SUPPLY CHAIN MANAGEMENT

Chapter 1: Introduction to Supply

Chain Management
 Reference
Prescribed textbook:
• Simchi-Levi, D., Kaminsky, P. & Simchi-Levi, E. 2003, Designing and Managing the Supply
Chain, 3rd edition, McGraw-Hill, USA.
Reference textbook:
• Bloomberg, D.J., Murray, A. and Hanna, J.B. 1998, The Management of Integrated Logistics: A
Pacific Rim Perspective, 2nd edn, Sprint Print, Prentice-Hall.
• Bowersox, D.J. Closs, D.J. and Cooper, M.B. 2002, Supply Chain Logistics Management,
McGraw-Hill/Irwin, New York.
• Christopher, M. 1998, Logistics & Supply Chain Management, 2nd edn, Pearson Education.
Essex.
• Cooper, J. 1994, Logistics & Distribution Planning, Kogan Page, London.
• Coyle, J. J., Langley, C. J. & Bardi, E. J. 2003, The Management of Business Logistics: A
Supply Chain Perspective, 7th edn, Thomson Learning, Canada.
• Coyle, J.J., Bardi, E.J. and Langley, C.J. 2003, The Management of Business Logistics, West
Publishing Company, New York.
• Greasley, A. 2006, Operations Management, John Wiley & Sons Ltd, Chichester, England.
• Johnson, J.C. 1999, Contemporary Logistics, Prentice Hall, Upper Saddle River, N.J.
 Reference textbook:
• Lambert, D. M., Stock, J. R. and Ellram, L. M. 1998, Fundamentals of Logistics Management, McGraw
Hill, USA.
• Rushton, A., Croucher, P. and Baker, P. 2006, The Handbook of Logistics and distribution
Management, 3rd edn, Kogan Page, UK.
• Stock, J.R. and Lambert D.M. 2001, Strategic Logistics Management, 4th Edn, Irwin/McGraw-
Hill, Boston.
• Mentzer, J. T., DeWitt, W., Min, S., Nix, N. W., Smith, C. D. and Zacharia, Z. G. 2001,
‘Defining supply chain management’, Journal of Business Logistics, Vool. 22, No. 2, pp. 1 – 25.
List of additional readings
• Mentzer, J. T., DeWitt, W., Min, S., Nix, N. W., Smith, C. D. and Zacharia, Z. G. 2001,
‘Defining supply chain management’, Journal of Business Logistics, Vool. 22, No. 2, pp. 1 – 25.
 Content

1.1 Differentiating between logistics and supply chain management

1.2 What is a supply chain?
1.3 What is supply chain management?
1.4 Definitions of supply chain management
1.5 The supply chain network
1.6 The benefits of supply chain management
1.7 Technology and supply chain management
1.8 Supply chain management: New business models and challenges
1.9 Key issues in supply chain management
1.10 Supply chain management – industry standard
1.1 Differentiating between Logistics and Supply
Chain Management
• Logistics is an element of the supply chain, while
scope of SCM encompasses logistics
management activities and others
– What are those of logistics management?
• A supply chain is, in effect, the integration of
various logistics chains with various strategic
issues. What are they?
 Differentiating between Logistics and Supply
Chain Management (C)
• SCM focuses on integration of business processes
and activities aiming at enhancing customer value,
rather than on particular business functions
– What about logistics?
• It is a set of approaches utilized to efficiently
integrate suppliers, manufacturers, warehouses, and
stores, so that merchandise is produced and
distributed at the right quantities, to the right
locations, and at the right time, in order to minimize
system wide costs while satisfying service level
requirements (Simchi-Levi et al. 2008)
 Differentiating between Logistics and Supply
Chain Management (C)

Narrow focus of
Traditional logistics

materials
Outbound Internal Outbound
Logistics Operations Logistics
information

Internal External
interfaces interfaces

Broad focus of
Customer
integrated supply
Demands
chain management
(by segment)

Source: Gattorna (2006)

 1.2 What is a Supply Chain?

• The interrelationship, through which information,

physical goods, and services flow back and forth,
consisting of business entities that undertake
value-creating activities involved in supplying
necessary materials, transforming various
supplies into valuable goods and services, and
distributing the final outputs to customer markets
(Kim 2005)
 What is a Supply Chain? (C)

Raw materials W IP Final assembly Distribution Customers

Component Option
Subassembly N. America
Component Hong Kong

Europe
Finished goods Chicago
Raw material
Subassembly Amsterdam Asia/Pacific
Component
Peripheral Nairobi
S. America

Raw material
Subassembly Accessory Africa/M.East
Component
1.3 What is Supply Chain Management anyway?

