Operations and Supply Chain
Management: Introduction
CHAPTER
1/ Operations and Supply Chain Management
Operations and Supply Chain management is related to industrial, distribution and service companies. The
field covers a wide range of strategic, tactical and operational issues and decisions:
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product and manufacturing process design,
management of human and material resources,
management of physical flows (from the supply of raw materials and manufacturing process
monitoring to making the finished products available to customers), inventory and transport,
purchasing policy for raw materials, components, sub-assemblies and services,
quality policy,
integration of environmental constraints associated with a sustainable development strategy,
…
Operations management involves designing and managing the technical operations that convert raw
materials into finished products. It ensures that operations are efficient in terms of using as few resources
as possible while still meeting customer requirements. Supply Chain management is defined as the
management of coordination of the sequence of supply, production and distribution steps, from suppliers
to end customers. It is the overall issue facing all stakeholders involved: how can all the steps be
coordinated in such a way as to provide the end customer with the requested product while ensuring
maximum overall efficiency? Supply Chain management is therefore an activity that manages the
interfaces between the various stakeholders: traditionally, internal operations were managed by
dedicated and experienced departments, yet none of the departments were in charge of optimizing the
interdepartmental or inter-company interfaces involved in the flow of products. The development of this
new activity has brought about organizational changes in companies, allowing them to deploy
coordination mechanisms that did not previously exist.
Supply Chain activity must simultaneously handle conflicting objectives: it must ensure the quality of
services provided to customers, improve financial ratios by limiting working capital requirements, reduce
costs, account for environmental constraints, etc.
Furthermore, significant interactions of Operations and Supply Chain with the other main corporate
functions require decision-making and tradeoffs that impact upon the entire company:
 with Marketing: defining the product portfolio (and hence the range), determining the price level
(and hence the objective cost price), specifying delivery times and distribution delivery methods,
 with Finance: defining the working capital requirements (and hence the resource and inventory
levels),
 with Management control: jointly defining the projected budgets, cost-tracking (procurement,
production, distribution) and performance indicators.
A company’s economic decision-making is often complex and multivariate in nature. A comprehensive
analysis is required to ensure effective choices and decisions. The managers of various corporate functions
Supply Chain Management: Introduction
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must not limit their thinking to the established culture1 of their own activity but must acquire a sufficient
understanding of the problems facing the other corporate functions.
Customer service
The primary mission involves the timeframe for providing customers with products. For example, an
unavailable product can lead to a loss in turnover, while a short delivery time provides a definite
competitive edge. Supply Chain must organize the flow of materials and components in a way that ensures
that the time between the order and product delivery is consistent with the promise made and is as short
as possible. Operations and Supply Chain management must also ensure the quality of the products (from
the factory to the point of consumption).
Improving financial indicators
Financial pressure on companies brings with it a need to reduce fixed assets, including inventory and
industrial resources, which are under the responsibility of Supply Chain. Tradeoffs will therefore be
required since inventory and industrial resource sizing directly affects the quality of customer service
(especially in terms of the timeframe for providing the requested products).
Numerous studies and analyses of the financial performance of large companies in a variety of sectors
have shown that competitiveness originates in part from companies’ decisions regarding operations,
which determine the following:
 the majority of the pollution and waste caused by the activity,
 overall production cost for the manufactured products,
 the quality of products delivered,
 the quality of customer service, particularly in terms of delivery times and the capacity to process
urgent orders or provide additional services related to the products,
 most of the working capital needed to finance inventory,
 capital tied up in property, plant and equipment, transportation and handling.
Cost reduction
Cost reduction is a major objective of the Supply Chain function. Cost reduction includes the following:
 purchasing costs for materials and components, which typically represent 50 to 80 percent of the
cost price,
 inventory holding and storage costs,
 production and transportation costs, which are reduced through efficient resource capacity
utilization and by limiting waste that does not add any value to activity.
Environmental constraints
Since processing and transportation activities have significant impacts on the environment, the supply
chain must be optimized in the following ways:
 through the design of products that plan for recycling options,
 by choosing suppliers who respect the environment and are located nearby to minimize
transportation,
 by using manufacturing operations that recover energy and heat and by treating effluent and
waste,
 through “cleaner” transportation solutions (boats, electric vehicles, etc.).
1 Each function involves constraints and key variables that are specific to the business line, forms of remuneration that depend
on specific factors, etc.
Notes from the course Operations and Supply Chain Management – Ch. van Delft - 10/09/19
Supply Chain Management: Introduction
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Supply Chain Management: simple, but not easy
Most of the concepts behind Supply Chain management are easy to understand. However, practically
implementing effective decision-making is a difficult task for numerous reasons:
 in general, each decision is associated with a tradeoff (between the pros and cons), which is
difficult because while certain items are easily quantifiable, others are primarily qualitative,
 the many tradeoffs represent complex and significant interactions,
 vast amounts of information and data are available, and yet they are incomplete and sometimes
even erroneous.
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Operations: a historical perspective
Operations and Supply Chain management has gone through various stages.
