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Supply Chain Management 18ME653

Module 1
Syllabus:
Introduction: Supply Chain – Fundamentals –Evolution- Role in Economy -
Importance - Decision Phases – Supplier Manufacturer-Customer chain. -
Enablers/ Drivers of Supply Chain Performance. Supply chain strategy - Supply
Chain Performance Measures.

MODULE 1
INTRODUCTION
What is Supply Chain Management?
A supply chain consists of all parties involved, directly or indirectly, in
fulfilling a customer request. The supply chain includes not only the
manufacturer and suppliers, but also transporters, warehouses, retailers, and
even customers themselves. Within each organization, such as a manufacturer,
the supply chain includes all functions involved in receiving and filling a
customer request. These functions include, but are not limited to, new product
development, marketing, operations, distribution, finance, and customer
service.
The supply chain encompasses all activities involved in the
transformation of goods from the raw material stage to the final stage, when
the goods and services reach the end customer. Supply chain management
involves planning, design and control of flow of material, information and
finance along the supply chain to deliver superior value to the end customer in
an effective and efficient manner.
Supply Chain Fundamentals
Supply chain management, as we understand it today, represents the
confluence of at least three main streams of knowledge and practical
experience of the business world, spanning almost 60 years. The fusion of
these streams into one powerful movement, supply chain management, which
is sweeping across the present-day industrial world has been brought about by
intense competition characteristic of contemporary markets. It is, therefore,
appropriate that a discussion on supply chain management is preceded by a
brief understanding of contributing disciplines. The supply chain is how a
company turns raw materials into finished goods and services for the

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customer. It starts with the harvesting of the raw material. The commodity
could be crops, animals, timber, gold, or other natural resources. The
commodity then goes to the manufacturer. That's when it becomes a finished
product. There can be several steps in this process and they can involve
locations in several different countries. The finished product goes to one of
three places: a wholesaler, a retailer, or directly to the consumer.

These streams include business processes and managerial practices, which

have evolved somewhat unconnectedly, if not entirely independently, in the
fields of operations management, industrial engineering, and physical
distribution. In the course of their development, these processes and practices
have absorbed several allied and subsidiary functions as well as activities, and
adopted various successful business innovations.
The three principal streams are:
 Sourcing, procurement, and supply management
 Materials management
 Logistics and distribution

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THE OBJECTIVE OF A SUPPLY CHAIN

The objective of every supply chain should be to maximize the overall value
generated. The value (also known as supply chain surplus) a supply chain
generates is the difference between what the value of the final product is to
the customer and the costs the supply chain incurs in filling the customer’s
request.
Supply Chain Surplus = Customer Value – Supply Chain Cost
 The value of the final product may vary for each customer and can be
estimated bythe maximum amount the customer is willing to pay for it.
 The difference between the value ofthe product and its price remains
with the customer as consumer surplus.
 The rest of the supplychain surplus becomes supply chain profitability,
the difference between the revenue generatedfrom the customer and
the overall cost across the supply chain.
 Supply chain profitability is the difference between the revenue
generated from thecustomer and the overall cost across the supply
chain.
 Supply chain profitability is the total profit to be shared across all supply
chain stages and intermediaries.
 The higher the supply chain profitability, the more successful is the
supply chain.
 Supply chain success is measured in terms of supply chain profitability
and not in termsof the profits at an individual stage
 Revenue is from customer – positive cash flow
 All other cash flows are simply fund exchanges that occur within the
supply chain giventhat different stages have different owners
 All flows of information, product or funds generates costs within the
supply chain.
 Supply chain management involves the management of flows between
and among stagesin a supply chain to maximize total supply chain
profitability.
Evolution
The evolution of supply chain management has been a gradual process.
Over the last century, there have been three major revolutions in the field of

