BA 4021 SUPPLY CHAIN MANAGEMENT 1

UNIT I –INTRODUCTION TO SCM

INTRODUCTION - Supply Chain – Fundamentals, Evolution, Role in Economy, Importance,

Decision Phases, Enablers & Drivers of Supply Chain Performance; Supply chain strategy; Supply
Chain Performance Measures.
1.1 SUPPLY CHAIN – FUNDAMENTALS
A supply chain is the network of all the individuals, organizations, resources, activities and
technology involved in the creation and sale of a product. A supply chain encompasses everything
from the delivery of source materials from the supplier to the manufacturer through to its eventual
delivery to the end user. The supply chain segment involved with getting the finished product from
the manufacturer to the consumer is known as the distribution channel.

1.1.1 Steps in the supply chain

The fundamental steps of a supply chain in order are as follows:
 Sourcing raw materials.
 Refining those materials into basic parts.
 Combining those basic parts to create a product.
 Order fulfilment/Sales.
 Product delivery.
 Customer support and return services.

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 BA 4021 SUPPLY CHAIN MANAGEMENT 2

1.1.2 Supply Chain Management (SCM)

Supply chain management (SCM) is the process of managing the flow of goods and services to and
from a business, including every step involved in turning raw materials and components into final
products and getting them to the ultimate customer. Effective SCM can help streamline a
company's activities to eliminate waste, maximize customer value, and gain a competitive
advantage in the marketplace.

1.1.3 Phases of Supply Chain Management

A supply chain manager's job is not only about traditional logistics and purchasing but finding
ways to increase efficiency and keep costs down while also avoiding shortages and preparing for
unexpected contingencies. Typically, the SCM process consists of these five phases:
Planning
To get the best results from SCM, the process usually begins with planning to match supply with
customer and manufacturing demands. Companies must try to predict what their future needs will
be and act accordingly. This will take into account the raw materials or components needed during
each stage of manufacturing, equipment capacity and limitations, and staffing needs. Large
businesses often rely on enterprise resource planning (ERP) software to help coordinate the
process.
Sourcing
Effective SCM processes rely very heavily on strong relationships with suppliers. Sourcing entails
working with vendors to supply the materials needed throughout the manufacturing process.
Different industries will have different sourcing requirements, but in general, SCM sourcing
involves ensuring that:
 The raw materials or components meet the manufacturing specifications needed for the
production of the goods.
 The prices paid the vendor are in line with market expectations.
 The vendor has the flexibility to deliver emergency materials due to unforeseen events.
 The vendor has a proven record of delivering goods on time and of good quality.
Supply chain management is especially critical when manufacturers are working with perishable
goods. When sourcing goods, companies should be mindful of lead times and how well equipped a
supplier is to meet their needs.
Manufacturing
This is the heart of the supply chain management process, where the company uses its machinery
and labour to transform the raw materials or components it has received from its suppliers into

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something new. This final product is the ultimate goal of the manufacturing process, though it is
not the final stage of supply chain management.
The manufacturing process may be further divided into sub-tasks such as assembly, testing,
inspection, and packaging. During the manufacturing process, companies must be mindful of waste
or other factors that may cause deviations from their original plans. For example, if a company is
using more raw materials than planned and sourced for due to inadequate employee training, it
must rectify the issue or revisit the earlier stages in SCM.
Delivery
Once products are made and sales are finalized, a company must get those products into the hands
of its customers. A company with effective SCM will have robust logistic capabilities and delivery
channels to ensure timely, safe, and inexpensive delivery of its products.
This includes having a backup or diversified distribution methods should one method of
transportation temporarily be unusable. For example, how might a company's delivery process be
impacted by record snowfall in distribution center areas?
Returns
The supply chain management process concludes with support for the product and customer
returns. It's bad enough when a customer needs to return a product, but even worse if that's due to
an error on the company's part. This return process is often called reverse logistics, and the
company must ensure it has the capabilities to receive returned products and correctly assign
refunds for them. Whether a company is conducting a product recall or a customer is simply not
satisfied with the product, the transaction with the customer must be remedied.
Returns can also be a valuable form of feedback, helping the company to identify defective or
poorly designed products and to make whatever changes are necessary. But without addressing the
underlying cause of a customer return, the supply chain management process will have failed, and
future returns will likely persist.

