Principles of Supply Chain Management (5e)

Chapter 1
INTRODUCTION
TO SUPPLY CHAIN
MANAGEMENT

Prepared by Cynthia Wisner, MBA

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 Principles of Supply Chain Management (5e)

CHAPTER OUTLINE
• Introduction
• Supply Chain Management Defined
• The Importance of Supply Chain Management
• The Origins of Supply Chain Management in the U.S.
• The Foundations of Supply Chain Management
• Current Trends in Supply Chain Management

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 Principles of Supply Chain Management (5e)

SCM Success Stories

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 Principles of Supply Chain Management (5e)

What SCM can do

• P&G’s estimated savings to retail customers of $65 million through logistics gains

• Dell Computer’s outperforming of the competition in terms of shareholder value

growth over more than two decades by over 3,000% using:
• Direct business model
• Build-to-order strategy

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 Principles of Supply Chain Management (5e)

What is a Supply Chain?

A supply chain consists of the flow of products and
services from:
• Raw materials manufacturers
• Component and intermediate manufacturers
• Final product manufacturers
• Wholesalers and distributors and
• Retailers
Connected by transportation and storage activities, and
Integrated through information, planning, and integration
activities
Today large firms are moving away Vertically Integrated
due to high cost and difficulty managing diverse units

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 Principles of Supply Chain Management (5e)

What is a Supply Chain? (continued)

Supply Chain
or Network?

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 Principles of Supply Chain Management (5e)

What is Supply Chain Management?

The planning and management of all activities involved in
sourcing and procurement, conversion, and all logistics
management activities … also includes coordination with channel
partners, which can be suppliers, intermediaries, third party
service providers, and customers.
Council of Supply Chain Management Professionals
The design and management of seamless, value-added processes
across organizational boundaries to meet the real needs of the end
customer.
Institute for Supply Management
The design, planning, execution, control and monitoring of
supply chain activities with the objective of creating net value,
building a competitive infrastructure, leveraging worldwide
logistics, synchronizing supply with demand, and measuring
performance globally.
Association for Operations Management

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 Principles of Supply Chain Management (5e)

What is Supply Chain Management?

(continued)

• Traditional organizational cultures that emphasized short-

term, company focused performance can conflict with the
objectives of supply chain management

• Successful supply chain management requires high levels

of trust, cooperation, collaboration, and honest, accurate
communications
• All participants in the supply chain benefit.
• Boundaries are dynamic and extend from “the firm’s
suppliers’ suppliers to its customers’ customers (i.e.,
second tier suppliers and customers).”
• Supply chains also include reverse logistics activities to
handle returned products, warranty repairs, and recycling.

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 Principles of Supply Chain Management (5e)

The Objective of a Supply Chain

• Maximize overall value created

Supply Chain Surplus

= Customer Value – Supply Chain Cost

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 Principles of Supply Chain Management (5e)

The Objective of a Supply Chain

• Example: a customer purchases a wireless router from
Best Buy for $60 (revenue)
• Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
• Difference between $60 and the sum of all of these
costs is the supply chain profit
• Supply chain profitability is total profit to be shared
across all stages of the supply chain
• Success should be measured by total supply chain
profitability, not profits at an individual stage

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 Principles of Supply Chain Management (5e)

The Objective of a Supply Chain

• Customer the only source of revenue
• Sources of cost include flows of information, products, or funds
between stages of the supply chain
• Effective supply chain management is the management of flows
between and among supply chain stages to maximize total
supply chain surplus

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 Principles of Supply Chain Management (5e)

Importance of Supply Chain Management

Firms with large system inventories gain the most
from successful SCM
• Lower purchasing & carrying costs
• Better product quality
• Higher customer service levels
• Increased sales and profits

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 Principles of Supply Chain Management (5e)

Importance of Supply Chain Management

(continued)

Firms using Supply Chain Management:

1. Start with key suppliers
2. Move on to other suppliers, customers,
and logistics services
3. Integrate second tier suppliers and
customers (second tier refers to the
customer’s customers and the supplier’s
suppliers)

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 Principles of Supply Chain Management (5e)

Importance of Supply Chain

Management (continued)

Cost savings and better coordination of resources are

reasons to employ Supply Chain Management
• Reduced Bullwhip Effect
• Defined as: Erratic demand forecasts causing
excess safety stocks, which cause production
planning problems.
• SCM reduces safety stocks and costs due to
coordinated planning and better sharing of
information