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supply chain management and we examine each of them in the context of the
broader evolution in the economic and technological environment. Consider
the following statement made by the chief executive of an automobile firm:
Our aim is always to arrange the material and machinery and to simplify the
operations so that practically no orders are necessary. Our finished inventory is
in transit. So is most of our raw material inventory. Our production cycle is
about eighty-one hours from the mine to the finished machine (automobile) in
the freight car.
It is clear from this statement that this firm had a well-integrated supply chain
in place that allowed it to minimize cost and maximize asset productivity. Most
people, including students and business executives, are surprised to learn that
the company that achieved this, did so almost a century ago. Indeed, this
statement came not in the 1960s or 1970s. Rather, Henry Ford achieved this
fine balance in the 1910s with the Ford Motor Company. Clearly, this
achievement set the standard for all managers the world over.
If such a well-integrated and efficient supply chain was achieved a century ago,
then the obvious question is why are managers still worrying about it and,
more pertinently, why are you reading this book? Before we look for the
answer to this question let us take a look at the evolution of supply chain
management over the past century and try to understand of the key
dimensions over which supply chains have evolved over the past century.
There have been three major revolutions along this journey, and we examine
each of them in the context of the broader evolution in the economic
environment.

1. The First Revolution (1910–1920): Vertical Integrated Firms Offering Low

Variety of Products.
The first major revolution was staged by the Ford Motor Company where they
had managed to build a tightly integrated chain. The Ford Motor Company
owned every part of the chain - right from the timber to the rails. Through its
tightly integrated chain, it could manage the journey from the iron ore mine to
the finished automobile in 81 hours.

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However, as the famous saying goes, the Ford supply chain would offer any
colour, as long as it was black; and any model, as long as it was Model T. Ford
innovated and managed to build a highly efficient, but inflexible supply chain
that could not handle a wide product variety and was not sustainable in the
long run.
General Motors, on the other hand, understood the demands of the market
place and offered a wider variety in terms of automobile models and colours.
Ford’s supply chain required a long time for set-up changes and, consequently,
it had to work with a very high inventory in the chain.
Till the second supply chain revolution, all the automobile firms in Detroit were
integrated firms. Even traditional firms in India, like Hindustan Motors, were
highly integrated firms where the bulk of the manufacturing was done in-
house.
2. The Second Revolution (1960–1970): Tightly Integrated Supply Chains
Offering Wide Variety of Products.
Towards the end of the first revolution, the manufacturing industry saw many
changes, including a trend towards a wide product variety. To deal with these
changes, firms had to restructure their supply chains to be flexible and
efficient. The supply chains were required to deal with a wider product variety
without holding too much inventory. The Toyota Motor Company successfully
addressed all these concerns, thereby ushering in the second revolution.
The Toyota Motor Company came up with ideas that allowed the final
assembly and manufacturing of key components to be done in-house. The bulk
of the components was sourced from a large number of suppliers who were
part of the keiretsu system. Keiretsu refers to a set of companies with
interlocking business relationships and shareholdings.
The Toyota Motor Company had long-term relationships with all the suppliers.
These suppliers were located very close to the Toyota assembly plants.
Consequently, set-up times, which traditionally used to take a couple of hours,
were reduced to a couple of minutes.
This combination of low set-up times and long-term relationships with
suppliers was the key feature that propelled the second revolution - and it was
a long journey from the rigidly integrated Ford supply chain. The principles
followed by Toyota are more popularly known as lean production systems.

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3. The Third Revolution (1995–2020): Virtually Integrated Global Supply

Networks Offering Customized Products and Services.
Technology, especially information technology, which is evolving faster than
enterprises can find applications for some of the innovations, is the fuel for the
third revolution in supply chain.
It will probably take at least couple of years before we can fully understand the
IT-enabled model that has emerged and begin to apply it to all industries.
However, we have enough information to get a reasonably good
understanding of the contours of the third revolution.
We can understand the key characteristics of the third revolution using the
example of Dell computers (Customized product), Apple Inc.(Revolutionized
used experience) and Bharti Airtel(strategic outsourcing and partnerships with
global partners for these core activities).
The first is a product company, the second combines product and service, and
third is a pure service organization. In each of these organisations, we can see
different aspects of the third revolution.
Role in Economy
The growth of global supply chains has changed the distribution of
incomes across countries. Participation in these supply chains, initiated by the
successful completion of low value-added manufacturing tasks, contributed to
industrialization and high rates of economic growth in several Asian developing
economies.
Manufacturing managers decide where to locate the company based on the
costs of production. That's led to a lot of jobs outsourcing in technology to
India and China. Many call - centers have outsourced to India and the
Philippines.
Natural disasters are becoming an increasing threat that can disrupt any part
of the supply chain. The United Nations Refugee Agency reported their
frequency has doubled in the last 20 years due to global warming. The impact
on local productivity can last decades after an event.
If a disaster is bad enough, it can slow global growth. In 2011, Japan's
earthquake and the resultant tsunami created the most damage to the world's
supply of automobiles, electronics, and semiconductor equipment. The wings,

