HOW SUPPLY CHAIN

WORKS
MODULE - 1
 INTRODUCTION

• Discussion on the concept of supply chain management.

It also discuss what are the different supply chain drivers
LEARNING OBJECTIVES
• After this module the students will be able to:
1.Understand the concept of supply chain management
2.Learn the different definition of supply chain and logistics
3.Master the different supply chain drivers
4.Understand the different approaches in manufacturing and warehousing
5.Distinguish the types of inventory
 TOPICS AND KEY CONCEPTS
• The term “supply chain management” arose in the late 1980’s and came into widespread
use in the 1990s. Prior to that time, businesses used terms such as “logistics” and
“operation management” instead:
• “A supply chain is the alignment of firms that bring products or services to market.”—
from Lambert, Stock, and Ellram. (Lambert, Douglas M., James R. Stock, and Lisa M.
Ellram, 1998, Fundamentals of Logistics Management, Boston, MA: Irwin/ McGraw-Hill,
Chapter 14).
• “A supply chain consists of all stages involved, directly or indirectly, in fulfilling a
customer request. The supply chain not only includes the manufacturer and suppliers, but
also transporters, warehouses, retailers, and customers themselves.”—from Chopra and
Meindl (Chopra, Sunil, and Peter Meindl, 2003, Supply Chain, Second Edition, Upper
Saddle River, NJ: Prentice-Hall, Inc., Chapter 1).
 SHORT DESCRIPTION
Materials
•Are all the things that an organization moves to create its products or services. These
materials can be both tangible (such as raw materials) and intangible (such as information).

Supply Chain Management

•A series of interconnected activities related to the transformation and movement of raw
material to the finished goods till it reaches to the end user. It is the outcome of the efforts of
multiple organizations that helped in making this chain of activities successful.
•It is also the design and management of processes across organizational boundaries with the
goal of matching the supply and demand in the most cost effective way.
• Supply Chain Paper
•There is a difference between the concept of supply chain management and the traditional concept of logistics;
•Logistics typically refers to activities that occur within the boundaries of a single organization and supply
chains refer to networks of companies that work together and coordinate their actions to deliver a product to
market. Also, traditional logistics focuses its attention on activities such as procurement, distribution,
maintenance, and inventory management.
• Supply chain management acknowledges all of traditional logistics and also includes activities such as
marketing, new product development, finance, and customer service.
•In the wider view of supply chain thinking, these additional activities are now seen as part of the work needed
to fulfill customer requests. Supply chain management views the supply chain and the organizations in it as a
single entity.
•It brings a systems approach to understanding and managing the different activities needed to coordinate the
flow of products and services to best serve the ultimate customer. This systems approach provides the
framework in which to best respond to business requirements that otherwise would seem to be in conflict with
each other.
•Taken individually, different supply chain requirements often have conflicting needs. For instance, the
requirement of maintaining high levels of customer service calls for maintaining high levels of inventory, but
then the requirement to operate efficiently calls for reducing inventory levels.
•It is only when these requirements are seen together as parts of a larger picture that ways
can be found to effectively balance their different demands. Effective supply chain
management requires simultaneous improvements in both customer service levels and the
internal operating efficiencies of the companies in the supply chain.
•Customer service at its most basic level means consistently high order-fill rates, high on-
time delivery rates, and a very low rate of products returned by customers for whatever
reason. Internal efficiency for organizations in a supply chain means that these organizations
get an attractive rate of return on their investments in inventory and other assets and that they
find ways to lower their operating and sales expenses.
• There is a basic pattern to the practice of supply chain management. Each supply chain has
its own unique set of market demands and operating challenges and yet the issues remain
essentially the same in every case.
 Logistics Management
•Is one part of supply chain management and the process of planning, implementing and
controlling the efficient, cost-effective flow and storage of raw materials, in-process
inventory, finished goods and related information from point of production (e.g. factory)
SHORT
to the point of consumption (e.g. store, customer’s home).
DESCRIPTI
•It is also the function responsible for the flow of materials from suppliers into an
ON
organization, through their operations unto the customers/consumers. The overall aim of
logistics is to achieve high customer satisfaction. it must provide a high quality service
with low or acceptable cost.

