Supply Chain Management: Author: B. Mahadevan Operations Management: Theory and Practice, 3e

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Ltd
Chapter 5
Supply Chain
Management
Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Issues in Supply Chain Management
The case of Mother Dairy
• In bound supply chain issues
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– Mother Diary procures milk from hundreds of cooperatives located in Gujarat,
Haryana, Punjab, Rajasthan and Uttar Pradesh
– The milk collected from these cooperatives is transported to the Patparganj
plant in East Delhi, where it is homogenized, pasteurized and then stored in
special tanks until it is loaded into tankers for distribution
• In house supply chain issues
– Mother Diary has a processing capacity of 650,000 litres per day
– Over the years, Mother Dairy has increased its variety of offerings. Skimmed,
toned, double toned and full cream milk is available in half and one litre
polythene packs. Mother Dairy offers over 30 flavours of ice creams.
– Forecasting & demand management to manage a large variety
– Since milk is a perishable commodity with very short life cycle, logistics
planning, demand estimation and production scheduling are very crucial

Issues in Supply Chain Management
The case of Mother Dairy
• Out bound supply chain issues

– Nearly a hundred of its tankers cris-cross Delhi and supply milk to
about 568 booths located in every nook and corner of the city.
– Besides its own booths, Mother Dairy also sells loose milk through
over 200 manually operated insulated containers setup in shops in
congested areas and also through 300 cycle rickshaws, which home
delivers milk in some localities.
– Furthermore, it also sells milk through 850 retail shops in polythene
packs
– The distribution of the processed milk and a large variety of milk
derivatives require efficient network design, distribution requirement
planning, logistics and transportation planning

Supply Chain Management (SCM)
• Supply Chain includes

– A chain of entities involved in planning, procurement,
production and distribution of Products & services to the end
customer
– A unique combination of these entities makes up a value stream
• Need for SCM
– Shrinking Product Life Cycles
• Computer, Electronics Goods
– Shrinking time window for delivery
– Non-shrinking lead times
– Dramatically increasing product variety
• Apparels, Fashion/Trendy Goods, appliances
Supply Chain Management
Key Questions
• Will the structure of the supply chain have any impact on

the overall performance?
• What are the strategies for improving “in-bound”
logistics?
• What kind of planning tools are useful for Supply Chain
Management?
• Are there workable strategies for managing scenarios
such as product variety and short product life cycle?
• What are the appropriate measures for supply chain
performance?

What is a supply chain?

External External External
Supplier 3 Supplier 2 Supplier 1
Internal
Customer
Procurement
Ultimate
Customer Production
Distribution

Supply Chain
Information & Material Flows

Purchasing Production
Sales Planning
Stores Factory Warehouse
Distributors Retailers Customer

Material Flow
Information Flow

Components
• In-bound SCM

– Supplier Development
– Supply Management
• In-house SCM
– Master Scheduling, MRP
– Layout, materials handling
• Out-bound SCM
– Warehousing
– Distribution & Channel Management

In-bound supply chain
Tier structure: Automotive Industry
Wiring Auto

Upholstery Transmission Tier 1
Harness Electrical
Spindles & Insulators &

Castings Gears
Armatures Bushes
Tier 2
Copper Plates Spindles & Forging
Wires Shafts Blanks
Copper Iron & Steel

Manufacturers Manufacturers Tier 3

In-house supply chain
An illustration

Core Manufacturing Layer
Pre-manufacturing
Machining Fabrication
Assembly Testing
Manufacturing Support Layer
Marketing IT Maintenance Planning
Quality Material Design Costing

Out-bound Supply Chain
An illustration using a Soap Manufacturer
Soap Manufacturing Factory

Factory Warehouse
Distribution
North East West South Central Centers
Sales
SD SD SD SD SD SD SD Depots
Retail
RO RO RO RO RO RO RO Outlets
End Customers

Video Insight 5.1
Rural Distribution Network: HUL Project Shakti

Right click on the URL below to open the hyperlink in the web browser…
https://www.youtube.com/watch?v=Fu1pkdVk7ow

Outbound SCM
Decision context
• Outbound SCM addresses all issues pertaining to

distribution of goods and services to the end
customer
– Distribution network design refers to various choices made
with respect to the entities included in out-bound logistics
– Logistics management refers to the set of activities
involved in planning and physical movement of goods
across the supply chain
– Route planning
– Channel Management

