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Basics of Supply Chain and Operations Management
Chapter · January 2017
DOI: 10.1007/978-3-319-24217-0_1
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Jörn Schönberger
Hochschule für Wirtschaft und Recht Berlin
Technische Universität Dresden
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Chapter 1 Basics of Supply Chain and
Operations Management
Learning objectives for this Chapter:
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What is transformation process and value creation?
What is operations and operations management?
What is supply chain and supply chain management?
Which decisions are in the scope of supply chain and operations management?
Which objectives are used to measure performance of supply chain and operations management?
 Which qualifications should obtain a future supply chain and operations manager?
 Which career paths are possible for supply chain and operations managers?
1.1 Introductory case study: The Magic Supply Chain and the
Best Operations Manager
Santa Claus is one of the best supply chain (SC) and operations managers in the world. He achieves incredible performance: he always delivers the right products, at the right place
and at the right time. And this is despite highly uncertain demand and a very complex SC with more than two billion customers.
His strategy and organization is customer-centred and strives to provide maximal
children satisfaction. The organization of the operations and supply chain management is structured as follows. The customer department is responsible for processing all the letters from children from all over the world. This demand data is
then given to the supply department. The supply department is responsible for
buying the desired items from suppliers worldwide. The core of the supply department is the global purchasing team which is responsible for coordinating all
the global purchasing activities.
Since many of the children’s wishes are country-specific, the regional purchasing
departments (so-called lead buyers) are distributed worldwide and build optimal
SC design. In some cases, the desired items are so specific that no supplier can be
found. For such cases, Santa Claus has established some production facilities and
located them globally to minimize total transportation costs and to ensure on-time
delivery of all the gifts for Christmas.
The customer department regularly analyses children's' wishes. It was noticed that
there are lots of items which are asked for each year. In order to reduce purchasing
fixed costs and use scale effects, Santa Claus organized a network of warehouses
worldwide. Standard items are purchased in large batches and stored. If the actual
demand in the current year is lower than forecasted demand, this is not a problem
– these items can be used again in the following year. Since there are millions of
different items in each warehouse, Santa Claus created optimal layouts and pickup processes in order to find the necessary items quickly and efficiently.
The SC and operations planning happens as follows. In January, Santa Claus and
the customer department start to analyse the previous year’s demand. During the
first six months of the year, they create a projection of future demand. The basis
for such a forecast is statistical analysis of the past and identification of future
trends (e.g., new books, films, toys, etc.). After that, the supply department replenishes the items and distributes them to different warehouses. The production department schedules the manufacturing processes. From October, the first letters
from children start to arrive. The busy period begins. From October to December,
Santa Claus needs lots of assistants and enlarges the workforce.
The operations and supply chain execution is now responsible for bringing all the
desired items to children. It comprises many activities: transportation, purchasing
and manufacturing. Children are waiting impatiently to start the incoming goods
inspection. No wrong pick-ups and bundles are admissible and no shortage is allowed. More and more, children’s wishes are not about items but rather about
some events which they want to happen (e.g., holidays, etc.). Service operations
are also in the competence of Santa Claus. In addition, Santa Claus has established
the most sustainable SC in the world based on transportation by sledges. Sometimes, the letters with very unusual wishes come in the very last moment but Santa
Claus’s SC is prepared for the unpredictable – lastly it is a magic SC.
1.2 Basic definitions and decisions
1.2.1 Transformation process, value creation and operations
function
One of the basic elements in management is the creation of added value. Operations is a function or system that transforms inputs (e.g., materials and labour) into
outputs of greater value (e.g., products or services); in other words, the operations
function is responsible to match demand and supply (see Fig. 1.1):
Transformation process
Input
Value adding
Output
• Labour
• Machines
• Materials
• Information
Transformation
process
• Products
• Services
• Emissions
Control
Feedback
Fig. 1.1. Input-output view of operations function
The transformation process is the traditional way to think about operations management in terms of planning activities. In practice, SC and operations managers
spend at least a half of their working time to handle different uncertainties and
risks. That is why control function becomes more and more important to establish
feedbacks between planned and real processes.
2
The operations function along with marketing and finance is a part of any organization (see Fig. 1.2).
Organization
Marketing
Operations
Finance
Operations management is involved
with managing the resources to produce and deliver products and services efficiently and effectively.