• Supply Chain Management encompasses the

planning and management of all activities involved
in sourcing and procurement, conversion, and all
Logistics Management activities. Importantly, it
also includes coordination and collaboration
with channel partners, which can be suppliers,
intermediaries, third-party service providers, and
customers. In essence, Supply Chain Management
integrates supply and demand management within
and across companies.
(Council of Supply Chain Management
Professionals)
 What is Supply Chain Management anyway?

• The study of how to manage the supply chain in an optimum

way to create maximum value for customers (Kim 2005)
• The management of upstream and downstream relationships
with suppliers and customers to deliver superior customer
value at less cost to the supply chain as a whole in order to
achieve a more profitable outcome (Christopher 1998)
• The objective of managing the supply chain is to synchronise
the requirements of the customer with the flow of materials
from suppliers in order to effect a balance between what are
often seen as conflicting goals of high customer service, low
inventory management, and low unit cost (Stevens 1989 in
Mentzer et al. 2001, p. 6)
What is Supply Chain Management anyway? (C)

• Supply chain management is a set of approaches

utilized to efficiently integrate suppliers,
manufacturers, warehouses, and stores, so that
merchandise is produced and distributed at the
right quantities, to the right locations, and at the
right time, in order to minimize system wide costs
while satisfying service level requirements

(Simchi-Levi, Kaminsky and Simchi-Levi 2008)

What is Supply Chain Management anyway? (C)

• Mentzer et al. (2001, p. 8) list SCM activities as:

– Integrated behaviour
– Mutually sharing information
– Mutually sharing risks and rewards
– Cooperation
– The same goal and the same focus on serving
customers
– Integration of processes
– Partners to building and maintain long-term
relationships
 1.4 Supply Chain Management Evolution

Further Refinement
of
SCM Capabilities

SCM Formation/
Extensions

JIT, TQM, BPR,

Alliances

Inventory Management/Cost
Optimization

Traditional Mass Manufacturing

1950s 1960s 1970s 1980s 1990s 2000s Beyond

Source: Simchi-Levi et al. (2008)
 1.5 The Supply Chain Network

• Recall that the ultimate goal of SCM is to provide

value to the end customers
• Each player in the SC thus take outputs from an
upstream player as their input then transforms it
to value/output to the next downstream player
• Value in SC is created in this process though
production, and/or storage, and distribution
• SC network is a result of these activities
 The Supply Chain Network (C)

• Elements of the SC network:

– Facilities (nodes)
– Transport systems (links)
– Inventories
– Information systems

• Spanning those elements are SCM issues at both

strategic, tactical and operational levels
The Supply Chain Network (C)
 The Supply Chain Network (C)

• 12 areas of SCM activity (Pyke and Johnson

2001):
– Location
– Transport and logistics
– Outsourcing and logistics alliances
– Sourcing and supplier management
– Marketing and channel restructuring
– Inventory and forecasting
– Service and after sales support
– Reverse logistics and green issues
 The Supply Chain Network (C)

– Product design and new product introduction

– Information and electronic mediated environments
– Metrics and incentives
– Global issues

• The focus on each issue is on either achieving a

globally optimised supply chain or managing
uncertainty in the supply chain, or both
The Supply Chain Network (C)

Source: Simchi-Levi et al. (2008)

 Goals of Supply Chain Management

• Supply chain management is concerned with the

efficient integration of suppliers, factories, warehouses
and stores so that merchandise is produced and
distributed:
– In the right quantities and quality
– To the right locations, right time and customer
– At the right cost
• In order to
– Minimize total system cost
– Satisfy customer service requirements
What makes Supply Chain Management difficult?

• All of the advanced strategies, techniques,

and approaches for Supply Chain
Management focus on followings:

– Global Optimisation: minimising systemwide

cost & maintaning systemwide service level

– Managing Uncertainty
 Global Optimisation

• Why is global optimisation difficult?

