mod 1 scm - introduction

8/4/2019 Mod 1 SCM - Introduction

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Module 1

SCM - Introduction

Case analysis importance of SCM

Sales Target for the year 2010 -2011 Rs 100 lakhsProfit Target Rs 10 lakhsGM has been told to increase profit to Rs 13 lakhs

Cost analysisProfit 10 % of salesDirect Labor 25 %Over head 5 %Cash credit Rs 40 lakhs at 12.5 % interest

Areas considered for achieving the targetMarketingFinance

ProductionMaterials

Marketing Add more salesmen and retailers to increase sales by Rs 30 lakhs to getadditional profit of 3 lakhs

Finance Cash credit used Rs 40 lakhs at 12.5% interest. Negotiate and reduceinterest by 0.5% to get additional profit of Rs 0.2 lakhs

Production Labour cost 25% at Rs 25 lakhs. With additional tooling and training,improve productivity by 5 % and get additional profit of Rs 1.25 lakhs

Materials material cost 60% at Rs 60 lakhs. Reduce total material cost by 5%through price negotiations, inventory management, credit management ,transportation etc and get additional profit of Rs 3 lakhs.

Lesson Reduction of 5% in material cost is equal to increasing sales by 30 %.

Thumb rule : Efforts to save Rs 1 is equivalent to increasing sales by Rs 10. It will beeven more in a shortage economy like India.

Hence traditional clerical Purchasing Function has been elevated to StrategicManagement Function as Supply Chain Management, closely monitored by thetop management


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Integrated SCM / Supply chain model

- Supply chain is the flow of products, services and information from rawmaterial stage through suppliers, warehouses, manufacturer, warehouses,distributors and retailers ultimately to the customer.

- Supply chain also include flow of funds and information in the reverse

direction from customer through all the above supply chain links to thebeginning of supply chain.

- Logistics is the primary conduit of product and services through the supplychain arrangement.

- Each firm in the supply chain is involved in some aspect of over all logisticsand add cost to the supply chain.

- The end to end cost of supply chain is called Supply Chain Cost.

- The difference between sales revenue and the supply chain coast is the SupplyChain Surplus

- Achieving logistical integration, high efficiency and reduction in supplychain cost is the essence of Supply Chain(SC) Management.

- Supply chain is also called value chain because value is added to the goodsat each case as it progresses through supply chain.

- As far as a firm is concerned, the SC has two components

Goods &information flow

Funds & Information flowthrough the entire supply chain

Raw Supplier Warehouse Manu- Warehouse Disti- CustomerMaterial facturer butor


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- Supply component: it begins with the start of SC to the end of internaloperations of the firm, when the product is packed and ready for dispatch.

- Deliverycomponent: it starts with dispatch from the firm till it reaches thecustomer.

- Length of supply chain depends on the type and size of business.

- Supply chain follow Responsive Business Model or Pull Process (referdiagrams)

Difference between PDM to SCM

PDM - Physical Distribution Management

S No PDM SCM

1

2

3

4

5

6

7

8

9

Centuries old style

Product centric system

Product, information and funds flowconfined to between two elementsonly, mostly on the delivery sideEg. between producer & distributor,

between retailer & customer etc

It is based in Anticipatory BusinessModel based on market forecast.

It follow Push Process, make aproduct and push it to the market tosell.

Raw materials and parts supply

have no linkage to customer orders

There is no bull whip effect,increasing inventory build up fromretailer to raw material supplier

High levels of inventory, high costof operations, high productobsolescence and poor in meeting

changing customer needs.

Product and services pricing istransactional pricing, betweentwo elements, to maximize ones

Modern management style

Customer centric system

Product, information and funds flowthrough the entire supply chain fromraw material to the customer

It is a Responsive Business Modelresponding to customer needs

It works on Pull Process,production, especially final assembly,responding to specific the customerorders.All supplies for production are linked

backward to specific customer orders

There is no Bull whip effect. Thereis no inventory built up at anyelement in supply chain

Optimum inventory, lower cost ofoperations, low product obsolescenceand quick response to customer

needs.

Collaborative Pricing across allelements of supply chain includingcustomer, to share the benefits


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10

gain

Low in competitiveness

mutually.