Fig. 1.2. Role of operations in organization
Operations management deals with the design and management of products, processes, and services, and comprises the stages of sourcing, production, distribution
and after sales.
COSTS
QUALITY
TIME
Measurement of operations and SC performance is typically related to the objective triangle “costs-timequality” (see Fig. 1.3):
Fig. 1.3. Objective triangle of operations and supply chain performance
The importance of these objectives is dynamic, i.e., it changes in time since operations management has a long history. Over the last 60 years, a transition from the
producers’ market to the customers’ markets has occurred. This transition began in
the 1960s with an increasing role of marketing in the conditions of mass production of similar products to an anonymous market. This period is known as the
economy of scale. After filling the markets with products, the quality problems
came to the forefront. In the 1970s, total quality management (TQM) was established.
The increased quality caused the individualization of customers’ requirements in
the 1980s. This was the launching point for the establishment of the economy of
the customer. This period is characterized by efforts for optimal inventory management and a reduction in production cycles.
In the 1980–1990s, handling a high product variety challenged operations management. Another trend was the so-called speed effect. The speed of reaction to
market changes and cutting time-to-market became even more important. Consequently, the optimization of internal processes simultaneously with external links
to suppliers was rooted in the concepts of lean production and just-in-time (JIT).
Throughout the 1990s, companies concentrated on development approaches to
core competencies, outsourcing, innovations and collaboration. These trends were
caused by globalization, advancements in IT and integration processes into the
world economy. Particularly in the 1990s, the paradigm of supply chain management (SCM) was established that shapes developments in supply chain and operations management (SCOM) in the 21st century.
In 2010-2015, such trends like risk management, SC resilience and flexibility, intelligent information technologies, e-operations, leanness and agility, the servitization of manufacturing, outsourcing and globalization, smart manufacturing and
Industry 4.0 shape the SCOM landscape in practice and research.
1.2.2 Supply Chain Management
A supply chain (SC) is a network of organizations and processes wherein a number
of various enterprises (suppliers, manufacturers, distributors and retailers) collaborate (cooperate and coordinate) along the entire value chain to acquire raw materials, to convert these raw materials into specified final products, and to deliver
these final products to customers (see Fig. 1.4).
Supply chain management (SCM) is a cross-department and cross-enterprise integration and coordination of material, information and financial flows to transform
and use the supply chain resources in the most rational way along the entire value
chain, from raw material suppliers to customers. SCM is one of the key components of any organization and is responsible for balancing demand and supply
along the entire value-adding chain (see Fig. 1.5).
SCM integrates production and logistics processes. In practice, the production, logistics and SCM problems interact with each other and are tightly interlinked. Only two decades have passed since enterprise management and organizational structure have been considered from the functional perspective: marketing, research
and development, procurement, warehousing, manufacturing, sales, and finance.
The development of SCM was driven in the 1990s by three main trends: customer
orientation, markets globalization and establishing an information society. These
trends caused changes in enterprise competitive strategies and required new adequate value chain management concepts.
Fig. 1.4. Supply chain
Fig. 1.5. Functions of logistics, production, and SCM in a value chain (from Ivanov and
Sokolov, 2010).
The first use of the term “SCM” is commonly related to the article “SCM: Logistics Catches up with Strategy” by Oliver and Weber (1982). They set out to examine material flows from raw material suppliers through SC to end consumers within an integrated framework that has been named SCM. The origins of SCM can be
seen in early works on postponement, system dynamics and the bullwhip effect
(Forrester 1961), cooperation (Bowersox 1969), multi-echelon inventory management (Geoffrion and Graves 1974), JIT, and lean production.
SCM, as the term implies, is primarily directed to the inter-organizational level.
Another successful application of SCM depends to a very large extent on the intraorganizational changes. Even the collaborative processes with an extended information systems application are managed by people who work in different departments: marketing, procurement, sales, production, etc. The interests of these departments are usually in conflict with each other. Hence, not only outbound
synchronizations but also internal organizational synchronization are encompassed
by SC organization.
1.2.3 Decisions in Supply Chain and Operations Management
The main management task is to make decisions. Chocolate SC can be used as an
illustrative example to depict basic decisions in SC and operations management
(SCOM). What happens between the cocoa pods harvest and placing chocolate on
the shelves in a supermarket? A complex SC should be built between raw material
suppliers and end customers (see Fig. 1.6). To produce chocolate, cocoa pods are
first harvested from cocoa trees, e.g. in Côte D'ivoire. Cocoa pods are then moved
by donkeys to a processing station where they are packed into special carrier bags
to avoid damages during transportation by container ship.
