Introduction to Logistics

Introduction To Supply Chain Management

• Evolution of Supply Chain Management

The evolution of supply chain management has been characterized by an increasing degree of integration of separate tasks, a trend that was underlined in the 1960s as a key area for future productivity improvements since the system was highly fragmented. This process moved further in the 1990s as globalization incited a functional integration and the emergence of logistics in a true sense, all the elements of the supply chain became part of a single management perspective.

• Definition of Supply Chain Management

Supply Chain Can be defined as​

"Supply chain management is the handling of the entire production flow of a good  or service — starting from the raw components all the way to delivering the final product to the consumer. A company creates a network of suppliers that move the product along from the suppliers of raw materials to those organizations that deal directly with users."

• Objective of Supply Chain

The objective of every supply chain should be to maximize the overall value generated. The value (also known as supply chain surplus) a supply chain generates is the difference between what the value of the final product is to the customer and the costs the supply chain incurs in filling the customer’s request. Supply Chain Surplus = Customer Value – Supply Chain Cost The value of the final product may vary for each customer and can be estimated by the maximum amount the customer is willing to pay for it. The difference between the value of the product and its price remains with the customer as consumer surplus. The rest of the supply chain surplus becomes supply chain profitability, the difference between the revenue generated from the customer and the overall cost across the supply chain. For example, a customer purchasing a wireless router from Best Buy pays $60, which represents the revenue the supply chain receives. Customers who purchase the router clearly value it at or above $60. Thus, part of the supply chain surplus is left with the customer as consumer surplus.

 The rest stays with the supply chain as profit. Best Buy and other stages of the supply chain incur costs to convey information, produce components, store them, transport them, transfer funds, and so on. The difference between the $60 that the customer paid and the sum of all costs incurred by the supply chain to produce and distribute the router represents the supply chain profitability. Supply chain profitability is the total profit to be shared across all supply chain stages and intermediaries. The higher the supply chain profitability, the more successful is the supply chain. A focus on growing the supply chain surplus pushes all members of the supply chain toward growing the size of the overall pie. Having defined the success of a supply chain in terms of supply chain profitability, the next logical step is to look for sources of value, revenue, and cost. For any supply chain, there is only one source of revenue: the customer. The value obtained by a customer purchasing detergent at Wal-Mart depends upon several factors, including the functionality of the detergent, how far the customer has to travel to Wal-Mart, and the likelihood of finding the detergent in stock. The customer is the only one providing positive cash flow for the Wal-Mart supply chain. All other cash flows are simply fund exchanges that occur within the supply chain, given that different stages have different owners. When Wal-Mart pays its supplier, it is taking a portion of the funds the customer provides and passing that money on to the supplier. All flows of information, product, or funds generate costs within the supply chain. Thus, the appropriate management of these flows is a key to supply chain success. Effective supply chain management involves the management of supply chain assets and product, information, and fund flows to maximize total supply chain surplus. A growth in supply chain surplus increases the size of the total pie, allowing contributing members of the supply chain to benefit. In this book, we have a strong focus on analyzing all supply chain decisions in terms of their impact on the supply chain surplus. These decisions and their impact can vary for a wide variety of reasons. For instance, consider the difference in the supply chain structure for fast-moving consumer goods observed in the United States and India. U.S. distributors play a much smaller role in this supply chain compared to their Indian counterparts. We argue that the difference in supply chain structure can be explained by the impact a distributor has on the supply chain surplus in the two countries. Retailing in the United States is largely consolidated, with large chains buying consumer goods from most manufacturers. This consolidation gives retailers sufficient scale that the introduction of an intermediary such as a distributor does little to reduce costs and may actually increase costs because of an additional transaction. In contrast, India has millions of small retail outlets. The small size of Indian retail outlets limits the amount of inventory they can hold, thus requiring frequent replenishment—an order can be compared with the weekly grocery shopping for a family in the United States. The only way for a manufacturer to keep transportation costs low is to bring full truckloads of product close to the market and then distribute locally using “milk runs” with smaller vehicles. The presence of an intermediary who can receive a full truckload shipment, break bulk, and then make smaller deliveries to the retailers is crucial if transportation costs are to be kept low. Most Indian distributors are one-stop shops, stocking everything from cooking oil to soaps and detergents made by a variety of manufacturers. Besides the convenience provided by one-stop shopping, distributors in India are also able to reduce transportation costs for outbound delivery to the retailer by aggregating products across multiple manufacturers during the delivery runs. Distributors in India also handle collections, because their cost of collection is significantly lower than that of each manufacturer collecting from retailers on its own would be. Thus, the important role of distributors in India can be explained by the growth in supply chain surplus that results from their presence. The supply chain surplus argument implies that as retailing in India begins to consolidate, the role of distributors will diminish.

