Supply Chain

Supply chain management encompasses the planning and management

of all activities involved in sourcing and procurement, conversion, and all
logistics management activities. Importantly, it also includes coordination
and collaboration with channel partners, which can be suppliers,
intermediaries, third party service providers, and customers. In essence,
supply chain management integrates supply and demand management
within and across companies.

Supply chain management is an integrating function with primary

responsibility for linking major business functions and business processes
within and across companies into a cohesive and high-performing
business model. It includes all of the logistics management activities
noted above, as well as manufacturing operations, and it drives
coordination of processes and activities with and across marketing, sales,
product design, finance, and information technology.

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Challenges in Supply Chain Management
1. Globalization of manufacturing operation
With the globalization of manufacturing operations, having a global
procurement network that can support and react to your supply chain
needs is important. According to many chief procurement officers,
selecting a strategic supplier that provides manufacturing locations with
consistent global quality and a reliable local service, is a challenge.

2. Safety and quality products

The pressure on manufacturers to produce high-quality products that are
safe is an increasing challenge. The number of product recall cases is
growing each day. It can damage a company‘s reputation and is
expensive to its bottom line. Manufacturers have to meet a lot of
standards and compliance norms.

3. Shorter lead time, less inventory and better

throughput
With shorter product life cycles and changing market demands,
companies are forced to embark on a lean journey.

It is important to note that the supply strategies in a lean environment

support the operations strategy. The challenge is always to find not just a
lean concept, but a working lean solution.

4. Supplier base consolidation

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Consolidation of the supplier base can bring many advantages. It
eliminates supply base variances and overheads, especially in the supply
of critical parts. The challenge is to find a supplier with solutions and
experience in supplier-based consolidation processes.

5. Complexity of supply chains

Serving many different customers with a wide variety of products and
services may result in a complex, global, network of suppliers, factories,
warehouses, transporters, customers and others. The complexity of such a
network is hard to unravel and makes it difficult to find where and why
problems occur.

6. Finding and holding on to supply chain talent

Although supply chain management is now a generally accepted and
understood function in a company, it is difficult to find true supply chain
talent. Supply chain management covers multiple disciplines and it can
therefore be difficult to find that all-round supply chain person.

7. Customer Preferences
As stated above, global supply chains are complex. Add to that product
features that are constantly changing, and the challenge is even greater.

A product is released and customers rapidly pressure companies to come

up with the next big thing. Innovation is important since it allows
companies to stay competitive in the market, but it‘s also a challenge. To
enhance a product, companies have to redesign their supply network and
meet market demand in a way that‘s transparent for customers.

8. Market Growth
Another factor that presents a challenge is the pursuit of new customers.
The cost of a developing a product, from R&D to product introduction, is
significant. Therefore, companies are trying to expand their distribution to
emerging markets in order to grow revenues and increase market share.
Companies all around the world are expected to expand in their home and
foreign markets. The introduction to new markets is difficult due to trading
policies, fees, and government policies.

Customers‘ expectations nowadays are more demanding than ever. As

described here, companies have responded with global networks, product
innovation, and market expansions. This means that companies now rely
on supply chain managers to optimize their value chains in order to stay
competitive. As such, it‘s no surprise that these professionals are in high
demand. So customers, rest assured - experts in supply chain
management, including our own Grainger Center graduates - are behind

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the scenes tackling these complexities each and every day and are eager
to delight the customer experience.

Value Chain
A value chain is a set of activities that a firm operating in a specific
industry performs in order to deliver a valuable product or service for the
market. The activity of a diamond cutter can illustrate the difference
between cost and the value chain. The cutting activity may have a low
cost, but the activity adds much of the value to the end product, since a
rough diamond is significantly less valuable than a cut diamond.
Rather than looking at departments or accounting cost types, Porter's
Value Chain focuses on systems, and how inputs are changed into the
outputs purchased by consumers. Using this viewpoint, Porter described a
chain of activities common to all businesses, and he divided them into
primary and support activities, as shown below.

Primary activities
1. Inbound Logistics: arranging the inbound movement of materials,
parts, and/or finished inventory from suppliers to manufacturing or
assembly plants, warehouses, or retail stores

2. Operations: concerned with managing the process that converts

inputs (in the forms of raw materials, labour, and energy) into outputs (in
the form of goods and/or services).

3. Outbound Logistics: is the process related to the storage and

movement of the final product and the related information flows from the
end of the production line to the end user

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4. Marketing and Sales: selling a product or service and processes for
creating, communicating, delivering, and exchanging offerings that have
value for customers, clients, partners, and society at large.