Supply Chain Management Logistics Management

✔ The overall management and coordination of activities ✔ The part of integrating the movement of goods in and out of an organization

✔ Competitive Advantage ✔ Customer Satisfaction

✔ Suppy Chain Managemet is the new version of Logistics Management ✔ Logistics Management is a fraction of Supply Chain Management
 COMPANIES IN ANY SUPPLY CHAIN MUST MAKE DECISIONS INDIVIDUALLY
AND COLLECTIVELY REGARDING THEIR ACTIONS IN FIVE AREAS:

•1. Production—What products does the market want? How much of which products should be produced and by when? This activity includes the
creation of master production schedules that take into account plant capacities, workload balancing, quality control, and equipment maintenance.
•2. Inventory—What inventory should be stocked at each stage in a supply chain? How much inventory should be held as raw materials, semi
finished, or finished goods? The primary purpose of inventory is to act as a buffer against uncertainty in the supply chain. However, holding
inventory can be expensive, so what are the optimal inventory levels and reorder points?
•3. Location—Where should facilities for production and inventory storage be located? Where are the most cost efficient locations for production
and for storage of inventory? Should existing facilities be used or new ones built? Once these decisions are made they determine the possible paths
available for the product to flow through for delivery to the final consumer.
•4. Transportation—How should inventory be moved from one supply chain location to another? Air-freight and truck delivery are generally fast
and reliable but they are expensive. Shipping by sea or rail is much less expensive but usually involves longer transit times and more uncertainty.
This uncertainty must be compensated for by stocking higher levels of inventory. When is it better to use which mode of transportation?
•5. Information—How much data should be collected and how much information should be shared? Timely and accurate information holds the
promise of better coordination and better decision making. With good information, people can make effective decisions about what to produce and
how much, about where to locate inventory, and how best to transport it.
 PRODUCTION
• Production refers to the capacity of a supply chain to make and store products. The facilities
of production are factories and warehouses. The fundamental decision that managers face
when making production decisions is how to resolve the trade-off between responsiveness
and efficiency. If factories and warehouses are built with a lot of excess capacity, they can
be very flexible and respond quickly to wide swings in product demand. Facilities where all
or almost all capacity is being used are not capable of responding easily to fluctuations in
demand. On the other hand, capacity costs money and excess capacity is idle capacity not in
use and not generating revenue. So the more excess capacity that exists, the less efficient the
operation becomes. Factories can be built to accommodate one of two approaches to
manufacturing:
• Cycle Inventory
• Safety Inventory
• Seasonal Inventory
• Cycle Inventory—This is the amount of inventory needed to satisfy demand
for the product in the period between purchases of the product. Companies
tend to produce and to purchase in large lots in order to gain the advantages
that economies of scale can bring. However, with large lots also come
increased carrying costs. Carrying costs come from the cost to store, handle,
and insure the inventory. Managers face the trade off between the reduced cost
of ordering and better prices offered by purchasing products in large lots and
the increased carrying cost of the cycle inventory that comes with purchasing
in large lots.
•Safety Inventory—Inventory that is held as a buffer against
uncertainty. If demand forecasting could be done with perfect
accuracy, then the only inventory that would be needed would be
cycle inventory. But since every forecast has some degree of
uncertainty in it, we cover that uncertainty to a greater or lesser
degree by holding additional inventory in case demand is suddenly
greater than anticipated. The tradeoff here is to weigh the costs of
carrying extra inventory against the costs of losing sales due to
insufficient inventory.
• Seasonal Inventory—This is inventory that is built up in anticipation of
predictable increases in demand that occur at certain times of the year. For
example, it is predictable that demand for antifreeze will increase in the
winter. If a company that makes antifreeze has a fixed production rate that is
expensive to change, then it will try to manufacture products at a steady rate
all year long and build up inventory during periods of low demand to cover
for periods of high demand that will exceed its production rate. The
alternative to building up seasonal inventory is to invest in flexible
manufacturing facilities that can quickly change their rates of production of
different products to respond to increases in demand. In this case, the
tradeoff is between the cost of carrying seasonal inventory and the cost of