At harbor, the bags are packed into special containers and moved to a container
ship that will bring them, e.g., to Hamburg (see Fig. 1.7).
Fig. 1.6. Chocolate supply chain
Simultaneously, from harbors in Guatemala and Madagascar container ships with
vanilla starts. Along with sugar and milk powder, vanilla belongs to the components needed for chocolate production. Sugar and milk powder are typically
sourced locally to avoid long transportation ways. Simultaneously, from harbors in
Guatemala and Madagascar container ships with vanilla starts.
After unloading at Hamburg harbor, where
up to 200,000 tons of cocoa pods are
transshipped each year, the transportation is continued by trucks.
Fig. 1.7. Global view of the chocolate supply chain
First, cocoa pods are delivered to preliminary processing plant to produce cocoa
butter and cocoa mass which are then moved in trucks by road to chocolate manufacturers. After getting all the components, multi-stage manufacturing process
can be started, the final result of which is chocolate. Chocolate is then packed and
delivered in large batches at pallets to distribution centers from which small
batches are finally delivered to supermarket.
It can be observed from the chocolate SC as well as from
the introductory example of the Santa Claus’s SC that
the responsibilities of SCOM managers can be divided
into sourcing, production, distribution, transportation and
SCM (see Fig. 1.8).
Fig. 1.8. House of SCOM
The responsibilities of SCOM managers are really multi-faceted (see Fig. 1.9).
The decision-making area in SCOM ranges from strategic to tactical and operative
levels. Strategic issues include, for example, determination of the size and location
of manufacturing plants or distribution centres, decisions on the structure of service networks, factory planning, and designing the SC. Tactical issues include
such decisions as production or transportation planning as well as inventory planning. Operative issues involves with production scheduling and control, inventory
control, quality control and inspection, vehicle routing, traffic and materials handling, and equipment maintenance policies.
Fig. 1.9. Decision matrix in supply chain and operations management
This description holds true for many different organizations like global brand
manufacturer such as Apple or Toyota, major retailers such as Tesco or Wal-Mart,
nonprofit organizations such as International Red Cross, local petrol stations or
hospitals. Purchasing, assembly, shipping, stocking and even communicating are
just a few examples of the many different actions unfolding within these organizations, united by a single purpose: to create value for a customer.
1.3 Careers and future challenges in supply chain and
operations management
SCOM is everywhere! SCOM specialists should obtain different qualifications
since SCOM is multi-disciplinary in its nature (see Fig. 1.10). There are many
skills and attributes which are important for SC and operations managers to succeed in the operations environment. Those are:
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systems and engineering knowledge
leadership an d strong communication skills
general multidisciplinary business knowledge
strong analytical problem solving abilities and quantitative skills
negotiation and presentation skills
Business
Administration
Quantitative
Methods
SCOM
Management
Information
Systems
Engineering
Fig. 1.10. Multi-disciplinary view of supply chain and operations management
To become an SC or operations manager, it is important to be able to communicate well with people from all departments. There is a strong relationship between
the SCOM function and other core and support functions of the organization, such
as accounting and finance, product development, human resources, information
systems and marketing functions. Another important skill is time management.
Some of the job responsibilities common to SCOM are as follows:
 coordinating business processes concerned with the production, pricing, sales
and distribution of products and services
 managing workforce, preparing schedules and assigning specific duties;
 reviewing performance data to measure productivity and other performance indicators
 coordinating activities directly related to making products / providing services
 planning goods and services to be sold based on forecasts of customer demand;
 managing the movement of goods into and out of production facilities
 locating, selecting, and procuring merchandise for resale, representing management in purchase negotiations
 managing inventory and collaborating with suppliers
 planning warehouse and store layouts and designing production processes
 process selection: design and implement the transformation processes that best
meet the needs of the customers and firms
 demand forecasting and capacity planning
 logistics: managing the movement of goods throughout the SC
 risk manager: pro-active SC design, risk monitoring, and real-time coordination
in the case of disruptions
SC and operations managers have strategic responsibility but also control many of
the everyday functions of a business or organization. They oversee and manage
goods used at the facility such as sales merchandise, inventory or production ma-
terials. SC and operations managers also authorize and approve vendors and contract services at different locations worldwide. Starting positions for SCOM typically comprise operative responsibilities in procurement or sales departments and
work as for example a consultant, customer service man-ager or a supply chain
analyst. With five–ten years of practical experience, such positions as purchasing
manager, transportation manager, international logistics manager, warehouse operations manager or SC software manager can be achieved. With ten or more years
of experience, vice president for SCOM is a realistic position.
