SUPPLY CHAIN 1
Supply Chain
•
A supply chain encompasses all the essential functions that directly or indirectly influence
the customer, ensuring that their needs are met in the most efficient manner.
•
A supply chain consists of all parties involved, either directly or indirectly, in fulfilling a
customer request. It includes manufacturers, suppliers, transporters, warehouses, retailers,
and even customers. Within an organization, the supply chain covers functions such as
product development, marketing, operations, distribution, finance, and customer service.
•
The supply chain is dynamic and involves a continuous flow of information, products,
and funds between different stages.
Example
Consider a customer purchasing detergent from a Walmart store. The supply chain starts
with the customer's demand and moves to Walmart, which stocks inventory from
warehouses or distributors. Walmart shares sales data with distributors, who, in turn, place
orders with manufacturers like Procter & Gamble (P&G). P&G sources raw materials from
suppliers such as Pactiv Corporation for packaging. Throughout this process, there is a
constant exchange of:
1. Products: Detergent moves from suppliers to manufacturers, distributors, and finally
to Walmart.
2. Information: Walmart shares sales data with distributors, who update manufacturers
on demand.
3. Funds: The customer pays Walmart, which pays the distributor, who then pays the
manufacturer and suppliers.
This interconnected network ensures that customer demand is met efficiently while maintaining a
balance of supply and demand.
•
These examples show that the customer is a key part of the supply chain. The main
purpose of a supply chain is to fulfill customer needs while generating profit. The term
"supply chain" often brings to mind the movement of products from suppliers to
manufacturers to distributors to retailers to customers in a linear sequence. While
this is part of the supply chain, it is also important to conside r the flow of information,
funds, and products in both directions. A supply chain may seem to have only one
participant at each stage, but in reality, a manufacturer may receive materials from
multiple suppliers and supply several distributors. This means most supply chains
function as networks or supply webs rather than simple c hains. the appropriate design of
the supply chain depends on both the customer’s needs and the roles played by the stages
involved.
A typical supply chain consists of:
•
•
•
•
•
Customers
Retailers
Wholesalers/Distributors
Manufacturers
Component/Raw Material Suppliers
Each stage is connected through the flow of products, information, and funds, which may
move in both directions and be managed by one of the stages or an intermediary. Not all stages
need to be present in every supply chain.
For example, Dell uses two supply chain models:
1. For servers, Dell builds to order—manufacturing starts only after receiving a customer
order. There is no retailer, distributor, or wholesaler in this supply chain.
2. For consumer products like PCs and tablets, Dell sells through retailers such as
Walmart, which stock Dell products. This supply chain includes an additional stage (the
retailer) compared to Dell’s direct sales model for servers.
In some cases, the supply chain may also have a wholesaler or distributor between the
manufacturer and the retailer.
Evolution of Supply Chain Management
The evolution of supply chain management has been a gradual process with three major
revolutions over the last century, shaped by changes in the economic and technological
environment.
The First Revolution (1910–1920): Vertical Integrated Firms Offering Low
Variety of Products
The first revolution in supply chain management was driven by Ford’s highly integrated
supply chain, where the company controlled every part of the chain—from raw materials to the
finished product. Ford’s tightly integrated system allowed them to complete the process from
iron ore mine to finish ed automobile in 81 hours. However, Ford's supply chain had
limitations: it was efficient but inflexible, offering a low variety of products—only the Model
T in black.
This made Ford’s supply chain efficient for the mass production of a single model but unable to
adapt to market demands for more variety. General Motors recognized this and introduced
more variety in its products, offering multiple models and colors. Ford’s rigid supply chain
required long setup times and was unable to manage product variety.
By this time, most automobile firms in Detroit and companies like Hindustan Motors in India
operated as highly integrated firms, where most of the manufacturing was done in-house,
much like Ford’s model.
The Second Revolution (1960–1970): Tightly Integrated Supply Chains Offering
Wide Variety of Products
By the end of the first revolution, industries faced a need for more product variety in response
to changing market demands. To accommodate this, companies needed to restructure their
supply chains to be both flexible and efficient, minimizing inventory while dealing with a wider
range of products. This challenge was addressed by Toyota Motor Company, which
spearheaded the second revolution in supply chain management.
