Module 1 SCM - Introduction

Case analysis importance of SCM Sales Target for the year 2010 -2011 Rs 100 lakhs Profit Target Rs 10 lakhs GM has been told to increase profit to Rs 13 lakhs Cost analysis Profit 10 % of sales Direct Labor 25 % Over head 5% Cash credit Rs 40 lakhs at 12.5 % interest Areas considered for achieving the target Marketing Finance Production Materials Marketing Add more salesmen and retailers to increase sales by Rs 30 lakhs to get additional profit of 3 lakhs Finance Cash credit used Rs 40 lakhs at 12.5% interest. Negotiate and reduce interest by 0.5% to get additional profit of Rs 0.2 lakhs Production Labour cost 25% at Rs 25 lakhs. With additional tooling and training, improve productivity by 5 % and get additional profit of Rs 1.25 lakhs Materials material cost 60% at Rs 60 lakhs. Reduce total material cost by 5% through price negotiations, inventory management, credit management , transportation etc and get additional profit of Rs 3 lakhs. Lesson Reduction of 5% in material cost is equal to increasing sales by 30 %. Thumb rule : Efforts to save Rs 1 is equivalent to increasing sales by Rs 10. It will be even more in a shortage economy like India. Hence traditional clerical Purchasing Function has been elevated to Strategic Management Function as Supply Chain Management, closely monitored by the top management

Integrated SCM / Supply chain model

Funds & Information flow through the entire supply chain Goods & information flow

Raw Material

Supplier Warehouse

Manufacturer

Warehouse

Disti- Customer butor

- Supply chain is the flow of products, services and information from raw material stage through suppliers, warehouses, manufacturer, warehouses, distributors and retailers ultimately to the customer.
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Supply chain also include flow of funds and information in the reverse direction from customer through all the above supply chain links to the beginning of supply chain.

- Logistics is the primary conduit of product and services through the supply chain arrangement.
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Each firm in the supply chain is involved in some aspect of over all logistics and add cost to the supply chain.

- The end to end cost of supply chain is called Supply Chain Cost.
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The difference between sales revenue and the supply chain coast is the Supply Chain Surplus Achieving logistical integration, high efficiency and reduction in supply chain cost is the essence of Supply Chain(SC) Management. Supply chain is also called value chain because value is added to the goods at each case as it progresses through supply chain. As far as a firm is concerned, the SC has two components

Supply component: it begins with the start of SC to the end of internal operations of the firm, when the product is packed and ready for dispatch. Delivery component: it starts with dispatch from the firm till it reaches the customer.

- Length of supply chain depends on the type and size of business. - Supply chain follow Responsive Business Model or Pull Process (refer diagrams) Difference between PDM to SCM PDM - Physical Distribution Management S No PDM 1 Centuries old style 2 3 Product centric system SCM Modern management style Customer centric system

Product, information and funds flow Product, information and funds flow confined to between two elements through the entire supply chain from only, mostly on the delivery side raw material to the customer Eg. between producer & distributor, between retailer & customer etc It is based in Anticipatory Business It is a Responsive Business Model Model based on market forecast. responding to customer needs It follow Push Process, make a product and push it to the market to sell. Raw materials and parts supply have no linkage to customer orders There is no bull whip effect, increasing inventory build up from retailer to raw material supplier High levels of inventory, high cost of operations, high product obsolescence and poor in meeting changing customer needs. Product and services pricing is transactional pricing, between two elements, to maximize ones It works on Pull Process, production, especially final assembly, responding to specific the customer orders. All supplies for production are linked backward to specific customer orders There is no Bull whip effect. There is no inventory built up at any element in supply chain Optimum inventory, lower cost of operations, low product obsolescence and quick response to customer needs. Collaborative Pricing across all elements of supply chain including customer, to share the benefits

4 5

6 7

gain 10 Low in competitiveness Physical Distribution Management Model

Product, information and fund flow Producer Distributor

mutually. High in competitiveness

Distributor

Retailer

Retailer

Customer

SCM Model
Funds & Information flow through the entire supply chain Goods & information flow

Raw Material

Supplier Warehouse

Manufacturer

Warehouse

Disti- Customer butor

Need for SCM 1. Need to further reduce operational cost - Over the last century, companies have done much to reduce their operations cost with in the organization through BPR. ERP, TQM,TPM, lean manufacturing, JIT etc.
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But there is still scope for improvement and cost reduction in the areas of supply side, delivery side and logistics of the company.