High in competitiveness

Physical Distribution Management Model

SCM Model

Producer Distributor

Product, informationand fund flow

Distributor Retailer

Retailer Customer

Goods &information flow

Funds & Information flowthrough the entire supply chain

Raw Supplier Warehouse Manu- Warehouse Disti- CustomerMaterial facturer butor


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Need for SCM

1. Need to further reduce operational cost

- Over the last century, companies have done much to reduce their operationscost with in the organization through BPR. ERP, TQM,TPM, leanmanufacturing, JIT etc.

- But there is still scope for improvement and cost reduction in the areas ofsupplyside, delivery side and logistics of the company.

2. Increased outsourcing requirements

Out sourcing activities of companies are on the increase. This also increasesthe cost associated with procurement, distribution and logistics, offering scope forsubstantial efficiency improvement and coordination beyond its productionactivities.

3. Increasing transportation cost

Transportation cost account to 5 to 30% of the operating expenses of thecompany. It needs focus to reduce cost

Functions/Role/ Importance/Objectives of SCM

1. Achieve strategic advantage2. Achieve Cost control/ reduction3. Enhance Outsourcing capability

4. Achieve globalization for market and supplies5. Better inventory management6. Effective use of supply and logistic resources7. Reduced lead time by design collaboration8. Achieve on time delivery9. Facilitate e-commerce

1. Achieve strategic advantage

- Gives competitive edge to the firm by ensuring smooth and systematic flow of

goods, information and funds. Underperformance of one link in the supplychain can destroy strategic advantage of all in the supply chain.

- Achieve capability to reduce product development time and offer more newproducts to the customers.

- SCM support ERP which integrate other functional areas for performanceimprovement.

- It supports TQM to meet the quality and delivery needs of the customer as wellas supplies for production.

- Support CRM which meet customer expectation and bring customersatisfaction and delight.


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- Support e-commerce for buying and selling, increasing strategic competencefurther.

2. Achieve Cost control/reduction

- reduce over all cost of business by optimizing transportation and logistics cost.

- Identify sources of waste and avoid them in the whole supply chain.

- Ensure quality during warehousing, transportation and handling logistics.

3. Enhances outsourcing capability

- out sourcing generally reduces the cost of operation of a company.

- An efficient and cost effective SCM system will enable the firm to reap thebenefits of outsourcing.

4. Achieve Globalization

- helps to operate across world market.

- helps to make the product available in existing and new markets at competitiveprice.

- Properly designed and executed SC make global out sourcing possible.

- SCM helps to meet global competition successfully.

5. Better Inventory management

- eliminate the necessity to stock the items in large quantities.

- Ensure availability of goods in right quantity at right price with right quality atthe right time.

- Systematic inventory management like JIT, ERP etc can be implemented.

- Prevent Bull whip effect of inventories in the entire SC. The phenomenon ofprogressively larger inventories at different stages of supply chain fromcustomer to backwards is called Bull whip effect. Bull whip effect increasesthe SC cost.

Supplier Producer Distributor Retailer Customer

Bull whip effect on Inventory levels


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6. Effective use of supply and logistic resources

- few dedicated suppliers

- dedicated transportation and logistics.

- participation of suppliers in quality improvement, design improvement, value

engineering and new product development through Design Collaboration

- Competitive, participative and collaborative pricing with suppliers andlogistics providers by sharing benefits mutually.

7. Reduced lead time by design collaboration

- lead time for product improvement is less

- new product development time is shorter.

8. Achieve on time delivery

- ensure prompt delivery of product and services to customers on time.

9. Facilitate e-commerce

Introduction of e-commerce and e-business gives an entirely new dimension tobuying and selling using internet which enhances operational efficiency andcustomer satisfaction.

Wal-Mart case analysis

Wal- Mart planned, designed and invested heavily in transportation and informationinfrastructure to facilitate effective flow of goods and information.

It designed supply chain with clusters of stores around distribution centers.

It facilitates more frequent replenishment (instead of occasional replacement) tomatch the demand and supply more effectively.

Sharing information and collaborating with suppliers brought down cost andimproved productivity considerably.