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landing gears, and other major airline parts are also made in Japan, so the
quake disrupted the production of Boeing's 787 Dreamliner. U.S. gross
domestic product slowed in 2011 as 22 Japanese auto part plants suspended
production.
Efficient management of the supply chain can reduce costs, maximize
customer value, and maximize competitive advantage. It entails effective
coordination and control of linked sectors, departments, systems, and
organizations.
IMPORTANCE
There is a close connection between the design and management of
supply chain flows (product, information, and funds) and the success of a
supply chain. Walmart, Amazon, and Seven - Eleven Japan are examples of
companies that have built their success on superiordesign, planning, and
operation of their supply chain. In contrast, the failure of many online
businesses, such as Webvan,can be attributed to weaknesses in their supply
chain design and planning.
In the past, customers were not very demanding and competition was
not really intense. As a result, firms could afford to ignore issues pertaining to
the supply chain. Today, firms that do not manage their supply chain will incur
huge inventory costs and eventually end up losing a lot of customers because
the right products are not available at the right place and time. The following
are the five major trends that have emerged to make supply chain
management a critical success factor in most industries.
a) Proliferation in product lines: Companies have realized that more and more
product variety is needed to satisfy the growing range of customer tastes and
requirements. This is evident from the fact that every time a customer walks
into a neighborhood store, he or she is bound to discover a couple of items on
the shelf that he or she had not seen during his or her last visit and that he or
she has more varieties to choose from now.
b) Shorter product life cycles: With increased competition, product life cycles
across all industries are becoming shorter. For example, technology leaders
like Apple works with a life cycle as short as 6 months.
c) Higher level of outsourcing: Firms increasingly focus on their core activities
and outsource non-core activities to other competent players. Michael Dell,

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the CEO of Dell Computers, had mentioned that if his company was vertically
integrated, it would need five times as many employees and would suffer from
a drag effect.
d) Shift in power structure in the chain: In every industry, the entities closer to
customers are becoming more powerful. With increasing competition, a
steadily rising number of products are chasing the same retail shelf space.
Retail shelf space has not increased at the pace at which product variety has
increased. So there have been cases of retailers asking for slotting allowance
when manufacturers introduce new products in the market place.
e) Globalization of manufacturing: Over the past decade, tariff levels have
come down significantly. Many companies are restructuring their production
facilities to be at par with global standards. Unlike in the past, when firms use
to source components, produce goods and sell them locally, now firms are
integrating their supply chain for the entire world market.
The rise and subsequent fall of the bookstore chain “Borders” illustrates
how a failure to adapt its supply chain to a changing environment and
customer expectations hurt its performance. Dell Computer is another
example of a company that had to revise its supply chain design in response to
changing technology and customer needs.
Walmart has been a leader at using supply chain design, planning, and
operation to achieve success. From its beginning, the company invested
heavily in transportation and information infrastructure to facilitate the
effective flow of goods and information. Walmart designed its supply chain
with clusters of stores around distribution centers to facilitate frequent
replenishment at its retail stores in a cost-effective manner. Frequent
replenishmentallows stores to match supply and demand more effectively than
the competition. Walmart has been a leader in sharing information and
collaborating with suppliers to bring down costs and improve product
availability. The results are impressive. In its 2013 annual report, the company
reported a net income of about $17 billion on revenues of about $469 billion.
These are dramatic results for a company that reached annual sales of only $1
billion in 1980. The growth in sales represents an annual compounded growth
rate of more than 20 percent. Seven-Eleven Japan is another example of a
company that has used excellent supply chain design, planning, and operation
to drive growth and profitability. It has used a very responsive replenishment