Scientific organization of operations
Following the emergence of mass production, industrial and logistics operations became repetitive.
Within this context, Taylorism proposed a scientific analysis of work and operations through timekeeping
and the pursuit of efficiency. 2 This approach led to a horizontal division of labor, which breaks any
complex task down into a succession of simple tasks, and a vertical division of labor that clearly separates
implementation tasks from management tasks. This model presents advantages (such as short training
periods, high productivity, a low level of required qualification), but also the major disadvantage of making
it difficult to ensure product quality and implement collaborative improvement processes.
Optimization of flows between operations for standardized products
To meet growing demand, Henry Ford invented the one-piece flow principle (still referred to as an
“assembly line”) to ensure fast production flows. The parts move continuously from station to station and
operators have the required materials and components available at their workstation. Henry Ford limited
his approach to manufacturing operations and only standardized products and operations that were fixed
over time.
Just-in-time manufacturing and overall flow optimization within a general framework
Designed by Taiichi Ohno, an engineer from Toyota, the just-in-time principle (now widely known as Lean
Management) generalized this idea of accelerating physical flows. This approach, which applies to all
flows, involves synchronizing all the physical flows as much as possible to limit the need for inventory and
reduce the time spent in the factory. This leads to a reduction in certain costs. This objective is achieved
in part by a set of techniques: sticking to production and supply plans, greater flexibility, quick
adjustments, implementation of total quality and elimination of breakdowns. In light of experience, the
intelligent implementation of this type of approach for all the operational processes of the Supply Chain
(Purchasing, Procurement, Manufacturing, Transportation, Distribution) leads to an overall reduction of
costs due to all the operational progress achieved.
Transportation efficiency and international globalization
For several decades now, the efficiency of transportation over short and long distances and the low
associated costs have led to the emergence of international Supply Chains. The number of parties involved
in purchasing, production and sales has simultaneously increased with the increase in international trade.
The traditional model of local production for local consumption has been replaced by a system that
involves a large number of international stakeholders that are physically connected by multiple carriers
2One famous example is Taylor’s reorganization of the unloading of train cars containing coal: by optimizing the size of the
pitchforks and shovels used, each operator was able to unload over twice as much material per day.
Notes from the course Operations and Supply Chain Management – Ch. van Delft - 10/09/19
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and that serve markets on several continents. This change requires the implementation of new processes
for coordinating these suppliers, carriers, manufacturers and sellers.
Information systems in operations management
The accuracy of information and rapid processing offer a clear competitive edge. These systems can be
used to measure performance and optimize decisions on operations.
In summary, these information systems cover commercial management (customer contacts, order
registration), supply management with suppliers, storage, manufacturing (technical definition of
operations and products, forecasts and planning, quality monitoring, etc.) and transportation to
customers. Real-time knowledge of all the data describing operations enables greater responsiveness to
changes in customer requests and various factors that can disrupt the operation of the entire system. In
addition to a company’s internal management functions, these information systems can be connected to
suppliers’ or customers’ systems in order to provide real-time information on the company’s entire supply
chain.
These applications are aimed at structuring and sharing information. The assumption is that better
information leads to better decisions.
3/
Operations and Supply Chain: changes in the environment
Operations and Supply Chain management is now faced with an economic environment that is increasingly
complex and features new constraints.
Increased complexity
The economic environment has undergone changes that introduce challenges for Operations and the
Supply Chain. Increased competition driven by globalization demands an ever-higher level of
performance. Furthermore, in order to take advantage of economies of scale, products are sold on
multiple markets, which generates an increasing variety of products to manage. Markets then became to
a large extent renewal markets, which, combined with technological advances, reduce the average
commercial life of products. The overall complexity of managing flows has therefore significantly
increased due to this accelerated renewal of product families that are increasingly varied.
Operations and sustainable development
The manufacture and transportation of goods are responsible for approximately 45% of greenhouse gas
emissions. The reduction potential for these emissions by changing/improving operations is considerable,
as witnessed in multiple examples of cutting-edge companies in this area. The supply chain function,
initially through the transportation aspect, is at the forefront. Yet the entire supply chain is affected,
beyond transportation alone. It is possible to improve the environmental performance of production,
develop the reuse of materials (recycling defective, damaged and end-of-life products), implement more
environmentally friendly packaging and choose modes of transportation that are less polluting.
The ecological approach will lead to a reduction in the number of suppliers, the strengthening of relations
and the development of collaborative and mutual practices or, in terms of the supply chain, the relocation
of certain production or storage activities closer to centers of consumption or geographical areas of
consumption. This would mean a move towards shorter logistics circuits.
In general, however, while Supply Chain stakeholders see sustainable development as an important aspect
of their overall strategy, they must be able to assess its entire carbon footprint (see also the other aspects
of sustainable development). The development of corporate social and environmental responsibility,
combined with the development of sustainable development standards, will directly affect companies’
operational and logistics approach.
