SUPPLY CHAIN MANAGEMENT

Learning Objectives
• To understand the escalating importance of SCM
• To learn about Evolution of SCM
• Understanding Global SCM and Logistics
• Understanding Purchase as a concept
• Understanding key terms and jargons used in SCM
• SCM Strategies
• What’s New
A picture is better than 1000 words!!
- A supply chain consists of

Supplier Manufacturer Distributor Customer

Retailer

Upstream
Downstream

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• Supply chain management (SCM) is the management of the
flow of goods. It includes the movement and storage of raw
materials, work-in-process inventory, and finished goods from
point of origin to point of consumption.
• An integrated group of processes to “source,” “make,” and
“deliver” products
• Supply-chain management connects a company’s supply side
with its demand side.
• Competition is no longer between companies; it is
between
supply chains
• That portion of the supply chain which comes after the
manufacturing process is sometimes known as the distribution
network
• Importance of the Supply Chain: Globalization of
manufacturing

INTRODUCTION
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Supply Chain Processes
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 Traditional Scope of the Supply
Chain Business logistics

Physical supply Physical distribution

(Materials management)

Sources of Plants/
Customers
supply operations
• Transportation • Transportation
• Inventory maintenance • Inventory maintenance
• Order processing • Order processing
• Acquisition • Product scheduling
• Protective packaging • Protective packaging
• Warehousing • Warehousing
• Materials handling • Materials handling
• Information maintenance • Information maintenance

Internal supply chain

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 Evolution of Supply Chain Management 2000+
Activity fragmentation to 1960 Activity Integration 1960 to 2000

Demand forecasting

Purchasing

Requirements planning
Purchasing/
Production planning Materials
Management
Manufacturing inventory

Warehousing
Logistics
Material handling

Packaging
Supply
Supply Chain
Chain
Finished goods inventory Supply
Supply Chain
Chain
Physical Management
Management
Distribution Management
Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance
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Need For Supply Chain Management
Improve operations

Increasing levels of outsourcing

Increasing transportation costs

Competitive pressures

Increasing globalization

Increasing importance of e-commerce

Complexity of supply chains

Manage inventories
Benefits Of Effective Supply Chain Management
SCM provides strategies and methods for integrating separate organizations.

Lower inventories.

Lower cost.

Higher productivity.

Greater agility.

Shorter lead times.

Higher profits .

Greater customer loyalty.

 Elements of Supply Chain Management
• Determining what products and/or
services customers want.
Customer
• Predicting the quantity and timing
Forecasting of customer demand.
• Incorporating customers, wants,
manufacturability and time to Design
market
Capacity Planning • Matching supply and demand.

• Controlling quality, scheduling

work. Processing
• Meeting demand requirements while
Inventory managing the costs of holding
inventory.
• Evaluating suppliers & making
timely purchases for production Purchasing
• Managing supply and supplier
Suppliers relations
• Determining the best location for the
facility
Location
• Deciding the best way to move
Logistics information & materials
UNDERSTANDING GLOBAL
SUPPLY CHAIN MANAGEMENT
AND LOGISTICS
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Well . . . . Is This Logistics ?

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Actually . . . . . This Is Logistics

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 Transportation
• Rail
• low-value, high-density, bulk
products, raw materials,
intermodal containers
• not as economical for small
loads, slower, less flexible than
trucking
• Trucking
• main mode of freight transport
• small loads, point-to-point
service, flexible
• More reliable, less damage
than rails; more expensive than
rails for long distance

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 Transportation
• Air
(cont.)
• most expensive and fastest, mode of
freight transport
• lightweight, small packages <500 lbs
• high-value, perishable and critical goods
• less theft
• Package Delivery
• small packages
• fast and reliable
• increased with e-Business
• primary shipping mode for Internet
companies

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 Transportation
• Water
•
(cont.)
low-cost shipping mode
• primary means of international shipping
• waterways
• slowest shipping mode
• Intermodal
• combines several modes of shipping-truck,
water and rail
• key component is containers
• Pipeline
• transport oil and products in liquid form
• high capital cost, economical use
• long life and low operating cost

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 Duties and Tariffs (cont.)