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system along with an outstanding information system to ensure that products

are available when and where customers need them. Its responsiveness allows
it to change the merchandising mix at each store by time of day to precisely
match customer demand. As a result, the company has grown from sales of 1
billion yen in 1974 to almost 1.9 trillion yen in 2013, with profits in 2013
totaling 222 billion yen.
The failure of many online businesses, such as Webvan and Kozmo, can
be attributed to their inability to design appropriate supply chains or manage
supply chain flows effectively. Webvan designed a supply chain with large
warehouses in several major cities in the United States, from which groceries
were delivered to customers’ homes. This supply chain design could not
compete with traditional supermarket supply chains in terms of cost.
Traditional supermarket chains bring product to a supermarket close to the
consumer using full truckloads, resulting in very low transportation costs. They
turn their inventory relatively quickly and let the customer perform most of
the picking activity in the store. In contrast, Webvan turned its inventory
marginally faster than supermarkets but incurred much higher transportation
costs for home delivery, as well as high labor costs to pick customer orders.
The result was a company that folded in 2001, within two years of a very
successful initial public offering. Dell is another example of a company that
enjoyed tremendous success based on its supply chain design, planning, and
operation but then had to adapt its supply chain in response to shifts in
technology and customer expectations. Between 1993 and 2006, Dell
experienced unprecedented growth of both revenue and profits by structuring
a supply chain that provided customers with customized PCs quickly and at
reasonable cost. By 2006, Dell had a net income of more than $3.5 billion on
revenues of just over $56 billion. This success was based on two key supply
chain features that supported rapid, low-cost customization. The first was
Dell’s decision to sell directly to the end customer, bypassing distributors and
retailers. The second key aspect of Dell’s supply chain was the centralization of
manufacturing and inventories in a few locations where final assembly was
postponed until the customer order arrived. As a result, Dell was able to
provide a large variety of PC configurations while keeping low levels of
component inventories.

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Decision Phases
Successful supply chain management requires many decisions relating to
the flow of information, product, and funds. Each decision should be made to
raise the supply chain surplus. These decisions fall into three categories or
phases, depending on the frequency ofeach decision and the time frame
during which a decision phase has an impact. As a result, each category of
decisions must consider uncertainty over the decision horizon.
1. Supply chain strategy or design: During this phase, a company decides how
to structure the supply chain over the next several years. It decides what the
chain’s configuration will be, how resources will be allocated, and what
processes each stage will perform. Strategic decisions made by companies
include whether to outsource or perform a supply chain function in-house, the
location and capacities of production and warehousing facilities, the products
to be manufactured or stored at various locations, the modes of transportation
to be made available along different shipping legs, and the type of information
system to be used. Pepsi Co Inc.’s decision in 2009 to purchase two of its
largest bottlers is a supply chain design or strategic decision.
A firm must ensure that the supply chain configuration supports its strategic
objectives and increases the supply chain surplus during this phase. As the
PepsiCo CEO announced in a news release on August 4, “while the existing
model has served the system very well, the fully integrated beverage business
will enable us to bring innovative products and packages to market faster,
streamline our manufacturing and distribution systems and react more quickly
to changes in the marketplace.” Supply chain design decisions are typically
made for the long term (a matter of years) and are expensive to alter on short
notice. Consequently, when companies make these decisions, they must take
into account uncertainty in anticipated market conditions over the following
few years.
Strategic Changes are also underway in the Indian Generic Drugs industry
where the division between the Chronic Therapy and Acute Therapy range of
drugs is becoming sharper with more and more firms migrating from the later
to the former. This is a strategic shift to avail higher profit margins rather than
operating in a highly competitive environment in the Acute Therapy range
where low-price leadership strategy seems to operate. Sun Pharma, Doctor
Reddy’s Laboratories Limited, Cipla, and Lupin have chosen to concentrate on

