31 Supply Chain Management

Dr. Ashish Saihjpal

epgp books

 

 

  1. Learning Outcome:

 

After completing this module the students will be able to:

  • Understand the fundamentals of Supply Chain Management
  • Understand the role and importance of Supply Chain Management
  • Understand Stages in the use of Supply Chain Management
  • Understand the relation between Information Systems and SCM
  • Understand the concept of Logistics Information Systems
  1. Introduction

 

A typical box of oatmeal cookies could spend as much as 104 days starting from the factory to a supermarket, struggling its way through an unbelievable maze of wholesalers, distributors, brokers and retailers and finally the consumer. Exhibit 1 shows a broad layout of this interaction.

 

However, when the same cycle is mitigated with a supply chain software package, the company is able to integrate the different suppliers, production systems, logistic partners, distributors and retailers through a common platform where they communicate and receive information in the form of real time updates and hence, bringing in a substantiate drop in the lead time.

 

Supply Chain Management (SCM) refers to the complete chain of events starting from procuring of raw material to transformation of intermediate goods or finish goods and further, distribution of the final product to the shop floor. This process involves end to end monitoring and optimization to reduce lead time. It is the time that has elapsed between the initiation and final completion stage of the production cycle. Supply chain enables availability of the product in the marketplace. Items that may be returned flow in reverse direction from the buyer back to the seller. This can be understood from the block diagram shown in Figure 1.

 

  1. Role of Supply Chain Management

 

Managers these days realize that getting products to customers, faster than the competitors, will improve a company’s competitive position. It’s always more profitable to be visible in the marketplace and be placed prominently. A capable firm strives to get a product to market in the shortest possible time and supply chain management plays a vital role in achieving this. Key drivers to effective supply chain as listed in Figure 2 are Production, Inventory, Location, Transportation and Information. Where, production refers what and when to produce. Inventory decides what quantity to produce and how much to store to satisfy business needs. Location determines the right place where the product should be manufactured and positioned. Transportation decides the mode of transfer of goods as per business requirements and finally information determines the need for establishing communication between each entity of the supply chain.

 

SCM requires synergy between cross functional departments to enable smooth flow of the goods and services as shown in Exhibit 2. It is important to locate and remove bottlenecks in the SCM lifecycle to make the company more competitive

 

Foe an effective SCM, certain parameters are required to be met. These are:

  • Effective market coverage – A product that is intended to go to the market needs to reach there well in time and be available for purchase. It is important for a product to be present at the right place at the right time otherwise the product loses its market share.
  • Inventory control – Inventory is a valued asset to any company. It implies the finished goods in stock that are available for purchase. Each business has a standard for inventory turnaround, which is optimum for business. It determines the frequency by which the inventory needs to be replenished over a period of one year.

 

An organization that operates globally needs to maintain inventory at multiple locations. Apart from transportation, it could be in transit at the warehouses or at distribution centers. Any damage or loss of inventory can negatively impact the business commitments.

  • Global Sourcing – It implies the procurement of material and other prerequisites like machinery or manpower on a global level. Sourcing in this scenario spans borders internationally. The aim is to pick the best expertise, lowest cost of material and optimum machinery.
  • Demand planning – Global sourcing strategies are built around industry vide best practices that enable the business processes to be competent yet cost effective. Forecasting methods help to determine future demand based on industry trends. Practices picked up around the world include Just – In – Time Manufacturing (Exhibit 3), Vendor Managed Inventory, Six Sigma, Kanban etc.
  • E-Commerce – Information Technology forms the backbone of electronic exchange. Internet connectivity and global logistics network is very important to establish e commerce network (Exhibit 4). If a customer is allowed to access the business portfolio at the click of a button, he also requires status updates about the movement of the goods being ordered. Enterprises need to look at new market developments to update their SCM packages with features that the business demands. Changing business needs and both the internal and external environment of the firm play an important role in supply chain management.
  1. Information Systems and Supply Chain Management

 

A robust information system platform is a fore runner to a competent Supply Chain Management system. This comprises compatible and scalable hardware that can store data, process information and manage logistic activities. Hardware includes computers, servers; internet technologies such as bar code, radio frequency devices and storage media. Software includes application software that can be run on hardware to integrate supply chain activities. Exhibit 5 lists out the various building blocks that help realize integration interfaces between an MIS and SCM package.

 

The objective of a computer integrated logistics/ information system is to integrate, manage and provide access to the information associated with control of freight movement. The aim is to ensure satisfaction of customer commitments consistent with the desired levels of resource allocation.

 

The power of technology and internet connectivity enables direct communication of producers with customers. It helps to remove unnecessary intermediaries like channel partners, distributors and retailers who were previously involved in between.

 

It is important to note the various technical advances underway that are leading to the development of significantly intelligent marketplaces.