Net income rose tp $ 9 bil in 2004 with CAGR of 26 %Wal- Mart became the largest chain of stores in a short time

Process View of Supply Chain

- SC is a sequence of processes and flows between supply chain stages and within each stage to fulfill customer needs- These processes and flows can be viewed in 2 different ways

o Cycle view of supply chain

o Push/Pull view of supply chain


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Cycle View of Supply Chain

1. Customer order cycle

- customer arrive- interact with retailer- place order- receive goods- pay money funds flow from customer to retailer

2. Replenishment cycle- Retail trigger (based on inventory policy)- Retail order placement

- Retail receive goods- Funds flow from retailer to distributor- Distributor trigger- Distributor order placement- Distributor receive goods- Funds flow from distributor to manufacturer

3. Manufacture cycle- order arrival from distributor

- production plan and schedule- manufacturing- transportation- receive goods by distributor- funds flow from distributor to manufacturer- materials/parts order trigger- materials/parts order placement

4. Supplier cycle- order arrival as per manufacturers production schedule- supplier production schedule- part manufacturing- transportation- receive materials/part by manufacturer

1. CustomerOrder cycle

2.ReplenishmentOrder cycle

3.ManufacturerCycle

4. ProcurementCycle

Customer

Retailer

Distributor

Manufacturer

Supplier


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Push/Pull view of supply chain

- All processes in a SC belong to one of the two categories depending upon thetiming of execution (order processing) relative to Customer Order Arrive

Push Process

- In push process the execution is initiated in anticipation of the customer order.- Production is based on forecast and not on actual orders.- It is aspeculative process.- It is anAnticipatory Business Model- Procurement cycle, Manufacturing Cycle and Replenishment cycle happen

even before a customer places order.- The products are produced and await customer- Inventory is high

Application- Used for products which generally do not change specifications and features

rapidly- E.g. steel, cement, fertilizer etc

Anticipatory Business Model

Push Process is an Anticipatory Business Model as represented below


2. ReplenishmentCycle

3. Manufacturing

Cycle

4. ProcurementCycle

Push Process

Pull Process

Customer order arrives


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Pull Process

- In pull process, the execution, especially the final assembly, starts after receiptof the order from customer. Procurement of certain raw materials and somemanufacturing activities that are common in nature are done in Push Process,Final assembly is postponed till the customer order is received (eg. Dell PCs)

- The customer requirement is clearly known.- It is called reactive process, because it react to customer order.- It is fine tuned to each customer.- Customer needs can be fully met in terms of features, delivery, price and

quality,- Require high degree of supply chain efficiency and information flow.

- Often constraint by capacity constraints when the demand is high.- It is a Responsive Business Model.- Pull process operate in an environment where the customer needs are changing

and not clearly known.- eg. Durable and electronics goods.

Forecast

Buy materialsand parts

Manufacture

Warehouse/Distributor/Retailer

Sell

Deliver


2. ReplenishmentCycle

3. Manufacturing

Cycle

4. ProcurementCycle

Pull Process

Customer order arrives

Push Process


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Responsive Business Model

Pull Process is a Responsive Business Model as represented below

Dell Experience.

In a short period of time Dell became one of the top PC sellers with a sales of $41 biland net profit of $ 2.6 bil by managing flow of product, information and fundsthrough supply chain very effectively.

- Dell bypassed distributors in US and sold directly to customers.

- Through internet or phone, Dell steered customers to different PCconfigurations that can be built with the available inventory, giving customersa much wider choice.

- They adopted Responsive business model. They centralized manufacturing andinventories in few locations. The final assembly is postponed till the receipt ofcustomer order.

- Dell was offering a vide variety of PCs of latest configuration with aninventory of only 5 days.

- Direct customer contact made it possible to know customer needs better.

- When Intel introduces new chip at a much lesser price, Dell was able to offer itto customers much faster than competitors because of low inventory holding,some times passing on the lower price to the customers.

- For some parts like monitors (say Sony), Dell did not have any inventory. Thedelivery transporter was instructed to pick up the monitor from Sonywarehouse and bundle it with the PC Delivery (cross docking).

Ware houseDistributor

Retailer

Manufacture/Assembly

Sell

Deliver


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- Through supply chain information system, suppliers has access daily to Dellproduction plans and their component stock level in the inventory, enablingthem to meet Dells order immediately.