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the chronic Therapy Range dealing in limited number of drugs with high profit
margins. This shift supports the belief that Low Price Leadership Strategy has
its limitations and cannot be sustained over prolonged periods.
2. Supply chain planning: For decisions made during this phase, the time frame
considered is from a quarter to a year. Therefore, the supply chain’s
configuration determined in the strategic phase is fixed. This configuration
establishes constraints within which planning must be done. The goal of
planning is to maximize the supply chain surplus that can be generated over
the planning horizon given the constraints established during the strategic or
design phase.
Companies start the planning phase with a forecast for the coming year (or a
comparable time frame) of demand and other factors, such as costs and prices
in different markets. Planning includes making decisions regarding which
markets will be supplied from which locations, the subcontracting of
manufacturing, the inventory policies to be followed, and the timing and size
of marketing and price promotions.
For example, steel giant Arcelor-Mittal’s decisions regarding markets supplied
by a production facility and target production quantities at each location are
classified as planning decisions. In the planning phase, companies must include
uncertainty in demand, exchange rates, and competition over this time horizon
in their decisions.
Given a shorter time frame and better forecasts than in the design phase,
companies in the planning phase try to incorporate any flexibility built into the
supply chain in the design phase and exploit it to optimize performance. As a
result of the planning phase, companies define a set of operating policies that
govern short-term operations.
3. Supply chain operation: The time horizon here is weekly or daily. During this
phase, companies make decisions regarding individual customer orders. At the
operational level, supply chain configuration is considered fixed and planning
policies are already defined. The goal of supply chain operations is to handle
incoming customer orders in the best possible manner.
During this phase, firms allocate inventory or production to individual orders,
set a date by which an order is to be filled, generate pick lists at a warehouse,
allocate an order to a particular shipping mode and shipment, set delivery

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schedules of trucks, and place replenishment orders. Because operational

decisions are being made in the short term (minutes, hours, or days), there is
less uncertainty about demand information.
Given the constraints established by the configuration and planning policies,
the goal during the operation phase is to exploit the reduction of uncertainty
and optimize performance. The design, planning, and operation of a supply
chain have a strong impact on overall profitability and success. It is fair to state
that a large part of the success of firms such as Walmart and Seven-Eleven
Japan can be attributed to their effective supply chain design, planning, and
operation.
Supplier - Manufacturer - Customer chain
In its simplest form, a supply chain is composed of a company and the
suppliers and customers of that company. This is the basic group of
participants that creates a simple supply chain. Extended supply chains contain
three additional types of participants.
First there is the supplier’s supplier or the ultimate supplier at the beginning of
an extended supply chain. Then there is the customer’s customer or ultimate
customer at the end of an extended supply chain.

Finally, there is a whole category of companies who are service providers to

other companies in the supply chain. These are companies who supply services
in logistics, finance, marketing, and information technology.
In any given supply chain, there is some combination of companies who
perform different functions. There are companies that are producers,
companies that are distributors or wholesalers, companies that are retailers,

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and companies or individuals that are the customers who are the final
consumers of a product. Supporting these four kinds of companies there are
other companies that are service providers providing a range of needed
services. In this post we’ll look at the four main participants in every supply
chain.
 Producers: Producers or manufacturers are organizations that make a
product. This includes companies that are producers of raw materials
and companies that are producers of finished goods. Producers of raw
materials are organizations that mine for minerals, drill for oil and gas,
and cut timber. It also includes organizations that farm the land, raise
animals, or catch seafood. Producers of finished goods use the raw
materials and sub-assemblies made by other producers to create their
products.
 Distributors: Distributors are companies that take inventory in bulk from
producers and deliver a bundle of related product lines to customers.
Distributors are also known as wholesalers. They typically sell to other
businesses and they sell products in larger quantities that an individual
consumer would usually buy. Distributors buffer the producers from
fluctuations in product demand by stocking inventory and doing much of
the sales work to find and service customers. For the customer,
distributors fulfill the “Time and Place” function – they deliver products
when and where the customer wants them.
 A distributor is typically an organization that takes ownership of
significant inventories of products that they buy from producers and sell
to consumers. In addition to product promotion and sales, other
functions the distributor performs are ones such as inventory
management, warehouse operations and product transportation as well
as customer support and post sales service.
 A distributor can also be an organization that only brokers a product
between the producer and the customer and never takes ownership of
that product. This kind of distributor performs mainly the functions of
product promotion and sales. In both these cases, as the needs of
customers evolve and the range of available products changes, the
distributor is the agent that continually tracks customer needs and
matches them with products available.

