SUPPLY CHAIN MANAGEMENT

Decision Phases in a Supply Chain

CHAPTER 1: Successful supply chain management requires
Supply Chain and Stages many decisions relating to the flow of information,
Supply Chain - consists of all parties involved, directly or product, and funds. Each decision should be made to raise
indirectly, in fulfilling a customer request. The supply the supply chain surplus. These decisions fall into three
chain includes not only the manufacturer and suppliers, categories or phases, depending on the frequency of each
but also transporters, warehouses, retailers, and even decision and the time frame during which a decision phase
customers themselves. Within each organization, such as a has an impact.
manufacturer, the supply chain includes all functions 1. Supply Chain Strategy or Design: During this
involved in receiving and filling a customer request. These phase, a company decides how to structure the
functions include, but are not limited to, new product supply chain over the next several years. It decides
development, marketing, operations, distribution, finance, what the chain's configuration will be, how
and customer service. resources will be allocated, and what processes each
stage will perform. Strategic decisions made by
In fact, the primary purpose of any supply chain is to companies include whether to outsource or perform
satisfy customer needs and, in the process, generate profit a supply chain function in-house, the location and
for itself. The term supply chain conjures up images of capacities of production and warehousing facilities,
product or supply moving from suppliers to manufacturers the products to be manufactured or stored at various
to distributors to retailers to customers along a chain. This locations, the modes of transportation to be made
is certainly part of the supply chain, but it is also available along different shipping legs, and the type
important to visualize information, funds, and product of information system to be utilized.
flows along both directions of this chain. The term supply 2. Supply Chain Planning: For decisions made
chain may also imply that only one player is involved at during this phase, the time frame considered is a
each stage. In reality, a manufacturer may receive material quarter to a year. Therefore, the supply chain's
from several suppliers and then supply several configuration determined in the strategic phase is
distributors. Thus, most supply chains are actually fixed. This configuration establishes constraints
networks. It may be more accurate to use the term supply within which planning must be done. The goal of
network or supply web to describe the structure of most planning is to maximize the supply chain surplus
supply chains. that can be generated over the planning horizon
given the constraints established during the strategic
A typical supply chain may involve a variety of stages, or design phase. Companies start the planning phase
including the following: with a forecast for the coming year (or a comparable
• Customers time frame) of demand and other factors such as
• Retailers costs and prices in different markets. Planning
• Wholesalers/distributors includes making decisions regarding which markets
• Manufacturers will be supplied from which locations, the
• Component/raw material suppliers subcontracting of manufacturing, the inventory
policies to be followed, and the timing and size of
Each stage in a supply chain is connected through the flow marketing and price promotions.
of products, information, and funds. These flows often 3. Supply Chain Operation: The time horizon here is
occur in both directions and may be managed by one of weekly or daily. During this phase, companies make
the stages or an intermediary. decisions regarding individual customer orders. At
the operational level, supply chain configuration is
Supply Chain Stages Diagram 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.
CHAPTER 2:
Competitive and Supply Chain Strategies
A company's competitive strategy defines, relative to its
competitors, the set of customer needs that it seeks to
satisfy through its products and services.
The competitive strategy is defined based on how the Strategic fit - refers to consistency between the customer
customer prioritizes product cost, delivery time, variety, priorities that the competitive strategy hopes to satisfy and
and quality. the supply chain capabilities that the supply chain strategy
A firm's competitive strategy will be defined based on its aims to build
customers' priorities. Competitive strategy targets one or How Is Strategic Fit Achieved?
more customer segments and aims to provide products and A competitive strategy will specify, either explicitly or
services that satisfy these customers' needs. implicitly, one or more customer segments that a company
hopes to satisfy. To achieve strategic fit, a company must
ensure that its supply chain capabilities support its ability
to satisfy the needs of the targeted customer segments.

Three Basic Steps of Strategic Fit

1. Understanding the Customer and Supply Chain
Uncertainty: First, a company must understand the
customer needs for each targeted segment and the
uncertainty these needs impose on the supply chain.