SCOM positions may include jobs in production planning, inventory control, materials control, work scheduling, quality control, and operations analysis. There are
a wide variety of career options in the field of SCOM. Some key opportunity areas
are as follows:
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Operations manager
Business analyst
Production planner
Operations analyst
Materials manager
Quality control specialist
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Project manager
Purchasing manager
Industrial production manager
Facility coordinator
Logistics manager
Risk manager
Consider some of these and other possible careers in SCOM more detailed.
 Plant managers supervise and organize the daily operations of manufacturing
plants. For this position, expertise in activities such as production planning,
purchasing and inventory management is needed.
 Quality managers aim to ensure that the product or service an organization
provides is fit for purpose, is consistent and meets both external and internal
requirements. This includes legal compliance and customer expectations. A
quality manager, sometimes called a quality assurance manager, coordinates
the activities required to meet quality standards. Use of statistical tools is required to monitor all aspects of services, timeliness and workload management.
 Process improvement consultants take over activities which include designing
and implementing such activities as lean production, six sigma and cycle time
reduction plans in both service and manufacturing processes.
 Analyst is a key member of the operations team supporting data management,
client reporting, trade processes, and problem resolution. They use analytical
and quantitative methods to understand, predict and improve SC processes.
 Production managers are involved with the planning, coordination and control
of manufacturing processes. They ensure that goods and services are produced
at the right cost and level of quality.
 Service manager plans and directs customer service teams to meet the needs of
customers and support company operations.
 Sourcing managers are involved with commercial and supplier aspects of
product development and sourcing projects. They conduct supplier analysis,
evaluate potential suppliers, and manage the overall supplier qualification pro-
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cess, develop and create sourcing plans, request for proposals and other sourcing documents, evaluate and recommend purchasing and sourcing decisions.
International logistics manager works closely with manufacturing, marketing
and purchasing to create efficient and effective global supply chains.
Transportation manager is responsible for the execution, direction and coordination of transportation. They ensure timely and cost effective transportation of
all incoming and outgoing shipments.
Warehouse manager is responsible for managing inventory, avoiding stockouts and ensuring material replenishment at minimal costs.
Risk manager analyses possible risks, develops pro-active operations and SC
design, monitors risks and coordinates activities for stabilization and recovery
in the case of disruptions.
Since all organizations have an operations function there are many sectors which
would need SCOM. Those sectors include but are not limited to:
 Manufacturing companies
 Airlines and airports
 Retail establishments
 Entertainment parks
 Logistics
 Building and construction companies
 Hospitals
 Public transportation companies
 Banks and insurance companies
 Government agencies
 Restaurants
 Research corporations.
SC and operations managers work in an exciting and dynamic environment. This
environment is the result of a variety of challenging forces, from globalization of
world trade to the transfer of ideas, products and money via the internet. Some of
the challenges are as follows:
 globalization and collaboration with suppliers and customers worldwide
 issues of flexibility and resilience
 shorter product lifecycles and fast changing technology, materials and processes (e.g., additive manufacturing, internet of things, and Industry 4.0)
 sustainability and mass customization
 higher requirements on multidisciplinary knowledge and competencies.
A career in SCOM has many opportunities. The job itself is also diverse, due to
the varied tasks completed by SC and operations managers. Another advantage is
the high income expected, especially for experienced SC and operations managers.
On the other hand, there may be long working hours and a stressful job. Operations and SC managers generally have to work in a changing environment so they
have to be flexible. As can be seen in the real job offers, flexible managers with
the willingness to travel a lot are always in demand.
Example: Jeff Williams is Apple’s Senior Vice-President of Operations
Jeff leads a team of people around the world responsible for end-to-end supply
chain management and dedicated to ensuring that Apple products meet the highest
standards of quality. Jeff joined Apple in 1998 as head of worldwide procurement
and in 2004 he was named vice-president of operations. In 2007, Jeff played a significant role in Apple’s entry into the mobile phone market with the launch of the
iPhone, and he has led worldwide operations for iPod and iPhone since that time.