Toyota's approach was based on a keiretsu system, where a large number of suppliers provided
key components, but final assembly and key component manufacturing were done in-house.
Keiretsu refers to a group of companies with interconnected business relationships and
shareholdings, allowing Toyota to establish long-term relationships with its suppliers. The
suppliers were located near Toyota’s assembly plants, significantly reducing setup times from
hours to minutes.
This combination of reduced setup times and long-term supplier relationships was central to
Toyota’s ability to handle wide product variety while maintaining low inventory levels. This
system became known as lean production, which emphasized efficiency and waste reduction.
Toyota's system marked a significant shift from the rigid Ford supply chain, focusing on
flexibility and responsiveness.
However, in the later part of the century, Toyota faced challenges as it expanded internationally.
When setting up assembly plants abroad, Toyota realized it needed to bring its suppliers along.
Additionally, some of the suppliers in the keiretsu became complacent and less costcompetitive. With the advent of Electronic Data Interchange (EDI), firms could now integrate
with suppliers without the need for them to be located close to the manufacturing plants.
As a result, the second revolution gave way to a third revolution, where firms like Dell
Computers, Apple Inc., and Bharti Airtel began offering more customized products while
relying on loosely connected supplier networks, signaling another shift in how supply chains
were managed.
The Third Revolution (1995–2020): Virtually Integrated Global Supply
Networks Offering Customized Products and Services
The third revolution in supply chain management was largely driven by advances in information
technology (IT), which has evolved at a rapid pace. The integration of IT into supply chains has
allowed companies to offer customized products and services that create unique, personalized
experiences for customers. This revolution represents a shift from traditional product offerings to
a more dynamic, user experience-based model.
Companies such as Dell Computers, Apple Inc., and Bharti Airtel illustrate the key
characteristics of the third revolution:
•
•
•
Dell Computers allows customers to customize their laptops, choosing specifications
like processors, memory, and screen size, while also tracking the product's progress in
production and distribution.
Apple Inc. offers more than just physical products; it provides a personalized user
experience. For example, with iTunes, Apple gave users access to a vast library of
music, while the App Store further enhanced user experiences by allowing developers to
create and sell apps that expanded the functionality of Apple devices.
Bharti Airtel, a telecom company, broke away from traditional practices by outsourcing
core functions like network management and IT to global partners, enabling them to
focus on delivering an exceptional service experience to customers.
These companies exemplify how businesses have moved beyond offering physical products and
now focus on creating bundled goods and services that lead to personalized experiences. The
focus is on providing value that is unique to each customer.
Virtual Integration:
The third revolution has led to virtual integration, where companies are no longer confined by
physical proximity to their suppliers. This model allows firms to access global talent, resources,
and ideas, leading to more customized products and services for customers. By creating easyto-use platforms that attract numerous external contributors, companies can personalize the
customer experience and enhance the value provided.
In summary, organizations today no longer focus just on offering a range of products. Instead,
they prioritize delivering personalized experiences that combine products and services, which
are made possible through virtually integrated global supply networks. This shift in supply
chain management, enabled by IT, has transformed business practices across various industries.
Historical Perspective
Supply chain management, as we know it today, has evolved over nearly 60 years through the
integration of three key areas of knowledge and business practices. This fusion has been driven
by intense market competition, leading to the widespread adoption of supply chain
management across industries.
Originally, these areas developed independently in fields such as operations management,
industrial engineering, and physical distribution. Over time, they have incorporated various
functions, activities, and business innovations to improve efficiency.
The three main contributing streams to supply chain management are:
•
•
•
Sourcing, Procurement, and Supply Management – Managing supplier relationships
and acquiring raw materials.
Materials Management – Handling inventory, storage, and production planning.
Logistics and Distribution – Managing transportation, warehousing, and the delivery of
products to customers.
These disciplines have merged to form the modern concept of supply chain management,
which plays a crucial role in today’s business environment.
