one another. To preserve exam integrity. specific exam questions and their
breadth arc not shared with the APICS CSCP Learning System developers.
Intellectual Property and Copyright Nutice
All printed materials in the APICS CSCP Learning System and all material and information in the ••
companion online component arc owned by APJCS and protected by United States copyright law as well as
international treaties and protocols. including the Berne Convention. The APICS CSCP Learning System
and the companion Access Code for the CSCP onlinc component arc for your personal educational use only
and may not he copied. reproduced. reprinted. modified. displayed. published, transmitted (electronically
otherwise). transferred. sold. distributed, leased, licensed, adapted, uploaded. downloaded, or reformatted.

In addition to being illegal. distributing CSCP materials in violation of copyright laws will limit the
program· s uselu l ness. AP lCS invests s ignilicant resources to create quality professional development
opportunities for its membership. Please do not violate APICS' intellectual property rights or copyright
APIC\' Dictionary, 13111 Edition Reference
Definitions contained within the AP JCS CSCP Learning System arc consistent with the AP/CS Dictionary. ••
13th edition. You may purchase the complete dictionary from the J\PICS bookstore.

/'1odule /~Book I Checklist: ••
Fundamentals of Supply Chain Management
Section Start Date Completion Date Section Quiz Score*

--- --~-·· ·-- ~-~-~~---+.-----------------+--------~

1-B: Supply chain alignment \\ ith husincs~

1-( ': Supply
chain dc:-.ign and irnprnx cment
rns id era ti on-,
1-D: luvcmory rna11agc1rn:11l


•• Course Overview and
Module 1: Fundamentals of
•• SupplyChain Management
•• Book 1
•• Module 1, Book 1 Contents




•• Introduction

Section A: SupplyChain Management Concepts



•• It's a World of Global, Complex, Interdependent Supply Chains

Basic Supply Chain

The SCOR® Model: Linking Processes, Metrics, Best Practices, and Technologies 1-13
Vertical versus Horizontal Integration 1-15
Supply Chain Management Objectives 1-24

•• Supply Chain Management Benefits

Accounting and Financial Statement Basics

•• Section B: SupplyChain Alignmentwith BusinessStrategy

Business Strategy and Competitive Advantages
1- 70

•• Organizational and Supply Chain Strategy, Prioritization,

Resolving Misalignment or Gaps
Capabilities, and Alignment.. I- 74

•• Section C: SupplyChain Design and Improvement Considerations

Understanding the Marketplace

•• Supply Chain Design Considerations

Continuous Improvement

•• Section D: Inventory Management

The Need for Inventory

•• Aggregate and Item Inventory Management

Flow of Material

Functions of Inventory 1-155
Inventory-Related Cost Categories 1-157
Effects of Inventory on the Financial Statements 1-159

•• :D 2012 APICS Version 3.0, 2012 Edition

• All rights reserved @ Primed <'II 1011',, p<>sl~c,;i1>tJ111er wuxt c rccyclcd paper
Module 1, Book 2 Contents

Section E: Logistics Fundamentals
Role of I .ogistics in Supply Chain Munagcment..
Service Providers
3Pf.s and 4PLs
. .
1-1 SS
Section F: Market Segmentation 1-J l)7 ••
Reasons to ldcntif)' and U ndcrstand
\Vays lo
Scgrncn1 Markets
tile \V~rnls and Needs of Each Segment
Mark ct Segments 1-197
Section G: Demand Planning 1-209
Forecast i ng l k1rnmd
Dcmaud Munagcmcnt
. .
. .
1-2.:;<) ••
I ink<igl'" '\1nung the·
Dc1rnnd \lanagcrncnt
Functional Rcsponsihiliiics
.. ··········
and Inter laces
1-262 ••
Section H: Customer Relationship Management (CRM) Concepts
'\cl·d for CR\1
Sc(lpc ofCR\1
l·~lcmcnh of CR vl
1-2 77 ••
fknclits of CR\l
lmplcrncntinp CR\1 .
l -2X l
1-282 ••
l\ccd fur and Uses of Customer lnlornuuion

Section I: Supply Management Concepts

in CR\L . ........................... 1-285

Total (\isl ui" Ownership
Outsourcing and Offshnring
Range (If.
Buyer-Supplier RcLnionships
. .
. .. .. .. .. l -2l/<)
1-303 ••
Supply Plan\
icr l~cl:tt ion-hip \L1n:1gcn1L'11( (SI~ \l)
l -11

Interrelationship h.:l11 c..:n Cl\\! and SR:\l .

aphy . .. 1-323

Cumulative Course Index............ . 1-338 ••

C 2012 APICS
All rights reserved @ p,-;ntcd
Version 3.0, 2012 Edition
"" 100% post-consumer waste occyckd paper ••
•• APICS Certified Supply Chain Professional™
(CSCP) Learning System
•• This product is based on the APICS CSCP Exam Content Manual (ECM) developed by APlCS. Although

•• the text is based on the body of knowledge tested by the APICS CSCP exam, program developers do not
have access to the exam questions. Therefore, reading the text does not guarantee a passing score .

•• The references in this manual have been selected solely on the basis of their educational value to the
APICS CSCP certification program and on the content of the material. APICS does not endorse any

•• services or other materials that may be offered or recommended by the authors or publishers of books and
publications listed in this module .

•• Every effort has been made to ensure that all information is current and correct. However, laws and
regulations are constantly changing. Therefore, this product is distributed with the understanding that the

•• publisher and authors are not offering legal or professional services .

•• Acknowledgments
We would like to thank the following dedicated subject matter experts who shared their time, experience,

•• and insights during the initial development and subsequent updates of the CSCP Leaming System:

Greg P. Allgair Julie Jenson, CPIM, CSCP Maryanne Ross, CFPIM, CIRM,

•• Curtis Brewer, CFPIM, CIRM, CSCP

Jashobrata Bose, CSCP
Honey Johnson, CFPIM, CIRM,
Rajcsh Kamat, CSCP
Kimber Rucff, CPIM, CIRM,

•• Al Sukey, CFPIM, CIRM, CSCP

Luc Chalmet, Ph.D, CFPIM, CSCP
Prashant Choudhary, CSCP
Prakash Kanagalekar, CPlM, CSCP
Jack Kerr, CPIM, CSCP, C.P.M.
Ignacio Sanchez-Chiappc
Carolyn Sly, CPlM, CSCP, C.P.M.

•• David N. Dadich, CSCP, LSS

Jose Lara
Mike Loughman, CSCP
Pam Somers, CPIM, CIRM, CSCP
Chad Stricklin
Shashank Tilak, CPIM, CSCP

Prasanta K. Dash, CSCP, PMP Giuseppe Lovecchio, CFPIM, CSCP
Sudripto De, CSCP Richard Merritt, CFPIM, CSCP, Huan-Jau (Arthur) Tseng, CFPIM,
Arnaud Deshais, CPIM, CIRM,


Alan Downs, CPIM, CSCP
Thiagu Mathan, CSCP
Steven J. Miller, CSCP
Alan L. Milliken, CFPIM, CIRM,
Dave Turbide, CFPTM, CIRM
Sudcep Valmiki,
Rosemary Van Trceck, CPIM,

Ralph G. Fariello, CFPIM, CIRM,
Laura E. Gram, CSCP Peter W. Murray, C!RM Wout Vcrwocrd, CFPIM, CIRM,

•• Janice M. Gullo, CFPIM, CSCP

Amit Kumar Gupta, BE, CSCP
Joni Holeman, CFPIM, CIRM, CSCP
Mike Okrent, Ph.D., CIRM, CSCP
Kasthuri Rcngan Ponnambalam,
Robert Vokurka, Ph.D., CFPIM,

•• Eric P. Jack, Ph.D., CFPIM, CSCP

Rajcsh Kumar Jagadccswaran, CPJM,
Gautam Chand Pradhan, CPIM,
David Rivers, CFPIM, ClRM, CSCP
Eddie J. Whitfield,
Vivek Wikhe, CSCP

Dave Jankowski, CFPfM, CSCP
Blair Williams, Jonah, CFPIM,

•• 0 2012 APICS
V crsion 3.0, 2012 Edition

• All rights reserved Printed on 100"" po<! consumer waste recycled po pa



•• The Association for
•• Operations Manaqement'E:

•• Exam Content Manual
•• This manual is in effect from
•• January1, 2012, throughDecember 2012 .

•• Visit for APICS CSCP Exam Content Manual Errata .

•• The references in this manual have been selected solely on the basis of their educational value to the APICS

•• CSCP certification program and on the content of the material. APICS does not endorse any services or other
materials that may be offered or recommended by the authors or publishers of books and publications listed in
this manual.

•• © 2012 APICS The Association for Operations Management

8430 West Bryn Mawr Avenue
Suite 1000
Chicago, IL 60631-3439 USA

•• (773) 867-1777
(800) 444-2742
Fax: (773) 639-3001

•• No portion of this document may be reproduced under any circumstances. CSCP is a registered trademark of

•• Stock #09031-2012

• ••
•• Table of Contents
•• Letter to Candidates ECM-1

•• • Introduction

About the APICS CSCP Examination



•• Question Format
Taking the Test

••• Interpreting Test Scores

Suggested Study Materials

Additional Resources for APICS CSCP Candidates



APICS CSCP learning System
APICS CSCP Instructor-Led Review Courses
APICS Educational Programs

•• APICS Certified in Production and Inventory Management (CPIM} Basics of Supply Chain Management
(BSCM) Review Course and Examination ECM-5

APICS CSCP Certification Maintenance Continuing Professional Development ECM-5

The Importance of Certification Maintenance ECM-5

•• APICS Code of Ethics

APICS Certified Supply Chain Professional (CSCP)



•• • Scope of the Subject Matter

Content Outline
ECM- 7
ECM- 7

•• Key Terminology
Supplemental Glossary

••• Sample Questions

Answers to Sample Questions

•• CSCP Exam Content fJlanuzil
•• Letter to Candidates
The subject matter is organized into three content

•• Dear Candidate:

On behalf of all the members of APICS The

Fundamentals of SupplyChain Management

•• Association for Operations Management and the

Certified Supply Chain Professional (CSCP)
Examination Committee, I want to congratulate
This section provides the foundation for the exam
by addressing the concepts and strategies used
for effective supply chain management. It includes

•• you for your interest in the APICS CSCP

certification program. APICS is the global leader
and premier source of the body of knowledge in
an overview of supply chain management,
managing the supply chain, and improving the
supply chain.

•• operations management, including production,

inventory, supply chain, purchasing, and logistics .
Since 1957, individuals and companies have
Strategy, Design, and Compliance
This section addresses considerations in the

relied on APICS for its superior training,
internationally recognized certifications,
comprehensive resources, and worldwide network
of accomplished industry professionals.
design of a supply chain, the processes that
support the organization's strategy, improvement
of the sustainability of the organization and its
trading partners, and compliance with applicable
regulations and voluntary standards .

The APICS CSCP program is primarily intended
for professionals in supply chain management and
operations management and is designed to test
Implementationand Operations
This section covers managing and balancing
the candidate's knowledge and application of the supply and demand through measuring,

•• supply chain management body of knowledge .

The successful candidate will be able to recognize

and analyze specific supply chain situations and
analyzing, and improving supply chain processes.

This AP/CS CSCP Exam Content Manual is

intended to provide you with an overview of the

•• opportunities and select the appropriate

approaches, tools, techniques, and technologies .
The candidate will be able to define the actions
program, an outline of its body of knowledge, key
terminology, and references. The outline is
divided into three diagnostic areas, and the

•• necessary to implement selected solutions. This

includes an understanding of, and the ability to,
manage the
relative emphasis of each of the areas is indicated
by a percentage figure. A sample of 1 O illustrative
questions is also provided. The AP/CS CSCP

•• • alignment of supply chain processes and

capabilities with strategic business goals
Exam Content Manual should not be the only
reference you use to prepare for the CSCP exam;
however, it should be the first. We wish you

•• •

organizational roles and infrastructures in the
supply chain
material, information, and financial flows
success in your pursuit of the CSCP designation.

•• •

intra- and interorganizational relationships
selection and use of technologies to enable

effective process management.

The APJCS CSCP program will help you advance Roly White, CFPIM, CIRM, CSCP
your career while giving you validated CSCP Examination Committee Chair

•• foundational knowledge to assist in improving

your company's competitive position and
profitability. The program takes a broad view of

•• the field, extending beyond internal operations to

encompass all the steps throughout the supply
chain-from the supplier, through the company, to

••• the end consumer and the reverse flow of

products and materials for the purpose of
managing returns, refurbishing, or recycling. The
program provides you with the knowledge to
effectively manage the integration of these

•• activities to maximize a company's value chain .

•• CSCP Exam Content iVLmual ECM-1

Introduction About the APICS ••
This exam content manual provides guidance for
individuals preparing for the certification
examination. The objective of this manual is to
CSCP Examination
The APICS CSCP exam consists of 175 multiple-
• ••
outline the APICS CSCP tested body of choice questions. There is a four-hour time limit

The main section of this manual begins with a

for the exam.

For more information about testing and

statement of the scope of the subject matter,
followed by a descriptive outline of the content.
Key terminology and a bibliography of references
registration policies and procedures, call
APICS Customer Service at 1-800-444-2742
(United States and Canada), or +1-773-867-1777
are provided. The section concludes with sample and order a current AP/CS CSCP Certification
questions similar to those that appear on the Bulletin or visit the APICS website at
examination and the correct answers for the
sample questions, with brief explanations of why
they are correct.

The recommended procedure for mastering the

Candidates who plan to test in North America
should order stock #09056, and candidates
testing outside North America should order stock ••
subject matter is to
• review the content outline, which defines the
#09057. Candidates may also order the bulletins
at via the APICS Bookstore at ••

scope of the material.
study each topic, using the suggested
Question Format
Several question formats are used in the APICS
At the end of each major section is a list of the
references that apply to the topics in that section.
CSCP examination although not all are included in
this manual's sample questions (pages 18-19). A
review of all the formats is recommended to
The first number indicates the sequence number
for the reference in the Bibliography section, and
the numbers in parentheses indicate the
ensure maximum preparedness. For each
question, only one of the four choices represents
the correct answer.
chapter(s) within that reference.
Examples 1 and 2 are samples of an incomplete
Candidates should understand the definitions of
statement or a question, followed by four
the key terms and the application of the outlined
tools and techniques.

Sufficient references are given that provide

suggested completions or answers. In Example 1,
you are to choose the one option-A, B, C, or D-
that completes the statement correctly. In ••
different approaches to the material covered in
each diagnostic area and different styles of
presenting the information. Reading available
Example 2, you are to choose the option that best
answers the question.

Example 1: The 80-20 rule is an application of:

periodical material, such as AP/CS magazine, will
help you maintain an awareness of changes in the
state of the art.
(A) Statistical process control
(B) Defect measurement
(C) Root cause analysis
(D) Pareto analysis ••
(The correct answer is D.)

Example 2: Which of the following is used as a ••

key performance indicator (KPI) to measure
variability of demand through the supply chain?
(A) Bullwhip effect
(B) Fill rate
(C) Inventory turns ••
(D) Internal failure
(The correct answer is A.)
ECM-2 ((J 2012 APICS The Association for Operations Management
•• Example 3 is different. All the choices given are
correct EXCEPT one. You are to choose the
information for each question. Choose the best
answer from the choices given.

•• option that does not correctly complete the


Example 3: All of the following are examples of

If a question includes stimulus material, such as a
table, graph, or situation, be sure to study it before
you answer the question.

•• voice of the customer EXCEPT:

(A) collecting point-of-sale (POS) data Interpreting Test Scores

•• (B) customer panel groups

(C) recording customers' problems with recent
Scoring is based on your correct responses.
There is no penalty for incorrect answers. It is to
your benefit to make a choice, even if you are not

•• (D) surveying customers online

(The correct answer is A.)
certain of the correct answer. A blank answer will
have the same result as an incorrect answer .

•• Examples 4 and 5 ask for a judgment or

evaluation of the MOST or LEAST appropriate
The APICS CSCP scaled score range is 200-350 .
The minimum passing score is 300.

choice. The judgment is not one person's opinion; You will receive your final exam score along with
it is the accepted choice according to the APICS diagnostic information on your performance.
body of knowledge. Example 4 asks for the MOST
appropriate choice. Example 5 calls for the

•• LEAST appropriate choice.

Example 4: The MOST significant advantage of

Suggested Study Materials
This manual contains a Bibliography section that
lists references. A candidate may discover that

•• strategic sourcing is:

(A) finding suppliers who can provide materials
the material covered in the chapters of one
reference duplicates material covered in another
reference. Both sources are included as

•• at lowest cost
(B) using technology to select low-cost, high-
quality sources of materials
references to allow candidates some discretion in
selecting test preparation materials that they find
accessible and understandable. In deciding if a

•• (C) developing long-term supplier relationships

(D) having a process for recurring transactions
with single suppliers
single reference is sufficient. candidates should
assess their own level of knowledge against both
the descriptive examination specifications and the

•• (The correct answer is C.)

Example 5: Which of the following factors has

detailed topic list contained in the content outline .
If there are any areas of weakness, the candidate
should consult another reference as part of the

•• had the LEAST impact on the growth of

customer relationship management?
test preparation process.

It is not practical to list all texts that contain

•• (A) increased customer expectations excellent material. The serious student of supply
(B) reduced commodity prices chain management who wishes to stay current
with the state of the art will take advantage of
(C) increased ease in comparison shopping publications such as those listed in the

•• (D) reduced cost of gaining new customers

(The correct answer is C.)
comprehensive AP/CS Educational Resources
Brochure (stock #01041 ), featuring AP ICS
reference materials. To receive the brochure, call

•• • Taking the Test

Before starting your exam, read all the directions
carefully. Be sure you understand them before
APICS Customer Service at 1-800-444-2742
(United States and Canada) or +1-773-867-1777,
or via the APICS Bookstore at

•• you begin to read and answer any questions .

Read each question carefully and thoroughly.

The content outline provided in this document
should be considered a primary resource for exam

Take care to avoid assuming information not preparation. It provides an overview of the major
given or "second guessing" the question. Do not topics included in the exam, as well as a list of the
look for hidden tricks or exceptional concepts that are relevant to that topic .
circumstances. Every effort has been made to

•• avoid misleading wording and to provide sufficient

•• CSCP Exam Content Manual ECM-3

The AP/CS Dictionary, 13th edition, is an
essential publication that applies to the exam Additional Resources ••
content manual and exams. Within the profession,
terminology varies among industries, companies,
and the academic community. The examination
uses standard terminology as defined in the
Candidates •••
AP/CS Dictionary and the Supplemental Glossary
section in this manual. Recognizing the terms and
understanding their definitions are essential.
APICS offers a number of resources to help
individuals prepare for the APICS CSCP
In studying for the APICS CSCP certification
exam, candidates may discover multiple terms
used to denote the same technique. An example
In addition to the cited references, it may be
helpful for you to pursue chapter-sponsored
of this is lateral integration versus horizontal
integration. APICS has attempted to provide
consistency with preferred terminology. However,
courses, college courses, APICS workshops, self-
study courses, or courses offered by APICS'
network of Authorized Education Providers
synonyms are often used by authors in the
various references used to compile the body of
knowledge. Candidates are encouraged to be
(AEPs) as a means of learning the body of
knowledge that is tested in the certification
program. A wide variety of courses and materials ••
familiar with all terms and concepts listed within
each outline and key terminology section, using
the AP/CS Dictionary as the primary guide for
is available. As with any other investment of time
and money, you should research various courses
before investing in one. For courses in North ••
definitions. The Supplemental Glossary, included
in this manual, provides needed additional
information identified by the exam committee.
America, visit the Chapter Locator on the APICS
website at or call APICS Customer
Service at 1-800-444-2742 (United States and ••
Canada) or +1-773-867-1777 to obtain contact
information for your local chapter. For courses
outside North America, visit to locate the nearest
APICS CSCP Learning System
The AP/CS CSCP Learning System is a
comprehensive professional development and
certification preparation program. This self-
directed program combines print material and
online interactive tools. This system is also offered
in instructor-led formats.

The AP/CS CSCP Learning System does not ••

"teach the test" and in many areas reviews
concepts but does not teach concepts. The
AP/CS CSCP Learning System provides a ••
thorough review of the subject matter, but it
should not be used without the most current
AP/CS CSCP Exam Content Manual as a means ••
to direct the candidate's study. There will likely be
some content in the AP/CS CSCP Learning
System not covered by the exam; conversely,

there will likely be some content in the exam not
covered by the learning system. Thus, the use of
the current exam content manual to assist
candidates with their studies is essential.

For more information, visit the APICS website at or call APICS Customer Service at 1-
800-444-2742 (United States and Canada) or +1-
773-867-1777 and request a complimentary ••
ECM-4 ;_g 2012 APiCS The Association for Operations Management
•• AP/CS Educational Resources Brochure (stock
#01041). APICS CSCP
•• APICS CSCP Instructor-Led
Review Courses
•• The instructor-led format combines the APICS
CSCP Learning System print and online Continuing
•• components with the leadership of a qualified
instructor; peer collaboration; company
networking: and a structured, set schedule to
keep participants on track. APICS provides an on-
line list of APICS Qualified Instructors for your Development
review at e.

•• APICS Educational Programs

APICS offers a variety of educational programs
The Importance of

The growing number of individuals choosing to
and the APICS International Conference & Expo. pursue professional development through APICS'
For a list of APICS learning opportunities and Certified Supply Chain Professional (CSCP)
information on course availability, call APICS program indicates a strong awareness that

•• Customer Service at 1-800-444-2742 (United

States and Canada) or +1-773-867-1777.
continuing education and skills development are
essential to meeting the information and
technological challenges in today's rapidly

•• APICS Certifiedin Productionand

InventoryManagement (CPIM)
evolving workplace and global marketplace.
Professional development opens doors to
individual career opportunities and organizational

•• Basicsof SupplyChain
Management (BSCM)

Although APICS CSCP certification and APICS

•• Review Course and Examination

The APICS CPIM Basics of Supply Chain
Management module introduces terminology,
CSCP certification maintenance are voluntary
programs, they equally demonstrate one's
commitment to achieving the highest level of

•• approaches, and techniques for managing the

internal supply chain in a manufacturing
organization. For that reason, the references and
professional development and standards of
excellence .

•• the review course may be valuable resources for

APICS CSCP candidates who are not familiar with
the production and inventory management
The APICS CSCP Certification Maintenance
program upholds both the objectives of the APICS
CSCP program and APICS' vision to promote

•• environment. Additionally, individuals lifelong learning. This flexible program recognizes

inexperienced in taking certification examinations that individuals are at various levels in their
using the multiple-choice format of items typically careers, come from many industries, have
different educational needs and career goals, and

•• find it beneficial to take the BSCM examination .

have varying degrees of access to continuing
education. Thus, requirements for maintaining
certification can be met through multiple sources

•• • and a variety of professional development

activities intended to help prepare for the
challenges ahead and maintain a professional
edge by

•• • preserving the currency of hard-earned

certification credentials expanding your
knowledge of the latest industry practices

•• • expanding your knowledge of the latest industry

practices reinforcing skills

•• •

exploring new technology solutions
reinforcing skills

•• CSCP Exam Content M;muzd ECM-5


improving job performance
demonstrating commitment to excellence
APICS Code of Ethics ••
• increasing competitive advantage .

To promote professional growth and lifelong

When you start an examination, you will be asked
to pledge to abide by the APICS Code of Ethics.
Once certified, you pledge to continue your ••
learning, APICS CSCP designees must complete education to increase your contribution to the
the APICS Certification Maintenance program supply chain profession. After achieving the
every five years. Complete details on how to APICS CSCP certification, you pledge also to

maintain your APICS CSCP designation will be share your knowledge with others by participating
mailed to candidates upon successful completion in APICS research and educational activities at
of the certification requirements. Visit the APICS local, district, national, and international levels.
APICS Code of Ethics:
website at or call APICS Customer
Service at 1-800-444-2742 (United States and
Canada) or +1-773-867-1777. • To maintain and improve sound business
practices and foster high standards of

professional conduct.
To hold in professional confidence any
information gained of the business of a fellow

member's company and to refrain from using
such information in an unethical manner.
To seek success without taking unfair
advantage or using questionable acts that
would compromise one's self-respect. ••

To neither engage in nor sanction any
exploitation of one's membership, company, or

To encourage, and cooperate in, the
interchange of knowledge and techniques for

the mutual benefit of the profession.
To be careful with one's criticisms and liberal
with one's praise; to build and not to destroy.
• Whenever a doubt arises as to the right or
ethics of one's position or action, to resolve
such doubt according to generally accepted

standards of truth, fair dealing, and good taste.
To maintain high personal standards of moral ••
responsibility, character, and business integrity.
• To uphold the high ideals of the association as
outlined in the bylaws.

Failure to abide by APICS Code of Ethics policy

may result in sanctions up to and including
ECM-6 <ci 2012 APICS The Association for Operations Management
•• APICS Certified
Implementation and Operations
This section covers managing and balancing

•• SupplyChain
Professional (CSCP)
supply and demand through measuring, analyzing,
and improving supply chain processes .

