Supply Chain Management Complete Notes - Manoj Shriwas

Supply Chain Management

Prepared by : Manoj Shriwas
Manoj Shriwas Page 1

Unit-1
Supply chain network:

What is a supply chain network? And why are they so important for logistics and business
managers? Supply chain networks allow us to look at the big picture; giving us a better
understanding of the flow of materials and information.
Often organizations focus only on their organization; what they produce or provide and not what
the end customer receives. Looking at a supply chain network enables firms to look at the overall
movement of materials/information from start to end, allowing organizations to see the value in
creating partnerships; and the value in working together to ensure the best possible value is
provided to the end-customer.
Supply chains and supply networks both describe the flow and movement of materials &
information, by linking organizations together to serve the end-customer.
Network describes a more complex structure, where organizations can be cross-linked and
there are two-way exchanges between them; chain describes a simpler, sequential set of links
(Harland et al., 2001)
In order to understand a supply chain network; we need to understand what a supply chain is. A
supply chain is a series of processes linked together to form a chain.
Supply Chain Example: for apple juice production.
The above diagram is an example of a simplified supply chain; the supply chain shows the
movement of material flow from the Apple farm right through the production process to the end
users.
Supply Chain Network Example: For Apple Juice Organisation
A supply chain network shows the links between organisations and how information and
materials flow between these links. The more detailed the supply chain network the more
complex and web like the network becomes.
Organizations are linked via two types of flows:

To get a complete picture of an organizations supply chain network; information & material flow
should be mapped. Inefficiency can then be located and removed.
Material flow: Is the movement of goods from raw primary goods (such as Wool, Trees
and Coal etc.) to complete goods (TVs, Radios and Computers) that are to be delivered
to the final customer.
Information flow: Is the demand from the end-customer to preceding organisations in
the network.

Integrated Supply Chain Management

The supply chain is a network of suppliers, factories, warehouses, distribution centres and
retailers through which raw materials are acquired, transformed and delivered to the customer.
Supply chain management is the strategic, tactical and operational level decision making that
optimizes supply chain performance. The strategic level defines the supply chain network, i.e.,
selection of suppliers, transportation routes, manufacturing facilities, production levels,
warehouses, etc. The tactical level plans and schedules the supply chain to meet actual demand.
The operational level executes plans. Tactical and operational level decision making functions
are distributed across the supply chain.
In order to optimize performance, supply chain functions must operate in an integrated manner.
But the dynamics of the enterprise and the market make this difficult; materials do not arrive on
time, production facilities fail, workers are ill, customers change or cancel orders, etc. causing
deviations from plan. In some cases, these events may be dealt with locally, i.e., they lie within
the scope of a function. In other cases, the problem cannot be locally contained; modifications
across many functions are required. Consequently, the supply chain management system must
coordinate the revision of plans/schedules across supply chain functions.
The Integrated Supply Chain Management (ISCM) project addresses coordination problems at
the tactical and operational levels. It is composed of a set of cooperating, intelligent agents, each
per-forming one or more supply chain functions, and coordinating their decisions with other
agents -this is called a Logistical Execution System (LES). The focus of our research is on the
develop-ment of 1) a theory of coordination that allows agents to cooperatively manage change,
2) a theory of agent problem-solving that enables agents to cooperate with other agents in their
exploration of solutions, and reason in an anytime manner, and 3) a theory of agency and
support tools that enable users to build multi-agent systems with minimal programming effort,
based on trusted reusable components.
Our approach views problem-solving as a constraint satisfaction/optimization process where

agents influence each others problem solving behavior through the communication of con-
strains. Coordination occurs when agents develop plans that satisfy their own internal
constraints but also the constraints of other agents. Negotiation occurs when constraints, that
cannot be satisfied, are modified by the subset of agents directly concerned. One of the main
thrusts of this research is to investigate the use of constraints, their specification and relaxation
(i.e., modification), as a means of coordination and negotiation. The recent advent of the
Internet and WWW as infrastructures for global connectivity has confirmed the distributed
multi-agent orientation of the project and has allowed us to develop new Internet agent
technologies that can aptly support the global integration and management of the supply chain.
The objectives of the project are to:
Develop a sharable representation of supply chain knowledge.

Identify an appropriate decomposition of supply chain functions and encapsulate into agents.
Develop an incremental, anytime model of problem solving for each functional agent so that it
can provide rapid responses to unplanned for events.
Extend each function oriented agent so that it is able to answer more questions within its
functional domain.

Investigate the issues of agent oriented programming and agent architectures and their
application to agent oriented manufacturing systems that can operate distributed and
cooperatively over global networks.
Develop protocols, strategies and tools for the: communication of information, coordination of
decisions, and management of change within multi-agent environments.
Decision phases in supply chain
chain management for taking an action or decision related to some product or services.
Successful supply chain management requires decisions on the flow of information, product, and
funds that fall into three decision phases.
Here Decision phases can be defined as the different stages involved in supply we will be
discussing the three main decision phases involved in the entire process of supply chain. The
three phases are described below
Supply Chain Strategy
In this phase, decision is taken by the management mostly. The decision to be made considers
the sections like long term prediction and involves price of goods that are very expensive if it
goes wrong. It is very important to study the market conditions at this stage.
These decisions consider the prevailing and future conditions of the market. They comprise the
structural layout of supply chain. After the layout is prepared, the tasks and duties of each is laid
out.
All the strategic decisions are taken by the higher authority or the senior management. These
decisions include deciding manufacturing the material, factory location, which should be easy
for transporters to load material and to dispatch at their mentioned location, location of
warehouses for storage of completed product or goods and many more.

Supply Chain Planning
Supply chain planning should be done according to the demand and supply view. In order to
understand customers demands, a market research should be done. The second thing to
consider is awareness and updated information about the competitors and strategies used by
them to satisfy their customer demands and requirements. As we know, different markets have
different demands and should be dealt with a different approach.
This phase includes it all, starting from predicting the market demand to which market will be
provided the finished goods to which plant is planned in this stage. All the participants or
employees involved with the company should make efforts to make the entire process as
flexible as they can. A supply chain design phase is considered successful if it performs well in
short-term planning.
Supply Chain Operations
The third and last decision phase consists of the various functional decisions that are to be made
instantly within minutes, hours or days. The objective behind this decisional phase is
minimizing uncertainty and performance optimization. Starting from handling the customer
order to supplying the customer with that product, everything is included in this phase.
For example, imagine a customer demanding an item manufactured by your company. Initially,
the marketing department is responsible for taking the order and forwarding it to production
department and inventory department. The production department then responds to the customer
demand by sending the demanded item to the warehouse through a proper medium and the
distributor sends it to the customer within a time frame. All the departments engaged in this
process need to work with an aim of improving the performance and minimizing uncertainty.
The process view of supply chain management
The supply chain process occurs in two ways, Cycle View and Push/Pull view.
1. Cycle View
The processes in a supply chain are divided into a series of cycle, each performed at the interface
between two successive stages of a supply chain. Cycle view of Supply chain process includes,

Customer order cycle

Replenishment cycle
Manufacturing cycle
Procurement cycle
Customer: Customer arrives at location of choice to make a buying decision. The Supply Chains
goal is to convert customer arrival into customer order.
Retailer: Retailer is informed what products they are buying. The goal is to ensure order entry
quickly and well communicated among all other processes.
Distributor:- here are some distribution channels which enhance the Supply Chain network as a
whole to reach the product to the customer.
Manufacturer:-Manufacturing facilities make the product according to order placed by customer

order to do this they need to do necessary interaction with other members of the Supply Chain
Cycle.
Supplier :- Supplier in a Supply Chain is an enterprise that contributes goods or services in a

Supply Chain Cycle. Usually they manufacture a stock item & which is supplied to the net link
of the Supply Chain & which contributes to enhance value of the supply Chain.
2. Push/ Pull view
The processes in a supply chain are dividing into two categories depending on whether they are
executed in response to a customer order or in anticipation of customer orders. Pull process are
initiated by a customer order, whereas push process are initiated and performed in anticipation of
customer orders.
Push Strategies
A push-model supply chain is one where projected demand determines what enters the process.
For example, warm jackets get pushed to clothing retailers as summer ends and the fall and
winter seasons start. Under a push system, companies have predictability in their supply chains

since they know what will come when -- long before it actually arrives. This also allows them to
plan production to meet their needs and gives them time to prepare a place to store the stock they
receive.
Pull Strategies
A pull strategy is related to the just-in-time school of inventory management that minimizes
stock on hand, focusing on last-second deliveries. Under these strategies, products enter the
supply chain when customer demand justifies it. One example of an industry that operates under
this strategy is a direct computer seller that waits until it receives an order to actually build a
custom computer for the consumer. With a pull strategy, companies avoid the cost of carrying
inventory that may not sell. The risk is that they might not have enough inventories to meet
demand if they cannot ramp up production quickly enough.
Push/Pull Strategies
Technically, every supply chain strategy is a hybrid between the two. A fully-push based system
still stops at the retail store where it has to wait for a customer to "pull" a product off of the
shelves. However, a chain that is designed to be a hybrid flips between push and pull somewhere
in the middle of the process. For instance, a company may choose to stockpile finished product at
its distribution centers to wait for orders that pull them to stores. Manufacturers might choose to
build up inventories of raw materials especially those that go up in price knowing that they will
be able to use them for future production.
Supply chain flows

Supply chain management can be defined as a systematic flow of materials, goods, and related
information among suppliers, companies, retailers, and consumers.
Types
There are three different types of flow in supply chain management
Material flow
Information/Data flow
Money flow

Let us consider each of these flows in detail and also see how effectively they are applicable to
Indian companies.
Material Flow
Material flow includes a smooth flow of an item from the producer to the consumer. This is
possible through various warehouses among distributors, dealers and retailers.
The main challenge we face is in ensuring that the material flows as inventory quickly without
any stoppage through different points in the chain. The quicker it moves, the better it is for the
enterprise, as it minimizes the cash cycle.
The item can also flow from the consumer to the producer for any kind of repairs, or exchange
for an end of life material. Finally, completed goods flow from customers to their consumers
through different agencies. A process known as 3PL is in place in this scenario. There is also an
internal flow within the customer company.
Information Flow
Information/data flow comprises the request for quotation, purchase order, monthly schedules,
engineering change requests, quality complaints and reports on supplier performance from
customer side to the supplier.
From the producers side to the consumers side, the information flow consists of the
presentation of the company, offer, confirmation of purchase order, reports on action taken on
deviation, dispatch details, report on inventory, invoices, etc.

For a successful supply chain, regular interaction is necessary between the producer and the
consumer. In many instances, we can see that other partners like distributors, dealers, retailers,
logistic service providers participate in the information network.
In addition to this, several departments at the producer and consumer side are also a part of the
information loop. Here we need to note that the internal information flow with the customer for
in-house manufacture is different.
Money Flow
On the basis of the invoice raised by the producer, the clients examine the order for correctness.
If the claims are correct, money flows from the clients to the respective producer. Flow of
money is also observed from the producer side to the clients in the form of debit notes.
In short, to achieve an efficient and effective supply chain, it is essential to manage all three
flows properly with minimal efforts. It is a difficult task for a supply chain manager to identify
which information is critical for decision-making. Therefore, he or she would prefer to have the
visibility of all flows on the click of a button.
Supply chain models and modeling systems
Supply chain model have following phases:-

Plan
Source
Deliver
Buy
Return

Plan
Demand and supply planning and management are included in this first step. Elements include
balancing resources with requirements and determining communication along the entire chain.
The plan also includes determining business rules to improve and measure supply chain
efficiency. These business rules span inventory, transportation, assets, and regulatory
compliance, among others. The plan also aligns the supply chain plan with the financial plan of
the company.
Source
This step describes sourcing infrastructure and material acquisition. It describes how to manage
inventory, the supplier network, supplier agreements, and supplier performance. It discusses how
to handle supplier payments and when to receive, verify, and transfer product.
Make
Manufacturing and production are the emphasis of this step. Is the manufacturing process make-
to-order, make-to-stock, or engineer-to-order? The make step includes, production activities,
packaging, staging product, and releasing. It also includes managing the production network,
equipment and facilities, and transportation .
Deliver
Delivery includes order management, warehousing, and transportation. It also includes receiving
orders from customers and invoicing them once product has been received. This step involves
management of finished inventories, assets, transportation, product life cycles, and importing and
exporting requirements.
Return
Companies must be prepared to handle the return of containers, packaging, or defective product.
The return involves the management of business rules, return inventory, assets, transportation,
and regulatory requirements.
Supply chain planning: Strategic, operational and tactical