2. Increased outsourcing requirements Out sourcing activities of companies are on the increase. This also increases the cost associated with procurement, distribution and logistics, offering scope for substantial efficiency improvement and coordination beyond its production activities. 3. Increasing transportation cost Transportation cost account to 5 to 30% of the operating expenses of the company. It needs focus to reduce cost Functions/Role/ Importance/Objectives of SCM Achieve strategic advantage Achieve Cost control/ reduction Enhance Outsourcing capability Achieve globalization for market and supplies Better inventory management Effective use of supply and logistic resources Reduced lead time by design collaboration Achieve on time delivery Facilitate e-commerce

1. 2. 3.
4.

5. 6. 7. 8. 9.

1. Achieve strategic advantage - Gives competitive edge to the firm by ensuring smooth and systematic flow of goods, information and funds. Underperformance of one link in the supply chain can destroy strategic advantage of all in the supply chain. - Achieve capability to reduce product development time and offer more new products to the customers. - SCM support ERP which integrate other functional areas for performance improvement.
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It supports TQM to meet the quality and delivery needs of the customer as well as supplies for production.

- Support CRM which meet customer expectation and bring customer satisfaction and delight.

- Support e-commerce for buying and selling, increasing strategic competence further. 2. Achieve Cost control/reduction - reduce over all cost of business by optimizing transportation and logistics cost. - Identify sources of waste and avoid them in the whole supply chain. - Ensure quality during warehousing, transportation and handling logistics. 3. Enhances outsourcing capability - out sourcing generally reduces the cost of operation of a company. - An efficient and cost effective SCM system will enable the firm to reap the benefits of outsourcing. 4. Achieve Globalization - helps to operate across world market. - helps to make the product available in existing and new markets at competitive price. - Properly designed and executed SC make global out sourcing possible. - SCM helps to meet global competition successfully. 5. Better Inventory management - eliminate the necessity to stock the items in large quantities. - Ensure availability of goods in right quantity at right price with right quality at the right time. - Systematic inventory management like JIT, ERP etc can be implemented. - Prevent Bull whip effect of inventories in the entire SC. The phenomenon of progressively larger inventories at different stages of supply chain from customer to backwards is called Bull whip effect. Bull whip effect increases the SC cost.

Supplier

Producer

Distributor

Retailer Customer

Bull whip effect on Inventory levels

6. Effective use of supply and logistic resources - few dedicated suppliers - dedicated transportation and logistics. - participation of suppliers in quality improvement, design improvement, value engineering and new product development through Design Collaboration
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Competitive, participative and collaborative pricing with suppliers and logistics providers by sharing benefits mutually.

7. Reduced lead time by design collaboration - lead time for product improvement is less - new product development time is shorter. 8. Achieve on time delivery - ensure prompt delivery of product and services to customers on time. 9. Facilitate e-commerce Introduction of e-commerce and e-business gives an entirely new dimension to buying and selling using internet which enhances operational efficiency and customer satisfaction. Wal-Mart case analysis Wal- Mart planned, designed and invested heavily in transportation and information infrastructure to facilitate effective flow of goods and information. It designed supply chain with clusters of stores around distribution centers. It facilitates more frequent replenishment (instead of occasional replacement) to match the demand and supply more effectively. Sharing information and collaborating with suppliers brought down cost and improved productivity considerably. Net income rose tp $ 9 bil in 2004 with CAGR of 26 % Wal- Mart became the largest chain of stores in a short time Process View of Supply Chain - SC is a sequence of processes and flows between supply chain stages and with in each stage to fulfill customer needs - These processes and flows can be viewed in 2 different ways o Cycle view of supply chain o Push/Pull view of supply chain

