Chapter 1: Understanding the supply chain

What is a Supply Chain?

A SC consists of all parties involved, directly or indirectly, in fulfilling a customs
request. This includes manufacturer, suppliers, transporters, warehouses, retailers,
customers themselves, or even within organization different functions (product
development, marketing, operations, distribution, finance, and customer service).

A SC is dynamic and involves constant flow of information, product, and funds among
different stages. These are the three key flows. The goal is to structure the three flows in
a way that meets customer needs in a cost effective manner.

The functioning of a supply chain involves three key flows – information, product, and
funds - as illustrated in Figure 1-2.

The Objective of a Supply Chain

The objective should be to maximize the net value generated. This is the difference
between what the value of the final product is to the customer and the costs the entire
supply chain incurs. This will be named the supply chain surplus.

Supply Chain Surplus = Customer Value – Supply Chain Cost

The supply chain surplus is the total profit to be shared across all supply chain stages and
intermediaries. The higher the supply chain’s profitability, the more successful the supply
chain.

Look for sources of value, revenue, and cost. The source of revenue is always the
customer. The more retailers consolidate, the more the role of distributors will diminish.

Importance of supply chain decisions

A failure to adapt a supply chain to a changing environment and customer
expectations hurt the performance of companies. Excellent supply chain designs,
planning, and operation may lead to growth and profitability.

Decision Phases in a Supply Chain

The three key supply chain decision phases are:
1. Supply chain strategy or design (several years): Decisions on the chain’s
configuration, the allocation of resources, what processes each stage will perform.
Strategic decisions include whether to outsource or to perform an in-house
function. Also, in this stage the company look at location and capacities of
production and warehouses, modes of transportation, products to be manufactured
or stored, different shipping legs, and the type of information system. SC decisions
are typically made for long term, because expensive to alter. Companies must bear
in mind the uncertainty of the market conditions.

2. Supply chain planning (quarter to a year): Strategic phase is fixed. This

configuration establishes constraints within which planning must be done. Goal of
planning is maximization of SC surplus. Companies start planning phase with a
forecast for coming year of demand and other factors (e.g. costs and prices in
different markets). Planning includes decisions on which markets will be supplied,
from which location, subcontracting of manufacturing, inventory policies, and
timing and size of marketing and price promotions. Bear in mind the uncertainty in
demand, exchange rates, and competition over this time horizon. In this phase
companies try to incorporate any flexibility built in the design and exploit to
optimize performance. Result of planning phase is definition of a set of operating
policies that govern short-term operations.

3. Supply chain operation (weekly or daily): Decisions regarding individual customer

orders. At operational level SC configuration is fixed with planning policies. Goal
of SC operations is handling incoming customer orders in the best possible
manner. Done by allocating inventory or production to the orders, setting a date to
fulfil order, generate pick lists at warehouse, allocate order to shipping mode and
shipment, set delivery schedule of trucks, and place replenishment orders. In this
phase there is less uncertainty about demand information. Goal is to exploit the
reduction of uncertainty and optimize performance.

Process Views of a Supply Chain

There are two ways to view the processes performed in a supply chain:
1. Cycle view: processes are divided into series of cycles, each performed at the
interface between two successive stages.
2. Push/pull view: processes are divided into two categories, depending on whether
they are executed in response to a customer order or in anticipation of customer
orders.
o Pull = initiated by customer order
o Push = initiated and performed in anticipation of customer order
Cycle View of Supply Chain Processes
All SC can be broken down into the following four process cycles:
• Customer order cycle
• Replenishment cycle
• Manufacturing cycle
• Procurement cycle
Each cycle occurs at the interface between two successive stages. Sometimes companies
bypasses
the retailer and distributor when it sells directly to customer. Each cycle has the next six
subprocesses:
1. Supplier stage markets product
2. Buyer stage places order
3. Supplier stage receives order
4. Supplier stage supplies order
5. Buyer stage receives supply
6. Buyer returns reverse flows to supplier or third party
This view is used by enterprise resource planning systems to support supply chain
operations.