Distribution Network Design
Alternative A

Factory A Factory B
Matl. Flow from Factory A

Matl. Flow from Factory B
Sales Depot

Distribution Network Design
Alternative B
Matl. Flow from Factory A
North Zone

Matl. Flow from Factory B
Matl. Flow from Zonal DCs
Sales Depot
Factory A
Factory B
West Zone
East Zone
South Zone

A process orientation

Plan
Source Make Deliver
In-house In-bound In-house Out-bound

•Supplier •Layout &
•Demand •Logistics
Development Facilities
Management Management
•Supply Management
•Master Production •Warehousing
Management •Materials Handling
Scheduling •Distribution
•Joint cost •Co-ordination
•Materials & •Channel
reduction with supply chain
Capacity Planning Management
•Target costing partners
•Distribution
Requirement •Value engineering
Planning •Import
substitution

Supply Chain Structure
An illustration
Tier 2 8 days to prepare shipment

7 days review Suppliers 2 days for transit
2 days to transmit order
Tier 1 3 days to prepare shipment
2 days for transit
7 days review Suppliers
2 days to transmit order 1 day from receipt to issue
Factory 26 days for manufacturing
1 day for transit
1 day to transmit order
Factory 2 days from receipt to issue
1 day to prepare shipment
10 days review
Warehouse 7 days for transit
2 days to transmit order
2 days from receipt to issue
Distributors 1 day to prepare shipment
7 days review 3 days for transit
2 days to transmit order Retailers 2 days from receipt to issue
Customers

Supply Chain Structure
Salient Features
• Number of layers: Supply chain always involves multiple

layers
• Delays in the chain: There are finite delays between each
pair of layers to receive and send information and goods
• Decision making patterns: Decisions of “how much” and
“when” to order are taken independently by each
member in the chain
• Independence of each member of the supply chain:
Since each member is organisationally a separate unit,
there is considerable independence in policy and
decision making
What causes Bullwhip effect?
• The more

– the number of layers,
– the delay,
– the rate of change,
the greater the fluctuations
• Each layer
– updates its forecast in varying patterns
– places order at different times
– price fluctuations (promotions)
– rationing of supply
How to avoid Bullwhip effect?
• Devise new strategies for minimising the

number of layers, delay in information
exchanges and rate of change
– Improve quality of demand forecast update
• use of point of sales data, EDI, Internet
– Share sales, capacity and inventory data across
the supply chain partners
– Lead time reduction, reduction in fixed costs in
ordering

Measures for SCM Performance
• Post-process indices
– Rely on past data to assess the performance of the supply chain

function during the relevant period of time
– Typically use information available in annual reports of
companies to compute indices
• Process Indices
– Tracks improvements in the supply chain processes and assesses
how the supply chain may improve its responsiveness, cost,
quality or reliability
• SCOR Model
– Developed by Supply Chain Council (SCC), a Pennsylvania, US
based independent not-for-profit organisation
– Spans all customer interactions from order entry through paid
invoice
Post-Process Indices
Total investment in Inventory ( Rs)
Inventory turn over ratio, TO (%) = *100

Annual Sales ( Rs )
Annual Sales ( Rs)

Number of inventory turns, TN =
Total Investment in Inventory ( Rs)

Total Inventory (Days), TID = * 365
Annual Sales ( Rs)
Raw
Accounts Re Material
ceivable (Inventory
Rs) ( Rs)
RM Inventory (Days), RMD
Days of Sales Outstanding, DSO = = * 365 * 365
Value of Sales
Annual Raw Material
( Rs) Consumed ( Rs)
WIP Accounts
InventoryPayable
( Rs) ( Rs)
Days of Payables Outstanding, DPO = Value of Pr oduction ( Rs) * 365
WIP Inventory (Days), WIPD = * 365
Value of Raw Material Consumed ( Rs)
Cash-to-Cash Cycle Time (Days), FG=Inventory ( Rs)– DPO

FG Inventory (Days), FGDCCD
= TID + DSO * 365
Annual Sales ( Rs)

Annual Sales ( Rs)
Number of inventory turns, TN =
Post-Process
Total Investment inIndices…
Total Inventory (Days), TID =
Inventory ( Rs)
* 365
Annual Sales ( Rs)

