JOMOKENYATTA UNIVERSITY

OF
AGRICULTURE AND TECHNOLOGY
BP&CM
UNIT CODE: HPS 2406
UNIT NAME: SUPPLY CHAIN THEORY
SEP-DEC, 2018.
Lecturer:Denish A. Matunga – 0729006426
1.0 PURPOSE

To introduce students to the bigger picture of supply chain Management and various supply
chain strategies.

2.0 COURSE OBJECTIVES

At the end of this course students should be able to:

a) Explain the Evolution of Supply Chain Management.

b) Explain the Value Chain and Value Delivery System.
c) Understand Supply Chain in the Global Perspective.
d) Formulate Strategies on how to Enhance Coordination and Collaboration in the Supply
Chain Management.
e) Explain the Role of Transportation and Logistics in the Supply Chain.

3.0 COURSE DESCRIPTION

Concept of Supply Chain Management; Evolution of Supply Chain Management: Organization

Design and Management of the Supply Chain: Strategic Supply Chain Management; Customer
Focus in supply chain; Value Chain and value Delivery System; Facilities Decision; Supply
Chain Communication; Transportation Choices in the Supply Chain, Inventory Management;
Formulation Supply Chain Strategy; Distribution Channel Design and Management: Forming
Strategic Alliances and Partnerships; Supply Chain Structures; Inter-organizational Relationships
; Distribution, Production Issues for supply Chain Procurement, Transportation and Logistics;
Managing Supply Chain; Information System for supply Chain; Market Relationships, Global
Issues; Strategic Modeling and Location; Strategy of Supply Chain; Supply Chain and Corporate
Strategy. Best Practices and Benchmarking; Optimization of Supply Chain, Ethical
Considerations.

WEE HRS COURSE CONTENT RE-MARKS

K
1 3 Concept of Supply Chain Management;
 Decisions in a supply chain
 Design Decisions
 Operations Decisions

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  The important of the chain supply
 Enablers of Supply Chain Performance
Evolution of Supply Chain Management:
Organization Design and Management of the Supply Chain:
Strategic Supply Chain Management;
 Introduction to Strategy and Supply Chain
Management
 Strategic Planning
 Organization Objectives
 Process of Developing Corporate Strategy
 Tools and approaches for Strategic Planning
 Understanding Strategic Management Process
 Applicability in Strategic Purchasing
Customer Focus in supply chain;
Value Chain and value Delivery System;
Facilities Decision;
Supply Chain Communication;
Transportation Choices in the Supply Chain,
Inventory Management;
Formulation Supply Chain Strategy;
Distribution Channel Design and Management:
Forming Strategic Alliances and Partnerships;
Supply Chain Structures;
Inter-organizational Relationships;
 Distribution,
 Production Issues for supply Chain Procurement,
Transportation and Logistics;
Managing Supply Chain;
Information System for supply Chain;
Market Relationships,
Global Issues; Strategic Modeling and Location;
Strategy of Supply Chain;
 Supply Chain and Corporate Strategy.
Best Practices and Benchmarking;

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 Optimization of Supply Chain,
Ethical Considerations.
2 3

4.0 TEACHING METHODOLOGY.

This course will be taught using lectures, case studies, group discussions and assignments.
5.0 INSTRUCTIONAL MATERIALS.
These will include white board, white board markers, LCD projector, a lap top computer and
teaching notes.
6.0 COURSE EVALUATION
Continuous Assessment Tests (CATs) 30% of the marks and University Examination 70% to
make a total of 100 marks.
7.0 COURSE TEXT BOOKS
Mandyam Srinivasan (2011). Building Lean Supply Chains with the Theory of Constraints.
McGraw Hill Publishers
Kenneth Lysons and Brian Farrington (2006) Purchasing and Supply Chain management
prentice Hall
Michael H. Hugos (2011) Essential of Supply Chain Management, 3rd Edition. Wiley pub.
8.0 REFERENCE TEXTBOOKS.
Terry P et al. (2005) The practice of Supply Chain Management: Where Theory and Application
Converge (International Series in Operations Research & Management science) Springer
publishers
Causina, R., Lawson, B. and Squire, B (2008) Strategic Supply Chain Management: Principles,
Theories and Practice. Pearson Education. Ltd.
Van Weele, A. (2005). Purchasing and Supply Chain Management. London Thomson

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1.1Meaning of Procurement and Supply Management.
Though many different and conflicting definitions of procurement and supply
management abound, in this definition;

 Purchasing is a subset of supply chain management.

 Procurement deals primarily with managing all aspects related to the
inputs to an organization (i.e., purchased goods, materials, and services),
 While supply management deals with inputs, conversion, and outputs.

A supply chain consists of three types of entities:

 customers,
 a producer, and
 The producer's suppliers.

The extended supply chain includes customers and suppliers.

• Supply management oversees and optimizes the processes of acquiring

inputs from suppliers (purchasing),
• Converting those inputs into a finished product (production), and
• Delivering those products or outputs - to customers (fulfillment).

Under this definition, supply chain managers decide where to locate manufacturing
and distribution facilities, how to route goods and materials among those facilities,
and from which parts of the world to source the inputs. Supply management unites
disparate functions that historically reported to different executive positions with
different and sometimes conflicting priorities.
One understanding is that procurement will become more important. This is due to,
analyzing spend for cost savings opportunities, negotiating, and selecting reliable
sources of supply will always be critical. These functions fuel profit and provide
competitive advantage for the organization.

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However, the procurement professional can expect to see his or her role expand to
include the management of functions that were separate in the past. These
functions include inventory management, internal logistics, warehousing, and other
functions that are more related to the input or pre-production side of the supply
chain. Today, due to this expanded role, purchasing is often referred to as
procurement and supply management.

Supply management addresses the following problems:

 Distribution network configuration: the number, location, and network
missions of suppliers, production facilities, distribution centers, warehouses,
cross-docks, and customers.
 Distribution strategy: questions of operating control (e.g., centralized,
decentralized, or shared); delivery scheme (e.g., direct shipment, pool point
shipping, cross docking, direct store delivery, or closed loop shipping);
mode of transportation (e.g., motor carrier, including truckload, less than
truckload (LTL), parcel, railroad, intermodal transport, including trailer on
flatcar (TOFC) and container on flatcar (COFC), ocean freight, airfreight);
replenishment strategy (e.g., pull, push, or hybrid); and transportation
control (e.g., owner operated, private carrier, common carrier, contract
carrier, or third-party logistics (3PL)).
 Trade-offs in logistical activities: The above activities must be coordinated
in order to achieve the lowest total logistics cost. Trade-offs may increase
the total cost if only one of the activities is optimized. For example, full
truckload (FTL) rates are more economical on a cost-per-pallet basis than
are LTL shipments. If, however, a full truckload of a product is ordered to
reduce transportation costs, there will be an increase in inventory holding
costs, which may increase total logistics costs. The planning of logistical
activities therefore takes a systems approach. These trade-offs are key to
developing the most efficient and effective logistics and SCM strategy.
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  Information: The integration of processes through the supply chain in order
to share valuable information, including demand signals, forecasts,
inventory, transportation, and potential collaboration.
 Inventory management: Management of the quantity and location of
inventory, including raw materials, work in process (WIP), and finished
goods.
 Cash flow: Arranging the payment terms and methodologies for exchanging
funds across entities within the supply chain.
Supply chain execution means managing and coordinating the movement of
materials, information and funds across the supply chain. The flow is bi-
directional. SCM applications provide real-time analytical systems that manage the
flow of products and information throughout the supply chain network.

1.2 Corporate Environment Affecting Procurement

The different environmental factors that affect the business can be broadly
categorized as internal and has its own external factors.

1.2.1 Internal Factors

Internal factors are those factors which exist within the premises of an organization
and directly affect the different operations carried out in a business. These internal
factors are:

1. Value System: It implies the culture and norms of the business. In other
words, it means the regulatory framework of a business and every member
of the organization has to act within the limits of this framework.
2. Missions And Objectives: Different priorities, policies and philosophies of
a business is guided by the mission and objectives of a business.

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 3. Financial Factors: Financial factors like financial policies, financial
position and capital structure also affect a business performance and its
strategies.
4. Internal Relationship: Factors like the amount of support the top
management enjoys from its shareholders, employees and the board of
directors also affects the smooth functioning of a business.
1.2.2 External Factors

These include all those factors which exist outside the firm and are often regarded
as uncontrollable. These external forces can further be categorized as MICRO
ENVIRONMENT and MACRO ENVIRONMENT. 

1.2.2.1 Micro Environment

They include the following factors:

1. Suppliers: Suppliers are those people who are responsible for supplying
necessary inputs to the organization and ensure the smooth flow of
production. The role of suppliers for a business is critical, as the business is
reliant on a third party which can exert considerable influence. This
environmental factor, involves the number of suppliers in the industry and
the suppliers;--as well as the company--bargaining power. For example, a
few large suppliers that dominate the market and supply material for which
there is no good substitute often means that companies needing those
supplies pay higher prices.
2. Competitors: Competitors can be called the close rivals and in order to
survive the competition one has to keep a close look in the market and
formulate its policies and strategies as such to face the competition. A
business makes many decisions about the direction to go based on the
success, or lack thereof, of its competitors. From the customers; standpoint,
competition provides choice. Businesses must analyze competitors to find
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 and exploit weaknesses to gain increased market share. Businesses often
conduct analyses to help identify strengths and weaknesses of current
competitors and threats which can come from future competitors in the
marketplace.
3. Marketing Intermediaries: Marketing intermediaries aid the company in
promoting, selling and distribution of the goods and services to its final
users. Therefore, marketing intermediaries are vital link between the
business and the consumers.
1.2.2.2. Macro Environment

They include the following factors:

1. Economic Factors: Economic factors include economic conditions and

economic policies that together constitute the economic environment. These
include growth rate, inflation, restrictive trade practices etc. Which have a
considerable impact on the business.
2. Social Factors: Social factors includes the society as a whole alongside its
preferences and priorities like the buying and consumption pattern, beliefs of
people their purchasing power, educational background etc.
3. Political Factors: The political factors are related to the management of
public affairs and their impact on the business. It is important to have a
political stability to maintain stability in the trade.
Technological Factors: Latest technologies help in improving the marketability of
the product plus make it more consumer friendly. Therefore, it is important for a
business to keep a pace with the changing technologies in order to survive in the
long run.

1.1 Introduction to Purchase and Supply Management

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Whether you are a tea or coffee drinker – have you ever wondered how your hot
drink makes its way onto your breakfast table?

Firstly, let’s consider the flow of materials. They range from;

 Raw materials (tea leaves), to

 Work in progress (silo), all the way to
 Finished goods (a cup of tea).

This goods flow encompasses the supplier’s supplier through to end consumer.

Secondly, we have the flow of information, e.g. order confirmation or dispatch

advice. In addition, there are also reverse flows.

These reverse flows can be in the form of:

a) Goods, e.g. quality defect products or obsolete products

b) Information, e.g. customer feedback
c) Packaging material, e.g. outer cartons
d) Transportation equipment, e.g. cages, pallets or containers

We also have the reverse flow of funds. This is the money that flows back into the
supply chain. Ultimately, the supplier’s supplier wants to be paid for the delivery
of tea leaves!

Thus, tracking your breakfast drink all the way back from its source of raw
materials shows a number of players and processes involved which are but not
limited to the following:

1. Product supply
2. Customer demand
Which of these two starts the supply chain?
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 Imagine a scenario where a retail outlet is operating from customer demand.
You enter as a consumer with the intention to buy some tea bags. You find
the tea and coffee shelf empty. Instead of the full assortment of black, green,
fruit and herbal tea, there is a sign over the counter saying, “Please order
your favorite tea here”. Irritated by the absence of product supply you
would probably go and see the shop assistant for clarification. They would
then explain to you that the shop is running a customer demand driven tea
supply chain where the end consumer can place an order directly in the shop.
The order is then automatically transmitted to the tea bag supplier in India in
order to grow, pick and process the required amount of tea leaves that are
filled into tea bags. Does that work? It probably does not.
 Commodities, such as tea, coffee, rice, bread, milk and most other basic
consumer products that you find in supermarkets are more likely to be
produced on a product supply basis. This means that the supply chain
starts supplying before you come into the supermarket to buy some tea
bags. As a consequence, you find supermarket shelves full of products for
everyday use. The same applies to small household equipment, electronics
and general fashion clothes – mostly these are sourced, produced and
shipped in advance. So in this case, product supply starts the supply
chain.
 Unlike tea bags, some products are produced based on customer demand.
These products are typically characterized by a high degree of
customization. Here, the customer order starts the chain of supply,
manufacturing and transport activities of your desired product. Some typical
products of customer demand driven products are: tailor-made clothes,
customized tools and dinner in an up-market fish restaurant.
 As in the fish, customers see the fish that they are going to eat later on still
swimming in the fish tank when they enter the restaurant. The chain starts

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 moving after you have expressed your wish or after you have set your order.
Thus, the supply chain starts with customer demand.
 To summarize, supply chains can be triggered by product supply
(commodities) or by customer demand (customized products).
 The degree of customization dictates how much and in which format the
supplying company holds inventory: no stock at all, raw or basic materials
only or sub-assemblies of their products as in the famous example of Dell
computers. The strategies and associated decoupling of product supply from
customer demand form a crucial part of supply chain management. It has
aspects of purchasing which is buying at the most right total cost of
ownership.

1.1 Definition of Supply Chain Management

As per definition SCM is the management of a network of all business processes and activities
involving procurement of raw materials, manufacturing and distribution management of Finished
Goods.

Def; SCM is also called the art of management of providing the Right Product, At the Right
Time, Right Place and at the Right Cost to the Customer.

Commonly accepted definitions of supply chain management include:

 The management of upstream and downstream value-added flows of materials, final
goods, and related information among suppliers, company, resellers, and final consumers.
 The systematic, strategic coordination of traditional business functions and tactics across
all business functions within a particular company and across businesses within the
supply chain, for the purposes of improving the long-term performance of the individual
companies and the supply chain as a whole.
 A customer-focused definition is given by Hines (2004): "Supply chain strategies require
a total systems view of the links in the chain that work together efficiently to create
customer satisfaction at the end point of delivery to the consumer. As a consequence,
costs must be lowered throughout the chain by driving out unnecessary expenses,
movements, and handling. The main focus is turned to efficiency and added value, or the
end-user's perception of value. Efficiency must be increased, and bottlenecks removed.

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 The measurement of performance focuses on total system efficiency and the equitable
monetary reward distribution to those within the supply chain. The supply chain system
must be responsive to customer requirements."
 The integration of key business processes across the supply chain for the purpose of
creating value for customers and stakeholders (Lambert, 2008).
 According to the Council of Supply Chain Management Professionals (CSCMP), supply
chain management encompasses the planning and management of all activities involved
in sourcing, procurement, conversion, and logistics management. It also includes
coordination and collaboration with channel partners, which may be suppliers,
intermediaries, third-party service providers, or customers. Supply chain management
integrates supply and demand management within and across companies. More recently,
the loosely coupled, self-organizing network of businesses that cooperate to provide
product and service offerings has been called the Extended Enterprise.