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 Principles of Supply Chain Management (5e)

Grebson Manufacturing’s Supply Chain

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 Principles of Supply Chain Management (5e)

Importance of
Supply Chain Decisions
• Wal-Mart, $1 billion sales in 1980 to $408 billion in 2010
• Seven-Eleven Japan, ¥1 billion sales in 1974 to ¥3 trillion in
2009
• Webvan folded in two years (2001)
• Borders, $4 billion in 2004 to $2.8 billion in 2009
• Dell, $56 billion in 2006, adopted new supply chain strategies

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 Principles of Supply Chain Management (5e)

Origins of Supply Chain Management

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 Principles of Supply Chain Management (5e)

Origins of Supply Chain Management

1950s-1960s
U.S. manufacturers focused on mass production
techniques as their principal cost reduction and
productivity improvement strategies

1960s-1970s
Introduction of new computer technologies lead to
development of Materials Requirements Planning
(MRP) and Manufacturing Resource Planning
(MRPII) to coordinate inventory management and
improve internal communication

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 Principles of Supply Chain Management (5e)

Origins of Supply Chain Management

(continued)

1980s-1990s
Intense global competition led U.S.
manufacturers to adopt:
• Supply Chain Management (SCM)
• Just-In-Time (JIT)
• Total Quality Management (TQM)
• Business Process Reengineering (BPR)
• Customer Relationship Management (CRM)

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 Principles of Supply Chain Management (5e)

Origins of Supply Chain Management (continued)

2000s and Beyond

Evolution along 2 parallel paths
1. Supply management emphasis from industrial buyer
2. Logistics and customer service emphasis from wholesalers
and retailers

Focus on improving supply chain capabilities with initiatives

such as:
• Third-party service providers (3PLs)
• Integrating logistics
• Client/server SCM software - Enterprise Resource
Planning

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 Principles of Supply Chain Management (5e)

Origins of Supply Chain Management (continued)

Today
Emphasis is being placed on the environmental and
social impacts of supply chains

• Sustainability - ability to meet the needs of current

supply chain members without hindering the ability to
meet the needs of future generations
• Triple bottom line – taking care of people, planet and
profits

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 Principles of Supply Chain Management (5e)

Decision Phases of a Supply Chain

• Supply chain strategy or design

• How to structure the supply chain over the next several years
• Supply chain planning (tactical)
• Decisions over the next quarter or year
• Supply chain operation
• Daily or weekly operational decisions

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 Principles of Supply Chain Management (5e)

Supply Chain Strategy or Design

• Decisions about the structure of the supply chain and
what processes each stage will perform
• Strategic supply chain decisions
• Locations and capacities of facilities
• Products to be made or stored at various locations
• Modes of transportation
• Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and
expensive to reverse – must take into account market
uncertainty
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 Principles of Supply Chain Management (5e)

Supply Chain Planning

• Definition of a set of policies that govern short-term operations
• Fixed by the supply configuration from previous phase
• Starts with a forecast of demand in the coming year

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 Principles of Supply Chain Management (5e)

Supply Chain Planning

• Planning decisions:
• Which markets will be supplied from which locations
• Planned buildup of inventories
• Subcontracting, backup locations
• Inventory policies
• Timing and size of market promotions
• Must consider in planning decisions demand
uncertainty, exchange rates, competition over the
time horizon

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 Principles of Supply Chain Management (5e)

Supply Chain Operation

• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating policies
are determined
• Goal is to implement the operating policies as effectively
as possible
• Allocate orders to inventory or production, set order due
dates, generate pick lists at a warehouse, allocate an
order to a particular shipment, set delivery schedules,
place replenishment orders
• Much less uncertainty (short time horizon)
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 Principles of Supply Chain Management (5e)

Foundations of Supply Chain Management

Supply base reduction, supplier alliances,
Supply SRM, global sourcing, ethical and sustainable
sourcing (Ch. 2-4)
Demand management, CPFR, inventory
Operations management, MRP, ERP, lean systems, Six
Sigma quality systems (Ch. 5-8)
Logistics management, customer relationship
management, network design, RFID, global
Logistics
supply chains, sustainability, service response
logistics (Ch. 9-12)
Barriers to integration, risk and security
Integration management, performance measurement,
green supply chains (Ch. 13,14)
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 Principles of Supply Chain Management (5e)

The Foundations of Supply Chain

Management (continued)