  • Websites – It allows both virtual organizations like Flipkart, Amazon and brick and mortar stores like and Oracle, Apple etc to move their product offering online. Apart from warehousing, the movement of goods being purchased online and their delivery cycle needs to be well managed.
  • Electronic Data Interchange – It helps enable exchange of information that supports business From customer invoices, purchase orders to billing details the EDI platform integrates the communicating parties to use these documents and share them electronically.
  • Trading communities – There are hubs of suppliers, customers, manufacturers, distributors and wholesalers brought together with a common data interchange platform which is the internet. These are able to replace the traditional, linear supply chain and thus, create the new age trading communities.
  • Intelligent marketplaces – These form a logical extension of the trading communities. These marketplaces led by innovative software providers, consultancies and service providers are characterized by
  • Tools to optimize the entire network.
  • Technology to equip participants with sophisticated tools
  • Integration, collaboration and seamless integration.
  • Flexibility in trades, transactions and solutions shall consider operational flexibility components like equipment availability.

Exhibit 6 lists out various SCM packages. The most popular ones are from SAP, Oracle, JDA, EPICOR and Manhattan Associates.

 

  1. Stages in the use of Supply Chain Management

Figure 3 illustrates trends in the use of supply chain management with three possible stages in a company’s implementation of SCM systems. The first stage in the cycle concentrates on strengthening the internal movement of goods between suppliers and customers. Websites and product catalogs provide access to the trading partners and provide necessary information prior to the actual transfer of goods. The second stage ensures connectivity between various stakeholders of the supply chain network. A software implementation connects suppliers, distributors and trading partners. Web enabled SCM packages play a major role in increasing operational efficiency and achieving cost reduction goals. In the third stage, collaborative SCM applications can be implemented using advanced SCM software. This implementation requires extranet networks and public – private e-commerce exchanges. These technologies come a long way in supporting business needs.

  1. Logistics Information Systems (LIS)

Logistics Information System refers to an information technology based support system for end to end movement of material. This system helps to keep the Operations and Production departments as well as cross functional units informed on a real time basis. The availability status, delivery schedules and readiness of hardware, software and machinery can be monitored and managed. The logistic manager is supported at each level from planning to implementation, control and re-order.

 

Logistics Information Systems – Subsystems

 

There are four principal subsystems or modules that constitute the logistics information system as shown in Exhibit 7. These are Planning, Execution, Research and Intelligence and Reports and Output. Collectively, these provide timely and accurate information for the basic management function of planning, implementation and control.

 

 

The different logical information systems are:

  • Planning System – These are referred as decision support systems. These are defined as an interactive, computer based system that provides data and analytical models to help decision makers solve unstructured problems. Planning technologies relate to needs such as network design, demand planning, sourcing, production planning, scheduling.
  • Execution System –They are responsible for the short-term, day to day functioning of the logistics system. It includes technologies that help manage activities in areas such as warehousing, transportation, trade and inventory. There are a range of capabilities that effectively manage the customer orders responsible for initiation of supply chain activities.
  • Research and Intelligence Systems – The logistics manager must have information relating to three distinct environments – the macro or external, the inter-firm environment, the micro or internal environment. Apart from environmental scanning, the systems shall support undirected viewing i.e., general exposure to information and conditional viewing – direct exposure to information. The systems shall support both informal search which refers to unstructured and limited effort to find information and formal search which is more of a deliberate effort to find information on a specific issue.
  • Reports and Output Systems – The reporting engine shall communicate only if the message keys into the receivers values and responds directly to needs of the recipients. Various reports that are essential to business are planning reports, operating reports and control report.
  1. Successful deployments of SCM

 

7.1 Case of Wal-mart: Key to Successful Supply Chain

 

When it comes to supply chain, Wal-mart can undoubtedly boast of its success. With operations across twenty seven countries, eleven thousand stores and nearly $32 billion in inventory the retail giant is a powerhouse of logistic and operational proficiency. Through this case let us see that how Wal-mart has scaled its business to the global level with the help of successful implementation of SCM systems.

 

Vendor Managed Inventory – Wal-mart was working directly with manufacturers to reduce costs on overheads and manage inventory better. This initiative designated manufacturers to manage their own inventory at the Wal-Mart warehouses. This enabled them to service each customer and ensure nearly 100 percent order fulfillment.

 

Vendor Partnerships – Wal-Mart aimed at building long term strategic partnerships with suppliers. They aim was to meet demand but at lowest possible price over a sustainable period of time. The complete ecosystem of suppliers, warehouses and retail stores behave as a composite firm.

 

Cross Docking – This concept played a vital role in the Wal- Mart strategy of inventory replenishment. Direct transfer of articles from inbound trucks to the out bound trucks and trailers left no room for storage in between.

 

Cross docking largely minimized cost and duration of transport and optimized the process. The truck fleet managed the distribution process ensuring the products don’t sit in inventory for long. The packaging, distribution and storage were managed in its entirety. This cost reduction mechanism helps them to offer better bargains to their customers.