The successful candidate will be able to recognize

•• Effective for January 1, 2012-December 31, 2012,

and analyze specific supply chain situations and
opportunities and select the appropriate
approaches, tools, techniques, and technologies.

The candidate will be able to define the actions
CSCP EXAMINATION COMMITTEE necessary to implement selected solutions. This
includes an understanding of, and ability to,

•• Roly White, CFPIM, CIRM, CSCP (Chair)

Nishat Ahmed, CPIM, CIRM, CSCP, C.P.M .
M.C. Dean, Inc.
• alignment of supply chain processes and

•• Joanne Gorski, CFPlM, CSCP

Fox Valley Technical College

capabilities with strategic business goals
organizational roles and infrastructures in the
supply chain

•• Robert Pinchot, CPIM, CSCP

Andrea M. Prud'homme, Ph.D., CPIM, CIRM,

material, information, and financial flows
intra- and interorganizational relationships

• selection and use of technologies to enable
CSCP, The Ohio State University
effective process management.
Eduardo A. Shelley, CFPIM, CIRM, CSCP
Solmex Many of the items on this exam require the

•• Scope of the Subject Matter

candidate to apply one or more of the items
identified in the outline and key terminology.

•• Please read the introductory material in this

manual for essential information about the
Three content areas have been designed to

•• The APICS CSCP certification covers concepts,

strategies, processes, tools, and technologies
organize the APICS CSCP domain. The relative
importance of a topic is not necessarily reflected
by its appearance in the outline. The relative

applied to managing the end-to-end forward and importance of these topics will vary among
backward flow of materials, information, and value industries. The percentage figures given below
in a supply chain. can be used as a guideline for the APICS CSCP
exam content.

•• The subject matter is organized into three content


Fundamentals of Supply Chain Management
(SCM) Fundamentals
This section provides the foundation for the exam of Supply Chain

I 33.33%
by addressing the concepts and strategies used Management
for effective supply chain management. It includes (SCM)
an overview of supply chain management, Supply Chain

•• managing the supply chain, and improving the

supply chain. II
Design, and

•• Strategy, Design, and Compliance

This section addresses considerations in the
design of a supply chain, the processes that
and Operations

•• support the organization's strategy, improvement

of the sustainability of the organization and its
trading partners, and compliance with applicable

•• regulations and voluntary standards .

•• CSCP Exam Content fJi;mu.::il ECM-7

Content Outline B. Supply Chain Alignment with Business Strategy:
The supply chain strategy should align with and
I. Fundamentals of Supply Chain Management enable the business strategy. Achieving
(SCM) appropriate alignment requires an
understanding of the forms of competitive
This section addresses the fundamental concepts
used for effective SCM and will provide the
foundation for the APICS CSCP exam. It includes
an overview of SCM concepts and the need to
advantage being pursued. It also requires an
understanding of the organizational strategy,
priorities, capabilities, and the resolution of ••
misalignments or gaps. Knowledge in this area
align resources with the strategy of the
organization. Management and improvement of
the supply chain are then addressed. Exam 1. Competitive advantages
questions covering this area will include elements
related to the following: 2. Business capabilities and strategy
a. Organizational strategy
A. Supply Chain Management Concepts: A
thorough understanding of the roles in a supply
chain network and the flow of value through it is
b. Prioritization options
c. Organizational capabilities ••
required. A broad understanding of the supply
chain management processes, objectives,
integration, and benefits is also required. 3.
d. Alignment of capabilities and strategy
Resolving misalignment or gaps ••
Knowledge in this area encompasses:
1. Basic supply chain
4. Collaboration among trading partners
a. Benefits of collaboration ••
a. Entities b. Requirements for success
b. Structures
C. Supply Chain Design and Improvement
c. Flows Considerations: The supply chain strategy
2. Supply chain management processes -
SCOR® model
should be designed with an understanding of
the marketplace. It also requires an
understanding of supply chain management
a. Planning demand and supply
b. Sourcing goods and services
c. Producing goods and services
design and continuous improvement
considerations. Knowledge in this area
d. Delivering goods and services
e. Planning for and processing returns
Understanding the marketplace
Supply chain design considerations
Vertical and horizontal integration
Supply chain management objectives
a. Network configuration
b. Inventory location and levels ••
a. Improved customer service
b. Efficient use of systemwide resources
c. Product design
d. Information technology
e. Support systems
c. Effective use of systemwide resources
d. Leverage of partner strengths 3. Continuous improvement
a. Product considerations
5. Supply chain management benefits
a. Improved market knowledge
b. Increased velocity in the flows of goods
b. Process improvement initiatives
c. Managing change ••
and services, funds, and information
c. Increased visibility of flows
D. Inventory Management: Inventories throughout
the supply chain must be planned and ••
d. Reduced variability of flows controlled for effective supply chain
e. Integrated operations management. Managing inventories, in turn,
requires an understanding of the costs of
f. Improved management of risk
g. Increased sustainability
8 @ 2012 APlCS The Association for Operations Management

•• maintaining and not maintaining inventory.
Knowledge in this area encompasses:
G. Demand Planning: An understanding of demand
forecasting, the components of demand
management, associated linkages, and demand

•• 1.
Need for inventory
Aggregate and item inventory management
management functional responsibilities and
interfaces is required. Knowledge in this area

•• 3.
Flow of material
Functions of inventory
1. Forecasting demand
a . Demand forecasting concepts

•• 5. Inventory-related cost categories

Effects of inventory on the financial
b. Qualitative methods
c. Quantitative methods

6. d . Combination methods

•• E. Logistics Fundamentals: An understanding of

the logistics function is required. Understanding
e. Measures of forecast error
2 . Components of demand management

•• the role of logistics, types of logistics service a . Planning demand

providers, and reverse logistics is required. b. Communicating demand
Knowledge in this area encompasses: c. Influencing demand

•• 1. Role of logistics in supply chain

d. Prioritizing demand
Linkages among the components

•• a . Logistics functions
b. Logistics value proposition
c. Flow of goods and information
4. Demand management functional
responsibilities and interfaces

•• 2.
d. Push, pull, and push-pull systems
Logistic service providers
a. Product development

•• a. Types of logistics services

b . Advantages of using logistics service
d. Operations

H . Customer Relationship Management (CRM)

•• c. Disadvantages of using logistics service

Concepts: Effective customer relationship
management includes an understanding of the
CRM philosophy. It also requires the

•• 3. Reverse logistics
a . Activities supported
understanding of the need, scope, elements,
and benefits of CRM. Knowledge in this area

b. Design for reverse logistics
c . Benefits 1. Need for CRM

Market Segmentation: An understanding of 2. Scope of CRM

market segmentation is required. Understanding
3. Elements of CRM
the reasons for identifying market segments,
ways to segment markets, and understanding

•• the wants and needs of each segment is

important. Knowledge in this area

Benefits of CRM

Implementing CRM

•• 1. Reasons to identify and understand market

6. Need for, and uses of, customer information
in CRM

•• 2.
Ways to segment markets
Understanding the wants and needs of each
I. Supply Management Concepts: Effective
management of all sources of supply requires
an understanding of the components of the total

cost of ownership and the considerations in
segment deciding whether to source an item internally or
externally. It also requires an understanding of

,. •• CSCP Exam Content Manual ECM-9
the types of relationships that can exist between
a firm and its suppliers, the development of
supply plans, and supplier relationship
B. Risk Management: Designing a robust supply
chain requires recognizing the sources and ••
forms of risks, the magnitude and potential
management. Knowledge in this area impact of each, and methods of mitigating each
encompasses: form of risk. Knowledge in this area

Total cost of ownership

Make versus buy analysis

1. Identification, mitigation, and response to
Range of buyer-supplier relationships
Developing supply plans
a. Forms of risk
b. Assessing the risk in a supply chain ••
5. Supplier relationship management (SRM)
References: 1; 2 (1-6); 3 (1-2, 6-7, 9); 4 (1, 5--8);
c. Mitigating significant risks
d. Responses to risk
5 (1, 3, 5, 8-9, 12) 2. Security and regulatory concerns
a. Risk of loss, such as intellectual
II. SupplyChain Strategy, Design, and property or goods

This section addresses considerations in the

b. Complying with import and export
requirements, such as prohibited
goods, labeling, and documentation
design of a competitive supply chain, the
processes that support the organization's strategy, c. Costs and benefits of participating in
improvement of the sustainability of the security partnerships
organization and its trading partners, and d. Costs and benefits of meeting
compliance with applicable regulations. Exam
questions covering this area will include elements
related to the following:
sustainability regulations
e. Product traceability ••
A. Sustainability: Designing and operating a supply
chain requires an understanding of the concepts
3. ISO 31000 Risk Management Principles
and Guidelines ••
of sustainable business practices and how to
adapt and apply them to a specific supply chain.
Knowledge in this area encompasses:
C. Globalization: Managing globally dispersed
sources of supply and demand requires an
understanding of the requirements for operating
1. Economic
a. Micro and macro considerations
in multiple countries and for moving goods and
funds among countries. Knowledge in this area
encompasses: ••
b. Leading and lagging economic
c. Balancing short-term and long-term
1. Effects of globally dispersed supply and
demand ••
a. Export and import participants
b. Currency considerations
c. Harmonized Tariff Schedule (HTS)

ISO 14000 Series of Environmental
Management Systems Standard
Governmental regulatory compliance 2.
d. Total, or landed, cost of acquisition
Free trade zones
c. Industry-specific guidelines and
standards a. Definition
d. Impact of supply chain decisions b. Benefits

c. Requirements
3. Social
a. ISO 26000 Guidance on Social 3. Trading blocs

a. Definition
b. Corporate social responsibility b. Effects on supply chains within the bloc
c. Effects on supply chains that extend
United Nations 'The Global Compact"
Triple bottom line (TBL)
outside the bloc
10 @ 2012 APlCS The Association for Operations Manaqernerrt ••

•• 4. Operational considerations
a. Exporting issues
b. Attributes of a responsive supply chain
c. Supply chain fit with the organizations'

•• b. Importing issues
c. lncoterms F.
markets requirements

Technology: An understanding of technologies

that enable designing, tracking, operating, and
5. Implications of globalization communicating among trading partners within a
a. Legal and regulatory considerations supply chain is necessary. The correct
application of appropriate technology is needed

•• b. Acceptable standards of conduct

c. "Glocalization"
for efficient and effective supply chain
management. Knowledge in this area

•• D. Logistics: An understanding of the total effect

that globalization and supply chain
management has on inbound and outbound
1. Role of technology in supply chain

•• logistics is important. An understanding of

trade-offs among warehousing, transportation,
and logistics services' decision making is also
a. Information system architecture
b. Use of information technology in the
supply chain

•• required. Knowledge in this area encompasses:

1. Transportation
c. Comprehensive supply chain
management system

a. Transportation objectives and d. Need for timely and accurate data
b. Stakeholders in transportation decisions 2. Key application tools

•• c. Modes of transportation
d. Considerations in mode selection
a. Enterprise resources planning (ERP)

Advanced planning and scheduling

•• 2. Warehousing
a. Warehousing objectives and
(APS) systems
c. Supply chain event management

•• b. Warehouse capabilities
c. Automated material handling
d. Warehouse management systems

e. Transportation management systems
3. Transportation and warehousing trade-offs (TMS)
a. Public/private
3. Data acquisition and communications tools

b. Owning/leasing assets
a. Interface devices
c. Capacity constraints
b. Data communications methods

•• E. Managing the Supply Chain: Managing the

supply chain requires an understanding of the
dynamics of supply and demand and the need
c. Databases-hierarchical/relational/
d. Acquisition and use of data

to balance efficiency and responsiveness in the
supply chain. It also requires a set of e. Automatic identification technologies
comprehensive measures that are agreed upon 4. Supply chain design and optimization tools
and used by the organizations in the supply

•• chain. Knowledge in this area encompasses:

1. Indicators of supply chain performance
a. Supply network design
b. Supply network optimization

•• a. Customer-focused metrics
b. Financial metrics
5. lnterorganization integration tools
a. Information technology in collaborations
and joint processes

•• c. Operational metrics
d. Other key performance indicators
b. Standardization
c. Challenges

•• 2. Responsive versus efficient supply chains

a. Attributes of an efficient supply chain
6. Electronic business
a. Enabling virtual organizations

•• ECM-11

b. Internet-enabled supply chains 3. Measuring customer service
c. E-business considerations a. Response to inquiries
d. Business-to-business commerce (828)
and business-to-consumer sales (B2C)
b. Order processing
c. Level of service
d. Product or service quality
G. Influencing and Prioritizing Demand: A thorough
understanding of how the members of a supply e. Customer satisfaction
chain can influence demand and how they may
4. Challenges in implementing CRM
need to prioritize demand when necessary is
required. Knowledge in this area encompasses:
1. Designing products and services
I. Supplier Relationship Management (SRM):
Successful implementation of supplier
a. Standardization
b. Simplification
relationship management requires an
understanding of the underlying concepts, the
enabling technologies, and the requirements for
c. Customization
d. Sustainability considerations
e. Design and development collaboration
improved management of sources of supply.
Knowledge in this area encompasses: ••
2. Marketing
a. Market research
1. Supplier selection
a. Corporate social responsibility (CSR)
b. Negotiations
b. Demand generation
c. Influencing demand
c. Internet-enabled sourcing
d. Contract performance ••
Matching customer orders to supply
e. Alignment with supply chain needs

Developing and implementing SRM

a. Need for matching
b. Approaches to matching
a. Steps in implementing SRM
b. Managing risk
H. Customer Relationship Management (CRM):
Effective customer relationship management
includes understanding the underlying
3. Creating alliances with suppliers
a. Characteristics of a successful ••
concepts; enabling technologies; and
requirements for improved demand
management, customer service, and alignment
b. Commitment required for a successful
of customer-facing processes and resources.
Knowledge in this area encompasses:
c. Steps in creating and maintaining an
alliance ••
1. Developing and implementing CRM as a
a. Components of CRM strategy
4. Using technology to implement SRM
a. Components of a SRM system
b. Portals and trading exchanges
b. Aligning CRM strategy and product or
service life cycle
c. Creating a customer relationship
c. Processes enabled by SRM
d. Effects of SRM on the firm and its ••
d. Developing CRM strategy for various 5. Measuring SRM

types and segments of customers 6. Challenges in implementing SRM
2. Using technology to implement CRM
J. Inventory Planning and Control: Inventories
a. Benefits of using a customer data
b. Sales force automation
throughout the supply chain must be planned,
located, and controlled for effective supply chain
management. Managing inventories in turn ••
c. Keys to successful CRM requires an understanding of the total costs of
implementation maintaining and not maintaining inventory and
the techniques for planning and controlling

12 © 2012 APICS The Association for Operations Management ••

•• inventory. Knowledge in this area


Measuring performance
requirements and priorities

•• 1. Inventory planning
a. Locations of inventory
Operational measures
Financial measures

•• 2.
b. Levels of inventory

Inventory control
C. Managing Supply from External Sources:
Managing supply from external sources requires
an understanding of the basic purchasing

•• a.
Determining order quantities
Ordering systems
Safety stock and safety lead time
processes, selecting suppliers, and evaluating
suppliers. Knowledge in this area

•• d.
Organization of storage locations
Methods of tracking inventory
1. Communicating requirements and priorities

•• f. Methods for assessing inventory 2. Supplier performance management

accuracy a. Ethical and legal considerations
References: 1; 2 (5-10, 13-15, 17}; 3 (1, 3-5, b. Negotiations

•• 8-11, 12-13, 17); 4 (1-9); 5 (2-12, 14-15)

Ill. Implementationand Operations

Contract issues
Internet-enabled sourcing

•• This section addresses managing and balancing

supply and demand by measuring, analyzing, and 3.
e. Scorecards and performance metrics

Supplier certification

•• improving supply chain processes. Exam a. Customer and supplier benefits

questions will include elements related to the b. Third-party certification
following: c. Supplier certification process

•• A. Supply Chain Dynamics: Managing supply

chains requires an understanding of the
dynamics of supply and demand and the need
D. Implementation of Demand Plans: Requires an
understanding of the methods for prioritizing

•• to balance efficiency and responsiveness in the

supply chain. It also requires a set of measures
that are agreed upon and used by the
and fulfilling demand. Knowledge in this area

1. Demand prioritization

•• organizations in the supply chain. Knowledge in

this area encompasses:
Time fences
Allocation of supply

•• 1. Sources of variability in demand

2. Sources of variability in supply

c. Measures
of customer service levels
Fill rates
Lead-time monitoring

•• 3.

Synchronizing supply and demand

Metrics 2.

Order status reporting

and communicating point-of-sale

•• B. Managing Supply from Internal Sources:

Managing supply from internal sources requires
an understanding of the operations planning
Capturing data at point-of-sale
Sharing demand data among trading

•• and control processes. Knowledge in this area


Continuous Improvement: Enhancing the

•• 1. Operations planning and control

a. Implementation of the sales and
operations plan (S&OP}
competitiveness of a supply chain requires an
understanding of the techniques and tools of
continuous improvement and the appropriate

•• b.
Controlling priorities
Materials and inventory
application of each. Knowledge in this area

•• d. Capacity management 1. Continuous improvement philosophies

a. Lean
b. Six sigma

•• CSCP Exam Content f/lanual ECM-13

c. Theory of constraints (TOC) c

d. Total quality management

Continuous improvement tools

(TQM) capable-to-promise (CTP)
carrying cost ••
Basic seven tools of quality (B7)
Seven new tools (N7)
cash flow
cash-to-cash cycle time
References: 1; 2 (5-6, 15-16); 3 (9-11, 14-15);
5 (2, 4, 7, 12)
chase strategy
collaborative planning, forecasting, and
replenishment (CPFR)
Key Terminology competitive analysis
An understanding of the following list of terms is
recommended. The list is intended to be thorough
but not exhaustive. The candidate is also expected
consortia trade exchanges (CTX)
to be familiar with the definitions of terms identified
in the content outline. A review of the list and
study of the topics in the outline may reveal other
content management applications
continuous replenishment ••
important terms. Definitions of these terms can be
found in the AP/CS Dictionary, 13th edition, or in
the Supplemental Glossary.
cost of goods sold
cost of quality
ABC analysis
cumulative lead time
customer relationship management (CRM)
active tag
advanced planning and scheduling (APS)
customer service
customer service ratio ••
agent cycle
alliance development cycle counting
anticipation inventories cycle stock
automatic identification and data capture (AIDC)
available inventory D
cycle time
available-to-promise (ATP) database management system (DBMS)
data cleansing
data dictionary
balanced scorecard
data normalization
data warehouse ••
balance sheet
bar coding
define, measure, analyze, improve, control
(DMAIC) process
bill of material (BOM)
blanket purchase order
demand forecasting
demand management
demand planning
demand pull ••
business intelligence
business plan
business process management
demand shaping
dependent demand
design for the supply chain
business-to-business commerce (B2B)
business-to-consumer sales (B2C)
distribution inventory
distribution requirements planning (DRP)
14 © 2012 APICS The Association for Operations Management
•• •
•• E
electronic commerce (e-commerce)
inventory visibility
ISO 26000 Guidance on Social Responsibility

••• electronic data interchange (EDI)

electronic document
electronic product codes (EPCs) J
ISO 31000 Risk Management-Principles and

end-of-life management joint replenishment system

•• engineer-to-order
enterprise resources planning {ERP}
extensible markup language (XML}
joint venture
Just-in-Time (JIT)

•• extranet
extrinsic forecasting method

kaizen event
F kanban
feedback keiretsu

•• file transfer protocol (FTP)

fill rate
fluctuation inventory
key performance indicator (KPI}

•• forecast error
landed cost
lead time

•• G
general and administrative expenses (G&A)
global strategy
legacy systems
level of service

level strategy
g localization linear programming
graphical user interface (GUI) line haul costs

•• H
gross margin load leveling
local area network (LAN)

•• harmonized system classification codes

horizontal marketplace
hypertext markup language (HTML}

•• hypertext transfer protocol (HTTP) make-to-stock

manufacturing resource planning (MRP II)
market demand

•• income statement
independent demand
market driven
market research

•• information system architecture

information technology
market share
master planning
master production schedule (MPS)

interplant demand material requirements planning (MRP}
intra net materials management

•• in-transit inventory mathematical programming

intrinsic forecast method metrics
inventory management middleware

•• inventory optimization software

inventory turnover
mix forecast
modular design strategy
modular system

•• inventory turns
inventory valuation
inventory velocity
multicountry strategy

•• CSCP Exam Content Manual ECM-15

safety stock
sales and operations planning (S&OP)
ordering cost
semipassive tag
service industry
order losers
order qualifiers
service-oriented architecture (SOA)
single-source supplier
order winners
outsourcing six sigma
software-as-a-service (SaaS) ••
package to order
Pareto analysis
sole-source supplier
spend management
Pareto's law
passive tag
standard costs
stockkeeping unit (SKU) ••
stockout costs
pipeline inventory strategic alliance
planning horizon strategic planning
portal strategic sourcing
private trading exchange (PTX)

process chart supplier
process map supplier certification
product differentiation
product family
supplier-input-process-output-customer (SIPOC)
supplier relationship management (SRM)
product life cycle
supply chain
supply chain event management (SCEM)
supply chain management (SCM)
profit margin
pull system Supply-Chain Operations Reference-model
purchasing (SCOR®)

push system supply chain risk
supply chain visibility
quality function deployment (QFD)
quick response program (QRP)
synchronized production
R tactical buying
radio frequency identification (RFID) tag tactical planning
rapid replenishment target costing
relational database
resource management
return on assets (ROA)
third-party logistics (3PL) ••
return on investment (ROI)
reverse auction
total cost of ownership (TCO)
trade bloc
trading bloc ••
reverse logistics
reverse supply chain
risk pooling
transportation management system (TMS)
triple bottom line (TBL)
16 © 2012 APICS The Association for Operations Management ••

•• u
United Nations Global Compact (UNGC}
ISO 26000 Guidance on Social Responsibility:
ISO 26000 or ISO SR is an international standard

•• v
adopted by the International Standards
Organization to assist organizations in contributing
to sustainable development beyond legal
compliance through a common understanding of

•• value-added
value-added network (VAN)
value chain
social responsibility. ISO 26000 is not a
management system standard and it's not
intended or appropriate for certification purposes

•• value stream
value stream mapping
or regulatory or contractual use.

ISO 31000 Risk Management: Principlesand

•• variance
vendor-managed inventory (VMI)
Guidelines: A standard adopted by the
International Standards Organization that outlines
principles and a set of guidelines to manage risk in

•• w
virtual trading exchange any endeavor. The standard outlines guidelines for
understanding risk, for developing a risk
management policy, for integrating risk

•• warehouse management system (WMS}

web services
management into organizational processes
(including accountability and responsibility), and
for establishing internal and external risk

•• x
XML (extensible markup language}
communication processes. ISO 31000 is not a
management system standard and it's not
intended or appropriate for certification purposes

•• Supplemental Glossary
or regulatory or contractual use .

Trade bloc or tradingbloc: A trade bloc is an

•• The following concepts, not found in the AP/CS

Dictionary, 13th edition, will be helpful in preparing
for the CSCP examination.
agreement between countries intended to reduce
or remove barriers to trade within member
countries. Frequently, but not always, those

countries are geographically close. Examples of
Businessprocessmanagement (BPM): A trade blocs are the European Economic
business discipline or function that uses business Community and the North American Free Trade

practices, techniques, and methods to create and Agreement (NAFT A).
improve business processes. BPM is a holistic
approach to the use of appropriate process-related United Nations Global Compact: A voluntary
initiative whereby companies embrace, support,

business disciplines to gain business performance
improvements across the enterprise or supply and enact, within their sphere of influence, a set of
chain. It promotes business effectiveness and core values in the areas of human rights, labor
efficiency while striving for innovation, flexibility, standards, the environment, and anticorruption.

•• and integration with technology. Most process

improvement disciplines or activities can be
considered as BPM .

•• Demand shaping:The practice of using the 4 Ps

(product, pricing, placement, promotion} and other

•• market variables to influence the demand of a

product or service so that the demand better
matches the available supply .

•• Glocalization:A combination of "globalization"

and "localization." When used in a supply chain

•• context, glocalization is a form of postponement

where a product or service is developed for
distribution globally but is modified to meet the

needs of a local market. The modifications are
made to conform with local laws, customs, culture,
or preferences .

•• C:3CP Exa;11 Content r·.11011uc:d EClVl-17

Bibliography (C) it is everyone's responsibility.
(0) quality targets change frequently.
All test candidates should familiarize themselves
with the following references for this examination.
The recommended references pertaining to the
3. An example of the use of a third-party logistics
(3Pl) company would be when a company
diagnostic area are listed at the end of each
section of the content outline. All of these
references are available from the APICS
contracts with another company to:
(A) perform its shipping and receiving functions . ••

1. AP/CS Dictionary, 13th ed., 2011.

(B) produce and deliver a major subassembly.
(C) provide payroll services.
(0) act as a sales agent in another country.
2. Bowersox, Donald, David Closs, and M. Bixby
Cooper. Supply Chain Logistics Management.
3rd ed., McGraw-Hill, 2010.
4. Which of the following is an expected benefit of
implementing supply chain event management?
3. Crandall, Richard, William Crandall, and Charlie
Chen. Principles of Supply Chain Management,
CRC Press, 2010.
(A) It will reduce the need for supply chain
performance reporting. ••
4. Ross, David F. Introduction to Supply Chain
Management Technologies, 2nd ed., CRC
(B) It will improve forecasting accuracy.
(C) It notifies partners when a deviation from
plans occurs.
Press, 2010.
Simchi-Levi, David, Philip Kaminsky, and Edith
Simchi-Levi. Designing & Managing the Supply
(0) It reduces the cost of communications
between partners. ••
Chain, 3rd ed., McGraw-Hill Irwin, 2008.

