supply chain management, procurement, sourcing, acquire, and logistics

SUPPLY CHAIN MANAGEMENT

Delivered By:

Rishabh Agarwal

MBA IIM-C(C) www.rishabhagarwal.in

Learning Objectives

• To understand the escalating importance of SCM

• To learn about Evolution of SCM

• Understanding Global SCM and Logistics

• Understanding Purchase as a concept

• Understanding key terms and jargons used in SCM

• SCM Strategies

• What’s New

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A picture is better than 1000 words!!

- A supply chain consists of

Supplier Manufacturer Distributor Retailer Customer

Upstream

Downstream

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INTRODUCTION

• Supply chain management (SCM) is the management of the flow of goods. It includes the movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption.

• An integrated group of processes to “source,” “make,” and “deliver” products

• Supply-chain management connects a company’s supply side with its demand side.

• Competition is no longer between companies; it is between supply chains

• That portion of the supply chain which comes after the manufacturing process is sometimes known as the distribution network

• Importance of the Supply Chain: Globalization of manufacturing

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Supply Chain Processes(C) www.rishabhagarwal.in

Physical distributionPhysical supply(Materials management)

Business logistics

Sources ofsupply

Plants/operations

Customers

• Transportation• Inventory maintenance• Order processing• Acquisition• Protective packaging• Warehousing• Materials handling• Information maintenance

• Transportation• Inventory maintenance• Order processing• Product scheduling• Protective packaging• Warehousing• Materials handling• Information maintenance

Internal supply chain

Traditional Scope of the Supply

Chain

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Demand forecasting

Purchasing

Requirements planning

Production planning

Manufacturing inventory

Warehousing

Material handling

Packaging

Finished goods inventory

Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

Supply Chain

Management

Supply Chain

Management

Logistics

Purchasing/

Materials

Management

Physical

Distribution

Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning

Production planning

Manufacturing inventory

Warehousing

Material handling

Packaging

Finished goods inventory

Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

Supply Chain

Management

Supply Chain

Management

Logistics

Purchasing/

Materials

Management

Physical

Distribution

Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Evolution of Supply Chain Management

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UNDERSTANDING GLOBAL

SUPPLY CHAIN MANAGEMENT

AND LOGISTICS

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Well . . . . Is This Logistics ?

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Actually . . . . . This Is Logistics

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Transportation

• Rail• low-value, high-density, bulk

products, raw materials, intermodal containers

• not as economical for small loads, slower, less flexible than trucking

• Trucking• main mode of freight transport

• small loads, point-to-point service, flexible

• More reliable, less damage than rails; more expensive than rails for long distance

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Transportation (cont.)

•Air• most expensive and fastest, mode of

freight transport

• lightweight, small packages <500 lbs

• high-value, perishable and critical goods

• less theft

•Package Delivery• small packages

• fast and reliable

• increased with e-Business

• primary shipping mode for Internet companies

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Transportation (cont.)•Water

• low-cost shipping mode• primary means of international shipping• waterways• slowest shipping mode

•Intermodal• combines several modes of shipping-truck,

water and rail• key component is containers

•Pipeline• transport oil and products in liquid form• high capital cost, economical use• long life and low operating cost

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Duties and Tariffs (cont.)

APEC

ASEAN

ANZCERTA

FTAA

NAFTA

CALM

ATPA

MERCOSUR

TAFTA

INCOTERMS Map(C) www.rishabhagarwal.in

INCOTERMS

International Commercial Terms

• Sea and Inland Waterway Transport

• FAS – Free Alongside Ship (named port of shipment)

• FOB – Free on Board (named port of shipment)

• CFR – Cost and Freight (named port of destination)

Seller must pay the costs and freight to bring the goods to the port of

destination. However, risk is transferred to the buyer once the goods are

loaded on the vessel. Insurance for the goods is NOT included. This term is

formerly known as CNF (C&F, or C+F).

• CIF – Cost, Insurance and Freight (named port of destination)

Exactly the same as CFR except that the seller must in addition procure and

pay for the insurance.

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INCOTERMS

International Commercial Terms

• General Transport

• EXW – Ex Works (named place of delivery).

• CIP – Carriage and Insurance Paid to (named place of destination)

The containerized transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier. CIP is used for intermodal deliveries & CIF is used for Sea .

• DDP – Delivered Duty Paid (named place of destination)

Seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes. The seller is not responsible for unloading. This term is often used in place of the non-Incoterm "Free In Store (FIS)". This term places the maximum obligations on the seller and minimum obligations on the buyer.

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UNDERSTANDING PURCHASE

AS A CONCEPT

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Understanding Key Terminologies

Buy

Purchase

Procurement

Contracts

Sourcing

Acquire

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Understanding Key Terminologies

Buy – general act of acquiring anything

Purchase – Money, ready made material

Procurement – Plus Efforts

Contracts – mostly services and agreements

Sourcing – act of obtaining (repeatable/ not one time activity) Global/ strategic/ outsourcing

Sourcing manpower, information, not necessarily goods

Acquire – to gain possession, complete rights, e.g. you can not sell a pump in your name as it is not being

acquired, Mergers and Acquisitions

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SOP (Standard Operating Procedure)

• Procurement steps

• Procurement life cycle in modern businesses usually

consists of 7 steps:

1. Identification of need:

2. Supplier Identification:

3. Supplier Communication:

4. Negotiation:

5. Purchase Orders:

6. Logistics Management: expediting, shipment, delivery

7. Payment:

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Purchase Order Contents

1. Scope of Work

2. Total Amount

3. Delivery Date and Terms

4. Payment Terms

5. Bank Guarantees

6. Currency Fluctuation or Exchange Rates

7. Packaging Terms

8. Expediting

9. Inspection and Quality

10. Taxes

11. Insurance

12. LD Clause

13. Warranty Terms

14. Arbitration or Jurisdiction

15. Force Majeure

16. Documentation

17. PO Acceptance

18. General Terms and Conditions

Letterhead PO#

Vendor Ref#

Quote Ref#

Order Date

Delivery Address

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DIRECT VS.