 

 

Technology

 

From logistics to information technology, Wal-Mart has mastered the art of Supply Chain Mechanism. Having pioneered the usage of Universal Product Bar Codes it further devised Retail Link, one of the largest B2B supply-chain systems

 

The Radio Frequency Identification Tags and smart tags enabled products to be scanned by a handled product scanner. The inventory management was possible with competence of P&G who helped them build an automated reordering system.

 

The supply chain management system has enabled Wal-Mart to establish a very strong hold in the retail market space. With each process backed by supporting infrastructure and technology the company is able to lower product cost, reduce inventory cost, optimize store operations and offer aggressive pricing to its end customer.

 

7.2  Business Case – Ingredients of the McDonald’s Supply Chain

 

McDonald’s burgers are made up of ingredients blended by chain of events and dedicated efforts of the farmers, suppliers, distributors and franchisees.

 

McDonald’s journey began in India in 1996. The big challenge was to establish the brand as per international standards. The big question was, to either import product as per McDonald’s standards or establish relationships with local vendors to produce each ingredient in India.

 

Starting from then, to now, almost 99% of their products are sourced from within the country. Production has been a green field project; the crop grown by the farmer is picked, processed and dispatched to the distribution centre. These are temperature controlled multi chamber trucks. Based on each ingredient a temperature controlled zone is maintained in them.

 

McDonald’s took the challenge to implement the cold chain management systems when the supply chain mechanism in the country was largely under developed. The supply chain was to be integrated with quality food suppliers and a retail format. It was essential to build this system as a crucial step to operate in India. The company has a focus on a limited menu characterized by on time delivery. Operational redundancies are removed to optimize the nutritional value and freshness of food items. From sourcing to transportation and warehousing – all activities maintained under controlled temperatures.

 

The Key Role of IT: McDonald’s Supply Chain

 

The use of traceability system has helped to record movement of every ingredient of the burger. It enables tracking of movement, location and the temeprature on real time basis at any location in India. Each restaurant is able to record the logistic movement. Since food items are perishable in nature, the company can take preventive and immediate actions well in time. Not only does this ensure 100 percent availability of the items on the menu but supports business and helps in forecasting and promotional strategies.

 

 

7.3  Success of e – Nagare at Maruti Suzuki

 

The SCM implementation at Maruti Suzuki is one of the most popular success stories of the automobile Industry of Indian subcontinent. Former Chief Mentor, Maruti Suzuki and Chief Executive Officer of Supply Chain, Sudam Maitra (Exhibit 11) has played an instrumental role in realizing this. The company functions very proactively. They believe in maintaining minimal inventory. In contrast to the previous 30 day supply period, they receive their supplies ordered the previous night in a two hour slot the next day. While setting up the Industrial plant the government had approved of manufacturing only on condition of localization of components.

The Localization Policy

 

The company inculcated the Japanese ideology of Just – In – Time (JIT). This not only increased the efficiency of the production process but largely reduced inventory costs. The e-Nagare system of electronic flow played the real game changer. To successfully implement JIT, the company follows a localization policy. Within a radius of 100 kms lie its 75% suppliers. Suppliers of components, instruments, fuel tanks and spares are located closest to their manufacturing facility.

 

Within the legal framework of the company’s industrialization policy, they have made every attempt to implement localization. This policy has greatly reduced logistics cost and exposure to foreign exchange fluctuations. Interestingly the inventory is held up only for two hours at the factory premises. The plants at Gurgaon and Manesar have multi colored bumpers carried in mobile trolleys carrying components to feed the assembly lines. Further, the sequence of activities starting from the production plan to the shop floor is a two hour cycle. For country wide distribution, the company relies on railways as compared to their movement by road. This has led to shorter lead times and faster delivery to customers. As per statistics mentioned in Exhibit 12, Maruti has invested close to 50 crore in developing the flexi deck auto wagon rakes for high speed delivery of vehicles across Gurgaon and Bengaluru.

 

(Source: Julka Tapasya, Lamba Ajaybir Singh, “Supply Chain & Logistics Innovation at Maruti Suzuki Ltd,” International Journal of Management & Social Sciences Research, Vol 3, No 3, 2014.)

 

8. Summary

 

Supply chain management is a cross functional enterprise system that connects various stake holders of the business ecosystem. This deployment integrates the suppliers, distributors, logistic partners, vendors, employees and customers on a common platform. The goal of SCM is to help a company achieve responsiveness; optimize operations in meeting demands of the customers, needs of the suppliers. It enables to design, build and sell products using a fast, efficient and low cost network of business partners, processes and supply chain. SCM is subdivided into supply chain planning applications, demand and supply forecasting, supply chain execution applications such as inventory management, logistics management and warehouse management. SCM continues to be of paramount importance to organizations due to the use of internet technologies to enhance integration, collaboration with business partners to increase operational and business effectiveness.

you can view video on Supply Chain Management

Web Resources

  • https://www.tradegecko.com/blog/topic/b2b-ecommerce
  • http://marketrealist.com/2015/02/managing-walmarts-supply-chain-cross-docking-tools/
  • https://scm.ncsu.edu/scm-articles/article/logistics-information-systems