1.1.4 Types of Supply Chain Models

Supply chain management does not look the same for all companies. Each business has its own
goals, constraints, and strengths that will shape its SCM process. These are some of the models a
company can adopt to guide its supply chain management efforts.
 Continuous flow model: One of the more traditional supply chain methods, this model is
often best for mature industries. The continuous flow model relies on a manufacturer
producing the same good over and over and expecting customer demand will show little
variation.

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 BA 4021 SUPPLY CHAIN MANAGEMENT 4

 Agile model: This model is best for companies with unpredictable demand or custom-order
products. This model prioritizes flexibility, as a company may have a specific need at any
given moment and must be prepared to pivot accordingly.
 Fast model: This model emphasizes the quick turnover of a product with a short life cycle.
Using a fast chain model, a company strives to capitalize on a trend, quickly produce
goods, and ensure the product is fully sold before the trend ends.
 Flexible model: The flexible model works best for companies affected by seasonality.
Some companies may have much higher demand requirements during peak season and low
volume requirements in others. A flexible model of supply chain management ensures that
production can easily be ramped up or wound down.
 Efficient model: For companies competing in industries with very tight profit margins, a
company may strive to get an advantage by making its supply chain management process
the most efficient. This includes utilizing equipment and machinery in the most ideal ways
in addition to managing inventory and processing orders most efficiently.
 Custom model: If any model above doesn't suit a company's needs, it can always turn
toward a custom model. This is often the case for highly specialized industries with high
technical requirements, such as an automobile manufacturer.

1.1.5 Example of SCM

Understanding the importance of SCM to its business, Walgreens Boots Alliance Inc. decided to
transform its supply chain by investing in technology to streamline the entire process. That
included using big data, collected from its 9,000 stores and 20,000 suppliers, to help improve its
forecasting capabilities and better manage sales and inventory.1 In 2019 it appointed its first-ever
chief supply chain officer, a key leadership role in the company.2
The company has also incorporated supply chain management into its environmental, social, and
governance (ESG) initiatives, including those involving human rights, animal testing,
sustainability, and transparency regarding product ingredients.34
Why Is Supply Chain Management Important?
Supply chain management is important because it can help achieve several business objectives. For
instance, controlling manufacturing processes can improve product quality, reducing the risk of
recalls and lawsuits while helping to build a strong consumer brand. At the same time, control over
shipping procedures can improve customer service by avoiding costly shortages or periods of
inventory oversupply. Overall, supply chain management provides multiple opportunities for

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companies to improve their profit margins and is especially important for businesses with large
and international operations.

1.2 EVOLUTION OF SUPPLY CHAIN MANAGEMENT

The Stages of evolution in Supply Chain Management

There are a total number of 5 stages in the evolution of the supply chain industry. These 5 stages
include:
• Stage 1 – The early 1980s
• Stage 2 – Late 1980s
• Stage 3 – The early 1990s
• Stage 4 – Late 1990s
• Stage 5 – The twenty-first century
Stage 1 – Consolidation
Starting from the early 1980s, businesses focused on products. They focused more on quality and
the key performance metrics were – inventory turns and production cost. For the purpose of
achieving inventory turns, small companies began merging into larger organizations. This also led
to organized planning of the production cost which further resulted in becoming a good solution for
most businesses.

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 BA 4021 SUPPLY CHAIN MANAGEMENT 6