Supply chain management is often taken for granted in the business world. Regardless of
industry, the supply chain is the backbone of any company. It begins with procuring the
materials or services needed to create the end product and continues until the finished goods are
in the customers hands. This process typically involves a range of decisions and transactions
between several distinct entities.
Strategic Planning
Every effective supply chain strategy begins with solid long-term decision-making. The strategy
level lays the groundwork for the entire supply chain process, from beginning to end, and is an
essential part of supply chain management. Strategy level supply chain decisions are usually the
first step of developing a good process.
Issues addressed at this level include:
Choosing the site and purpose of business facilities
Creating a network of reliable suppliers, transporters, and logistics handlers
Long-term improvements and innovations to meet client demands
Inventory and product management throughout its life cycle
IT programs and systems to make the process more effective
Tactical Management
Businesses make short-term decisions involving the supply chain at the tactical level. At the
strategy level, general planning begins, but processes are actually defined at the tactical level.
Tactical decisions play a big role in controlling costs and minimizing risks. At this level, the
focus is on customer demands and achieving the best end value.
Common concerns include:
Procurement contracts for necessary materials and services
Production schedules and guidelines to meet quality, safety, and quantity standards

Transportation and warehousing solutions, including outsourcing and third-party options

Inventory logistics, including storage and end-product distribution
Adopting best practices in comparison to competitors
The Operational Level
The operational level of supply chain management is the most obvious. These are the day-to-day
processes, decision-making, and planning that take place to keep the supply chain active. The
mistake that many companies make is to jump straight into operational management without
focusing on the strategy and tactical levels. Effective operational level processes are the result of
strong strategically and tactical planning.
Some aspects of operational level management are:
Daily and weekly forecasting to figure out and satisfy demand
Production operations, including scheduling and detailed management of goods-in-process
Monitoring logistics activity for contract and order fulfillment
Settling damages or losses with suppliers, vendors, and clients
Managing incoming and outgoing materials and products, as well as on-hand inventories
The most effective supply chain strategies are the result of a holistic management approach.
When all 3 levels of supply chain management are given proper attention, every member of the
supply chain benefits.
Understanding supply chain through process mapping and process

flow chart
A supply chain process map shows the path supplies take from raw materials to manufacturers to
consumers and afterwards. It provides a quick visual overview of the flow of merchandise
through a particular industry.

The figure above shows supply chain process mapping.
Process flowchart
We can understand supply chain through this flowchart.

Unit 2
Supply chain strategies

We define supply chain strategy and explain how creating a strategic fit between a company's
competitive strategy and its supply chain strategy affects performance. 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.
To see the relationship between competitive and supply chain strategies, we start with the value
chain for a typical organization. The value chain begins with new product development, which
creates specifications for the product. Marketing and sales generate demand by publicizing the
customer priorities that the products and services will satisfy. Marketing also brings customer
input back to new product development. A supply chain strategy determines the nature of
procurement of raw materials, transportation of materials to and from the company, manufacture
of the product or operation to provide the service, and distribution of the product to the customer,
along with any follow-up service and a specification of whether these processes will be
performed in-house or outsourced. Given that firms are rarely completely vertically integrated, it
is important to recognize that the supply chain strategy defines not only what processes within
the firm should do well but also what the role played by each supply chain entity is.
The value chain begins with new product development, which creates specifications for the
product.
A product development strategy specifies the portfolio of new products that a company will try
to develop. It also dictates whether the development effort will be made internally or outsourced.
A marketing and sales strategy specifies how the market will be segmented and how the product
will be positioned, priced, and promoted.
Achieving strategic fit
The greater the implied demand uncertainty, the more responsive a supply chain has to be. More
responsive supply chains are more costly supply chains. When compared directly with less
responsive but more efficient supply chains, their costs may look excessive.

Expanding the Supply Chain Optimization and Strategic Fit Scope
Intracompany Intraoperation scope: The most limited scope over which strategic fit and
optimization can be attempted is one with operation within a functional area in a company.
Intracompany Intrafunctional scope: If the competitive strategy and supply chain strategy are
aligned across all the operations functions of the company and optimization is attempted in an
integral manner including the raw material inventory, manufacturing operations, finished goods
inventory and warehouse, and transportation, the scope is extended to intracompany
intrafuctional level.
Intracompany Interfunctional scope: At this level of scope, the entire company's activities are
viewed and modeled as one single system, and optimization is done and company profit is
maximized.
Intercompany Interfunctional scope: The Maximum Supply Chain Surplus view: At this level of
optimization and fit making, the entire supply chain is modeled as a system and optimization and
fit is designed so that supply chain surplus is maximized.
Flexible Intercompany inter-functional scope: The flexibility refers to dynamic situation.

Physically, the participants in the supply chain keep changing, products keep changing,
technologies keep changing, facilities keep changing. Mathematically, there are changes in
number of variables and variable values. A supply chain capable of optimizing and fit making
dynamically is a flexible intercompany inter-functional scope supply chain.
Value chain
The idea of the value chain is based on the process view of organizations, the idea of seeing a
manufacturing (or service) organization as a system, made up of subsystems each with inputs,
transformation processes and outputs. Inputs, transformation processes, and outputs involve the
acquisition and consumption of resources money, labor, materials, equipment, buildings, land,
administration and management. How value chain activities are carried out determines costs and
affects profits.

Firm level
The appropriate level for constructing a value chain is the business unit, not division or corporate
level. Products pass through a chain of activities in order, and at each activity the product gains
some value. The chain of activities gives the products more added value than the sum of added
values of all activities.
The activity of a diamond cutter can illustrate the difference between cost and the value chain.
The cutting activity may have a low cost, but the activity adds much of the value to the end
product, since a rough diamond is significantly less valuable than a cut diamond. Typically, the
described value chain and the documentation of processes, assessment and auditing of adherence
to the process routines are at the core of the quality certification of the business.
Physical, virtual and combined value chain
Physical/traditional value chain: a physical-world activity performed in order to enhance a

product or a service. Such activities evolved over time by the experience people gained from
their business conduct. As the will to earn higher profit drives any business,[citation needed]
professionals (trained/untrained) practice these to achieve their goal.
Virtual value chain: The advent of computer-based business-aided systems in the modern world
has led to a completely new horizon of market space in modern business-jargon the cyber-
market space. Like any other field of computer application, here also we have tried to implement
our physical world's practices to improve this digital world. All activities of persistent physical
world's physical value-chain enhancement process, which we implement in the cyber-market, are
in general terms referred to as a virtual value chain.

Industry level:
An industry value-chain is a physical representation of the various processes involved in

producing goods (and services), starting with raw materials and ending with the delivered
product (also known as the supply chain). It is based on the notion of value-added at the link
(read: stage of production) level. The sum total of link-level value-added yields total value. The
French Physiocrats' Tableau conomique is one of the earliest examples of a value chain
Supply Chain Drivers and Obstacles
Enabling technologies
The supply chain strategic fit concept requires that a company achieve the desired
responsiveness and efficiency in its supply chain that best meets the needs of the company's
competitive strategy.
The performance of a supply chain (responsiveness and efficiency) is determined by decisions in
the areas of inventory, transportation, facilities and information. Hence these four areas are
identified as drivers of supply chain performance.
A Framework for Structuring Supply Chain Drivers
Supply chain managers have to take research and development efforts to improve both
responsiveness and efficiency of their supply chains on a continuous basis. In the past there were
technological and managerial breakthroughs which improve one of them without any
deterioration in the other and also improvement in both dimensions simultaneously. Actual
economic theory tells, new technologies (capital investments) are adopted for capital
productivity. Capital productivity in the context of supply chains comes through improvement in
responsiveness and efficiency.
But at a certain point in time, there can be tradeoffs between responsiveness and efficiency.
Hence supply chain designers come with supply chains with that give various combinations of
responsiveness and efficiency (responsiveness - efficiency frontier) and the optimal combination
is chosen based on the competitive strategy considerations.

Definition/Explanation of Four Drivers
Inventory: It consists of all raw material, work in process, and finished goods within a supply
chain.
Transportation: It involves moving inventory from one point in the supply chain to another point.
Facilities: A facility is a place where inventory is stored, manufactured or assembled. Hence
facilities can be categorised into production facilities and storage facilities.
Information: It consists of data and results of analysis regarding inventory, transportation,
facilities, customer orders, customers, and funds.
Inventory
Inventory is maintained in the supply chain because of mismatches between supply and demand.
Types of inventory based on reasons for keeping them:
Cycle inventory: This results due to producing or buying larger lots to minimize acquisition costs
related to processing each purchase order or production order.
Safety Inventory: It is held to counter against uncertainty or variability of demand.
Seasonal Inventory: It is inventory maintained to satisfy higher demands in a period compared to
production capacity. It arises due to the decision to service predicted variability in demand
through extra production during slack period or low demand periods.
Increasing inventory gives higher responsiveness but results in higher inventory carrying cost.
Transportation
Number of decisions have to taken in designing a supply chain regarding transportation.
Mode of Transportation: Six basic modes exist
Air, Truck (Road), Rail, Ship, Pipeline, Electronic transportation (the newest mode for music,
documents etc)

Route and Network Selection
Network is a set of facilities or destinations which can be used for transportation of goods. Route
is a specific selection of facilities or destinations through which goods move.
Own Transport or Outsourced Transport
Facilities
Within a facility, inventory is either transformed into another state or stored. Facilities Related
Decisions, Location, Capacity, Manufacturing Methodology or Technology, Warehousing
methodology
Information
Issues related to Information
Push Process Information and Pull Process Information

Coordination and information sharing across various facilities in the supply chain.
Forecasting
Aggregate Planning
enabling technologies.
strategic alliance & outsourcing
A strategic alliance (also see strategic partnership) is an agreement between two or more
parties to pursue a set of agreed upon objectives needed while remaining independent
organizations. A strategic alliance will usually fall short of a legal partnership entity, agency, or
corporate affiliate relationship. Typically, two companies form a strategic alliance when each
possesses one or more business assets or have expertise that will help the other by enhancing
their businesses. Strategic alliances can develop in outsourcing relationships where the parties
desire to achieve long-term win-win benefits and innovation based on mutually desired
outcomes.

Further kinds of strategic alliances include

1. Cartels: Big companies can cooperate unofficially, to control production and /or prices
within a certain market segment or business area and constrain their competition
2. Franchising: a franchiser gives the right to use a brand-name and corporate concept to a
frachisee who has to pay a fixed amount of money. The franchiser keeps the control over
pricing, marketing and corporate decisions in general.
3. Licensing: A company pays for the right to use another companies technology or
production processes.
4. Industry Standard Groups: These are groups of normally large enterprises, that try to
enforce technical standards according to their own production processes.
5. Outsourcing: Production steps that do not belong to the core competencies of a firm are
likely to be outsourced, which means that another company is paid to accomplish these
tasks.
6. Affiliate Marketing: is a web-based distribution method where one partner provides the
possibility of selling products via its sales channels in exchange of a beforehand defined
provision.
Advantages of strategic alliance
Access to new technology, intellectual property rights,

Create critical mass, common standards, new businesses,
Diversification,
Improve agility, R&D, material flow, speed to market,
Reduce administrative costs, R&D costs, cycle time
Allowing each partner to concentrate on their competitive advantage.
Learning from partners and developing competencies that may be more widely exploited
elsewhere.
To reduce political risk while entering into a new market.
Risk
Partner experiences financial difficulties

Hidden costs
Inefficient management
Activities outside scope of original agreement
Information leakage
Loss of competencies
Loss of operational control