Push/Pull View of Supply Chain Processes

Pull processes means that execution is initiated by a customer order and is known as a
reactive process (reacting on demand).
Push is initiated by the anticipation of customer orders based on forecast and is known as
speculative processes (respond on speculated).
The push/pull boundary in a SC separates the different processes. Sometimes the pull
process is customer order and manufacturing cycle and sometimes the pull process is
only customer order cycle.

Supply Chain Macro Processes in a Firm

All SC processes can be classified to the following three macro processes:
1. Customer relationship management (CRM): all processes at the interface between
the firm and its customers.

E.g.: market, price, sell, call center, and order management.

2. Internal supply chain management (ISCM): all processes that are internal to
the firm. E.g.: strategic planning, demand planning, supply planning, fulfilment, and
field service.

3. Supply relationship management (SRM): all processes at the interface between the
firm and its suppliers.
E.g.: source, negotiate, buy, design collaboration, and supply collaboration.
These macro processes manage the flow of information, product, and funds required to
generate, receive, and fulfil a customer request.

Examples of Supply Chains

At a strategic level, a supply chain designer must decide whether to build a responsive
supply chain like Zara or focus on lower costs. A decision must be made on the location
and capacity of each facility and whether it will be dedicated or flexible in terms of the
products it produces and markets it serves. The designer must decide whether products
will be sold directly to customers, through distributors (like Grainger), or through brick-
and-mortar retailers (like Macy’s). If opting for omni- channel retail, the designer must
decide on the production levels at each production site and inventory levels at each DC
and retail store. As customer orders arrive, the operations manager must decide how each
order will be fulfilled given the available inventory and production schedule. The goal
when making all these decisions is to maximize the supply chain surplus.

Developing Skills for Your Career

The link between strategic decision making and analytics is a key theme of this book.
Good strategic decisions cannot be made without access to relevant analytics, and all
analytics should be designed to support decision making. Book will help using data and
models to improve strategic decision making. Student will develop critical thinking, the
ability to formulate and analyse problems, and support their recommendations with
analytics that uses data literacy and computing skills.

Summaries
Objective of a SC
The goal of a supply chain should be to grow overall supply chain surplus. This is the
difference between the value generated for the customer and the total cost incurred across
all stages of the supply chain. A focus on the supply chain surplus increases the size of
the overall pie for all members of the supply chain. SC decisions have a large impact on
the success or failure of each firm because they significantly influence both the revenue
generated and the cost incurred. Successful supply chains manage flows of product,
information, and funds to provide a high level of product availability to the customer
while keeping costs low.

Decision phases in a SC
Supply chain decisions may be characterized as strategic (design), planning, or
operational, depending on the time horizon over which they apply. Strategic decisions
relate to supply chain configuration. These decisions have a long term impact that lasts
for several years. Strategic decisions define the constraints for planning decisions, and
planning decisions define the constraints for operational decisions. Planning decisions
cover a period of a few months to a year and include decisions regarding production
plans, subcontracting, and promotions over that period. Operational decisions span from
minutes to days and include sequencing production and filling specific orders.

Process views of a SC
The cycle view divides processes into cycles, each performed at the interface between
two successive stages of a SC. Each cycle starts with an order placed by one stage of the
SC and ends when the order is received from the supplier stage. A push/pull view of a SC
characterizes processes based on their timing relative to that of a customer order (pull is
response to customer order, whereas push is performed in anticipation of customer order).
All SC processes within a firm can be classified into three macro processes: CRM, ISCM,
and SRM.
 - CRM (customer relationship management): consists of all processes at interface
between firm and the customer and works to generate, receive, and track customer
orders.
- ISCM (internal supply chain management): consists of all SC processes that are
internal to the firm and works to plan for and fulfil customer orders.
- SRM (supply relationship management): consists of all SC processes at interface
between firm and its suppliers and works to evaluate and select suppliers and then
source goods and services from them.
Integrating among the three macro processes is crucial for successful supply chain
management.