Stage 2 – Integration
In the late 1980s, businesses shifted their focus from products to the volume of output. Keeping a
close eye on the cost, the key performance metrics for Stage 2 of the supply chain evolution turned
out to be production capacity and throughput. Companies that started making profits in the earlier
stage now analyzed that just production cost will not help them in making more profits. And for this
reason, the rate of production and the volume of production became important. By the end of this
stage, companies found their solutions.
Stage 3 – Market Value
Then came the third stage of the supply chain evolution which began in the early 1990s.
Organizations in this stage started to focus more on market-driven results. The key factor of this
stage of evolution was product availability and the performance metrics were clearly – market share
and order fill rate. Now the problem was not about making more products but about delivering them
to the markets. So, by the end of this stage, businesses had the solution again and were onto their
next stages of growth for even better results.
Stage 4 – Brand Value
During the late 1990s, firms analyzed that customers were the game changers for revenue
generation. This is when they shifted their business strategies and made ‘lead time’ the key factor in
their goals. With this, the key performance metrics changed from market share and order fill rate to
customer satisfaction, value-added, and response time. Companies now had the time to analyze that
products that were made with a prime focus on customers were what sold out more. That’s how
companies started focusing on products that added value to their companies.
Stage 5 – Automation
The twenty-first century is more driven by knowledge and that is why having more information is
preferred to be ideal for a company’s supply chain management. The key performance metrics for
the 5th stage of supply chain management is real-time communication and business intelligence.
Over the years, with a growth in each segment of the supply chain, employment has also increased.
With more people in the circle, communicating every little detail to each person has become a task.
The process of storing information also began to get hectic and for all these reasons, automation
started out to be the focus for companies to grow.
Today, all the companies using automation throughout their supply chain are the companies that
have a bigger scope to grow. With each stage of the evolution, companies found their solutions, and
likely, this stage will also be smooth in transition for those who live up to the changing strategies
for their business growth – focus on automation. Keeping automation as a solution for real-time

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communication and business intelligence, your organization will get the chance to rise above and
move on to the next big solution of the next stage of the evolution.
Supply mint for Automation – The solution for the 5th stage of Evolution
To address the problem of automation before the next evolution in supply chain management, you
can get in touch with Supply mint. We’re helping organizations in making smooth transitions
towards automation. This will help your organization in becoming intelligent because you’ll have
all the information you need to make the ‘one right decision’ for your organization’s growth and
prosperity with the least cost and wastage.

1.3 SUPPLY CHAIN ROLE IN ECONOMY

The supply chain and logistics industry plays a significant role in India's economy and has a far-
reaching impact on various sectors. Here are some key aspects highlighting its significance:
Economic Contribution:
The supply chain and logistics industry contributes significantly to India's GDP, creating jobs and
fostering economic growth. It comprises various segments, including transportation, warehousing,
packaging, and distribution.
Enabler of Trade:
India's rapid economic growth and increasing trade activities depend heavily on efficient logistics
and supply chain management. It enables the movement of goods within the country and across
borders, facilitating international trade.
Job Creation:
The industry is a major employer, offering jobs to a large workforce. It encompasses various roles
such as truck drivers, warehouse workers, logistics managers, and customs agents, contributing to
employment generation.
Infrastructure Development:
The growth of the logistics sector has led to the development of transport infrastructure, including
highways, railways, ports, and airports, which benefit other industries as well.
Agriculture and Food Supply:
Efficient supply chain and logistics systems are essential for the agriculture sector, ensuring timely
transportation of perishable goods and reducing post-harvest losses. It plays a vital role in food
supply chains, helping distribute food products across the country.

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E-commerce Boom:
The rapid expansion of e-commerce in India heavily relies on logistics and supply chain services.
Companies like Flipkart, Amazon, and others have invested significantly in building robust delivery
networks and warehousing facilities.
Manufacturing and Industry:
Manufacturing industries depend on timely and cost-effective supply chain solutions to source raw
materials, manage inventory, and deliver finished products to markets. Efficient logistics are crucial
for maintaining a competitive edge.
Infrastructure Investment:
India has been investing in improving its logistics infrastructure, including dedicated freight
corridors, logistics parks, and modernizing ports and airports. These investments aim to reduce
transportation costs and enhance efficiency.
GST Implementation:
The introduction of the Goods and Services Tax (GST) in India has streamlined the tax structure
and reduced logistics complexities. This has led to improved efficiency in supply chains, reduced
transit times, and cost savings.
Global Trade Competitiveness:
An efficient logistics and supply chain network enhances India's competitiveness in the global
market. It attracts foreign investment, encourages export-oriented industries, and strengthens India's
position in international trade.

1.4 DECISION PHASES OF SUPPLY CHAIN

How do companies decide the right place to set up their manufacturing plants? How do they come up
with suppliers, locations of warehouses, and Distribution Centers? To maximize supply chain surplus
a company should build an efficient supply chain keeping in mind costs and responsiveness.