Outsourcing
Outsourcing is the process of contracting a portion of a company's activities to third-party

providers.
Outsourcing involves subcontracting parts of a company's value-chain, (i.e. steps in the design,
supply, production, marketing, sales, and services processes) to other companies or contractors
that specialize in those activities. Through outsourcing agreements, the client company hires
separate companies to perform specific tasks in the value-chain on its behalf. Often, the work is
performed under the name of the client.
The kinds of outsourcing work performed vary widely across industry sectors. Some common
outsourcing activities include: human resource management, facilities management, supply chain
management, accounting, customer support and service, marketing, computer aided design,
research, design, content writing, engineering, diagnostic services, and legal documentation.
Purchasing
Purchasing is the act of buying the goods and services that a company needs to operate and/or
manufacture products. Many people are ignorant of what purchasing is all about. Purchasing is
the term used in industries, commerce, public corporations to denote the act of and the financial
responsibility for procuring material, supplies and services. It simply describes the process of
buying. However in a broader sense, the term involves determining the needs, selecting the
supplier, arriving at a proper price, terms and conditions, issuing the contract or order, and
following up to ensure proper delivery. It focus is to purchase or obtain materials in the right
quantity, in the right quality, at the right price, at the right time, and from the right supplier and
delivering to the right place.
Supply chain performance measurement :The balanced score card approach:
This paper develops a balanced scorecard for supply chain management (SCM) that measures
and evaluates day-to-day business operations from following four perspectives: finance,
customer, internal business process, and learning and growth. Balanced scorecard has been
developed based on extensive review of literature on SCM performance measures, supported by
three case studies, each illustrating ways in which BSC was developed and applied in small and
medium sized enterprises (SMEs) in India. The paper further suggests that a balanced SCM
scorecard can be the foundation for a strategic SCM system provided that certain development
guidelines are properly followed, appropriate metrics are evaluated, and key implementation
obstacles are overcome. The balanced scorecard developed in this paper provides a useful
guidance for the practical managers in evaluation and measuring of SCM in a balanced way and
proposes a balanced performance measurement system to map and analyze supply chains. While

suggesting balanced scorecard, different SCM performance metrics have been reviewed and
distributed into four perspectives. This helps managers to evaluate SCM performance in a much-
balanced way from all angles of business.
Keywords
Balanced scorecard;
Supply chain management;
Performance measurement;
Metrics;
Framework;
Case studies
Figure Balanced scorecard
Performance metrics
When a company wants to look at the performance of its supply chain, there are a great many
metrics that can be used. Each supply chain performance metric gives a slightly different view of
a piece of the supply chain. The important decision for any company is to prioritize which supply
chain metrics are important and how they will be used. Many companies use supply chain
performance metrics that are easy to calculate but may not necessarily give a true indication of
how the supply chain is performing.
Some companies use a range of metrics that they require their logistics department to adhere to,
but do not realize that in doing so, other parts of the supply chain may be negatively impacted.

Characteristics of a Good Performance Metric
When companies look at the various performance metrics that are available, there are a number
of characteristics that they should look for when selecting metrics that will help with their
business decisions.
Easy To Understand - A good metric is one that can easily be understood by anyone that
looks at it. It should be clear as to what the metric is actually measuring and how it is
actually derived.
Quantitive - An important characteristic for a supply chain performance metric is that it is
expressed by a value that is objective, i.e. derived from real data and not subjective.
Measures What is Important - Some metrics can look to be important, but when the data
is analyzed, the relevance of the metric can be tenuous. It is vital that a performance
metric on which business decisions are made should measure important data.
Causes Correct Behavior - A good performance metric should be one that makes the user
take the correct action. For example, if a metric shows a number of orders processed per
day, then the correct action increases the number processed. However, sometimes the
metric by itself can cause the user to take action but at the determent of other areas. For
example, if the metric is to measure the warehouse staff by the number of movements per
day, they can increase the number of movements at the determent of the number of trucks
loaded and a number of orders processed.
Metrics Should be Easy To Collect - Sometimes companies select complex performance

metrics that are very time-consuming to collect and may require time to be taken away
from line staff to prepare. This is counterproductive and these types of metrics should be
avoided.
Categories of Performance Metrics
There are three main categories of supply chain performance metrics; time, cost and quality.
Time - When companies look at selecting supply chain performance metrics, they usually
will examine those metrics that relate to time, as they are easily calculated, easily
understood, and clearly show operational effectiveness. For example, companies will
look at metrics that show the level of on-time deliveries, on-time receipts, time to process
purchase orders, and time to fulfill an order.
Cost - This is an important performance metric as it shows how efficient parts of the
company is. Businesses need to make a profit and by focusing on cost metrics, they can
identify where in the business the improvements can be made. Inventory carrying costs is
a popular performance metric that companies look at to see how much it costs them to
carry items in the warehouse. Companies are always trying to identify where they can
make changes to improve cash flow and making the business more profitable.
Quality - For companies that want to improve customer satisfaction, the performance
metrics focused on quality are vitally important. Although the metrics around delivery

times are important to customer service, improvements in the quality of the product can
significantly improve customer satisfaction.
Demand Forecasting
Forecasting demand, and coordinating activities to meet demand, is full-time jobs. Companies
with global operations use sophisticated software and systems to forecast demand, but small
businesses can forecast supply chain needs using simple techniques. The methods of moving
averages and exponential smoothing seek to smooth out demand to allow for seasonality in the
results. With moving averages, you drop the oldest sales numbers and add newer numbers,
making the average move over time. For example, to calculate sales over a four-week moving
average, add weeks two through five, drop the sales from week one and divide by four.
Exponential smoothing is similar to moving averages except that older data receives
progressively less weight and new data receives greater weight. When there is definitive trend,
however, the moving averages and exponential smoothing forecasts might lag behind the trend.
High Inventory
If your business overestimates demand, it ends up with more inventory than is necessary. This
can increase your labor and storage costs if workers have to move this inventory to another
storage facility to make way for new inventory. If your business supplies perishable goods, you
might incur a further loss due to deterioration of unsold inventory. In such a case, you might
need to sell inventory at a discount, which reduces your company's profit margins and income.
Shortage of Inventory
Suppose you suddenly find yourself inundated with large orders. This is a nice problem to have -
- if you have enough inventory to meet demand. It's not so nice if you failed to forecast how
much supply you would need and wind up with a shortage of inventory. In such a case, some
disgruntled customers might take their business elsewhere. One option is to make a large, last-
minute rush order, but this usually leads to much higher supplier prices, which reduces your
profit margins and net income.
Insight
Supply chain management (SCM) software can help facilitate the process of forecasting and
measuring the supply chain synchronizes the supply and demand cycle through the use of real-
time information. As a result, inventory is less likely to sit unused. For example, a baked goods
manufacturer using SCM software can monitor its inventories and place an electronic order to its
suppliers in anticipation of a spike in demand. Experience is also an asset when it comes to
managing your supply chain. Having years of demand data helps you better predict future
demand.

Aggregate Planning
An organization can finalize its business plans on the recommendation of demand forecast. Once
business plans are ready, an organization can do backward working from the final sales unit to
raw materials required. Thus annual and quarterly plans are broken down into labor, raw
material, working capital, etc. requirements over a medium-range period (6 months to 18
months). This process of working out production requirements for a medium range is called
aggregate planning.
Factors Affecting Aggregate Planning
Aggregate planning is an operational activity critical to the organization as it looks to

balance long-term strategic planning with short term production success. Following factors
are critical before an aggregate planning process can actually start;
A complete information is required about available production facility and raw materials.
A solid demand forecast covering the medium-range period
Financial planning surrounding the production cost which includes raw material, labor,
inventory planning, etc.
Organization policy around labor management, quality management, etc.
For aggregate planning to be a success, following inputs are required;
An aggregate demand forecast for the relevant period

Evaluation of all the available means to manage capacity planning like sub-contracting,
outsourcing, etc.
Existing operational status of workforce (number, skill set, etc.), inventory level and
production efficiency
Aggregate planning will ensure that organization can plan for workforce level, inventory level
and production rate in line with its strategic goal and objective.
Aggregate planning as an Operational Tool
Aggregate planning helps achieve balance between operation goal, financial goal and overall
strategic objective of the organization. It serves as a platform to manage capacity and demand
planning.
In a scenario where demand is not matching the capacity, an organization can try to balance both
by pricing, promotion, order management and new demand creation.
In scenario where capacity is not matching demand, an organization can try to balance the both
by various alternatives such as.

Laying off/hiring excess/inadequate excess/inadequate excess/inadequate workforce until

demand decrease/increase.
Including overtime as part of scheduling there by creating additional capacity.
Hiring a temporary workforce for a fix period or outsourcing activity to a sub-contrator.
Importance of Aggregate Planning
Aggregate planning plays an important part in achieving long-term objectives of the

organization. Aggregate planning helps in:
Achieving financial goals by reducing overall variable cost and improving the bottom
line
Maximum utilization of the available production facility
Provide customer delight by matching demand and reducing wait time for customers
Reduce investment in inventory stocking
Able to meet scheduling goals there by creating a happy and satisfied work force
Aggregate Planning Strategies
There are three types of aggregate planning strategies available for organization to choose from.
They are as follows.
1. Level Strategy
As the name suggests, level strategy looks to maintain a steady production rate and
workforce level. In this strategy, organization requires a robust forecast demand as to
increase or decrease production in anticipation of lower or higher customer demand.
Advantage of level strategy is steady workforce. Disadvantage of level strategy is high
inventory and increase back logs.
2. Chase Strategy
As the name suggests, chase strategy looks to dynamically match demand with
production. Advantage of chase strategy is lower inventory levels and back logs.
Disadvantage is lower productivity, quality and depressed work force.
3. Hybrid Strategy
As the name suggests, hybrid strategy looks to balance between level strategy and chase
strategy.

Predictable Variability in a Supply Chain

Predictable variability is change in demand that can be forecasted that Can cause increased costs
and decreased responsiveness in the supply chain. A firm can handle predictable variability using
two broad approaches:
Manage supply using capacity, inventory, subcontracting, and backlogs .
Manage demand using short-term price discounts and trade promotions.

Unit 3
Introduction to Supply Chain Inventory Management
Inventory is an idle stock of physical goods that contain economic value, and are held in various
forms by an organization in its custody awaiting packing, processing, transformation, use or sale
in a future point of time.
Any organization which is into production, trading, sale and service of a product will necessarily
hold stock of various physical resources to aid in future consumption and sale. While inventory
is a necessary evil of any such business, it may be noted that the organizations hold inventories
for various reasons, which include speculative purposes, functional purposes, physical
necessities etc.
From the above definition the following points stand out with reference to inventory:
All organizations engaged in production or sale of products hold inventory in one form or
other.
Inventory can be in complete state or incomplete state.
Inventory is held to facilitate future consumption, sale or further processing/value
addition.
All inventoried resources have economic value and can be considered as assets of the
organization.
Different Types of Inventory
Inventory of materials occurs at various stages and departments of an organization. A

manufacturing organization holds inventory of raw materials and consumables required for
production. It also holds inventory of semi-finished goods at various stages in the plant with
various departments. Finished goods inventory is held at plant, FG Stores, distribution centers
etc. Further both raw materials and finished goods those that are in transit at various locations
also form a part of inventory depending upon who owns the inventory at the particular juncture.
Finished goods inventory is held by the organization at various stocking points or with dealers
and stockiest until it reaches the market and end customers.
Besides Raw materials and finished goods, organizations also hold inventories of spare parts to
service the products. Defective products, defective parts and scrap also forms a part of inventory
as long as these items are inventoried in the books of the company and have economic value.

INPUT PROCESS OUTPUT
Raw Materials Work In Process Finished Goods
Consumables required Semi Finished Finished Goods at

for processing. Eg : Production in various Distribution Centers
Fuel, Stationary, Bolts stages, lying with through out Supply
& Nuts etc. required in various departments like Chain
manufacturing Production, WIP Stores,
QC, Final Assembly,
Paint Shop, Packing,
Outbound Store etc.
Maintenance Production Waste and Finished Goods in transit

Items/Consumables Scrap
Packing Materials Rejections and Finished Goods with

Defectives Stockiest and Dealers
Local purchased Items Spare Parts Stocks &

required for production Bought Out items
Defectives, Rejects and

Sales Returns
Repaired Stock and Parts
Sales Promotion &

Sample Stocks
Economic order quantity model
Economic order quantity (EOQ) is the order quantity of inventory that minimizes the total cost of
inventory management.
Two most important categories of inventory costs are ordering costs and carrying costs. Ordering
costs are costs that are incurred on obtaining additional inventories. They include costs incurred
on communicating the order, transportation cost, etc. Carrying costs represent the costs incurred

on holding inventory in hand. They include the opportunity cost of money held up in inventories,
storage costs, spoilage costs, etc.
Ordering costs and carrying costs are quite opposite to each other. If we need to minimize
carrying costs we have to place small order which increases the ordering costs. If we want
minimize our ordering costs we have to place few orders in a year and this requires placing large
orders which in turn increases the total carrying costs for the period.
We need to minimize the total inventory costs and EOQ model helps us just do that.
Total inventory costs = Ordering costs + Holding costs
By taking the first derivative of the function we find the following equation for minimum cost
EOQ = SQRT(2 Quantity Cost Per Order / Carrying Cost Per Order)
Example
ABC Ltd. is engaged in sale of footballs. Its cost per order is $400 and its carrying cost unit is
$10 per unit per annum. The company has a demand for 20,000 units per year. Calculate the
order size, total orders required during a year, total carrying cost and total ordering cost for the
year.
Solution
EOQ = SQRT(2 20,000 400/10) = 1,265 units
Annual demand is 20,000 units so the company will have to place 16 orders (= annual demand of
20,000 divided by order size of 1,265). Total ordering cost is hence $64,000 ($400 multiplied by
16).
Average inventory held is 632.5 ((0+1,265)/2) which means total carrying costs of $6,325 (i.e.
632.5 $10).

