SUPPLY CHAIN MANAGEMENT

Module-5

Supply Chain Integration

By
Dr. Renukananda K H

Assistant Professor
Dept. of Mechanical Engineering.
RVITM-Bangalore

1
 Supply Chain Management
(18ME653)

Course content
 

Teaching Hours/Week (L:T:P): CIE Marks: 40

(3:0:0)
Credits: 03 SEE Marks:60
Exam Hours: 03 Total: 100

2
 Learning Objectives

You should be able to:

• Discuss the overall importance of process integration in
supply chain management.
• Describe advantages & obstacles of process integration.
• Understand the important issues of internal & external
process integration.
• Understand the role of information systems in creating
information visibility along the supply chain.
• Describe integration needs along the supply chain.
• Understand the causes of the bullwhip effect & their
impact on process integration.
 Outline
Supply Chain Mgmt (SCM) Integration Obstacles to Process
Model
Integration Along the SC
Identify Key SC Trading Partners
Review & Establish SC Strategies
• The Silo Mentality
Align SC Strategies w/Objectives • Lack of SC Visibility
Develop Performance Measures • Lack of Trust
• Improve Internal Integration of SC • Lack of Knowledge
Processes
• Develop SC Measures for Key Activities Causing the
Processes Bullwhip Effect
• Improve External Integration & SC
Performance
• Extend Integration to 2nd-Tier SC
Partners
• Reevaluate Integration Model
Annually
 Introduction
Primary Goal of Supply Chain Management- create value for
the end customers as well as the firms in the supply chain
network. Firms in the supply chain network must integrate
process activities internally & with other firms in the
network.
• Process integration means coordinating &
sharing information & resources to jointly
manage a process.
• Process integration is often a difficult task &
requires:
• Training
• Willing & competent partners
• Trust
• Organizational culture change
 Supply Chain Integration
Relationship Integration Firm-to-Firm Social
Interactions
Measurement
Integration Operational
Planning and
Technology and Control
planning Integration
Material and service
supplier Integration
Internal Operations Customer
Integration Integration

Customer Integration
 Supply Chain Integration

The ability of two or more

companies to develop social
Relationship
connections that serve to guide
Integration
their interactions when working
together.

When each firm in a supply chain

has clarity in terms of knowing
Role which firm is the leader, which
Specificity firms are the followers, and which
responsibilities are assigned to
each firm.
 Measurement Integration
The performance assessment of
Measurement the supply chain as a whole that
Integration also holds each individual firm or
business unit accountable for
meeting its own goals

The creation and maintenance of

Technology information technology systems
and planning that connect managers across
integration and through the firms in the
supply chain
 Internal Operations
Integration
Internal Links internally performed work
Operations into a seamless process that
Integration stretches across departmental
and/or functional boundaries,
with the goal of satisfying
customer requirements