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 Retailers: Retailers stock inventory and sell in smaller quantities to the

general public. This organization also closely tracks the preferences and
demands of the customers that it sells to. It advertises to its customers
and often uses some combination of price, product selection, service,
and convenience as the primary draw to attract customers for the
products it sells. Discount department stores attract customers using
price and wide product selection. Upscale specialty stores offer a unique
line of products and high levels of service. Fast food restaurants use
convenience and low prices as their draw.
 Customers: Customers or consumers are any organization that purchase
and use a product. A customer organization may be an organization that
purchases a product in order to incorporate it into another product that
they in turn sell to other customers. Or a customer may be the final end
user of a product who buys the product in order to consume it.

Enablers/ Drivers of Supply Chain Performance

The drivers of Supply chain performance are as follows:
1. Facilities are the actual physical locations in the supply chain network
where productis stored, assembled, or fabricated. The two major types of
facilities are production sites andstorage sites. Decisions regarding the role,
location, capacity, and flexibility of facilities have asignificant impact on the
supply chain’s performance. For example, in 2009, Amazon increasedthe
number of warehousing facilities (observe increase in Property, plant and

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equipment, inTable 3-1) located close to customers to improve its

responsiveness. In contrast, Blockbustertried to improve its efficiency in
2010 by shutting down many facilities even though it
reducedresponsiveness. Facility costs show up under property, plant and
equipment, if facilities areowned by the firm or under selling, general, and
administrative if they are leased.
2. Inventory encompasses all raw materials, work in process, and finished
goods withina supply chain. The inventory belonging to a firm is reported
under assets. Changing inventorypolicies can dramatically alter the supply
chain’s efficiency and responsiveness.
For example,W.W. Grainger makes itself responsive by stocking large
amounts of inventory and satisfyingcustomer demand from stock even
though the high inventory levels reduce efficiency. Such apractice makes
sense for Grainger because its products hold their value for a long time. A
strategyusing high inventory levels can be dangerous in the fashion apparel
business where inventoryloses value relatively quickly with changing
seasons and trends. Rather than hold high levels ofinventory, Spanish
apparel retailer Zara has worked hard to shorten new product and
replenishmentlead times. As a result, the company is very responsive but
carries low levels of inventory.Zara thus provides responsiveness at low
cost.
3. Transportation entails moving inventory from point to point in the supply
chain.Transportation can take the form of many combinations of modes
and routes, each with its ownperformance characteristics. Transportation
choices have a large impact on supply chainresponsiveness and efficiency.
For example, a mail-order catalog company can use a faster modeof
transportation such as FedEx to ship products, thus making its supply chain
more responsive,but also less efficient given the high costs associated with
using FedEx. McMaster-Carr andW.W. Grainger, however, have structured
their supply chain to provide next-day service to mostof their customers
using ground transportation. They are providing a high level of
responsivenessat lower cost. Outbound transportation costs of shipping to
the customer are typically included inselling, general, and administrative
expense, while inbound transportation costs are typicallyincluded in the
cost of goods sold.

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4. Information consists of data and analysis concerning facilities, inventory,

