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Supply Chain
Management
Subtopics:-
4.1 B2B logistics service
4.2 JIT system
4.3 Logistic integration

4.1 B2B logistics services

Many studies have shown that logistics services if often just as important as product quality
as a measure of supplier performance. In many industry, as quality product at a competitive
price is given, so customer service is the key differentiate or among competitors.

In one industry for example purchasing agents begin the buying the process by calling
suppliers with the best delivery services to see whether they are willing to negotiate prices.
Because it is important to customers, reliable logistics service can lead to higher profit.

A study by Bain and Company showed that companies with the superior logistics services
grow 8 percent faster, collect a 7 percent price premium and are 12 times as profitable as
firm with inferior service levels.

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 Elements Descriptions

Delivery times The time from the creation of an order to the fulfillment and
delivery of that order encompasses both order processing time
and delivery or transportation one.
Delivery reliability The most frequently used measure of logistics service delivery
reliability focused on the capability of having products available
to customer demand.
Order accuracy The degree to which items received conforms to the specification
of the order. The key dimension incidence of orders shipped
complete and without error.
Information Access The firm’s ability to respond to inquiries about order status of
product available.
Damage A measure of the physical conditions of the product when
received by the buyer.

Ease of doing A range of factors, including the ease with which orders returns,
business credits, billing and adjustment are handled.

Value added Such features as packaging willing facilitate customer handling or

services other services such as pre-pricing and drop shipment.

Logistic service impact on the customer

i. Supplier logistic service translates into product availability. For a manufacturer

to producer or for a distributor to resell, industrial product must be available at
the right time, at right place and in usable condition.
ii. The longer the supplier’s delivery time the less available the product.
For Example: A reduction in the supplier’s delivery time permit a buyer the hold
less inventory because needs cab be met rapidly.
iii. The customer reduces the risk that the productivity will be interrupted.
Consistent delivery enables the buyers to program more effectively or routine
the purchasing process thus lowering buyer costs.
iv. Consistent delivery cycle performance allows buyer to cut their level of buffer
to of safety stock, there by the reducing inventory cost.
v. However for many business products, such as those that are low in unit value
and relatively standardized, the overriding concern is not inventory cost but
simply having the products. A malfunctioning &0.95 bearing could shut down
as whole production line.
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Determining the level of services

Buyer often ranks logistics service right behind “quality” as a criterion for selecting a vendor.
However not all products or all customers require the same level of logistical service.

Many made to order products such as heavy machinery have relative low logistical service
requirements. Other such as replacement parts, components, and subassemblies, require
extremely demanding logistical performance. Similarity customer may be more or less
responsive to varying levels of logistical services.

Profitable Levels of service

In developing a logistical service strategy business marketing strategies should assess the
profit impact of the service options that they provide to customer.

In nearly all the industries, firm possible numerous supply chain services such as next day
delivery, customized handling and specialized labeling. However truer, few companies
actually trace the true cost specialized service and the resulting effect on customer
profitability.

To combat this unhealthy situation, some companies are now using cost to serve analytics
to address the problem among them are Dow Chemical, Eastman Chemical and Georgia
Pacific, Georgia Pacific used total delivered cost to improved performance of a major
customer account.

By incorporating cost to serve data into the calculation gross margin. GP supply chain team
determined the cost to provide this customer with expedited transportation and distribution
services were significant reducing the account profitability.

Profitable Levels of service

In a top meeting with the customer, GP used the data to expose the root causes of the high
costs and poor chasing service included last minute uncoordinated promotional planning
and purchasing across the customer’s major business units and the customer’s unwilling to
share inventory levels and positioning. Customer once confronted with the data is often
willing to collaborative on ways to improve service, reduce costs and restore profitability.

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To recap service levels are developed by assessing customer service requirements. The
sales and cost of various service levels are analyzed to find the service level generating the
highest profits. The needs of various customer segments dictate various logistical system
configurations. Example: when logistical service is critical, industrial distributors can provide
the vital product availability, whereas customers with less rigorous service demands can be
served from factory inventories.

Traditional View: Logistics in the Economy (1990, 1996)

 Freight Transportation $352, $455 Billion

 Inventory Expense $221, $311 Billion
 Administrative Expense $27, $31 Billion
 Logistics Related Activity 11%, 10.5% of GNP

Traditional View: Logistics in the Manufacturing Firm

 Profit 4%
 Logistics Cost 21%
 Marketing Cost 27%
 Manufacturing Cost 48%

The Magnitude in the Traditional View

1. Estimated that the grocery industry could save $30 billion (10% of operating cost) by
using effective logistics and supply chain strategies.
 A typical box of cereal spends 104 days from factory to sale
 A typical car spends 15 days from factory to dealership
2. Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago.
3. Compaq estimates it lost $.5 billion to $1 billion in sales in 1995 because laptops were
not available when and where needed.
4. When the 1 gig processor was introduced by AMD, the price of the 800 mb processor
dropped by 30%.
5. P&G estimates it saved retail customers $65 million by collaboration resulting in a
better match of supply and demand.

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4.2 JIT System

What is a Supply Chain?

1. All stages involved, directly or indirectly, in fulfilling a customer request.

2. Includes manufacturers, suppliers, transporters, warehouses, retailers, and customers.
3. Within each company, the supply chain includes all functions involved in fulfilling a
customer request (product development, marketing, operations, distribution,
finance, customer service).
Examples: Fig. 4.1 Detergent supply chain (Wal-Mart), Dell.
4. Customer is an integral part of the supply chain.
5. Includes movement of products from suppliers to manufacturers to distributors, but
also includes movement of information, funds, and products in both directions.
6. Probably more accurate to use the term “supply network” or “supply web”.

Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers (Fig.
4.1)

P&G or Jewel or Jewel Customer wants

other third Supermarket detergent and goes
manufacture party DC to Jewel

Plastic Tenneco Chemical

Producer Packaging manufacturer
(e.g. Oil Company)

Chemical
manufacturer Paper Timber
(e.g. Oil Company) Manufacturer Industry

Flows in a Supply Chain

Information
Supplier/
Customer
Production
Manufacturer

Funds

Figure 4.1
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The Objective of a Supply Chain

1. Maximize overall value created.

2. Supply chain value: difference between what the final products is worth to the
customer and the effort the supply chain expends in filling the customer’s request.
3. Value is correlated to supply chain profitability (difference between revenue
generated from the customer and the overall cost across the supply chain).
4. Example: Dell receives $2000 from a customer for a computer (revenue).
5. Supply chain incurs costs (information, storage, transportation, components,
assembly, etc.)
6. Difference between $2000 and the sum of all of these costs is the supply chain profit.
7. Supply chain profitability is total profit to be shared across all stages of the supply
chain.
8. Supply chain success should be measured by total supply chain profitability, not
profits at an individual stage.
9. Sources of supply chain revenue: the customer.
10. Sources of supply chain cost: flows of information, products, or funds between stages
of the supply chain.
11. Supply chain management is the management of flows between and among supply
chain stages to maximize total supply chain profitability.

Decision Phases of a Supply Chain

1. Supply Chain Strategy or Design

i. Decisions about the structure of the supply chain and what processes each stage
will perform.
ii. Strategic supply chain decisions
a. Locations and capacities of facilities
b. Products to be made or stored at various locations
c. Modes of transportation
d. Information systems
iii. Supply chain design must support strategic objectives.
iv. Supply chain design decisions are long-term and expensive to reverse – must take
into account market uncertainty.

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 2. Supply Chain Planning
• Definition of a set of policies that govern short-term operations
• Fixed by the supply configuration from previous phase
• Starts with a forecast of demand in the coming year
• Planning decisions:
 Which markets will be supplied from which locations
 Planned buildup of inventories
 Subcontracting, backup locations
 Inventory policies
 Timing and size of market promotions
• Must consider in planning decisions demand uncertainty, exchange rates,
competition over the time horizon

3. Supply Chain Operation

i. Time horizon is weekly or daily
ii. Decisions regarding individual customer orders
iii. Supply chain configuration is fixed and operating policies are determined
iv. Goal is to implement the operating policies as effectively as possible
v. Allocate orders to inventory or production, set order due dates, generate pick lists
at a warehouse, allocate an order to a particular shipment, set delivery schedules,
place replenishment orders
vi. Much less uncertainty (short time horizon)

4.3 Logistic integrations

Process View of a Supply Chain

Cycle view: processes in a supply chain are divided into a series of cycles, each performed
at the interfaces between two successive supply chain stages.

Push/pull view: processes in a supply chain are divided into two categories depending on
whether they are executed in response to a customer order (pull) or in anticipation of a
customer order (push).

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Cycle View of Supply Chains
Customer

C
Customer order cycle
Retailer
Replenishment cycle
Distributor

Manufacturing cycle Manufacturer

Procurement cycle Supplier

Fig 4.2

Cycle View of a Supply Chain

 Each cycle occurs at the interface between two successive stages

 Customer order cycle (customer-retailer)
 Replenishment cycle (retailer-distributor)
 Manufacturing cycle (distributor-manufacturer)
 Procurement cycle (manufacturer-supplier)
 Figure 4.2
 Cycle view clearly defines processes involved and the owners of each process.
Specifies the roles and responsibilities of each member and the desired outcome
of each process.

Push/Pull View of Supply Chain Processes

 Supply chain processes fall into one of two categories depending on the timing
of their execution relative to customer demand
 Pull: execution is initiated in response to a customer order (reactive)
 Push: execution is initiated in anticipation of customer orders (speculative)
 Push/pull boundary separates push processes from pull processes

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Push/Pull View of Supply Chains

Procurement, Manufacturing
and Replenishment cycle Customers’ order cycle

Push process Pull process

Customer order arrives

Examples of Supply Chains

1. 7-Eleven
 What factors influence decisions of opening and closing stores? Location of
stores?
 Why has 7-Eleven chosen off-site preparation of fresh food?
 Why does 7-Eleven discourage direct store delivery from vendors?
 Where are distribution centers located and how many stores does each center
serve? How are stores assigned to distribution centers?
 Why does 7-Eleven combine fresh food shipments by temperature?
 What point of sale data does 7-Eleven gather and what information is made
available to store managers? How should information systems be structured?
2. Toyota
 Where should plants be located, what degree of flexibility should each have,
and what capacity should each have?
 Should plants be able to produce for all markets?
 How should markets be allocated to plants?
 What kind of flexibility should be built into the distribution system?
 How should this flexible investment be valued?
 What actions may be taken during product design to facilitate this flexibility?

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 3. W.W. Grainger and McMaster Carr
 How many DCs should there be and where should they be located?
 How should product stocking be managed at the DCs? Should all DCs carry all
products?
 What products should be carried in inventory and what products should be left
at the supplier?
 What products should Grainger carry at a store?
 How should markets be allocated to DCs?
 How should replenishment of inventory be managed at various stocking
locations?
 How should Web orders be handled?
 What transportation modes should be used?

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