Accounts Re ceivable ( Rs)
Days of Sales Outstanding, DSO = * 365
Annual Sales ( Rs)
Accounts Payable ( Rs)

Days of Payables Outstanding, DPO = * 365
Value of Raw Material Consumed ( Rs)
Cash-to-Cash Cycle Time (Days), CCD = TID + DSO – DPO

Video Insight 5.2
ITC eChoupal: A new model for Farmers

Right click on the URLs below to open the hyperlink in the web browser…
https://www.youtube.com/watch?v=ArYgpXIQC-4
https://www.youtube.com/watch?v=-RH8Xl1C8eE

Design of Supply Chains
• Profile of the product influences the design of

supply chain
– Primarily functional products
– Primarily innovative products
• Two Supply Chain design alternatives
– An efficient supply chain and
– A responsive supply chain

Functional & Innovative Products
Key Attributes

Criterion Functional Innovative
Product life cycle > 2 years 3 months to 1 year
Contribution margin 5% - 20% 20% - 60%
Product variety low (upto 20 variants high (often thousands
per category) of variants)
Average forecast 10% 40% - 100%
error
Average stock out 1% - 2% 10% - 40%
Forced end of 0% 10% - 25%
season markdown
Lead time for made 6 months - 1 year 1 day to 2 weeks

to order
Source: Fisher (1997), What is the right supply chain for your product, HBR, Mar. - Apr. 1997, 105 - 116.

Designing efficient supply chains
Strategies
• Continuous replenishment programme using EDI

links for information sharing
• Invest in supply chain partnership programme both
on the “in-bound” and “out-bound” side
• Integrate material planning and control systems with
ERP to benefit from improved data visibility
• Develop robust inventory control mechanisms to
accurately fix reorder points and order levels

Designing responsive supply chains
Strategies
• Accept uncertainty in demand & large forecast errors

as the reality
• Devise strategies for managing uncertainty
– Capture Point-of-Sale data for accurately and immediately
updating forecast
– Improve responsiveness by cutting lead times
– Postponement strategies/Delayed differentiation
– Deploy standardisation, modular design and product
platform strategies

Postponement Strategies
Alternatives & Implications
• Packaging postponement

– Savings in transportation (bulk containers)
– Handle multi-lingual requirements (HP printers)
• Assembly postponement
– Low levels of investment in FG
– Ability to handle a large variety through modular design
(computer - the case of Dell)
• Manufacturing postponement
– Final stages of manufacturing delayed until firm orders are
received (Benetton dyeing of fabrics)
– Reduced lead time

Chapter Highlights
• Major activities in any supply chain includes Planning,

Procurement, production of goods and services and
distribution to the end customers
• The components of supply chain includes in-bound, in-
house and out-bound.
• Supply chain structure refers to the manner in which
various entities pertaining to a supply chain are
configured. It includes
– Number of layers that make up a supply chain,
– Composition of each layer and
– Nature of integration among the layers
Chapter Highlights…
• Bullwhip effect occurs due to

– Number of layers in the supply chain
– Delays in information flow across these layers
– Variations in decision making patterns at each layer
– Independence of each member in the supply chain
• Several process indices and post-process indices are
available to assess the performance of supply chains.
• Supply chain design varies with the nature of
products
– Innovative products require responsive supply chains
and functional products require efficient supply chains

Supply Chain Management: Author: B. Mahadevan Operations Management: Theory and Practice, 3e

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Copyright © 2016 Pearson India Education Services Pvt.

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Stores Factory Warehouse

Distributors Retailers Customer

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Spindles & Insulators &

Copper Iron & Steel

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Manufacturing Support Layer

Marketing IT Maintenance Planning

Quality Material Design Costing

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Matl. Flow from Factory A

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan

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In-house In-bound In-house Out-bound

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan

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• Devise new strategies for minimising the

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Annual Sales ( Rs)

Total Investment in Inventory ( Rs)

Cash-to-Cash Cycle Time (Days), FG=Inventory ( Rs)– DPO

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Accounts Payable ( Rs)

Cash-to-Cash Cycle Time (Days), CCD = TID + DSO – DPO

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

• Profile of the product influences the design of

Copyright © 2016 Pearson India Education Services Pvt. Ltd

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

Copyright © 2016 Pearson India Education Services Pvt. Ltd