transportation,costs, prices, and customers throughout the supply chain.
Information is potentially thebiggest driver of performance in the supply
chain because it directly affects each of the otherdrivers. Information
presents management with the opportunity to make supply chains
moreresponsive and more efficient. For example, Seven-Eleven Japan has
used information to bettermatch supply and demand while achieving
production and distribution economies. The result isa high level of
responsiveness to customer demand while production and replenishment
costs arelowered. Information technology–related expenses are typically
included under either operatingexpense (typically under selling, general,
and administrative expense) or assets. For example, in2009, Amazon
included $1.24 billion in technology expense under operating expense
andanother $551 million under fixed assets to be depreciated.
5. Sourcing is the choice of who will perform a particular supply chain
activity such asproduction, storage, transportation, or the management of
information. At the strategic level,these decisions determine what functions
a firm performs and what functions the firmoutsources. Sourcing decisions
affect both the responsiveness and efficiency of a supply chain.
After Motorola outsourced much of its production to contract
manufacturers in China, it saw itsefficiency improve but its responsiveness
suffer because of the long distances. To make up for thedrop in
responsiveness, Motorola started flying in some of its cell phones from
China eventhough this choice increased transportation cost. Flextronics, an
electronics contract manufacturer,is hoping to offer both responsive and
efficient sourcing options to its customers. It is tryingto make its production
facilities in high-cost locations very responsive while keeping its facilitiesin
low-cost countries efficient. Flextronics hopes to become an effective
source for all customersusing this combination of facilities. Sourcing costs
show up in the cost of goods sold, and moniesowed to suppliers are
recorded under accounts payable.
6. Pricing determines how much a firm will charge for the goods and
services that itmakes available in the supply chain. Pricing affects the
behavior of the buyer of the good or service,thus affecting supply chain
performance. For example, if a transportation company varies itscharges

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based on the lead time provided by the customers, it is likely that

customers who valueefficiency will order early and customers who value
responsiveness will be willing to wait andorder just before they need a
product transported. Differential pricing provides responsiveness
tocustomers that value it and low cost to customers that do not value
responsiveness as much. Anychange in pricing impacts revenues directly but
could also affect costs based on the impact of thischange on the other
drivers.
Supply chain strategy
Supply chain strategy will have a major impact on creating value for a
company and its supply chain partners. An effective supply chain strategy
may be formulated to meet the needs of the market and integrate them
with technology to generate the highest level of customer satisfaction while
delivering the highest value to the share-holders. Supply chain strategy is
based on: a) Collaboration strategy
b) Demand flow strategy
c) Customer service strategy
d) Technology integration strategy

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a) Collaboration Strategy: Opportunities for collaboration among business

partners will vary depending upon the organization’s perspective role in the
supply chain. The three main types of collaboration are as follows:
i. Manufacturer - Supplier Collaboration: By collaborating with suppliers,
manufacturers will derive benefits in activities such as product
development, order fulfillment and capacity planning.
ii. Manufacturer - Customer Collaboration: The opportunities of
collaboration between manufacturers and customers are focused on
demand planning and inventory replenishment. This approach ensures that
the customer requirements are met efficiently.
iii. Collaboration with Third Party and Fourth Party Logistics Providers: The
collaboration of companies with 3rd party logistics providers focuses on
jointly planning logistics activities. It also gives the company the added
advantage of better packaging. The 4th party logistics organisation is one of
the intermediate stages along the logistics spectrum that combine the
benefits of outsourcing and insourcing.

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b) Demand Flow Strategy: Traditionally, in supply chain management, the

key focus and scope has been in managing flow of goods from suppliers
through the manufacturing and distribution chain to the customer. The key
in demand management is the continuous flow of demand information
from customer and end users through distribution and manufacturing to
suppliers. Customers can never be totally predictable but then a good
demand flow strategy enables the company to simplify their supply chain
operations.
c) Customer Service Strategy: Customer satisfaction level is directly
proportional to the service provided by the company. Formulating a
customer service strategy involves addressing 3 steps, namely:
i. Customer Segmentation: A company has to decide on the segment it
wants to target for a particular commodity. It can decide not to have a
homogenous market which is unacceptable.
ii. Cost to Serve: It is important to obtain an impartial assessment of
whether the things that the customers want are feasible for the company. It
is also important to determine the kind of support needed from the
suppliers or other parties in the supply chain. Finally, it is required to
project the cost of the support system and its feasibility of execution.
iii. Revenue Management: Determination of the appropriate response to
the identified needs and expectations of each customer segment must be
completed. In short, the response which maximizes the firm's profitability
and growth should be determined.
d) Technology Integration Strategy: Developments in IT enabled the
integration of business information systems, both horizontally and
vertically. A number of IT-based supply chain information management
tools are now available to provide intelligent decision support and
execution management. The main SCM approach today deals with the
integration of all the elements of a customer service focused organisation,
as shown in Figure.
ACHIEVING STRATEGIC FIT
Strategic fit requires that both the competitive and supply chain strategies
of a company have aligned goals. It refers to consistency between the
customer priorities that the competitive strategy hopes to satisfy and the

