Unit 3 Supply Chain Management
In the context of SCM, we will view all these activities as a sequence
of processes within and between different supply chain stages, which
combine to fill a customer need for a product.
There are two different ways to view the processes performed in a
supply chain:
1. The cycle view -- this view focuses on the process cycles of
the products (or services) to be delivered to customers
starting from the raw material stage and ending with end
products. The cycle view divides the whole supply chain into
four process cycles, namely:
o
procurement cycle;
o
manufacturing cycle;
o
replenishment cycle; and
o
customer order cycle.
2. The push/pull view -- this view focuses on the division of
the supply chain processes according to customer demand.
The push processes are initiated according to demand
speculation and the pull processes are initiated according to
real customer demand. The push/pull view allows supply
chain managers to analyse supply chain activities from a
global view, which leads to higher-level strategic decisions.
Evolution of supply chain management
Even though SCM is not just logistic planning and inventory control,
the development of modern SCM was triggered by needs in logistic
planning and inventory control.
The early development of SCM can probably be traced back to the
quick response program in the textile industry and efficient consumer
response (ECR) in the grocery industry in the US
The need for supply chain management
The need for supply chain management is basically driven by changes
in the business and industrial environment. During the past few
decades, there has been an evolution in competitiveness for many
industries and businesses.
The competition turned to
manufacturing and business process efficiency. The success of
companies relied on techniques and practices such as lean
manufacturing, just-in-time production, and stockless production.
Companies had to seek other opportunities outside in order to
compete. Issues such as the following needed to be addressed:

Where should we source materials?

Where should we manufacture?

What distribution channels should we use?

How can we build a good relationship with business partners
and customers?

How can we obtain effective market information?

What is the most efficient logistics structure?

How can we coordinate information flows globally?
Supply chain strategy
It is clear from the last section that SCM is vital to a company's
success in today's competitive and globalized business environment.
To embark on SCM and to increase the chance of success, a company
must align its supply chain objectives with its overall business
strategy.
Managing the supply chain means managing across functional areas
in the company as well as managing interactions external to the
company with business partners. This cross-boundary nature of SCM
requires top-down support from the senior management of the
company to incorporate supply chain goals and capabilities in the
strategic plan of the company. This focus on integration can lead to
using the supply chain to obtain a sustainable competitive advantage
over the competitors
Supply chain performance measures
Over the last decade companies have put significant investment into
the reengineering of their supply chain in order to compete. They
have sought to implement integrated supply chain management
through changes in business processes and technology, which
involve substantial financial and human resources. Given this
investment, senior management has to think about how to develop
an appropriate system of measurement to track the benefits resulting
from SCM implementation and to provide guidance to the company
for continuous improvement in order to respond to the rapid changes
in the business environment.
One common practice for measuring the performance of any business
process is to base it on financial return. However, it is problematic to
totally rely on financial return as the measure of performance for
complicated business processes such as an integrated SCM for the
following reasons:

Measurement based on financial return tends to be historically
oriented and lack a forward-looking perspective, and hence
fails to provide guidance for future improvement.

Such measurement does not relate directly to strategic
performance. For example, a start-up company may set
market share as its strategic SCM objective, but financial
return may not accurately reflect performance in this regard.

This kind of measurement may not directly tie to operational
effectiveness and efficiency given such a complicated system
involving cross-functional processes internally and business
partners externally. For example, financial return may be
good in a favourable economic atmosphere despite an
inefficient and non-effective supply chain.
In recent years, a new approach to performance measurement,
called the 'balanced scorecard' approach, has been adopted to
assess corporate performance.
Inventory management
Managing economies of scale in a supply chain
To control the inventory of a product, we have to decide how much of
the product to order and how frequently. Traditionally, this problem
has been formulated as a decision problem. Mathematical models
have been developed to help determine the optimal order quantity
based on some simplified assumptions. These have been further
developed and extended into many complex and sophisticated
models. Using these models generally requires the following
information:

the inventory on hand and on order;

forecast of demand;

lead times of order delivery; and

estimates of inventory costs.
The inventory costs can be divided into the following components:

holding or carrying costs -- cost of storage, capital and
obsolescence/shrinkage;

setup or order costs -- costs associated with the production of
a lot internally or the placing of an order externally with a
vendor;

shortage or out-of-stock costs -- loss of profit and any 'ill-will'
generated; and