Notes from the course Operations and Supply Chain Management – Ch. van Delft - 10/09/19
Supply Chain Management: Introduction
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4/ Value Chain and Supply Chain
The value chain is defined in the strategy as a set of steps or processes that allow a company to obtain a
competitive edge by creating value for its customers. The value is what a customer is willing to pay for the
product or service provided. The analysis of a value chain’s performance often reveals the importance of
coordinating various processes, in addition to compartmentalized optimization.
If we look at the sequence of physical operations, the cost price is created over the course of the entire
chain. The final operator buys from suppliers at an amount that is 50 to 90% of the cost price for the
products delivered to the customer. The quest for the best cost and the best tradeoffs along the entire
chain is essential. We again observe that companies in the supply chain are interconnected and the chain’s
overall performance depends not only on each one, but also on the effective management of their
interactions. Supply Chain Management therefore prioritizes the overall performance of a chain consisting
of independent companies united by a common goal: sales, conditioned on the satisfaction of the end
customer.
In summary, value chain management is aimed at identifying ways of creating value for customers,
whereas Supply Chain management is focused on delivering the desired products and services as
efficiently as possible.
5/ Structures and organization charts
The organization of the company and the established structures reflect the value placed on Supply Chain
management.
Functional organization
A traditional approach involves a Purely functional organization that maintains the company’s
organization within separate “business functions”.
Functional organization
The coordination between functions when making decisions requires periodic decision-making meetings
bringing together the functions directly affected by the types of decisions.
Organization with an integrated Supply Chain
The goal is overall cross-functional optimization, based on set performance criteria (profits, turnover, total
costs, quality, inventory, deadlines, etc.). The Supply Chain department is therefore in charge of
simultaneously synthesizing the issues, constraints and tradeoffs of the Purchasing, Production and
Logistics functions to enable effective decision-making by the steering committee when faced with
financial or marketing strategy tradeoffs.
Integrated Supply Chain Organization
Notes from the course Operations and Supply Chain Management – Ch. van Delft - 10/09/19
Supply Chain Management: Introduction
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6/ Examples of Supply Chains
Textile products
The products (shirts, t-shirts, etc.) are manufactured at a few factories located in a low-cost region near
the final consumers. The raw materials and components are sourced from Asia and North Africa and are
transported in large quantities by containers (via sea and rail). The finished products transit via a central
warehouse close to the factories. There, the products are received as packages or hanging garments (suits,
for example). They are then shipped to small receiving warehouses distributed throughout the target
market. The stores are then supplied via these local warehouses.
Automobiles
The cars are assembled in a small number of factories (which are generally very large). The raw material
components (steel, glass, electronics, seats, engines, etc.) are supplied via an international network
involving hundreds (or even thousands) of suppliers. The finished products are then shipped by rail to
distribution centers that handle the final customization (such as programming the car computers) and
ship the vehicles to the national markets (by land or sea).
Chocolate
The cocoa is harvested in the form of beans grown locally in the producer countries, according to weather
conditions. In general, the major producers purchase these beans and import them to their factories or
workshops where they are processed (ground, roasted, mixed, molded, packaged) to obtain various
finished or semi-finished products (cocoa butter, cocoa powder and chocolate). These products are then
stored and transported to the sales outlets at controlled temperatures to protect the aromas.
7/ The Emergence of Supply Chain Management
Supply Chain managers, as drivers of a discipline that has only emerged over the past few decades, are
beginning to integrate the Management Boards of most large companies. There are multiple reasons for
this.
The issues associated with the Supply Chain are increasingly strategic. The increased cost of fuel (and
therefore transport) are causing companies to reconsider the structure of their networks. The use of
numerous suppliers located farther and farther away requires the specific expertise of the Purchasing
department. Moreover, a response strategy must be established to handle the various factors and risks
and protect the entire activity of the Supply Chain. A global Supply Chain, involving a network of suppliers
located in numerous countries and multiple delocalized production sites, clearly raises major ethical and
environmental questions.
Furthermore, competition and cost pressure lead companies to focus on any source of improvement,
particularly by identifying processes that have not yet been streamlined and optimized. One of the
characteristics of Operations and Supply Chain management is the complexity involved in optimizing
decisions.
Traditionally, the management of interfaces and the coordination of Supply Chain stakeholders are
processes that companies do not fully understand and often lead to breakdowns and generate costs.
Moreover, these decisions are numerous and based on gigantic databases: we need only take the example
of the supply chain management of a company that owns tens of thousands of different kinds of raw
materials and components.
Finally, the numerous types of tradeoff are not intuitive: the associated cost functions are non-linear, and
the action variables introduce significant interactions. Overall optimization requires a dedicated
department with the necessary expertise.
Notes from the course Operations and Supply Chain Management – Ch. van Delft - 10/09/19
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Experience shows that these inherently complex and multivariate issues can be addressed much more
effectively by a single department possessing an understanding of the overall operations, rather than
departments specialized in their business functions.
Notes from the course Operations and Supply Chain Management – Ch. van Delft - 10/09/19