CONCEPT OF SUPPLY CHAIN MANAGEMENT

 If you go to a Supermarket and pick up a few items of the shelf from electronics and
white goods or even clothes and look at the labels, chances are that you will find them
having been manufactured in China or Mexico.
 The coffee pods you buy to use for your everyday use comes from Africa.
 Computers have been shipped out of South American Factories and Soft furnishings on
the shelves are from India and Hong Kong.
 Global markets are expanding beyond borders and re-defining the way demand and
supplies are managed.
 Global companies are driven by markets across continents.
 In order to keep the cost of manufacturing down, they are forced to keep looking to set up
production centers where cost of raw materials and labor is cheap.
 Sourcing of raw materials and vendors to supply the right quality, quantity and at right
price calls for dynamic procurement strategy spanning across countries.
With the above scenario you find companies procuring materials globally from various
vendors to supply raw materials to their factories situated in different continents.

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 The finished goods out of these different factory locations then pass through different
chains of distribution network involving warehouses, exports to different countries or
local markets, distributors, retailers and finally to the end customer.
In simple language, managing all of the above activities in tandem to manage demand
and supply on a global scale is Supply Chain Management.

Supply Chain Management as a concept has been widely accredited to a Booz Allen consultant
named Keith Oliver who in 1982 defined the concept as follows: “Supply chain management
(SCM) is the process of planning, implementing, and controlling the operations of the supply
chain with the purpose to satisfy customer requirements as efficiently as possible. Supply chain
management spans all movement and storage of raw materials, work-in-process inventory, and
finished goods from point-of-origin to point-of-consumption”.

This seems to be the earliest published definition and therefore places the concept of Supply
Chain Management. We can see that “Supply Chain” without the “Management” is referenced in
the definition, so we know that the general idea of a supply flow through a business was
recognized prior to Oliver’s definition. What Oliver really captured was the conscious and
deliberate control, integration, and management of the business functions contributing to, and
affecting that supply flow through the business, for the purpose of improving performance, costs,
flexibility etc., and for the ultimate benefit of the end customer.

The concept has been defined in simpler terms since that time and is often captured with five
words: Plan, Source, Make, and Deliver & Return.

Both of these definitions allude to a manufacturing origin but of course Supply Chain
Management is as relevant to service, retail, distribution, and most other types of companies as it
is to manufacturing.

The area of Supply Chain Management has enjoyed a meteoric rise in significance over the last
twenty to thirty years as businesses have tried to establish advantage, and felt the pressure to
keep up, in an increasingly homogeneous and competitive global business environment.

Japanese manufacturing companies brought great emphasis to the area of Supply Chain
Management in the 1980’s and early 1990’s. Awareness of Supply Chain Management tools
such as “Just In Time” and “Kan Ban” spread rapidly and became globally accepted best practice

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Amongst volume manufacturing businesses. Western businesses raced to keep pace with a
rapidly changing environment, dragging their supply bases, and sometimes employees behind
them.

At the same time companies like SAP and Oracle were developing the complex IT systems that
would be essential for enabling large complex businesses to effectively integrate and managing
the sub areas that combined to make complex supply chains.

Of course the elements of Supply Chain Management have always existed in business. What
changed was the willingness of businesses to recognize the inter-relationship of the various sub
areas, and to pursue the benefits generated through coordination and integration, both from a
strategy / planning perspective and operationally. The sub-areas comprising a supply chain
include:
 Forecasting / Planning
 Purchasing / Procurement
 Logistics
 Operations
 Inventory Management
 Transport
 Warehousing
 Distribution
 Customer Service

Today, Supply Chain Management is an accepted term in our business glossary. However, it is
difficult to find a standard model of Supply Chain Management operating in the business
community. We continue to see variations on the theme. Some business will refer to and manage
their supply chains in a coordinated and all-encompassing fashion, including the entire sub areas
defined above. Others will integrate some elements of the supply chain, for example purchasing
and logistics and call this Supply Chain Management. Many will refer conceptually to Supply
Chain Management, but only address it specifically at the general management level.

One area of confusion arises because Supply Chain Management is both a horizontal business
function (i.e. managing the supply chain in a business), and a vertical industry sector (i.e.
businesses involved in managing supply chains on behalf of their clients). A company like TDG
operates as a supply chain services provider, within the vertical supply chain industry sector. But
each of the clients serviced by TDG will employ supply chain staff within their business
operating on a horizontal basis across their organisation. The “supply chain industry” sector as
the vertical is often referred to, is largely restricted to transport and storage type operations.
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Distributing products on behalf of clients. Whereas, the horizontal supply chain functional areas
encompass the entire supply chain spectrum across a business.

Supply Chain Management has matured from a compelling method of deriving competitive
advantage, to a “ticket to ride”. It is now a baseline expectation for any company wishing to
compete in the 21st Century, and with that the professions and occupations comprising Supply
Chain Management are now firmly entrenched in the armory of essential business executives.

The sub areas comprising Supply Chain Management are defined further below:

Forecasting / Planning

All business needs to forecast and plan.

To look forward and predict what will be required in terms of resources and materials in order to
deliver their product or service to their customer in a timely manner. In this area we find
activities such as demand planning, inventory planning, capacity planning etc

Purchasing / Procurement

The commercial part of the supply chain is purchasing.

Otherwise known as Buying or Procurement. This is where a business identifies suppliers to

provide the products and services that it needs to acquire in order to create and deliver its own
service or product. Costs and terms of business are negotiated and agreed and contracts created.
Thereafter the suppliers performance and future contractual arrangements will be managed in
this area. This area of the business is sometimes referred to as purchasing, sometimes,
procurement, buying, sourcing, etc. However, all titles relate to the acquisition of materials and
services.

The difference between purchasing and procurement is largely academic as, whilst there is a
theoretical difference between them, businesses use the titles interchangeably for the two
variations of activity. You will for example find manufacturing companies with purchasing
departments that are actually doing procurement roles, and you will find service based
organizations with procurement departments but in fact doing purchasing roles. In its strictest
definition purchasing is limited to the actual commercial transaction and no more, whilst
procurement includes the wider elements of the acquisition, including logistics and performance
management.
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Logistics

In its strictest definition logistics refers to the movement of goods or materials, whether inbound,
through, or outbound.

In some manufacturing businesses forecasting and planning will be found within a logistics
department, in other businesses logistics will be exclusively managing the movement and
transportation of goods and materials.

Operations

Operations is a general management type activity ensuring that a business uses its resources
effectively to meet its customer commitments.

Usually referring to the conversion activity of the business, i.e. the point where the acquired
resources and/or materials are converted into the product or service that the business is selling on
to its customers.

Inventory Management

Sometimes found within Logistics Management, or Demand Planning or Operations, Inventory

Management typically takes responsibility for both the replenishment of physical stock, the
levels of physical stock, and of course storage and issue of physical stock. Stock may be
materials and goods sourced from suppliers, work in progress, or finished goods awaiting
sale/dispatch.

Transport

Transport management can involve the control of a company owned fleet of vehicles, collecting,
moving, or delivering materials and goods, or managing transport services sourced from a 3rd
party transport provider.

Warehousing

Like transport management, warehousing can involve the control of company warehouse space,
or managing warehouse space sourced from 3rd party providers.

Distribution

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Distribution involves the physical distribution of the company’s products to the sub-distributor or
directly to the customer base. Typically this is a combined transport and warehousing operation,
responsible for storing and delivering products to meet the customers’ needs. Again this
combined activity will often be placed with a 3 rd party service provider who will control and
implement the processes.

Customer Service

Most people do not recognize customer service as part of supply chain management, but it is in
fact the final piece in the jigsaw. Having taken the business inputs, created and delivered a
product or service, the final element is to check that the customers’ expectations were achieved,
and manage any actions necessary to meet your customer obligations and commitments.

KEY CONCEPT IN SUPPLY CHAIN MANAGEMENT

Traditionally, firms have focused their energies on three main functions:
 purchasing,
 manufacturing and
 Distribution.
Transport and storage activities within individual functions and across functions have not
received adequate attention, and have usually been handled by the department managing the
logistical aspects of the company. Initially, supply chain management focused on the internal
integration of activities in these three functional areas with the logistics function. Gradually,
firms realized that these activities have to be coordinated, not just within a firm, but across the
entire supply chain, keeping in mind the material/ product flow, right from the vendor to the end
customer.

To integrate material flow across the chain, information and financial flow across the chain also
have to be integrated. A typical supply chain involves managing all the three flows in the chain.
In firms like Asian and Marico Industries, materials, information and financial flow seamlessly
across department and organization boundaries. Customer pull, and not any internal compulsion,
governs all the three flows in well-managed chains. In most chains, there exist many blocks, both
at departmental and the organizational boundaries. Individual departments and firms are more
interested in performance at the local level rather than the performance at the chain level. Thus,
numerous bottlenecks occur at the boundaries and the flow gets badly distorted. As observed
earlier, often, materials and products seem to spend a significant amount of time at the
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departmental and organizational boundaries. Since most of the inefficiencies seem to creep in at
the boundaries, while studying supply chains, our focus will be on linkages rather than on
individual operations. Though a typical supply chain will have a large number of firms, the
standard practice is to analyze supply chains from perspective of focal firm like HUL, Asian
Paints or Marico Industries. The concept of focal firms is discussed in Box1.1 a in certain
situations, apart from the forward flow of materials and products, firms are also interested in the
reverse flow of material as many companies also have to manage product returns, warranty
claims, etc. as per the European Union regulations, firms that manufacture and sell consumer
products are also expected to take the responsibility for product disposal at the end of the life of a
product. Tougher regulations and increasingly liberal product take backs are forcing firms to
focus their attention on reverse material flow as well. There is a growing realization that we need
to develop a special field to deal with the reverse supply chain management. Refer to box 1.2 for
details on reverse supply chain management. In this book, by and large, we will focus our
attention on the forward flow of materials/production

Decisions in a supply chain

Successful supply chain management involves several decisions with varying time frames. We
can broadly classify them as design decisions and supply chain operations decisions.

Design Decisions
Supply chain design (network Design) or strategic decisions involve the following critical issues:
 What activities should be carried out by the nodal firm and what should be outsourced:
 How to select entities/ partners to perform outsourced activities and what should be the nature
of the relationship with those entities? Should the relationship be transactional in nature or
should it be a long-term partnership?
 Decisions pertaining to the capacity and location of the various facilities.

Operations Decisions
 Once supply chain design decisions are in place, the firm has to take decisions regarding
the management of supply chain operations for shorter horizons.
 This involves tactical decisions, which have a horizon of about three months to a year;
and operations decisions, which usually have a horizon ranging from a day to a month.
Both tactical and operations decisions involve the following areas:

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 Demand forecasting
 Procurement planning and control
 Production planning and control
 Distribution planning and control
 Inventory management
 Transportation management
 Customer order processing
 Relationship management with partners in the chain.
Given the demand forecast and the business strategy of the firm, decision related to procurement,
production, planning, distribution and transportation have to be integrated with customer order
processing and inventory management decisions. Relationship management essentially involves
the alignment of incentives to the various entities in the chain so that the overall supply chain
performance meets customer requirements at lower cost. Though not so obvious, the supply
chain has also to be integrated with other important functions of the firm, for example, customer
relationship management and new product development. Since customer relationship creates
demand, the supply chain must ensure that it is in a position to fulfill the demand created by
customer relationship management in a profitable way. Well-managed firms integrate their
customer relationship and supply chain activities. Similarly, while designing new products well
managed firms ensure that supply issues are kept in mind at the design stage. Firms have to find
a way in which the new products can use the existing product platforms and components, so as to
minimize the supply chain costs for the product family as a whole.

Traditionally, terms like integrated logistics or business logistics have been used synonymously
with the term supply chain management. In some firms, traditionally logistics professionals have
taken up the responsibility of integrating supply chain activities within the firm under the banner
of integrated logistics. In some other firms where this integration is quite weak, the top
management has taken on the responsibility of developing the supply chain culture within the
organization. Since both these approaches are prevalent in the industry, a lot of practitioners and
academicians refer to this body of knowledge as logistics and supply chain management.

The important of the chain supply

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

19
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 factors in most industries.
 Proliferation in product lines. Companies have realized that more and more product variety is
needed to satisfy the growing range of customer tastes and requirement. This is evident from the
fact that every time 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. Every time you walk into neighborhood store, do not
be surprised to find that even a simple product like toilet soap has 50-odd varieties.
We define stock-keeping unit (SKU) as a unit of variety. For example, the same brand of soap
may be offered in varying colours and sizes. Each variety is treated as a separate average,
1,200SKUs. Chains like Food world manage about 6,000SKUs. With increasing product variety,
it becomes rather difficult to accurately. Hence, retailers and other organizations involved in the
business are forced to either maintain greater amount of inventories or lose customers.

 Shorter product life cycles. With increased competition, product life cycles across all
industries are becoming shorter. For example, the PC industry works with a life cycle as short as
6 months. So a firm like Dell, which has, on an average, just 7 days of inventory, as compared to
the industry average of 35 days, does not have to worry about and component obsolescence. Its
competitors with higher inventories end up writing off huge amounts of stocks every year as
obsolete. In the past, in developing countries where inflation was a way of life, higher
inventories used to be a major source of profits for the firm. With inflation in control and shorter
product life cycles, firms have had to change the way they manage their inventories. Also, with
shorter product life cycle, there is not much data available for demand forecasting. Most of the
technology firms find that that 50 per cent of their revenue comes from products that were
introduce in the last three years.

 Higher level of outsourcing. As discussed in the section on “Evolution of supply chain

management”, firms increasingly focus on their core activities and outsource non-core activities
to other competent players. Michael Dell, 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. Apart from primary activities in the value chain, even support activities

20
that were usually done in-house are outsourced in a big way now. Bharti Tele-ventures, India’s
number one private telecom service provider, has outsourced network-management services, IT
services and call centre operations. This trend towards outsourcing is irreversible but a higher
level of outsourcing makes supply chains more vulnerable, forcing firms to develop different
types of supply chain capabilities within the organization.

 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 as 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.
Savvy firms have started talking about trade marketing and treating dealers and retailers as their
customers while simultaneously trying to woo the retailers aggressively.
Retailers have realized that they are powerful entities in the chain and hence expect the
manufacturers to be more responsive to their needs and demands. Discount retailers like
Wal-Mart have been asking their suppliers to replenish the supplies on a daily basis based on
actual sales data from their point-of-sales systems. In general, manufacturers are forced to
respond more quickly to the customers’ demands, because of changes in power structure within
the chain.

 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. For
example, companies like ABB have developed some global centres of excellence for each of
their product lines that take care of the global market. General Motors is talking about a world
car and has been designing a few cars for global markets.
In the telecommunications and electronics industry, companies usually get their chips from
Taiwan, test them in Europe and finally integrate them with other products in United States of
America to sell in the international market. This has made managing supply chains extremely
complicated. Unlike information and finance flow, which can be managed electronically,
materials and products have to move physically, and as this movement can even be across
continents, managing supply chains is now an extremely complex issue.

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ENABLERS OF SUPPLY CHAIN PERFORMANCE
As mentioned in the previous section, managing supply chains is becoming increasingly
complex. Despite this, firms have actually managed to reduce their logistics costs. For example,
in a country like the United States of America, costs used to account for 15 per cent of the gross
domestic product (GDP) in the 1980s. Today, because of innovations in technology and
management practices, logistics costs account for about 8.5 per cent of their GDP.
Three major enablers that have helped firms and nations in reducing supply chain costs are
briefly discussed below.