A competency that enables firms to

Customer offer long-lasting, distinctive,
Integration value-added offerings to those
customers who represent the
greatest value to the firm or
supply chain
9
 The Supply Chain
Management Integration Model
 The Supply Chain
Mgmt. Integration Model- Cont.
Identify Critical Supply Chain Trading Partners
• Enable sale & delivery of end products to final customers
• Identifying primary trading partners allows the firm to
concentrate on managing these links
Review & Establish Supply Chain Strategies regarding:
• Parts purchased & suppliers
• Shop layout & manufacturing processes
• Design of the products manufactured
• Mode of transportation
• Warranty & return services
• Employee training methods
• Types of information technologies used
 The Supply Chain
Mgmt. Integration Model- Cont.
Align SC Strategies with Key SC Process Objectives
 The Supply Chain
Mgmt. Integration Model- Cont.
Develop Internal Performance Measures for Key Processes
• Performance should be continuously measured
w/metrics for each process.
• ERP systems support internal performance measures
• Firm is able to track progress for each of the key
processes.
Assess & Improve Internal Integration of Key SC Processes. Internal
integration requires:
• Empowered teams & cooperation across all functions
• Management support & resources
• ERP system
• an understanding of the internal supply chain
 The Supply Chain
Mgmt. Integration Model- Cont.
Develop SC Performance Measures for Key Processes
• Monitor the links with trading partners in the key
SCM processes.
• Trading partners should monitor a number of cost-
oriented measures averaged across the member
firms for each of the key supply chain processes.
Assess & Improve External Process Integration & Performance
• Build, maintain & strengthen relationships
• Share information concerning:
• Sales, forecast information, new products, expansion
plans, new processes, & new marketing campaigns
process integration will enable firms to collaborate &
share this information.
 The Supply Chain
Mgmt. Integration Model- Cont.
Extend Process Integration to Second-Tier SC Partners
• Integrate process to second-tier partners & beyond
• Radio-frequency identification (RFID) tag- Microchip
device relays information on product’s whereabouts
as it moves through the supply chain.
• Price of RFID tags is economical (about 5 cents
each).
Reevaluate the Integration Model Annually
• Trading partners should revisit the integration
model annually to identify changes within supply
chains & to assess the impact these changes have
on integration efforts.
 Obstacles to Process
Integration Along the SupplyChain
The Silo Mentality
• “I win, you lose”
• Using the cheapest
suppliers.
• Ignoring customers.
• Assigning few resources to
new product & service
design.
Firm must strive to align SC goals & the
goals & incentives of the firm
Performance reviews of managers must
include their ability to integrate
processes internally & externally.
 Obstacles to Process
Integration Along the SupplyChain
Lack of Supply Chain Visibility
• In a 2002 survey, 67% of manufacturers had not
yet successfully synchronized their supply chain
operations with those of their trading partners
• And 67% said they used different supply chain
management applications than their partners 1
RFID technology promises to add real-time information visibility
to supply chains.
• Technology boards & user boards are being
formed now to develop standards & electronic
product codes (ePCs) for the RFID industry.
[1] Anonymous, “Survey Finds Manufacturers’ Supply Chains Come Up Short,” Logistics
Management 41, no. 9 (2002): 19-20.
 Obstacles to Process
Integration Along the SupplyChain
Lack of Trust
Successful process integration between partners requires trust.
Trust occurs over time- Partners earn trust.
Creating collaboration & trust are based on:
• Start small: Pick a project likely to provide a quick
return.
• Look inward: establishing trust with internal
constituents.
• Gather ‘round: meet face-to-face.
• Go for the win-win: optimize business for all SC
members.
• Do not give away the store: Some information should
remain proprietary
• Just do it: Simple start - sharing information.
 Obstacles to Process
Integration Along the SupplyChain
Lack of Knowledge
• In a survey of 122 executives
practicing SCM, 43 % said lack of
core SCM skills & knowledge was
the greatest obstacle within their
own organizations, & 54 % echoed
this opinion for their trading
partners.1
• Firms successfully managing their
supply chains must spend
significant time influencing &
increasing the capabilities of
themselves & their partners.
[1] Bachelor, B “Implementation Imperative Information Week
(28 April 2003), 62-66
 Obstacles to Process
Integration Along the SupplyChain
Bullwhip Effect
• Forecasts & their corresponding orders along
the supply chain can become amplified and
accumulate, causing what is termed the
bullwhip effect.
• Variations in demand lead to problems in
capacity planning, inventory control, &
workforce & production scheduling.
• Ultimately, these variations result in lower
levels of customer service & higher total supply
chain costs.
 Obstacles to Process
Integration Along the SupplyChain
To Avoid Bullwhip Effect- Demand
Forecast Updating
• Make actual demand
data available to
suppliers.
• Vendor-managed
inventory (VMI)
• Reduce the length of the
supply chain.
• Reduce the lead times
from order to delivery
 Obstacles to Process
Integration Along the SupplyChain
To Avoid Bullwhip Effect- Monitor Order Batching
• Safety stocks, & the desire to order full container
loads of materials causes orders to be placed
monthly or even less often, or at varying time
interval.
• Order batching occurs when sales reps fill end-of-
period sales quotas, or when buyers spend end-of-
year budgets.
Solution: use frequent & smaller order sizes. Firms can order
smaller quantities of a variety of items from a supplier or use a
freight forwarder to consolidate small shipments.
 Obstacles to Process
Integration Along the SupplyChain
To Avoid Bullwhip Effect-
1. Reduce price fluctuations through
forward buying activities to take
advantage of the low price offers
between:
• retailers & consumers.
• distributors & retailers.
• manufacturers &
distribution.
2. Eliminate price discounting. Many
retailers have adopted everyday
low prices (EDLP).
 Obstacles to Process
Integration Along the SupplyChain
To Avoid Bullwhip Effect- Rationing & Shortage Gaming
• Rationing- occurs when demand exceeds the
availability of a supplier’s finished goods. To provide a
partial supply to all customers, goods are rationed to
customers. Buyers tend to inflate their orders to satisfy
their real needs.
• Shortage gaming- occurs when production capacity
eventually equals demand & orders are filled
completely, demand suddenly drops to less-than-
realistic levels, as the buying firms try to unload their
excess inventories.
Solution: sellers should allocate short supplies based on the demand
histories of their customers. Sharing future order plans with suppliers
allows suppliers to increase capacity if needed, thus avoiding a rationing
situation.
 Supply Chain Coordination
1. Describe supply chain coordination and the bullwhip
effect, and their impact on supply chain
performance.
2. Identify obstacles to coordination in a supply chain.
3. Discuss managerial levers that help achieve
coordination in a supply chain.
4. Understand the different forms of collaborative
planning, forecasting, and replenishment possible in
a supply chain.
 Lack of Supply Chain
Coordination & the Bullwhip Effect
• Supply chain coordination – all stages of the chain
take actions that are aligned and increase total
supply chain surplus
• Requires that each stage share information and take
into account the effects of its actions on the other
stages
• Lack of coordination results when:
• Objectives of different stages conflict
• Information moving between stages is delayed or
distorted
 Bullwhip Effect