APEC
NAFT
A TAFT
FTA A
A ASEAN

CALM

ATP
A
MERCOSUR ANZCERTA

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INCOTERMS Map
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 • Sea and Inland Waterway Transport

• FAS – Free Alongside Ship (named port of shipment)

• FOB – Free on Board (named port of shipment)
• CFR – Cost and Freight (named port of destination)
Seller must pay the costs and freight to bring the goods to the port of
destination. However, risk is transferred to the buyer once the goods are
loaded on the vessel. Insurance for the goods is NOT included. This term is
formerly known as CNF (C&F, or C+F).
•CIF – Cost, Insurance and Freight (named port of destination) Exactly
the same as CFR except that the seller must in addition procure and pay for
the insurance.

INCOTERMS
International Commercial Terms
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• General Transport

• EXW – Ex Works (named place of delivery).

• CIP – Carriage and Insurance Paid to (named place of destination)
The containerized transport/multimodal equivalent of CIF. Seller pays for
carriage and insurance to the named destination point, but risk passes when
the goods are handed over to the first carrier. CIP is used for intermodal
deliveries & CIF is used for Sea .
• DDP – Delivered Duty Paid (named place of destination)
Seller is responsible for delivering the goods to the named place in the
country of the buyer, and pays all costs in bringing the goods to the
destination including import duties and taxes. The seller is not responsible
for unloading. This term is often used in place of the non-Incoterm "Free In
Store (FIS)". This term places the maximum obligations on the seller and
minimum obligations on the buyer.

INCOTERMS
International Commercial Terms
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UNDERSTANDING PURCHASE
AS A CONCEPT

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 Buy

Purchase

Procurement

Contracts

Sourcing

Acquire

Understanding Key Terminologies

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 Buy – general act of acquiring anything

Purchase – Money, ready made material

Procurement – Plus Efforts

Contracts – mostly services and agreements

Sourcing – act of obtaining (repeatable/ not one

time
activity) Global/ strategic/ outsourcing
Sourcing manpower, information, not
necessarily goods

Acquire – to gain possession, complete rights, e.g. you

can not sell a pump in your name as it is not being
acquired, Mergers and Acquisitions

Understanding Key Terminologies

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• Procurement steps
• Procurement life cycle in modern businesses usually
consists of 7 steps:
1. Identification of need:
2. Supplier Identification:
3. Supplier Communication:
4. Negotiation:
5. Purchase Orders:
6. Logistics Management: expediting, shipment,
delivery
7. Payment:

SOP (Standard Operating Procedure)

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1. Scope of Work
2. Total Amount
3. Delivery Date and Terms
4. Payment Terms
5. Bank Guarantees
6. Currency Fluctuation or Exchange Rates Letterhead PO#
7. Packaging Terms
8. Expediting
Vendo Quote
9. Inspection and Quality r Ref#
10. Taxes Ref#
11. Insurance Order Delivery
12. LD Clause Date
13. Warranty Terms Address
14. Arbitration or Jurisdiction
15. Force Majeure
16. Documentation
17. PO Acceptance
18. General Terms and Conditions

Purchase Order Contents

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Direct procurement
occurs in
manufacturing settings
only.
In contrast, Indirect
procurement activities
concern “operating
resources” that a
company purchases to
enable its operations.

DIRECT VS.
INDIRECT
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• What instigates the movement of the work in the system?

• In Push systems, work release is based on downstream demand

forecasts
• Keeps inventory to meet actual demand
• Acts proactively
• e.g. Making generic job application resumes today (e.g.: exempli gratia)

• In Pull systems, work release is based on actual demand or

the actual status of the downstream customers
• May cause long delivery lead times
• Acts reactively
• e.g. Making a specific resume for a company after talking to the recruiter

Push vs Pull System

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• Factors that contribute
to uncertainty
• inaccurate demand
forecasting
• long variable lead times
• late deliveries
• incomplete shipments
• product changes batch
ordering
• price fluctuations and
discounts
• inflated orders

Supply Chain Uncertainty

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Bullwhip Effect
Occurs when slight demand variability is magnified as
information
moves back upstream

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UNDERSTANDING ROLE OF A
SCM PROFESSIONAL