5. Service: includes all the activities required to keep the product/service

working effectively for the buyer after it is sold and delivered.

Support/Secondary activities
1. Infrastructure: consists of activities such as accounting, legal,
finance, control, public relations, quality assurance and general (strategic)
management.

2. Technological Development: pertains to the equipment, hardware,

software, procedures and technical knowledge brought to bear in the
firm's transformation of inputs into outputs.

3. Human Resources Management: consists of all activities involved in

recruiting, hiring, training, developing, compensating and (if necessary)
dismissing or laying off personnel.

4. Procurement: the acquisition of goods, services or works from an

outside external source

Functional product
This type of product is very stable and does not have variety or undergoes
changes with high frequency. So it is of less variety (low customization)
and has Stable demand and thus does not undergo rapid changes.

The supply chain used for such products is an efficient supply chain,
where demand uncertainty is less and hence the corresponding supply
uncertainty is also low.

Innovative Product
This type of product undergoes frequent changes and this leads to
variation in demand

 High level of customization

 Demand in not stable
 Product undergoes rapid changes

For a functional product an efficient supply chain is the fit, where

demand and supply uncertainties are minimum. In an efficient supply
chain, we maintain less or no inventory.

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 For an innovative product, responsive supply chain is the fit, where
we maintain a large inventory to tone down the sudden surge in the
demand.

Bullwhip effect
The bullwhip effect on the supply chain occurs when changes in consumer
demand causes the companies in a supply chain to order more goods to
meet the new demand. The effect can be best explained as an extreme
change is supply position that is generated by a small change in demand
downstream. Inventory can quickly move from being back ordered to
being in excess due to serial nature of communicating up the supply chain
and the delays in moving product down the supply chain.

Logistics
Logistics management activities typically include inbound and outbound
transportation management, fleet management, warehousing, materials
handling, order fulfilment, logistics network design, inventory
management, supply/demand planning, and management of third party
logistics services providers..

To varying degrees, the logistics function also includes sourcing and

procurement, production planning and scheduling, packaging and
assembly, and customer service. Logistics management is an integrating
function, which coordinates and optimizes all logistics activities, as well as

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integrates logistics activities with other functions including marketing,
sales manufacturing, finance, and information technology.

1PL - First-Party Logistics

An enterprise that sends goods or products from one location to another is
a 1PL. For example, a local farm that transports eggs directly to a grocery
store for sale is a 1PL.

2PL - Second-Party Logistics

An enterprise that owns assets such as vehicles or planes to transport
products from one location to another is a 2PL. That same local farm
might hire a 2PL to transport their eggs from the farm to the grocery
store.

3PL - Third-Party Logistics

In a 3PL model, an enterprise maintains management oversight, but
outsources operations of transportation and logistics to a provider who
may subcontract out some or all of the execution. Additional services may
be performed such as crating, boxing and packaging to add value to the
supply chain. In our farm-to- grocery store example, a 3PL may be
responsible for packing the eggs in cartons in addition to moving the eggs
from the farm to the grocery store.

4PL - Fourth-Party Logistics

In a 4PL model, an enterprise outsources management of logistics
activities as well as the execution across the supply chain. The 4PL
provider typically offers more strategic insight and management over the
enterprise's supply chain. A manufacturer will use a 4PL to essentially
outsource its entire logistics operations. In this case, the 4PL may manage
the communication with the farmer to produce more eggs as the grocery
store's inventory decreases.

5PL - Fifth-Party Logistics

A 5PL provider supplies innovative logistics solutions and develops an
optimum supply chain network. 5PL providers seek to gain efficiencies and
increased value from the beginning of the supply chain to the end through
the use of technology like blockchain, robotics, automation, Bluetooth
beacons and Radio Frequency Identification (RFID) devices.

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Difference between 3PL and 4PL
Typically, the 4PL does not own transportation or warehouse assets.
Instead, it coordinates those aspects of the supply chain with vendors.

 The 4PL may coordinate activities of other 3PLs that handle various
aspects of the supply chain. The 4PL functions at the integration and
optimization level, while a 3PL may be more focused on day-to-day
operations.
 The primary advantage of a 4PL relationship is that it is a strategic
relationship focused on providing the highest level of services for
the best value, as opposed to a 3PL that may be more transaction
focused.
 A 4PL provides a single point of contact for your supply chain. With a
3PL, there may be some aspects that you still have to manage. The
4PL should take over those processes for you, acting as the
intermediary for 3PLs, carriers, warehouse vendors and other
participants in your supply chain.