Reorder Point Models and Multi echelon Inventory Systems
A multiechelon supply chain has multiple stages and possibly many players at each stage. The
lack of coordination in lot sizing decisions across the supply chain results in high costs and more
cycle inventory than required. The goal in a multiechelon system to decrease total costs by
coordinating orders across the supply chain. Consider a simple multiechelon system with one
manufacturer supplying one retailer. Assume that production is instantaneous, so the
manufacturer can produce a lot when needed. If the two stages are not synchronized, the
manufacturer may produce a new lot of size Q right after shipping a lot of size Q to the retailer.
Inventory at the two stages is as shown in Figure. In this case the retailer carries an average
inventory of Q/2 and the manufacturer carries an average inventory of about Q. Overall supply
chain inventory can be lowered if the manufacturer synchronizes its production to be ready just
in time to be shipped to the retailer. In, this case, the manufacturer carries no inventory and the
retailer carries an average inventory of Q/2. In this case, synchronization of production and
replenishment allows the supply chain to lower total cycle inventory from about 3Q/2 to Q/2. For
a simple multiechelon supply chain with only one player at each stage, ordering policies in which
the lot size at each stage is an integer multiple of the lot size at its immediate customer have been
shown to be quite close to optimal. When lot sizes are integer multiples, coordination of ordering
across stages allows for a portion of the delivery to a stage to be cross-docked on to the next
stage. The extent of cross-docking depends on the ratio of the fixed cost of ordering S and the
holding cost H at each stage. The closer this ratio is between two stages, the higher is the optimal
percentage of cross-docked product.

Set reorders intervals across stages such that the receipt of a replenishment order at any stage is
synchronized with the shipment of a replenishment order to at least one of its customers. The
synchronized portion can be cross-docked.
For customers with a longer reorder interval than the supplier, make the customer's reorder
interval an integer multiple of the supplier's interval and synchronize replenishment at the two
stages to facilitate cross-docking. In other words, a supplier should cross-dock all orders from
customers who reorder less frequently than the supplier himself.
For customers with a shorter reorder interval than the supplier, make the supplier's reorder
interval an integer multiple of the customer's interval and synchronize replenishment at the two
stages to facilitate cross-docking. In other words, a supplier should cross-dock one out of every k
shipments to a customer who orders more frequently than itself, where k is an integer.
The relative frequency of reordering depends on the setup cost, holding cost, and demand at
different parties.
Relevant deterministic and stochastic inventory models and Vendor managed

inventory models
We now turn to stochastic inventory models, which are designed for analyzing inventory systems
where there is considerable uncertainty about future demands. In this section, we consider a
continuous-review inventory system. Thus, the inventory level is being monitored on a

continuous basis so that a new order can be placed as soon as the inventory level drops to the
reorder point. The traditional method of implementing a continuous-review inventory system
was to use a two-bin system. All the units for a particular product would be held in two bins. The
capacity of one bin would equal the reorder point. The units would first be withdrawn from the
other bin. Therefore, the emptying of this second bin would trigger placing a new order. During
the lead time until this order is received, units would then be withdrawn from the first bin. In
more recent years, two-bin systems have been largely replaced by computerized inventory
systems. Each addition to inventory and each sale causing a withdrawal are recorded
electronically, so that the current inventory level always is in the computer. (For example, the
modern scanning devices at retail store checkout stands may both itemize your purchases and
record the sales of stable products for purposes of adjusting the current inventory levels.)
Therefore, the computer will trigger a new order as soon as the inventory level has dropped to
the reorder point. Several excellent software packages are available from software companies for
implementing such a system. Because of the extensive use of computers for modern inventory
management, continuous-review inventory systems have become increasingly prevalent for
products that are sufficiently important to warrant a formal inventory policy. A continuous-
review inventory system for a particular product normally will be based on two critical numbers:
R reorder point. Q order quantity. For a manufacturer managing its finished products inventory,
the order will be for a production run of size Q. For a wholesaler or retailer (or a manufacturer
replenishing its raw materials inventory from a supplier), the order will be a purchase order for Q
units of the product. An inventory policy based on these two critical numbers is a simple one.
Inventory policy: Whenever the inventory level of the product drops to R units, place an order
for Q more units to replenish the inventory. Such a policy is often called a reorder-point, order-
quantity policy, or (R, Q) policy for short. [Consequently, the overall model might be referred to
as the (R, Q) model. Other variations of these names, such as (Q, R) policy, (Q, R) model, etc.,
also are sometimes used.] After summarizing the models assumptions, we will outline how R
and Q can be determined.
The Assumptions of the Model
1. Each application involves a single product.
2. The inventory level is under continuous review, so its current value always is known.
3. An (R, Q) policy is to be used, so the only decisions to be made are to choose R and Q.
4. There is a lead time between when the order is placed and when the order quantity is received.
This lead time can be either fixed or variable.
5. The demand for withdrawing units from inventory to sell them (or for any other purpose)
during this lead time is uncertain. However, the probability distribution of demand is known (or
at least estimated).
6. If a stockout occurs before the order is received, the excess demand is backlogged, so that the
backorders are filled once the order arrives.
7. A fixed setup cost (denoted by K) is incurred each time an order is placed. 8. Except for this
setup cost, the cost of the order is proportional to the order quantity Q.
9. A certain holding cost (denoted by h) is incurred for each unit in inventory per unit time.

10. When a stockout occurs, a certain shortage cost (denoted by p) is incurred for each unit
backordered per unit time until the backorder is filled. This model is closely related to the EOQ
model with planned shortages presented in Sec. 19.3. In fact, all these assumptions also are
consistent with that model, with the one key exception of assumption 5. Rather than having
uncertain demand, that model assumed known demand with a fixed rate. Because of the close
relationship between these two models, their results should be fairly similar. The main difference
is that, because of the uncertain demand for the current model, some safety stock needs to be
added when setting the reorder point to provide some cushion for having well-above-average
demand during the lead time. Otherwise, the trade-offs between the various cost factors are
basically the same, so the order quantities from the two models should be similar.

Unit 4
Role of transportation in a supply chain-direct shipment
Transportation refers to the movement of product from one location to another as it makes its
way from the beginning of a supply chain to the customer. Transportation is an important supply
chain driver because products are rarely produced and consumed in the same location. The role
of transportation is even more significant in global supply chains. Dell currently has suppliers
worldwide and sells to customers all over the world from just a few plants. Transportation allows
products to move across Dell's global network.
Supply chains also use responsive transportation to centralize inventories and operate with fewer
facilities. For responsive transportation one required the responsible person or group for that we
define two most common terms used for persons or group of persons.
The shipper is the party that requires the movement of the product between two points in the
supply chain. A shipper, in contrast, uses transportation to minimize the total cost
(transportation, inventory, information, sourcing, and facility) while providing an appropriate
level of responsiveness to the customer.
The carrier is the party that moves or transports the product. A carrier makes investment
decisions regarding the transportation equipment (locomotives, trucks, airplanes, etc.) and in
some cases infrastructure (rail), and then makes operating decisions to try to maximize the return
from these assets.
Two other parties have a significant impact on transportation: the owners and operators of
transportation infrastructure such as roads, ports, canals, and airports; and the bodies that set
transportation policy worldwide. Actions by all four parties influence the effectiveness of
transportation.
Transportation originates and ends at nodes and travels on links. For most modes of
transportation, infrastructure such as ports, roads, waterways, and airports is required both at the
nodes and links.
Most transportation infrastructure is owned and managed as a public good throughout the world.
It is very important that infrastructure be managed in such a way that monies are available for
maintenance and investment in further capacity as needed.
Transportation policy sets direction for the amount of national resources that go into improving
transportation infrastructure.
Transportation policy also aims to prevent abuse of monopoly power, promote fair competition,
and balance environmental, energy, and social concerns in transportation.

DIRECT SHIPMENT NETWORK
The buyer structures his transportation network so that all shipments come directly from each
supplier to each buyer location, as shown below
With a direct shipment network, the routing of each shipment is specified and the supply chain
manager only needs to decide on the quantity to ship and the mode of transportation to use. This
decision involves a trade-off between transportation and inventory costs
The major advantage of a direct shipment transportation network is:
1. Eliminations of intermediate warehouse.

2. Its simplicity of operation and coordination.
3. The shipment decision is completely local, and the decision made for one shipment does
not influence others.
4. The transportation time from supplier to buyer location is short because each shipment
goes direct.
5. A direct shipment network is justified if demand at buyer locations is large enough that
optimal replenishment lot sizes are close to a TL from each supplier to each location.
If a TL carrier is used for transportation, the high fixed cost of each truck results in large lots
moving from suppliers to each buyer location, resulting in high supply chain inventories. If a
LTL carrier is used, the transportation cost and the delivery time increase, though inventories are
lower. If package carriers are used, transportation costs are very high. With direct deliveries from
each supplier, receiving costs are high because each supplier must make a separate delivery.
Direct shipping provides the benefit of eliminating intermediate warehouses, whereas milk runs
lower transportation cost by consolidating shipments to multiple locations on a single truck.

Warehousing
A warehouse is a commercial building for storage of goods. Warehouses are used
by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are
usually large plain buildings in industrial areas of cities, towns and villages.
They usually have loading docks to load and unload goods from trucks. Sometimes warehouses
are designed for the loading and unloading of goods directly from railways, airports, or seaports.
They often have cranes and forklifts for moving goods, which are usually placed
on ISO standard pallets loaded into pallet racks. Stored goods can include any raw materials,
packing materials, spare parts, components, or finished goods associated with agriculture,
manufacturing and production. In Indian English a warehouse may be referred to as a godown.
CROSS DOCKING
Under this option, suppliers do not send shipments directly to buyer locations. The buyer divides
locations by geographic region and a DC is built for each region. Suppliers send their shipments
to the DC and the DC then forwards appropriate shipments to each buyer location The DC is an
extra layer between suppliers and buyer locations and can play two different roles. One is to
store inventory and the other is to serve as a transfer location. In either case, the presence of DCs
can help reduce supply chain costs when suppliers If transportation economies require very large
shipments on the inbound side, DCs hold inventory and send product to buyer locations in
smaller replenishment lots. If replenishment lots for the buyer locations served by a DC are large
enough to achieve economies of scale on inbound transportation, the DC does not need to hold
inventory. In this case the DC can cross dock product arriving from many suppliers on inbound
trucks by breaking each inbound shipment into smaller shipments that are then loaded onto
trucks going to each buyer location.
.Cross-docking also saves on handling cost because product does not have to be moved into and
out of storage. Successful cross-docking, however, does require a significant degree of
coordination and synchronization between the incoming and outgoing shipments. Cross-docking
is appropriate for products with large, predictable demands and requires that DCs be set up such
that economies of scale in transportation are achieved on both the inbound and outbound sides.
Wal-Mart has used cross-docking successfully to decrease inventories in the supply chain
without incurring excessive transportation costs.

As a result, the total lot size to all stores from each supplier fills trucks on the inbound side to
achieve economies of scale. On the outbound side, the sum of the lot sizes from all suppliers to
each retail store fills up the truck to achieve economies of scale. As a result, the total lot size to
all stores from each supplier fills trucks on the inbound side to achieve economies of scale. On
the outbound side, the sum of the lot sizes from all suppliers to each retail store fills up the truck
to achieve economies of scale.
Wal-Mart has used cross-docking successfully to decrease inventories in the supply chain
without incurring excessive transportation costs. Wal-Mart builds many large stores in a
geographic area supported by a DC. As a result, the total lot size to all stores from each supplier
fills trucks on the inbound side to achieve economies of scale. On the outbound side, the sum of
the lot sizes from all suppliers to each retail store fills up the truck to achieve economies of scale.
Push and pull
The business terms push and pull originated in logistics and supply chain management, but are
also widely used in marketing, and is also a term widely used in the hotel distribution business.
Wal-Mart is an example of a company that uses the push vs. pull strategy. A pushpull system in
business describes the movement of a product or information between two subjects. On markets
the consumers usually "pull" the goods or information they demand for their needs, while the
offers or suppliers "push" them toward the consumers. In logistics chains or supply chains the
stages are operating normally both in push- and pull-manner. Push production is based on
forecast demand and pull production is based on actual or consumed demand. The interface
between these stages is called the pushpull boundary or decoupling point.