– The supply chain is a complex network
– Different facilities often have different, conflicting
objectives
– The supply chain is a dynamic system that evolves
over time: customer demand, supplier capabilities,
relationships
– The system varies over time: although demand may be
known, planning needs to factor in seasonal
fluctuations, advertising & promotion, competitors’
strategies, etc.
 Global Optimisation (C)

• Conflicting objectives in the supply chain:

1. Purchasing
 Stable volume requirements
 Flexible delivery time
 Little variation in mix
 Large quantities
2. Manufacturing
 Long run production
 High quality
 High productivity
 Low production cost
 Global Optimisation (C)

• Conflicting objectives in the supply chain:

3. Warehousing
 Low inventory
 Reduced transportation costs
 Quick replenishment capability
4. Customers
 Short order lead time
 High in stock
 Enormous variety of products
 Low prices
Tools and Approaches for Global Optimisation

• Everything for optimization, plus…

• Strategic Alliances/Supplier
Partnerships

• Supply Contracts/Incentive Schemes

 Managing Uncertainty

• Why is uncertainty hard to deal with?

– Matching supply and demand is difficult
– Forecasting doesn’t solve the problem
– Inventory and back-order levels typically fluctuate
widely across the supply chain
– Demand is not the only source of uncertainty:
 Lead times
 Manufacturing yields
 Transportation times
 Natural disasters
 Managing Uncertainty (C)

• Supply chain variability: Manufacturer

Manufacturer Forecast
Forecast
of
of Sales
Sales
Volumes

Actual
Actual
Consumer
Consumer
Retailer
RetailerWarehouse
Warehouse Demand
Demand
Retailer
Retailer Orders
Orders to
toShop
Shop

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 Managing Uncertainty (C)

• What management wants:

Volumes

Production
ProductionPlan
Plan
Consumer
Consumer
Demand
Demand

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 Managing Uncertainty (C)

• What management gets:

Volumes

Consumer
Consumer
Demand
Demand

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 Managing Uncertainty (C)

• Tools and approaches to deal with uncertainty:

– Pull Systems
– Risk Pooling
– Centralization
– Postponement
– Strategic Alliances
– Collaborative Forecasting
 1.6 The Benefits of Supply Chain Management

• According to Simchi-Levi et al. (2003), in 1998,

American companies spent $898 billion in supply-
related activities (or 10.6% of gross domestic
product)
– Transportation 58%
– Inventory 38%
– Management 4%
• In the US market alone, the market size of the
third-party logistics industry is about $225 billion,
with the average industry growth rate of 5.2%
during the 2015–2020 period (IBISWorld, 2020)
The Benefits of Supply Chain Management (C)

• It is estimated that the grocery industry could

save $30 billion (10% of operating cost) by using
effective logistics strategies
– A typical box of cereal spends more than three months
getting from factory to supermarket.

• A typical new car spends 15 days traveling from

the factory to the dealership, although actual
travel time is 5 days
The Benefits of Supply Chain Management (C)

• Procter & Gamble estimates that it saved retail

customers $65 million through logistics gains
over the past 18 months.

“According to P&G, the essence of its approach lies in

manufacturers and suppliers working closely together ….
jointly creating business plans to eliminate the source of
wasteful practices across the entire supply chain”.
(Journal of business strategy, Oct./Nov. 1997)
The Benefits of Supply Chain Management (C)

• In 10 years, Wal-Mart transformed itself by

changing its logistics system. It has the highest
sales per square foot, inventory turnover and
operating profit of any discount retailer
• Dell Computer has outperformed the competition
in terms of shareholder value growth over the
eight years period, 1988-1996, by over 3,000%
using
– Direct business model
– Build-to-order strategy
 The Benefits of Supply Chain Management (C)

• Reducing non-value adding time improves service and

reduces cost (Christopher 2005 )
Value added
Time, place Customer
and form Delivery
utility Finished Regional
Stock stock

Manufacturing In transit

Raw
Materials

11 12 1
10 2
9 3
8 4
7 6 5

Raw Finished Customer

Manufacturing In transit Regional
Materials Stock Delivery
stock
Cost Added over Time
Production, storage and transportation costs and the time cost of money
 The Benefits of Supply Chain Management (C)