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1. Supply Chain Strategy

This phase deals with how to structure a supply chain over the next few years, basically a long-term
view, which is expensive to reverse. If a company plans to bring in a product in the next two years
then it should decide on the following issues
 Location of the facility
 Allocation of resources
 Modes of Transportation
 Outsourcing Decisions
 Information Systems Infrastructure
2. Supply Chain Planning
This is also called a tactical phase which involves the decisions that will be taken over the next
quarter of the year by considering market constraints. This phase starts with demand forecasting and
policies that govern short-term planning. The key decisions that contribute to effective supply
planning are
 Demand Forecasting
 Inventory Policies
 Size of Market promotions
 Markets allocation to warehouse
 Production Planning and Control
3. Supply Chain Operation
Operations deals with the daily and weekly activities related to individual customer demand, with
less uncertainty of demand. The Operations at this stage involve
 Inventory Reporting
 Generate pick lists at a warehouse
 Allocate orders to shipments
 Set delivery schedules
To build effective Supply Chain decisions related to Man, Material, Machine, and Method play a key
role. These three are the key decision phases to maximize your supply chain surplus by keeping in
mind the various costs involved in the short, medium, and long term of the Organization.

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 BA 4021 SUPPLY CHAIN MANAGEMENT 10

1.5 SUPPLY CHAIN ENABLERS

1. Organizational Infrastructure
In order to accomplish organizational goals and objectives, including supply chain
goals, organizational design refers to the process of evaluating and choosing the structure and
formal system of communication, labour division, coordination, control, authority, and
responsibility. Formal charts show the formal structure of an organization, but they can give an
incomplete perspective. The organizational structure consists of much more than just a chart’s
worth of lines and boxes.
Teams will continue to play a crucial role in supply chain design. Managers should only
occasionally use teams, though. Even fewer studies have objectively evaluated the effect of teaming
on corporate performance and demonstrated a clear link between teaming and improved
performance. Increased effectiveness is not a guarantee when organizational work teams are used to
support purchasing and supply chain goals.
2. Technology
The development of information technology (IT) systems and software that support an end-to-end
supply chain, as well as identifying technologies like radio frequency identification (RFID), have
accelerated in the twenty-first century. The supply chain participants may now work together more
effectively thanks to these technologies. E-purchasing suites, which have grown in popularity with
businesses, are among the software packages that buyers are becoming more interested in. Supply
chain planning and execution are the two main supply chain applications used in supply chain
collaboration involving purchasing. With planning software, you may increase forecast accuracy,
schedule production more efficiently, spend less on working capital, complete projects faster, save
money on transportation, and provide better customer service. To make sure that clients receive the

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correct products at the proper location, time, and cost, execution software assists in obtaining
materials and managing physical flows from suppliers through downstream distribution.
3. Strategic Alliances
A relationship formed by two or more organizations that share (proprietary), participate in joint
investments, and develop linked and common processes to increase the performance of both
companies. Many organizations form strategic alliances to increase the performance of their
common supply chain.
In a strategic alliance, business decisions are made jointly, allowing aligned organizations to
leverage their combined resources, information, and expertise. This collaboration can take various
forms, such as partnerships between suppliers, manufacturers, distributors, and retailers. By
working together, organizations can tap into new markets, optimize their product/service offerings,
reduce costs, learn from each other, and enhance their credibility.
4. Human Resource Management
The strength of a company’s workforce is essential to its success. Of course, this applies to
purchasing. Professionals in the purchasing and supply chain industries today need different
knowledge and abilities than they did a few years ago. The knowledge areas for prospective buyers
were;
 Supplier relationship management
 Total cost analysis
 Purchasing strategies
 Supplier analysis
 Competitive market analysis.

1.6 SUPPLY CHAIN DRIVERS

Supply chain capabilities are guided by the decisions you make regarding the five supply chain
drivers. Each of these drivers can be developed and managed to
emphasize responsiveness or efficiency depending on changing business requirements. As you
investigate how a supply chain works, you learn about the demands it faces and the capabilities it
needs to be successful. Adjust the supply chain drivers as needed to get those capabilities.
The five drivers provide a useful framework for thinking about supply chain capabilities. Decisions
made about how each driver operates will determine the blend of responsiveness and efficiency a
supply chain is capable of achieving. The five drivers are illustrated in the diagram below:

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1. Production
This driver can be made very responsive by building factories that have a lot of excess capacity and
use flexible manufacturing techniques to produce a wide range of items. To be even more
responsive, a company could do their production in many smaller plants that are close to major
groups of customers so delivery times would be shorter. If efficiency is desirable, then a company
can build factories with very little excess capacity and have those factories optimized for producing
a limited range of items. Further efficiency can also be gained by centralizing production in large
central plants to get better economies of scale, even though delivery times might be longer.
2. Inventory
Responsiveness can be had by stocking high levels of inventory for a wide range of products.
Additional responsiveness can be gained by stocking products at many locations so as to have the
inventory close to customers and available to them immediately. Efficiency in inventory
management would call for reducing inventory levels of all items and especially of items that do not
sell as frequently. Also, economies of scale and cost savings can be gotten by stocking inventory in
only a few central locations such as regional distribution centers (DCs).
3. Location
A location decision that emphasizes responsiveness would be one where a company
establishes many locations that are close to its customer base. For example, fast-food chains use
location to be very responsive to their customers by opening up lots of stores in high volume
markets. Efficiency can be achieved by operating from only a few locations and centralizing

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activities in common locations. An example of this is the way e-commerce retailers serve large
geographical markets from only a few central locations that perform a wide range of activities.
4. Transportation
Responsiveness can be achieved by a transportation mode that is fast and flexible such as trucks and
airplanes. Many companies that sell products through catalogues or on the Internet are able to
provide high levels of responsiveness by using transportation to deliver their products often within
48 hours or less. FedEx and UPS are two companies that can provide very responsive
transportation services. And now Amazon is expanding and operating its own transportation
services in high volume markets to be more responsive to customer desires. Efficiency can be
emphasized by transporting products in larger batches and doing it less often. The use of
transportation modes such as ship, railroad, and pipelines can be very efficient. Transportation can
also be made more efficient if it is originated out of a central hub facility or distribution center (DC)
instead of from many separate branch locations.
5. Information
The power of this driver grows stronger every year as the technology for collecting and sharing
information becomes more wide spread, easier to use, and less expensive. Information, much like
money, is a very useful commodity because it can be applied directly to enhance the performance of
the other four supply chain drivers. High levels of responsiveness can be achieved when companies
collect and share accurate and timely data generated by the operations of the other four drivers. An
example of this is the supply chains that serve the electronics market; they are some of the most
responsive in the world. Companies in these supply chains, the manufacturers, distributors, and the
big retailers all collect and share data about customer demand, production schedules, and inventory
levels. This enables companies in these supply chains to respond quickly to situations and new
market demands in the high-change and unpredictable world of electronic devices (smartphones,
sensors, home entertainment and video game equipment, etc.)

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 BA 4021 SUPPLY CHAIN MANAGEMENT 14

1.7 SUPPLY CHAIN STRATEGY

A supply chain strategy is a formal approach to managing the network between an organization and
its suppliers. A supply chain manager usually develops this strategy with the primary goal of
maximizing value across all stages of the production cycle.
A supply chain strategy is like a roadmap that helps companies get their products to customers with
as little friction as possible. This plan ensures that every phase of the supply chain is optimized,
including the sourcing of materials, manufacturing, delivery, and logistics.
Four factors usually influence an organization’s supply chain strategy:
1. Industry
2. Company value proposition
3. Internal decision-making processes
4. Business goals

1.7.1 Components of supply chain strategy

1. Sourcing: This involves identifying and selecting suppliers, as well as managing the
relationships with those suppliers to ensure that they can meet the organization’s needs in terms
of quality, cost, and delivery.
2. Logistics: This includes managing the movement of goods and materials through the supply
chain, from the point of origin to the point of consumption. This can include transportation,
warehousing, and inventory management.
3. Production: This includes the processes and technologies that are used to turn raw materials into
finished goods. It can also include managing the flow of goods through the organization’s own
production facilities.
4. Distribution: This involves getting the finished goods to the customers. It can include managing
the organization’s own distribution centers, as well as working with third-party logistics
providers (3PLs) and other partners to deliver products to customers.
5. Customer service: This includes managing the relationship with customers, including taking
orders, providing after-sales service, and handling returns and complaints.
The ultimate goal of a supply chain strategy is to align all of these components to create an
efficient, cost-effective, and responsive supply chain that can meet the needs of customers and the
organization.
It’s important to note that supply chain strategy is not a one-time decision, it’s an ongoing process
and review, new trends, technologies, competition and other factors may require adjustments and
refinement.