Complete Definition
PUSH Node performs order planning for succeeding node. Like stated by Bonny et al.
(1999) control information flow is in the same direction of goods flow.
SEMI PUSH or PUSH-PULL Succeeding node makes order request for preceding node.
Preceding node reacts by replenishing from stock that is rebuilt every fixed period.
PULL Succeeding node makes order request for preceding node. Preceding node reacts by
producing the order, which involves all internal operations, and replenishes when finished.
SEMI-PULL or PULL-PUSH Succeeding node makes order request for preceding node.
Preceding node reacts by replenishing from stock that is rebuilt immediately. Note that there
are several levels of semi-pull systems as the node can have stock at several layers in the
organization.
Transportation decisions (mode selection, fleet size)
Supply chains use a combination of the following modes of transportation:
Air
Package carriers
Truck
Rail
Water
Pipeline
Intermodal
The effectiveness of any mode of transport is affected by equipment investments and

operating decisions by the carrier as well as the available infrastructure and transportation
policies. The carrier's primary objective is to ensure good utilization of its assets while
providing customers with an acceptable level of service.
Air
Airlines have a high fixed cost in infrastructure and equipment. Labor and fuel costs are
largely trip related and independent of the number of passengers or amount of cargo carried
on a flight. An airline's goal is to maximize the daily flying time of a plane and the revenue
generated per trip. Given the large fixed costs and relatively low variable costs, revenue
management in which airlines vary seat prices and allocate seats to different price classes, is
a significant factor in the success of passenger airlines.
Package carriers
Package carriers are transportation companies such as FedEx, UPS, and the U.S. Postal.
Service, which carry small packages ranging from letters to shipments weighing about150
pounds. Package carriers use air, truck, and rail to transport time-critical smaller shippers use
package carriers for small and time-sensitive shipments. Package carriers also provide other
value-added services that allow shippers to speed inventory flow and track order status. By
tracking order status, shippers can proactively inform customers about their packages.

Package carriers also pick up the package from the source and deliver it to the destination
site. With an increase in just-in-time (JIT) deliveries and focus on inventory reduction,
demand for package carriers has grown. Package carriers are the preferred mode of transport
for e-businesses. Package carriers seek out smaller and more time-sensitive shipments than
air cargo, especially where tracking and other value-added services are important to the
shipper.
TRUCK
The trucking industry consists of two major segments- TL or LTL. Trucking is more
expensive than rail but offers the advantage of door-to-door shipment and a shorter delivery
time. It also has the advantage of requiring no transfer between pickup and-delivery. Major
TL carriers include Schneider National, JB Hunt, Ryder Integrated, Werner, and Swift
Transportation. A key to reducing LTL costs is the degree of consolidation that carriers can
achieve for the loads carried. LTL carriers use consolidation centers to which trucks bring in
many small loads originating from a geographic area and leave with many small loads
destined for the same geographic area. This allows LTL carriers to improve their truck use,
although it increases delivery time somewhat. Larger firms enjoy an advantage in the LTL
industry given the importance of consolidation and the fixed cost of setting up consolidation
centers. Strong regional players have developed in the LTL industry because of the
advantage offered by a high density of pickup and delivery points in a geographic area.
RAIL
Rail carriers incur a high fixed cost in terms of rails, locomotives, cars, and yards. There is
also a significant trip-related labor and fuel cost that is independent of the number of cars but
does vary with the distance traveled and the time taken. Any idle time, once a train is
powered, is very expensive because labor and fuel costs are incurred even though trains are
not moving. Idle time occurs when trains exchange cars for different destinations. It also
occurs because of track congestion. Labor and fuel together account for over 60 percent of
railroad expense. From an operational perspective, it is thus important for railroads to keep
locomotives and crew well utilized. Transportation time by rail, however, can be long. Rail is
thus ideal for very heavy, low-value shipments that are not very time sensitive.
WATER
Water transport is ideally suited for carrying very large loads at low cost. Water transport is
used primarily for the movement of large bulk commodity shipments and is the cheapest
mode for carrying such loads. It is, however, the slowest of all the modes, and significant
delays occur at ports and terminals. For the quantities shipped and the distances involved in
international trade, water transport is by far the cheapest mode of transport. A significant
trend in maritime trade worldwide has been the growth in containerization. This has led to a
demand for larger, faster, and more specialized vessels to improve the economics of
container transport. Delays at ports, customs, security, and the management of containers
used are major issues in global shipping.

PIPELINE
Pipeline is used primarily for the transport of crude petroleum, refined petroleum products,
and natural gas. A significant initial fixed cost is incurred in setting up the pipeline and
related infrastructure that does not vary significantly with the diameter of the pipeline.
Pipeline operations are typically optimized at about 80 to 90 percent of pipeline capacity.
Pipeline may be an effective way of getting crude oil to a port or a refinery. Sending gasoline
to a gas station does not justify investment in a pipeline and is done better with a truck.
Pipeline pricing usually consists of two components fixed component related to the shipper's
peak usage and a second charge relating
INTERMODAL
Intermodal transportation is the use of more than one mode of transport to move a shipment to its
destination. A variety of intermodal combinations are possible, with the most common being
truck/rail. Major intermodal providers with rail include CSX Intermodal, Pacer Stacktrain, and
Triple Crown. Intermodal traffic has grown considerably with the increased use of containers for
shipping and the rise of global trade.
Market channel structure
1. Roads, seaports, airports, rail, and canals are some of the major infrastructural elements
that exist along nodes and links of a transportation network.
2. In almost all countries, the government has either taken full responsibility or played a
significant role in building and managing these infrastructure elements. The role of the
railroads and canals in the economic development of the United States is well
documented.
3. More recently, the impact of improved road, air, and port infrastructure on the
development of China is very visible. An excellent discussion of the history of road
construction and pricing is given by Levinson (1998). In the late 1700s, turnpikes were
built using public funds in Virginia, Maryland, and Pennsylvania but were then turned
over to private companies that collected tolls.
4. Over time, other turnpikes were built as a result of competition between towns to gain
trade. Other than federal land grants, these roads were typically built with local effort and
money. The tolls on these turnpikes were generally structured to keep local travel free
and make people traveling across an area pay for this right.
5. With the growth in railroads and canals, turnpikes suffered financially in the mid-1800s
and were eventually converted into public roads. In the twentieth century, as the modes of
transport changed, there was a need for higher-quality roads.

6. A network of national toll-free highways was built, largely using gasoline taxes as the
source of funding. At the same time, other facilities such as tunnels and bridges were
often constructed as toll facilities. In many other countries, such as France and Spain,
concessions were granted to private companies that received toll revenue. More recently,
private toll roads have also been built in Malaysia, Indonesia, and Thailand.
7. From the above examples it seems reasonable that the government has to either own or
regulate a monopolistic transportation infrastructure asset. When the transportation
infrastructure asset has competition either within a mode or across modes, private
ownership, deregulation, and competition seem to work well.
8. The deregulation of the transportation industry within the United States is a case in point.
Keep in mind, however, that roads, ports, and airports are largely public and not private.
This is because of the inherently monopolistic nature of these transportation
infrastructure assets. In such a setting the public ownership of these assets is justified.
9. This raises the policy question of financing the construction and maintenance of these
publicly owned transportation assets. Should roads be financed through a gasoline tax, or
is some other form of financing such as tolls more appropriate? Economists such as
Vickrey have argued for public ownership of these assets but the setting of quasi-market
prices to improve overall efficiency. Quasi-market prices need to take into account the
discrepancy between the incentives of an individual using the transportation
infrastructure and the public as a whole that owns the infrastructure.
IT also comes into play in the use of Global Positioning Systems (GPS) and electronic
notification of impending arrivals. GPS systems monitor the real-time location of vehicles. This
real-time information improves a firm's response to customer questions.
RISK MANAGEMENT IN TRANSPORTATION

There are three main types of risk to consider when transporting a shipment between two nodes
on the network:
1. The risk that the shipment is delayed
2. The risk that the shipment does not reach its destination because intermediate nodes or links
are disrupted by external forces
3. The risk of hazardous material
Vehicle routing problem:

Tailored transportation is the use of different transportation networks and modes based on
customer and product characteristics. Most firms sell a variety of products and serve many
different customer segments. A firm can meet customer needs at a lower cost by using tailored
transportation to provide the appropriate transportation choice based on customer and product
characteristics.
TAILORED TRANSPORTATION BY CUSTOMER DENSITY AND DISTANCE

Firms must consider customer density and distance from warehouse when designing
transportation networks. The ideal transportation options based on density and distance
When a firm serves a very high density of customers close to the DC, it is often best for the firm
to own a fleet of trucks that are used with milk runs originating at the DC to supply customers,
because this scenario makes very good use of the vehicles. If customer density is high but
distance from the warehouse is large, it does not pay to send milk runs from the warehouse
because trucks will travel a long distance empty on the return trip.
In such a situation it is better to use a public carrier with large trucks to haul the shipments to a
cross-dock center close to the customer area, where the shipments are loaded onto smaller trucks
that deliver product to customers using milk runs.
In this situation, it may not be ideal for a firm to own its own fleet. As customer density
decreases, use of an LTL carrier or a third party doing milk runs is more economical because the
third-party carrier can aggregate shipments across many firms. If a firm wants to serve an area
with a very low density of customers far from the warehouse, even LTL carriers may not be
feasible and the use of package carriers may be the best option. Boise Cascade Office Products,
an industrial distributor of office supplies, has designed a transportation network consistent with
the suggestion.
Customer density and distance should also be considered when firms decide on the degree of
temporal aggregation to use when supplying customers. Firms should serve areas with high
customer density more frequently because these areas are likely to provide sufficient economies
of scale in transportation, making temporal aggregation less valuable. To lower transportation
costs, firms should use a higher degree of temporal aggregation when serving areas with a low
customer density.
TAILORED TRANSPORTATION BY SIZE OF CUSTOMER
Very large customers can be supplied using a TL carrier, whereas smaller customers will require
an LTL carrier or milk runs. When using milk runs, a shipper incurs two types of costs:
Transportation cost based on total route distance
Delivery cost based on number of deliveries
Transportation cost based on total route distance
The transportation cost is the same whether going to a large or small customer. If a delivery is to
be made to a large customer, including other small customers on the same truck can save on
transportation cost. For each small customer, however, the delivery cost per unit is higher than
for large customers. Thus, it is not optimal to deliver to small and large customers with the same
frequency at the same price. One option firms have is to charge a higher delivery cost for smaller

customers. Another option is to tailor milk runs so that they visit larger customers with a higher
frequency than smaller customers.
Firms can partition customers into large (L), medium (M), and small (S) based on the demand at
each. The optimal frequency of visits can be evaluated based on the transportation and delivery
costs If large customers are to be visited every milk run, medium customers every other milk run,
and low-demand customers every three milk runs, suitable milk runs can be designed by
combining large, medium, and small customers on each run. Medium customers would be
partitioned into two subsets (M1, M 2) and small customers would be partitioned into three
subsets (S1, S2, S3).
Delivery cost based on number of deliveries
The degree of inventory aggregation and the modes of transportation used in a supply chain
network should vary with the demand and value of a product The cycle inventory for high-value
products with high demand is disaggregated to save on transportation costs because this allows
replenishment orders to be transported less expensively. Safety inventory for such products can
be aggregated to reduce inventories and a fast mode of transportation can be used if the safety
inventory is required to meet customer demand. For high-demand products with low value, all
inventories should be disaggregated and held close to the customer to reduce transportation costs.
For low-demand, high-value products, all inventories should be aggregated to save on inventory
costs. For low-demand, low-value products, cycle inventories can be held close to the customer
and safety inventories aggregated to reduce transportation costs while taking some advantage of
aggregation. Cycle inventories are replenished using an inexpensive mode of transportation to
save costs.
FACILITIES IN MAKING TRANSPORTATION DECISIONS
1. Align transportation strategy with competitive strategy. Managers should ensure that a firm's
transportation strategy supports its competitive strategy. They should design functional
incentives that help achieve this goal. Historically, the transportation function within firms has
been evaluated based on the extent to which it can lower transportation costs. Such a focus leads
to decisions that lower transportation costs but hurt the level of responsiveness provided to
customers and may raise the firm's total cost.
2. Consider both in-house and outsourced transportation. Managers should consider an

appropriate combination of company-owned and outsourced transportation to meet their needs.
This decision should be based on a firm's ability to handle transportation profitably as well as the
strategic importance of transportation to the success of the firm. In general, outsourcing is a
better option when shipment sizes are small, whereas owning the transportation fleet is better
when shipment sizes are large and responsiveness is important. For example, Wal-Mart uses
responsive transportation to reduce inventories in its supply chain. Given the importance of
transportation to the success of its strategy, it owns its transportation fleet and manages it itself.