Sourcing, Procurement, and Supply Management
Sourcing, procurement, and supply management are often confused with supply chain
management, but they actually come from the purchasing function in businesses. These
functions became important because they impact a company’s cash flow and profits. Businesses
realized that making money by increasing sales was much harder than saving money by getting
better deals when buying materials. This made purchasing a strategic function that could
improve profits.
In the past, purchasing decisions were made by top management with advice from experts in
buying materials. Once the materials were bought, the process of materials management took
over, which dealt with how materials flowed through the company. Today, sourcing, managing
suppliers, and controlling the flow of materials, information, and cash are all connected parts of
the supply chain.
Materials Management
Materials management used to focus on tasks like forecasting, inventory management,
warehousing, and scheduling. Over time, it grew to include production planning and
production control, becoming integrated materials management. Since materials make up a
large part of manufacturing costs—around 60% for many industries—managing them efficiently
became a key focus for companies, especially in the 1970s.
When purchasing (getting materials at the best prices) and materials management (controlling
the flow of materials) were combined, businesses became better at reducing inventory costs
while still meeting demand. Techniques like just-in-time (JIT) inventory, where companies
only keep the materials they need for production, became important for cost savings.
In supply chain management, materials management focuses on making sure materials flow
smoothly in and out of the company, adding value at each step. The goal is to minimize waste,
cut costs, and keep the supply chain running efficiently to meet customer needs.
Development of LDC Markets
The development of Logistics and Distribution Centers (LDCs) has been crucial in enhancing
the efficiency of the supply chain. These centers serve as hubs where goods are stored,
processed, and distributed to the next step in the supply chain. As businesses have expanded
globally and customer demands have become more complex, the role of LDCs in managing the
flow of goods has grown significantly.
Logistics Partners: 3PL and 4PL
When businesses want to manage their logistics, they often rely on third-party logistics (3PL)
or fourth-party logistics (4PL) partners to streamline operations and reduce costs. These
logistics providers help companies move goods efficiently across the supply chain.
3PL (Third-Party Logistics)
A 3PL provider is a company that handles all or part of a company’s logistics needs, including
transportation, warehousing, inventory management, and distribution. By outsourcing logistics to
a 3PL, businesses can focus on their core activities like marketing and sales, while the 3PL takes
care of the supply chain operations.
4PL (Fourth-Party Logistics)
A 4PL provider goes a step further than a 3PL. While a 3PL focuses on providing logistics
services, a 4PL is more of an integrator that manages the entire supply chain. The 4PL provider
oversees the work of multiple 3PLs and other service providers, ensuring that everything in the
What is Logistics and Distribution in Supply Chain?
Logistics refers to the movement of goods and services from where they are made to where they
are needed. It's all about getting things to the right place at the right time. It involves planning,
controlling, and managing the flow of materials, products, and information to meet customer
needs.
Key Parts of Logistics in Supply Chain
There are two main types of logistics:
1. Inbound Logistics: This is the process of bringing raw materials or goods into the
company. It involves transporting, storing, and managing materials that will be used to
make products.
2. Outbound Logistics: This is the process of getting finished products to customers. It
includes storing, managing inventory, and delivering products to stores or directly to
customers.
Why Transportation Matters in Logistics
Transportation is a huge part of logistics. It's how goods are moved from one place to another.
Since transportation can take up to half of the cost of logistics, managing it well helps businesses
save money and deliver products more quickly. The rise of container shipping and different ways
to move goods (air, sea, and land) has made it easier to send products all around the world.
Manufacturing Logistics
Manufacturing logistics is about moving materials and products inside the company during
production. It's like making sure all the parts needed to build a product arrive at the right place at
the right time so the production line can keep running smoothly.
Why is Logistics Important?
Logistics is a key part of supply chain management (SCM). SCM is all about connecting
different parts of a business—like suppliers, factories, and customers—to get products to people
quickly and efficiently. Good logistics makes sure materials and products move smoothly, which
leads to better customer service and cost savings.
Conclusion
In simple terms, logistics is about getting things from point A to point B in the best way possible.