• Fluctuations in orders increase as they move up the supply

chain from retailers to wholesalers to manufacturers to
suppliers
• Distorts demand information within the supply chain, where
different stages have very different estimates of what
demand looks like
• Results in a loss of supply chain coordination

Examples: Proctor & Gamble (Pampers)

Bullwhip Effect in SC
 Demand at Different Stages

Figure 10-1
 Information Distortion
Too rapid adjustment with safety stocks
exacerbate the bullwhip effect. How?

Ex. Average weekly sales =100 units

Sales increased to 105 units in a given week
 5% increase in sales, and might be expected to result
in a 5% increase in orders if there were no bullwhip
effect
 Information Distortion
Average Sales: 100 units/week

Sales Increase: 5% to 105 units

Forecast Increase: 5% to 105 units

Initial Safety Stock: 200 units (2 weeks' supply)

Revised Safety Stock: 210 units (5% increase)

Inventory = safety stock + cycle stock.

 If the "optimal" safety stock level was immediately recalculated and

updated
 Information Distortion
Initial Safety Stock: 200 units
Forecast Error: - 5 units
Current Safety Stock: 195 units

Then for replenishment:

  +105 units
Replenishment for Forecasted Future Demand:
(replenish cycle stock to new forecast of 105)

  +15 units
Replenishment for Safety Stock Adjustment:   
(to bring safety stock to new level of 210)

Total Replenishment Order:   120 units

5% increase in sales has led to a 20% increase in orders - the

Bullwhip Effect!
 Information Distortion

If weekly sales dropped from 100 to 95,

 Subsequent replenishment order would be more
than 5% lower
Bullwhip Effect on the downside

Remedy: Keep safety stocks steady

 Not update safety stocks unless and until there has
really been a significant and persistent change in
the sales rate
 The Effect on Performance
• Supply chain lacks coordination if each stage
optimizes only its local objective
• Reduces total profits
• Performance measures include
– Manufacturing cost
– Inventory cost
– Replenishment lead time
– Transportation cost
– Labor cost for shipping and receiving
– Level of product availability
– Relationships across the supply chain
 The Effect on Performance
Performance Measure Impact of the Lack of
Coordination

Manufacturing cost Increases

Inventory cost Increases
Replenishment lead time Increases
Transportation cost Increases
Shipping and receiving cost Increases
Level of product availability Decreases
Profitability Decreases
 Obstacles to
Coordination in a Supply Chain
• Incentive Obstacles
• Information Processing Obstacles
• Operational Obstacles
• Pricing Obstacles
• Behavioral Obstacles
 Incentive Obstacles