This is made easier by the fact that it achieves good utilization from its transportation assets
because most of its shipments are large.
3. Use technology to improve transportation performance. Managers must use information

technology to decrease costs and improve responsiveness in their transportation networks.
Software helps managers do transportation planning, modal selection, and build delivery routes
and schedules. Available technology allows carriers to identify the precise location of each
vehicle as well as the shipments the vehicle carries.
4. Design flexibility into the transportation network. When designing transportation networks,
managers should take into account uncertainty in demand as well as availability of
transportation. Ignoring uncertainty encourages a greater use of inexpensive and inflexible
transportation modes that perform well when everything goes as planned. Such networks,
however, perform very poorly when plans change. When managers account for uncertainty, they
are more likely to include flexible, though more expensive, modes of transportation within their
network.
THE ROLE OF IT IN TRANSPORTATION
1. The complexity and scale of transportation makes it an excellent area within the supply
chain for the use of IT systems. The use of software to determine transportation routes
has been the most common IT application in transportation. This software takes the
location of customers, shipment size, desired delivery times, information on the
transportation infrastructure (such as distances between points), and vehicle capacity as
inputs. These inputs are formulated into an optimization problem whose solution is a set
of routings and a packing list for each vehicle that minimize costs while meeting delivery
constraints
2. By accounting for the size of the container and the size and sequence of each delivery
3. This IT also comes into play in the use of Global Positioning Systems (GPS) and
electronic notification of impending arrivals. GPS systems monitor the real-time location
of vehicles. This real-time information improves a firm's response to customer questions
regarding deliveries corresponding administrative work in a more efficient manner.
4. The most common problems in the use of IT in transportation relate to cross enterprise
collaboration and the narrow view taken by some transportation software. Collaboration
across enterprises is crucial in transportation because this is a function that is often
outsourced and does not directly involve either the shipper or the customer.
5. The players in this space include virtually all the major supply chain vendors, including
the ERP firms and the supply chain-focused best-of-breed firms. There has also been a
large amount of in-house development that has focused on the transportation
management process.

Mathematical foundations of distribution management

THE ROLE OF DISTRIBUTION IN THE SUPPLY CHAIN
A variety of distribution network models are presented, along with an analysis of the pros and
cons of each model. Distribution refers to the steps taken to move and store a product from the
supplier stage to a customer stage in the supply chain. Distribution occurs between every pair of
stages in the supply chain. Raw materials and components are moved from suppliers to
manufacturers, whereas finished products are moved from the manufacturer to the end consumer.
Distribution is a key driver of the overall profitability of a firm because it affects both the supply
chain cost and the customer experience directly. Distribution related costs make up about 10.5
%of the U.S. economy and abo~ut20 % of the cost of manufacturing.
FACTORS INFLUENCING DISTRIBUTION NETWORK DESIGN
At the highest level, performance of a distribution network should be evaluated along two
dimensions:
1. Customer needs that are met
2. Cost of meeting customer needs firm must evaluate the impact on customer service and cost as
it compares different distribution network options. The customer needs that are met influence the
company's revenues, which along with cost decide the profitability of the delivery network.
Although customer service consists of many components, we focus on those measures that are
influenced by the structure of the distribution network. These include:
Response time
Product variety
Product availability
Customer experience
Time to market
Order visibility
Return ability
1. Response time- is the amount of time it takes for a customer to receive an order.
2. Product variety- is the number of different products/configurations that are offered by the
distribution network.
3. Product availability- is the probability of having a product in stock when a customer

order arrives.
4. Customer experience- includes the ease with which customers can place and receive
orders as well as the extent to which this experience is customized.
5. Time to market -is the time it takes to bring a new product to the market.

6. Order visibility- is the ability of customers to track their orders from placement to
delivery.
7. Return ability - is the ease with which a customer can return unsatisfactory merchandise
and the ability of the network to handle such returns.
Changing the distribution network design affects the following supply chain costs
Inventories
Transportation
Facilities and handling
Information
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK
In this section, we discuss distribution network choices from the manufacturer to the end
consumer. When considering distribution between any other pair of stages, such as supplier to
manufacturer or even a service company serving its customers through a distribution network,

many of the same options still apply. Managers must make two key decisions when designing a
distribution network:
1. Will product be delivered to the customer location or picked up from a preordained site?
2. Will product flow through an intermediary (or intermediate location)?
Based on the firm's industry and the answers to these two questions, one of six distinct
distribution network designs may be used to move products from factory to customer, which are
classified as follows:
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with package carrier delivery
------~
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with costumer pickup
6. Retail storage with customer pickup
Next we describe each distribution option and discuss its strengths and weaknesses.
MANUFACTURER STORAGE WITH DIRECT SHIPPING
In this option, product is shipped directly from the manufacturer to the end customer, bypassing
the retailer (who takes the order and initiates the delivery request). This option is also referred to
as drop-shipping, with product delivered directly from the manufacturer to the customer. The
retailer, if independent of the manufacturer, carries no inventories. Information flows from the
customer, via the retailer, to the manufacturer, and product is shipped directly from the
manufacturer to customers as shown in Figure.
Online retailers such as e-Bags and Nordstrom.com use drop-shipping to deliver goods to the end
consumer. E-Bags hold few bags in inventory. Nordstrom carries some products in inventory and
uses the drop-ship model for slow-moving footwear.
W.W. Grainger also uses drop-shipping to deliver slow-moving items to customers. The biggest
advantage of drop-shipping is the ability to centralize inventories at the manufacturer. A
manufacturer can aggregate demand across all retailers that it supplies. As a result, the supply
chain is able to provide a high level of product availability with lower levels of inventory. A key
issue with regard to drop-shipping is the ownership structure of the inventory at the
manufacturer. If specified portions of inventory at the manufacturer are allocated to individual
retailers, there is little benefit of aggregation even though the inventory is physically aggregated.
Benefit of aggregation is achieved only if the manufacturer can allocate at least a portion of the
available inventory across retailers on an as-needed basis. The benefits from centralization are
highest for high value, low-demand items with unpredictable demand. The decision of
Nordstrom to drop-ship low-demand shoes satisfies these criteria. Similarly, bags sold by eBags
tend to have high value and relatively low demand per SKU. The inventory benefits of
aggregation are small for items with predictable demand and low value. Thus, drop-shipping
does not offer a significant inventory advantage to an online grocer selling a staple item such as
detergent. For slow-moving items, inventory turns can increase by a factor of 6 or higher if drop-

shipping is used instead of storage at retail stores. Drop-shipping also offers the manufacturer the
opportunity to postpone customization until after a customer has placed an order.
Supply chain facility layout and capacity planning

The other two drivers, sourcing and pricing, also affect the choice of the distribution system; the
link will be discussed when relevant. As the number of facilities in a supply chain increases, the
inventory and resulting inventory costs also increase.
The other two drivers, sourcing and pricing, also affect the choice of the distribution system; the
link will be discussed when relevant. As the number of facilities in a supply chain increases, the
inventory and resulting inventory costs also increase
Inbound transportation costs are the costs incurred in bringing material into a facility.
Outbound transportation costs are the costs of sending material out of a facility. Outbound
transportation costs per unit tend to be higher than inbound costs because inbound lot sizes are
typically larger.

Facility costs decrease as the number of facilities is reduced, as shown because a

consolidation of facilities allows a firm to exploit economies of scale. Total logistics
costs are the sum of inventory, transportation, and facility costs for a supply chain
network. As the number of facilities increases, total logistics costs first decrease and then
increase as shown in Figure 4-5. Each firm should have at least the number of facilities
that minimize total logistics costs. For example, Amazon has more than one warehouse
primarily to reduce its logistics costs (and improve response time).
As a firm wants to reduce the response time to its customers further, it may have to increase the
number of facilities beyond the point that minimizes logistics costs. A firm should add facilities
beyond the cost-minimizing point only if managers are confident that the increase in revenues
because of better responsiveness is greater than the increase in costs because of the additional
facilities.
The customer service and cost components listed earlier are the primary measures used to
evaluate different delivery network designs. In general, no distribution network will outperform

others along all dimensions. Thus, it is important to ensure that the strengths of the distribution
network fit with the strategic position of the firm.
Supply chains save on the fixed cost of facilities when using drop-shipping because all
inventories are centralized at the manufacturer. This eliminates the need for other warehousing
space in the supply chain. There can be some savings of handling costs as well, because the
transfer from manufacturer to retailer no longer occurs. Handling cost savings must be evaluated
carefully, however, because the manufacturer is now required to transfer items to the factory
warehouse in full cases and then ship out from the warehouse in single units. The inability of a
manufacturer to develop single-unit delivery capabilities can have a significant negative effect on
handling cost and response time. Handling costs can be reduced significantly if the manufacturer
has the capability to ship orders directly from the production line.
A good information infrastructure is needed between the retailers and the manufacturer so that
the retailer can provide product availability information to the customer, even though the
inventory is located at the manufacturer. The customer should also have visibility into order
processing at the manufacturer, even with the order being placed with the retailer.

Unit 5
The financial impacts
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.
Production units are identified mostly with their decision to make or buy. In other words, do they
wish to produce the desired product on their own or do they want to purchase it from the foreign
market.
This decision is critical because the third-party suppliers especially in countries like Eastern
Europe, China, and other low-cost parts of the world hold out the promise of essential
beneficiaries, which the developed nations fail to offer.
However, the developed countries can easily overcome the expenses cost in the imported
material through activities like human resources, information technology, maintenance and
customer relations. If properly utilized and taken care of, these activities may yield profit rather
than leading the nation to suffer more loss. All the expense of outsourcing can be regained
through these activities and thus they should not be neglected when the options are considered.
The Make Vs Buy decision of a nation depends on three pillars. These pillars are
Business strategy
Risks
Economic factors
Business Strategy
The first pillar in the Make Vs Buy decision is the business strategy adopted by a nation.
Business strategy strategically engages the importance of the company whose product or
service is being considered for outsourcing, in addition to the process, technologies or skills
needed to design the product or deliver that particular service.
These factors should be carefully considered, not just on the basis of current competitive
environment but also by anticipating the changing competitive environment in future.So, as a

rule, its advisable to select the in-house skills and abilities when a product or a function plays a
very important role in improving the companys performance or is considered a core operation.
Perhaps, if we consider a time-sensitive product or a product, which is prone to consequent
design changes, third-party producing would likely be a mistake. In simple worlds, companies
must opt for outsourcing in the following scenarios
Remove the processes, which are intensive on the balance sheet, e.g., capital or labor.
Minimize the costs.
Achieve flexibility for adjusting output in comeback to changing demand.
Phase out management of paperwork, documents or training.
Monitor fewer workers.
Have access to new process or network tools and technologies.
Leverage external expertise.
In fact, if a product relies on proprietary technology or intellectual property or if a product or an
operation is critical for the companys performance, it is recommended to select in-house skills
& abilities rather than outsourcing.
Obviously, outsourcing is worth considering under some situations. If a product or function has
essentially become a commodity or is derived from factors other than unique or differentiating
capabilities and as such, moving production or management to a third party does not give rise to
significant risk to the companys strategy, outsourcing would be the perfect solution.
Risks
The second pillar under the Make Vs Buy strategy is risks involved with any decision. The
major risk factors involved in making a product in the home country or purchasing it from
foreign countries are quality, reliability, and predictability of outsourced solutions or services.
Along with these, there are risks inherent in the process of labeling and selecting the right
supplier and structuring a workable ongoing relationship.
When we have numerous suppliers, a single failure in the supply chain may not be deadly. Even
when the suppliers are making parts of an item instead of that completely furnished item, there
will be errors in manufacturing. These errors should be identified before the products are
assembled so that the faulty item cannot be delivered to the consumer directly.
We know outsourcing opens up a broad array of new risks. We need to be attentive of any
potential pitfalls with producers and examine outsourcing partners on the basis of their
importance to the company.
Operations in outsourcing that lead to failure of service could be overwhelming, for example, an
IT network, a payroll processing system or element manufacturing, as compared to risks or
problems like a glitch in a training program or a long-term product development plan, which is
much lesser.
It is very important to acknowledge the risks that are related to the location of an external
supplier. Apart from judging the source countrys political stability, companies require to
examine the safety and lead times of shipment schedule. Along with this, they have to label and
examine potential secondary carriers or routes or search for other producers as a backup in a
different area that supplies incremental volume during peaks in demand or disruptions of the
primary source of supply.
When we merge the outsourced manufacturing of products or outsourced processes that demand
distinct skills or assets, making it difficult or expensive to re-source, the supply chain
management becomes a highly complex function. In fact, these risks through which a producer