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Reverse Logistics

A complete supply chain dedicated to the reverse flow of products and

materials for the purpose of returns, repair, remanufacture and/or
recycling. It is moving the items from the consumer back to the producer
for repair or disposal. There are two main categories of reverse logistics:
asset recovery, which is the return of actual products, and green reverse
logistics, which represents the responsibility of the supplier to dispose of
packaging materials or environmentally sensitive materials such as heavy
metals and other restricted materials.

Goods are returned for many reasons that can include:

 Quality demands by final customers (both real and perceived).

 Damaged or defective products.
 Inventories that result from over-forecast demand.
 Seasonal inventories.
 Out-of-date inventories.
 Remanufacturing and refurbishment of products.

Returned goods can be:

 Returned to inventory.
 Refurbished for resale.
 Sold into alternate markets.
 Broken down into reusable components.
 Sorted to recover valuable materials (further reducing disposal
costs).

Example: recycling of used soft drink glass bottles, refurbishment of

used Apple iPhone, returnable packaging in automotive industry

Quality
Quality means user satisfaction: that goods or services satisfy the needs
and expectations of the user. To achieve quality according to this
definition, we must consider

1. Quality and product policy 2. Product design

3. Manufacturing
4. Final use of the product.

Dimensions of Quality

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1. Performance 2. Features
3. Conformance 4. Warranty 5. Service
6. Aesthetics
7. Perceived Quality 8. Price 9.Cost of Quality
• Costs of Controlling Quality

Prevention costs: The costs of avoiding trouble by doing the job right in
the first place. They include training, statistical process control, machine
maintenance, design improvements, and quality planning costs.

Appraisal costs: The costs associated with checking and auditing quality
in the organization. They include product inspection, quality audits,
testing, and calibration.

• Costs of Failure
The costs of failing to control quality are the costs of producing material
that does not meet specification.

Internal failure costs: The costs of correcting problems that occur while
the goods are still in the production facility. Such costs are scrap, rework,
and spoilage. These costs would disappear if no defects existed in the
product before shipment.

External failure costs: The costs of correcting problems after goods or

services have been delivered to the customer. They include warranty
costs, field servicing of customer goods and all the other costs associated
with trying to satisfy customer complaints.

Quality control Tools

The Seven Basic Tools of Quality is a designation given to a fixed set of
graphical techniques identified as being most helpful in troubleshooting
issues related to quality.

A. Tools for Generating the Data

1. Check sheet
2. Scatter Diagram

3. Cause-and-effect diagram (also known as the "fishbone" or Ishikawa

diagram)

B. Tools for Organizing the Data

1. Pareto Chart
2. Flowchart (Process Diagram)

C. Tools for Identifying Problems

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1. Histogram
2. Statistical Process Control Chart

Check Sheet
These represent a very simple method to collect data.

Once an issue of interest has been determined (for example, customer

complaints about some product or service), the sources of the complaints
are listed as they occur. Whenever a complaint reason is repeated, a
check is put beside the reason. Below is shown a check sheet for
Telephone Interruptions and its causes.

Scatter Diagram
A scatter plot is a type of mathematical diagram using Cartesian
coordinates to display values for two variables for a set of data.
The data is displayed as a collection of points, each having the value of
one variable determining the position on the horizontal axis and the value
of the other variable determining the position on the vertical axis.

Cause-and-effect diagram
Ishikawa diagrams are causal diagrams created by Kaoru Ishikawa (1968)
that show the causes of a specific event. These diagrams are used to plot

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out all the potential causes for an identified problem (effect). Causes are
grouped into 6 major groups to make it easier to understand.

 Manpower: People associated with the process

 Methods: Method of performing a process and requirement
arrangement
 Machines: Various tools, equipment or processors involved in
process
 Materials: Feed/Raw material, intermediate materials required to
produce end product
 Measurements: Quality deciding factors in form of various data
generated using various parameters
 Mother Nature: Environmental, cultural or engineering factors
affecting process

As specific problems are branched out from the major effect area, the
result appears to look something like a fishbone. Common uses of the
Ishikawa diagram are product design and quality defect prevention, to
identify potential factors causing an overall effect.