Sample Questions
5. Which of the following applications would
enable a company to detect patterns in the
preferences of a customer segment?
The following 10 questions are similar in format
and content to the questions on the CSCP exam.
These questions are intended for practice-that is,
(A) Business intelligence
(B) Advanced planning system
to enable you to become familiar with the way the
questions are asked. The degree of success that
you have in answering these questions is not
(C) Sales force automation
(D) Artificial intelligence ••
related to your potential for success on the actual
exam and should not be interpreted as such.
6. Cash-to-cash cycle time is a measure of how
efficiently a company: ••
Read each question, select an answer, and check
your responses with the explanations on pages
(A) recovers its investment in plant and
(B) manages assets to generate cash flow
1. Which of the following is the primary advantage
of using web-based electronic data interchange
(C) converts inventory into sales
(D) collects on sales to customers ••
(EDI) for communication of transactions?
(A) There is more flexibility in transaction
7. Which of the following types of inventory is used
to protect against variations in supply and/or ••
(B) It lowers the cost per transaction.
{A) Cycle stock
(C) It eliminates translation of transactions.
(B) Transportation inventory

(0) A larger number of transactions are

Quality remains an elusive concept in most

(C) Safety stock
(0) Anticipation inventory
•• •
organizations because: 8. Which of the following is typically a
(A) it depends on customer perception.
(B) there are many quality philosophies.
characteristic of strategic sourcing?
(A) It includes automation of contract ••
management processes.
(B) It reduces the price of goods and services.
13 (r;J 2012 APlCS The Association for Operations Management
•• (C) A supplier receives all of the company's
orders for a product or product family.

•• 9.
(D) The focus of the relationship is on large
transactions .
Which of the following measures would be most

•• appropriate for trading partners to use to assess

the delivery performance of the manufacturer of
items built to forecast?

•• (A) Percentage of items shipped within the final

assembly lead time.

•• (B) Percentage of orders shipped complete

within 24 hours of their receipt.
(C) Number of items shipped within 24 hours of

•• their receipt.
(D) Revenue from orders shipped in a week .

•• 10. Which of the following is an expected benefit of

collaborative supply chain management?

•• (A) Maximizing the performance of the firm

(B) Reducing the number of competitors
(C) Increasing scope of operations

•• (D) Synchronizing supply and demand

•• (Answers listed on pages 20-21.)

•• ECM-19

Answers to Sample Questions
Note: References to the content outline appear in
5. A (llH2) A is the best choice because business
intelligence applications collect, organize, and

1. B (I IF1) B is the best choice because a web-

analyze information. Use of these applications
on customer data would allow the company to
detect patterns in the data. Bis not the best
based EDI system would eliminate the cost of
a private or value-added network. A is not the
best choice because the EDI transaction
choice because advanced planning systems
address operations rather than customers. C is
not the best choice because sales force
formats are independent of the network used
for transmission. C is not the best choice
because the transactions still must be
automation does not capture or organize the
data required to detect patterns in customer
preferences. Dis not the best choice because ••
translated to and from the standardized format.
D is not the best choice because the standards
are independent of the transmission method
artificial intelligence applications are intended
to learn and reason like humans to address
specific problems. ••

A (lllE) A is the best choice because the

customers are the ultimate judges of quality
6. B (IA5) Bis the best choice because the
definition of cash-to-cash cycle time is that it is
an indicator of how efficiently a company
and they may have differing requirements and
priorities. B is not the best answer because the
philosophies have similar definitions of quality
manages assets to improve cash flow. It is the
inventory days + accounts receivable days -
accounts payable days. A is not the best
and address how to improve it. C is not the
best choice because the fact that it is
everyone's responsibility has nothing to do with
choice because cash-to-cash cycle time does
not consider the investment in plant and
equipment. C is not the best choice because it
the concept of what is quality. D is not the best
choice because targets should change once
they have been achieved.
is limited to the inventory days component of
cash-to-cash cycle time. D is not the best
choice because it is limited to the accounts
3. A (IE2) A is the best choice because a 3PL
company is a company that manages part or
receivable component of cash-to-cash cycle
time. ••
all of a company's product delivery operations
and shipping is part of the product delivery
operations. B is not the best choice because
neither producing the subassembly nor
7. C (ID) C is the best choice because safety
stock is maintained to protect against variability
in either supply or demand. A is not the best
choice because cycle stock is related to lot •• •
delivering it is part of the company's product sizing. B is not the best choice because
delivery operations. C is not the best choice
because payroll services are not a part of the
company's product delivery operations. D is
transportation inventory is inventory that is in
transit between locations. D is not the best
choice because anticipation inventory is
not the best choice because selling does not
necessarily include any delivery operations.
inventory held to cover trends or planned
events, such as promotions or plant shutdown. ••
4. C (llF2) C is the best choice because supply
chain event management monitors the supply
chain and notifies designated individuals when
8. A (II) A is the best choice because strategic
sourcing focuses on the long-term relationship
and, from an information technology
specified events or exceptions occur or when
trends are recognized. A is not the best choice
because it enables performance reporting but
perspective, typically includes automation of
contract management. B is not the best choice
because the focus is on the total cost of ••
does not reduce the need for it. B is not the
best choice because supply chain event
management itself does not affect any specific
ownership rather than on the quoted price. C is
not the best choice because strategic sourcing
can include contracting with more than one ••
application. D is not the best choice because
supply chain event management does not
directly affect the amount or cost of
partner for a part or family of parts to reduce
the risk of disruptions. D is not the best choice
because the focus of the relationship is on a ••
communications among partners. long-term relationship between the partners
rather than on individual transactions.

20 @ 2012 flPJCS The Association for Operations Management
•• 9. B (lllB3) Bis the best choice because the items
are being produced to forecast and should be
10. D (lllA) D is the best choice according to the
AP/CS Dictionary definition of supply chain

•• shipped from stock shortly after receipt of the

order. A is not the best choice because the
final assembly lead time should not be needed
management. A is not the best choice because
SCM should improve the performance of the
entire chain, not a single member of the chain.

•• before shipment because the items are

produced to forecast. C is not the best choice
because it is a measure of the number of items
B is not the best choice even though it may be
an outcome of collaborative supply chain
management. C is not the best choice because

•• shipped and there is no indication of the actual there is no direct relationship between
number of items that were ordered. Dis not the collaborative supply chain management and
best choice because revenue is a financial the scope of operations for one of the partners.

•• measure, but does not indicate delivery

performance .

1• • CSCP Exam Content M;~nual ECM-21

•• Course Overview

•• Welcome to the APICS Certified Supply Chain Professional™ (CSCP)

•• Learning System. Whether you are interested in professional development or

are pursuing the APICS CSCP credential, you will find the program to be a

•• + Getting Started
complete, easy-to-use learning and reference tool.

•• Course materials This course allows you to work at your own pace to increase your understanding

•• of supply chain and operations management and the APICS CSCP body of
knowledge. It includes three printed textbooks (called modules), which

•• correspond to the knowledge domains tested on the APlCS CSCP exam. The
course also includes onlinc practice tests and learning reinforcement activities .

•• Please check that you have received the three modules (five textbooks total) and
your online system invitation (provided to you via e-mail) for access to the

•• online course components .

•• If anything is missing or if you have not received your invitation e-mail, please
contact APICS CSCP Leaming System Customer Support at 1-888-266-9079

(USA/Canada) or+ 1-651-905-2664 (worldwide) .

Accessing the Before you use the online components of the course, you must create an

•• online course
account in the system:
l. Click on the link in your invitation e-mail. This will take you to the Web

•• site to create your account to access the online components of the course .
2. Read and accept the tenns-of-usc agreement.

3. Create a login name and password. Both must be at least eight characters .
4. Log in using your newly created login name and password .
5. Complete the short survey.

•• You will use your login name and password to access the Web site in the future,

•• so write this information in the space below .

•• APICS Certified Supply Chain Professional Learning System

Login name: I Password:

•• en 2012 APICS
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Course Overview

Note that access to the online components in the CSCP Learning System Web
site is valid for one year after activation of your account. ••
Accessing the
Once you are enrolled, you can access and leave the program as often as you
wish. To access the program:
1. Go to
2. Click Log In to go to the APICS CSCP Leaming System login page. ••
3. Enter your login name and password.
4. Click Log In to enter the course. ••
Read the online overview, and then go to the course menu, from which you
select course components.
Exiting the You may exit the program from most screens by clicking Log Out. This option ••
program allows you to leave the program and return at a later time to where you left off. All
current scores and your current place in the tests are saved. You may start any
activity over at any time. If you start over in a test, your current score is erased.
Upon completion of that test, your new score is saved and displayed on your reports.
Online help The Frequently Asked Questions option on the Login screen is available to answer
common questions related to enrollment and login. If you require additional assistance, ••
please contact APICS CSCP Leaming System Customer Support at 1-888-266-9079
(USA/Canada) or+ 1-651-905-2664 (worldwide), Monday through Friday, 8 a.m. to ••
5 p.m., central time.

For specific details regarding the certification exam, please visit .
Learn more The APICS CSCP Learning System combines printed material and online ••
software plus an instructor-led option to enhance your learning effectiveness.
Go to to learn more about the advantages of APICS
membership, the power of certification, and the various learning options.
+ Completingthe Course
Increase your The APICS CSCP Leaming System is based on the APICS CSCP Exam ••
knowledge base with
this enjoyable and
complete program as
Content Manual (ECM). Using a blend of printed text and on line practice
testing and learning reinforcement activities, the course provides an enjoyable ••
you preparefor the
examination and
and complete preparation method for the APlCS CSCP certification exam.
develop your You may complete the course in any order. The following describes the
professional recommended, step-by-step method.

I[) 2012 AP ICS 11

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All rights reserved Priorcd on ml"'. po,;t-<'<>OSUOlC' W"-"C recycled paper.

•• Step 1: Review the "Introductionto CSCP" tutorial.

•• • The introduction
Once you have read the description of the course on the Overview screen and
become familiar with the online components, review the first item on the menu,
"Introduction to CSCP," which is a tutorial on the Certified Supply Chain
tutorial provides an

•• overview of the
CSCP program.
Professional program. This short presentation introduces the certification
program and includes a link to access the CSCP Exam Content Manual. The

CSCP exam and learning system were designed to follow the ECM outline .

•• Step 2: Complete the pre-test.

•• You begin to plan your own course of study by completing the online pre-test.
This 50-question test checks your basic understanding of supply chain

concepts .

As you answer each pre-test question, you will know immediately if your

•• The pre-test aflows

answer is correct or incorrect and you are given a reference to the module from
which the question was drawn. If you leave the test, you can reenter it and will

•• you to evaluate your

understanding of
supply chain
have the option to either continue or restart the test. You may also print any
page by using your browser's print function.

•• concepts and focus

your study. When you have completed the pre-test, you see a report that shows your
module-by-module score. You may use this report to develop a study plan to

•• help focus your efforts on the modules you need to examine most thoroughly.
Use the print function on your browser if you want to print a copy of your pre-

•• test results .

•• The entire program

includes more than
1, 000 pages of text
m Step 3: Studythe print modules.

•• reinforced by online
practice testing and
learning reinforce-
Based upon your individual study profile, study each of the three modules at
your own pace. The modules include the following topics, which correspond to

•• ment activities. those that constitute the APICS CSCP Exam Content Manual. The APICS CSCP
certification exam questions arc distributed equally among the three modules .

•• It's important to understand how these three modules are interdependent

illustrate a natural progression of critical decisions regarding the strategies,

•• design, compliance, implementation, and operation of every supply chain. The

exhibit below underscores this relationship and previews key topics that arc

•• pertinent to each module. Each module is linked to the next, reflecting the need

•• ~l'J 2012 APICS

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Course Overvinv

for a solid understanding of concepts, terms, and processes before moving onto
the next module.

Exhibit1-1: CSCP Learning System Overview

Module 1:
SupplyChain Management
Module 2:
SupplyChain Strategy,
Module 3:
Design and Compliance

Supply chain management
• Sustainability • Managing and balancing
• Network roles Design considerations supply and demand
• Processes, objectives, • Risk management • Efficiency vs.
benefits • Processes supporting strategy responsiveness

Financial impact • Technology • Continuous improvement
• CRM and SRM

Module l: Fundamentalsof Supply ChainManagement(33.3%)


Supply Chain Management Concepts
Supply Chain Alignment with Business Strategy

Supply Chain Design and Improvement Considerations
Inventory Management

Logistics Fundamentals
Market Segmentation ••
At the end of each
module section is a
progress check.

Demand Planning
Customer Relationship Management (CRM) Concepts ••
Progress check
questions provide an
opportunity for you to
• Supply M anagemcnt Concepts

Module 2: Supply Chain Strategy, Design, and Compliance (33.3%)

stop and think about
what you have just
studied. They include

Risk Management
a page reference
with the correct • Globalization
answer to guide • Logistics
further review.

Managing the Supply Chain
Influencing and Prioritizing Demand •• •

Customer Relationship
Supplier Relationship
Management (CRM)
Management (SRM) ••
• Inventory Planning and Control
o 2012 APICS
A 11 rights reserved
@ Printed
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•• Module 3: Implementationand Operations(33.3%)

•• Each module
includes a

Supply Chain Dynamics
Managing Supply from Internal Sources

•• bibliography
referencing the
books used in the

Managing Supply from External Sources
Implementation of Demand Plans

•• development of that
module .
• Continuous Improvement

•• Step 4: Complete the section-specificquizzes .

•• Section-specific tests
check your
Each module includes section-specific quizzes. You may take as many

•• understanding of
each module .
quizzes as you like, as often as you like. After you answer each
question, you will know immediately if your answer is correct or
incorrect along with the reasoning for the correct answer. If you leave a

•• quiz, you can reenter it and will have the option to either continue or
restart the quiz. You may also print any screen by using your browser's

•• print function .

•• Step 5: Complete the module-specificeFlashcards.

•• The eF/ashcards
provide an
After you have studied each module and taken the section-specific
complete the eFlashcards for that module. The eFlashcards are drawn from the

•• opportunity to review
terms and definitions
by module.
glossary and represent the terms identified as key or supplemental by the
APICS Exam Content Manual. The eFlashcards present a definition of a tcnn,

•• and you supply the term. Click to "flip" the card to check your answer. You
may visit the Resource Center to download a printable version of the module-

•• specific eFlashcards .

•• Step 6: Complete the module-specificlearning


•• The learning
activities are
After you have studied the print module, taken the section-specific

quizzes, and reviewed the module-specific ef'lashcards, complete the
exercises designed
to reinforce the main onlinc learning activities. These exercises reinforce the concepts
concepts presented presented in the text and allow you to apply that knowledge in a real-

•• in the modules.
world application .

•• <D 2012 APICS v
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Course Overview
Step 7: Complete the post-test. ••
When you reach this point, you've studied all the components of the program
and are ready to measure your learning gain. The 50-question post-test draws
from a different bank than you saw in the pre-test, so all the questions are new.
• ••
Post-test questions After you answer each question, you will know immediately whether your
will be new. If you
don't pass the post- answer is correct or incorrect and will see the reasoning for the correct answer to
test, the program

help clarify your understanding. If you leave the test, you can reenter it and will
helps redirect your
have the option to either continue or restart the test.
study efforts, and
then you can take the
test again. Or use the
post-test as a
refresher to help you
After you finish the post-test, you may view a report that compares your pre-test
and post-test scores and your scores on questions related to each of the three
stay current. modules.
You may take the post-test as many times as you wish until you are satisfied
with your results. Each time you retake the post-test, your new score is saved. ••
All attempts are recorded in the system and available to you on the reports.

Step 8: Complete the practiceexam. ••

The practice exam
allows you to get a
Prior to sitting for the CSCP exam or to just review what you have learned, you
will want to select the CSCP Practice Exam option. This exam includes 50 ••
feel for the actual
CSCP exam.
questions written by the ECM committee-the same group that writes the actual
CSCP exam. ••
The practice exam is a useful tool to help you prepare for the CSCP exam. Its
format and functionality emulate that of the software used at the Pearson Vue
testing center. As such, the practice exam has the same marking and review
features as offered by the software at the testing center.
The test is timed to enable you to determine whether you are answering ••
questions at the pace needed to complete the APICS CSCP certification
examination within the time allotted. If you are interested in timing your test, ••
allow yourself an uninterrupted block of time.

As with the CSCP exam, you do not receive instructive feedback after each
question. However, the online reports allow you to see which questions you
answered incorrectly and provide source bibliography references for additional ••
((} 2012 J\PlCS
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Printed on 100% post-consumer waste recycled paper. ••
•• Step 9: Review your reports.

•• Review your reports

to measure your
At any time, you may view online reports of your progress by clicking the
Reports link. The reports show the dates you have completed tests as well as

•• progress through the

course at any time. your scores for each attempt of the pre-test, section-speci fie quizzes, post-test,
and practice exam. You can use the reports to determine where you may have

•• areas of strength or weakness to direct further studying of the course .

•• Step 10: Complete the Program Evaluation.

•• Help us improve our

product offerings and
Upon completion of the course, we would appreciate your feedback. Select
Certificate of Achievement from the menu and complete the online form.

request your Letter of
Upon successful completion of the course (a post-test score of at least 80

•• percent), you can print a Certificate of Achievement (recognizing completion of

the learning system) from the Program Evaluation form.

•• lD 2012APICS Vll
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Course Overview

The following is a graphic representation of the APICS CSCP Leaming System.

APICS CSCP Learning System ••


Pre -Tcst ••
. .L -





• !;e;:

Section - Section - Section -

i .
Specific Quizzes Specific Quizzes Specific Quizzes
,, ...

• ........
Module -
1:-r-- .. •J

Module -
c Flashcards
Module -
• 1;.,i~.
·--=-\ ••
Post - Test

I! . --

Practice Exam
• ==
' t:.J~I
··.I .


Program Evaluation and

Certificate of Achievement

~) 2012APICS
All rights reserved

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Printed on I 00% post .ccasuuwr waste recycled paper. ••
•• Module 1: Fundamentals of Supply
•• Chain Management
•• Introduction

•• There have been supply chains as long as there have been suppliers and

•• customers, but the evolving discipline of managing those chains for competitive
advantage belongs to recent decades. Even the term "supply chain" came into
common usage only toward the end of the 20th century .

•• As with many other phenomena occurring in that period of time, supply chains

•• and their management reflect the revolution in electronic communication and

the shrinking of the world into one global community-what author Thomas

•• Friedman, in his book The World ls Flat, calls the "flattening of the globe."
There were supply chains when primitive hunters brought back skins for

transformation into garments for use or trade. Marco Polo went east in search of
trade routes to bring raw materials from "the Orient" to Europe. But the scope,
scale, and speed of supply chain processes have all gathered revolutionary

•• momentum-and businesses around the world hasten to catch up or, in the case
of leaders like Toyota, Walmart, and Zara, to stay ahead. Their opportunities

•• result from the flattening of the global playing field and advances in technology;
their discoveries contribute to globalization and revolutionary technology .

•• Supply chain management (SCM) may be a young discipline, but like those
other young disciplines, rocket science and brain surgery, it isn't a simple one .

•• It also resembles other youngsters in its rapid rate of development. Staying

abreast of the theoretical and practical aspects of supply chain managemcnt-

•• even keeping up with the vocabulary-requires constant attention .

•• This first module in the APICS CSCP Leaming System, Fundamentals of

Supply Chain Management, provides basic information that forms a foundation

•• both for the following modules in the course and for the continuous learning
you will do later to stay current with new developments .

•• • Section A introduces essential concepts and vocabulary, including

definitions and illustrations of the terms "supply chain" and "supply chain

•• management." It also presents the supply chain processes and the SCOR00
model, compares vertical and horizontal integration, and describes supply

•• chain management objectives and benefits. The section concludes with a

discussion of the basic financial terms and financial statements that are

•• important in managing the supply chain .

•• en 2012 APICS l-1

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Module 1: Fundamentals ofSupply Chain Management
• Section B explores the competitive advantage of various supply chain
strategies, including their alignment with organizational capabilities and
strategy and how to resolve misalignment or gaps.

• Section C explains the need to understand the marketplace before designing

a supply chain as well as the key considerations in its design. The section
describes how continuous improvement opportunities can be built into a ••
supply chain design in order to reap the benefits of ongoing, incremental
process improvements. It also discusses the importance of managing change ••

successfully throughout the supply chain.

Section D explores inventory management from a wide variety of

perspectives=the need for inventory, different types of inventory
management, the flow of inventory, and its functions in the supply chain. ••
The categories of inventory-related
costs and inventory's effects on an
financial statements will round out the discussion. ••
• Section E looks at the fundamentals of logistics, its related functions, the
custom-tailored value proposition, and the types of logistics service
providers and their inherent advantages and disadvantages. The activities
involved in reverse logistics are explained, along with how a supply chain ••
can be designed to facilitate this reverse flow of products from the end users
in a manner that benefits the manufacturer and society. ••
• Section F examines the reasons for identifying market segments, how it is done,
and how to leverage the knowledge of the wants and needs of each segment.
• Section G explores demand planning, including methods for forecasting ••
demand, demand management components and their linkages, and the
functional responsibilities and how those areas interface. ••
• Section H looks at the basic concepts of customer relationship
(CRM), including the need for CRM and its scope, elements, and benefits.
The section concludes with tips on implementing CRM and how customer
information can be leveraged in the supply chain. ••
• Section T describes supply management concepts such as total cost of
ownership, outsourcing and offshoring, factors to consider in a make-
versus-buy decision, and types of buyer-supplier
explains how to develop supply plans and foundational
relationships. It also
concepts of supplier ••
relationship management (SRM).
D 2012 APICS 1-2 Version 3.0, 2012 Edition
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•• Section A: Supply Chain Management Concepts

•• This section is designed to
• Define and illustrate the supply chain in terms of entities, structures, and flows

•• • Identify and describe key supply chain processes

• Describe the SCOR~ model and its use for improving supply chains

• Differentiate between vertical and horizontal integration

•• •

Define supply chain management and its objectives and benefits
Describe the stages of supply chain evolution globally and within companies

•• •

Identify specific ways in which supply chain management creates value for all stakeholders

Define key financial terms

•• • Explain key financial statements that are commonly used in supply chain management .

•• It's a World of Global, Complex, Interdependent Supply Chains!
•• When the 8.9 magnitude earthquake and resulting tsunami hit Japan in March
2011, initial concerns and the world's focus were on the people of Japan. As the

•• weeks progressed, it started to become clear in just how many ways we are all
connected and that the entire world was affected by this event. These are just a

•• sampling of the headlines and paraphrased news stories in the weeks that

•• • Wall Street Journal, "Quake Disrupts Key Supply Chains." Dozens of

semiconductor factories had their operations affected by the earthquake,

•• raising fears of shortages or price increases for a number of widely used

components ... other manufacturers are likely to be affected by disruptions of

•• transportation of finished goods to airports or ports as well as the movement

of employees and supplies to production plants .

•• • Financial Times, "Multinationals Warn over Japanese Supplies."

Multinational companies in several sectors are warning of supply chain

•• disruptions after the earthquake, tsunami, and nuclear crisis in

Japan .... General Motors became the first international group to announce a

~) 2012APICS 1-3 Version 3.0, 2012 Edition
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Module 1: Fundamentals of Supply Chain Management
direct impact on production after the disasters .... Sony Ericsson, a
smartphone joint venture between the two companies, said its supply chain
would be affected, and German carmaker Volkswagen warned of a possible
medium-term components shortage.
• JP Morgan Insights newsletter, "Asia: The Impact from the Earthquake in
Japan." It is believed that the adverse impact of the Japanese earthquake on ••

Asia is primarily via a supply chain disruption due to reduced exports from
Japan given the interruption in power supply, factory closures, and
logistical challenges.