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 BA 4021 SUPPLY CHAIN MANAGEMENT 15

1.7.2 Importance of Supply Chain Strategy

With ever-changing customer demands, a well-developed supply chain execution strategy is more
important than ever to have in an organization’s short- and long-term business plan. Today’s market
requires organizations to have adaptable, agile supply chains to maintain customer satisfaction.
Without an integrated and agile supply chain management strategy, the supply chain can quickly
negatively impact your business’s bottom line.
Adopting the right supply chain planning strategy can help you reduce costs, improve customer
service, and support your business goals. It can also help you understand your historical data, know
where your inventory is, and adapt to changing demand.

1.7.3 Capabilities of Supply Chain Strategy

There are five key capabilities to consider that will help give you an inclusive view of your end-to-
end network when beginning to develop your supply chain strategy:
1. Supply Sense: What’s possible in your supply chain
2. Supply Response: Operations that make things happen, such as manufacturing and asset
management
3. Deciding and Committing: Orchestrating your end-to-end capabilities
4. Demand Sense: Learning, knowing and monitoring what your customers want
5. Demand Response: Order fulfillment processes that help give customers what they want
To develop your optimized end-to-end supply chain strategy, it is critical to develop and integrate
all five of these capabilities.

1.7.4 Optimization of Supply Chain Strategy

Within the capabilities mentioned above, there are several areas you can look to optimize your
supply chain. From your supply chain design to your workforce management, optimizing and
building strategies around the following areas of your supply chain can make significant impacts on
your business and its customers.
Supply Chain Network Design
Supply chain network design, also known as strategic planning, uses simulation tools to replicate a
company’s inbound and outbound transactional data. This type of supply chain network strategy is
used to understand the cost and time it will take to deliver goods to the market.

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Demand Planning
Meeting service requirements and sales targets requires you to consistently offer the right product,
through the right channel, at the right time, place and price. To do so, you need to have the
right demand forecast planning tools at your disposal.
Inventory Optimization
Proper inventory management helps you determine the best product position in your network to
maintain service levels while reducing overall holding costs. This helps you to understand your cost
of inventory relative to the sales of your product. Inventory optimization, or product flow
optimization, also helps your business by:
 Improving inventory turns
 Reducing capital risks
 Reducing distribution center storage requirements
Sales and Operations Planning
Sales and operations planning is the process by which a business achieves long-term
synchronization across every stage of the supply chain. Through careful planning and execution,
businesses should be able to align objectives across departments while matching consumer demand
with supply from manufacturers.
Workforce Management
Labor accounts for some of the most significant portions of operational costs in any organization.
Organizations can help to optimize their workforce operations by implementing Lean processes,
new labor management systems, engineering or creating labor standards or training their workforce.

1.8 SCM - PERFORMANCE MEASURES

Supply chain performance measure can be defined as an approach to judge the performance of
supply chain system. Supply chain performance measures can broadly be classified into two
categories −
 Qualitative measures − for example, customer satisfaction and product quality.
 Quantitative measures − for example, order-to-delivery lead time, supply chain response
time, flexibility, resource utilization, delivery performance.
Here, we will be considering the quantitative performance measures only. The performance of a
supply chain can be improvised by using a multi-dimensional strategy, which addresses how the
company needs to provide services to diverse customer demands.
Quantitative Measures