1. Improvement in communication and IT

Computing power has become cheaper and communication costs too have come down. This has
helped firms in coordinating global supply chains in a cost-effective manner. Advances in
enterprise resource planning (ERP) systems have helped firms in automating several business
process resulting in seamless information flow throughout the company across different
functions. The way ERP systems have changed the nature of information flow in inter-firm
transactions. In the past, only large companies could integrate with partner firms using expensive
EDI technologies. Now, even small firms can communicate with their chain partners using the
worldwide web at a fraction of the earlier cost. Companies are realizing that they can replace
physical inventory by information. To really exploit their IT investments, companies need to
reengineer their supply chain and other supporting organizational process and try to replace
physical inventory with information. Unfortunately, many Indian companies have invested in
information systems but have not made the corresponding changes in their supply chain systems
and processes, which has resulted in the company failing to exploit the information system to its
full potential. For example, a company with multiple plants can work with a common pool of
safety stock of raw materials and does not need to have safety stocks for each individual plant.
Similarly, on the order-processing side, companies can offer greater customization as compared
to the past because their order-processing system would allow them to track these customized
orders and their manufacturing and distribution system would allow them to track these
customized products in the system. In the absence of an information system, this would not have
been possible at all. But unfortunately a significant number of companies have used IT to just
exploited IT have made major changes in their supply chain structure, systems, processes and
strategy.
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 2. Entry of third-party logistics providers
Traditionally, many firms have been managing their logistics activities internally. Lately, companies
have realized that they need to focus their energies on managing core business activities, and hence
have been exploring the possibility of outsourcing logistics activities to third-party logistics (3PL)
service providers. In developed countries almost 90 per cent of the logistics activities are outsourced
and are managed by 3PL companies. Apart from bringing in the much needed professionalism to the
field, 3PL companies have economies of scale as they are able to pool demand across customers. In
developed markets, global firms would like leading 3PL companies to go beyond the traditional role
and play the role of a fourth-party logistics (4PL) company that can integrate the capabilities,
resources and technology so as to provide comprehensive supply chain solutions to its customers.
Currently, the 3PL industry in India is still in its infancy. Two sets of companies have emerged in
this field. One set of companies involves traditional transporters, shippers, warehouse service
providers and freight forwarders, who want to offer value-added services and would like to see if
they can develop competencies and become a 3PL company. The second set of service providers
comprises international 3PL companies that have come to India along with their global MNC
customer. For example, when Toyota wanted to set up a manufacturing plant in India, it asked its
logistics service provider Mitsui and Co. to come to India to take care of its logistics requirements.
Currently, not many companies in India employ the services of other 3PL companies. However, with
the evolution of the India market, new MNCs and progressive Indian companies operating in the
mind-volume, mid-variety segment have started using the services of 3PL companies.
Over a period of time, the 3PL companies would not only develop the competence required to
function smoothly in the Indian context but also take care of the logistics requirements of the bulk of
the industries in India as well.

3. Enhanced inter-firm coordination capabilities

Successful coordination across a global network of companies has been a comparatively new
phenomenon in the corporate world. It has been realized that for a network to function meaningfully
one needs a firm to play the role of the strategic centre. Many companies, like Nike, Benetton,
Nintendo, Sun and Toyota, have successfully managed complex networks, played the part of the
strategic centre and, hence emerged as role models to other companies.
While each company in the network focuses on its core competencies, the strategic centres function
as a leading and orchestrating system. Consequently, supply chains become more efficient and
responsive. However, there have been a large number of failures also, where firms within the chain
could not align their interests, and as a result the network could not function effectively. The industry
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is still on the learning curve in this matter, but better understanding and coordination of issues would
greatly help in diffusing the third supply chain revolution across all industries.

EVOLUTION OF SUPPLY CHAIN MANAGEMENT

Learning Objectives

By the end of this chapter the learner should be able to:

a) Analyse the Historical Development of Supply chain Concept.

The term "supply chain management" entered the public domain when Keith
Oliver as already mentioned, a consultant at Booz Allen Hamilton (now Booz &
Company), used it in an interview for the Financial Times in 1982. The term was
slow to take hold. It gained currency in the mid-1990s, when a flurry of articles
and books came out on the subject. In the late 1990s it rose to prominence as a
management buzzword, and operations managers began to use it in their titles with
increasing regularity.
A supply chain, as opposed to supply chain management, is a set of organizations
directly linked by one or more upstream and downstream flows of products,
services, finances, or information from a source to a customer. Supply chain
management is the management of such a chain. Supply chain management
software includes tools or modules used to execute supply chain transactions,
manage supplier relationships, and control associated business processes.

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Supply chain event management (SCEM) considers all possible events and factors
that can disrupt a supply chain. With SCEM, possible scenarios can be created and
solutions devised. In many cases the supply chain includes the collection of goods
after consumer use for recycling. Including third-party logistics or other gathering
agencies as part of the RM re-patriation process is a way of illustrating the new
endgame strategy.

Problems Addressed
Supply chain management addresses the following problems:

Distribution network configuration: the number, location, and network missions

of suppliers, production facilities, distribution centers, warehouses, cross-docks,
and customers.

Distribution strategy: questions of operating control (e.g., centralized,

decentralized, or shared); delivery scheme (e.g., direct shipment, pool point
shipping, cross docking, direct store delivery, or closed loop shipping); mode of
transportation (e.g., motor carrier, including truckload, less than truckload (LTL),
parcel, railroad, intermodal transport, including trailer on flatcar (TOFC) and
container on flatcar (COFC), ocean freight, airfreight); replenishment strategy
(e.g., pull, push, or hybrid); and transportation control (e.g., owner operated,
private carrier, common carrier, contract carrier, or third-party logistics (3PL)).

Trade-offs in logistical activities: The above activities must be coordinated in

order to achieve the lowest total logistics cost. Trade-offs may increase the total
cost if only one of the activities is optimized. For example, full truckload (FTL)
rates are more economical on a cost-per-pallet basis than are LTL shipments. If,
however, a full truckload of a product is ordered to reduce transportation costs,
there will be an increase in inventory holding costs, which may increase total
logistics costs. The planning of logistical activities therefore takes a systems
approach. These trade-offs are key to developing the most efficient and effective
logistics and SCM strategy.

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Information: The integration of processes through the supply chain in order to
share valuable information, including demand signals, forecasts, inventory,
transportation, and potential collaboration.

Inventory management: Management of the quantity and location of inventory,

including raw materials, work in process (WIP), and finished goods.

Cash flow: Arranging the payment terms and methodologies for exchanging funds
across entities within the supply chain.

Supply chain execution means managing and coordinating the movement of

materials, information and funds across the supply chain. The flow is bi-
directional. SCM applications provide real-time analytical systems that manage the
flow of products and information throughout the supply chain network.

Functions
Supply chain management is a cross-functional approach that includes managing
the movement of raw materials into an organization, certain aspects of the internal
processing of materials into finished goods, and the movement of finished goods
out of the organization and toward the end consumer. As organizations strive to
focus on core competencies and becoming more flexible, they reduce their
ownership of raw materials sources and distribution channels. These functions are
increasingly being outsourced to other firms that can perform the activities better
or more cost effectively. The effect is to increase the number of organizations
involved in satisfying customer demand, while reducing managerial control of
daily logistics operations. Less control and more supply chain partners led to the
creation of the concept of supply chain management. The purpose of supply chain
management is to improve trust and collaboration among supply chain partners,
thus improving inventory visibility and the velocity of inventory movement.

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Importance
Organizations increasingly find that they must rely on effective supply chains, or
networks, to compete in the global market and networked economy. This concept
of business relationships extends beyond traditional enterprise boundaries and
seeks to organize entire business processes throughout a value chain of multiple
companies.
In recent decades, globalization, outsourcing, and information technology have
enabled many organizations, such as Dell and Hewlett Packard, to successfully
operate collaborative supply networks in which each specialized business partner
focuses on only a few key strategic activities. This inter-organizational supply
network can be acknowledged as a new form of organization. However, with the
complicated interactions among the players, the network structure fits neither
"market" nor "hierarchy" categories. It is not clear what kind of performance
impacts different supply network structures could have on firms, and little is
known about the coordination conditions and trade-offs that may exist among the
players. From a systems perspective, a complex network structure can be
decomposed into individual component firms. Traditionally, companies in a supply
network concentrate on the inputs and outputs of the processes, with little concern
for the internal management working of other individual players. Therefore, the
choice of an internal management control structure is known to impact local firm
performance.
In the 21st century, changes in the business environment have contributed to the
development of supply chain networks. First, as an outcome of globalization and
the proliferation of multinational companies, joint ventures, strategic alliances, and
business partnerships, significant success factors were identified, complementing
the earlier "just-in-time", lean manufacturing, and agile manufacturing practices.
Second, technological changes, particularly the dramatic fall in communication

27
costs (a significant component of transaction costs), have led to changes in
coordination among the members of the supply chain network.
Many researchers have recognized supply network structures as a new
organisational form, using terms such as "Keiretsu", "Extended Enterprise",
"Virtual Corporation", "Global Production Network", and "Next Generation
Manufacturing System". In general, such a structure can be defined as "a group of
semi-independent organisations, each with their capabilities, which collaborate in
ever-changing constellations to serve one or more markets in order to achieve
some business goal specific to that collaboration".
The security management system for supply chains is described in ISO/IEC 28000
and ISO/IEC 28001 and related standards published jointly by the ISO and the
IEC. Supply Chain Management draws heavily from the areas of operations
management, logistics, procurement, and information technology, and strives for
an integrated approach.

2.1 Historical Developments

Six major movements can be observed in the evolution of supply chain
management studies: creation, integration, and globalization, specialization phases
one and two, and SCM 2.0.
Creation Era
The term "supply chain management" was first coined by Keith Oliver in 1982 as
mentioned from above. However, the concept of a supply chain in management
was of great importance long before, in the early 20th century, especially with the
creation of the assembly line. The characteristics of this era of supply chain
management include the need for large-scale changes, re-engineering, downsizing
driven by cost reduction programs, and widespread attention to Japanese
management practices.

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Integration Era
This era of supply chain management studies was highlighted with the
development of electronic data interchange (EDI) systems in the 1960s, and
developed through the 1990s by the introduction of enterprise resource planning
(ERP) systems. This era has continued to develop into the 21st century with the
expansion of Internet-based collaborative systems. This era of supply chain
evolution is characterized by both increasing value added and cost reductions
through integration.
A supply chain can be classified as a stage 1, 2 or 3 network. In a stage 1–type
supply chain, systems such as production, storage, distribution, and material
control are not linked and are independent of each other. In a stage 2 supply chain,
these are integrated under one plan and are ERP enabled. A stage 3 supply chain is
one that achieves vertical integration with upstream suppliers and downstream
customers. An example of this kind of supply chain is Tesco.

Globalization Era
The third movement of supply chain management development, the globalization
era, can be characterized by the attention given to global systems of supplier
relationships and the expansion of supply chains over national boundaries and into
other continents. Although the use of global sources in organizations' supply chains
can be traced back several decades (e.g., in the oil industry), it was not until the
late 1980s that a considerable number of organizations started to integrate global
sources into their core business. This era is characterized by the globalization of
supply chain management in organizations with the goal of increasing their
competitive advantage, adding value, and reducing costs through global sourcing.

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Specialization Era (Phase I): Outsourced Manufacturing and Distribution
In the 1990s, companies began to focus on "core competencies" and specialization.
They abandoned vertical integration, sold off non-core operations, and outsourced
those functions to other companies. This changed management requirements, by
extending the supply chain beyond the company walls and distributing
management across specialized supply chain partnerships.
This transition also refocused the fundamental perspectives of each organization.
Original equipment manufacturers (OEMs) became brand owners that required
visibility deep into their supply base. They had to control the entire supply chain
from above, instead of from within. Contract manufacturers had to manage bills of
material with different part-numbering schemes from multiple OEMs and support
customer requests for work-in-process visibility and vendor-managed inventory
(VMI).
The specialization model creates manufacturing and distribution networks
composed of several individual supply chains specific to producers, suppliers, and
customers that work together to design, manufacture, distribute, market, sell, and
service a product. This set of partners may change according to a given market,
region, or channel, resulting in a proliferation of trading partner environments,
each with its own unique characteristics and demands.

Specialization Era (Phase II): Supply Chain Management as A Service

Specialization within the supply chain began in the 1980s with the inception of
transportation brokerages, warehouse management, and non-asset-based carriers,
and has matured beyond transportation and logistics into aspects of supply
planning, collaboration, execution, and performance management.
Market forces sometimes demand rapid changes from suppliers, logistics
providers, locations, or customers in their role as components of supply chain
30
networks. This variability has significant effects on supply chain infrastructure,
from the foundation layers of establishing and managing electronic communication
between trading partners, to more complex requirements such as the configuration
of processes and work flows that are essential to the management of the network
itself.
Supply chain specialization enables companies to improve their overall
competencies in the same way that outsourced manufacturing and distribution has
done; it allows them to focus on their core competencies and assemble networks of
specific, best-in-class partners to contribute to the overall value chain itself,
thereby increasing overall performance and efficiency. The ability to quickly
obtain and deploy this domain-specific supply chain expertise without developing
and maintaining an entirely unique and complex competency in house is a leading
reason why supply chain specialization is gaining popularity.
Outsourced technology hosting for supply chain solutions debuted in the late 1990s
and has taken root primarily in transportation and collaboration categories. This
has progressed from the application service provider (ASP) model from roughly
1998 through 2003, to the on-demand model from approximately 2003 through
2006, to the software as a service (SaaS) model currently in focus today.

Supply Chain Management 2.0 (SCM 2.0)

Building on globalization and specialization, the term "SCM 2.0" has been coined
to describe both changes within supply chains themselves as well as the evolution
of processes, methods, and tools to manage them in this new "era". The growing
popularity of collaborative platforms is highlighted by the rise of Trade-Card’s
supply chain collaboration platform, which connects multiple buyers and suppliers
with financial institutions, enabling them to conduct automated supply-chain
finance transactions.

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Web 2.0 is a trend in the use of the World Wide Web that is meant to increase
creativity, information sharing, and collaboration among users. At its core, the
common attribute of Web 2.0 is to help navigate the vast information available on
the Web in order to find what is being bought. It is the notion of a usable pathway.
SCM 2.0 replicates this notion in supply chain operations. It is the pathway to
SCM results, a combination of processes, methodologies, tools, and delivery
options to guide companies to their results quickly as the complexity and speed of
the supply chain increase due to global competition; rapid price fluctuations;
surging oil prices; short product life cycles; expanded specialization; near-, far-,
and off-shoring; and talent scarcity.
SCM 2.0 leverages solutions designed to rapidly deliver results with the agility to
quickly manage future change for continuous flexibility, value, and success. This is
delivered through competency networks composed of best-of-breed supply chain
expertise to understand which elements, both operationally and organizationally,
deliver results, as well as through intimate understanding of how to manage these
elements to achieve the desired results. The solutions are delivered in a variety of
options, such as no-touch via business process outsourcing, mid-touch via
managed services and software as a service (SaaS), or high-touch in the traditional
software deployment model.
Successful SCM requires a change from managing individual functions to
integrating activities into key supply chain processes. In an example scenario, a
purchasing department places orders as its requirements become known. The
marketing department, responding to customer demand, communicates with
several distributors and retailers as it attempts to determine ways to satisfy this
demand. Information shared between supply chain partners can only be fully
leveraged through process integration.

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10.1 Why is Supply Chain Management Important?
Supply chain management involves planning and managing activities relevant to
sourcing and procurement and logistics management. The process is valuable in
the efficient collaboration and coordination with channel partners including
intermediaries, customers, suppliers, and third-party service providers. It is
relevant to the logistics industry because it also tackles activities in transporting
goods and services to consumers. It is an integrating function mainly responsible in
connecting major business processes and functions inside your company and
across various organizations into a high-performance and cohesive model. It has a
close relationship to logistics since it covers most of the activities in the field. It
also supports the effective coordination of procedures involved in sales, finance,
product design, information technology, and marketing.