• Occur when incentives offered to different

stages or participants in a supply chain lead
to actions that increase variability and
reduce total supply chain profits
• Local optimization within functions or stages
of a supply chain
• Sales force incentives
 Information
Processing Obstacles
• When demand information is distorted as it
moves between different stages of the supply
chain, leading to increased variability in
orders within the supply chain
• Forecasting based on orders, not customer
demand
• Lack of information sharing
 Operational Obstacles
• Occur when placing and filling orders lead to
an increase in variability
• Ordering in large lots
• Large replenishment lead times
• Rationing and shortage gaming
Operational Obstacles
Figure 10-2
 Pricing Obstacles

• When pricing policies for a product lead to an

increase in variability of orders placed
• Lot-size based quantity decisions
• Price fluctuations
Pricing Obstacles
Figure 10-3
 Behavioral Obstacles
• Problems in learning within organizations that
contribute to information distortion
1. Each stage of the supply chain views its actions locally and
is unable to see the impact of its actions on other stages
2. Different stages of the supply chain react to the current
local situation rather than trying to identify the root causes
3. Different stages of the supply chain blame one another for
the fluctuations
4. No stage of the supply chain learns from its actions over
time
5. A lack of trust among supply chain partners causes them to
be opportunistic at the expense of overall supply chain
performance
 Managerial Levers to
Achieve Coordination
• Aligning goals and incentives
• Improving information accuracy
• Improving operational performance
• Designing pricing strategies to stabilize
orders
• Building strategic partnerships and trust
 Aligning Goals
and Incentives
• Align goals and incentives so that every
participant in supply chain activities works to
maximize total supply chain profits
• Align goals across the supply chain
• Align incentives across functions
• Pricing for coordination
• Alter sales force incentives from sell-in (to the
retailer) to sell-through (by the retailer)
 Improving Information
Visibility and Accuracy
• Sharing point of sale data
• Implementing collaborative forecasting and
planning
• Designing single-stage control of
replenishment
• Continuous replenishment programs (CRP)
• Vendor managed inventory (VMI)
 Improving Operational
Performance
• Reducing replenishment lead time
• Reducing lot sizes
• Rationing based on past sales and sharing
information to limit gaming
 Designing Pricing
Strategies to Stabilize Orders
• Encouraging retailers to order in smaller lots
and reduce forward buying
• Moving from lot size-based to volume-based
quantity discounts
• Stabilizing pricing
• Building strategic partnerships and trust
 Continuous Replenishment &
Vendor-Managed Inventories
• A single point of replenishment
• CRP – wholesaler or manufacturer
replenishes based on POS data
• VMI – manufacturer or supplier is responsible
for all decisions regarding inventory
• Substitutes
 Collaborative Planning,
Forecasting, and Replenishment (CPFR)
• Sellers and buyers in a supply chain may
collaborate along any or all of the following
1. Strategy and planning
2. Demand and supply management
3. Execution
4. Analysis
• Retail event collaboration
• DC replenishment collaboration
 Common CPFR Scenarios

Where Applied in Industries Where

CPFR Scenario Supply Chain Applied
Retail event collaboration Highly promoted All industries other than
channels or categories those that practice EDLP

DC replenishment Retail DC or distributor Drugstores, hardware,

collaboration DC grocery
Store replenishment Direct store delivery or Mass merchants, club
collaboration retail DC-to-store delivery stores

Collaborative assortment Apparel and seasonal Department stores,

planning goods specialty retail
 Collaborative Planning,
Forecasting, and Replenishment (CPFR)
• Store replenishment collaboration
• Collaborative assortment planning
• Organizational and technology requirements
for successful CPFR
• Risks and hurdles for a CPFR implementation
 Collaborative Planning,
Forecasting, and Replenishment (CPFR)
 Achieving Coordination
in Practice
• Quantify the bullwhip effect
• Get top management commitment for coordination
• Devote resources to coordination
• Focus on communication with other stages
• Try to achieve coordination in the entire supply chain
network
• Use technology to improve connectivity in the
supply chain
• Share the benefits of coordination equitably
 Summary of
Learning Objectives
1. Describe supply chain coordination and the bullwhip
effect, and their impact on supply chain
performance
2. Identify obstacles to coordination in a supply chain
3. Discuss managerial levers that help achieve
coordination in a supply chain
4. Understand the different forms of CPFR possible in a
supply chain
Supply Chain Restructuring
 Supply Chain Restructuring

Supply Chain Restructuring

•Restructuring Supply Chain Processes
–Supply chain mapping
•Restructuring Supply Chain Architecture
–Restructuring flow in chain
–Restructuring placement of inventory in
chain
Supply Chain Restructuring
 Supply Chain Restructuring