• Los Angeles Times, "Disaster Puts Kink in World Supply Chain." Concerns ••
are growing that the earthquake and tsunami could lead to a long-term
disruption in the world's supply of automobiles, consumer electronics, and
machine tools.
As millions of people around the globe extended their condolences to the people of ••
Japan for the lives lost and suffering, companies around the globe had to quickly
assess whether their business would be impacted by this tragedy thousands of miles ••
away. In many instances, those firms were not happy to learn how their supply
chains would indeed be affected by such an unpredictable natural catastrophe. ••
Even after major disasters like Japan's recent earthquake, the World Trade Center
attacks of September 11, 2001, in New York, the U.S. recession that was felt
worldwide in 2009 to 2010, and the volcanic eruption in Iceland in April 2010,
when aviation authorities closed the country's airspace due to a cloud of drifting
ash, some companies are hesitant to realize that with the global economy, actions
in one part of the world, whether planned, unplanned, human-induced, or naturally ••
occurring, seem to affect us. We are all connected.
That level of connectedness is impacting supply chain management and causing it
to evolve into a more strategic role. Managers now recognize that the actions taken
by one organization in the supply chain can influence the success of the rest of the
network. While in the past the strategic focus for many organizations was on
improving their internal quality and reducing costs, the new focus is on ••
implementing total supply chain solutions that require collaboration from partner
organizations both upstream and downstream. ••
These new global forces are being met by corresponding technological solutions in ••
supply chains in most nations. Collectively they are revolutionizing supply chain

e ••
2012 APICS 1-4 Version 3.0, 2012 Edition
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•• Section A: Supply Chain Management Concepts

We want you to be prepared and ready to handle the new powerful forces that will
impact virtually every supply chain:

•• • Global expansion. The globalization of sourcing and manufacturing is making

supply chains longer and more complex than ever before, thereby requiring

•• more formal coordination and collaboration. Also, many manufacturers and

retail chains have expanded both nationally and globally, creating the need for

•• more formal mechanisms to coordinate supply chain activities.

firms that have created their own e-commerce sites can now have, or at least
In addition, the

•• •
claim to have, global exposure .

Increasedprojectcomplexity and scope. Project size and complexity are

•• increasing. Projects involve, in some cases, large teams operating at different

remote sites. Moreover, the information involved is more important than ever,

•• in larger amounts than ever, and more difficult than ever to manage manually
with the required speed and accuracy .

•• • Greatermarketvolatility. Demand is becoming more volatile and harder to

•• predict due to the increasing power and speed of information available to both
consumers and competitors .

•• Our goal is to prepare you to grasp these concepts, be confident in your actions,
and eventually thrive in the world of supply chain management. Remember that

•• "the beginning of knowledge is the discovery of something we do not understand"

(Frank Herbert, science fiction author and writer, 1920-1986) .

•• +Topic 1: Basic SupplyChain

•• Basic supply According to the AP JCS Dictionary, 13th edition, a supply chain is a "global

•• chain network used to deliver products and services from raw materials to end
customers through an engineered flow of information, physical distribution,
cash." A supply chain, in this view, comprises a network of both entities and

•• processes (the engineered flow), A supply chain doesn't have to be global,

the massive chains that interest us in this course-the ones that run through

•• corporations such as Walmart, Mitsubishi, Dell, and the clothing chain Zara-
are decidedly global in scope .

•• Exhibit 1-2 illustrates a very basic supply chain (one that isn't necessarily
global) with three entities-a producer with one supplier and one customer.

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Module I: Fundamentals ofSupply Chain Management
Exhibit1~2: The Basic Supply Chain for a Product
~~-- Reverse product flow ~ ••
-.'. [ Producer J ~ c:sto~: f ••
.......... Primary ~
........_ Primary /
flow ••
Primary cash flow
Three entities These "entities" that perform the processes can be business or governmental
organizations or (at least in theory) individuals. They can also be departments or ••
functional areas or individuals within a larger organization;
well as external supply chains. For the most part the model applies to
there are internal as
• ••
Most work on supply chains, both theoretical and applied, involves a
manufacturing firm in the middle (although service firms also have supply ••
chains) with a supplier of materials or components on the upstream side and a
customer on the downstream side. Technically, a supply chain needs only those ••
three entities to exist, but that isn't realistic for the types of global supply chains
of interest in this course. ••
The simplified chain in Exhibit 1-2 might be made up of these organizations:
• A supplier, a provider of goods or services or a seller with whom the buyer ••
does business, as opposed to a vendor, which is a generic term referring to
all sellers in the marketplace. The supplier provides materials, energy, ••
services, or components for use in producing a product or service. These
could include items as diverse as sugar cane, fruit, industrial metals, roofing
nails, electric wiring, fabric, computer chips, aircraft turbines, natural gas,

electrical power, or transportation services.
A producer that receives services, materials, supplies, energy, and
components to use in creating finished products, such as dress shirts,
packaged dinners, airplanes, electric power, legal counsel, or guided tours. ••
(Note that supply chains for services may be more abstract than those for
manufacturing.) ••
• A customer that receives shipments of finished products to deliver to its
customers, who wear the shirts, eat the packaged dinners, fly the planes, or ••
tum on the lights.

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•• Section A: Supply Chain Management Concepts

•• An organization's supply chain or network can have many forms. It can be a

•• Structures
simple chain structure with a single strand, as shown in Exhibit 1-2, a complex
network, or any structure between those two extremes. No matter whether it is a

•• product or service chain, or what types of entities are involved, companies

require their supply chain to guarantee a steady flow of supply while at the same

•• time striving to reduce their supply chain costs. They can improve operating
efficiency by employing the right supply chain structure .

•• Depending upon the type of industry, supply chain costs can be as high as 50%

of a company's revenues. According to research done by A. T. Kearney, a
global consulting firm, inefficiencies in the supply chain can total 25% of a
firm's operating costs. When a company is faced with thin profit margins, like

•• 3% to 4%, even a small improvement in efficiency can double profitability .

Implementing the appropriate cost-centered structure and strategy is critical.

•• There are three main types of supply chain strategies: stable, reactive, and

•• efficient reactive .

The stable supply chain strategy is appropriate for chains:
• With a significant history of stability between demand and supply
• That are focused on execution, efficiencies, and cost performance

•• • That use simple connectivity technologies and have little need for real-time
information .

•• An example is a table salt manufacturer with commodity-oriented processes that

•• use scale production and dedicated capital assets .

•• A reactive supply chain strategy works well when:

• The chain acts to fulfill demand from trade partners' sales and marketing

• The chain is perceived as a cost center by all involved
• The chain needs minimal connectivity technologies and capital assets to

•• •
respond to demand
Ensuring the throughput at any cost is the chain's primary goal.

•• An example of this strategy is a manufacturer of sports team apparel for the fans

•• of competing rivals in the world championship soccer tournament. When a team

makes it to the next round, more products are needed. However, for the losing

learn, demand virtually disappears for their apparel.

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Module l : Fundamentals of Supply Chain Management

With an efficient reactive supply chain strategy, the chain:

• Supports competitive positioning by serving as an efficient, low-cost, and
integrated unit
• Focuses efficiency and cost management on the total delivered cost of

finished goods
Places greater importance on connectivity technology and new equipment to ••
automate functions to reduce labor costs and improve capacity and
throughput. ••
An example of this strategy is the supermarket chains in the Netherlands, where ••
the shops, distribution centers, third-party logistics providers, and manufacturers
cooperated to replace what is sold in the shops within less than 24 hours.

All of these models are rather simplified in that they perceive the supply chain as
a cross-company cost center. Their metrics focus on the return on investment ••
(ROI) of the individual trading partners but not on the potential
value and collaborative payback. As you will learn in Module 2, the more
for joint strategic
sophisticated supply chains-those having network partners with highly
integrated and synchronized connectivity-focus more on value than on cost.

Four flows Four basic flows connect the supply chain entities together:
• The flow of physical materials and services from suppliers through the ••
intermediate entities that transform them into consumable items for distribution
to the final customer ••
• The flow of cash from the customer back upstream toward the raw material
• The flow of information back and forth along the chain (also back and forth
within the entities and between the chain and external entities, such as
governments, markets, and competitors)
• The reverse flow of products returned for repairs, recycling, or disposal
(This is called the reverse supply chain, and it is handled by reverse logistics,
which involves different arrangements than the forward logistics
materials and products in the other direction. This topic is discussed in more
that carried
Supply chain
detail in Section E, "Logistics Fundamentals," in this module.)

Consider, as a very simplified instance of this stripped-down supply chain model,

example a young street vendor who sells just a few light snacks. This is a familiar sight on
warm summer days around the globe, whether it is fresh crepes in Paris, roasted
chestnuts in New York, or small servings of spicy tapas in South America. In
many ways, the food vendor on the street resembles small family businesses that ••
exist in cities all across the world.
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•• Section A: Supply Chain Management Concepts

This simple street vendor represents one end of a supply chain. The supplier is
probably a small wholesale food distributor that sells basic ingredients to many
one- or two-person food kiosks. The worker is the "producer" who turns the raw

•• ingredients into crepes, roasted nut mixes, or a variety of easy-to-eat tapas. The
stand, operated by one or two owners, is the retailer that sells the finished

•• delicacies to the customers or passersby who are cajoled into making a purchase .

•• Notice that even in this simplest of supply chains, the basic model needs
amplification. For instance, there are more suppliers than one. While flour and

•• nuts may be procured from the same supplier, water to warm the stainless steel
food containers comes from the employee's kitchen faucet, and the supplier of
that water may actually be a government entity rather than another business .

•• Electricity is supplied to light this mini "manufacturing center." Nearby is a food

preparation area with refrigeration for storing the perishables needed plus shelves

•• and drawers to hold various basic supplies, such as tongs and other utensils. There
is also wood to build the stand and a white board and markers for making signs to

•• advertise the day's offerings. Somewhere in the chain, though they remain
invisible in our model, arc suppliers' suppliers, who bring materials, components,

•• or services to the food wholesaler and the utility companies.

Manufacturing Exhibit 1-3 at least hints at the organizational complexity that appears in corporate
•• supplychain
supply chains by adding a second tier of suppliers and more distribution centers
and customers.

•• Exhibit1-3: ManufacturingSupplyChain Model

•• Information flow

•• '. 2 ma·t
I far.supp ..erials
I ier ·1 ·- .. ·-··-.
Tier I materials
H~~::mer I

Tier 2 materials .., ; ~ Customer I

•• 1· I ier 2 service
I supplier
- .,. ·················-,;;:::----·

•• ! Tier 2 materials .. f

, Tier I service


•• I'icr 2 service

Primary Primary
product flow--+-...- cash flow

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Module I: Fundamentals ofSupply Chain Management
Notice that there are suppliers of services as well as materials. Discussions of
supply chains typically put manufacturing at the center and suppliers of
components to the immediate left. It may be that component suppliers are the
most crucial consideration when designing and managing a supply chain for
manufactured products, but utilities and other services are not inconsequential ••
contributors to the cost of operations.
In the case of our food vendor on the street, services most obviously include
utilities, transportation, warehousing, carpentry, and cleanup, among others. ••
Utilities, which are suppliers to all manufacturers, are crucial considerations
when locating plants and warehouses. If water and electricity (or natural gas, or
both) are not available at a proposed site, they cannot be readily made available.

The exhibit also shows that Tier I suppliers have their own suppliers in Tier 2.
The wholesale food distributor that supplies the daily ingredients
materials for the menu items has its material and service suppliers-and they
and raw
have their suppliers, and so forth. The flour for the crepes, for instance, is not a
raw material but a product with its own supply chain that begins in a farmer's ••
wheat field and is processed in a plant, shipped to a wholesaler, and distributed
to the corner store. No matter how far you travel toward the left, you will never
run out of new tiers of suppliers.

Even a raw material extractor, such as a coal mine, has its own suppliers of
extraction machinery and services. In fact, the coal mine may ship coal to a
generating plant that supplies power to the manufacturer that produces a ••
machine that is shipped to a distributor that sells mining equipment to the same
mine that began the process; supply chains can double back on themselves. (A ••
distributor is a business that does not manufacture its own products but
purchases and resells these products.)

Services also
have supply
Although the traditional supply chain model was developed in manufacturing,
the service industry, too, has supply chains. According to the AP/CS Dictionary, ••
chains 13th edition, a firm in the service industry is "in its narrowest sense, an
organization that provides an intangible product such as medical or legal ••
advice." In its broadest sense, service industries include "all organizations
except farming, mining, and manufacturing. It includes retail trade; wholesale ••
trade; transportation and utilities; finance, insurance, and real estate;
construction; professional, personal, and social services; and local, state, and
federal governments."

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•• Section A: Supply Chain Management Concepts

Service-oriented supply chains also require sophisticated management. Exhibit
1-4 illustrates, in simple form, the supply chain of an electric utility. It receives
products, services, and supplies of its own and dispenses its services into three

•• distribution channels: home customers, commercial customers, and other

utilities .

•• Exhibit1-4: ElectricUtility SupplyChain

•• l- Fuel supplies -:_J~


•• • '..Electric b~ckup power1


·---· ·-~··- '·~--

"'"'~"~~, I .-..,-.J:•••••..••··
.....~ ,,~~--O_th_e_r_u_til_it_ie_s_---"

~ Home customers

•• ; Facility maintenance
J ·


!' . . .r.: . --. ·---. ------·-·--·-,
· 1 Commerc1al customers I

•• l!_:~~ram1~~ng services

•• The flows in our street vendor example aren't quite as simple as might be
supposed, either. The "products" that move through the chain could include

•• materials, supplies, and the components used in the production

items. Information flows may be fairly rudimentary: orders submitted by end
of the menu

•• users (eaters) of the product, by the distributor (the person on the street with the
cart) to the manufacturer (the person who assembles the ingredients), and by the
manufacturer to the supplier (the source of the food). There will be recipes and

•• shopping lists, discussions of potential demand, perhaps records of last year's

results. The flows of cash may be based upon information contained in cash

•• register or credit card receipts .

•• Cash travels in several separate flows from the manufacturer to suppliers of

products and services and, of course, to any lenders or investors for debt or

•• dividend payments. There are also logistics concerns: transportation

entity to the other-perhaps drawing upon the private fleet of a car or two--as
well as the warehousing decisions. And, finally, the reverse supply chain-
from one

you'll read more about that later in this module-exists to return any
unacceptable menu items, to recycle the vegetable waste into a composter, to
reuse utensils and other supplies after sterile cleansing, and to dispose

•• responsibly of any packaging .

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Module 1: Fundamentals of Supply Chain Management

Many global businesses began in someone's home office, garage, or basement

with the glimmering of an idea for, let us say, a computer operating system or a
new idea for consumer-to-consumer e-commerce. Perhaps the food vendor
comes up with a new twist on the old recipe for crepes; a customer is impressed
and asks if the vendor can make 50 crepes for a lunch-time birthday celebration
at his nearby office; someone at the birthday lunch owns a neighborhood
restaurant ... and before long the vendor has rented space in a small commercial ••
kitchen facility to supply special made-to-order crepes for local businesses
within a few blocks. It's surprising how many challenges and opportunities can ••
be anticipated and can be seen most easily in a very simple model.
Summing up There are many variations on the basic supply chain models presented so far.
Here are some basic points to keep in mind as the discussion continues and
grows more complex.

• A supply chain involves, directly or indirectly, everyone and everything ••

required to extract materials, transform them into a product, and sell the
product to a user. ••
• Supply chains include various entities, such as raw material extractors,
service and component suppliers, a material product manufacturer or a ••

producer of services, distributors, and end customers.

Supply chain structures vary based on demand history, business focus, and
needs for connectivity, technology, and equipment.
• Supply chains can be viewed in terms of processes, such as the gathering
and processing of marketing data, distribution and payment of invoices,
processing and shipping of materials, scheduling, fulfillment of orders, and
so forth. Such functions cut across entities.
• Supply chains include various flows as well as various entities. Materials
and services flow from suppliers toward customers; payment flows from
customers toward suppliers; information flows both ways. Supply chains
also run in reverse, starting with the customer who sends back such items as
components for replacement or repair, returned goods for remanufacture,
and obsolete goods for recycling or disposal. The reverse chain, like the
forward chain, also comprises information flows and cash or credits. •
Supply chain expertise is so important in today's business world that an annual
survey is conducted to identify the 25 best supply chain leaders based on
specific criteria. It's a major accomplishment to be named to that list and an
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Section A: Supply Chain Management Concepts

•• even higher compliment when a company manages to remain in that top echelon
of supply chain performers for consecutive years. Check the on line Resource
Center for a link to those survey results and to see which companies are top-

•• ranked for their supply chain management expertise .

•• -t- Topic 2: The SCOR® Model: Linking Processes, Metrics,

Best Practices, and Technologies
•• [n this discussion of supply chain processes, we' 11 describe one of the more

•• widely accepted and used process-oriented models: the Supply Chain

Operations Reference (SCOR'.i!J) model. The SCOR model is "a process
reference model developed and endorsed by a nonprofit corporation, [the]

•• Supply Chain Council (SCC), as the cross-industry standard diagnostic tool for
supply chain management" (APJCS Dictionary, 13th edition). It reflects the

•• collective wisdom of years of field-based practices and provides a unique

framework that links business processes, metrics, best practices, and technology

•• features in a unified structure .

•• The SCOR model is used by SCC members to enhance their understanding of

their supply chains and associated processes and to improve their supply chain

management systems and practices. SCC membership is open to all interested
corporations, nonprofit organizations, government and military agencies,
consultants, and academicians .

•• The SCC carefully defines the boundaries within which the SCOR process model

•• applies. Specifically, it does not apply to all business processes, only to those
involved in the supply chain as the chain extends two tiers in both directions from
the company at the core. This is shown in Exhibit 1-5 on the next page .

•• •

At the center is "Your Organization."
To the immediate right is the first tier of customers, which can be either

•• •
internal or external.
To the left is the first tier of suppliers, which, again, can be either internal or

•• •
The model goes out two tiers in both directions; the second-tier suppliers

•• and customers are assumed to be external.

The main focus of the model is on the chain's management processes: plan,
source, make, deliver, and return. These processes-which are not traditional
functional areas or departments-exist within the member firms of the chain .

•• All the processes are carried out by the central triad of chain members .

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Exhibit 1-5: Supply Chain Operations Reference (SCOR) Model

Source: Adapted from Supply Chain Council, Inc.

The members at each end of the chain (a raw material supplier and a retail
outlet, for example) perform only two processes (the supplier's
only delivery and returns, while the customer's customer manages only
supplier handles ••
sourcing and returns). This model can also be applied to supply chains
containing many more linked firms.
SCOR Version IO.O does apply to the following activities: ••

All customer interactions from order entry through paid invoice
All product transactions (defined as physical materials and services), ••

including equipment, spare parts, bulk product, and software, among others
All market interactions from understanding aggregate demand through ••
order fulfillment

SCOR Version 10.0 does not apply to the following processes: ••

Sales and marketing (defined as demand generation)
Research and technology development ••

Product development
Some elements of post-delivery customer support (But it does include ••
returns as a fundamental process.)

(The SCOR model assumes that the product has already been designed and
•• •
tested for production. However, the design of a product may significantly
influence the functioning of the chain, so supply chain representatives should
play a role in the design process, as you'll see in Section C of this module.) ••
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•• Section A: Supply Chain Management Concepts

•• SCOR does not address the following but assumes that they exist:

•• •


•• •

Information technology (IT)
Administration (other than SCM administration)

•• You will be learning more about SCOR and its metrics later in this module and

•• in Module 2 .

Next we'll look at how supply chains have evolved over the years, moving from

•• vertical chains to the lateral supply chain management that is now widely
practiced around the globe .

•• *Topic 3: Vertical versus Horizontal Integration

•• Shift from Finns have generally pursued one of two types of supply chain management, called

•• verticalto
vertical integration and lateral (or horizontal) integration.

Vertical integration, or vertical supply chain management, refers to the practice of

•• (horizontal)
bringing the supply chain inside one organization. For instance, in the early days of
the American automotive industry, Henry Ford pursued a strategy of owning and

•• controlling as many links in the automobile supply chain as possible. Another

example is a paper company that was fully vertically integrated by owning its land

•• • and trees, replanting for future harvests, owning the related equipment it used, and
managing all of its product processing, palletizing, and shipping. (The company
purchased only its chemicals from an outside source.) While this vertical structure
still persists in some companies, it is very challenging to be fully integrated end to

•• end .

•• Some companies have a blend of structures, for example, outsourcing supply chain
management but keeping other core competencies vertical. It's difficult for one

•• corporation to garner the expertise needed to excel in all elements of the supply
chain, and it increases their risk, so corporations around the globe have turned
instead to outsourcing those aspects of their business in which they judge themselves

•• to be least effective. Philips, a manufacturer of light bulbs, uses third-party providers

for some of its supply chain activities. Ford divested itself of the production of many

•• components, as Chrysler Corporation shed its Mopar (motor parts) division and
General Motors turned loose its component supplier to become Delphi Corporation .

•• Now lateral supply chain management has replaced vertical integration as the
favored approach to managing the myriad activities in the supply chain. The lateral,

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Module 1: Fundamentals of Supply Chain Management

or horizontal, approach is assumed in most supply chain illustrations, including the

ones featured so far in this text. We usually assume that the customer-producer-
supplier illustrations refer to three separate companies. This is, of course, not
necessarily the case; the entities could be departments within one cornpany=.a
supplier of tires in one department, an assembler of finished automobiles in another
(the assembly line), and a wholly owned dealership at the customer end.
Horizontal chains are now the way of the world and, therefore, the major focus
of supply chain theory and application. In this discussion of how supply chains
have evolved over time, we will look first at vertical integration and then
examine the development of lateral supply chains.
By bringing many supply chain activities in-house and putting them under
corporate management, vertical integration solves the problem of who will ••
design, plan, execute, monitor, and control supply chain activities.

A vertically integrated enterprise may grow from an entrepreneurial base by

adding departments and layers of management to accommodate expansion, or it
may be built through mergers and acquisitions. Jn an attempt to create a self-
sufficient enterprise, Ford owned iron ore mines, steel mills, and a fleet of ships
as well as the manufacturing plants and showrooms that built and distributed the ••
cars bearing his name (and, eventually, Lincolns and Mercurys as well).

Exhibit 1-6 illustrates the vertical integration of a supply chain.

Exhibit 1~6: Vertical Integration/Supply Chain Management a la Henry Ford ••
j: ••
---·- ·-----
Showroom " -4 Ford customer ••
---~;st,;h"'mn .... =r~ )
--1 Plant I(
Primary materials!
______ ~---~ ) product flow
Component production

=-~aw mate;j~l·~----y
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Section A: Supply Chain Management Concepts

•• The primary benefit of vertical integration is control. A department or wholly

owned subsidiary with no independent presence in the marketplace can't deal
with competitors to sell its components or services at a higher price. Its

•• operations are completely visible to the parent company (at least in theory) and
can be synchronized with other company functions by directives from the top .

•• Its schedules, workforce policies, locations, amounts produced-s-all aspects of

its business=-are controlled by the overarching management.

•• Lateral When corporate ownership turns instead to outsourcing various activities, it

loses control of these aspects of the supply chain and will deal separately with
members of the chain as suppliers or customers. Each of them will focus on
their core competencies such as extraction or production and deal with each

•• other through discrete transactions or by longer-term contracts .

•• Some Japanese companies favor an intermediate form of integration called

"keiretsu." The APJCS Dictionary, 13th edition, defines keiretsu as follows:

•• A form of cooperative relationship among companies in Japan where

the companies largely remain legally and economically independent,
even though they work closely in various ways such as sole sourcing

•• and financial backing. A member of a keiretsu generally owns a limited

amount of stock in other member companies. A keiretsu generally

forms around a bank and a trading company, but "distribution" (supply
chain) keiretsu alliances have been formed of companies ranging from
raw material suppliers to retailers .

•• Among the reasons for relying on a lateral supply chain, the following stand out:

•• • To achieve economies of scale and scope. No matter how large the

corporation, its internal supply chain functions lack economies of scale when

•• compared with the potential capacity of an independent provider of the same

product or service .

•• • To improve business focus and expertise. Vertical integration, in a globally

competitive market, multiplies the complexity of managing disparate

•• businesses spread across international borders, time zones, and oceans. The
independent company that focuses entirely on its particular business can

develop more expertise than an in-house department, leading to more
attractive pricing, higher quality, or both .

•• • To leverage communication and production competencies. Today many of

the barriers to doing business at a distance have been reduced or minimized .

•• Nearly instantaneous communication means that information can be shared

simultaneously by videoconference or in internal organization Web boards or

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chat rooms. There are advantages to using already established companies that
know their local markets. Many apparel companies in Europe, for example,
work through Dutch logistics centers to take advantage of Holland's central
location and because a number of specialized firms have sprung up there with
well-developed capabilities in handling both the distribution and the return of
Despite the benefits of the lateral chain, however, synchronizing the activities of
a network of independent firms can be enormously challenging. What each firm
gains in scale, scope, and focus, it may lose in ability to sec and understand the
larger supply chain processes=-or to care about them.

Exhibit 1-7 hints at the complexity of a multitiered chain. As you can see,
"horizontal" doesn't quite capture the complexity of the global supply network
with multiple connections around the world and information shared on networks ••
connected all along the chain.

Exhibit 1-7: Lateral (Horizontal) Supply Chain

Information flows
Components Plant Distribution
y· Retail
materials Customers
----- -----
.r > . .

• • Primary

product flows cash flows

Stages of
supply chain
The advances made over the past few decades in supply chain management are
generally reflected in each supply chain's development. Experts in the field
agree that there are typically between four or five sequential stages.
Supply chain evolution often includes the following:

• Stage I-Multiple dysfunction. The (potential) nucleus firm lacks clear

internal definitions and goals and has no external links other than
transactional ones.
• Stage 2-Semifunctional enterprise. The nucleus firm undertakes
initiatives to improve effectiveness, efficiency, and quality within
functional areas. While some or all functions engage in initiatives designed
to increase efficiency within their departmental walls, there is little or no
overlap in decision making from one department to another. ••
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•• Section A: Supply Chain Management Concepts

• Stage 3-lntegrated enterprise. The firm breaks down silo walls and
brings functional areas together in processes such as sales and operations
planning (S&OP) with a focus on companywide processes rather than

•• individual functions .