Prior to Apple, Jeff worked for the IBM Corporation from 1985 to 1998 in operations and engineering roles. He holds a bachelor’s degree in Mechanical Engineering from North Carolina State University and an MBA from Duke University.
Source: https://www.apple.com/pr/bios/jeff-williams.html
1.4 Key points
Operations is a function or system that transforms inputs into outputs of greater
value. Operations management is involved with managing the resources in order
to produce and deliver products and services. It comprises the stages of sourcing,
production, distribution and after sales. A supply chain is a network of organizations and processes along the entire value chain. SCM is a collaborative philosophy and a set of methods and tools to integrate and coordinate local logistics processes and their links with the production processes from the perspective of the
entire value chain and its total performance.
SCOM is everywhere: in production, logistics, healthcare, airlines, entertainment
parks, passenger transport, hotels, building and construction, etc. Key objectives
of SCOM are costs, time, quality, and resilience. Career is SCOM is really multifacet and requires multi-disciplinary knowledge that comprises the elements from
business administration, optimization, engineering, and information systems. As
examples of logistics problems, warehouse management, transportation optimization, procurement quantity optimization, inventory management, cross-docking
design, inter-modal terminals design, etc. can be named. Accordingly, production
management deals with optimizations in assembly lines, production cells, etc. As
examples of SCM problems, supply chain design, demand planning, and supply
coordination can be named.
1.5 Further reading
Bowersox DJ (1969) Physical Distribution Development, Current Status, and Potential. J Marketing 33:63–70
Bowersox DJ, Closs DJ, Copper MB (2012) Supply Chain Logistics Management. 4 th edn.
McGraw-Hill, Boston et al.
Chopra S, Meindl P (2012) Supply Chain Management. Strategy, Planning and Operation. 5 th
edn. Pearson, Harlow
Christopher M (2011) Logistics and Supply Chain Management. Creating Value-Adding Networks. 4th edn. FT Press, New Jersey
Dolgui A, Proth J-M (2010) Supply Chain Engineering: Useful Methods and Techniques.
Springer, Berlin
Forrester JW (1961) Industrial dynamics. MIT Press, Cambridge
Francis M, Fisher R, Thomas A, Rowland H (2014) The meaning of ‘value’ in purchasing, logistics and operations management. Int J Prod Res 52(22):6576-6589
Geoffrion AM, Graves GW (1974) Multicommodity Distribution System Design by Benders Decomposition. Manage Sci 29(5):822–844
Greasly A (2013) Operations Management. 3rd edn. Wiley, New York
Heizer J, Render B (2013) Operations Management: Sustainability and Supply Chain Management. 11th edn. Pearson, Harlow
http://careersinsupplychain.org
http://www.apics.org
Ivanov D, Sokolov B (2010) Adaptive Supply Chain Management. Springer, London
Oliver RK, Webber MD (1992) Supply Chain Management: Logistics catches up with strategy.
In: Christopher M (ed) Logistics: the strategic issues, Chapman & Hall, London.
Simchi-Levi D, Kaminsky P, Simchi-Levi E (2007) Designing and Managing the Supply Chain:
Concepts, Strategies and Case Studies. 3rd edn. McGraw-Hill, Boston et al.
Slack N, Brandon-Jones A, Johnston R (2013) Operations Management. 7th edn. Pearson, Harlow
Stadtler H, Kilger C (2008) Supply Chain Management and Advanced Planning. 4 th edn. Springer, Berlin et al.
Trends in Modern Operations Management: Special Issue (2014). Int J Oper Prod Man 33(11/12)
See additional materials and video in the E-Supplement to
this book to understand basic decisions in SCOM better!
A
added value, 2
C
control, 3
E
economy of scale, 3
enterprise management, 6
I
information society, 6
J
just-in-time, 4
L
lean production, 4
View publication stats
M
mass production, 3
O
Operations, 1, 2, 3, 6, 10, 11, 12, 13
Operations management, 3
P
performance, 3
planning, 3
S
Service operations, 2
supply chain, 4
supply chain management, 4,6
T
total quality management, 3
transformation process, 3