1.2 Strategic Management

 Strategic chain management is more than just innovation for the sake of
being innovative.
 It’s creating a unique supply chain configuration that drives your strategic
objectives forward.
 To get the most from your supply chain, you need to consider three critical
configuration components which are:
 Corporate Strategy
 Functional Strategy
 Operations strategy

 Your decisions around these components and how they play together define
your supply chain strategy.

33
  Until now, companies tended to either address these components informally
or make decisions about them in isolation—often as part of a functional
strategy related to sales, purchasing, or manufacturing.
 However, companies that view the supply chain as a strategic asset see their
components as interdependent—part of an integrated whole.

Let’s look at each more closely.

Corporate Strategy
Corporate strategy is the direction and scope of an organization over the long term:
ideally, which matches its resources to its changing environment and in particular
its markets, customers or clients so as to meet stakeholder expectations.

The mission describes the purpose of an organization. An example would be

Novartis, who offers a wide range of healthcare products through
pharmaceuticals, vaccines and diagnostics. Their mission statement reads:
“We want to discover, develop and successfully market innovative products
to prevent and cure diseases, to ease suffering and to enhance the quality of
life”. The overriding focus in the whole of the Novartis business should fit
their mission.
A goal is the aim or purpose. A goal could be: “To grow business revenue
or to give increasing returns to our shareholders”. The goal needs to be
substantiated by the objective. Good examples could be;
1. To build bottom line profit by 10% every year for the next 5 years
2. To launch five Ksh.1 million turnover new products in the next 3 years
Defining the objective is not easy as it needs to be really clear, measurable
and needs a verb included so people have to do something. If it is totally
unrealistic people will give up and it needs to have time parameters set so
people can work towards them. Strategies are then considered, the broad
types of actions that will be needed to achieve the objectives. The actions are

34
 the specific activities by team or individual and lead to the rewards, the
payoff for satisfying the objectives.

In summary all organizations are faced with the fact that they need to continually
manage their strategies and there are many successful and less successful examples
of this taking place. An example would be IKEA that has become one of the
world’s most successful companies over recent decades because of the way it has
defined a clear customer focus, clear long-term strategy and implemented that
strategy.

However IKEA is aware that the strategies it has adopted over time might not be
successful for the next decades. Kodak was very successful in the photographic
industry for many years, but did not have a strategy to keep it at the forefront of the
digital photographic age. It has now reinvented itself to align to the rapidly
changing marketplace.

Functional Strategy

In order to understand the supply chain better, it makes sense to break it down into
functional processes which include functional areas of an organization and they are

a) Transportation,
b) Warehousing,
c) Finance,
d) Marketing,
e) Research & Development and
f) Information,
g) Communication & Technology.

The Supply Chain Council (SCC), an industry body representing supply chain
companies and industry players, has developed the Supply Chain Operations
Reference (SCOR) model that depicts the broad spectrum of generic functional
35
processes in the supply chain and can be accessed from http://www.supply-
chain.org, SCOR model. All of these belong to the functional plan process, where
demand and supply are balanced to develop a course of action to meet sourcing,
production and delivery needs. The plan process aligns the supply chain plan with
the financial plan.

Operations Strategy
Your decisions about how you will produce goods and services form your
operations strategy. Will you choose make to stock, make to order, engineer to
order, or some combination? Will you outsource manufacturing? Will you pursue a
low-cost offshore manufacturing strategy? Will you closer to the customer? These
are critical decisions because they influence and shape the whole supply chain and
the investments you make. Your operations strategy determines how you staff and
run your factories, warehouses, and order desks—as well as how you design your
processes and information systems.

Make to stock, is the best strategy for standardized products that sell in high
volume. Larger production batches keep manufacturing costs down, and having
these products in inventory means that customer demand can be met quickly.

Make to order, is the preferred strategy for customized products or products with
infrequent demand. Companies following this strategy produce a shippable product
only with a customer order in hand. This keeps inventory levels low while
allowing for a wide range of product options.

Configure to order, is a hybrid strategy in which a product is partially completed

to a generic level and then finished when an order is received. This is the preferred
strategy when there are many variations of the end product and you want to
achieve low finished-goods inventory and shorter customer lead times than make
to order can deliver.

36
Engineer to order, Which shares many of the characteristics of make to order, is
used in industries where complex products and services are created to unique
customer specifications?

?
Review Questions
i) Define a the following terms:
a) Purchasing
b) Supply Chain Management
c) Strategy
d) Customized Products
ii) Differentiate between Corporate Strategy and Functional Strategy
iii) What are Operational Strategies

ORGANIZATION DESIGN AND MANAGEMENT OF THE SUPPLY CHAIN

Learning Objectives

By the end of this chapter the learner should be able to:

a) Analyse the Concept Organization Design.

b) Analyse the Management of Supply Chains.

3.1 Organizational Design

The importance of organizational design and core competencies are often
underestimated when assessing the performance of current supply chain processes
or evaluating designs for supply chain process transformation. We believe that
organizational competency is consistently ignored because it is difficult to evaluate
and measure. It is always easier to view processes or technology as the culprit as
opposed to the organization of people. However, when measuring success by the
effectiveness of the solution instead of simply by the implementation of the tool or
process, organizational competency must be included as a key factor in the
eventual outcome.

Organizational designs differ from company to company. Certain designs

encourage innovation and shorten development cycles while some aid quicker
37
decision making. By synchronizing its supply chain with its organizational design,
an enterprise can create a competitive tool to quickly respond to changing
customer needs and demand cycles. That is precisely what our consultants can help
you achieve.

In this global economy, supply chain organization needs to be optimally designed

for better business performance and to add value to the overall customer
experience.  Effective organization design can be structured answering the
following issues:

 Decision relating to identifying the core competencies of the firm and

thus completing those activities internally
 When can an activity be outsourced and the associated risks with it?
 Decentralization of any activity/ process for e.g. having centralized
warehouse system or having distributed network and the resulting trade
off which needs to be balanced between time, money and quality
 Are all the functions needed to perform an activity/ process in place?
 What are the various non value adding functions that can be done way
with resulting in a lean organization hence better managed?
 Linking of roles/ ownership associated with each function thereby
assigning the responsibility and doing away with all the non value adding
roles
 Identification of the bottlenecks in proper flow of information, goods etc.
from one function to another and their respective solutions
 Identification of critical roles and responsibility required to maintain an
efficient supply chain and equipping them with appropriate wherewithal
to discharge their duties effectively
 Strictly defining  the reporting structure across the entire supply chain

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  Restructuring the supply chain with a view to building support
throughout the firm, eliminating unnecessary delays, reducing costs,
simplifying complexities
 Developing the capability in order to acquire the critical roles internally
over a period of time
Supply chain management (SCM) is the oversight of materials, information, and
finances as they move in a process from supplier to manufacturer to wholesaler to
retailer to consumer. Supply chain management involves coordinating and
integrating these flows both within and among companies. It is said that the
ultimate goal of any effective supply chain management system is to reduce
inventory (with the assumption that products are available when needed). As a
solution for successful supply chain management, sophisticated software systems
with Web interfaces are competing with Web-based application service providers
(ASP) who promise to provide part or all of the SCM service for companies who
rent their service.

Supply chain management flows can be divided into three main flows:

 The product flow

 The information flow
 The finances flow
The product flow includes the movement of goods from a supplier to a customer,
as well as any customer returns or service needs.
The information flow involves transmitting orders and updating the status of
delivery.
The financial flow consists of credit terms, payment schedules, and consignment
and title ownership arrangements.
There are two main types of SCM software: planning applications and execution
applications. Planning applications use advanced algorithms to determine the best

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way to fill an order. Execution applications track the physical status of goods, the
management of materials, and financial information involving all parties.
Some SCM applications are based on open data models that support the sharing of
data both inside and outside the enterprise (this is called the extended enterprise,
and includes key suppliers, manufacturers, and end customers of a specific
company). This shared data may reside in diverse database systems, or data
warehouses, at several different sites and companies.
By sharing this data "upstream" (with a company's suppliers) and "downstream"
(with a company's clients), SCM applications have the potential to improve the
time-to-market of products, reduce costs, and allow all parties in the supply chain
to better manage current resources and plan for future needs.
Increasing numbers of companies are turning to Web sites and Web-based
applications as part of the SCM solution. A number of major Web sites offer e-
procurement marketplaces where manufacturers can trade and even make auction
bids with suppliers.

3.2 Strategic Supply Chain Management

Strategic supply chain management is more than just innovation for the sake of
being innovative. It’s creating a unique supply chain configuration that drives your
strategic objectives forward. To get the most from your supply chain, you need to
consider five critical configuration components:

 Operations strategy
 Outsourcing strategy
 Channel strategy
 Customer service strategy
 Asset network

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Your decisions around these components and how they play together define your
supply chain strategy. Until now, companies tended to either address these
components informally or make decisions about them in isolation—often as part of
a functional strategy related to sales, purchasing, or manufacturing.

However, companies that view the supply chain as a strategic asset see their
components as interdependent—part of an integrated whole. Let’s look at each
more closely.

Operations Strategy

Your decisions about how you’ll produce goods and services form your operations
strategy. Will you choose make to stock, make to order, engineer to order, or some
combination? Will you outsource manufacturing?

Will you pursue a low-cost offshore manufacturing strategy? Will you complete
your final configuration outside the manufacturing plant and closer to the
customer? These are critical decisions because they influence and shape the whole
supply chain and the investments you make. Your operations strategy determines
how you staff and run your factories, warehouses, and order desks—as well as how
you design your processes and information systems.

◆ Make to stock is the best strategy for standardized products that sell in high
volume. Larger production batches keep manufacturing costs down, and having
these products in inventory means that customer demand can be met quickly.

◆ Make to order is the preferred strategy for customized products or products with
infrequent demand. Companies following this strategy produce a shippable product
only with a customer order in hand. This keeps inventory levels low while
allowing for a wide range of product options.

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◆ Configure to order is a hybrid strategy in which a product is partially completed
to a generic level and then finished when an order is received. This is the preferred
strategy when there are many variations of the end product and you want to
achieve low finished-goods inventory and shorter customer lead times than make
to order can deliver.

◆ Engineer to order, which shares many of the characteristics of make to order, is

used in industries where complex products and services are created to unique
customer specifications. Changing your operations strategy can be a key source of
performance advantage. Several of our clients in consumer packaged goods, for
instance, found that moving from make to stock to configure to order improved
service levels while reducing inventory. In the past, these companies manufactured
and shipped products directly to the end market. Small pack size, combined with
the need for local language variants, meant that products were dedicated to a given
market very early in the production process.

Channel Strategy

Your channel strategy has to do with how you’ll get your products and services to
buyers or end users. These decisions address such issues as whether you’ll sell
indirectly through distributors or retailers or directly to customers via the Internet
or a direct sales force. The market segments and geographies you’re targeting will
drive your decisions in this area. Since profit margins vary depending on which
channels are used, you have to decide on the optimal channel mix—and who gets
the goods in times of product shortages or high demand.

Outsourcing Strategy

Outsourcing decisions begin with an analysis of your company’s existing supply

chain skills and expertise. What is your company really good at? What areas of
expertise are—or have the potential to become—strategic differentiators? These

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are the activities you should keep in-house and make even better. Consider
outsourcing activities with low strategic importance or that a third party could do
better, faster, or more cheaply.

Outsourcing allows companies to ramp up or down quickly, build new products, or

reposition themselves in the marketplace— all by leveraging the expertise and
capacity of other companies. This added flexibility and agility can make an
enormous difference in today’s competitive global markets. Most important,
though, outsourcing allows companies to focus on their core competencies and
enhance their competitive positioning.

Customer Service Strategy

Customer service strategy is another key configuration component. Your customer

service strategy should be based on two things: the overall volume and profitability
of your customer accounts and an understanding of what your customers really
want. Both pieces of knowledge are integral to your supply chain strategy because
they help you to prioritize and focus your capabilities.

Should all customers get same-day delivery, or should you aim for different service
levels depending on customer importance? Should all products be equally
available, or should some customers have quicker, easier access? If your company
never examines its service strategy, you may be providing more costly levels of
service than your customers need— or you may be missing important market
opportunities.

Not all customers warrant the same level of service, but it’s critical to know who
your high-value customers are. For instance, an Internet service provider (ISP) was
planning to raise the level of customer service across the board in response to
complaints about slow problem resolution.

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We suggested a more strategic approach—basing service levels on each customer’s
value to the company. By analyzing each customer’s total revenue potential and
strategic relationship value, the company learned that just 5 percent of its clients
were high-value customers.

Asset Network

The final component of your supply chain configuration includes the decisions you
make regarding your company’s asset network—the factories, warehouses,
production equipment, order desks, and service centers that make up your business.
The location, size, and mission of these assets have a major impact on supply chain
performance. Most companies choose one of three network models based on such
factors as business size, customer service requirements, tax advantages, supplier
base, local content rules, and labor costs:

◆ Global model—Manufacturing of a given product line is done in one location

for the global market. The choice of this model is driven by factors such as the
need to colocate manufacturing with research and development (R&D), the need to
control unit manufacturing costs for very capital-intensive products, or the need for
highly specialized manufacturing skills.

◆ Regional model—Manufacturing is done primarily in the region where the

products are sold, although some cross-regional flows may exist based on
production-center specialization. The regional model is often chosen based on a
mix of factors, including customer service levels, import duty levels, and the need
to adapt products to specific regional requirements.

◆ Country model—Manufacturing is done primarily in the country where the

market is. This is the model of choice for goods that are prohibitively expensive to
transport. Other factors include duties and tariffs and market access that is
conditional on in-country manufacturing.

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Due to price competition, many companies are manufacturing in low-cost countries
to lower unit production costs. When choosing such a location, key considerations
include manufacturing costs, corporate tax rate, export incentives, the presence of
key suppliers or duty-free imports, infrastructure, and skilled labor. While unit
costs are important, supply chain leaders know that supply chain flexibility and
total supply chain cost are also critical considerations when designing an asset
network, particularly for products with highly variable demand and short product
life cycles.

?
Review Questions

i) What is organizational design

ii) Explain strategic supply chain management
iii) Explain the concept operations strategy
iv) What is outsourcing strategy
v) Explain the meaning of channel strategy
vi) Write notes on customer service strategy
vii) What is asset network

3.0 Introduction to Strategy and Supply Chain Management

 The strategic supply chain management concept represents an integration

of information flows, extending from the supplier to end user.
 While materials management is generally involved with the flow in
materials into an organization. 
 Many organizations combine materials management (input function) with
logistics (physical distribution) management which includes all material
flow function, both into and out of, an organization.
 As business grow and personnel are added, it becomes evident that certain
advantages would accrue if individual functions, such as purchasing, stores,
traffic, production scheduling, inventory control, and quality control were
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 separated and made full-time managerial assignments, thereby permitting
occupational specification. 
 Because of communication and coordination problems, however, it becomes
clear that bringing together those functions that are clearly interrelated,
under one responsible individual, makes for a more effective organization.

However, as you note, few organizations have created positions specifically

responsible for managing the entire supply chain from supplier to end customer.  In
addition, I have found few suppliers and customers willing to develop the level of
trust required to share information across the supply chain.

The supply management organization is not a traditional pyramid structure for a

new functional initiative that will replace the procurement organization.  In fact, it
isn't a structure at all.  Rather, it is a comprehensive collection of work tasks and
role definitions, processes, organizational mechanisms, and competencies that
work together to span functional groupings and geographic and business locations. 
The trick is to provide strong, singular-focused leadership for a new initiative
while making provision for various implementation tactics necessary to support
different businesses and locations.