•• • Stage 4--Extended enterprise. The firm integrates its internal network

with the internal networks of selected supply chain partners to improve

efficiency, product/service quality, or both. The starting point is generally
one inside/outside partnership that points the way toward the completely
networked enterprise .

•• Whether the supply chain ownership strategy rests on vertical integration,

•• lateral integration, or a compromise (like keiretsu), the relative sophistication

with which the chain is managed develops along the continuum that we have

divided into these four states. Let's look at these stages in greater detail.

Stage 1: multiple It's possible for the nucleus firm in a lateral supply chain to lack any

•• dysfunction disciplined management for both its internal and external chains. Exhibit 1-8
illustrates the lack of coordinated flows of information or solid relationships

•• among potential partners .

Exhibit1-8: MultipleDysfunction

•• • Gp~~ri) Purchasing

(~~) Production
·--~- _.-~

- ~- ~
Logistics Distributioy

• Materials/
......... _
•• products/services Payments -----

In the dysfunctional

organization, this is what tends to happen:
Internal activities tend to be undertaken impulsively rather than according
to plan .

•• • Management provides only the most general sense of mission,

communicated perhaps by pep talks at best or threats at worst.

•• • Forecasting tends to be mostly guesswork, often inflated by unwarranted

marketing optimism .

•• • Products are designed without advice from other areas that could provide
guidance, such as manufacturing or marketing .

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Module/: Fundamentals ofSupply Chain Management
• Warehouses are sited near each market, stocked with an overabundance of
inventory in anticipation of a big sale, and staffed with manual laborers who
have little training.
• Trucks or trains are unloaded when they arrive and loaded when an order
comes in, without much advance warning in either case.
• There may be flows of payments (but collection may be poorly executed) as
well as materials, but the exchange of information tends to be tied mostly to ••

giving orders internally, accepting bids, and sending invoices.
Material requirements planning (MRP) takes place at a basic level, ••
involving a bill of material (BOM), a master schedule, and current on-
hand/on-order data. ••
Stage 2:
sem ifunctional
Exhibit 1-9 provides an illustration of the semifunctional enterprise. Information
flow has been improved and functional areas have been defined-but they tend
to perform their functions one after the other without collaborating on the most
effective ways of creating value. At this stage, there are no partnerships with ••
customers and suppliers.

Exhibit1-9: Semifunctional Enterprise

.....,_ __ Information ---t•• ••
Supplier (.Customer

:~ Supplier Customer

products/services Payments ----
Reverse product flow ------------

In the second stage of supply chain evolution, an individual firm undertakes
initiatives to improve specific functional areas. Here are some examples: ••
• The largely manual operations in warehouses may be augmented by the
addition of basic materials-handling equipment. ••
• Inventory management may find ways to reduce levels of inventory
within the firm's own facilities. ••

Procurement might take advantage of new purchasing strategies to obtain
supplies and services at the lowest possible prices.
The traffic department may reduce transportation costs by strategic

selection of carriers and routes.
Some departments may institute more effective hard skills training and
adopt strategies for making jobs more challenging.
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Section A: Supply Chain Management Concepts

•• •

Marketing may develop more reliable research and forecasting techniques .
Manufacturing resource planning (MRP If) software may be in place, and
the company may have cross-functional integration of planning processes .

•• When the nucleus firm concentrates only on improvements within its separate

•• departments, it may find its efforts wasted through lack of communication. For
example, market researchers and well-trained sales representatives may uncover

•• market opportunities among current and potential customers without being

provided an opportunity to share this information in a structured collaboration

•• with product designers. And this lack of collaboration may play out repeatedly
among the departments. In this stage some functions may be automated-MRP
software, for instance, may put the bill of material in the computer to streamline

•• workflow. But new software in one department may be incompatible with

current software in other areas .

•• Stage 3: In the third stage of supply chain evolution, the individual firm begins to focus

•• integrated
on business processes rather than compartmentalized functions. Historically,
this shift in supply chain strategy is associated with the late 1980s and early

•• 1990s-the same time that personal computers were becoming more powerful,
reliable, and affordable.

•• There are a few key milestones that mark this phase: introduction of
manufacturing and enterprise-wide software, increased cross-functional

•• communication and training, centrally located and easily accessible databases

and files, and periodic sales and operations planning meetings attended by

•• representatives for all departments involved .

•• Exhibit 1-10 provides a visual representation of a linked internal supply

chain with collaboration between functions and sharing of information
through companywide enterprise resources planning (ERP) software .

•• Exhibit1-10: Integrated Enterprise

•• Reverse product flow

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Module I: Fundamentals of Supply Chain Management
This stage is markedly different from the previous one because of the following:

• The focus on business processes is facilitated with the increased availability

of e-mail, file transfers, powerful databases, and enterprisewide software
applications. Cross-functional cooperation becomes much faster and easier
and takes place almost instantaneously across functions, time zones, and
• ••

international boundaries.

A variety of initiatives reduce the time it takes to get an order from a supplier,
create the product, and deliver it to the customer, including MRP II and ERP:
• MRP has been upgraded to MRP II, a breakthrough development that
allows cross-functional communication between manufacturing and
finance. ••
• Enterprise resource planning (ERP) extends that process by adding
modules for each functional area until the most advanced versions tie ••
together entire companies. Further advances have reached through the
corporate wall to tie supply chain partners together. ••
• Product design in some firms is now a team effort in which production
engineers and other stakeholders, such as marketing and purchasing,
collaborate with design engineers to "design for marketing," "design for
logistics," "or design for the environment." This approach results in products
that are on target for customer desires and are ready to be manufactured
without making costly modifications in processes, equipment, or staffing. ••
• There are improvements in customer service due to astute segmentation of ••
markets and more efficient replenishment policies suited to each segment.


• Inventory is treated more strategically as Just-in-Time procedures, more
accurate demand planning, and improved logistics work together to make
fulfillment more efficient and reliable.
• Warehousing and transportation decisions arc carried out in tandem to achieve
the optimal balance of cost-effectiveness and customer service. ••
• Warehouse management benefits from more advanced equipment and
At this point, the nucleus firm may begin to take a step toward integration with the
external members of the chain by contracting with a logistics supplier, such as ••
UPS, to "insource" by using its expertise to help optimize logistics decisions.
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Section A: Supply Chain Management Concepts

•• Stage 4: extended
The hallmark of this stage is the decision to extend at least one business process
beyond the boundary of the individual corporation. When the nucleus firm decides
to collaborate on planning, design, replenishment, logistics, or another business

•• process with one of its suppliers or customers, the barrier to developing the
extended enterprise from end to end of the supply chain integration has been

•• overcome. Exhibit 1-11 shows how the supply chain has changed .

Exhibit1-11: Extended Enterprise

•• /-Suppliers''--<' S
l .
-. -"-~-.<> ----

) . llpp 1. rers
Internal ',<'c-

<; 'Customers'">,
ustorners , , )

'--·, s_upp 1. 1crs_,"''---. c 1 ram /'-- _,/·-~ustomcrs___,,

-<11•1----- Payments ----+
•• Reverse product Ilow

•• What is unique to this stage is the following:

•• • There is an initial exploratory collaboration between a channel master and

one or several partners in the chain--often a manufacturer and one

•• component supplier or a retailer and one supplier of finished goods. It may

involve only one component or product: the famous collaboration between

•• Procter & Gamble and Walmart began (as we'll see later) with diapers. If
this first collaboration succeeds, it can lead to a more fully networked

•• relationship between the first two partners-more products might be

involved, there might be more complete sharing of information across

•• integrated electronic networks and more formal team building and planning
across corporate boundaries, and so on. And that relationship
the model for other partnerships and, eventually, to multifinn collaborations
can become

•• that stretch from retailer through manufacturer into one or more tiers of
suppliers .

•• • Technology enables the extended enterprise to reach farther, to add new

•• partners, to move faster in response to market changes, and to operate with

broader scope than in Stage 3. With MRP II merged with other functional

•• applications and transformed into ERP, enterprisewide planning software is

able to link the entire internal supply chain together on one platform .

•• • The networked enterprise is built on intrancts, extranets, peer-to-peer

networks, the Internet, or a combination of those platforms. Partners begin to

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Module 1: Fundamentals of Supply Chain Management
synchronize their ERP systems across corporate boundaries so they can share
data as necessary for their efficient collaboration. A retailer may, for example,
send information from the point-of-sale (POS) to suppliers each time a
customer purchases an item to trigger production of a replacement. Dell
Computer is able to fill orders taken on the Internet without keeping its own
inventory of machines because customers' specifications are sent immediately
through to component suppliers so the computer can be assembled to order. ••
• Cross-functional approaches are implemented with certain processes such as ••
CPFR (collaborative planning, forecasting, and replenishment). In place of
traditional "silo" production planning by sales, marketing, and production,
Stage 4 companies institute periodic sales and operations planning meetings
in which representatives of sales and marketing, production (or operations),
and other functions meet to coordinate demand planning and production ••
• In Stage 4, there are advances in e-commerce such as interactive sites where
customers can order products and services, track their shipment, and
communicate with customer service immediately upon their arrival.
Behind the scenes of such business-to-consumer e-commerce, there is also of
course increasing business-to-business e-commerce taking place on wired and
wireless networks. In the global arena, competition no longer takes place only ••
among individual companies; whole supply chains are now battling one another
for customers, for workers, and for capital in multiple countries across the globe. ••
Cooperation among companies is integral to competition among supply chains.

-t- Topic
4: Supply Chain Management Objectives
Before we discuss the objectives, it's important to define supply chain and
definition of
SU pply Chain
supply chain management. The definition of supply chain seems fairly solid
when you consider the chain as linked organizations-vsupplier, producer, ••
management and customer connected by product, information, and payment flows. But the
supply chain is more accurately viewed as a set of linked processes that take ••
place in the extraction of materials for transformation into products (or
perhaps services) for distribution to customers. Those processes are carried
out by the various functional areas within the organizations that constitute •• •
the supply chain. When considered as a set of processes rather than a
succession of companies, the supply chain becomes just a little more difficult
to idcntify-s-let alone manage.
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Section A: Supply Chain Management Concepts

The AP/CS Dictionary, 13th edition, defines supply chain management as "the
design, planning, execution, control, and monitoring of supply chain activities
with the objective of creating net value, building a competitive infrastructure,

•• leveraging worldwide logistics, synchronizing supply with demand, and

measuring performance globally." (Globally, in this case, can mean either

•• worldwide or applying to the chain as a whole rather than to a particular entity

within the chain.)

•• Aside from the definition, there are some other aspects of supply chain
management that should be highlighted at this time .

•• • Supply chain managementis aboutcreatingnet value. Early efforts at

•• managing chains often focused only on cost reduction---on making the

chain leaner. Unfortunately, these efforts sometimes reduced the ability to

•• create value more than they reduced costs, for a net negative effect. As
we'll see, there's more to creating value through intelligent management

•• than simply squeezing costs out of one or another activity in the chain .

• There should be value-creatingactivities in the supply chain that
transcend the activities of particularentities in the chain. Supply chains
are generally organized by one strong firm called a channel master or

•• nucleus firm---often a manufacturer, sometimes a powerful retailer, which

often manages those activities. Nevertheless, the chain has to produce value

•• for more than one stakeholder in addition to generating value for the
consumers or investors .

•• • Managing supply chains requires a balancing act among competing

•• interests. Given the complicated nature of group dynamics, this can be a

challenging task, especially in "worldwide" chains. Consider the rivalries
that arise among and between the 50 American states, the 25 nations in the

•• European Union, the various sects of any world religion, and the divergent
cultures around the globe .

•• Other related Although many would assume that a supply chain is, in fact, a value chain-at

•• terms: value
chain and
least it is if well managed-others may draw a distinction between the two.

A value chain is a string of collaborating players who work together to satisfy

•• mapping
market demands for specific products or services. According to the AP/CS
Dictionary, 13th edition, the value chain is made up of "the functions within a

•• company that add value to the goods or services that the organization
customers and for which it receives payment."
sells to

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Module 1: Fundamentals of Supply Chain Management

Value chains integrate a variety of supply chain activities throughout the
product/service life cycle, from determination of customer needs through
product/service development, production/operations, and distribution. The
intent of a value chain is to increase the value of a product or service as it
passes through stages of development and distribution before reaching the
end user. ••
Not all value chain activities are technically part of the supply chain, and ••
those engaged in them may not understand their role in supporting the supply
chain. Those activities might include engineering, marketing, finance,
accounting, information technology, human resources, and legal. For
example, managers from outside the supply chain often don't understand the
requirements of supply chain management, can't distinguish a value chain
from a supply chain, and consequently don't provide the SCM support
required from their areas. ••
Two closely related terms are value stream and value stream mapping. ••
As defined in the APICS Dictionary, 13th edition, a value stream is ••
the processes of creating, producing, and delivering a good or service to
the market. For a good, the value stream encompasses the raw material ••
supplier, the manufacture and assembly of the good, and the distribution
network. For a service, the value stream consists of suppliers, support
personnel and technology, the service "producer," and the distribution ••
channel. The value stream may be controlled by a single business or a
network of several businesses.
A value stream encompasses all the primary actions required to bring a product
or service from concept to placing it in the hands of the end user. It also ••
includes timing. Mapping the stream aids in process improvement, which will
be discussed in depth in Module 3. ••
Value stream mapping is defined in the APICS Dictionary, 13th edition, as
"drawing the current production process/flow and then attempting to draw the
most effective production process/flow."
On the following pages, Exhibit l-12 shows a basic process flowchart for a
supply chain, and Exhibit 1-13 shows how an organization can apply value ••
stream mapping to find the most effective production flow for that supply chain
process. ••
© 2012 APilS
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•• Section A: Supply Chain Management Concepts


Now that everyone has the same understanding of supply chain management,
let's look at its objectives. There are five primary objectives that supply chain

•• objectives
management can help a company or organization accomplish:
• Add value for customers and stakeholders .

•• •

Improve customer service .
Effectively use systemwide resources .

•• •

Efficiently use systemwidc resources.
Leverage partner strengths .

•• We will examine each of these goals in detail.

•• Objective #1:
Add value for
Supply chain management, like any other type of business management, aims to
create value through financial benefits, match the values of its various

•• customersand
customers, and appeal to the social values of its customers, stakeholders, and
community. The APJCS Dictionary, 13th edition, defines value broadly as "the

•• worth of an item, good, or service." While this merely shifts the discussion
the meaning of value to the meaning of worth, it usefully includes both goods

•• and services .

A related concept, which is fundamentally important to supply chain

•• management, is value added. Adding value to a good or service is the

responsibility of each entity and process in the supply chain. The 13th edition of

•• the APJCS Dictionary defines value added as "the actual increase of utility from
the viewpoint of the customer as a part is transformed from raw material to

•• finished inventory. It is the contribution made by an operation or a plant to the

final usefulness and value of a product, as seen by the customer."

•• The goal is to add value at each step in a service-oriented

in a manufacturing-oriented
value chain as well as
supply chain. Note that utility may not be the only

•• value, or worth, of a good or service from a customer's point of view. Price,

availability, and attractiveness are also values to consider .

•• Financial benefits: profitand profitmargin

Adding value that customers desire promotes increased sales, which improves

•• the bottom line. In order to be successful and have longevity, any organization
must have a positive cash flow. Making money definitely constitutes a measure

•• of success.
expenses .
Profit is money remaining from revenues after deduction of certain

•• Another related term, triple bottom line, coined by author and sustainability

•• advocate John Elkington in 1994, refers to the concept that corporate success

•• 2012/\PICS
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Module I: Fundamentals of Supply Chain Management
should be also measured in three dimensions--economic, social, and
environmental-and not only by the traditional bottom line of relative

You will be learning more about financial statements and key terms at the end
of this section.
Measuring value one stakeholder group at a time
Supply chain activities can be beneficial to one stakeholder group while being ••
harmful to another. When planning any new supply chain activity or monitoring
continuing practices, it is important to identify all the stakeholder groups and
determine the impact the activity will have on each one.
The primary stakeholder in any business activity is the business itself. A
business must be profitable to survive and create value for any other stakeholder
group. A supply chain, however, may touch many businesses, not just one. And ••
each business will have its own view of the potential value of any particular
activity. As a simple example, a supplier may decide to increase profits by ••
raising the price of goods purchased by its downstream supply chain partners.
But the resulting negative impact on those partners and on the end customer
may make a price increase unwise.
Customers are also significant stakeholders in supply chains. And there are
many customers in a supply chain, not only the consumer of the ultimate
good or service delivered through the chain. Each business must create value ••
for its customers as well as profits for itself. Moreover, the end result of each
partner's activities must optimize value for the supply chain as a whole. ••
There are also stakeholders that are external to the supply chain's business
partners and end customers. These include public or private investors, lenders,
and communities and governments. To investors and lenders, supply chain
value may be defined as capital growth, dividend income, or interest payments
and eventual return of invested capital. Value as defined by these external
partners must be considered when making business decisions. ••
Communities and local governments may also feel the impact of supply chain
operations because they affect community members and their environment, both •• •
built and natural. The location of a retail outlet, warehouse, or other supply
chain facility will have an impact on the community where it is built and
maintained. The community, and its political leadership, may judge this impact
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•• Section A: SupplyChain Management Concepts

to be a positive value or a detriment. These reactions, as well as the overall
impact on supply chain profitability, must also be taken into account.

•• Balancing varied stakeholder values

Stakeholders may-usually do, in fact-have different views of what value a

•• supply chain should create. So managing a supply chain successfully sometimes

requires balancing increases in value for one stakeholder with decreases for

•• another. Everyone must be satisfied enough to continue participating .

Customers have to keep buying, investors have to keep investing, workers have

•• to keep showing up and giving their best, communities must be satisfied with
each supply chain partner's impact on social and environmental values, and so
on .

•• Exhibit 1-14 lists some typical supply chain stakeholders and various values

•• they may realize from supply chain management.

Exhibit 1-14: Supply Chain Stakeholder Values

•• Supply Chain Stakeholder

•• Stakeholders
Firms in the supply chain
Profit margin, market share, revenues, expenses, image and

•• End customers Affordable, safe, attractive, useful products; affordable, timely,

secure, easy, pleasant services; sustainable manufacturing

•• Investors
Return on investment (capital growth, dividend income),
comprehensive and comprehensible communications

•• Lenders
Interest rate, long-term stability, return of principal
Tax base enhancement, sustainable manufacturing practices,

•• environment

environmental impact (safety, esthetics, convenience, natural
resources), growth of attractive jobs
Legality, regulation, overall impact on community members and

•• Employees
Job security, wages and benefits, opportunity, good working

•• conditions, sustainable and safe manufacturing processes

•• Stakeholder value: green, sustainable supply chain management

As you can see in Exhibit 1-14, one value that is important to most of these

•• groups is sustainable manufacturing processes and practices, because it impacts

so many around the globe. Green supply chain management (GSCM) has been

brought to the forefront of most companies' strategic goals in response to
demands from consumers and stakeholders. This has become a global issue to

•• (t; 2012 APICS l-31

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Module 1: Fundamentals of Supply Chain Management
the extent that the United Nations developed a Global Compact to define
sustainability in a broad perspective:

The management of environmental, social, and economic impacts, and

the encouragement of good governance practice, throughout the
lifecycles of goods and services. The objective of supply chain
sustainability is to create, protect, and grow long-term environmental,
social, and economic value for all stakeholders involved in bringing
products and services to market.
In previous decades, the traditional supply chain focused on cost, quality, and ••
service, which included some attention on environmental impact. Today GSCM
requires supply chain managers to integrate environmental thinking into each ••
step within the supply chain. That means that they must employ innovative
environmental technologies to provide practical solutions to the environmental ••
problems facing the global community. This approach impacts nearly all the
activities from cradle to grave of a product.

The AP/CS Dictionary, 13th edition, defines a green supply chain as follows:
A supply chain that considers environmental impacts on its operations
and takes action along the supply chain to comply with environmental
safety regulations and communicate this to customers and partners.

Sustainability figures significantly in supply chain management decisions for

the following reasons.
• Government and regulatory pressures-myriad laws, regulations, and ••
treaties related to pollution prevention and control to prevent the dissipation
of harmful materials into the environment ••
• Good environmental management and sustainability concerns-
organizational efforts to conserve energy, reduce waste and carbon ••

footprints, and recycle

Public opinion and the power of consumer choice-heightened

consumer awareness about protecting the environment and preserving the
earth's finite natural resources and increasing demand for green products
• Potential for competitive advantage-increased resource efficiency and ••
reduced costs that can improve the financial bottom line across multiple
supply chain partners, build a reputation for eco-friendliness,
talented employees, and inspire loyalty in customers
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Section A: Supply Chain Management Concepts

•• In addition to adding value, sustainable supply chain management can make

good business sense, as illustrated in the following examples .

•• • Drive growth. Worldwide, there are increasing expectations for

organizations to meet broader social obligations. Organizations must

•• answer questions about how green their manufacturing processes and

supply chain are, what their carbon footprint is, and how they recycle .

•• Annual surveys of global chief operating officers conducted by the

international consulting firm McKinsey & Company confirm that

companies expect the focus on environmental performance to continue
to grow. Fulfilling such public responsibilities can increase customer
loyalty, sustain market share, and strengthen brand awareness (whereas

•• ignoring them may lead to market decline) .

•• • Reduce costs. Organizations are realizing cost savings by reducing the

environmental impact of their business processes. When a supply chain

•• is reevaluated, from purchasing, planning, and managing the use of

materials to shipping and distributing final products for environmental
performance, savings are often found by implementing green policies .

•• An obvious example is reduced energy bills from energy efficiencies .

But there are more subtle, less tangible benefits, such as reduced

•• employee turnover because of staff pride and loyalty. Close working

relationships with suppliers on green initiatives can lead to increased

•• knowledge, integration, and cooperation and, in turn, greater efficiencies

and integration in the supply chain .

•• Robust analyses of businesses now often include assessments of

environmental initiatives, as presented in Exhibit 1-15 on the next page .

•• Without forward-looking environmental and social policies and supply chain

practices, an organization's reputation may suffer among investment

•• analysts. Green supply chain management is here to stay and adds important
stakeholder value. There is additional information in Module 2, Section A,

•• relating to sustainability activities that fall into the category of continuous

improvement initiatives .

•• The discussion that follows focuses on three types of value that supply chains
should create-vfinancial, customer, and social=-regardless of whether they are

•• functioning within for-profit companies; nonprofit, charitable, or governmental

organizations; or branches of the military .

•• «) 20l2APICS 1-33 Version 3.0, 2012 Edition

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Module I: Fundamentals ofSupply Chain Management
Exhibit1-15: Initiativesand the Green Supply Chain

Organizations comply with international treaties such as the
Montreal Protocol, which is designed to phase out production
and use of chemicals depleting the ozone layer, or the Kyoto
Protocol to the United Nations Framework Convention on
Climate Change, which has legally binding carbon reduction
targets and commitments to reduce greenhouse gas emissions.
(Note: The U.S. did not sign the Kyoto Protocol.) Compliance
includes observance of country regulations such as the carbon
Education and training
auditing system in the U.K. or the U.S. Environmental Protection
Agency's regulations.
Worldwide, there is participation in college and university
degrees, certificate programs, professional development
courses, and on-the-job training for sustainable energy,
environmental and carbon footprinting, and other green topics.
Logistics Efforts are widespread to reduce fuel consumption. There is less
use of air freight; increased use of rail transport, hybrid road ••
Green manufacturing
fleets, and sea transport; relocated warehouses; and
reconfigured distribution centers.
There are initiatives to move away from traditional and wasteful
practices manufacturing practices to sustainable development practices
including recycling, conservation, waste management, pollution
control, and a variety of other related issues.
Packaging Organizations are replacing traditional packaging materials with
more eco-friendly alternatives. ••
Sourcing Initiatives include overseas consolidation, more sourcing of
goods to local suppliers, and "near sourcing" (which
encompasses a variety of strategies that attempt to bring ••
Innovative technologies
sourcing and distribution centers closer to final markets).
New technology and product solutions abound: efforts to reduce
harbor-generated port pollution have been a magnet for creative
green technologies and products. Diesel-electric technology for
tugboats and trucks powered by liquefied natural gas in and
around the harbor yard are just a couple of innovations for
cleaner emissions around ports. Large cargo ships are now using
320 square meter kites to cut consumption of dirty bunker fuel by
up to 35% in ideal sailing conditions.
Information sharing Organizations collaborate to build databases of information about
environmental improvement initiatives across supply chains. ••
Renewable energy sourcing Many companies around the globe are researching and investing
in renewable energy sources such as solar, wind, hydroelectric,
nuclear power, and geothermal. In spring of 2011, Forbes ranked ••
Intel, Kohl's Department Stores, Staples, Walmart, Whole Foods
Market, Starbucks, and Cisco Systems highest in their use of
renewable energy. ••
c 2012 APICS l-34 Version 3.0, 2012 Edition ••
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•• Section A: Supply Chain Management Concepts

•• Financial value
One method of increasing the financial value is to reduce costs. Take these
considerations into account when looking for opportunities to lessen expenses

•• within a supply chain:

•• • Cut costs to yield net gains at the bottom line. One danger in pursuing
cost reductions is the possibility that spending less in one area of the

•• business will simply mean spending more elsewhere or even possibly

creating a net loss. Cost cutting, therefore, needs to aim for net gains at the

•• bottom line. In the functional stage of supply chain evolution, this sort of
self-defeating tradeoff happens all too often. The warehouse manager
might, for example, eliminate one or more storage facilities to save

•• warehousing costs without consulting the traffic manager about the need for
compensating changes in transportation. More highly evolved supply chain

•• management coordinates selection of warehouse numbers and location with

costs of transportation, impact on fulfillment, and other relevant

•• considerations using sophisticated optimization software-and perhaps

putting the entire process under third-party management. The same

•• consideration holds throughout the supply chain .