• Decision Phrases in Supply Chain 

1. Supply Chain Strategy or Design: 

During this phase, a company decides how to structure the supply chain over the next several years. It decides what the chain’s configuration will be, how resources will be allocated, and what processes each stage will perform. Strategic decisions made by companies include whether to outsource or perform a supply chain function in-house, the location and capacities of production and warehousing facilities, the products to be manufactured or stored at various locations, the modes of transportation to be made available along different shipping legs, and the type of information system to be utilized. PepsiCo Inc.’s decision in 2009 to purchase two of its largest bottlers is a supply chain design or strategic decision. A firm must ensure that the supply chain configuration supports its strategic objectives and increases the supply chain surplus during this phase. As the PepsiCo CEO announced in a news release on August 4, “while the existing model has served the system very well, the fully integrated beverage business will enable us to bring innovative products and packages to market faster, streamline our manufacturing and distribution systems and react more quickly to Key Point Supply chain design, planning, and operation decisions play a significant role in the success or failure of a firm. To stay competitive, supply chains must adapt to changing technology and customer expectations.  Supply chain design decisions are typically made for the long term (a matter of years) and are expensive to alter on short notice. Consequently, when companies make these decisions, they must take into account uncertainty in anticipated market conditions over the next few years. 

2. Supply Chain Planning: 

For decisions made during this phase, the time frame considered is a quarter to a year. Therefore, the supply chain’s configuration determined in the strategic phase is fixed. This configuration establishes constraints within which planning must be done. The goal of planning is to maximize the supply chain surplus that can be generated over the planning horizon given the constraints established during the strategic or design phase. Companies start the planning phase with a forecast for the coming year (or a comparable time frame) of demand and other factors such as costs and prices in different markets. Planning includes making decisions regarding which markets will be supplied from which locations, the subcontracting of manufacturing, the inventory policies to be followed, and the timing and size of marketing and price promotions. For example, steel giant ArcelorMittal’s decisions regarding markets supplied by a production facility and target production quantities at each location are classified as planning decisions. Planning establishes parameters within which a supply chain will function over a specified period of time. In the planning phase, companies must include uncertainty in demand, exchange rates, and competition over this time horizon in their decisions. Given a shorter time frame and better forecasts than in the design phase, companies in the planning phase try to incorporate any flexibility built into the supply chain in the design phase and exploit it to optimize performance. As a result of the planning phase, companies define a set of operating policies that govern short-term operations.

 3. Supply Chain Operation:

 The time horizon here is weekly or daily. During this phase, companies make decisions regarding individual customer orders. At the operational level, supply chain configuration is considered fixed, and planning policies are already defined. The goal of supply chain operations is to handle incoming customer orders in the best possible manner. During this phase, firms allocate inventory or production to individual orders, set a date that an order is to be filled, generate pick lists at a warehouse, allocate an order to a particular shipping mode and shipment, set delivery schedules of trucks, and place replenishment orders. Because operational decisions are being made in the short term (minutes, hours, or days), there is less uncertainty about demand information. Given the constraints established by the configuration and planning policies, the goal during the operation phase is to exploit the reduction of uncertainty and optimize performance.

• Process Views in Supply Chain

A supply chain is a sequence of processes and flows that take place within and between different stages and combine to fill a customer need for a product. There are two ways to view the processes performed in a supply chain. 

1. Cycle View: 

The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain. 

2. Push/Pull View: 

The processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order or in anticipation of customer orders. Pull processes are initiated by a customer order, whereas push processes are initiated and performed in anticipation of customer orders.