Rather than focusing on structures and organization charts, the new approach seeks
to define the work and simply put in place those things necessary to complete it,
share learning, and improve results over time.  In this way business can create a
new order of things without creating new structures and new overhead costs.

In carryout out the work of supply management--developing and implementing

supply-stream strategies that maximize the value of expenditures for purchased
materials and services--a number of new work tasks and roles have been
developed.  A supply-steam leader is accountable for optimizing the total supply
stream by developing and implementing supply-steam strategies and improvement
plans while the location supply leader is accountable for optimizing a location's
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total purchase expenditure by implementing a number of supply-stream strategies
at that location (plant site, business unit, etc.).

These leaders work together as part of a team to develop supply strategies and
select preferred suppliers.  Once the strategy is developed, both supply leaders in
these roles shift their emphasis to improvement and implementation work.  For the
supply-steam leader, this work is managing supplier resources to implement the
supply-stream changes at all locations and benchmarking market and usage
practices in order to continually improve the supply-steam strategy and introduce
innovations.  For the location supply leader, this work is engaging relevant users
and implementing the actual usage and flow changes at the point of use.

This supply network made up of Supply Stream Leader, Location Supply Leaders,
Resources and Suppliers, and other Supply Team participants and functional inputs
make up the strategic supply team.  The supply network is like a cross-functional
team except it crosses business units, locations, and often suppliers.  In so doing it
spans the barriers to implementation that often exist by ensuring that specific plans
in fact deliver results directly beneficial to the specific point of use.  The supply
leader roles and the supply network are the building blocks of the supply
management organization.

3.1 Strategic Planning

Strategic planning is an organization's process of defining its strategy, or direction,
and making decisions on allocating its resources to pursue this strategy. In order to
determine the future direction of the organization as already said, it is necessary to
understand its current position and structure and the possible avenues through
which it can pursue particular courses of action. Generally, strategic planning deals
with at least one of three key questions which are:
1. "What do we do?"

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 2. "For whom do we do it?"
3. "How do we excel?"
This part is going to provide pertinent information on how strategies arise within
organizational structures which are; centralized, hybrid, and decentralized. 
Centralized purchasing is where all main purchasing is controlled at one central
point for the entire firm.  In hybrid purchasing, purchasing is shared between
corporate offices and business units, operating plants, and/or divisions.  In
decentralized purchasing, all main purchasing is controlled at the business units,
plants, and/or divisions and strategies revolve around them.

Mergers, acquisitions, management changes, and the emphasis on cost saving

prompt organizations to continually reevaluate the way they conduct business. 
Determining a purchasing organization structure requires consideration of the
advantages and disadvantages of centralized, hybrid and decentralized structure for
the company, then selecting the most appropriate.  It is very difficult to sustain a
situation where the organization is decentralized and purchasing is centralized. 
Cost savings have been identified as the major instigator of structural change.  The
toughest challenges in moving from decentralized to centralized is determine what
the many decentralized units had been purchasing and exactly what they spent, and
finding the right people for the newly created purchasing department.

To make a structural change successful, you need a skillful, purposeful execution;

good people; the ability to identify the right opportunities; and the ability to
negotiate the right contracts and establish workable procedures.  One of the
negative issues was the displacement of some employees.  However, there were
many positive sides such as substantial cost savings and getting the supply chain
under control.

A hybrid structure can be beneficial when an organization is faced with a merger

or acquisition.  This structure can help facilitate the blending of processes and

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cultures.  The purchasing organization can negotiate a contract, manage its
implementation, including related systems and training, and then allow the users to
complete the purchase transactions directly with the selected supplier.

Many of the organizations follow a three-step process in the change.  They

prioritize spend categories, identify current and potential supplier(s) and establish a
competitive process and resulting contract.

For Strategies to be effective, change is inevitable. Changes are driven by factors

external to the supply organization itself. Major changes in the organizational
structure of the entire organization are made with or without consultation with
purchasing and supply and/or without considering the potential impact on supply.
All of the changes involves organizations attempting to improve their cost
structure.  Cost was cited as a universal driver for major corporate structure
change. Additional external drivers included market change, political change, and
parent organization change.

3.2 Organization Objectives

Strategic planning is a very important business activity. It is also important in the

public sector areas such as education. It is practiced widely informally and
formally. Strategic planning and decision processes should end with objectives and
a roadmap of ways to achieve them. The goal of strategic planning mechanisms
like formal planning is to increase specificity in business operation, especially
when long-term and high-stake activities are involved.
One of the core goals when drafting a strategic plan is to develop it in a way that is
easily translatable into action plans. Most strategic plans address high level
initiatives and overarching goals, but don't get articulated (translated) into day-to-
day projects and tasks that will be required to achieve the plan. Terminology or
word choice, as well as the level at which a plan is written, are both examples of
easy ways to fail at translating your strategic plan in a way that makes sense and is
49
executable to others. Often, plans are filled with conceptual terms which don't tie
into day-to-day realities for the staff expected to carry out the plan.
The following terms have been used in strategic planning: desired end states, plans,
policies, goals, objectives, strategies, tactics and actions. Definitions vary, overlap
and fail to achieve clarity. The most common of these concepts are specific, time
bound statements of intended future results and general and continuing statements
of intended future results, which most models refer to as either goals or objectives
(sometimes interchangeably).
One model of organizing objectives uses hierarchies. The items listed above may
be organized in a hierarchy of means and ends and numbered as follows: Top Rank
Objective (TRO), Second Rank Objective, Third Rank Objective, etc. From any
rank, the objective in a lower rank answers to the question "How?" and the
objective in a higher rank answers to the question "Why?" The exception is the
Top Rank Objective (TRO): there is no answer to the "Why?" question. That is
how the TRO is defined.
People typically have several goals at the same time. "Goal congruency" refers to
how well the goals combine with each other. Does goal A appear compatible with
goal B? Do they fit together to form a unified strategy? "Goal hierarchy" consists
of the nesting of one or more goals within other goal(s).
One approach recommends having short-term goals, medium-term goals, and long-
term goals. In this model, one can expect to attain short-term goals fairly easily:
they stand just slightly above one's reach. At the other extreme, long-term goals
appear very difficult, almost impossible to attain. Strategic management jargon
sometimes refers to "Big Hairy Audacious Goals" (BHAGs) in this context. Using
one goal as a stepping-stone to the next involves goal sequencing. A person or
group starts by attaining the easy short-term goals, then steps up to the medium-
term, then to the long-term goals. Goal sequencing can create a "goal stairway". In
an organizational setting, the organization may co-ordinate goals so that they do

50
not conflict with each other. The goals of one part of the organization should mesh
compatibly with those of other parts of the organization.

Objectives are guided by statements of vision which tend to be quite broad and can
be described as a goal that represents an inspiring, overarching, and emotionally
driven destination. Mission statements, on the other hand, tend to be more specific
and address questions concerning the organization’s reason for being and the basis
of its intended competitive advantage in the marketplace. Strategic objectives are
used to operationalize the mission statement. That is, they help to provide guidance
on how the organization can fulfill or move toward the “high goals” in the goal
hierarchy-the mission and vision. As a result, they tend to be more specific and
cover a more well-defined time frame. Setting objectives demands a yardstick to
measure the fulfillment of the objectives. If an objective lacks specificity or
measurability, it is not very useful, simply because there is no way of determining
whether it is helping the organization to move toward the organization’s mission
and vision.

Most of strategic objectives are directed toward generating greater profits and
returns for the owners of the business, others are directed at customers or society at
large.

 Measurable. There must be at least one indicator (or yardstick) that

measures progress against fulfilling the objective.
 Specific. This provides a clear message as to what needs to be
accomplished.
 Appropriate. It must be consistent with the vision and mission of the
organization.
 Realistic. It must be an achievable target given the organization’s
capabilities and opportunities in the environment. In essence, it must be
challenging but doable.

51
  Timely, there needs to be a time frame for accomplishing the objective.
After all, as the economist John Maynard Keynes once said, “In the long
run, we are all dead!”
When objectives satisfy the above criteria, there are many benefits for the
organization.

First, they help to channel employees throughout the organization toward common
goals. This helps to concentrate and conserve valuable resources in the
organization and to work collectively in a timelier manner.

Second, challenging objectives can help to motivate and inspire employees

throughout the organization to higher levels of commitment and effort. A great
deal of research has supported the notion that individuals work harder when they
are striving toward specific goals instead of being asked simply to “do their best.”

Third, there is always the potential for different parts of an organization to pursue
their own goals rather than overall company goals. Although well intentioned,
these may work at cross-purposes to the organization as a whole. Meaningful
objectives thus help to resolve conflicts when they arise.

Finally, proper objectives provide a yardstick for rewards and incentives. Not only
will they lead to higher levels of motivation by employees but also they will help
to ensure a greater sense of equity or fairness when regards are allocated.

There are, of course, still other objectives that are even more specific. These are
often referred to as short-term objectives-essential components of “action plans”
that are critical in implementing a firm’s chosen strategy.

3.3 Process of Developing Corporate Strategy

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Many organizations view strategic planning as a process for determining where an
organization is going over the next year or—more typically—3 to 5 years (long
term), although some extend their vision to 20 years, or even (in the case of
Mitsubishi) 500 years.
The key components of 'strategic planning' include an understanding of an entity's
vision, mission, values and strategies. (In the commercial world a "Vision
Statement" and/or a "Mission Statement" may encapsulate the vision and mission).

Vision: outlines what the organization wants to be, or how it wants the world in
which it operates to be (an "idealised" view of the world). It is a long-term view
and concentrates on the future. It can be emotive and is a source of inspiration. For
example, a charity working with the poor might have a vision statement which
reads "A World without Poverty."

Mission: Defines the fundamental purpose of an organization or an enterprise,

succinctly describing why it exists and what it does to achieve its vision. For
example, the charity above might have a mission statement as "providing jobs for
the homeless and unemployed".

Values: Beliefs that are shared among the stakeholders of an organization. Values
drive an organization's culture and priorities and provide a framework in which
decisions are made. For example, "Knowledge and skills are the keys to success"
or "give a man bread and feed him for a day, but teach him to farm and feed him
for life". These example maxims may set the priorities of self-sufficiency over
shelter.

Strategy: Strategy, narrowly defined, means "the art of the general". A

combination of the ends (goals) for which the firm is striving and the means
(policies) by which it is seeking to get there. A strategy is sometimes called a
roadmap - which is the path chosen to plow towards the end vision. The most

53
important part of implementing the strategy is ensuring the company is going in the
right direction - defined as towards the end vision.

Organizations sometimes summarize goals and objectives into a mission

statement and/or a vision statement. Others begin with a vision and mission and
use them to formulate goals and objectives. A newly emerging approach is to use a
visual strategic plan such as is used within planning approaches based on
outcomes theory. When using this approach, the first step is to build a visual
outcomes model of the high-level outcomes being sought and all of the steps which
it is believed are needed to get to them. The vision and mission are then just the top
layers of the visual model.
Many people mistake the vision statement for the mission statement, and
sometimes one is simply used as a longer term version of the other. However they
are distinct; with the vision being a descriptive picture of a desired future state; and
the mission being a statement of a rationale, applicable now as well as in the
future. The mission is therefore the means of successfully achieving the vision.
This may be in the business world or the military.
For an organization's vision and mission to be effective, they must become
assimilated into the organization's culture. They should also be assessed internally
and externally. The internal assessment should focus on how members inside the
organization interpret their mission statement. The external assessment — which
includes all of the businesses stakeholders — is valuable since it offers a different
perspective. These discrepancies between these two assessments can provide
insight into their effectiveness.

3.4 Tools and Approaches for Strategic Planning

Among the most widely used tools for strategic planning is SWOT analysis which
means (Strengths, Weaknesses, Opportunities, and Threats). The main objective of
this tool is to analyze internal strategic factors, strengths and weaknesses attributed
54
to the organization, and external factors beyond control of the organization such as
opportunities and threats.
Other tools include:
Balanced Scorecards, which creates a systematic framework for strategic
planning

Scenario planning, which was originally used in the military and recently used by
large corporations to analyze future scenarios.

PEST analysis (Political, Economic, Social, and Technological)

ASSIMPLER Blueprinting - The Business Blueprinting of the organization is

designed based on the ASSIMPLER framework (based on work of Mandar
Vanarse). ASSIMPLER stands for Availability, Scalability, Security,
Interoperability, Maintainability, Performance, Low cost of ownership,
Extendibility and Reliability - applied to business services and processes.

STEER analysis (Socio-cultural, Technological, Economic, Ecological, and

Regulatory factors)

EPISTEL (Environment, Political, Informatic, Social, Technological, Economic

and Legal).

ATM Approach (Antecedent Conditions, Target Strategies, Measure Progress and

Impact). Once an understanding of the desired end state is defined, the ATM
approach uses Root Cause Analysis (RCA) to understand the threats, barriers, and
challenges to achieving the end state. Not all antecedent conditions identified
through RCA are within the direct and immediate control of the organization to
change. Therefore, a review of organizational resources, both human and financial,
are used to prioritize which antecedent conditions will be targeted. Strategies are
then developed to target the prioritized antecedent conditions. Linking strategies to
antecedent conditions ensures the organization does not engage in activity traps:
55
feel good activities that will not lead to desired changes in the end state. Once a
strategy is defined then performance measures and indicators are sought to track
progress toward and impact on the desired end state.

3.4.1 Situational Analysis

It is important to analyze the organization and its environment as it is at the
moment and how it may develop in the future when developing strategies. The
analysis has to be executed at an internal level as well as an external level to
identify all opportunities and threats of the external environment as well as the
strengths and weaknesses of the organizations.
There are several factors to assess in the external situation analysis:
1. Markets (customers)
2. Competition
3. Technology
4. Supplier markets
5. Labor markets
6. The economy
7. The regulatory environment
It is rare to find all seven of these factors having critical importance. It is also
uncommon to find that the first two - markets and competition - are not of critical
importance. (Bradford "External Situation - What to Consider")
Analysis of the external environment normally focuses on the customer.
Management should be visionary in formulating customer strategy, and should do
so by thinking about market environment shifts, how these could impact customer
sets, and whether those customer sets are the ones the company wishes to serve.
Analysis of the competitive environment is also performed, many times based on
the framework suggested by Michael Porter.

56
With regard to market planning specifically, researchers have recommended a
series of action steps or guidelines in accordance to which market planners should
plan.

3.5 Understanding Strategic Management Process

Strategic management process involves monitoring the implementation of the set

strategies either annually, bi-annually quarterly and even monthly. The process is
as follows:

a) Setting annual objectives

b) Revising policies to meet the objectives
c) Allocating resources to strategically important areas
d) Changing organizational structure to meet new strategy
e) Managing resistance to change
f) Introducing new reward system for performance results if needed.
The first point in strategy implementation is setting annual objectives for the
company’s functional areas. These smaller objectives are specifically designed to
achieve financial, marketing, operations, human resources and other functional
goals. To meet these goals managers revise existing policies and introduce new
ones which act as the directions for successful objectives implementation.

The other very important part of strategy implementation is changing an

organizational chart. For example, a product diversification strategy may require
new Strategic Business Units to be incorporated into the existing organizational
chart. Or market development strategy may require an additional division to be
added to the company. Every new strategy changes the organizational structure and
requires reallocation of resources. It also redistributes responsibilities and powers
between managers. Managers may be moved from one functional area to another

57
or asked to manage a new team. This creates resistance to change, which has to be
managed in an appropriate way or it could ruin excellent strategy implementation.