Supply Elements:
• Supplier management - improve performance
through
• Supplier evaluation (determining supplier capabilities)
• Supplier certification (third party or internal certification to
assure product quality and service requirements)
• Strategic partnerships - successful and trusting
relationships with top-performing suppliers
• Ethics and sustainability – recognizing suppliers’
impact on reputation and carbon footprint

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 Principles of Supply Chain Management (5e)

Important Elements of Supply

Chain Management (continued)

Operations Elements:
• Demand management - match demand to
available capacity
• Linking buyers & suppliers via MRP and ERP
systems
• Extending order communication and inventory
visibility farther up the supply chain
• Radio frequency identification (RFID) systems
scan cartons describing contents of the packages
• Use lean systems to improve the flow of materials
to reduce inventory levels
• Employ Six Sigma to improve quality compliance
among suppliers

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 Principles of Supply Chain Management (5e)

Important Elements of Supply

Chain Management (continued)

Logistics Elements:
• Transportation management - tradeoff decisions
between cost & timing of delivery / customer
service via trucks, rail, water & air
• Third party logistics providers (3PLs) – for hire
outside agencies providing transportation and
services
• Creating distribution networks based on tradeoff
decisions between cost & sophistication of
distribution system

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 Principles of Supply Chain Management (5e)

Important Elements of Supply Chain Management (continued)

Integration Elements:
• Supply Chain Process Integration - when supply
chain participants work for common goals. Requires
intra-firm functional integration, with efforts to
change attitudes & adversarial relationships
• Supply Chain Performance Measurement -
Crucial for firms to know if procedures are working
as expected
• High level supply chain performance occurs when
strategies at each firm fit well with overall supply
chain strategies

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 Principles of Supply Chain Management (5e)

Current Trends in Supply Chain Management

Supply Chain Analytics - examining raw supply chain data and
reaching conclusions or making predictions with the
information

• Growth being pushed by the rise in computing capabilities

and big data
• Huge volumes of data generated in business organizations
including retail, healthcare, manufacturing, and electronics

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 Principles of Supply Chain Management (5e)

Current Trends in Supply Chain

Management (continued)

Most companies are trying to improve their

supply chain sustainability performance
• Can lead to
• enhance processes
• reduce costs
• increase productivity
• uncover product innovation
• achieve market differentiation
• improve societal outcomes

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 Principles of Supply Chain Management (5e)

Current Trends in Supply Chain

Management (continued)

Increasing Supply Chain Visibility

• Knowing exactly where products are, at any point in
the supply chain
• Inventory visibility is made easier by technology
• Sophisticated software applications for tracking
orders, inventories, deliveries, returned goods, and
even employee attendance

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 Principles of Supply Chain Management (5e)

Amazon: Online Sales

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 Principles of Supply Chain Management (5e)

Gateway and Apple

1. Why did Gateway choose not to carry any finished-product
inventory at its retail stores? Why did Apple choose to carry
inventory at its stores?
2. Should a firm with an investment in retail stores carry any
finished-goods inventory? What are the characteristics of
products that are most suitable to be carried in finished-goods
inventory? What characterizes products that are best
manufactured to order?
3. How does product variety affect the level of inventory a retail
store must carry?
4. Is a direct selling supply chain without retail stores always less
expensive than a supply chain with retail stores?
5. What factors explain the success of Apple retail and the failure
of Gateway country stores?

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 Principles of Supply Chain Management (5e)

Zara
1. What advantage does Zara gain against the competition by having
a very responsive supply chain?
2. Why has Inditex chosen to have both in-house manufacturing and
outsourced manufacturing? Why has Inditex maintained
manufacturing capacity in Europe even though manufacturing in
Asia is much cheaper?
3. Why does Zara source products with uncertain demand from local
manufacturers and products with predictable demand from Asian
manufacturers?
4. What advantage does Zara gain from replenishing its stores
multiple times a week compared to a less frequent schedule? How
does the frequency of replenishment affect the design of its
distribution system?
5. Do you think Zara’s responsive replenishment infrastructure is
better suited for online sales or retail sales?

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 Principles of Supply Chain Management (5e)

Toyota
1. Where should plants be located, what degree of flexibility
should each have, and what capacity should each have?
2. Should plants be able to produce for all markets?
3. How should markets be allocated to plants?
4. What kind of flexibility should be built into the distribution
system?
5. How should this flexible investment be valued?
6. What actions may be taken during product design to facilitate
this flexibility?
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 Principles of Supply Chain Management (5e)

End of Chapter 1

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