These needs help the company define the desired
cost and service requirements. The supply chain
The value chain begins with new product uncertainty helps the company identify the extent of
development, which creates specifications for the product. the unpredictability of demand, disruption, and
Marketing and sales generate demand by publicizing the delay that the supply chain must be prepared for.
customer priorities that the products and services will 2. Understanding the Supply Chain Capabilities:
satisfy. Marketing also brings customer input back to new Each of the many types of supply chains is designed
product development. Using new product specifications, to perform different tasks well. A company must
operations transform inputs to outputs to create the understand what its supply chain is designed to do
product. Distribution either takes the product to the well.
customer or brings the customer to the product. Service 3. Achieving Strategic Fit: If a mismatch exists
responds to customer requests during or after the sale. between what the supply chain does particularly
These are core processes or functions that must be well and the desired customer needs, the company
performed for a successful sale. will either need to restructure the supply chain to
To execute a company's competitive strategy, all support the competitive strategy or alter its
these functions play a role, and each must develop its own competitive strategy.
strategy.
Strategy - refers to what each process or function will try Implied Demand Uncertainty – demand uncertainty
to do particularly well imposed on the supply chain because of the customer
Product development strategy - specifies the portfolio of needs it seeks to satisfy. It is the resulting uncertainty for
new products that a company will try to develop. It also only the portion of the demand that the supply chain plans
dictates whether the development effort will be made to satisfy based on the attributes the customer desires.
internally or outsourced. Demand Uncertainty – reflects the uncertainty of
Marketing and sales strategy - specifies how the market customer demand for a product
will be segmented and how the product will be positioned,
priced, and promoted. CHAPTER 3:
Supply chain strategy - determines the nature of APT – Accounts Payable Turnover – important ratio
procurement of raw materials, transportation of materials that defines financial leverage
to and from the company, manufacture of the product or ROE – Return on Equity – main summary measure of
operation to provide the service, and distribution of the firm’s performance. It measures the return on investment
product to the customer, along with any follow-up service made by a firm’s shareholders.
and a specification of whether these processes will be ROA – Return on Assets – measures the return earned
performed in-house or outsourced. Supply chain strategy On each dollar invested by the firm in assets
specifies what the operations, distribution, and service
functions, whether performed in-house or outsourced, Drivers of Supply Chain Performance
should do particularly well. 1. Facilities - the actual physical locations in the
Supply chain strategy includes a specification of the supply chain network where product is stored,
broad structure of the supply chain and what many assembled, or fabricated. The two major types of
traditionally call "supplier strategy," "operations facilities are production sites and storage sites.
strategy," and "logistics strategy." Supply chain strategy Decisions regarding the role, location, capacity, and
also includes design decisions regarding inventory, flexibility of facilities have a significant impact on
transportation, operating facilities, and information flows. the supply chain's performance.
2. Inventory - encompasses all raw materials, work in
process, and finished goods within a supply chain.
 The inventory belonging to a firm is reported under Product Availability – probability of having a product in
assets. Changing inventory policies can dramatically stock when a customer order arrives
alter the supply chain's efficiency and Time to market – time it takes to bring a new product to
responsiveness. the market
3. Transportation - entails moving inventory from Order visibility – the ability to customers to track their
point to point in the supply chain. Transportation orders from placement to delivery
can take the form of many combinations of modes Returnability – the ease with which a customer can
and routes, each with its own performance return unsatisfactory merchandise and the ability of the
characteristics. Transportation choices have a large network to handle such returns
impact on supply chain responsiveness and
efficiency. CHAPTER 5:
4. Information - consists of data and analysis The Role of Network Design in the Supply Chain
concerning facilities, inventory, transportation, Supply chain network design decisions include the
costs, prices, and customers throughout the supply assignment of facility role; location of manufacturing-,
chain. Information is potentially the biggest driver storage-, or transportation-related facilities; and the
of performance in the supply chain because it allocation of capacity and markets to each facility. Supply
directly affects each of the other drivers. chain network design decisions are classified as follows:
Information presents management with the 1. Facility role: What role should each facility play?
opportunity to make supply chains more responsive What processes are performed at each facility?
and more efficient. 2. Facility location: Where should facilities be
5. Sourcing - the choice of who will perform a located?
particular supply chain activity such as production, 3. Capacity allocation: How much capacity should be
storage, transportation, or the management of allocated to each facility?
information. At the strategic level, these decisions 4. Market and supply allocation: What markets
determine what functions a firm performs and what should each facility serve? Which supply sources
functions the firm outsources. Sourcing decisions should feed each facility?
affect both the responsiveness and efficiency of a
supply chain. Network design decisions have a significant impact on
6. Pricing - determines how much a firm will charge performance because they determine the supply chain
for the goods and services that it makes available in configuration and set constraints within which the other
the supply chain. Pricing affects the behavior of the supply chain drivers can be used either to decrease supply
buyer of the good or service, thus affecting supply chain cost or to increase responsiveness. All network
chain performance. design decisions affect one another and must be made
taking this fact into consideration.