having more flexible production capabilities.
Location
•Location refers to the geographical site of supply chain facilities. It also includes the decisions related to which
activities should be performed in each facility. The responsiveness versus efficiency tradeoff here is the decision
whether to centralize activities in fewer locations to gain economies of scale and efficiency, or to decentralize
activities in many locations close to customers and suppliers in order for operations to be more responsive.
•When making location decisions, managers need to consider a range of factors that relate to a given location
including the cost of facilities, the cost of labor, skills available in the workforce, infrastructure conditions, taxes
and tariffs, and proximity to suppliers and customers. Location decisions tend to be very strategic decisions
because they commit large amounts of money to long-term plans. Location decisions have strong impacts on the
cost and performance characteristics of a supply chain. Once the size, number, and location of facilities are
determined, that also defines the number of possible paths through which products can flow on the way to the
final customer. Location decisions reflect a company’s basic strategy for building and delivering its products to
market.
Transportation This refers to the movement of everything from raw material to finished goods between different
facilities in a supply chain. In transportation the tradeoff between responsiveness and efficiency is manifested in
the choice of transport mode. Fast modes of transport such as airplanes are very responsive but also more costly.
Slower modes such as ship and rail are very cost efficient but not as responsive. Since transportation costs can
be as much as a third of the operating cost of a supply chain, decisions made here are very important.
 THERE ARE SIX BASIC MODES OF TRANSPORT THAT A
COMPANY CAN CHOOSE FROM:
•1. Ship—which is very cost efficient but also the slowest mode of transport. It is limited to
use between locations that are situated next to navigable waterways and facilities such as
harbors and canals.
•2. Rail—which is also very cost efficient but can be slow. This mode is also restricted to use
between locations that are served by rail lines.
•3. Pipelines—which can be very efficient but are restricted to commodities that are liquids or
gases such as water, oil, and natural gas.
•4. Trucks—which are a relatively quick and very flexible mode of transport. Trucks can go
almost anywhere. The cost of this mode is prone to fluctuations though, as the cost of fuel
fluctuates and the condition of roads varies.
5. Airplanes—which are a very fast mode of transport and are very responsive. This is also
the most expensive mode, and it is somewhat limited by the availability of appropriate
airport facilities.
6. Electronic Transport—which is the fastest mode of transport and is very flexible and
cost efficient. However, it can only be used for movement of certain types of products such
as electric energy, data, and products composed of data such as music, pictures, and text.
Someday technology that allows us to convert matter to energy and back to matter again may
completely rewrite the theory and practice of supply chain management Given these
different modes of transportation and the location of the facilities in a supply chain,
managers need to design routes and for moving products. A route is the path through which
products move, and networks are composed of the collection of the paths and facilities
connected by those paths. As a general rule, the higher the value of a product (such as
electronic components or pharmaceuticals), the more its transport network should emphasize
responsiveness, and the lower the value of a product (such as bulk commodities like grain or
lumber), the more its network should emphasize efficiency
 INFORMATION

Information is the basis upon which to make decisions regarding the other four supply chain
drivers. It is the connection between all of the activities and operations in a supply chain. To
the extent that this connection is a strong one (i.e., the data is accurate, timely, and complete),
the companies in a supply chain will each be able to make good decisions for their own
operations. This will also tend to maximize the profitability of the supply chain as a whole.
That is the way that stock markets or other free markets work and supply chains have many
of the same dynamics as markets. Information is used for two purposes in any supply chain:
1. Coordinating daily activities
2. Forecasting and planning
Coordinating daily activities related to the functioning of the other four
supply chain drivers: production; inventory; location; and transportation. The
companies in a supply chain use available data on product supply and demand
to decide on weekly production schedules, inventory levels, transportation
routes, and stocking locations.

Forecasting and planning to anticipate and meet future demands. Available

information is used to make tactical forecasts to guide the setting of monthly
and quarterly production schedules and timetables.
Thank you!