Strategy Monitoring

Implementation must be monitored to be successful. Due to constantly changing

external and internal conditions managers must continuously review both
environments as new strengths, weaknesses, opportunities and threats may arise. If
new circumstances affect the company, managers must take corrective actions as
soon as possible. Usually, tactics rather than strategies are changed to meet the new
conditions, unless firms are faced with such severe external changes as the 2007
credit crunch. Measuring performance is another important activity in strategy
monitoring. Performance has to be measurable and comparable. Managers have to
compare their actual results with estimated results and see if they are successful in
achieving their objectives. If objectives are not met managers should:

 Change the reward system.

 Introduce new or revise existing policies.
The key element in strategy monitoring is to get the relevant and timely
information on changing environment and the company’s performance and if
necessary take corrective actions.

3.6 Applicability in Strategic Purchasing

Intense competitive pressures have forced companies to re-examine their approach

to managing suppliers and their supply base to implement their strategies. An
increasing focus on core competencies, and the concomitant increase in
outsourcing of components and services, has also placed greater emphasis on
supplier management. In addition, much of the traditional in-house development
activities have been pushed onto suppliers. Purchasing is thus increasingly
regarded as a strategic weapon, centered on its ability to create collaborative

58
relationships for firm advantage .Partnerships with suppliers can have a strong
positive influence on firm performance through the development of joint resources
and the exchange of valuable knowledge with these individual partners. In practice,
many firms fail to realize these benefits when they implement sourcing agreements
at a lower negotiated price. They fail to follow through with the relational
processes that capture benefits over the course of the contract. The ability to
extract benefits from supplier relationships is linked to the way these relationships
are managed. For example, those relationships characterized by close interactions
and successful process integration between buyer and supplier are better able to
create, coordinate and protect joint resources for a sustained competitive
advantage. Thus, it is not enough for a firm to possess a strategic purchasing
orientation, they must also create conditions which allow the buyer and supplier to
contribute and develop the relationship. Various supply management practices
facilitate this process. Three will now be discussed.

i) Formal Socialization Processes

Socialization may be defined as the level of interaction between, and

communication of, various actors within and between firms, which leads to the
building of personal familiarity, improved communication, and problem solving.
Socialization may also be understood as the process by which an individual
acquires the social knowledge and skills necessary to assume an organizational role
(e.g. the process of “learning the ropes”). Supply chain socialization is the process
by which individuals in a buyer-supplier engagement acquire knowledge of the
other enterprise’s social values. Examples include; rules of thumb, special
language, ideology that helps to edit a member’s every day experience, standard of
relevance of work, prejudices, and models for social etiquette.

ii) Supplier Integration

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Integration with suppliers is an effective strategy for improving business
performance. Suppliers are often included in the product development process, but
here we discuss integration with suppliers at the operational level. Integration of
suppliers at the operational level makes the supplier an extension of the firm’s
factory, emphasizing continuity of supply and an end-to-end pipeline. Mechanisms
for facilitating this integration include the participation of suppliers in design,
procurement, and production stages, as well as the use of ordering systems and
information technology to exchange information. These linkages permit increased
coordination with suppliers at a tactical level, enabling the firm to deal more
effectively with the complexity and uncertainty present in their environment. The
development of a strategic partnership approach is fundamental to the success of
supplier integration efforts. The approach must rest on a firm base of; supply
market research, spend analysis, customer requirements knowledge, supplier
selection criteria, and other formal processes. Ultimately, integrating suppliers into
a well-managed supply chain is found to have a lasting effect on the
competitiveness of the entire supply chain.

iii) Supply Base Flexibility

Supplier characteristics can have a large impact on the performance of the buyer
firm. The supply base flexibility reflects the degree to which a firm’s key suppliers
are able to customize products, be responsive to delivery changes, and to accept
late ‘mix’ and volume changes – that is, adapt to the needs of the buyer. This is
similar to the concept of lean supply which advocates working collaboratively with
fewer suppliers to reduce costs, improve design cycle times and foster innovation
development. In the next article, we cover the relationships between these elements
based on our study.

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  Review Questions
i) What is strategic planning?
ii) What are organizational objectives?
iii) What does it mean by SMART objectives?
iv) Explain the process of developing corporate strategy.
v) Explain three tools for Strategic Planning

8.0 Concepts Underlying Strategic Supply Chain Management

Supply chain management operates at three levels;
 Strategic,
 Tactical / functional and
 Operational / business level.

 At the strategic level; company management makes high level strategic

supply chain decisions that are relevant to whole organization. The decisions
that are made with regards to the supply chain should reflect the overall
corporate strategy that the organization is following.
 The strategic supply chain processes that management has to decide upon
will cover the breadth of the supply chain.
 These include
 product development,
 customers,
 manufacturing,
 vendors and
 Logistics.

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Product Development
Senior Management has to define a strategic direction when considering the
products that the company should manufacture and offer to their customers. As
product cycles mature or products sales decline, management has to make strategic
decisions to develop and introduce new versions of existing products into the
marketplace, rationalize the current product offering or whether develop a new
range of products and services. These strategic decisions may include the need to
acquire another company or sell existing businesses. However, when making these
strategic product development decisions, the overall objectives of the firm should
be the determining factor.

Customers
At the strategic level, a company has to identify the customers for its products and
services. When company management makes strategic decisions on the products to
manufacture, they need to then identify the key customer segments where company
marketing and advertising will be targeted.

Manufacturing
At the strategic level, manufacturing decisions define the manufacturing
infrastructure and technology that is required. Based on high level forecasting and
sales estimates, the company management has to make strategic decisions on how
products will be manufactured. The decisions can require new manufacturing
facilities to be built or to increase production at exiting facilities. However, if the
overall company objectives include moving manufacturing overseas, then the
decisions may lean towards using subcontracting and third party logistics. As
environmental issues influence corporate policy to a greater extent, this may
influence strategic supply chain decisions with regards to manufacturing.

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Suppliers
Company management has to decide on the strategic supply chain policies with
regards to suppliers. Reducing the purchasing spend for a company can directly
relate to an increase in profit and strategically there are a number of decisions that
can be made to obtain that result. Leveraging the total company’s purchases over
many businesses can allow company management to select strategic global
suppliers who offer the greatest discounts. But these decisions have to correspond
with the overall company objectives. If a company has adopted policies on quality,
then strategic decisions on suppliers will have to fall within the overall company
objective.
Logistics
As well as strategic decisions on manufacturing locations, the logistics function is
key to the success of the supply chain. Order fulfillment is an important part of the
supply chain and company management need to make strategic decisions on the
logistics network. The design and operation of the network has a significant
influence on the performance of the supply chain. Strategic decisions are required
on warehouses, distribution centers which transportation modes should be used. If
the overall company objectives identify the use of more third party subcontracting,
the company may strategically decide to use third party logistics companies in the
supply chain.
Strategic decisions determine the overall direction of company’s supply chain.
They should be made in conjunction with the companies overall objectives and not
biased towards any particular product or regional location. These high level
decisions can be refined, as required, to the specific needs of the company at the
lower levels which allow for tactical and operational supply chain decisions to be
made.

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 CUSTOMER FOCUS IN SUPPLY CHAIN

Learning Objectives

By the end of this chapter the learner should be able to:

a) Analyse the concept of Customer Focus in Supply Chain.

The current competitive environment is the outcome of the convergence of various

forces on all supply chain members and to compete in it, organizations need to do
more than optimize their supply chain activities. These forces include the
development of new technologies, increase in communication capabilities,
increasing demand for better quality and customer services, and the demand for
quick and efficient response to market.

Earlier, supply chain members who were away from the end consumers stressed
factors that directly affected their own immediate customer and supplier. But now,
they too need to focus on the end customers and see how these forces affect their
end customers. The key to survival depends on the supply chain members' focus on
the demand side of the supply chain equation. From the corporate perspective, end-
use forces like technology and changing lifestyles will help in determining the
supply chain. Thus, customer focused analysis influences the objectives and goals
of supply chain activities. The efficacy of "push" and "pull" strategies has always
been debatable. Of late, the consumer provides both the strategies in the demand-
chain management process.

4.1 Demand-Chains

A Focus on End Users: Instead of building and operating a supply chain from
manufacturer to market, demand-chain leaders focus on developing alliances with
those channel partners who can meet customer requirements. The focus on end-
users directed the attention of all supply chain partners to the demand side of the

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supply chain equation and made them rethink their roles in the supply chain. The
roles and responsibilities of players in today's emerging demand chains have
changed compared to those in traditional chains. In a demand chain, the products
are developed based on consumer research and information gathered by any of the
supply chain partners and not necessarily by the manufacturers.

For example, retailers provide comprehensive information on consumer spending

patterns and preferences to the manufacturer and this information helps in
producing products with attributes that meet customer requirements. Consumers
are now interacting with different entities in the purchasing process. Therefore,
every member of the demand chain needs to monitor consumer needs and wants.
This knowledge makes it easier for all the members to identify the product and
packaging requirements and marketing opportunities, and to determine the need for
brand extension. The success of a product and the channel members depends on
the level of participation and coordination between the channel members from the
time the product is conceptualized to the time it is launched in the market. This is
essential if supply chains are to be transformed into demand chains.

Broad Trends and Misconceptions:

While developing a demand chain, channel partners should be aware of the broad
demand trends in consumer markets based on demographics, lifestyle, and other
social factors. For example, the overall size of the average family has shrunk due
to a fall in the birth rate in industrialized nations, thus bringing down the number
of new consumers. Also, the workforce size has contracted due to an increase in
automation. These changes influence the way in which consumers purchase goods
and where they purchase them. The failure to accept these changes leads to two
general misconceptions about the working of the demand chain.

Misconception # 1 - Customers will always buy from retailers. Consumers are

actively looking for new sources from which to obtain products and services. In
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this process, to get value for money, they are prepared to buy products and services
from any channels member who can provide them with quality products, timely
delivery and a reasonable price.

Misconception # 2 - Business-to-business companies or industrial organizations

need to monitor only their customers. In industrial organizations, solving
customers' problems sometimes means solving your customer's customers'
problems. All customer/industrial demand for products or services across the
supply chain is derived from end-user demand. Industrial customers will not order
more parts if consumers are not buying their end products.

4.2 Creating the Demand Chains of the Future

Demand chains are intended to bring together channel members to delight

customers and solve their problems by.

 Gathering and analyzing information about consumers, their problems, and

their needs.
 Identifying and choosing the right channel partners.
 Developing a system for information sharing among channel partners.
 Developing products and services, which are capable of solving customers'
problems.
 Choosing the most optimal transportation and distribution methods.
In SCM, new areas of competition are emerging that go beyond manufacturer vs.
manufacturer, distributor vs. distributor and retailer vs. retailer tussles.
Organizations are now competing on flexibility, speed, and productivity, and
focusing on meeting consumer demand.
Organizations can be flexible, quick and productive only if they align their
strategic initiatives with their supply chain partners' strategic initiatives. In this
competitive environment, organizations need to do more than just optimize their
supply chain activities.
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Today's competitive environment is the result of the convergence of forces on all
members of the supply chain. These forces are the development of new
technologies, increase in communication capabilities, increasing demand for better
quality and customer services and demand for quick and efficient response to
market. Earlier, many supply chain members, especially the ones who were the
farthest from end consumers (for example suppliers of components to
manufacturers), gave attention only to those factors that directly affected their
immediate customer and supplier. However, for survival in today's highly
competitive environment, organizations need to focus on end customers and see
how these forces affect their end customers. The key to survival will depend on the
supply chain members' focus on the demand side of the supply chain equation.
From a corporate standpoint, end-use forces will influence the way things are done
in the supply chain and determine the best operational practices for meeting the
requirements of end users. From the point of view of consumers, end-use forces
such as technology and changing lifestyles will help determine what is done in the
supply chain. Thus, the objectives and goals of supply chain activities will be
influenced by customer focused analysis. Management professionals have often
debated the effectiveness of "push" and "pull" strategies. In the current scenario,
the consumer provides both the push and the pull, in a process known as demand-
chain management.
Demand-chain management focuses on the supply of items that consumers are
willing and able to purchase. Unlike supply chain management, which focuses on
the efficient distribution of products and services, demand chain management
focuses on meeting customer requirements efficiently.
Demand chains aim to bring together channel members to delight customers and
solve their problems by:
 Gathering and analyzing information about consumers, their problems,
and their unmet needs.

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  Identifying and choosing the right channel partners who can effectively
perform functions needed in the demand chain.
 Developing a system for information sharing among channel partners
about consumers and customers, available technology, and logistic
challenges and opportunities.
 Developing products and services which are able to solve customers'
problems.
 Choosing the most optimal transportation and distribution methods to
deliver products and services to consumers in the expected format.
  
?
Review Questions

i) What is customer focus on supply chain?

ii) What are demand chains in customer focus
iii) In customer focus, we have what we call Board Trends and Misconceptions. Explain
the TWO of them.
iv) Explain how Creating the Demand Chains of the Future helps in supply chains.

VALUE CHAIN AND VALUE DELIVERY SYSTEMS

Learning Objectives
By the end of this chapter the learner should be able to:
a) Analyse the concept Value Chain and its applications in Supply Chain.
b) Analyse Value Delivery Systems in Supply Chain.

5.1 Value Chain

 A value chain is a chain of activities that a firm operating in a specific

industry performs in order to deliver a valuable product or service for
the market.
 The concept comes from business management and was first
described and popularized by Michael Porter in his 1985 best-seller,

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 Competitive Advantage: Creating and Sustaining Superior
Performance.
 "The idea of the value chain is based on the process view of
organizations, the idea of seeing a manufacturing (or service)
organisation as a system, made up of subsystems each with inputs,
transformation processes and outputs.
 Inputs, transformation processes, and outputs involve the acquisition
and consumption of resources - money, labour, materials, equipment,
buildings, land, administration and management.
 How value chain activities are carried out determines costs and affects
profits."
 The concept of value chains as decision support tools, was added onto
the competitive strategies paradigm developed by Porter as early as
1979.
 In Porter's value chains, Inbound Logistics, Operations, Outbound
Logistics, Marketing and Sales and Service are categorized as primary
activities.
 Secondary activities include Procurement, Human Resource
management, Technological Development and Infrastructure.

According to the OECD Secretary-General (Gurría 2012) the emergence of

global value chains (GVCs) in the late 1990s provided a catalyst for
accelerated change in the landscape of international investment and trade,
with major, far-reaching consequences on governments as well as
enterprises. (Gurría 2012)

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5.2 Global Value Chains (GVCs)
Often multinational enterprises (MNEs) developed global value chains, investing
abroad and establishing affiliates that provided critical support to remaining
activities at home. To enhance efficiency and to optimize profits, multinational
enterprises locate "research, development, design, assembly, production of parts,
marketing and branding" activities in different countries around the globe. MNEs
offshore labour-intensive activities to China and Mexico, for example, where the
cost of labor is the lowest.(Gurría 2012) the emergence of global value chains
(GVCs) in the late 1990s provided a catalyst for accelerated change in the
landscape of international investment and trade, with major, far-reaching
consequences on governments as well as enterprises.(Gurría 2012).
Through global value chains, there has been growth in interconnectedness as
MNEs play an increasingly larger role in the internationalisation of business. In
response, governments have cut Corporate income tax (CIT) rates or introduced
new incentives for research and development to compete in this changing
geopolitical landscape.(LeBlanc et al. 6)

Firm-Level
The appropriate level for constructing a value chain is the business unit (not
division or corporate level). Products pass through activities of a chain in order,
and at each activity the product gains some value. The chain of activities gives the
products more added value than the sum of added values of all activities.
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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. Typically, the described value chain and the documentation of
processes, assessment and auditing of adherence to the process routines are at the
core of the quality certification of the business, e.g. ISO 9001.