purchased material costs.
You can realize why inventory management is so important, because
inefficiency in any area breaks the supply chain and results in a
degradation of performance. For a complex supply chain, the
management of inventory will be much more difficult. Since demand
is uncertain in most situations, it is very difficult to determine how
much to order so that customer needs can be fulfilled at minimal cost.
There are different approaches to manage each type of inventory. A
major distinction in the way different kinds of inventory are managed
results from the nature of demand.
Basically, demand can be divided into two categories: dependent
and independent demand.
Dependent demand derives from plans to make certain products,
e.g., raw materials, parts and assemblies.
Independent demand is normally for finished goods, and the
demand is mainly determined by some entity outside the producing
organization, e.g., customers. Referring to Figure 3.1, the raw
material and WIP inventories are subject to dependent demand and
the finished goods are subject to independent demand.
Dependent demand tends to be sporadic or 'lumpy' (i.e., large
quantities will be needed of a specific item, with little or no use of that
item at other times) because it is generated from the need for some
other items.
Independent demand is continuous although it may vary from time
to time. For this reason, we can actually predict the need for
dependent-demand items but not independent-demand items.
Dependent-demand items need only be stocked just prior to the time
they will be needed in the production process but
independent-demand items must be carried on a continued basis.
Managing uncertainty in a supply chain
In the inventory model, the re-order level is set such that a
replenishment order will arrive when the inventory level drops to zero.
This is an ideal situation because it assumes the product has a
constant demand.
In reality, the demand will vary and if the demand exceeds the
expectation during the lead time, an out-of-stock situation will occur
and seriously affect customer service as well as profit.
To avoid being out-of-stock, a certain amount of safety inventory will
be kept in the system to satisfy an unexpectedly high demand during
the lead time. The safety inventory will act as a buffer for serving
customers.
The appropriate level of safety inventory is determined by two factors:
the uncertainty of demand and the desired level of product
availability (or service level). The safety inventory level can be
derived from these two factors statistically. Now, read the textbook
to study how the safety inventory can be derived for the case with or
without fixed ordering costs.
Practical issues
To be effective, the inventory management system must include:

a system to keep track of the inventory on hand and on order;

a reliable forecast of demand that includes an indication of
possible forecast error;

knowledge of lead time and its variability; and

reasonable estimates of inventory costs
Logistics network configuration and distribution
strategies
Transportation in a supply chain
Transportation deals with moving a product in a supply chain.
Transportation decisions can involve mode selection, shipment size,
routing and scheduling.
These decisions are influenced by many factors such as the proximity
of warehouses to customers or plants, the required level of customer
service, the size of the storage facility, etc.
Transportation also affects decisions in inventory management and
facility location in a supply chain. Therefore, it has a direct impact on
the responsiveness and efficiency of the supply chain. The success of
any supply chain, particularly a global one, is closely linked to the
appropriate use of transportation.
Distribution strategies
The design of a transportation network directly affects the
performance of a supply chain. Chopra and Meindl (2001) suggested
the following five alternative design options for transportation
networks to take advantage of three outbound distribution
strategies.

Direct shipment network (Figure 3.2) -- all shipments come
directly from suppliers to the retail store.

Direct shipment with milk runs (Figure 3.3) -- a supplier
delivers directly to multiple retail stores on a truck by a milk
run.

All shipments via a central distribution center (Figure 3.4) -all shipments are delivered to a central distribution center (DC)
to breakbulk, crossduck (or mix), or consolidate into many
smaller shipments for delivery to retail stores.

Shipping via a distribution center using milk runs (Figure 3.5)
-- this is similar to the previous method, except milk runs are
used for delivery from the DC to retail stores to reduce
outbound traffic.

Tailored network -- a network specifically designed to meet
the transportation requirements of an organization using a
combination of crossducking, milk runs, etc
Network design in a supply chain
Network design is a complex decision problem. To find solutions, you
normally have to go through the following steps:
1. define the problem
2. collect the data
3. formulate the model and validate the data
4. solve the problem.
Logistics problems usually deal with a decision that balances the cost
of allocation of resources (e.g., a warehouse) against the level of
customer service. The following reading from the textbook describes
a typical scenario of how to define the network design problem.
Network design is a complex decision problem. To find solutions,
you normally have to go through the following steps:
1. define the problem
2. collect the data
3. formulate the model and validate the data
4. solve the problem.
Logistics problems usually deal with a decision that balances the cost
of allocation of resources (e.g., a warehouse) against the level of
customer service. The following reading from the textbook describes
a typical scenario of how to define the network design problem.