CHAPTER 4:
The Role of Distribution in the Supply Chain Decisions concerning the role of each facility are
Distribution - refers to the steps taken to move and store significant because they determine the amount of
a product from the supplier stage to a customer stage in flexibility the supply chain has in changing the way it
the supply chain. Distribution occurs between every pair meets demand.
of stages in the supply chain. Raw materials and
components are moved from suppliers to manufacturers, Facility location decisions have a long-term impact on a
whereas finished products are moved from the supply chain's performance because it is expensive to shut
manufacturer to the end consumer. Distribution is a key down a facility or move it to a different location. A good
driver of the overall profitability of a firm because it location decision can help a supply chain be responsive
affects both the supply chain cost and the customer value while keeping its costs low.
directly.
The process of designing a distribution network has two Whereas capacity allocation can be altered more easily
broad phases. than location, capacity decisions do tend to stay in place
First phase: the broad structure of the supply chain for several years. Allocating too much capacity to a
network is visualized. This stage includes decisions such location results in poor utilization and, as a result, higher
as whether the product will be sold directly or goes costs. Allocating too little capacity results in poor
through an intermediary. responsiveness if demand is not satisfied or high cost if
Second phase: Takes the broad structure and converts it demand is filled from a distant facility.
into specific locations and their capability, capacity, and
demand allocation. The allocation of supply sources and markets to
Response Time – amount of time it takes for a customer facilities has a significant impact on performance because
to receive an order it affects total production, inventory, and transportation
Product Variety – number of different costs incurred by the supply chain to satisfy customer
products/configurations that are offered by the distribution demand. This decision should be reconsidered on a regular
network basis so that the allocation can be changed as production
and transportation costs, market conditions, or plant Type of Test (100 items):
capacities change. Test I: Multiple Choice
Test II: Identification
Factors Influencing Network Design Decisions Test III: Enumeration
• Strategic Factors. A firm's competitive strategy has a Test IV: Completing the Diagram
significant impact on network design decisions within
the supply chain. Firms that focuses on cost leadership
tend to find the lowest cost location for their
manufacturing facilities, even if that means locating
far from the markets they serve. In contrast, firms that
focus on responsiveness tend to locate facilities closer
to the market and may select a high-cost location if
this choice allows the firm to react quickly to
changing market needs.
• Technological Factors. Characteristics of available
production technologies have a significant impact on
network design decisions. If production technology
displays significant economies of scale, a few high-
capacity locations are most effective. In contrast, if
facilities have lower fixed costs, many local facilities
are preferred because this helps lower transportation
costs.
• Macroeconomic Factors. Macroeconomic factors
include taxes, tariffs, exchange rates, and shipping
costs that are not internal to an individual firm. As
global trade has increased, macroeconomic factors
have had a significant influence on the success or
failure of supply chain networks. Thus, it is
imperative that firms take these factors into account
when making network design decisions.
• Political Factors. The political stability of the country
under consideration plays a significant role in location
choice. Companies prefer to locate facilities in
politically stable countries where the rules of
commerce and ownership are well defined. While
political risk is hard to quantify, there are some
indices like the global political risk index (GPRI) that
companies can use when investing in emerging
markets. The GPRI is evaluated by a consulting firm
(Eurasia Group) and aims to measure the capacity of a
country to withstand shocks or crises along four
categories: government, society, security, and
economy.
• Infrastructure Factors. The availability of good
infrastructure is an important prerequisite to locating a
facility in a given area. Poor infrastructure adds to the
cost of doing business from a given location. Key
infrastructure elements to be considered during
network design include availability of sites and labor,
proximity to transportation terminals, rail service,
proximity to air- ports and seaports, highway access,
congestion, and local utilities.
• Competitive Factors. Companies must consider
competitors' strategy, size, and location when
designing their supply chain networks. A fundamental
decision firms make is whether to locate their
facilities close to or far from competitors. The form of
competition and factors such as raw material or labor
availability influence this decision.