• According to Pilliglio, Rabin, Todd and McGrath (in

Gould 1998, p. 66), benefits from integrating the supply
chain include:
– 16%-18% improvement in delivery performance
– 25%-60% improvement in inventory reduction
– 30%-50% improvement in fulfilment cycle time
– 25%-80% improvement in forecast accuracy
– 10%-16% improvement in overall productivity
– 25%-50% improvement in supply chain costs
– 20%-20% improvement in fill rates
– 10%-20% improvement in capacity realisation
1.7 Technology and Supply Chain Management

• Technology is central in modern supply chain

management, a ‘rocket science’ (Metz 1998)
• IT enables communication, allowing better decision
making and better coordination – both within and
between the individual businesses in a supply chain
• There have been advancements in communication,
manufacturing and transportation technologies enabling
advanced supply chain management
• Most important business and supply-chain-related
technologies have some information technology-related
function, i.e. RFID, tracking tools, etc.
 1.8 SCM: New Business Models & Challenges

• The emphasis is now on collaborative business

relationships instead of adversarial relationships with
suppliers and customers
• “Virtual enterprise”
• IT is the key enabler
• Challenges:
– Intra- versus inter-organisational integration
– Demand management: shift from forecast to real-time demand
driven manufacturing & inventory management policies
– Management in uncertainty: push versus pull
– Short lifecycle and rapid obsolescence
 1.9 Key Issues in SCM

• Issues span
– Strategic: long term objectives and with long lasting
effects. Decisions include location of various
facilities, including the manufacturing plant,
distribution warehouses and the structure of the
distribution channel
– Tactical: concerned with purchasing and production
functions, inventory policies and transportation
strategies.
– Operational: day to day management of activities
such as scheduling, routing and vehicle loading etc.
 Key Issues in SCM (C)

• Key issues of SCM according to Kim (2005) and Simchi-

Levi et al. (2003):
– Structural dimension:
 Distribution network configuration
 Inventory control
 Logistics/distribution strategies
– Infrastructural dimension:
 Information sharing
 Supply contracts/smart pricing
 Strategic partnering
 Outsourcing and procurement strategies
 Innovation – product design and development
 Improvement: quality, process
 Information technology and Decision Support Systems
 Key Issues in SCM (C)

• Key issues of SCM according to Kim (2005) and

Simchi-Levi et al. (2003):
– Supply chain performance:
 Customer satisfaction
 Financial performance
 Value creation to customers
• The focus on each issue is on either achieving a
globally optimised supply chain or managing
uncertainty in the supply chain, or both
 1.10 Supply Chain Management – Industry
Standard
• The Supply Chain Operations Reference – model (SCOR)
has been developed and endorsed by the Supply–Chain
Council (SCC) as the cross-industry standard for supply
chain management.
• The SCC was formed in 1996 as an independent, not-for-
profit, global corporation with membership open to all
companies and organizations interested in applying and
advancing the state-of-the-art in supply-chain management
systems and practices.
• The SCC was merged in 2014 into APICS (the American
Production and Inventory Control Society)
• In 2019, APICS launched the Association for Supply Chain
Management (ASCM)
Supply Chain Management – Industry Standard
(C)
• The Supply Chain Operations Reference – model (SCOR)
provides methodology, diagnostic and benchmarking tools that
help organizations make dramatic and rapid improvements in
supply chain processes
• SCOR is a part of the APICS body of knowledge used to foster
the advancement of end-to-end supply chain management
• The SCOR model is part of an enterprise portfolio describing the
critical elements in a value chain.
• Including SCOR, the APICS framework portfolio consists of the
Product Life Cycle Operations Reference model (PLCOR),
Customer Chain Operations Reference model (CCOR), Design
Chain Operations Reference model (DCOR), and Managing for
Supply Chain Performance (M4SC)
Supply Chain Management – Industry Standard
(C)

Source: ASCM (2017)

Supply Chain Management – Industry Standard
(C)
• SCOR:
– Links processes or supply chain activities to performance
measures, best practices, and software requirements
– Provides a systematic approach for identifying,
evaluating, and monitoring supply chain performance
– Has a broad scope beginning with a demand forecast or
order placement and ending with final invoice and final
payment
– Has a six-component framework of Plan, Source, Make,
Deliver, Return and Enable
– Incorporates five performance measures of Reliability,
Responsiveness, Agility, Costs and Asset Management
Efficiency (Assets)
Supply Chain Management – Industry Standard
(C)

Source: ASCM (2017)

Supply Chain Management – Industry Standard
(C)

Source: ASCM (2017)