INDIRECT

Direct procurement

occurs in

manufacturing settings

only.

In contrast, Indirect

procurement activities

concern “operating

resources” that a

company purchases to

enable its operations.

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Push vs Pull System

• What instigates the movement of the work in the system?

• In Push systems, work release is based on downstream demand forecasts

• Keeps inventory to meet actual demand

• Acts proactively

• e.g. Making generic job application resumes today (e.g.: exempli gratia)

• In Pull systems, work release is based on actual demand or the actual status of the downstream customers

• May cause long delivery lead times

• Acts reactively

• e.g. Making a specific resume for a company after talking to the recruiter

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Supply Chain Uncertainty

• Factors that contribute to uncertainty• inaccurate demand forecasting

• long variable lead times

• late deliveries

• incomplete shipments

• product changes batch ordering

• price fluctuations and discounts

• inflated orders

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Bullwhip EffectOccurs when slight demand variability is magnified as information moves back upstream

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UNDERSTANDING ROLE OF A

SCM PROFESSIONAL

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Vendor Selection Vendor evaluation

Critical decision

Find potential vendors

Determine the likelihood of them becoming good suppliers

Vendor Development

Training

Engineering and production help

Establish policies and procedures

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Vendor Selection Negotiations

Cost-Based Price Model - supplier opens books to purchaser

Market-Based Price Model - price based on published, auction, or indexed price

Competitive Bidding - used for infrequent purchases but may make establishing long-term relationships difficult

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Supply Chain Strategies Negotiating with many suppliers

Long-term partnering with few suppliers

Vertical integration

Joint ventures

Keiretsu

Just In Time

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Many Suppliers Commonly used for commodity

products

Purchasing is typically based on price

Suppliers compete with one another

Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery

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Few Suppliers

Buyer forms longer term relationships with fewer suppliers

Create value through economies of scale and learning curve improvements

Suppliers more willing to participate in JIT programs and contribute design and technological expertise

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Vertical Integration

Raw material (suppliers)

Iron ore Silicon Farming

Backward integration

Steel

Current transformation

AutomobilesIntegrated

circuitsFlour milling

Forward integrationDistribution

systemsCircuit boards

Finished goods (customers) Dealers

Computers Watches

CalculatorsBaked goods

Vertical Integration Examples of Vertical Integration

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Joint Ventures

Formal collaboration

Enhance skills

Secure supply

Reduce costs

Cooperation without diluting brand or conceding competitive advantage

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Keiretsu Networks A middle ground between few suppliers and

vertical integration

Supplier becomes part of the company coalition

Often provide financial support for suppliers through ownership or loans

Members expect long-term relationships and provide technical expertise and stable deliveries

May extend through several levels of the supply chain

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Just In Time (JIT) “the right material, at the right time, at the right

place, and in the exact amount”, without the safety net of inventory.

The philosophy of JIT is simple:

the storage of unused inventory is a waste of resources.

JIT inventory systems expose hidden cost of keeping inventory.

Inventory is seen as incurring costs, or waste, instead of adding and storing value, contrary to traditional accounting.

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Measuring Supply-Chain Performance

• Inventory Turnover: how often the company replenishes

inventory. High value of inventory turnover means that the

inventory was not sitting around a long time.

Inventory turnover

=

Cost of goods sold

Inventory investment

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What’s New?

• Internet and E-Procurement

•RFID Capabilities

• SCM Software: ERP (Enterprise

Resource Planning) Software e.g.

SAP, Oracle, etc.

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Information Technology:

A Supply Chain Enabler

• Information links all aspects of supply chain

• E-business• replacement of physical

business processes with electronic ones

• Electronic data interchange (EDI)• a computer-to-computer

exchange of business documents

• Bar code and point-of-sale• data creates an instantaneous

computer record of a sale

• Radio frequency identification (RFID)• technology can send product

data from an item to a reader via radio waves

• Internet• allows companies to

communicate with suppliers, customers, shippers and other businesses around the world, instantaneously

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RFID Capabilities(C) www.rishabhagarwal.in

E-Procurement

• Direct purchase from suppliers over the Internet

• Direct products go directly into production process a product, indirect products not

• E-marketplaces• web sites where companies and suppliers conduct

business-to-business activities

• Reverse auction• a company posts orders on the Internet for suppliers to

bid on

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Online Sourcing/ Procurement

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Online Sourcing/ Procurement

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Online Sourcing/ Procurement

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SCM Software

• Enterprise Resource Planning (ERP)

• software that integrates components of a company by

sharing and organizing information and data

• SAP was first ERP software

• mySAP.com

• web enabled modules that allow collaboration between

companies along the supply chain

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Linking Supply Chain with SAP(C) www.rishabhagarwal.in

Supply Chain EconomicsSupply Chain Costs as a Percent of Sales

Industry % Purchased

All industry 52

Automobile 67

Food 60

Lumber 61

Paper 55

Petroleum 79

Transportation 62

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Losing Sight of the Common Objective

I'm glad that the hole

is not on our side!

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References

• Wikipedia

• Annual Consulting Companies Report

• Course Material B Schools

• Internet Open Sources

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© RISHABH AGARWAL

WWW.RISHABHAGARWAL.IN

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