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Mostly the measures taken for measuring the performance may be somewhat similar to each other,
but the objective behind each segment is very different from the other.
Quantitative measures is the assessments used to measure the performance, and compare or track
the performance or products. We can further divide the quantitative measures of supply chain
performance into two types. They are −
 Non-financial measures
 Financial measures
Non - Financials Measures
The metrics of non-financial measures comprise cycle time, customer service level, inventory
levels, resource utilization ability to perform, flexibility, and quality. In this section, we will discuss
the first four dimensions of the metrics −
1.8.1 Cycle Time
Cycle time is often called the lead time. It can be simply defined as the end-to-end delay in a
business process. For supply chains, cycle time can be defined as the business processes of interest,
supply chain process and the order-to-delivery process. In the cycle time, we should learn about two
types of lead times. They are as follows −
 Supply chain lead time
 Order-to-delivery lead time
The order-to-delivery lead time can be defined as the time of delay in the middle of the placement
of order by a customer and the delivery of products to the customer. In case the item is in stock, it
would be similar to the distribution lead time and order management time. If the ordered item needs
to be produced, it would be the summation of supplier lead time, manufacturing lead time,
distribution lead time and order management time.
The supply chain process lead time can be defined as the time taken by the supply chain to
transform the raw materials into final products along with the time required to reach the products to
the customer’s destination address.
Hence it comprises supplier lead time, manufacturing lead time, distribution lead time and the
logistics lead time for transport of raw materials from suppliers to plants and for shipment of semi-
finished/finished products in and out of intermediate storage points.
Lead time in supply chains is governed by the halts in the interface because of the interfaces
between suppliers and manufacturing plants, between plants and warehouses, between distributors
and retailers and many more.
Lead time compression is a crucial topic to discuss due to the time based competition and the
collaboration of lead time with inventory levels, costs, and customer service levels.

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1.8.2 Customer Service Level

The customer service level in a supply chain is marked as an operation of multiple unique
performance indices. Here we have three measures to gauge performance. They are as follows −
 Order fill rate − The order fill rate is the portion of customer demands that can be easily
satisfied from the stock available. For this portion of customer demands, there is no need to
consider the supplier lead time and the manufacturing lead time. The order fill rate could be
with respect to a central warehouse or a field warehouse or stock at any level in the system.
 Stockout rate − It is the reverse of order fill rate and marks the portion of orders lost
because of a stockout.
 Backorder level − This is yet another measure, which is the gauge of total number of orders
waiting to be filled.
 Probability of on-time delivery − It is the portion of customer orders that are completed
on-time, i.e., within the agreed-upon due date.
In order to maximize the customer service level, it is important to maximize order fill rate,
minimize stockout rate, and minimize backorder levels.
1.8.3 Inventory Levels
As the inventory-carrying costs increase the total costs significantly, it is essential to carry sufficient
inventory to meet the customer demands. In a supply chain system, inventories can be further
divided into four categories.
 Raw materials
 Work-in-process, i.e., unfinished and semi-finished sections
 Finished goods inventory
 Spare parts
Every inventory is held for a different reason. It’s a must to maintain optimal levels of each type of
inventory. Hence gauging the actual inventory levels will supply a better scenario of system
efficiency.
1.8.4 Resource Utilization
In a supply chain network, huge variety of resources is used. These different types of resources
available for different applications are mentioned below.
 Manufacturing resources − Include the machines, material handlers, tools, etc.
 Storage resources − Comprise warehouses, automated storage and retrieval systems.
 Logistics resources − Engage trucks, rail transport, air-cargo carriers, etc.
 Human resources − Consist of labor, scientific and technical personnel.
 Financial resources − Include working capital, stocks, etc.

Dr.C.THIRUMAL AZHAGAN
 BA 4021 SUPPLY CHAIN MANAGEMENT 19

In the resource utilization paradigm, the main motto is to utilize all the assets or resources
efficiently in order to maximize customer service levels, reduce lead times and optimize inventory
levels.
Financial Measures
The measures taken for gauging different fixed and operational costs related to a supply chain are
considered the financial measures. Finally, the key objective to be achieved is to maximize the
revenue by maintaining low supply chain costs.
There is a hike in prices because of the inventories, transportation, facilities, operations, technology,
materials, and labor. Generally, the financial performance of a supply chain is assessed by
considering the following items −
 Cost of raw materials.
 Revenue from goods sold.
 Activity-based costs like the material handling, manufacturing, assembling rates etc.
 Inventory holding costs.
 Transportation costs.
 Cost of expired perishable goods.
 Penalties for incorrectly filled or late orders delivered to customers.
 Credits for incorrectly filled or late deliveries from suppliers.
 Cost of goods returned by customers.
 Credits for goods returned to suppliers.
In short, we can say that the financial performance indices can be merged as one by using key
modules such as activity based costing, inventory costing, transportation costing, and inter-company
financial transactions.

Dr.C.THIRUMAL AZHAGAN