Changes at any one point in the system will create changes elsewhere;

•• therefore, change has to be viewed holistically. Supply chain management

necessitates cross-functional teamwork for the internal change and cross-

•• entity teamwork for the lateral chain. The guiding principle always has to
be creation of value at the customer's end of the chain. If a leaner supply

•• chain can deliver the same customer satisfaction with a greater profit, then
cost cutting is justified .

•• • It takes money to make money. Many of the improvements in supply

chain performance require investments of money up front to realize greater

•• revenues, profits, or both down the linc=-or simply to remain competitive

on a global playing field. As always, the end result has to be a net gain. If

•• an improvement in the supply chain brings in more revenue than the cost of
the investment, then it's justified. Purchasing automated machinery to

•• improve warehousing, upgrading hardware and software, training managers

in team building, and other investments may be necessary to build and

•• maintain a competitive supply chain. Again, the ultimate aim must always
be for creation of value at the customer's end of the chain-with sufficient
profits to satisfy the needs of other stakeholders .

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Module I: Fundamentals of Supply Chain Management

Typical measures of success in the use of invested money and assets more
generally are return on investment (ROI) and return on assets (ROA). ROI
is defined in the AP/CS Dictionary, 13th edition, as "a relative measure of
financial performance that provides a means for comparing various
investments by calculating the profits returned during a specified time
period." ROA is defined as "net income for the previous 12 months divided
by total assets." ••
• Gains should be equitablydistributed.Be careful when pursuing ••
increases in chain efficiency or effectiveness that might result in a financial
gain that isn't distributed with the needs of all stakeholders in mind.
Possibly the most common mistake in this regard is to send all cost savings
all the way to the consumers' end of the chain. If all efficiencies are plowed
into retail price reductions, the supply chain itself will suffer from lack of
financial sustenance.
While customer discounts bring immediate gains in volume and market
share, other stakeholders also have to be rewarded. Investors require a ••
competitive return on loans and equity. The maintenance and upgrades to
the chain's infrastructure requires virtually continuous investment.
Employees have to be compensated at a competitive rate, trained in new
processes and products, and, more fundamentally, recognized for their
contributions. Research and development need support in locating market ••
needs and creating products and services to satisfy them.
And perhaps most challenging of all in a lateral supply chain is the need for
productive sharing of any financial gains. For instance, a powerful nucleus
finn can rake in the benefits of an alteration in the placement of inventory
(or any other process change) at the expense of its suppliers. This has the
potential to be self-defeating if it drives away quality suppliers. Teamwork ••
among supply chain entities can create improved value for customers for a
net financial gain that is equitably shared by all stakeholders. ••
Customer value ••
In a competitive economy, making money depends upon "responding to
customer needs," which is the definition of the term "market driven" in the
AP/CS Dictionary, 13th edition. The ultimate goal of market-driven supply chain
management, therefore, must always be to deliver products and services that the
customer values-e-and, of course, will pay for. ••
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Depending upon the market being served, a supply chain may be managed
so that it delivers one or more of these values to its end customers .

•• • Quality of product or service. Quality applies to all products and

services from the production of a basic commodity like a bed mattress

•• to the reliability of 4G network services for smartphone performance.

Decisions all along the chain have to be coordinated to achieve the

•• appropriate level of quality through the right design, the right

production, and the right materials .

•• • Affordability. Almost all products and services have an appropriate

price level, one to which the market will react favorably. The supply

•• chain has to invest in the processes, people, and technology conducive

to creating a product at the right price. if a company's marketing

•• strategy is to provide the best everyday low price, the affordability

demands complete efficiency in the supply chain. Supply chain

•• managers who are operating with those types of goals must develop
collaborative design processes that result in specifications for products

•• of good quality that can be efficiently manufactured from readily

available materials by well-trained workers who function efficiently

and effectively within a well-defined supply chain process .

• Availability. For some products or customers, availability is of

•• paramount value and the supply chain has to be designed to deliver

products and services right on time. This may affect not only the

•• placement of inventories but also the selection of transportation modes

(overnight delivery, refrigerated containers, etc.) .

•• • Service. There is an indistinct line that separates product and service .

For example, the process of delivering a vehicle to a customer is
intertwined with related services-financing, dealer preparation, sales,
warranty agreements, and repair and replacement services at the

•• dealership. An effective supply chain management process will ensure

that service issues arc incorporated in the product design stage .

•• Collaborative design will include input from marketing, manufacturing,

and supply to create a product that is easy to repair. At the same time

•• the team will implement an efficient reverse chain that takes a vehicle
or its parts back for repair, replacement, or recycling .

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Module 1: Fundamentals of Supply Chain Management
• Sustainability. Consumers and customers are a driving force behind
environmental and social supply chain innovation. For individual
consumers and advocacy groups, sustainability is typically a matter of what
is important to them and what they are willing to pay. Consumer opinion
for or against a firm's environmental practices may be shaped by the media,
community groups, environmental organizations, lobbyists, and others who
exert social pressures. It is difficult to forecast exactly how much of a ••
premium consumers will pay, for example, for ethically sourced products or
items manufactured under high environmental and socially acceptable ••
standards. Consumers may also call attention in various ways (boycotts and
letter-writing campaigns, for example) to violations of regulations bearing
upon sustainability.
If, for example, availability is a key value to customers, emphasis in the
planning stage might be placed upon outsourcing to air express delivery
companies with overnight delivery capability, even if that requires putting extra ••
resources into logistics and cutting back elsewhere to stay within budget.
Similarly, perishable quantities-which tend to be of high value-require ••
special handling by high-end carriers. On the other hand, if the customer
doesn't value immediate availability (and the product doesn't require it), then
putting money into rapid delivery is not a rational supply chain decision. There
is no logic in making customers pay for quality or service they don't value.
An international fashion clothing company such as Zara, which is now in more
than 70 countries, succeeds by focusing its attention on its customers' values- ••
creativity, quality design, and rapid turnaround-to capture and quickly deliver
the latest trends in taste for each new season. All their decisions about suppliers ••
and distribution must serve those goals.

Social values
Supply chains are also judged on their contribution to the public and the
governments that (sometimes) represent their wishes. Generally speaking, a
supply chain's contributions to society come from three factors.
• Creating a positive good by delivering socially desirable and useful
products or services. On the positive side, supply chains deliver products ••
and services that are embedded in a social and cultural environment.
Businesses produce what society demands. Sometimes the connection ••
between private business and public need is very direct. For example, heavy
manufacturers serve governments directly when they produce motor

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• ••
vehicles and planes for purchase by the military. Even those vehicles not
sold to governments, however, serve social purposes as well as providing
transportation for vehicle owners and passengers. Bullet trains in Asia and
Europe exist because those societies value speedy, public transportation .

•• Beginning in the 1950s, the U.S. interstate highway system was

•• constructed, because the nation placed a high value upon private

automobiles to transport families to and from their suburban homes. This

•• same system also facilitated commercial truck transport and military

logistics. Beyond the production of goods and services, supply chains also
affect society by the number and types of jobs they create and in the

•• generation of tax money to support social purposes .

•• • Avoiding or reducing negative environmental side effects from

extraction, processing, and construction. In the past several decades there

•• has been growing attention to the impact of business on the natural

environment. This applies to supply chain activities all the way from

•• extraction of raw materials through manufacturing processes, logistics, and

distribution. Through laws and regulatory agencies, society requires

businesses to contribute, through sustainable practices, to a healthy
environment. Conforming to these regulations has become an increasingly
significant part of supply chain management.

•• It has also resulted in the identification of the reverse supply chain, which

•• handles products being returned by customers and those that have reached
the end of their life cycle and are ready to be recycled or disposed of in a

•• responsible manner. All the activities in the reverse supply chain can create
environmental value by reducing, reusing, and recycling resources rather
than simply using them up and putting them into landfills .

•• • Integrating sustainability into the supply chain. Much of this progress in

•• reducing negative impact on the environment is tied to sustainable supply

chain management. The SCOR model has applicability in sustainable

•• supply chain management. As you will recall, SCOR includes the major
processes of plan, source, make, deliver, and return. Before 2000, research

•• sponsored by the U.S. Office of the Deputy Under Secretary of Defense

(Installations and Environment) extended SCOR by integrating
environmental and supply chain management. The underlying premise was

•• that there should not be barriers between environmental and traditional

supply chain management and that integrating them results in a more

•• efficient and less expensive operations environment .

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Module 1: Fundamentals of Supply Chain Management

Consider the following examples of the potential environmental impact for

each of the main SCOR processes. ••
• Plan. Planning related to energy consumption and hazardous materials
usage, handling and storage of hazardous materials, the disposal of
ordinary and hazardous waste, and the compliance of all supply chain
activities ••
• Source. Selecting suppliers with positive environmental records and ••
materials with environmentally friendly content; specifying packaging
requirements and delivery requirements to minimize transportation and
• Make. Scheduling production to minimize energy consumption;
managing waste and air and water emissions generated during the
make process; reducing scrap; addressing waste disposal and
• Deliver. Minimizing the use of packaging materials and scheduling
shipments to minimize fuel consumption ••
• Return. Scheduling transportation and aggregate shipments to
minimize fuel consumption and preparing returns to prevent spills of
hazardous materials (such as oils and fuels) from damaged products;
accommodating the return of products after consumer use for recycling,
reuse, orremanufacture
Significant advantages have resulted from steps such as ensuring the use of
recycled or recyclable materials, reusing materials when possible, ••
minimizing hazardous materials, disclosing product safety information,
promoting environmental and energy efficiencies, and using more eco-
friendly packaging and, as feasible, less overall packaging.
There is no one-size-fits-all approach to building and sustaining a green
supply chain. But environmental initiatives need not be daunting. Exhibit 1-
16 lists several ways to build a greener supply chain. Keep in mind that the ••
list is not intended to be all-inclusive or sequential. Different practices and
the sequence in which they are adopted will vary and be driven by ••
organizational and supply chain objectives.
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•• Section A: Supply Chain Management Concepts

Exhibit1-16: Buildinga Sustainable Supply Chain

Sustainable Practice Sustainable Actions

•• Carbon footprint analysis Quantifying a product's or service's carbon footprint-the total amount
of carbon dioxide and other greenhouse gases emitted over the life

•• cycle of that product or service (Carbon footprint analysis captures the

mix of energy sources used in producing and delivering a product or
service as well as non-energy-related greenhouse gas emissions

(such as methane and nitrous oxide) from production, use, and
disposal of the product. Consumers and businesses often use carbon
footprint figures in their decision-making process when they select
products and services.)

•• Optimal plant locations Potential actions such as choosing a supplier closer to the customer
and greater collaboration with suppliers; understanding how to reduce
the carbon impact of manufacturing through alternative sourcing

•• Information technology
(IT) network design
Applying the "green" approach to IT to reduce consumption and
storage costs (e.g., reducing file formats and data storage that
consume inordinate amounts of space and the associated costs that

•• go with that storage); "greening" the information supply chain by

enabling anything that used to be printed and mailed to be presented
electronically (e.g., automating invoice processing to reduce paper

•• usage and promote other increased processing efficiencies);

consolidating and/or relocating data centers to take advantage of
renewable energy sources

•• Product or process
"Greening" the supply chain through actions such as forward planning
or decision analysis; evaluating design alternatives based on

environmental criteria applicable to the supply chain; rating products,
for example, as x-list (items that must be phased out), gray list (items
that are problematic but not urgent to phase out), and p-list (positive
items that are safe for use); rating products and services based on

•• Logistics design
energy consumption, least pollution, and materials used
Looking across the supply chain structure for inbound and outbound

•• logistics efficiencies, including improvements in transportation (e.g.,

new road networks, improved rail connections, additional port calls) as
well as energy conservation and pollution reduction

•• Waste reduction methods

Sustainable building
Applying the waste reduction methods: reduce, reuse/recover, repair,
remanufacture, redistribute, recycle, and reverse logistics
Using environmentally friendly practices in the design, construction,

•• practices and remodeling of buildings; using recycled material, eliminating or

reducing the amount of waste leaving a job site, reusing existing
material, using sustainable green building material, and using low-

•• emitting materials; obtaining LEED certification (Leadership in Energy

and Environmental Design, recognized in the U.S. and in many
countries worldwide)

•• Energy efficiency and

alternative energy
Monitoring energy consumption and managing energy usage to
eliminate wastes, cut energy costs, and reduce the carbon footprint;

•• implementing renewable energy sources and basic energy-use

alternatives (e.g., natural lighting, lighting management systems, and
energy-efficient bulbs)

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Module J: Fundamentals of Supply Chain Management
Examples abound of companies changing their supply chains to become more
sustainable. Consider the following examples of changes that affect the triple
bottom line and how they can build more sustainable supply chains.
Example: A company produces a product that goes into a plastic bottle. By ••
reducing the amount of plastic used to make the bottle by 15%, the company
not only reduces its cost for raw materials, it also reduces the amount of
pollution created by the supplier of the plastic and the amount of waste going
into a landfill. Another alternative for the company would be to switch to a
more recyclable type of plastic. This could reduce further the amount of
material going to the landfill. ••
Example: A company postpones the last steps of its manufacturing process
and completes them in its distribution center after the order is received. This
makes the process more sustainable in several ways. The shipping process
can be more efficient because the components being shipped can be
consolidated to fit more on a truck than the corresponding finished goods,
thus reducing freight costs and transportation pollution. Also, finished goods
inventories can be reduced and replaced with smaller quantities of
component inventories, thereby reducing the need for space and money tied
up in inventory. ••
Example: Whether a company manufactures a product or provides a
service, it uses energy. This may be in the form of gasoline for transportation,
electricity for the facility, or natural gas for heating and processing. To
become more sustainable a company could use more fuel-efficient vehicles
for transportation; develop more effective shipping schedules to reduce the
amount of miles traveled by its fleet; use alternative, replenishable fuel
sources such as wind or solar energy; or improve the efficiencies of its
processes to use less fuel to create more product. ••
Objective #2:
Improve customer
The second overarching goal of supply chain management is to improve customer
service. In terms of supply chains, customer service, according to the APICS
Dictionary, 13th edition, is "the ability of a company to address the needs,
inquiries, and requests from customers." Tt can also be explained as a "measure of ••
the deli very of a product to the customer at the time specified."

As part of supply chain management, a company will develop and use its
customer service strategy to identify and prioritize all activities required to
fulfill customers' logistical requirements at least as well, or better, than the
competition does. The strategy will include the fundamental
customer service: availability, operational
attributes of basic
performance, and customer ••
satisfaction. By implementing a strategy that takes these factors into account, a
company can target the measures that are weak and improve its customer ••

Let's take a closer look at each of these attributes.

Availability is the ability to have the product when it is wanted by a

customer. Traditionally,
many organizations have stocked product in
of customer orders and based on demand forecasts. But by
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•• Section A: Supply Chain Management Concepts

using supply chain management, a company can achieve high levels of
availability while keeping its investment in inventory and facilities to a
minimum. It is less likely to have products out of stock over time and is

•• more able to ship complete orders. (If a customer order is only missing one
item out of several, the order is considered incomplete.)

•• In Module 2, you will learn more details about the three performance

•• measures tied to availability: stockout frequency, fill rate, and orders

shipped complete .

•• • Operational performance deals with the time needed to deliver a customer

order. When supply chain management is in place, the elapsed time from

•• when the customer places an order until the product is delivered and ready for
use is reduced. Well-designed logistical systems facilitate a speedy delivery

•• but may also result in higher costs. Ideally, operational performance also
means that the supply chain is flexible in that it can accommodate unexpected

•• or unusual customer requests and that there are contingency plans in place if
there is a service breakdown or malfunction occurs .

•• • Customer satisfaction takes into account customer perceptions, expectations,

and opinions based on the customer's experience and knowledge. With
supply chain management in action, customer expectations are discussed and
clarified based on real supply chain data. So once the completed products and

•• orders reach the customer, they will meet customer expectations

quality, price, and delivery. Increases in customer satisfaction are the goal, as
in terms of

•• supply chain management strives to continuously improve with time and

build successful long-term relationships .

•• Objective#3:
For a supply chain to be effective in its use of resources, it must be using them in
a manner that helps the organization achieve its business objectives. Resources

•• systemwide
can be in the form of employees, raw materials, equipment, etc. Being effective
means that the supply chain gets the right product and the right amount to the

•• right customer at the right time. Effectiveness is being outward-focused-on

customer's needs and wants-while still meeting cost objectives .

•• For instance, if a supplier encounters a glitch in its normal mode of over-the-road

transporting of car headlights that it makes for an auto manufacturer, it could still

•• get the order to the customer on time if it sends the headlights via air instead. Air
is more costly, but it does contribute to the company'seffectiveness in meeting its

•• customer needs. There are often tradeoffs between effectiveness

illustrated in Exhibit 1- I 7 .
and efficiency, as

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Module I: Fundamentals o_{Supp!yChain Management
Exhibit 1 ·17: Balancing Effectiveness with Efficiency

Low High ••

Companies use a variety of tools and metrics to measure effectiveness, such as
benchmarking and comparing the company's actual performance against its
organizational strategies for growth, increased sales, increased customer
satisfaction ratings, or improvements on SCOR metrics. Supply chain
management enables an organization to be more effective in reaching these types
of strategic goals.
Objective #4:
As shown in Exhibit 1-17, efficiency is typically weighed against effectiveness.
Efficiency is defined, according to the APJCS Dictionary, 13th edition, as a ••
measurement (usually expressed as a percentage) of the actual output compared
to the standard output expected. It measures how well something is performing
relative to existing standards. Efficiency is inward-focused, in that a company
looks internally to determine how a supply chain process can be done less
expensively, in less time, and with fewer resources. ••
Efficiency is one of the measures of capacity in a supply chain environment. ••
Capacity is all about what can be accomplished by employing all the resources in
the supply chain network. That includes work centers, storage sites, people, and
equipment. Capacity, according to the APJCS Dictionary, has a few meanings:
( 1) The ability of a system to perform its expected function.
(2) The ability of a worker, machine, work center, plant, or organization
to produce output per time period.
(3) Required mental ability to enter into a contract.
Supply chain management can increase the efficiency of any mix of ••
manufacturers (or service providers), suppliers, and customers in a supply chain.
When a supply chain is operating at high efficiency, it means that it's utilizing its ••
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Section A: Supply Chain Management Concepts

•• resources well to produce the level of output in a production plan within the time
allowed .

•• Objective#5:
Leverage partner
Supply chain management enables an organization to leverage the strengths of
its partners. According to the AP! CS Dictionary, 13th edition, a partnership in a

•• strengths. supply chain is "a relationship based on trust, shared risk, and rewards aimed
toward achieving a competitive advantage."

•• The selection of the "right" partners means that their corporate culture,

•• operating styles, and business practices are similar enough for the benefits of an
alliance to outweigh the negatives. Well-chosen partners will benefit from a
high level of mutual trust, respect of each other's expertise and contributions,

•• and a shared common vision .

•• In order to leverage a partner's strengths, the organization must identify the

partner's core strengths or competencies. Core strengths may be intangible

•• items such as excellent management skills or a polished brand image. A strong

and useful partnership will yield a combination of the following as it performs

•• the functions needed by your organization:

• Adding value to products, such as shorter time to market

•• •

Improving market access, such as providing new market channels
Building financial strength through increased income and shared costs
Adding technological strength if there is internal expertise in use of more

•• •
advanced software and systems
Strengthening operations by lowering system costs and cycle times

•• • Enhancing strategic growth to break through barriers to new industry and


•• • Improving organizational skills that facilitate shared learning and insights

of both firms' management and employees

•• Supply chain management technologies and practices can help a company

select the appropriate sales partners and support them by:
• Providing timely and accurate information
• Helping them deal successfully with channel customers

•• • Aiding them in leveraging their strengths, such as innovation, speed, high

quality, low cost, etc .

•• With a strong partner, both members in the relationship can pool their resources

•• and work together to continually search for ways to improve sales, productivity,
and competitiveness .

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Module 1: Fundamentals of Supply Chain Management
You will learn more about collaborative partnerships and their advantages in
Section B of this module.
• ••
+Topic 5: Supply Chain Management Benefits
Supply chain management encompasses a series of linked processes. It's true
that companies have always been involved in managing their distinct functions,
such as planning, buying, manufacturing, delivering products, and getting paid, ••
but with supply chain management, this has evolved from control of discrete
business functions to an emphasis on business process excellence and the ••
management of a network of relationships tied together by complex inforrnation
flows. Although management of any one activity or link in the chain may be
straightforward, achieving the benefits of supply chain management requires
mastery of the connected processes.
The numerous benefits of mastering supply chain management practices,
systems, and technologies include: ••

Improved market knowledge
The three Vs-c-increased velocity, increased visibility, and reduced ••

variability in the flows of goods and services, funds, and information
Integrated operations ••
• Improved management of risk
• Increased sustainability.

With supply chain management in place, partners in the supply chain begin to
share their knowledge about the marketplace and in particular about their
knowledge customers. It may take some time for the organizations to build trust before they
share their key account information, but with time, it docs often occur. ••
Although market intelligence can be purchased from outside sources, it's most ••
advantageous (and less expensive) to gather it from your partners. There are a
myriad of sources and documents containing valuable customer information
that can be shared between supply chain partners, including transaction records,
customer survey results, sales and service representative knowledge,
information from distribution points such as retailers, Internet sites, or kiosks.
If this kind of market information is not forthcoming when needed from a
supply chain partner, there is always the option to purchase data from survey •• •
companies and database marketing companies. Service or finance bureaus can
provide broad information about the customer pool. Such data, as opposed to ••
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Section A: Supply Chu in Management Concepts

•• the other sources of data listed above, do not necessarily paint a picture of a
business's own customers. Purchased data may be more useful in acquiring new
customers than in managing relationships with existing customers .

•• The three Vs Often called the three Vs of supply chain management, visibility, velocity, and

•• variability are key elements of successful supply chain strategy. No matter what
the specific competitive priority, the goal of supply chain management is to

•• increase visibility and velocity while reducing variability, as seen in Exhibit 1-18 .
The future of supply chain management lies in continued pursuit of that goal.

•• Exhibit1-18: The Three Vs

•• ~ ~

•• L

~- (}_

•• Increased
Visibility is "the ability to view important information throughout a facility
or supply chain no matter where in the facility or supply chain the

•• information is located," according to the APICS Dictionary, 13th edition .

Increased visibility along the supply chain is a benefit for supply chain partners

•• and the end customer. With better visibility, a supply chain manager or employee
can see the results of activities occurring in the chain and is made aware of

•• minor, incremental changes via technological processes. For example, point-of-

sale data may be "visible" to computers in warehouses, the manufacturing plant,

•• and suppliers' facilities. Data about a sale can instantaneously

actions in all those places automatically.
warehouse to replenish the retailer's
Shipments are scheduled
shelves, manufacturing
trigger appropriate
from the
produces another

•• unit, and suppliers release parts to the manufacturer.

prompted automatically and instantaneously
With all these actions
by technology, the supply chain

•• partners can realize savings in cost and time. Better visibility has resulted in
greater velocity .

•• Increased
As noted earlier in this module, there are four types of flows in a supply chain:

•• physical materials and services, cash, information, and returns (or reverse flow)
of products for repairs, recycling, or disposal. Supply chain management impacts

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Module 1: Fundamentals of Supply Chain Management

the velocity of these four flows in a positive manner. According to the APICS
Dictionary, 13th edition, velocity is ••
a term used to indicate the relative speed of all transactions, collectively,
within a supply chain community. A maximum velocity is most ••
desirable because it indicates a higher asset turnover for stockholders
and faster order-to-delivery response for customers.
Velocity, like visibility, is enhanced by supply chain management. Methods of
increasing the velocity of transactions along the supply chain include the ••
• Relying on more rapid modes of transportation (if there is a net benefit after ••

the increase in transportation costs)
Reducing the time in which inventory is not moving by using Just-in-Time
delivery and lean manufacturing (The less time inventory spends at rest, the
less likely it is to suffer damage or spoilage. Increased velocity reduces the
expenses involved in warehousing inventory.)
• Eliminating activities that don't add value, thus reducing the time required to
accomplish supply chain activities ••
• Speeding up the flow of demand and cash as well as the velocity of
inventory (The more rapidly payments are received from customers, the ••
sooner the money can be put to work in the business or deposited at interest.
Information about demand changes is crucial when the competitive strategy
is responsiveness.)
Reduced Variability is the natural tendency of the results of all business activities to ••
variability fluctuate above and below an average value, such as fluctuations around average
time to completion, average number of defects, average daily sales, or average ••
production yields.