1. Supply chains are becoming more global by the day.

It is very important to maintain a nimble supply
chain that differentiates brands from being “order
qualifiers” to “order winners”.
2. Companies expand and shrink, which require
streamlined manufacturing and supply chain
footprints, resulting in massive restructuring
programs.
 Supply Chain Restructuring
3. Restructuring programs deal with major “lift &
shift” activities involving manufacturing, tooling,
transportation and warehousing assets.
4. Programs of such scale need tremendous amounts of
planning, starting from contingency sourcing, facility
readiness, finding new suppliers, buffer planning,
manufacturing process and production readiness.
 Reasons to Initiate
Restructuring
1. Cost Savings
2. Outsource non-core products and services
3. Improve supply chain network efficiency
4. Facilitate growth strategies
5. Mergers and acquisitions
6. Operations consolidation
7. Getting closer to customers
 Stages in Large Scale
Restructuring/Transformation
 Key Challenges &
Considerations
1. Defining program scope and make vs. buy decisions
in the restructuring programs go hand in hand.
Costs, competency, core/non-core and future
constraints are a few important aspects to consider.
2. Changes in economic policies also affect
restructuring programs. Close monitoring of new
policies and macroeconomic factors drive sourcing
and other supply chain decisions.
3. Integration of new products, production operations,
logistics and distribution are critical to restructuring
programs. It also includes integration of I.T. and
accounting systems, people coordination, and
ensuring a cultural fit.
 Key Challenges &
Considerations
4. Cost inflation in outsourced products and services
impacts the overall program. Therefore, probable
process and raw material cost inflation should be
taken in to consideration while designing a program.
Transformation program cost includes the cost of
additional resources, planning costs & costs associated
with unknown risks.
5. Closure Dates for facilities is another crucial area of
concern. For all restructuring projects, it is important
to plan and execute the phase-in & phase-out of
facilities. Often, they result in delayed closure, due to
ramp-up issues and the ability to maintain a stable
workforce at the closing facilities, during the transition
phase.
 Key Challenges &
Considerations
5. Reducing waste, during transformation, is a challenge in front of
stakeholders. It is important to have a burn off plan for all inventory
in the pipeline, especially for supply chains with long lead times.
Sometimes, it comes down to scrapping certain inventory to
complete the transition. In many cases, transition dates could be
pushed out, while all inventory in the supply chain is consumed.
6. Capital investment and budget allocation for inventory ensures a
smooth transition of products, from one facility to another.
Transformation inventory requires budget allocation for capital cost.
Efficient inventory planning ensures uninterrupted supply, during the
transition phase. It is important to design a strategy, which is
responsive to changes in required transformation inventory.
Transformation inventory is based on product development at the
new facility, exit date for the current facility and demand, during the
transition time. All of these factors can change in the middle of
execution, requiring a flexible and responsive inventory planning
process.
 Supply Chain
Management – Agile & Reverse
 Agile Supply Chain
• An agile supply chain can be defined as a chain of
supply that has the potential to respond to
changing requirements in a way that accelerates
the delivery of ordered goods to customers.
• In simple words, supply chain agility is a custom
adopted by many companies for choosing a dealer.
As we know, a supply chain with flexibility and the
ability to quickly react to emergency requirements
can help the business answer more efficiently to its
customers. Apart from flexibility, speed and
accuracy are also signature marks of this type of
supply chain.
Agile Supply Chain
 Agile Supply Chain
• To acknowledge the advantages of an agile supply chain,
we have to learn about the elements of any type of
supply chain. These include elements like collection of
orders and processing, supply of materials to create the
goods used to complete orders, packaging and transport
of finished goods, and the quality of customer service
that is advertised throughout the process from the point
of sale to the actual delivery and beyond.
• There are times when merchants need to think
creatively along with some flexibility in terms of
scheduling production time, selecting shippers and
basically looking closely at each step in the order
completion process to search for ways to reduce the
time required to successfully accomplish those tasks and
abide with the customer’s request.
 Reverse Supply Chain
• Reverse supply chain states the evolution of products from
customer to merchant. This is the reverse of the traditional
supply chain evolution of products from merchant to
customer.
• Reverse logistics is the process of planning, executing,
monitoring and controlling the efficient and effective
inbound flow and storage of secondary goods and
information related to the purpose of recovering value or
proper disposal. Some examples of reverse supply chain are
as follows −
 Product returns and handling product displacement.
 Remanufacturing and refurbishing exercises.
 Management and sale of surplus, along with returned
equipment and machines from the hardware leasing
business.
 Reverse Supply Chain
Different types of reverse supply chain arise at different
stages of the product cycle. Mostly reverse supply chain is
designed to carry out the below given five key processes −
• Product acquisition − Accumulating the used product
from the user by the reseller or manufacturer because of
some manufacturing defect or some other reason. It is
basically considered as a company’s growth strategy.
• Reverse logistics − Shipping of products from their final
destination for auditing, sorting and disposition.
• Inspection and disposition − Examining the condition of
the product returned along with making the most
profitable decision for reusing it in some other way.
 Reverse Supply Chain
• Remanufacturing or refurnishing − Returning the
product to its original source from where it was
ordered in the very first place along with
specifications. This is done basically when there is a
manufacturing or furnishing defect in the goods.
• Marketing − Establishing secondary markets for the
goods that have been recovered by the merchant
from the client who initially ordered it in the
beginning but chose to return it.
 Role of IT
in a Supply Chain
 Role of IT
in a Supply Chain
• Information provides the foundation on which
supply chain processes execute transactions and
managers make decisions
• Hardware, software, and people throughout a
supply chain that gather, analyze, and execute
upon information
1. Information must be accurate
2. Information must be accessible in a timely manner
3. Information must be of the right kind
4. Information must be shared
 Role of IT
in a Supply Chain
• Information is used when making
decisions about
1. Facility
2. Inventory
3. Transportation
4. Sourcing
5. Pricing and revenue management
 The Supply Chain
IT Framework
• Provides access and reporting of supply chain
transaction data
• Advanced systems layer a level of analytics that
uses transaction data to proactively improve supply
chain performance
• Enterprise software forms the foundation of a
supply chain IT system
 The Supply Chain
Macro Processes
• Customer Relationship Management (CRM)
• Internal Supply Chain Management (ISCM)
• Supplier Relationship Management (SRM)
• Rest on Transaction Management Foundation (TMF),
basic enterprise resource planning (ERP) systems
• When enterprise performance is closely linked to
supply chain performance, firms must focus on
macro processes
The Supply Chain
Macro Processes