Cycle View of Supply Chain

Customer 1. Customer Order cycle Retailer 2.Replenishment Order cycle 3.Manufacturer Cycle 4. Procurement Cycle Supplier Distributor Manufacturer

1. Customer order cycle - customer arrive - interact with retailer - place order - receive goods - pay money funds flow from customer to retailer 2. Replenishment cycle - Retail trigger (based on inventory policy) - Retail order placement - Retail receive goods - Funds flow from retailer to distributor - Distributor trigger - Distributor order placement - Distributor receive goods - Funds flow from distributor to manufacturer 3. Manufacture cycle - order arrival from distributor - production plan and schedule - manufacturing - transportation - receive goods by distributor - funds flow from distributor to manufacturer - materials/parts order trigger - materials/parts order placement 4. Supplier cycle - order arrival as per manufacturers production schedule - supplier production schedule - part manufacturing - transportation - receive materials/part by manufacturer

Push/Pull view of supply chain - All processes in a SC belong to one of the two categories depending upon the timing of execution (order processing) relative to Customer Order Arrive Push Process
1. Customer Order cycle Pull Process Customer order arrives 2. Replenishment Cycle 3. Manufacturing Cycle 4. Procurement Cycle Push Process

- In push process the execution is initiated in anticipation of the customer order. - Production is based on forecast and not on actual orders. - It is a speculative process. - It is an Anticipatory Business Model - Procurement cycle, Manufacturing Cycle and Replenishment cycle happen even before a customer places order. - The products are produced and await customer - Inventory is high Application - Used for products which generally do not change specifications and features rapidly - E.g. steel, cement, fertilizer etc Anticipatory Business Model Push Process is an Anticipatory Business Model as represented below

Deliver

Sell

Warehouse/ Distributor/ Retailer

Manufacture Buy materials and parts Forecast

Pull Process
1. Customer Order cycle 2. Replenishment Cycle 3. Manufacturing Cycle 4. Procurement Cycle

Pull Process

Customer order arrives Push Process

In pull process, the execution, especially the final assembly, starts after receipt of the order from customer. Procurement of certain raw materials and some manufacturing activities that are common in nature are done in Push Process, Final assembly is postponed till the customer order is received (eg. Dell PCs) The customer requirement is clearly known. It is called reactive process, because it react to customer order. It is fine tuned to each customer. Customer needs can be fully met in terms of features, delivery, price and quality, Require high degree of supply chain efficiency and information flow. Often constraint by capacity constraints when the demand is high. It is a Responsive Business Model. Pull process operate in an environment where the customer needs are changing and not clearly known. eg. Durable and electronics goods.

Responsive Business Model Pull Process is a Responsive Business Model as represented below

Deliver

Ware house Distributor Retailer

Manufacture/Assembly

Sell

Dell Experience. In a short period of time Dell became one of the top PC sellers with a sales of $41 bil and net profit of $ 2.6 bil by managing flow of product, information and funds through supply chain very effectively. - Dell bypassed distributors in US and sold directly to customers.
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Through internet or phone, Dell steered customers to different PC configurations that can be built with the available inventory, giving customers a much wider choice.

- They adopted Responsive business model. They centralized manufacturing and inventories in few locations. The final assembly is postponed till the receipt of customer order. - Dell was offering a vide variety of PCs of latest configuration with an inventory of only 5 days.
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Direct customer contact made it possible to know customer needs better.

- When Intel introduces new chip at a much lesser price, Dell was able to offer it to customers much faster than competitors because of low inventory holding, some times passing on the lower price to the customers.
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For some parts like monitors (say Sony), Dell did not have any inventory. The delivery transporter was instructed to pick up the monitor from Sony warehouse and bundle it with the PC Delivery (cross docking).