Unlike visibility and velocity, variability decreases with good supply chain
management. Supply chain management works to reduce variability in both
supply and demand as much as possible. The traditional offset against variability ••
is safety stock. If greater visibility along the chain results in greater velocity,
supply chain managers should also be able to reduce the amounts of safety stock ••
required to match supply to spikes in demand. As the "news" about increased
purchasing speeds more rapidly up the chain, distribution and production can get ••
off to a faster start to meet the demand.

Supply chain management serves to reduce both demand and supply variability.
Demand variability has many sources, but a primary source that can be
controlled is the bullwhip effect. The bullwhip effect is an extreme change in the ••
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Section A: Supply Chain Management Concepts

•• supply position upstream that is generated by a small change in demand

downstream in the supply chain, as shown in Exhibit 1-19 .

•• Exhibit1-19: BullwhipEffect

•• Small demand uncertainty becomes more

and more distorted

•• Customer

•• Inventory can quickly move from being backordered to being in excess due to
the serial nature of communicating orders up the chain with the inherent

•• transportation delays of moving product down the chain .

•• Supply variability can also be better managed with supply chain management
practices. Supply variability typically increases in waves down the chain starting

•• with small amounts at the resource extraction sites and culminating in the largest
amounts at the retail end of the chain. For example, any variability in the supply
of a raw material, such as an agricultural product that is dependent upon

•• fluctuating growing conditions, can result in even more widely fluctuating

purchase orders for that raw material from buyers down the chain. A shortage in

•• supply during one period may result in overpurchasing in the next period, with
the excess accumulating in warehouses as safety stock. Buyers depending upon

•• the supply will increase or decrease their purchase orders to reflect the variability
of materials, parts, and products available to them, while variability increases at

each point in the chain. The accumulating excesses can in tum trigger
underpurchasing .

•• Two additionalVs In addition, supply chain managers should attend to two other Vs: variety and
volume. Variety refers to the mix of products and services in a portfolio that

•• must alter to meet changes in customer demand. Volume is the amount of

product being produced in a given time. A supply chain must be flexible

•• enough to expand and contract volume to meet changes in demand for mass-
customized products and services. These concepts will be discussed in more

•• detail in Module 2 .

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Module I: Fundamentals 4 Supply Chain Management
Earlier in this module, we discussed the stages of supply chain evolution.
third stage is the one in which the enterprise and its operations become
integrated. Why is this so important? Supply chain management fosters

integrated operations by requiring everyone in the supply chain to form
partnerships with suppliers or customers.
Integrated networks, like intranets, extranets, and the Internet, play an important ••
role in forming these partnerships. Supply chain management uses networks to
tie together the various software applications associated with specific activities ••
within supply chain processes. Enterprise resources planning software packages
enable companies around the globe to not only manage their operations in one
plant but to facilitate enterprisewide integration and even cross-company
In addition to automation and networking, made possible by the computer
revolution, integrated operations use other technologies that can feed information ••
into the networks for instant access by all supply chain users. Bar codes on
products and radio frequency identification (RFID) devices can pick up sales ••
data and send them instantaneously throughout a network for use in revising
forecasts and triggering operations along the chain. Such data can also be fed
into databases for marketing analysis to gain insight into customer behavior.
Along with global positioning, RFID makes it possible to track serial numbers
anywhere in the world to provide customers with information about the progress
of shipments and to alert shippers and consignees to any difficulties
actions (perhaps using supply chain event management software). The hardware
that require
to run these complex applications continues to advance in power and speed, and
it has become more affordable. ••
All investments involve risk, including those made in any supply chain. Risk is
generally defined as a hazard, a source of danger, or a possibility of incurring loss,
of risk misfortune, or injury. In the supply chain context, it is the chance that something
will happen within the chain, positively or negatively, that will affect business ••
goals and objectives. Risk management is the process of identifying risk, analyzing
exposures to risk, and determining how to best handle those exposures. ••
With supply chain management, the organization develops a risk management
strategy in advance that describes how it will address the vulnerabilities it has
identified throughout the supply chain by avoiding, accepting, transferring, or
mitigating risk. Managing risk proactively gives an organization a competitive
edge over its competition.
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•• Section A: Supply Chain Management Concepts

An organization's strategy to address supply chain risk includes a risk response
plan and risk response planning. A risk response plan is a written document
defining known risks, including description, cause, likelihood, costs, and proposed

• ••
responses. It also identifies the current status of each risk. (This is also known as
business continuity planning.) Risk response planning is the process of developing
a plan to avoid risks and to mitigate the effect of those that cannot be avoided .

•• With a risk strategy and plan in place, a supply chain can keep goods,
information, and payments flowing through the network and arriving everywhere
•• in the right numbers at the right time and in good shape, because of its careful
preplanning for the unexpected. Specific types of risks that can be avoided or

•• mitigated will be discussed in Module 2, Section B, "Risk Management."

•• This type of proactive risk planning benefits the organization in a number of


•• • It helps keep the supply chain flexible so that it can continue functioning
despite disruptive events, which in turn helps balance the costs of
contingency planning against the potential economic, facility, resources, and

•• •
inventory losses.
Risks are shared among supply chain partners who will be prepared to work

•• in concert and play their parts responsibly. For instance, before Hurricane
Katrina deluged New Orleans and other locations along the U.S. Gulf Coast,

•• Wal mart had a fleet of trucks in place and was ready to roll into stricken
areas with supplies. A strong supply chain is more than good business; it

•• •
yields another advantage: good citizenship .
It prepares the employee workforce and chain partners with valuable,
actionable information and confidence to handle nearly any situation with a

•• well-thought-out strategy based on substantiated risk data .

•• You will be learning more about risk management and other factors to consider
in developing a plan in the following module .

•• Increased Earlier in this module green supply chain management was explained as the

•• sustainability expansion of the traditional supply chain focus of cost, quality, and service to
include environmental performance. "Sustainability" and "green" are often used

as synonyms in discussions of corporate obligations that go beyond the
traditional emphasis on bottom-line profits. Both terms refer to the need for
economic activity to operate within limits imposed by natural resources .

•• Business (and consumer) practices that rely upon energy derived from fossil

•• fuels, for a much-discussed example, cannot be sustained beyond the availability

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Module 1: Fundamentals of Supply Chain Management

of such energy resources. Supply chain management incorporates sustainability
efforts such as the replacement of resources as they are used (as in the planting ••
of seedlings as part of forest management) and increased usage and reliance on
wind and solar energy to generate power for manufacturing processes.

+Topic 6: Accountingand Financial Statement Basics ••

Supply chain management requires a basic understanding of accounting and the
organization's financial statements because supply chain managers must ••
understand and implement cost controls, they must understand how supply chain
decisions impact and flow down through the financial accounts and statements, ••
and they are assessed in part on how well their decisions contribute to the
organization's financial results. Supply chain managers can get guidance in this
area from the organization's financial professionals but need to have a basic
understanding of key terms and methods in order to communicate effectively.
The following concepts related to accounting and financial statements are
introduced here:
• The flow of funds

Spend management
Standard costing ••
• Financial statements: balance sheet, income statement, and statement of cash
flows ••
• Tax savings and the supply chain

As you recall from the supply chain model illustrating the different types of
The flow of
funds flows within a supply chain, the flow of money or funds goes upstream from
customer to producer and from producer to supplier as intermediate or final
products or services are paid for. This funds flow is not linear since some
upstream payments may occur long before the final good or service is even ••
purchased. Although there are other funds flows in a company, such as those for
equipment purchases and payroll, we will focus attention at this time on just the ••
cash flow along the supply chain.

While the flow of funds is mandatory for a supply chain to exist, it is often an
uncoordinated and suboptimized flow in many supply chains. Many mid-size
and even some large corporations still work with paper invoices and checks.
However, this practice appears to be declining given that many international
transactions require the buyer to pay up front with a credit card, wire transfer, or ••
letter of credit.
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•• Section A: Supply Chain Management Concepts

•• Why is it critical to improve the flow of funds within a supply chain? There are
several advantages to better flows:

•• • It reduces the cash-to-cash cycle time, an indicator of how efficiently a

company manages its assets to improve the speed or turnover of cash flows .

•• What is considered a normal duration for cash-to-cash cycle time will differ
by supply chain, industry, and organizational strategy. For example,

•• according to data from at the time of this writing, the cash-
to-cash cycle time for the retailers Walmart and Target were seven and 42
days respectively. However, Walmart may own less of its inventory than

•• Target due to heavier use of strategies such as vendor-managed

consignment. Similarly, an organization that is vertically integrated will own
inventory or

•• its inventory for much longer than one in a horizontal supply chain. Therefore
it is not necessarily possible to compare cycle times without understanding

•• the relevant strategies for each business. However, an organization's

time is a benchmark for its own continuous improvement.

•• • The improved turnover of funds improves customer-supplier

through lower perceptions of risk, improved reliability, and better

•• communications, which in tum tend to further improve the flow of funds .

More prompt and consistent payments also tend to improve relationships,

•• yielding a win-win situation throughout the supply chain .

•• • Improved cash flows tend to reduce imbalances between the larger and
smaller players in the supply chain. Consistent rules for integrated cash
flows across the supply chain help avoid the situation in which sizable

•• retailers request more liberal payables terms from manufacturers

manufacturers do the same with their smaller suppliers .
and large

•• Spend The initial efforts in supply chain management focused primarily on cutting costs

•• management because the supply chain constituted one long cost center. It was all about removal
of waste, time, unnecessary motion, defects, and extra costs .

•• When you are working in a supply chain organization,

sounds like it's the opposite of cost reduction:
you may hear a tenn that
spend management. The AP/CS

•• Dictionary, 13th edition, defines spend management as "managing purchases of

goods and services in a supply chain, including outsourcing and procurement

•• acti vi ti es."

•• Spend management often deals with consolidating internal demand across business
functions, divisions, or extended partners and/or consolidating suppliers to find

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Module 1: Fundamentals of Supply Chain Management

areas for purchasing and transportation quantity rate discounts. Relative to financial
performance, spend management involves managing the outflow of funds in order
to buy goods and services. Spend management may also need to coordinate closely
with accounts payable because payment timing is vital to spend management

If supply chain management can reduce the amount spent on inventory or increase ••
the speed with which inventory is converted into cash without reducing customer
service or revenue, then it certainly contributes to the company's financial
performance. Saving money will always be a priority; organizations realize a more
direct gain when costs go down than when revenues go up. This is because when
revenues go up all variable expenses also go up. When sales increase, some costs,
such as material and labor costs (called variable costs), increase right along with the
sales increases. Accounts receivable also increase, and organizations have more ••
control over inventories than over receivables.
While spend management is used by supply chain managers to control external
costs, many organizations use a system such as standard costing to control internal
costs related to the goods or services being produced. Standard costing is discussed
According to the A PICS Dictionary. 13th edition, standard costs are "the target
costs of an operation, process, or product, including direct material, direct labor, ••
and overhead charges." Standard costing or a standard cost accounting system is
"a cost accounting system that uses cost units determined before production for ••
estimating the cost of an order or product. For management control purposes, the
standards are compared to actual costs, and variances are computed." Standards
are targets that the organization sets to show the expected or desired outcome of
an activity. These arc periodically reviewed and changed as needed.
To understand standard costing, some additional
Dictionary, 13th edition, should also be introduced.
terms from the APICS
Cost of goods sold (COGS): An accounting classification useful for
determining the amount of direct materials, direct labor, and allocated
overhead associated with the products sold during a given period of time.
Current price: The price currently being paid as opposed to standard
cost. (A related tennis market price, which is the going price for an item ••
on the open market.)
Usage variance: Deviation of the actual consumption of materials as
compared to the standard.
Cost variance: Jn cost accounting, the difference between what has
been budgeted for an activity and what it actually costs. ••
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Section A: Supply Chain Management Concepts

Standards are set for each of the clements of the cost of goods sold. Each cost
has two components that are set as standards: volume and rate .

•• Cost Volume x Rate

•• Direct Materials Cost = Quantity Purchased x Unit Cost

Direct Materials Used = Quantity Used x Unit Cost

•• Direct Labor Cost= Standard Hours x Hourly Rate

•• Overhead Cost = Cost Driver

Total Overhead
Total Cost Driver

•• Volume is how many units of a resource is purchased or used, and rate is the cost

•• per unit of that resource. When volume has variances from the standard, it is a
usage variance; when the rate has variances, it is a cost variance. Both variances

•• are tracked separately, and their sum should equal the total variance. Variances
can be positive or negative. Negative variances occur when costs arc greater than

•• expected; positive variances occur when costs are less than expected .

•• Note that the quantity of materials for an operation has standards both for what
should be purchased and what should be used, since these quantities may differ
due to factors such as scrap in an operation or quantities for bulk discounts .

•• Note also that overhead costs are allocated costs based on a cost driver. A cost

•• driver is simply a measurable aspect of an operation that is used to

approximate how much of the overhead should be associated with the units

•• produced. The rate is the total expected overhead for the period divided by the
total of the expected cost driver for all operations at that site for the period. A

frequently used cost driver is direct labor hours. For example, during a given
• An operation to make 40,040 units is expected to use 1,400 direct labor

•• •
hours .
All operations in the plant are expected to use 14,000 direct labor hours .

•• •

Total overhead costs for the plant are expected to be US$400,400 .
The overhead rate is US$400,400/14,000 hours= US$28.60/per direct

•• •
labor hour .
The standard overhead cost for the 40,000-unit operation is 1,400 hours x

•• US$28.60/hour = US$40,040 (one-tenth of the total overhead cost) .

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Module I: Fundamentals ofSupply Chain Management
To continue this example, if the following actual results occurred during the
period, the variance would be calculated as follows:
• Actual overhead cost for 40,000-unit order: 1,300 hours x US$29.60/hour (a

rate determined only at the end of the period)= US$38,480.
Variance: US$40,040 - US$38,480 = US$1,560 positive overall variance
(less cost than expected), made up of a large positive variance from lower
labor hours than expected and a smaller negative variance (higher cost than ••
expected) from the higher actual overhead rate.
Standard costs and variances for direct materials and direct labor would be
similarly calculated and accounted for, except that the actual costs may be
known during or before production.
Uses of standard Standard costing is used to estimate the cost of goods sold before all costs are
costing known with certainty. It also provides benchmark targets for use during
production. Thus it is a method of controlling a process during production rather ••
than only being applied by accounting after production is complete. When
variances arc detected as they occur, process controls can sometimes keep
negative variances from continuing to expand or can prevent the problems from •••
recurring in a later operation. Management and accounting should exercise a
high level of control over variances because this is the key to avoiding period-
end surprises that impact financial results.

Many of the concepts discussed in these modules make use of standard costing.
Inventory can be valued using standard costing (although other methods also
exist). Inventory is discussed more in Section D: "Inventory Management." ••
Efficiency was discussed earlier. If standard costing is used at an organization, ••
efficiency can be calculated using a formula:

Eff . Standard Hours of Work

Hours Worked
x 100

For example, a work center that produces 110 standard hours of work while
operating for only I 00 hours has an efficiency rate of 110 percent. This is
where supply chain management comes into play. It is used to bring a synergy
to all the entities in the chain and enable them to operate and produce more
efficiently, whether this means optimizing production, storage, or movement
capacity. ••
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Section A: Supply Chain Management Concepts

•• Because the effectiveness and efficiency of supply chain management is partly

measured by its contribution to the bottom line, key financial statements are
discussed next.

•• Financial Financial statements help managers and investors track the financial results of an

•• statements organization's activities. The financial statements have different, but

complementary, functions. The AP/CS Dictionary, 13th edition, defines the

•• primary financial statements as follows.

•• Balance sheet: A financial statement showing the resources owned, the

debts owed, and the owners' share of a company at a given point in time .

•• Income statement: A financial statement showing the net income over a

given period of time.

•• Statement of cash flows (funds flow statement): A financial statement

showing the flow of cash and its timing into and out of an organization or
project [over a given period of time].

•• Next, we'll take a closer look at each of these statements, define some key terms,

•• and discuss some key relationships among the elements of the statements .

•• Balance sheet The balance sheet is often called a "snapshot" of the company's financial
position, because it is a static view of financial value or net worth at a point in

•• time, usually the last day of the fiscal or calendar year, though it could also be
for the end of any reporting period, such as a month or quarter. It gets its name
from the fact that it has two major sections that have to be in balance-e-assets on

•• the one hand and liabilities and owners' equity on the other. The accounting
equation defines this balance; it states that:

•• Assets= Liabilities+ Owners' Equity

•• The balance sheet sections are always in balance because owners' equity is

•• simply the difference between assets and liabilities. An organization uses

investments from owners (c.g., shareholders) and amounts owed to others (e.g.,

•• bank debt) to acquire assets that are expected to generate a return greater than the
amount invested. Owners' equity can increase or decrease if the organization

•• generates a positive return or negative return. The balance sheet shows the
increases or decreases in assets, liabilities, and owners' equity from year to year .

•• Exhibit 1-20 on the next page shows a sample balance sheet for a publicly traded
company .

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Module I: Fundamentals ofSupply Chain Management

Exhibit 1-20: Sample Balance Sheet Showing Two Years of Results

.-------------'"'i Statement of financial

,---- --- ----·--· '
~ ••
value at a point in In Thousands COOO)
-- - What the I\
organization owns
December 31,---
- -- - ; time (end of year) __ 2010 2011
- --- -- - - ------
Assets expected to ,
l /,·I'
1I be converted to cash .- ·
within one year


--·· - ·-··--···

Long -term assets not

ea sily converted to _
579 ••
---· · · ---1
mounts owed to · , LIABILITIES
TOTAL ASSETS [ii $ 2 222 $ 2 486 ••
__ others --r

Amounts owed this

I ___ -
I A~o~~ts owed\
735 ••
beyond one year : '
-· -·· ··--------,

Funds from owners j LONG-TERM DEBT 600 600
and operations (what\ TOTAL LIABILITIES c___ 1 264 1 335
is left after liabilities Assets =

are deducted)~
hat owners have
Liabilities+ Owners' Equity (


L ..
~ontributed f
einvested funds ·· RETAINED EARNINGS
701 ••
from operations ( TOTAL OWNERS' EQUITY 958 1 151


OWNERS' EQUITY ~ $ 2,222 $ 2,486

•• •
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•• Section A: Supp!» Chain Management Concepts

•• One purpose of the balance sheet is to show whether the organization has
increased or decreased its owners' equity during the year. This is done by

comparing the current year's amounts to the amounts in prior years. Note that
in Exhibit 1-20, the size of the owners' equity has increased in 2011 from
2010, based entirely on profits that were reinvested (retained earnings) rather

•• than from new owner investments (common stock and additional paid-in
capital are unchanged) .

•• The balance sheet can also be used as a source for a number of financial

•• measurements used in part to measure the success of supply chain activities .

For example, the balance sheet lists accounts receivable and accounts

payable. According to the A Pf CS Dictionary, 13th edition, accounts
receivable are "the value of goods shipped or services rendered to a customer
on which payment has not yet been received and usually includes an

•• allowance for bad debts." Accounts payable arc "the value of goods and
services acquired for which payment has not yet been made." These two

•• balance sheet amounts are used to calculate the cash-to-cash cycle time (sec
Module 2, Section E, "Managing the Supply Chain," for details), which

•• measures how many days the organization's working capital is invested in

managing the supply chain. Working capital is "the current assets of a firm

minus its current liabilities." Both of these amounts can be found on the
balance sheet. Working capital is important to the supply chain because these
are the funds the organization has readily available to invest in normal

•• operations .

•• Income statement In contrast to the balance sheet, the income statement is cumulative and
dynamic, meaning that the statement covers business results over a period of

•• time, such as a quarter or a year, rather than being a static snapshot. The income
statement shows managers, investors, and creditors whether the company has

made or lost money during the given period of time. The basic equation for the
income statement is:

•• Income= Revenues - Expenses

•• These arc the key terms to he familiar with, all of which can be impacted by
the effectiveness and efficiency of a supply chain:

•• • Profit is money remaining from revenues after deduction of certain

expenses .

•• • The profit margin that measures the degree of financial

business is "the difference between the sales and cost of goods
success for a

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Module I: Fundamentals of Supply Chain Management

sold ... sometimes expressed as a percentage of sales" (AP/CS

Dictionary, 13th edition). ••
• The gross profit margin measures "the difference between total revenue
and the cost of goods sold" (A PICS Dictionary, 13th edition).
• Net profit is figured by deducting all expenses, not only the cost of
goods sold, from revenues.
Exhibit 1-21 on the next page shows a sample income statement, with some
explanations in the margin. ••
Supply chain managers can use an income statement to determine the effect ••
of supply chain expenses on net income. For example, for a manufacturing
organization, the direct materials expenses listed in the statement would
consist primarily of raw material expenses, so reducing this type of
inventory would reduce overall expenses, directly increase profits, and likely
increase owners' equity on the balance sheet. The discussion of the uses of
financial statements in regard to inventory is continued in Section D,
"Inventory Management." ••
Note that operating expenses such as sales bonuses or general and ••
administrative expenses (all costs that cannot be linked to specific units sold)
are called period costs because they must be expensed in the period in which
they are incurred. COGS are called product costs. Product costs are
accounted for in the period in which the units arc sold even though many of
these costs may be incurred in earlier periods.
A final concept of importance to the income statement is matching. Matching
refers to reporting related revenues and expenses together in the period in ., ••
which they were incurred. For example, sales expenses incurred to make a
sale should fall in the period the sale was made. When they do not,
accountants use adjustments called accruals to account for the period
Note the text 'The 'bottom line'" near the bottom in the exhibit. This refers
to the line at the bottom of the income statement that shows a net profit or ••
Note also that the economic perspective of the triple bottom line, introduced
earlier, is a reference to this financial bottom line.
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Section A: Supply Chain Management Concepts

Exhibit 1~21: Sample Income Statement Showing Two Years of Results

' Profit or loss over a

In Thousands (000)

period of time
For the Years Endina 1
2010 2011
I Ex~enses from j REVENUE (SALES) 2,769 3,026

•• providinq goods/ --
services that -
~ne~ate revenue1

•• ! Revenue-COGS I,

•• =Gross Profit \

Gcne;~~i~:.~~~~1 [ .

GL:~~S~:~~~ING EXPENSES 2010 2011

-1 830

•• business that
cannot be directly
linked to specific
249 272

•• units of good~
services s~
---- --
83 91
-498 -545

Lowers fixed asset
value for ~axes _, \
,--------- ·-·
Paymen_~s on debt/ J.
•• Shows effect of
taxes on profits
LThe "bottom line" \

•• Gross Profit
- Operating Ii
343 $ 267
12% 9%

•• - Depreciation
- Interest Exp,
- Income Taxes
=Net Income

•• i~~-------

•• Statement of
cash flows
The statement of cash flows shows the sources of a company's cash flows and how
these cash flows are used. Cash flow is the net flow of money into or out of the

organization. It is the sum, in any time period, of all cash receipts, expenses, and
investments. There are three factors that determine cash flows: sales, after-tax
operating profit margins, and capital requirements. Some organizations consider

•• • cash flow to be a better long-term indicator of financial health than net income.

The purpose of a statement of cash flows is to show lenders, investors, and

creditors whether the organization has sufficient cash to pay debts, bills, and

•• dividends to owners because cash, not net income, is needed to make these
payments. The after-tax net income on the income statement is not the same as

•• cash flow, but it is the starting point for the statement of cash flows. The statement
adjusts this amount by increases or decreases in certain accounts to show whether

•• the cash balance has increased or decreased in the period .

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Module 1: Fundamentals of Supply Chain Management

Being able to read and understand a cash flow statement is important because it
enables you to assess if the firm is:
• Generating enough cash to fulfill its minimum obligations to lenders,

investors, and governments (taxes)
Generating extra cash that can be used to repay debt, purchase additional assets
for growth, or invest in new products.
This information is particularly helpful for financial managers, who use it along
with a cash budget when forecasting their organization's cash positions. ••
Exhibit 1-22 shows a sample statement of cash flows. ••
Exhibit 1-22: Sample Statement of Cash Flows Showing Two Years of Results
A viable firm needs
positive cash flow,
from operations in
most years 1(
IChange in cash
balance over a period In Thousands (000)
- -----
Depreciation i s 11
educted on the
-- .