Activities
The value chain categorizes the generic value-adding activities of an organization.
The activities considered under this product/service enhancement process can be
broadly categorized under two major activity-sets.
1. Physical/traditional value chain: a physical-world activity performed in
order to enhance a product or a service. Such activities evolved over time by
the experience people gained from their business conduct. As the will to earn
higher profit drives any business, professionals (trained/untrained) practice
these to achieve their goal.

2. Virtual value chain: The advent of computer-based business-aided systems

in the modern world has led to a completely new horizon of market space in
modern business-jargon - the cyber-market space. Like any other field of
computer application, here also we have tried to implement our physical
world's practices to improve this digital world. All activities of persistent
physical world's physical value-chain enhancement process, which we
implement in the cyber-market, are in general terms referred to as a virtual
value chain.
In practice as of 2013, no progressive organisation can afford to remain stuck to
any one of these value chains. In order to cover both market spaces (physical world
and cyber world), organisations need to deploy their very best practices in both of
these spaces to churn out the most informative data, which can further be used to
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improve the ongoing products/services or to develop some new product/service.
Hence organisations today try to employ the combined value chain.
A good look at this value-chain model indicates that there are a number of
locations in any business process to add value or to improve the process, which in
turn will help in saving money and time while improving the performance. The
basic idea is same age-old concept of utilizing the input of information, whatever
the source.
A firm's value chain forms part of a larger stream of activities, which Porter calls a
value system. A value system, or an industry value chain, includes the suppliers
that provide the inputs necessary to the firm along with their value chains. After
the firm creates products, these products pass through the value chains of
distributors (which also have their own value chains), all the way to the customers.
All parts of these chains are included in the value system. To achieve and sustain a
competitive advantage, and to support that advantage with information
technologies, a firm must understand every component of this value system.

Industry-Level
An industry value-chain is a physical representation of the various processes
involved in producing goods (and services), starting with raw materials and ending
with the delivered product (also known as the supply chain). It is based on the
notion of value-added at the link (read: stage of production) level. The sum total of
link-level value-added yields total value. The French Physiocrats' Tableau
économique is one of the earliest examples of a value chain. Wasilly Leontief's
Input-Output tables, published in the 1950s, provide estimates of the relative
importance of each individual link in industry-level value-chains for the U.S.
economy.

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Significance
The value chain framework quickly made its way to the forefront of management
thought as a powerful analysis tool for strategic planning. The simpler concept of
value streams, a cross-functional process which was developed over the next
decade, had some success in the early 1990s.
The value-chain concept has been extended beyond individual firms. It can apply
to whole supply chains and distribution networks. The delivery of a mix of
products and services to the end customer will mobilize different economic factors,
each managing its own value chain. The industry wide synchronized interactions of
those local value chains create an extended value chain, sometimes global in
extent. Porter terms this larger interconnected system of value chains the "value
system". A value system includes the value chains of a firm's supplier (and their
suppliers all the way back), the firm itself, the firm distribution channels, and the
firm's buyers (and presumably extended to the buyers of their products, and so on).
Capturing the value generated along the chain is the new approach taken by many
management strategists. For example, a manufacturer might require its parts
suppliers to be located nearby its assembly plant to minimize the cost of
transportation. By exploiting the upstream and downstream information flowing
along the value chain, the firms may try to bypass the intermediaries creating new
business models, or in other ways create improvements in its value system.
Value chain analysis has also been successfully used in large petrochemical plant
maintenance organizations to show how work selection, work planning, work
scheduling and finally work execution can (when considered as elements of chains)
help drive lean approaches to maintenance. The Maintenance Value Chain
approach is particularly successful when used as a tool for helping change
management as it is seen as more user-friendly than other business process tools.
A value chain approach could also offer a meaningful alternative to evaluate
private or public companies when there is a lack of publicly known data from

73
direct competition, where the subject company is compared with, for example, a
known downstream industry to have a good feel of its value by building useful
correlations with its downstream companies.
Value chain analysis has also been employed in the development sector as a means
of identifying poverty reduction strategies by upgrading along the value chain.
Although commonly associated with export-oriented trade, development
practitioners have begun to highlight the importance of developing national and
intra-regional chains in addition to international ones.

5.3 Supply-Chain Operations Reference (SCOR)

The Supply-Chain Council, a global trade consortium in operation with over 700
member companies, governmental, academic, and consulting groups participating
in the last 10 years, manages the Supply-Chain Operations Reference (SCOR), the
de facto universal reference model for Supply Chain including Planning,
Procurement, Manufacturing, Order Management, Logistics, Returns, and Retail;
Product and Service Design including Design Planning, Research, Prototyping,
Integration, Launch and Revision, and Sales including CRM, Service Support,
Sales, and Contract Management which are congruent to the Porter framework.
The SCOR framework has been adopted by hundreds of companies as well as
national entities as a standard for business excellence, and the U.S. Department of
Defense has adopted the newly launched.

5.4 Design-Chain Operations Reference (DCOR)

This framework for product design as a standard to use for managing their
development processes. In addition to process elements, these reference
frameworks also maintain a vast database of standard process metrics aligned to
the Porter model, as well as a large and constantly researched database of
prescriptive universal best practices for process execution.

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5.5 Value Reference Model
A Value Reference Model (VRM) developed by the trade consortium Value Chain
Group offers an open source semantic dictionary for value chain management
encompassing one unified reference framework representing the process domains
of product development, customer relations and supply networks.
The integrated process framework guides the modeling, design, and measurement
of business performance by uniquely encompassing the plan, govern and execute
requirements for the design, product, and customer aspects of business.
The Value Chain Group claims VRM to be next generation Business Process
Management that enables value reference modeling of all business processes and
provides product excellence, operations excellence, and customer excellence.
Six business functions of the value chain:
 Research and development
 Design of products, services, or processes
 Production
 Marketing and sales
 Distribution
 Customer service
This guide to the right provides the levels 1-3 basic building blocks for value chain
configurations. All Level 3 processes in VRM have input/output dependencies,
metrics and practices. The VRM can be extended to levels 4-6 via the Extensible
Reference Model schema.

5.6 Facilities Decision

 We classify the decisions for supply chain management into two broad
categories -- strategic and operational.

75
  As the term implies, strategic decisions are made typically over a
longer time horizon.
 These are closely linked to the corporate strategy (they sometimes {\it
are} the corporate strategy), and guide supply chain policies from a
design perspective.
 On the other hand, operational decisions are short term, and focus on
activities over a day-to-day basis.
 The effort in these type of decisions is to effectively and efficiently
manage the product flow in the "strategically" planned supply chain.

There are four major decision areas in supply chain management:

1) Location,

2) Production,

3) Inventory, and

4) Transportation (distribution), and there are both strategic and operational

elements in each of these decision areas.

1. Location Decisions
 The geographic placement of production facilities, stocking points, and
sourcing points is the natural first step in creating a supply chain.
 The location of facilities involves a commitment of resources to a long-term
plan.
 Once the size, number, and location of these are determined, so are the
possible paths by which the product flows through to the final customer.

76
 These decisions are of great significance to a firm since they represent the
basic strategy for accessing customer markets, and will have a considerable
impact on revenue, cost, and level of service.
 These decisions should be determined by an optimization routine that
considers production costs, taxes, duties and duty drawback, tariffs, local
content, distribution costs, production limitations, etc. (See Arntzen, Brown,
Harrison and Trafton [1995] for a thorough discussion of these aspects.)
Although location decisions are primarily strategic, they also have
implications on an operational level.

2. Production Decisions
 The strategic decisions include what products to produce, and which plants
to produce them in, allocation of suppliers to plants, plants to DC's, and
DC's to customer markets.
 As before, these decisions have a big impact on the revenues, costs and
customer service levels of the firm.
 These decisions assume the existence of the facilities, but determine the
exact path(s) through which a product flows to and from these facilities.
 Another critical issue is the capacity of the manufacturing facilities--and this
largely depends the degree of vertical integration within the firm.
 Operational decisions focus on detailed production scheduling.
 These decisions include the construction of the master production schedules,
scheduling production on machines, and equipment maintenance.
 Other considerations include workload balancing, and quality control
measures at a production facility.

3. Inventory Decisions
 These refer to means by which inventories are managed.
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 Inventories exist at every stage of the supply chain as either raw materials,
semi-finished or finished goods.
 They can also be in-process between locations.
 Their primary purpose to buffer against any uncertainty that might exist in
the supply chain. Since holding of inventories can cost anywhere between 20
to 40 percent of their value, their efficient management is critical in supply
chain operations.
 It is strategic in the sense that top management sets goals.
 However, most researchers have approached the management of inventory
from an operational perspective.
 These include deployment strategies (push versus pull), control policies ---
the determination of the optimal levels of order quantities and reorder points,
and setting safety stock levels, at each stocking location.
 These levels are critical, since they are primary determinants of customer
service levels.
4. Transportation Decisions
 The mode choice aspect of these decisions are the more strategic ones.
 These are closely linked to the inventory decisions, since the best choice of
mode is often found by trading-off the cost of using the particular mode of
transport with the indirect cost of inventory associated with that mode.
 While air shipments may be fast, reliable, and warrant lesser safety stocks,
they are expensive.
 Meanwhile shipping by sea or rail may be much cheaper, but they
necessitate holding relatively large amounts of inventory to buffer against
the inherent uncertainty associated with them.
 Therefore customer service levels, and geographic location play vital roles in
such decisions.

78
  Since transportation is more than 30 percent of the logistics costs, operating
efficiently makes good economic sense.
 Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing
and scheduling of equipment are key in effective management of the firm's
transport strategy.

Review Questions

i) What is value chain

ii) What is a global value chain
iii) Explain the factors that affect facilities decision determination.
iv) Explain the meaning of
a). Production Decisions
b). Inventory Decisions
c). Transportation Decisions

SUPPLY CHAIN COMMUNICATION

Learning Objectives

By the end of this chapter the learner should be able to analyze different communication strategies
and modes in Supply Chain.

 A supply chain communication is conceptually similar to the supply chain

talked about within industrial, manufacturing and distribution environments.
 Typical industrial supply chains include;
 multiple steps or a chain of events that begin with the sourcing of raw
materials and
 transporting them to a manufacturing environment to create a final
product,
 then delivering it for sale to an end customer.
 A communication supply chain focuses on a similar chain of events,
however its focus surrounds the;
 development,
 production,
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  updating,
 sharing,
 tracking and
 storage of an organization’s communication assets.

Communication Assets
Communication assets can be defined as materials that are either hardcopy or
electronic, created and produced by an organization designed to communicate
some form of important message to a particular audience.  Asset types can range
from raw materials (imagery, copy blocks, logos, legal text and the like) to a more
finished product that combines raw materials to create corporate brochures, sales
collateral, annual reports, press releases, contracts/agreements, technical
documentation, education & training materials, employee or customer newsletters
and more.

6.1 Importance of Supply Chain Communication

 While every organization has a communication supply chain, in many cases
the processes and procedures that enable it are not looked at in a strategic
manner, or worse, not looked at across the enterprise at all.
 Once an organization takes a hard look at the costs (soft and hard) involved
with how it manages its communication assets, it becomes apparent that
there has to be a better way.
 What if there was an effective way to optimize an organization’s
communication supply chain?  
 The savings could be significant. Well, there is a better way. It’s called
Communication supply chain optimization.
 Organizations are transforming costs into revenue opportunities. In today’s
challenging economy, this is always good news
 Effective communication throughout the supply chain helps a company
improve the efficiency of its supply and logistics operations.
 Networked communications enable all members of the chain to share
essential market and operational information, improving productivity and
reducing time-to-market.
 Regular marketing communication also builds teamwork by keeping all
parties informed on developments that impact their operations. By bringing
together all parties through communications, a company can build an
extended enterprise that operates as a single, coordinated unit.
1. Network
Providing a single integrated source of information creates a supply chain that can
respond rapidly to change or new opportunities, a concept discussed in the book
"Supply Chain Management on Demand." The problem is that as the supply chain
grows, the task of trying to communicate with members who might be located
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anywhere in the world over a variety of different networks, devices and standards
gets more and more complex. The network should therefore be based on open
standards so all members can communicate, regardless of the nature of their
internal networks.

2. Developments
An important aspect of supply chain communication is keeping members informed
on market developments that affect their business. In fact, a survey of senior
supply chain executives at Smart Conference 2009 found that 70 percent
highlighted supply chain visibility as a key improvement objective. The lead
company should provide essential market information that helps members plan
their own production schedules and investment programs. If the lead company has
acquired new customers, launched new products or entered new market sectors, the
changes will have an impact throughout the supply chain.

3. Teamwork
A strong supply network has teamwork at its core, and communication is key to its
success. A videoconferencing facility that enables meetings to take place without
time-wasting travel can simplify and improve management. Videoconferencing
and other communication tools can also encourage high levels of collaboration
within the supply chain. Members can share their skills and ideas as part of a
product development program, which may generate more business for the entire
chain.

4. Marketing
At the distribution end of a supply chain, companies can drive more business by
communicating marketing information and support material that helps distribution
partners increase sales. Product training, information on customer needs, lead
generation programs, branding and joint marketing campaigns can help to improve
distributors' sales performance. Lead companies can also use distributor channels
to communicate with end customers in niche sectors where distributors have a
strong presence.

5. Growth
A structured communication program can encourage growth and development at
different levels in the supply chain. Companies can offer each category of supplier
-- tier one and tier two, for example -- different levels of support. Tier one
suppliers would receive more frequent and detailed communications on business
opportunities and development support, a factor that would encourage suppliers at
lower levels to improve their performance.

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6.2 Transportation Choices in the Supply Chain

 Transportation refers to the movement of product from one location to

another as it makes its way from the beginning of a supply chain to the
customer’s handle.
 In this exciting new broad look at the business of transportation, including
Supply Chain Management, Logistics, & procurement.
 Freight transportation costs in the United States amount to about 6% of the
GDP.
 Many manufacturers & retailers have found that they can use state of the art
supply chain management to reduce inventory & warehousing costs while
speeding up delivery to the end customer.
 Any supply Chain’s success is closely linked to the appropriate use of
transportation.
 Wal- Mart has effectively used a responsive transportation system to lower
its overall costs.
 At DCs, Wal- Mart uses cross-docking, a process in which product is
exchanged between trucks so that each truck going to a retail store has
products from different suppliers.
 Meanwhile, the booming growth in shipments to & from China is creating
both bottlenecks opportunities.
 Many major corporations have invested in significant buying offices in
China, India, & elsewhere.
 There are two keys players in any transportation that takes place within a
supply chain.
 The shipper is that party that requires the movement of the product
between two points in the supply chain.
 The carrier is the party that moves or transports the product.

For eg, when Dell uses UPS to the ship its computers from the factory to the
customer, Dell is the shipper & UPS is the carrier.

There are numbers of factors affecting carrier decisions:

The vehicle- related is incurred whether the vehicle is operating or not & is
considered fixed for short-term operational decisions by the carrier.

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Fixed operating cost is generally proportional to the size of operating facilities.
This includes any cost associated with terminals, airport gates & labor that are
incurred whether vehicles are operating or not.

Trip-related cost includes the price of labor & fuel incurred for each trip
independent of the quantity transported. Quantity-related cost are loading /
unloading costs & a portion of the fuel cost that varies with the quantity being
transported.