may exploit a customers highly reliable relationship by increasing prices or charging better
terms (referred as hold up risks) can be easily handled with some external solutions.
This is a very important decision to make. One has to go through all the available options and
select the best one out of them before making any commitments to the supplier because
outsourcing agreements can be difficult to amend or break.
Economic Factors
The third pillar in the Make Vs Buy strategy is the economic factors residing in the country
that needs to decide if to buy a product or make it on its own. The various economic factors
comprise the effect of outsourcing on capital expenditures, return on invested capital and return
on assets, along with the probable savings gained by outsourcing.
To study the importance of pricing mechanisms, lets consider those companies that base their
decision on if they need to outsource solely on approximate calculations of the in-house as
compared to the external costs related to the outsourced function, for example, the cost of each
item produced or the price of running an HR department or an IT network instead on the total
costs. The net prices that need to be taken care of comprise the layouts for handling the outsource
supplier, exclusively as the outsourced process changes. These changes prove to be very
essential.
For example, customizing some software on a third-party information technology network can
compute a large surcharge to the outsourcing deal. Tackling the customization in-house, i.e.,
within the home country, where the IT department can work closely, their work can be easily
monitored and more productively with end-users to satisfy their demands can be obtained, tend
to be less costly.
Along with this, the home country needs to choose the outsourcing partners very cautiously. In
case the outsourcing partners are not selected properly, the companies often attempt to protect
themselves from failures or delays by replicating in-house some of the effort that was originally
farmed out. This leads to multiple prices for the same project and potential costs are mostly
neglected when the outsourcing deal is made.
The costs that are often neglected in outsourcing manufacturing operations are as follows
Transportation and handling charges.
Expanded, extended inventories.
Administrative bills like the supplier management and quality control rates.
Casted complexity and its effect on lean flows.
Minimal return on invested capital.
Production dependability and quality control.
Taking all these costs into consideration, depending on a one-time quote to measure the
competitiveness of an external producer is mostly not enough. Enterprises can be saved from this
mistake by factoring into the outsourcing equation the economic effects of comparative wage
prices, labor productivity, tools and staff utilization, the biasness of both the labor base and
functional processes, the potential for process and product innovation and relative purchasing
power.
Finally, we can say that for a successful outsourcing relationship, the basic factors include the
sharing of savings from productivity progress, so that both sides have an inducement to merge.
After establishing a sober formal relationship, it is very essential to search for the right balance
between fully transparent supplier functions and micromanagement or the perception of it. After
the outsourcing decisions are made and suppliers have been chosen, it is crucial to be on the

same front on a fair and balanced pricing mechanism, productivity progress and cost
minimization expectations and the necessary scale of responsiveness to design, service or
delivery changes.
Volume leveraging and cross docking
Supply chain networks present different types of models that help us understand the various
optimization methods used for studying the uncertainty and scenario modeling. There are six
distinct supply chain network models, as given below.
Producer storage with direct shipping

Producer storage with direct shipping and in-transit merge (cross docking)
Distributor storage with package carrier delivery
Distributor storage with last mile delivery
Producer or distributor storage with costumer pickup
Retail storage with customer pickup
The supply chain network basically deals with three major entities: Producer, Distributor and
Merchant. Two different options are available, i.e., customer pickup or door delivery. For
example, if the door delivery option is opted for, there is transport between producer and
distributor, distributor and merchant and producer and merchant.
The distribution system decision is made on the basis of the choice of the customers. This in turn
results in the demand for the product or products and cost of the distribution arrangement.
New companies may come to a halt through the application of a single type of distribution
network. Mostly, companies go for merging of different types for distinct products, different
customers and different usage situations, coming back to the different optimization models
mentioned above. Now we will discuss each model in brief.
Producer storage with direct shipping
In this model, goods are moved directly from the manufacturers location as the starting point to
the end customers location as the destination point bypassing the retailer. The retailer is the
person who takes the order and initiates the delivery request. This option is also called drop-
shipping, with product delivered directly from the manufacturers location to the customers
destination.
Producer storage with direct shipping and in-transit merge

It is somewhat congruent to pure drop-shipping or moving, but the difference is that pieces of the
order come from different locations and they are merged into one so that the customer gets a
single delivery.
Distributor storage with package carrier delivery
This comes into action when the inventory is not owned by the manufacturers at the plants;
instead it is owned by the merchants/retailers in intermediate warehouses and package carriers
are used for shipment of goods from the intermediate location to the final customer.
Distributor storage with last mile delivery
This type results when the merchant/retailer delivers the goods ordered by the customer to the
customers home instead of using a package carrier.
Producer/distributor storage with customer pickup
In this type, the inventory is stored at the warehouse owned by the manufacturer or producer but
the customers place their orders online or through phone and then come to pick up points allotted
for collecting their orders.
Retail storage with customer pickup
This is mostly applied on situations when inventory is locally stored at retail stores; customers
walk into the retail shop or order something online or on the phone and pick it up at the retail
store.
Global supplier development

Global Supplier development is development of the data which provide the altering of
inventories and capacity. Pricing influences the amount of product demanded and the total
revenue generated. Supply chain assets exist in two formscapacity and inventory. Capacity assets
in the supply chain exist for production, transportation, and storage. Inventory assets exist
throughout the supply chain and are carried to improve product availability. To increase the total
margin earned from these assets, managers must use all available levers, including price. This is
the primary role of revenue management. Traditionally, firms have often invested in or
eliminated assets to reduce the imbalance between supply and demand. Firms build additional
capacity during the growth part of a business cycle and shut down some capacity during a
downturn. Ideas from revenue management suggest that a firm should first use pricing to achieve
some balance between supply and demand and only then invest in or eliminate assets.
Revenue management adjusts the pricing and available supply of assets to maximize profits.
Revenue management has a significant impact on supply chain profitability when one or more of
the following four conditions exist:
1. The value of the product varies in different market segments.

2. The product is highly perishable or product wastage occurs.

3. Demand has seasonal and other peaks.
4. The product is sold both in bulk and on the spot market.
Every product and every unit of capacity can be sold both in bulk and in the spot market. An
example is the owner of a warehouse who must decide whether to lease the entire warehouse to
customers willing to sign long-term contracts or to save a portion of the warehouse for use in the
spot market. The long-term contract is more secure but typically fetches a lower average price
than the spot market. Revenue management increases profits by finding the right portfolio of
long-term and spot-market customers.
A classic example of a market with multiple customer segments is the airline industry,
where business travelers are willing to pay a higher fare to travel a specific schedule,
whereas leisure travelers are willing to shift their schedule to take advantage of lower
fares. Many similar instances arise in a supply chain. Consider ToFrom, a trucking firm
that has purchased six trucks, with a total capacity of 6,000 cubic feet, to use for transport
between Chicago and St. Louis. The monthly lease charge, driver, and maintenance expense is
$1,500 per truck. Market research has indicated that the demand curve for trucking capacity is
d = 10,000 - 2,000p
where d is the demand from each segment and p is the transport cost per cubic foot. A price of $2
per cubic foot results in a demand of 6,000 cubic feet, revenue of $12,000, and a profit of $3,000,
whereas a price of $3.50 per cubic foot results in a demand of 3,000, revenue of $10,500, and a
profit of $1,500. The real question is whether the 3,000 cubic feet of demand at a price of $3.50
is from a different segment than the 3,000 additional cubic feet of demand generated at a price of
$2 per cubic foot. If ToFrom assumes that all demand comes from a single segment, the optimal
price is $2.50 per cubic foot, resulting in a demand of 5,000 cubic feet and revenue of $12,500.

To differentiate between the various segments, the firm must create barriers by identifying
product or service attributes that the segments value differently. For example, business travelers
on an airline want to book at the last minute and stay only as long as they must. Leisure travelers,
on the other hand, are willing to book far in avarice and adjust the duration of their stay. Plans
for business travelers are also subject to change. Thus, advance booking, a required Saturday-
night stay, and a penalty for changes on the lower fare separate the leisure traveler from the
business traveler. For a transportation provider such as To From, the segments can be
differentiated based on how far in advance a customer is willing to commit and pay for the
transportation capacity. Similar separation can also occur for production- and storage-related
assets in a supply chain.
In the presence of multiple segments that can be separated, the firm must solve the following two
problems:
1. What price to charge each segment?
2. How to allocate limited capacity among the segments.
Target pricing
Any asset that loses value over time is perishable. Clearly, fruits, vegetables, and
pharmaceuticals are perishable. This list also includes products such as computers and cell
phones that lose value as new models are introduced. High-fashion apparel is perishable because
it cannot be sold at full price once the season is past. Perishable assets also include all forms of
production, transportation, and storage capacity that is wasted
if not fully utilized. Unused capacity from the past has no value. Thus all unutilized capacity is
equivalent to perished capacity. A well-known example of revenue management in retailing of
apparel was the original Filene's Basement in Boston. Merchandise was first sold at the main
store at full price. Leftover merchandise was moved to the basement and its price reduced
incrementally over a 35-day period until it sold. Any unsold merchandise was then given away to
charity. Today, most department stores progressively discount merchandise over the sales season
and then sell any remaining inventory to an outlet store, which follows a similar pricing strategy.
Another example of revenue management for a perishable asset is the use of overbooking by the
airline industry. An airplane seat loses all value once the plane takes off. Given that people often
does not show up for a plane even when they have a reservation, airlines sell more reservations
than the capacity of the plane, to maximize expected revenue?
The two revenue management tactics used for perishable assets are
1. Vary price dynamically over time to maximize expected revenue
2. Overbook sales of the asset to account for cancellations
DYNAMIC PRICING
Dynamic pricing, the tactic of varying price over time, is suitable for assets such as fashion
apparel that have a clear date beyond which they lose a lot of their value. Apparel designed for
the winter does not have much value by April. A retailer that has purchased 100 ski jackets in
October has many options with regard to its pricing strategy.