2010 2011
, income statement '. AFTER-TAX NET INCOME
but doesn't reduc
cash (added back)e ·DEPRECIATION ADD-BACK
$ 343
$ 267
46 ••
· 1


Increase i n [/
accounts receivabl e I ; INCREASE/(DECREASE)

reduces cash
Increase i

.- accounts payabl
increases cashe "/ /INVESTING SECTION
Increase i
bu sines s i
investment s
dec~eases cash

Increase in ne ~·-v
debt or equit y /
provides cash

Net lncom e, I
+/- Change in (ti
Operatin 91

+/- "'-. lnvestin g \

+/- ti Financin g 1'\,
165 125
•• •
+ Beginning Cas h \; BEGINNING CASH BALANCE 618 783
::: Ending Cash
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•• Section A: Supply Chain Management Concepts

•• Note the depreciation amount that is added back on the statement of cash flows .
Depreciation is a predetermined incremental reduction in the value of fixed assets,

•• such as property, plant, and equipment, on the income statement to account for
their deterioration over time. This provides organizations a tax benefit to offset the
investment in fixed assets. However, while depreciation is calculated and expensed

•• on the income statement as the cost of using an asset over its life, this cost is a
noncash charge (i.e., no one is paid). Since depreciation reduces net income on the

•• income statement but doesn't reduce actual cash levels, depreciation is added back
on the statement of cash flows to determine the actual cash flow .

•• Tax savings One relatively new aspect of supply chain management is tax planning to reduce

•• and the
the global tax liability of the extended enterprise. Paying less in taxes around the
world translates into increased earnings per share.

• ••
By aligning tax planning with supply chain efficiency initiatives, companies can,
if they're in the right circumstances, realize a double bonus of increased
operating efficiency and significant tax savings. Some of these savings may

•• contribute to cash flow in the short term, thus providing an immediate benefit
from investments in the process. This strategy applies for the most part to large,

•• multinational organizations that are in the midst of modifying their supply

chains, giving them the opportunity to locate assets and operations in low-tax

countries .

Procurementand When rethinking procurement strategy, multinational corporations may decide to

•• taxes set up a central, global procurement and sourcing center. In this way the supply
chain benefits from various efficiencies created by consolidation of staff and

•• equipment. If, in addition, the company locates the global facility in a low-tax
region, the tax savings will magnify the savings from efficiencies of scale. This

works because tax authorities generally levy taxes on separate streams of
corporate income depending upon where they are earned. The global
procurement center thus becomes subject to the tax policies of its country of
residence. Central procurement facilities can also, if planned carefully, reduce

other costs in the supply chain, such as tariffs and value-added taxes levied at
considerably different rates in different ports around the globe .

•• Taxes and
Organizations can also realize tax savings by combining tax planning with
logistics rccngineering projects. Some large companies review their networks

•• every five years or so to see if they can find ways to improve product flows for
efficiency's sake. While they're cutting lead times, reducing manufacturing

costs, and shaving transportation outlays, they can also reduce their global tax

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Module 1: Fundamentals ofSupply Chain Management

liability by closing facilities in high-tax jurisdictions and moving them to
countries with lower tax rates. ••
Taxes and
A particularly intriguing tax-saving strategy is the purchase of supply chain
software to improve planning and responsiveness. This could be an enterprise
technology resources planning (ERP) system or a system with more limited application. But
in any case, the company purchasing the software can have it designed so it ••
automatically determines the right tax payment for the company, thus freeing up
the people who would otherwise have done the tax work. At the same time, the ••
software is earning a tax break for itself. Such systems can also be useful in
complying with corporate governance laws, such as the Sarbanes-Oxley Act, and ••
can locate all justifiable tax credits and deductions.

Competing Whenever you are discussing supply chain financials, remember that each
values department in an organization has its own particular priorities based on its
activities. And those priorities may compete with each other. For instance, the ••
primary objective of marketing is to maintain and boost revenue, and it strives
toward that by providing great customer service. Although the finance function ••
is also interested in increasing revenues, its primary focus is on keeping costs
and investment expenses low. Production wants the lowest operating costs it can
achieve. Those conflicting viewpoints may spill over into how each function
views financial documents and metrics.
In summary, in many ways supply chains are like living organisms striving for
dynamic growth, trying to find a healthy balance of nutrients or inputs into its ••
increasingly complex system. These chains function according to specific
objectives and provide benefits to others when their activities and movements ••
are purposeful and planned. In the next section of this module, you will learn
how the supply chain aligns with business strategy to have an even greater and
focused impact.
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•• Section A: Supply Chain Management Concepts

••• *Progress Check

The following questions are included as study aids and may not follow the format used for questions in
the APICS CSCP examination. Read each question and respond in the space provided. Answers and page

references appear on the page following the progress check questions .

1. Technically speaking, which of the following combinations of firms is sufficient to constitute a

supply chain?

•• (
Any network of suppliers
Two suppliers and a customer

•• (
A supplier, a nucleus firm, and a customer
Two manufacturers and a distributor

•• 2.
( ) e. All of the above

True or false? Supply chain management can be applied only to supply chains with a manufacturing

•• company in the middle.

( ) True

•• 3.
( False

Which of the following processes is part of the SCOR process model?

•• (
Customer relationship management

•• (

•• 4. When Henry Ford organized Ford Motor Company to include raw materials extraction and
dealerships as well as his assembly lines, he created which of the following?

•• (
Vertical supply chain
Lateral supply chain

•• (
U.S. equivalent of a keiretsu

•• 5. Which of the following is the primary benefit of a vertical supply chain strategy?
( a. Multiorganization connectivity along the chain

•• (
Economies of scale at each supply chain node

•• 6.
) d. Focus on core functions

Which of the following is an advantage of using a lateral supply chain?

•• (
( )
To improve business focus and expertise
To leverage communication and production competencies

•• (
To achieve economies of scale and scope
All of the above

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Module 1: Fundamentals a/Supply Chain Management

7. Which of the following is the supply chain evolution stage in which a nucleus firm begins initiatives
to improve efficiency, effectiveness, and quality within functional areas?
( ) a. Extended enterprise
Semifunctional enterprise
Multiple dysfunction
( ) d. Integrated enterprise
8. True or false? The following graphic illustrates the extended enterprise.
( True
( False

Reverse product flow

9. Which of the following is an objective of supply chain management?

( ) a. Add value for customers and stakeholders. ••
( ) b. Improve management of risk.
( ) c. Increase velocity in flows of goods, services, funds, and information.
( ) d. Increase sustainability.

10. True or false? The three Vs are velocity, visibility, and volume. ••
) True
11. True or false? One of the benefits of supply chain management is increased visibility of flows.
) True ••
) False

12. True or false? An income statement shows the net income over a given period of time.
13. Which of the following is a primary purpose of the cash flow statement? ••
( a. To show net profit or loss
( b. To show key stakeholders if the company has sufficient cash to pay debts, bills, and
dividends to owners
( )
To show the cash-to-cash cycle time
To show dollars tied up in inventory ••
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•• Section A: Supply Chain Management Concepts

•• Progresscheckanswers
1. c (p. 1-5)

•• 2.
False (p. 1-6)
c (p. 1-13)
4 . a (p. 1-15)
•• 5.
c (p. 1-17)

•• 7.
b (p, 1-18)
True (p. 1-23)

•• 9 . a (p. 1-29)
I 0. False (p. 1-4 7) It refers to visibility, velocity, and variability .

•• 11. True(p.1-47)
12. True (p. 1-57)
13. b (p. 1-61 )

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Section B: Supply Chain Alignment with
Business Strategy
This section is designed to
• Describe the relationship between the business strategy, the organizational strategy, and

the supply chain strategy
Explain the factors used to select strategic partners

Enumerate the building blocks of collaborative relationships
Identify the features and benefits of collaboration ••

Describe how to overcome obstacles to collaboration
Define four types of organizational strategies and how they are used
Explain how strategic decisions are made concerning customers and markets, technology, key
processes, and sourcing
• Discuss the trends in outsourcing and its potential consequences (positive and negative) for the

Identify competitive priorities for gaining customers for a company product or service
Describe how each supply chain's capabilities are based on its design, processes, systems and
technology, human resources, and metrics
• Identify three factors that can cause an organization to alter its supply chain strategy.

There's a kind of magic in some words, "strategy" and "strategic" being key

examples. Place "strategic" in front of the name of any business process and
suddenly that process acquires an aura of great importance. Strategic objectives
cry out to be achieved in a way that simple objectives do not. Strategic planning
sounds considerably more sophisticated and powerful than plain old planning.

There's a reason those words have such power. Strategy, originally a military
term, is how generals marshal all available resources in pursuit of victory.
Strategy wins football games and chess matches---or loses them.

It's really the same in the business world. Each company has a business strategy
that paints a broad picture of how they will compete in the marketplace. ••
Since business strategy is like military strategy in that it requires the marshaling ••

and organizing of all its resources, then it becomes clear that the business's

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•• Section B: Supply Chain Alignment with Business Strategy

•• supply chain can be its most potent strategic resource. Designing and building
the right supply chain, one that promotes the business strategies, may just be the
most powerful way to gain an edge on the competition, to move faster, deliver

•• more value, and be more flexible in the face of both steady change and
surprises. The supply chain strategy is a complex and evolving means that

•• organizations use to distinguish themselves in the competitive contest to create

value for their customers and investors .

•• As illustrated in Exhibit 1-23, you can see how the direction of a firm or

•• organization is predicated on its business strategy. Of course many

organizations now also use mission and vision statements to give clarity to their
purpose .

•• Exhibit 1-23: Alignment of Strategies

•• If these strategies arc not aligned, the direction and fit will be askew. All three

•• strategies are linked and dependent. The AP JCS Dictionary, 13th edition,
differentiates between business and organizational strategy (listed as "strategy"

•• in the Dictionary) as follows:

•• • Business strategy. A plan for choosing how to compete. Three

generic business strategies are ( 1) least cost, (2) differentiation, and
(3) focus .

•• • Strategy (organizational). The strategy of an enterprise identifies

how a company will function in its environment. The strategy

•• specifies how to satisfy customers, how to grow the business, how

to compete in its environment, how to manage the organization and
develop capabilities within the business, and how to achieve

•• financial objectives .

•• Supply chain strategy is then a strategy for how the supply chain will function
in its environment to meet the goals of the organization's business and
organization strategies. Prior to discussing organizational and supply chain

•• strategy in more detail, the first topic in the section addresses business strategy
and competitive advantages. Competitive advantages are closely related to

•• business strategy because they outline the advantages the organization should
realize once it has decided how it will compete .

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Module 1: Fundamentals of Supply Chain Management

Other concepts covered in this section include
• Organizational and supply chain strategy
• Prioritization options

Organizational capabilities
Alignment of capabilities and strategy
• Resolving misalignment or gaps.
+Topic 1: Business Strategy and Competitive Advantages ••
Typically a business strategy will outline how to grow the business, how to
distinguish the business from the competition and outperform them, how to ••
achieve superior levels of financial and market performance, and how to
create or maintain a sustainable competitive edge. ••
As per the definition provided previously, business strategies include least
cost, differentiation, and focus. Least cost relates to a lower cost than the
competition for an otherwise equivalent product or service. Differentiation
relates to a product or service with more features, options, or models than the ••
competition. Focus relates to whether the product or service is designed for a
broad audience or a well-defined market segment or segments. There are ••
many ways that these generic strategies can be combined or made into
hybrids. For example, common business strategies that are generic to many ••
industries and manufacturers include the following variations:
• Best cost--creates a hybrid, low-cost approach for providing a
differentiated product or service
• Low cost-focuses on delivering low price and no-frills basics with prices
that are hard to match ••
• Broad differentiation--creates product and service attributes that appeal
to many buyers looking for variety of goods ••
• Focused differentiation--develops unique strategies for target market
niches to meet unique buyer needs ••
• Focused low cost=-designed to meet well-defined buyer needs at a low
cost ••
Competitive advantages mirror the strategies used to create them: A competitive
advantage exists when an organization is able to provide the same benefits from a
product or service at a lower cost than a competitor (low cost advantage), deliver
benefits that exceed those of a competitor's product or service (differentiation ••
advantage), or create a product or service that is better suited to a given customer
segment than what the competition can offer (focus advantage). The result of this ••
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•• Section B: Supply Chain Alignment with Business Strategy

•• competitive advantage is superior value creation for the organization and its
customers. If this advantage is successfully implemented and marketed, it should
result in improved profits and market share .

•• To explore how low-cost-, differentiation-, and focus-based competitive

•• advantages could be interpreted in an organization and its supply chain, we will

explore each of these strategies and their competitive advantages in more detail

•• Low-cost

Supply chain strategies consistent with a low-cost approach to competition

•• advantage
include a variety of methods to reduce cost in all areas of the chain, including
resource extraction, transportation, warehousing, and location and design of

•• retail facilities. A powerful nucleus firm with a low-price strategy and a large
market share can exert great leverage on its suppliers. Such a finn may be able

•• to require suppliers to cut facility costs, relocate, adopt lean manufacturing,

change employment practices, and so forth .

•• A low-cost strategy should not be confused with target cost. Target costing is
defined in the APICS Dictionary, 13th edition, as

•• the process of designing a product to meet a specific cost objective .

Target costing involves setting the planned selling price, subtracting

•• the desired profit as well as marketing and distribution costs, thus

leaving the required manufacturing or target cost.

•• In many cities, this strategy had resulted in the opening of numerous "dollar
stores" where the majority of the products are only one dollar and the

•• selection is huge .

•• Note that providing a product or service at the lowest price is generally not
compatible with either differentiation or focus (niche marketing) strategies .
The lower profit margins provided by this approach are more consistent with

•• mass marketing. However, even low-cost products have to meet some quality
standards to remain competitive. Also, price competition can exist within a

•• niche or differentiated market. One luxury automobile may undercut another

in price, for example, if it maintains a level of quality and a sterling

•• Product or service
reputation .

•• differentiation
Determining how to differentiate a product or service begins with a competitive
analysis of other firms in the market to see what they have to offer. According
to the A P!CS Dictionary, 13th edition, competitive analysis is "an analysis of a

•• strategies
competitor that includes its strategies, capabilities, prices, and costs."

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Module 1: Fundamentals of Supply Chain Management

Once a firm has analyzed the offerings of competitors, it may differentiate its
products and services in a number of ways. The following are some types of
• High quality-durability,appearance, performance, type of materials, and
so on (Quality is often an order "qualifier," or an element necessary to even
consider the purchase of a particular product.)
• Diversity of the product line, offering customers many options (The ••
opposite of this approach was Henry Ford's alleged claim that people could
have his cars in any color they wanted as long as they wanted black.) ••
• Greater reliability (which could be considered a type of quality)
• Special features not available from competing products or services ••
Supply chain strategies appropriate to product differentiation include
• Modular design combined with postponement to allow last-minute
customization to meet specific consumer demands
• Minimal inventory of the base model to prevent obsolescence and expand ••
the inventory of options
• Collaboration with suppliers to develop innovative designs, numerous ••
Focus advantage
options appealing to different customer tastes, artistic design, and so on.

The following discussion is divided into two ways to create a focus advantage:
strategies • Niche marketing (versus mass marketing)
• Responsiveness ••
Niche marketing (versus mass marketing) ••
Firms can choose to develop products and services for a mass market or for a
relatively small slice of a larger market-a market niche. ••
Some examples of niche market approaches include
• Catering to high-net-worth customers with products such as luxury ••
automobiles, yachts, large homes, or specialized services such as estate
planning, personal training, or expensive cruises ••
• Designing for a limited age group, such as children or senior citizens with
special needs instead of serving a broader population ••
• Providing products or services for residents of a particular geographic area,
such as growing vegetables for a neighborhood market rather than for
packaging and shipping around the nation or world.

Niche marketing shares some characteristics with product/service ••

differentiation. In both cases, the product or service provided to customers has
special features. Differentiation by quality, for example, can be the same thing ••
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Section B: Supply Chain Alignment with Business Strategy

•• as catering to high-net-worth customers. (Low-net-worth customers, or value

shoppers, can also be niche.) Therefore, some supply chain strategies will work
for both approaches. Collaboration to achieve distinctive design is one example .

•• Depending upon the niche, sourcing may focus more on finding special
expertise or high-quality materials rather than on low-cost labor.

•• Responsiveness

•• Perhaps the most obvious example of responsiveness is the fast-food industry

that grew up in the last half of the 20th century, led by McDonald's. Diners at

•• fine restaurants will happily wait half an hour for their specially cooked steak,
but employees on short lunch breaks become impatient with even a few minutes
in line as their sandwiches are prepared. In the early days of the Toyota Prius

•• automobile=-a highly differentiated car-buyers were known to wait for

months for a new vehicle. (The same phenomenon occurred when the

•• Volkswagen "Beetle" first came to the United States, where it was both highly
differentiated and a low-cost option.) But businesspeople or diplomats on

•• assignment expect a rental car or limousine to be ready immediately when they

arrive at the airport. Manufacturers of clothing prosper or go bankrupt by their

•• ability to bring the latest seasonal designs to market rapidly. Perishable

products, such as raw food items, must be delivered rapidly, unlike preserved
foods. Services may also compete on the basis of speed by cutting time spent

•• waiting on the phone, standing in line, or processing paperwork .

•• Supply chains designed for responsiveness may rely on substantial supplies of

safety stock to avoid outages. (Overstocked seasonal items typically go on sale

•• at the end of the season.) They may also have multiple warehouses to place
products nearer to users. Third-party providers of rapid transportation, such as

•• package delivery services, were developed to suit the needs of such supply
chains .

•• Choosing
While some firms may focus primarily on one business strategy, others may
pursue a mix of strategies. Note, however, that making one strategy the priority

•• strategies
may make other strategies difficult to achieve. For example, providing high
quality at the lowest price is a challenge. But not all the strategies are mutually

•• exclusive. Product differentiation and niche marketing fit well together. Either
responsiveness or low cost may be a key competitive factor that differentiates a

•• firm from its market rivals .

Once an organization has decided on a business strategy, it uses these choices to

•• drive the organizational strategy and eventually the supply chain strategy.

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Module I: Fundamentals of Supply Chain Management

* Topic 2: Organizational and Supply Chain Strategy,

Prioritization, Capabilities, and Alignment ••
Recall that the strategy of an enterprise identifies how a company will function
in its environment. The strategy specifies how to satisfy customers, how to
grow the business, how to compete in its environment, how to manage the
organization and develop capabilities within the business, and how to achieve
financial objectives.
Where do you start when building an organization's strategy? As author and
business consultant Stephen R. Covey says in The Seven Habits ofHighly ••
Effective People, "begin with the end in mind," that is, think first about the
goals of the strategy.

Goals of
Whatever strategy the corporation adopts to satisfy customers, grow, compete,
organize itself, and make money, the supply chain has to operate in a manner
that furthers those goals. To give a simple example, if customers are clamoring
for deeply discounted prices on durable, high-volume goods with stable ••
demand, a supply chain strategy that invests heavily in sourcing lower-cost
materials in emerging markets would be on target for accomplishing that goal. ••
Low-cost sourcing is probably the best option for this strategy because
purchasing machines involves a high capital investment and lower labor
expenses could help offset the investment costs. However, you might also look
into investing in equipment, as the high investment is covered by lower labor
costs and increased revenue. (It is possible for an organization to do both-
invest in automation and move into a geographic area where labor costs are
less. That decision would be based on volume, payback period, product life ••
cycle, etc.)
Horizontal supply chains will contain a number of independent organizations,
each with its own goals, processes, operations, technology, and strategy. So,
when we refer to the necessity of aligning supply chain strategy with
organizational strategy, we are referring to the strategies of a channel master or
nucleus firrn. Traditionally, that's the manufacturer of a product-the company
that sits right at the center of the chain (or network) with suppliers in tiers on
one side and customers on the other. ••
However, ifa supply chain has a dominant firm with a dominating strategy (one ••
that is dictating its requirements to others), for example, a large retailer, then
supplier and manufacturer strategies and goals must align with that retailer's
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Section B: Supply Chain Alignment with Business Strategy

•• organizational and supply chain strategies. The suppliers of suppliers also have
strategies to be brought into alignment. Finally, the strategies, once aligned,
have to do two things: serve the end customers' needs and be profitable for the

•• chain as a whole and each company individually .

•• The following looks at four types of organizational strategy in detail: customer

focus and alignment, forecast-driven enterprise, demand-driven enterprise, and

•• Strategy:
number of supply chains .

When it comes to supply chains, it's what's good for the customer that counts-

•• customerfocus
and alignment
not what's good for the nucleus company or even what seems to be good for the
supply chain itself. Supply chain management needs to be focused on giving the

•• final customer the right product at the right time and place for the right price. It
isn't necessarily about the most advanced product or service, nor is it always

•• about the lowest price, the fastest time, or the most convenient place. It's about
the balance of quality, price, and availability (timing and place) that's just right

•• for the supply chain's customer.

How does one determine what is the right amount of each of those factors? There

•• isn't a simple formula that will help the supply chain manager with this decision .
But there are some basic premises that will help you get started in determining the

•• appropriate balance:
• Serving the end-user customer is the primary driver of supply chain decisions.

•• • Organizations in the supply chain have to make a profit and stay in business
to serve the customer .

•• Functional teams in the organization will provide their input and research on the

optimal balance for the supply chain to meet customer needs. Design engineers-
or, better yet, design teams from across the network=design products that are
right for the end customer and can be sold profitably. Market research looks for

•• the true, and not always obvious, needs in potential consumers that the supply
chain can be engineered to satisfy profitably. Logistics strategy begins with data

•• about customer demands for availability-e-of materials, components, service, or

finished products, depending upon the customer-v-and then it looks for ways to

•• move products in a cost-effective way with acceptable risk .

Decisions are not just about product features or price or speedy delivery. They arc
about the right features at the right price on the right schedule. DOS was not a
great operating system; it was just the right operating system for the time and the

•• market.

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The term "customer" can be a complex concept in relation to supply chains

because there are multiple customers with different stakes in the process. When
we talk about customer focus, we mean the end user, the consumer of the
product. But usually only the retailer actually sees the end user and has a direct
relationship with that person or entity.
Everyone else in the supply chain has a more immediate customer just
downstream to our right in the supply chain diagram. rf the supply chain is ••
completely aligned in its focus on the end customer, then, at least in theory,
serving the customer just to an organization's downstream side would
automatically serve the end user and also be in the supplying organization's
best interest as well as the interest of investors.
Moreover, within each supply chain partner there are internal "customers"
whose needs also must be aligned with corporate and supply chain strategies. ••
Each manager must understand his or her role in making the supply chain
profitable, and staff, too, must be rewarded, motivated, and trained in alignment ••
with the needs of the supply chain's end customer.

Consider sustainable supply chain management. Successfully managing for

sustainability requires a strategic mindset, involving numerous personnel and
financial resources and a commitment from suppliers from first to lower tiers of
the supply chain as well as consumers further up the supply chain. Departments
must cooperate with other departments in their organization (e.g., purchasing ••
and environmental or design departments) and with their counterparts at
suppliers. This type of collaboration between supply chain partners necessitates ••
breaking down cultural barriers and building a culture of trust to ensure that the
focus is on end-to-end supply chain activities and not just discrete supply chain ••

Creating and managing a sustainable supply chain requires an organization to

be informed, exercise leadership, and cooperate with all supply chain partners
in achieving positive results on the triple bottom line. ••
Strategy: forecast- A second organizational strategy is the forecast-driven enterprise. Simply put,
driven enterprise this strategy is one in which the nucleus firm, usually the manufacturer, utilizes a
forecast, an estimate of future demand, as the basis of its organizational strategy. ••
Here is the complicating factor: It is difficult to know what customer
requirements will be from day to day, month to month, quarter to quarter, and so
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Section B: Supply Chain Alignment with Business Strategy

•• on. For instance, if a manufacturer was guaranteed that its wholesale or retail
customers were going to need 1,000 SKUs (stockkeeping units) every
Wednesday afternoon, then getting those products to customers at the right time

•• and place would be a matter of simple calculation based upon lead times for
production and delivery. In tum, the manufacturer would look at the bill of

•• material, determine the lead time for each, and submit schedules to its suppliers.
Unfortunately, it's difficult to predict even the most stable demand-say, for a

••' product like diapers. There is some variability in demand for diapers, even
though they aren't subject to seasonal style changes or rapid peaks and valleys in

•• response to outside influences affecting ability to pay. (That's why Procter &
Gamble cooperates with Walmart to plan for demand and replenishment of
diapers.) The chain of demand begins at the far retail end of the supply chain and

•• works its way back toward the source of raw materials used in making the
product. The traditional way of attempting to satisfy this demand is to forecast it.

•• In this retail example, forecasting along the chain works like this:

•• •

The retailer forecasts demand from parents who purchase diapers .
The wholesaler forecasts demand from all its retailers.

•• •

The manufacturer forecasts demand from the wholesale distributors.
The component suppliers forecast demand from manufacturers.

• The raw materials suppliers forecast demand from the component

•• How effective is this strategy? Let's say you don't want to be placing large bets on
the accuracy of all those forecasts. Here's what actually happens:

•• • Parents vary their diaper-buying patterns in fairly small increments due to

factors nobody fully understands. They may go to different stores for a change,
shop on Tuesday instead of Wednesday, or buy two or three weeks' worth at
•• one time because the diapers are on sale. So, actual demand never quite meets
the forecast.

•• • Meanwhile the retailer had already ordered enough to allow a little extra
"safety stock" to put in its storeroom. (For retailers, safety stock is a quantity

•• of stock planned to be in inventory to protect against fluctuations in demand or</