- It also eliminated possibility of defective part entering into large number ofPCs sold.

Integrated Logistics Management

- Logistics is the activity of moving and positioning inventories through out thesupply chain

- Logistics is the primary conduit of products and services with in the supplychain.

- Logistics is a sub-sect of supply chain which provides scope for performanceimprovement.

- Logistics create value by timely positioning of inventories.

- Logistics is a combination of companys order management, inventory,transportation, warehousing, material handling and packaging through out thecompanys net work of supply chains.

- Integrated Logistic Management is real time integration of all logistical

processes namely warehousing, transportation, inventory control, orderprocessing and logistic facilities using IT backbone, which in turn is connectedto the Operational/marketing/financial processes.

Facility network

IntegratedLogistic

Management

OrderProcessing

WarehousingMaterialhandling

Packaging

Transportation Inventory


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Manufacturing & Distribution Practices in

Global Economy and SCM Strategies

Expanding global economy provide several opportunities to companies to gointernational.

3 stages of global development are there for any organization to go international.

1. Export / Import

2. International operations

3. Globalization

1. Export Import

- Firms focus mainly on domestic market.

- Exports are for generation of additional income

- Exports are undertaken for using surplus capacity if any by marginal costing methodto increase net profit.

- Import of materials are made for cost advantage if the domestic costs are higher.

SCM Strategy:The supply chain operate through agents and 3rd party logistic service providers.Eg. - Firms have marketing agents in different countries.- Goods are transported by general cargo movers/ shippers etc

2. International Operations

- It is a combination of local production, distribution, logistics, and markets.

- Focus on specific market area in a linked global region across few nationalboundaries. E.g. India & South Asia market

SCM strategy: Operate through fully owned subsidiaries, local distributors ofspecific business characteristics and logistics services. Eg. Hyundai Motors India

Ltd

3. Globalization

- Globalization is by Global Business Enterprises or Stateless Enterprises.

- Have global brands

- Maintain several regional operations.

- Products are manufactured for the world with some customization suitable forthe region.

- No parent country dominates the corporate policies.


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- Senior management consists of persons of different nationalities.

- They use global resources and logistics.

SCM Strategy for Globalization:

- world wide flow of key resources including funds and personnel.

- Global sourcing

- Global marketing

- Centralized planning with local flexibility for production, distribution andmarketing.

International Supply Chain Management

Features

1. Globalization makes companies operate much beyond local and domesticmarket for selling their products and services globally.

2. Product design itself incorporate parts available globally at competitive rates.3. Production inputs are sourced globally where cost of production is lower4. Some global companies shift their manufacturing base itself to low cost

countries and sell products in global markets

5. Logistic support for transportation, warehousing, order handling, sorting etcare carried out by global 3PL and 4PL operators.

6. Part of product design itself is outsourced globally from specialized designfirms.

7. Back office work, call centers, servicing activities etc are outsourced globallyto remain competitive.

8. Companies enter into several regional and local alliances to operate in globalmarket.

All these features of global operation present several challenges in managinginternational supply chain.

Challenges in International SCM

1. Long performance cycle time2. Multi mode/ multi owner/ global transportation3. Operational challenges across several countries

4. Information system integration5. Necessity for multi alliances across the globe

1. Long performance cycle time

- Domestic operations


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1 to 5 days for transit and 2 to 10 days total cycle time

- Global operationsCycle time few weeks to few monthsAutomotive parts 60 daysFashion garments 30 to 60 days

Reasons for long performance cycle timei) Communication delays language difference, different time zones in severalelements supply chain causing undue delay in clear communication

ii) Financing delays need for Letter of Credit, foreign currency regulationsetc in different countries

iii) Special packing requirements to prevent damage due to different modesof transport, handling, high humidity, temperature and weather conditions of transitroute

iv) Ocean freight scheduling delay- containerized goods have to be scheduledthrough ports having adequate container handling facilities. High density shippingroutes may cause port and transit delays

v) Customs clearance delays caused by different export/import customsinspection procedures, documentation requirements, regulations and controls indifferent countries in the supply chain

2. Challenges from Global Transportation

Factors affecting global SCM are1. multimode multi owner carrier operation in one supply chain

2. problems associated with joint pricing, scheduling and information sharing.