It can charge a high price initially. This strategy will result in fewer sales early in the season
(though at a higher price), leaving more jackets to be sold later during the season, when they
have lower value to customers. Another option is to charge a lower price initially, selling more
jackets early in the season (though at a lower price) and leaving fewer jackets to be sold at a
discount. This trade-off determines the profits for the retailer. To vary price effectively over time
for a perishable asset, the asset owner must be able to estimate the value of the asset over time
and forecast the impact of price on customer demand effectively. Effective differential pricing
over time generally increases the level of product availability for the consumer willing to pay full
price and also increases total profits for the retailer. We now discuss a simple methodology for
dynamic pricing in the context where the seller has a specified quantity Q of a single product at
the start of the season. We assume that the seller is able to divide the selling season into k periods
and can forecast the demand curve for each period. The underlying assumption here is that
customers' response to pricing can be predicted over time and customers will not change their
behavior in response to anticipated price changes. For simplicity, we assume that, given
a price Pi in period i, the demand di in period i is given by
di = Ai- BiPi
This is a linear demand curve, but in general the demand curve need not be linear. We present
the linear case here because it is easier to understand and solve. The retailer wants to vary the
price over time to maximize the revenue it can extract from the Q units it has on hand at the
beginning of the season. These are briefed below
Electronic Commerce
Electronic commerce involves the broad range of tools and techniques used to conduct business
in a paperless environment. Hence it comprises electronic data interchange, e-mail, electronic
fund transfers, electronic publishing, image processing, electronic bulletin boards, shared
databases and magnetic/optical data capture. Electronic commerce helps enterprises to automate
the process of transferring records, documents, data and information electronically between
suppliers and customers, thus making the communication process a lot easier, cheaper and less
time consuming.
Electronic Data Interchange

Electronic Data Interchange (EDI) involves the swapping of business documents in a standard
format from computer-to-computer. It presents the capability as well as the practice of
exchanging information between two companies electronically rather than the traditional form of
mail, courier, & fax.
The major advantages of EDI are as follows
Instant processing of information
Improvised customer service
Limited paper work
High productivity
Advanced tracing and expediting
Cost efficiency
Competitive benefit

Advanced billing
The application of EDI supply chain partners can overcome the deformity and falsehood in
supply and demand information by remodeling technologies to support real time sharing of
actual demand and supply information.
Barcode Scanning
We can see the application of barcode scanners in the checkout counters of super market. This
code states the name of product along with its manufacturer. Some other practical applications of
barcode scanners are tracking the moving items like elements in PC assembly operations and
automobiles in assembly plants.
Cost management enablers

scrutinizing every process within your organization, knocking down departmental barriers,
understanding your suppliers' business, and helping improve their processes.
Or
A number of definitions of cost management can be found. The Future of Purchasing and
Supply: A Five- and Ten-Year Forecast indicates that cooperation between firms is required to
establish cost drivers and individual/joint cost reduction strategies. These efforts are necessary to
achieve cost reductions necessary to maintaining a competitive position. Also, formula pricing
approaches are needed for engineered and specified products and services to assure sufficient
profit and return on investment. Other definitions include relation of cost management to the
total supply chain and beyond any single transaction or supplier relationship (Kauffman, 1999).
Key enablers of cost management
Each individual organization needs to review their various supply needs and supply chains and
determine what enablers are of prime importance to their situations. We will discuss an approach
to that problem later in the paper. In this section we will discuss a number of generally applicable
enablers, some of which are likely to be present in many supply situations. The enablers are
grouped by the three phases present in most cost management approaches: analysis and planning,
implementation, and ongoing management and control. Some apply to more than one phase and
are so listed but discussed only at the first listing.
Analysis and Planning Enablers:
Top management support and sponsorship - Without this forget the whole idea of cost
management. However, to get this support, top management must understand the value
of supply chain management to the bottom line. If management seems reluctant to
recognize this from internal efforts alone, cooperative efforts with suppliers and/or
customers may help to convince them.
Information systems - To capture spending by commodity or service, supplier, and

geographical area. Information can be used to: identify opportunities for synergy with

other supply chain members in areas such as leveraging spend, pooling knowledge,
acquiring/providing/sharing technology, identify areas where transfer of best practices
will reduce costs, optimize location and use of resources, such as inventories, in the
supply chain, and help to identify total cost drivers.
Identity of total cost drivers - What are all of the elements that make up the total cost
in a given supply chain? Total cost drivers may vary by geographical areas and may
include items such as logistics, transportation, inventory, lead time, lack of
infrastructure, lack of qualified or trained personnel, lack of qualified suppliers, and
production impact of particular products or services. Additional drivers that may be
present in a global analysis could include tariffs and duties, currency exchange rates,
hostile political or geographical environments.
Cost models - If models of major costs in the supply chain are not available, they may
need to be developed. Cost models may have to be adjusted by country or region in
global supply chain situations. Some techniques for modeling costs include learning
curve analysis, experience effect analysis, price productivity analysis, implied set-up
cost analysis, should-cost analysis, comparative process analysis, and cost breakdown
analysis. Some approaches to cost and price modeling and analysis are presented in
Chapter 19 of the current edition of The Purchasing Handbook.
A strategic cost management plan - There must be known cost management objectives
and a plan as to how you are going to achieve them. One approach to prepare such a
plan is to use a three-step approach that includes: classifying purchases, matching cost
analysis tools with the purchase classifications, and focusing on strategic cost
management techniques to achieve cost management results (Ellram, 1996).
Effective cross-functional teams - Vital to the success of any cost management effort
because of the varied departments and functions that are affected and need to be
involved to implement cost management initiatives. All parties either affected by the
costs in question or involved in generating those costs need to be involved in the
applicable cost management teams.
Known Business strategies - To develop purchasing cost management strategies,

overall business strategies must be known. The maximum effect of strategic cost
management in the supply chain can only be achieved when supply chain strategies are
aligned with overall business strategies. Obviously, to achieve alignment, overall
business strategies must be known to the supply chain team.
Alignment of supply strategies with business strategies - To be most effective,

purchasing cost management strategies must be aligned with overall business
strategies. This enabler is key to successful strategic cost management and also to
obtaining full support of top management. Do not make the mistake of concentrating
cost management efforts in an area that management considers unimportant, or in an
area of the business that is not strategically important to the company and/or may be

up for divestiture.
Total cost approach to procurement - Frequently the most significant cost reductions in
a supply chain do not result from lower prices. Price is important but it is not the only
cost. Costs other than price may have more reduction potential or may be easier to
reduce than price itself. Do not overlook any cost element. Sometimes costs that are
indirectly linked to the use of products or services may contain large reduction
potential as a result of changes in the purchased products or services.
Balanced approach to sourcing - It is inefficient to either purchase everything through

alliances or purchase everything on a transactional basis. All purchases must be
analyzed and categorized according to criteria such as total spend, long-term vs. short-
term need, strategic importance, and supply base capabilities. From such an analysis
individual purchase categories can be identified as candidates for strategic alliances,
small-value purchase techniques, and transactional approaches.
Performance measurements - Without measurements you don't know where you are,
where you came from, or where you are going. Performance measurements should be
established for all aspects of a strategic cost management plan that are critical to its
success. Therefore the first step in establishing measurements is to identify critical
success factors and then develop indicators to measure how well they are being
achieved. The results of measurement can be used to report success, to identify
problem areas, and as the basis for taking corrective action.
Redefinition of procurement business processes - Necessary to accommodate balanced

sourcing and efficient methods for handling transactional purchasing activities.
Adoption of a continuous process improvement approach to supply chain operations
will cause continual redefinition of business processes in the supply chain.
Maximize the leverage effect of purchasing - Use the information available from data
systems to determine global spend by product, supplier, and geographical area to
identify leverage opportunities. Leverage benefits can include price, quality, service,
availability, knowledge, and other factors.
Service level in supply chain
Service level measures the performance of a system. Certain goals are defined and the service
level gives the percentage to which those goals should be achieved. File rate is different from
service level.
Examples of service level:
Percentage of calls answered in a call center.

Percentage of customers waiting less than a given fixed time.
Percentage of customers that do not experience a stock out.

Service level is used in supply chain management and in inventory management to measure the
performance of inventory replenishment policies. Under consideration, from the optimal solution
of such a model also the optimal size of back orders can be derived. Unfortunately, this
optimization approach requires that the planner knows the optimal value of the back order costs.
As these costs are difficult to quantify in practice, the logistical performance of an inventory
node in a supply network is measured with the help of technical performance measures. The
target values of these measures are set by the decision maker. Several definitions of service
levels are used in the literature as well as in practice. These may differ not only with respect to
their scope and to the number of considered products but also with respect to the time interval
they are related to. These performance measures are the Key Performance Indicators (KPI) of an
inventory node which must be regularly monitored. If the controlling of the performance of an
inventory node is neglected, the decision maker will not be able to optimize the processes within
a supply chain.

Customer satisfaction, value, profitability, differential advantage
As mentioned above, customer satisfaction is a measure of how customers are with their
relationship with an organization. Customer satisfaction can promote loyalty, meaning that a
customers loyalty constitutes the basis of a valuable relationship with a company (Nykamp,
2001). Highly satisfied customers make repeat purchases, communicating their good
experiences.
Armstrong and Kotler (2007) state later that it is major to match customers expectations with
company performance and generate customer value profitability. Satisfaction is achieved when
expectations are fulfilled and the customer knows that supplier is able to deliver what is expected
perceiving a low level of risk. Satisfaction affects the clients decision to continue a relationship
and reduce the likelihood of exit from the relationship and negative word-of-mouth.
Relationships between parties develop over time as they gain experience and trust each other,
reducing the perceived risk in a relationship.
Customer Relationship Management CRM assures competitive differentiation in an equivalent

environment where product, price, promotion strategies and distribution channels are less
influential as differentiators. However, due to technological advancements, enabling the early
immediate copying of product features and functions, it is increasingly difficult for organizations
nowadays to compete on the basis of products, Traditionally, pricing has been another basis of
competitive advantage, but actually, for many companies, price competition and complex
channel agreement have promoted parity pricing. Promotions are very easy to match, so special
offers, discounts and sales are expected and normal.
Customer Value
Customer value is the satisfaction a consumer feels after making a purchase for goods or services
relative to what she must give up to receive them. A consumer doesn't consider value just in
terms of money spent, but can also consider the time it takes to obtain a purchased product and
interactions with customer service personnel. Customer value has several tiers and is best
thought of as a hierarchy, according to Destination Marketing's website. This hierarchy
determines the importance of services in the mind of the consumer in terms of what the
consumer expects and does not expect from the purchase experience.
Customer profitability
Customer profitability (CP) is the profit the firm makes from serving a customer or customer
group over a specified period of time, specifically the difference between the revenues earned
from and the costs associated with the customer relationship in a specified period. According to
Philip Kotler,"a profitable customer is a person, household or a company that overtime, yields a
revenue stream that exceeds by an acceptable amount the company's cost stream of attracting,
selling and servicing the customer."

Calculating customer profit is an important step in understanding which customer relationships

are better than others. Often, the firm will find that some customer relationships are unprofitable.
The firm may be better off (more profitable) without these customers. At the other end, the firm
will identify its most profitable customers and be in a position to take steps to ensure the
continuation of these most profitable relationships. However, abandoning customers is a
sensitive practice, and a business should always consider the public relations consequences of
such actions.
______________________________________________________________________________
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Supply Chain Management

Supply Chain Management

Manoj Shriwas Page 1

Supply chain network:

Supply Chain Example: for apple juice production.

Supply Chain Network Example: For Apple Juice Organisation

Organizations are linked via two types of flows:

Manoj Shriwas Page 3

Integrated Supply Chain Management

Our approach views problem-solving as a constraint satisfaction/optimization process where

The objectives of the project are to:

Develop a sharable representation of supply chain knowledge.

Manoj Shriwas Page 4

Decision phases in supply chain

Supply Chain Strategy

Manoj Shriwas Page 5

Supply Chain Planning

Supply Chain Operations

The process view of supply chain management

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Customer order cycle

Manufacturer:-Manufacturing facilities make the product according to order placed by customer

Supplier :- Supplier in a Supply Chain is an enterprise that contributes goods or services in a

2. Push/ Pull view

Manoj Shriwas Page 7

Supply chain flows

Manoj Shriwas Page 8

Manoj Shriwas Page 9

Supply chain models and modeling systems

Supply chain model have following phases:-

Manoj Shriwas Page 10

Supply chain planning: Strategic, operational and tactical

Manoj Shriwas Page 12

Transportation and warehousing solutions, including outsourcing and third-party options

Understanding supply chain through process mapping and process

Manoj Shriwas Page 13

The figure above shows supply chain process mapping.

We can understand supply chain through this flowchart.

Manoj Shriwas Page 14

Supply chain strategies

Achieving strategic fit

Manoj Shriwas Page 15

Expanding the Supply Chain Optimization and Strategic Fit Scope

Flexible Intercompany inter-functional scope: The flexibility refers to dynamic situation.

Manoj Shriwas Page 16

Physical, virtual and combined value chain

Physical/traditional value chain: a physical-world activity performed in order to enhance a

Manoj Shriwas Page 17

An industry value-chain is a physical representation of the various processes involved in

Supply Chain Drivers and Obstacles

A Framework for Structuring Supply Chain Drivers

Manoj Shriwas Page 18

Definition/Explanation of Four Drivers

Number of decisions have to taken in designing a supply chain regarding transportation.

Mode of Transportation: Six basic modes exist

Manoj Shriwas Page 19

Route and Network Selection

Own Transport or Outsourced Transport

Issues related to Information

Push Process Information and Pull Process Information

strategic alliance & outsourcing

Manoj Shriwas Page 20

Further kinds of strategic alliances include

Advantages of strategic alliance