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Vendor Selection
 Vendor evaluation
 Critical decision
 Find potential vendors
 Determine the likelihood of them becoming
good suppliers
 Vendor Development
 Training
 Engineering and production help
 Establish policies and procedures

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Vendor Selection
 Negotiations
 Cost-Based Price Model - supplier opens
books to purchaser
 Market-Based Price Model - price based on
published, auction, or indexed price
 Competitive Bidding - used for infrequent
purchases but may make establishing long-
term relationships difficult

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Supply Chain Strategies
 Negotiating with many suppliers
 Long-term partnering with few
suppliers
 Vertical integration
 Joint ventures
 Keiretsu
 Just In Time

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Many Suppliers
 Commonly used for commodity
products
 Purchasing is typically based on
price
 Suppliers compete with one
another
 Supplier is responsible for
technology, expertise, forecasting,
cost, quality, and delivery
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Few Suppliers
 Buyer forms longer term relationships
with fewer suppliers
 Create value through economies of
scale and learning curve
improvements
 Suppliers more willing to participate in
JIT programs and contribute design
and technological expertise
 Cost of changing suppliers is huge
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Vertical Integration
Vertical Integration Examples of Vertical Integration
Raw material
Iron ore Silicon Farming
(suppliers)

Backward
Steel
integration

Current Integrated
Automobiles Flour milling
transformation circuits

Distribution
Forward integration Circuit boards
systems

Finished goods Computers

(customers) Dealers Watches Baked goods
Calculators

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Joint Ventures
 Formal collaboration
Enhance skills
Secure
supply
Reduce costs

 Cooperation without diluting brand or

conceding competitive advantage

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Keiretsu Networks
 A middle ground between few suppliers and
vertical integration
 Supplier becomes part of the company
coalition
 Often provide financial support for suppliers
through ownership or loans
 Members expect long-term relationships and
provide technical expertise and stable
deliveries
 May extend through several levels of the
supply chain
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Just In Time (JIT)
 “the right material, at the right time, at the right
place, and in the exact amount”, without the
safety net of inventory.
 The philosophy of JIT is simple:
 the storage of unused inventory is a waste of
resources.
 JIT inventory systems expose hidden cost of keeping
inventory.
 Inventory is seen as incurring costs, or waste,
instead of adding and storing value, contrary to
traditional accounting.

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Measuring Supply-Chain Performance

• Inventory Turnover: how often the company replenishes

inventory. High value of inventory turnover means that
the inventory was not sitting around a long time.

Cost of goods sold

Inventory
= Inventory
turnover investment

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• Internet and E-Procurement
• RFID Capabilities
• SCM Software: ERP (Enterprise
Resource Planning) Software e.g.
SAP, Oracle, etc.

What’s New?
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 • Bar code and point-of-sale
• data creates an instantaneous
• Information links all aspects computer record of a sale
of supply chain • Radio frequency identification
• E-business (RFID)
• replacement of physical • technology can send product
business processes data from an item to a
with electronic ones reader via radio waves
• Electronic data interchange • Internet
(EDI) • allows companies to
• a computer-to-computer communicate with suppliers,
exchange of business customers, shippers and other
documents businesses around the world,
instantaneously

Information Technology:
A Supply Chain Enabler
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RFID Capabilities
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• Direct purchase from suppliers over the Internet
• Direct products go directly into
production process a product, indirect
products not
• E-marketplaces
• web sites where companies and suppliers conduct
business-to-business activities
• Reverse auction
• a company posts orders on the Internet for suppliers
to bid on

E-Procurement
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Online Sourcing/ Procurement
Process
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Online Sourcing/ Procurement
Process (cont.)
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Online Sourcing/ Procurement
Process (cont.)
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• Enterprise Resource Planning (ERP)
• software that integrates components of a company by
sharing and organizing information and data
• SAP was first ERP software
• mySAP.com
• web enabled modules that allow collaboration between
companies along the supply chain

SCM Software
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Lariwnalk.ining Supply Chain with SAP
Supply Chain Economics
Supply Chain Costs as a Percent of Sales

Industry % Purchased
All industry 52
Automobile 67
Food 60
Lumber 61
Paper 55
Petroleum 79
Transportation 62

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Losing Sight of the Common Objective

I'm glad that the

hole is not on our
side!

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