- Through supply chain information system, suppliers has access daily to Dell production plans and their component stock level in the inventory, enabling them to meet Dells order immediately. - It also eliminated possibility of defective part entering into large number of PCs sold. Integrated Logistics Management - Logistics is the activity of moving and positioning inventories through out the supply chain - Logistics is the primary conduit of products and services with in the supply chain. - Logistics is a sub-sect of supply chain which provides scope for performance improvement. - Logistics create value by timely positioning of inventories.
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Logistics is a combination of companys order management, inventory, transportation, warehousing, material handling and packaging through out the companys net work of supply chains.

- Integrated Logistic Management is real time integration of all logistical processes namely warehousing, transportation, inventory control, order processing and logistic facilities using IT backbone, which in turn is connected to the Operational/marketing/financial processes.

Facility network

Warehousing Material handling Packaging

Integrated Logistic Management

Order Processing

Transportation

Inventory

Manufacturing & Distribution Practices in Global Economy and SCM Strategies Expanding global economy provide several opportunities to companies to go international. 3 stages of global development are there for any organization to go international. 1. Export / Import 2. International operations 3. Globalization 1. Export Import - Firms focus mainly on domestic market. - Exports are for generation of additional income - Exports are undertaken for using surplus capacity if any by marginal costing method to increase net profit. - Import of materials are made for cost advantage if the domestic costs are higher. SCM Strategy: The supply chain operate through agents and 3rd party logistic service providers. Eg. - Firms have marketing agents in different countries. - Goods are transported by general cargo movers/ shippers etc 2. International Operations - It is a combination of local production, distribution, logistics, and markets. - Focus on specific market area in a linked global region across few national boundaries. E.g. India & South Asia market SCM strategy: Operate through fully owned subsidiaries, local distributors of specific business characteristics and logistics services. Eg. Hyundai Motors India Ltd 3. Globalization - Globalization is by Global Business Enterprises or Stateless Enterprises. - Have global brands - Maintain several regional operations. - Products are manufactured for the world with some customization suitable for the region. - No parent country dominates the corporate policies.

Senior management consists of persons of different nationalities.

- They use global resources and logistics. SCM Strategy for Globalization: - world wide flow of key resources including funds and personnel. - Global sourcing - Global marketing - Centralized planning with local flexibility for production, distribution and marketing. International Supply Chain Management Features
1. Globalization makes companies operate much beyond local and domestic

2. 3.
4.

5. 6. 7. 8.

market for selling their products and services globally. Product design itself incorporate parts available globally at competitive rates. Production inputs are sourced globally where cost of production is lower Some global companies shift their manufacturing base itself to low cost countries and sell products in global markets Logistic support for transportation, warehousing, order handling, sorting etc are carried out by global 3PL and 4PL operators. Part of product design itself is outsourced globally from specialized design firms. Back office work, call centers, servicing activities etc are outsourced globally to remain competitive. Companies enter into several regional and local alliances to operate in global market.

All these features of global operation present several challenges in managing international supply chain. Challenges in International SCM
1. 2. 3. 4. 5.

Long performance cycle time Multi mode/ multi owner/ global transportation Operational challenges across several countries Information system integration Necessity for multi alliances across the globe

1. Long performance cycle time - Domestic operations

1 to 5 days for transit and 2 to 10 days total cycle time - Global operations Cycle time few weeks to few months Automotive parts 60 days Fashion garments 30 to 60 days Reasons for long performance cycle time i) Communication delays language difference, different time zones in several elements supply chain causing undue delay in clear communication ii) Financing delays need for Letter of Credit, foreign currency regulations etc in different countries iii) Special packing requirements to prevent damage due to different modes of transport, handling, high humidity, temperature and weather conditions of transit route iv) Ocean freight scheduling delay- containerized goods have to be scheduled through ports having adequate container handling facilities. High density shipping routes may cause port and transit delays v) Customs clearance delays caused by different export/import customs inspection procedures, documentation requirements, regulations and controls in different countries in the supply chain 2. Challenges from Global Transportation Factors affecting global SCM are 1. multimode multi owner carrier operation in one supply chain
2. problems associated with joint pricing, scheduling and information sharing. 3. Government restrictions and control over foreign owned carriers for inland

transportation in different countries

4. Artificial high pricing and low operational efficiency of local carriers and

transporting contractors 3. Operational challenges Thrust areas on operational side of global SCM are 1. Language accommodation Separate instruction plates on the products, key boards, operations and service manuals, separate inventories for different languages 2. National accommodation Performance characteristics, safety requirements, power supply, environmental considerations, domestic standards, product liability etc.