Figure 17-1
 Customer Relationship
Management
• The processes that take place between an
enterprise and its customers downstream in the
supply chain
• Marketing
• Sell
• Order management
• Call/service center
 Internal Supply Chain
Management
• Strategic Planning
• Demand Planning
• Supply Planning
• Fulfillment
• Field Service
• There must be strong integration between
the ISCM and CRM macro processes
 Supplier Relationship
Management
• Design Collaboration
• Source
• Negotiate
• Buy
• Supply Collaboration
• There is a natural fit between ISCM and SRM
processes
Supplier Relationship
Management

Figure 17-2
 The Transaction
Management Foundation
• Early ERP systems focused on transaction
management and process automation
• Current focus on improving decision making
in the three macro processes
 The Transaction
Management Foundation

Figure 17-3
 The Future of IT
in the Supply Chain
• The three SCM macro processes will
continue to drive the evolution of enterprise
software
• Three important trends
1. The growth in software as a service (SaaS)
2. Increased availability of real-time data
3. Increased use of mobile technology
 Risk Management in IT

• Installing new systems

• Revised business processes
• Integration
• Problems can shut down the business
• Software glitches
• Power outages
• Viruses
 Risk Management in IT

• Mitigating strategies
• Install new IT systems in an incremental
fashion
• Run duplicate systems to make sure the new
system is performing well
• Implement only the level of complexity that is
needed
 Supply Chain IT in Practice

1. Select an IT system that addresses the

company’s key success factors
2. Take incremental steps and measure value
3. Align the level of sophistication with the need
for sophistication
4. Use IT systems to support decision making, not
to make decisions
5. Think about the future
 Summary of
Learning Objectives
1. Understand the importance of information and
information technology in a supply chain
2. Know at a high level how each supply chain driver
uses information
3. Understand the major applications of supply chain
information technology and the processes that
they enable
Thank you

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