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supply chain capabilities that the supply chain strategy aims to build. For a
company to achieve strategic fit, it must accomplish the following:
a. The competitive strategy and all functional strategies must fit together to
form a coordinated overall strategy. Each functional strategy must support
other functional strategies and help a firm reach its competitive strategy
goal.
b. The different functions in a company must appropriately structure their
processes and resources to be able to execute these strategies successfully.
c. The design of the overall supply chain and the role of each stage must be
aligned to support the supply chain strategy.
A company may fail either because of a lack of strategic fit or because its
overall supply chain design, processes, and resources do not provide the
capabilities to support the desired strategic fit. Consider, for example, a
situation in which marketing is publicizing a company’s ability to provide a
large variety of products quickly; simultaneously, distribution is targeting
the lowest-cost means of transportation. In this situation, it is likely that
distribution will delay orders so it can get better transportation economies
by grouping orders together or using inexpensive but slow modes of
transportation. This action conflicts with marketing’s stated goal of
providing variety quickly. Similarly, consider a scenario in which a retailer
has decided to provide a high level of variety while carrying low levels of
inventory but has selected suppliers and carriers based on their low price
and not their responsiveness. In this case, the retailer is likely to end up
with unhappy customers because of poor product availability.
To elaborate on strategic fit, let us consider the evolution of Dell and its
supply chain between 1993 and the present. Between 1993 and 2006, Dell’s
competitive strategy was to provide a large variety of customizable
products at a reasonable price. Given the focus on customization, Dell’s
supply chain was designed to be very responsive. Assembly facilities owned
by Dell were designed to be flexible and to easily handle the wide variety of
configurations requested by customers. A facility that focused on low cost
and efficiency by producing large volumes of the same configuration would
not have been appropriate in this setting.

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Supply Chain Performance Measures.

An exhaustive list of supply chain performance measures is observed here
along with its’ significant impact of supply chain performance on business
performance using benchmarking data and also the methodology for linking
the two.
Among various sets of supply chain performance measures discussed in the
literature, we focus on a set of performance measures that have been most
widely accepted in the industry. The Supply-Chain Council is an
independent, non-profit, global corporation interested in getting the
industry to standardize supply chain terms so that meaningful supply chain
benchmarking can be carried out.
It has developed the Supply Chain Operations Reference (SCOR) model as
the industry standard for supply chain management. Several supply chain
software vendors have adopted the SCOR performance measures in their
performance management module. SCOR recognizes six major processes:
Plan, Source, Make, Delivery, Return, and Enable.
As per the SCOR model, supply chain performance measures fall under the
following five broad categories:
i. Cost
ii. Assets (Asset Management Efficiency)
iii. Reliability
iv. Responsiveness
v. Agility
Further, the SCOR model develops 10 performance measures as shown in
the figure. The Supply-Chain Council refers to measures related to costs and
assets as internal-facing measures, while reliability, responsiveness, and
agility are termed as customer-facing measures.

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Typically, a firm offers a bundle consisting of price, delivery and flexibility to

its customers. Price, in competitive markets, is dictated by the market
place. Thus, only delivery- and response-related measures are termed as
customer-facing measures. The performance measures related to assets
and costs affect the profitability of the firm and are, thus, termed as
internal-facing measures. The use of standard measures allows firms to
carry out meaningful benchmarking studies. Benchmarking studies carried
out by the Supply-Chain Council have shown that there are significant
differences in performance across firms in various industries.
SCOR measures, however, do not capture measures related to product
variety. So, to that extent, performance measures under the SCOR model
do not seem to be comprehensive. While relating the SCOR model to the
cost versus customer service trade-off framework, we combine costs- and
assets-related measures.
Supply chain benchmarking using frameworks like SCOR is difficult to
implement in countries in Asia where data availability is a big problem.
Alternatively, one may like to focus on fewer but important metrics like cost

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and assets utilization data, for which data are available in financial
statements of listed companies.

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