Whether it’s bringing raw materials into a factory or delivering a finished product to a customer,
logistics ensures the right goods are in the right place at the right time. It's an important part of
running a business and keeping customers happy
The Objective of a Supply Chain
The main goal of any supply chain is to maximize the overall value it generates. This value,
called the supply chain surplus, is the difference between the value of the product to the
customer and the costs the supply chain incurs to fulfill the customer’s request.
•
Supply Chain Surplus = Customer Value – Supply Chain Cost
Customer Value and Consumer Surplus
The customer value is the amount a customer is willing to pay for the product. Consumer
surplus is the difference between the value of the product and the price the customer actually
pays. For example, if a customer is willing to pay $100 for a product but only pays $60, the $40
is the consumer surplus.
Sometimes, estimating the exact consumer surplus can be difficult, but in cases like generic
drugs, A good example of this is branded vs. generic drugs. Both branded and generic drugs
may work equally well and provide the same benefits to the patient. However, branded drugs
often have a higher price because they are patented, while generic drugs are cheaper but provide
the same relief.
The difference in price between the two is a form of consumer surplus. For example, if a
branded drug costs $100 and the generic version costs $50, the $50 difference is the consumer
surplus. This is why many people prefer generic drugs—they get the same benefits at a lower
price.
In places like India, where people are more price-sensitive, the growth of the generic drugs
industry is driven by this concept of consumer surplus, as more people can afford these cheaper
alternatives while getting the same value as the branded version.
•
•
•
Brand Valuation is how much a brand is worth. A strong brand can charge more
because people trust it, recognize it, and are willing to pay extra for it.
Branded Drugs (like well-known medicines from big companies) are more expensive
because the brand is trusted, and people believe it works well. The higher price comes
from the value of the brand name.
Generic Drugs are cheaper because they don’t have the famous brand name. But they
work the same way as branded drugs. So, customers get the same benefits but at a lower
cost.
In countries like India, generic drugs are growing fast because they offer the same benefits as
branded drugs but cost much less. This difference in price creates what’s called consumer
surplus—the extra value customers get by paying less for something that works just as well.
So, brand valuation matters because the more trusted the brand, the more expensive the product
can be, even if the product itself is the same as a cheaper version.
Supply Chain Profitability
The remaining part of the supply chain surplus (after the customer gets their consumer surplus) is
the supply chain profitability. This is the profit that the entire supply chain generates. For
example, if a customer buys a wireless router for $60, the supply chain gets this revenue.
However, the supply chain has costs to manage, like producing and transporting the router. The
difference between the $60 and these costs is the supply chain profitability.
Supply chain profitability is a shared profit among all the stages of the supply chain. The higher
the supply chain profitability, the more successful the supply chain is. It's important to measure
success based on supply chain profitability, not just the profit at each individual stage of the
supply chain. Focusing on profitability across the entire chain helps everyone involved grow the
overall pie, meaning that all members benefit from the success.
Revenue and Costs in the Supply Chain
For any supply chain, the customer is the only source of revenue. Everything else is just an
exchange of funds between the different stages of the supply chain. For instance, when Wal-Mart
sells detergent, the customer pays, and Wal-Mart uses some of this money to pay its supplier.
Managing the flows of materials, products, information, and funds is crucial to maximizing the
supply chain surplus.
Supply Chain Structure Differences in Countries
Supply chains differ across countries depending on factors like distribution models. In the
United States, large retailers usually buy products directly from manufacturers, reducing the
need for distributors. However, in India, the retail market is much more fragmented with small
stores, requiring distributors to manage inventory and reduce transportation costs by delivering
products in smaller amounts to many locations.
For example, in India, distributors play an important role by aggregating products from different
manufacturers and reducing delivery costs. As Indian retailing begins to consolidate, the role of
distributors may decrease, but for now, they help increase the supply chain surplus.
Conclusion
In short, the objective of a supply chain is to maximize value for both the customer and the
supply chain itself. By understanding customer value, supply chain costs, and profitability,
businesses can improve the entire system, ensuring greater success for all the parties involved.