3. Diverse Documentation

Substantial documentation in different formats and different languages are required for global SC operations.
4. Counter trade requirements from customer countries

Government requirements compelling firms to buy products from the country of sale for an equivalent value of local sale.
5. Higher risks to IPR and Patents

Higher risk to IPR and patents of the firm when parts, supplies and services are globally out sourced 4. Challenges to Information system integration Factors to be managed are 1. System compatibility across several suppliers, customers, institutions and countries.
2. It require ERP capable of global transaction 3. International supply chain require global planning system to optimize

manufacturing, delivery and asset utilization at the same time meet customer requirements. 5. Challenges in establishing reliable Alliances Global SCM should establish and manage 1. alliances with local retailers, wholesalers, manufacturers, suppliers and service providers
2. alliances provide market access and information which otherwise may take

more time and expensive

3. Wrong alliances will be counter productive and end up as a liability

6. Supply chain security i) threat from terrorist, high seas pirates, organized theft from containers in transit route etc. ii) information and funds flow security theft of information and funds during global transfer

Supply Chain Strategies Objectives of Supply Chain strategies

1. It should be aimed at maximizing value creation to all participants in the

supply chain including the customers. 2. They should be formulated to meet the customer and market needs. 3. The strategies shall be integrated with technology to generate highest level of customer satisfaction. 4. The value creation should be sustained for all the participants.

Demand flow Strategy

Collaboration Strategy

Supply chain Strategy Framework

Customer Service Strategy

Technology Integration Strategy

Supply Chain Strategies are 1. Collaborative Strategy 2. Demand Flow Strategy 3. Customer Service Strategy 4. Technology Integration Strategy 1. Collaborative Strategy The essence of SCM is collaboration among all participants for mutually shared benefits with focus on customer satisfaction a) Manufacturer Supplier Collaboration By collaborating with suppliers, manufacturer will benefit from activities like product development, on time order fulfillment with lowest inventory, reduced costs and efficient capacity planning
b) Manufacturer Customer Collaboration

Collaboration between manufacturer and customers are focused on demand planning and inventory replenishments to ensure that customer requirements are met most efficiently at lowest cost. c) Manufacturer 3PL/4PL Collaboration

Collaboration with 3PL/4PL service providers make it possible for the manufacturer for global sourcing and global marketing of products made in company manufacturing facilities located in different geographical locations, in a very efficient and cost effective manner. 2. Demand Flow Strategy Customer/ end user demand is ever changing. Key strategy in demand management is continuous flow of demand information from customers/end users through distributors, manufacturer to part/raw material suppliers making every link in supply chain respond to changing customer demand quickly and at lowest cost. 3. Customer Service Strategy To a certain degree, customer satisfaction is directly proportional to the quality of service provided by the company. Customer service strategy is involves addressing 3 steps a) Customer Segmentation Correct segmentation and identification of customer requirements based on data analysis is a focus area in strategy formulation. b) Cost to Serve Understanding of the cost of services to different customers and the kind of support needed from suppliers or other parties in supply chain is essential to determine cost of support system to the company.
c) Revenue management

Determine the customer expectations of the service response time in each customer segment. Optimize the response time to maximize firms profitability and revenue. 4. Technology Integration Strategy Development of IT enabled integration of business information system, both horizontally and vertically. A number of IT based supply chain information management tools are now available which provide intelligent decision support system. The Supply Chain elements and areas getting IT enabled integrated management are Customer Analysis Demand and lead time analysis Manufacturing management Materials management Supplier Partnering Transportation Inventory management & control at each element Cost benefit analysis