Pareto Chart
A Pareto chart is a type of chart that contains both bars and a line graph,
where individual values are represented in descending order by bars, and
the line represents the cumulative total. It is technique of arranging data
according to priority or importance and using it into a problem solving
frame work. It helps to focus on those few vital problems, for identifying
the root causes of problems and Useful in checking the effectiveness of
the remedy on its implementation.

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Below mentioned Pareto chart shows that three major causes for
customer complaints are waiting for reservations, room cleanliness and
waiting time for getting room services.

Flow Chart
A Flow chart shows flow of a process. It consists of various symbols which
are used to describe various stages in a process and it can easily
determine the scope of a particular action upon on-going process.

Histogram
Histogram is a graphical representation of a frequency distribution which
is a summary of variation in a product or process

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Control Charts
It is a graphical representation of various parameters deciding Quality of a
product. It consists of a graph with a central line denoting the target value
or standard and two limit lines on either side of the central line called
“Upper Control Limit” and “Lower Control Limit”. Quality measured
periodically is plotted on the chart and status of control assessed.

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5S
"A place for
everything,
What does it What problems are
and everything Why is it important?
mean? avoided?
in its place"
Pillar
The factory becomes
increasingly crowded and
Space, time, money, hard to work in. Storage
energy, and other of unneeded items gets in
resources can be the way of
Remove all managed and used communication.
items not most effectively.
needed for Time wasted searching for
current Reduces problems parts/tools.
production and annoyances in the
Sort operations. work flow. Unneeded inventory and
machinery are costly to
Leave only the Improves maintain.
bare essentials: communication
When in doubt, between workers. Excess stock hides
throw it out Increases product production problems.
quality.
Unneeded items and
Enhances productivity equipment make it harder
to improve the process
flow
Arrange Eliminates many kinds Motion waste. Searching
needed items of waste, including:
waste. Waste of human
so that they
energy.
are easy to
Searching waste.
use.
Waste of excess
Set in order
Waste due to difficulty inventory.
Label items so
in using items.
that anyone
Waste of defective
can find them
or put them Waste due to difficulty products. Waste of unsafe
in returning items conditions
away.

Statistical Process Control

Statistical Process Control (SPC) is an industry-standard methodology for
measuring and controlling quality during the manufacturing process.
Quality data in the form of Product or Process measurements are obtained
in real-time during manufacturing. This data is then plotted on a graph
with pre- determined control limits. Control limits are determined by the

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capability of the process, whereas specification limits are determined by
the client's needs.

Data that falls within the control limits indicates that everything is
operating as expected. Any variation within the control limits is likely due
to a common cause—the natural variation that is expected as part of the
process. If data falls outside of the control limits, this indicates that an
assignable cause is likely the source of the product variation, and
something within the process should be changed to fix the issue before
defects occur.

Control Limits and Specification Limits

Control limits are determined by the capability of the process, whereas
specification limits are determined by the client's needs.
Specification limits are the targets set for the process/ product by
customer or market performance or internal target. In short it is the
intended result on the metric that is measured.

Control limits on the other hand are the indicators of the variation in the
performance of the process. It is the actual values that the process is
operating on. It is the real time value.

For example, consider a process of filling chips into packets of 100gm. The
process may have control limits of 95 gm to 105 gm. This means the
current process though ideally should fill exactly 100 gms of chips in each
packet, fills anywhere between 95 to 105 gm of chips.

On the other hand, the specification limits are those which are set by the
processor/customer. For example, in this case there may be a
specification limit between 98 gm to 102 gms, i.e customer will tolerate
only if there is a +/- 2 gm of variations. Hence generally, the specification
limits should be greater than the control limits (measured from the mean
of the process). This ensures that client and other needs are satisfied.

PDCA
PDCA is an iterative four-step management method used in business for
the control and continuous improvement of processes and products. It is
also known as the Deming circle/cycle/wheel, Shewhart cycle, control
circle/cycle, or plan–do–study– act (PDSA).

The steps in each successive PDCA cycle are:

PLAN
Establish the objectives and processes necessary to deliver results in
accordance with the expected output (the target or goals).

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DO
Implement the plan, execute the process, and make the product. Collect
data for charting and analysis in the following "CHECK" and "ACT" steps.

CHECK
Study the actual results (measured and collected in "DO" above) and
compare against the expected results (targets or goals from the "PLAN")
to ascertain any differences.

ACT
Request corrective actions on significant differences between actual and
planned results. Analyse the differences to determine their root causes.
Determine where to apply changes that will include improvement of the
process or product.

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