3. Government restrictions and control over foreign owned carriers for inlandtransportation in different countries

4. Artificial high pricing and low operational efficiency of local carriers andtransporting contractors

3. Operational challenges

Thrust areas on operational side of global SCM are1. Language accommodation

Separate instruction plates on the products, key boards, operations and service

manuals, separate inventories for different languages

2. National accommodationPerformance characteristics, safety requirements, power supply, environmentalconsiderations, domestic standards, product liability etc.


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3. Diverse DocumentationSubstantial documentation in different formats and different languages arerequired for global SC operations.

4. Counter trade requirements from customer countriesGovernment requirements compelling firms to buy products from the country

of sale for an equivalent value of local sale.

5. Higher risks to IPR and PatentsHigher risk to IPR and patents of the firm when parts, supplies and servicesare globally out sourced

4. Challenges to Information system integration

Factors to be managed are1. System compatibility across several suppliers, customers, institutions and

countries.

2. It require ERP capable of global transaction

3. International supply chain require global planning system to optimizemanufacturing, delivery and asset utilization at the same time meet customerrequirements.

5. Challenges in establishing reliable Alliances

Global SCM should establish and manage1. alliances with local retailers, wholesalers, manufacturers, suppliers and

service providers

2. alliances provide market access and information which otherwise may takemore time and expensive

3. Wrong alliances will be counter productive and end up as a liability

6. Supply chain security

i) threat from terrorist, high seas pirates, organized theft from containers intransit route etc.

ii) information and funds flow security theft of information and funds duringglobal transfer

Supply Chain Strategies

Objectives of Supply Chain strategies


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1. It should be aimed at maximizing value creation to all participants in thesupply chain including the customers.

2. They should be formulated to meet the customer and market needs.3. The strategies shall be integrated with technology to generate highest level of

customer satisfaction.4. The value creation should be sustained for all the participants.

Supply Chain Strategies are1. Collaborative Strategy2. Demand Flow Strategy3. Customer Service Strategy4. Technology Integration Strategy

1. Collaborative Strategy

The essence of SCM is collaboration among all participants for mutually sharedbenefits with focus on customer satisfaction

a) Manufacturer Supplier CollaborationBy collaborating with suppliers, manufacturer will benefit from activities like

product development, on time order fulfillment with lowest inventory, reducedcosts and efficient capacity planning

b) Manufacturer Customer Collaboration

Collaboration between manufacturer and customers are focused on demandplanning and inventory replenishments to ensure that customer requirementsare met most efficiently at lowest cost.

c) Manufacturer 3PL/4PL Collaboration

Supply chain Strategy

Framework

Customer Service

Strategy

Technology IntegrationStrategy

Collaboration

Strategy

Demand flowStrategy


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Collaboration with 3PL/4PL service providers make it possible for themanufacturer for global sourcing and global marketing of products made incompany manufacturing facilities located in different geographical locations,in a very efficient and cost effective manner.

2. Demand Flow Strategy

Customer/ end user demand is ever changing. Key strategy in demand management is

continuous flow of demand information from customers/end users throughdistributors, manufacturer to part/raw material suppliers making every link in supplychain respond to changing customer demand quickly and at lowest cost.

3. Customer Service Strategy

To a certain degree, customer satisfaction is directly proportional to the quality ofservice provided by the company. Customer service strategy is involves addressing 3steps

a) Customer SegmentationCorrect segmentation and identification of customer requirements basedon data analysis is a focus area in strategy formulation.

b) Cost to ServeUnderstanding of the cost of services to different customers and the kindof support needed from suppliers or other parties in supply chain isessential to determine cost of support system to the company.

c) Revenue managementDetermine the customer expectations of the service response time in

each customer segment. Optimize the response time to maximize firmsprofitability and revenue.

4. Technology Integration Strategy

Development of IT enabled integration of business information system, bothhorizontally and vertically. A number of IT based supply chain informationmanagement tools are now available which provide intelligent decision support

system.The Supply Chain elements and areas getting IT enabled integrated management are

- Customer Analysis- Demand and lead time analysis- Manufacturing management- Materials management- Supplier Partnering- Transportation

- Inventory management & control at each element- Cost benefit analysis

mod 1 scm - introduction

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