Overhead cost includes the cost of planning & scheduling a transportation network
as well as any investment in information Technology.

A carrier’s decisions are also affected by the responsiveness it seeks to provide its
target segment & the prices that the market will bear. The various modes of
transportation include water, rail, intermodal, truck, air, and pipeline & package
carriers. Water is typically the least expensive mode but is also the slowest
whereas air & package carriers the most expensive & the fastest. Rail & water are
best suited for low-value. Large shipments that do not need to be moved in a hurry.
Air & package carriers are best suited for small, high-value, emergency shipments.
Intermodal TL carriers are faster than rail & water but somewhat more expensive.
LTL carriers are best suited for small shipments that are too large for package
carriers but much less than a TL.

Making Transportation Decisions in practice:

Managers should ensure that a firm’s transportation strategy supports its

competitive strategy. Firms should evaluate the transportation function based on a
combination of transportation costs, other costs such as inventory affected by
transportation decisions, & the level of responsiveness achieved with customers.

Managers should consider an appropriate combination of company-owned &

outsourced transportation to meet their needs.

Wal- Mart has used responsiveness transportation to reduce inventories in its

supply chain. Given the importance of transportation to the success of their
strategy, they own their transportation Fleet & manage it themselves.
Transportation systems for the new economy need to be very responsive but most
also be able to exploit every opportunity for aggregation, some cases even with
competitors, to help decrease the transportation cost of small shipments. Managers
must use the information technology available to help decrease cost & improve
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responsiveness in their transportation networks. Satellite based communication
systems allow carriers to communicate with each vehicle in their fleet.

The supply chain goal is to minimize the total cost while providing the desired
level of responsiveness to customers.

Economic uncertainty, fluctuating fuel prices, increased safety and social

regulation, escalating customer expectations, globalization, improved technologies,
labor and equipment shortages, a changing transportation service industry…
today’s managers are faced with an array of challenges and opportunities that
contrast dramatically with those of a decade ago.

It is not surprising, then, that many managers have failed to fully adapt to the
changing environment, resulting in performance shortcomings and lost
opportunities. Prominent among the list of lost opportunities is fully leveraging the
transportation function as a critical strategic element within the supply chain. 
Transportation plays a central role in seamless supply chain operations, moving
inbound materials from supply sites to manufacturing facilities, repositioning
inventory among different plants and distribution centers, and delivering finished
products to customers. Benefits that should result from world-class operations at
the points of supply, production, and customer locations will never be realized
without the accompaniment of excellent transportation planning and execution.
Having inventory positioned and available for delivery is not enough if it cannot be
cost effectively delivered when and where needed.
This article addresses the key decision levels that need to be addressed for
transportation to make its greatest impact in the integrated supply chain. These
levels address long-term decisions, lane operations, choice of mode or carrier, and
dock level operations.

Long-Term Decisions
At the highest strategic decision level, transportation managers must fully
understand total supply chain freight flows and have input into network design. At
this level, long-term decisions related to the appropriateness and availability of
transportation modes for freight movement are be made. Managers need to decide,
for example, which primary mode of transportation is appropriate for each general
flow (i.e., inbound, interfacility, outbound) by product and/or location, paying
careful attention to consolidation opportunities where feasible.
Plans should indicate the general nature of product flows, including volume,
frequency, seasonality, physical characteristics, and special handling requirements.
Strategic mode and carrier-sourcing decisions should be considered part of a long-
term network design, identifying core carriers in each relevant mode to enhance
service quality commitments and increase bargaining power. Additionally,
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managers need to make decisions regarding the level of outsourcing desired for
each major product flow—ranging from providing the transportation through the
company’s own assets (e.g., private fleets) to latch-key turnover of transportation
operations to third-party providers.
Network and lane design decisions at the strategic level should examine tradeoffs
with other operational cost areas such as inventory and distribution center costs. In
conducting this analysis, companies should keep in mind that networks need not be
fixed or constant.  Rather,  substantial service improvements and cost reductions
can be achieved by critically examining existing networks and associated flows.
For instance, it may become apparent that stock locations can be centralized by
using contract transportation providers to move volume freight to regional cross-
dock facilities for sorting, packaging, and brokering small loads to individual
customers.

Lane Operation Decisions

The second level of decision-making regards lane operation decisions.  Where
network design decisions are concerned with long-term planning, these decisions
focus on daily operational freight transactions.  At this level, transportation
managers armed with real-time information on product needs at various system
nodes must coordinate product movements along inbound, interfacility, and
outbound shipping lanes to meet service requirements at lowest total costs. 
Decision-makers who are adept at managing information can take advantage of
consolidation opportunities, while ensuring that products arrive where they are
needed in the quantities they are needed just in time to facilitate other value-added
activities. At the same time, they are realizing transportation cost savings. 
The primary opportunities associated with lane operation decisions include
inbound/outbound consolidation, temporal consolidation, vehicle consolidation,
and carrier consolidation. If managers have access to inbound and outbound freight
movement plans, they can identify opportunities to combine freight to build
volume shipments. An inbound shipment may arrive from a supplier located in
Philadelphia, for example, on the same day that a production order destined for a
customer in Wilmington, Del., becomes available for movement. If this
information is known to transportation planners far enough in advance,
arrangements could be made for the inbound carrier to haul the outbound load back
to Wilmington.
In many cases the inbound carrier would be willing to negotiate lower roundtrip
rates to avoid deadhead miles on the backhaul.  This is particularly true if the
carrier and/or driver are headquartered in the Philadelphia area. If this happens to
be a heavy traffic lane, the firm may consider strategically sourcing a core carrier
in this geographic region to capitalize on this opportunity.

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Similarly, less-than-volume-load (LVL) shipments moving to the same geographic
region on consecutive days may be detained until sufficient volumes exists to
justify a full load on one carrier with multiple stops (temporal consolidation). By
avoiding the LVL terminal system, the detained freight often arrives at the same
time or earlier than the original LVL shipment—and at a lower cost.  Multiple,
small shipments inbound from suppliers or outbound to customers in the same
geographic region scheduled for delivery on the same day may also be combined
on one vehicle at full-volume rates, paying stop-off charges but saving on multiple
LVL rates (vehicle consolidation).
Another consolidation opportunity springs from the core carrier concept. Assigning
greater shipping volumes to fewer carriers should result in lower per-unit
transportation costs and higher priority assigned to the shipper’s increased freight.
In addition to consolidating the carrier base, the shipper can identify reliable
carriers in need of backhaul miles.
For instance, a plastics distributor identifies carriers that operate a high percentage
of deadhead miles in lanes over which the firm regularly moves freight. The firm
negotiates advantageous rates with these carriers in exchange for guaranteed
backhaul revenue miles. If the plastics firm plans to move significant amounts of
product from Texas to Florida, the transportation manager will find a Florida
carrier that moves a large volume of product from Florida to Texas. Given
sufficient planning information, the transportation manager can use guaranteed
volumes on the backhaul to negotiate attractive rates. 

6.3 Choice of Mode and Carrier

A third level of transportation decision-making involves the choice of mode and
carrier for a particular freight transaction. Due to the blurring of service
capabilities among traditional transportation modes, options that in the past would
not be considered feasible may now emerge as the preferred choice. For example,
rail container service may offer a cost-effective alternative to longhaul motor
transport while yielding equivalent service.  Similarly, package delivery carriers
are competing with traditional LTL operators. Truckload carriers, on the other
hand, are increasingly bidding for low-volume shipments as well as for overnight
freight movements. For the shipper seeking 24-hour delivery, truckload carriers
may offer an alternative to air carriers at significantly lower rates—and, quite
possibly, higher reliability. 
In an integrated mode/carrier decision-making scenario, each shipment would be
evaluated based upon the service criteria that must be met, (for example, delivery
date/time or special handling requirements) as well as the movement’s cost
constraints.  All core carriers, regardless of mode, that could possibly meet the
service and cost criteria would be pulled from the database.  Managers would then
choose the carrier from this multi-modal set based on availability and existing
rates.
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Dock Level Operations
The final set of transportation decisions involves dock level operations, such as
load planning, routing, and scheduling. These activities encompass the operational
execution of the higher-level planning decisions. While the fundamental purpose of
shipping docks may not have changed much over the years, the manner in which
work is done certainly has. One obvious change is the common usage of advanced
IT and decision support systems. These tools help the dock personnel to make
better use of the transportation vehicle space; to identify the most efficient routes;
and to better schedule equipment, facilities and drivers on a given day.
Transportation departments that avail themselves of better and more timely
information can derive significant benefits from more efficient and effective load
planning, routing, and scheduling. For example, if a vehicle is being loaded with
multiple customer orders, dock-level managers must ensure that the driver is
informed of the most efficient route and that loads are placed in the order of the
planned stops. Transportation managers, even at the dock level, must develop
expertise in using the information tools available to aid in these decisions.
Successful managers today require a broad view of transportation management’s
role and responsibilities in an integrated supply chain. Managers will continue to
encounter significant challenges as their firms proceed down the road toward
supply chain integration, particularly as external environmental characteristics such
as fuel costs and the overall economy wax and wane.
Regardless of external conditions, however, managers must encourage their firms
to avoid the temptation of making transportation decisions with an eye toward
short-term gain. Rather, they need to view the total cost and total value provided
by the function not only in relation to operating expenses but also in terms of the
impact on customer service and inventory reduction. The influence on total
economic value added is significant.

6.4 Factors Affecting the Choice of Mode of Transport

If business firm can deliver goods and satisfactory services to customers, it ca earn
goodwill. Nature of goods, needs of customers, cost, time for delivery (speed),
reliability, capacity, access, security etc. should be considered while selecting
means of transport. Selection of the means of transport affects the whole physical
distribution system. So proper means of transport should be selected keeping all
these factors in mind.

1. Cost

Water transport is the cheapest means for transporting raw materials or finished
goods. Road transport is relatively costly and airway transport is the costliest.

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2. Speed

The time taken by the means of transport in transporting goods is called speed. The
means of high speed takes shorter time to transport goods or people to the
destination, but the means of slow speed takes longer time. Airway transport is
fastest means whereas human and animals are the slowest means. Water transport
system is cheap means but it is very slow.

3. Accessibility Or Availability

All means of transport have no same accessibility. There is neither accessibility nor
availability of pipeline and water ways/sea route in some countries. So, road
transport is the best among available means.

4. Capacity

Railways and water ways are the best means in carrying capacity. They can
transport huge and heavy loads. The means of rad transport are medium whereas
airways can carry only limited loads and are the costliest means.

5. Reliability

The task of carrying goods to destination at right time regularly is called reliability.
Pipeline transport system is the best reliable means whereas road transport,
railway, human and animals are supposed to be good or reliable means of
transport.

6.5 Different Modes Means of Transport

There are various means to carry products from one place to another. Land
transport, water transport, air transport and pipeline transport are the major means
of transportation. Each of them has its own features, merits and demerits. Proper
means of transportation should be selected according to necessity, the nature of
goods, cost, time for transportation, reliability, capacity, access, security etc. We
can classify and describe the different modes of transportation in the following
ways mentioned below:

1. Land Transport System

Land transport is the oldest and more practiced system. The means, which are used
to carry people and goods through land transport are called land transportation.
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Land transportation is again divided in two classes as road transport and railway
transport.

i. Road Transport

Road transport is being used from ancient time and it is very useful and important.
The means of road transport are: a). men and labors, b). animals such as mule,
horse, sheep, goat, camel etc. c). cart, lorry etc. d). the modern automobile such as
motor, bus, truck, tractor, tempo, trolley bus, jeep etc are also used to transport
people and goods. People, cloths, paper materials, books, machines and machinery,
animals, fresh fruits and other goods are transported from one place to another.

Labors or porters are used to carry goods to remote places where modern means of
transport have not reached. In some places horse, mule, sheep, goat, camels etc. are
used to transport goods. Rickshaw, cycle, cart, lorry etc are also used in
transporting goods and people. But the means of transport like bus, truck, tractor,
motor, etc. have become very popular means of transporting goods and people.
Nowadays, motor, truck, bus, jeep etc. have become synonyms of road transport.

ii. Railway Transport

The other important means of land transport is railway. It is used to transport goods
and people from one place to another. Development of railway transport helps
much to develop industry, commerce and whole economy of any country. It is very
useful in transporting big and heavy goods and materials. Mostly railway is used in
transporting big and heavy materials such as big machines, coal, food grain,
chemicals, automobiles, iron , steel etc.

2. Water Transport System

Water transport is taken as an ancient means of transport, It was developed and

used to transport goods and people from one country to another before the
development of air transport. It is also operated to transport goods from one part to
another of any country through big canals, rivers or sea. Water transport is a
system of transporting goods and people from one place to another by ship, boat,
steamer, motorboat etc. through canals, rivers, lake, sea, ocean etc. Water transport
is suitable to transport petroleum products, chemicals, iron, machines, tools, heavy
equipment, coal and several heavy goods.

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3. Air Transport System

Air transport is the fastest modern means of transport. Air transport was started
after First World War, especially after 1918. In the beginning until 1960, only
passengers, mails, perishable goods and costly light goods were transported by air
transport. But nowadays, air transport system has also become suitable for other
industrial and commercial products. According to the research carried out by Air
Canada on air fair market, air transport system has been proved cost effective and
practical means for transporting industrial and business goods.

The importance of air transport has gradually growing. This is the fastest speed
means for transporting passengers and goods to different parts within a country and
different countries of the world. Mostly, flowers of different species, perishable
edibles, technical goods, emergency parts and parcels, equipment, mails and other
valuable goods are transported by air transport system.

4. Pipeline Transport System

Pipeline is another important means of transport. Raw oil, Petroleum products,

processed coal, drinking water, natural gas etc. are transported from one place to
another place. Pipeline transport may be constructed underground or underwater.
This means of transport is very useful for quick transportation of liquid materials
even through high hills or plane land. This is regular and reliable means of
transport. It needs less manpower. It does not need packaging service and cost and
it can be operated 24 hours. It becomes long lasting in the condition of proper
repair. But construction of pipeline system take huge investment and it can
transport only liquid materials.

5. Rope-way Transport System

Rope-way is the another means of transport. It can transport people and goods. It
can be operated in the places where road construction is impractical and costly.
Certain limit of goods or people can be transported with the help of electricity. In
the hilly remote countries, rope-way transport system may be suitable means.

?
Review Questions

i) What is Supply Chain Communication and what is its importance?

ii) What are transportation choices in the supply chain?
iii) Explain lane operation decisions
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 iv) What determines choice of mode and carrier
v) Explain the factors affecting the choice of mode of transport
vi) Explain different modes or means of transport

INVENTORY MANAGEMENT
Learning Objectives

By the end of this chapter the learner should be able to:

a) Understand Inventory Management Concept in Supply chain

b) Classify different types of inventories and how they are Managed within a Supply Chain
Environment

In any business or organization, all functions are interlinked and connected to each
other and are often overlapping. Some key aspects like supply chain management,
logistics and inventory form the backbone of the business delivery function.
Therefore these functions are extremely important to marketing managers as well
as finance controllers.
Inventory management is a very important function that determines the health of
the supply chain as well as the impacts the financial health of the balance sheet.
Every organization constantly strives to maintain optimum inventory to be able to
meet its requirements and avoid over or under inventory that can impact the
financial figures.
Inventory is always dynamic. Inventory management requires constant and careful
evaluation of external and internal factors and control through planning and
review. Most of the organizations have a separate department or job function called
inventory planners who continuously monitor, control and review inventory and
interface with production, procurement and finance departments.

7.1 Defining Inventory

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Inventory is an idle stock of physical goods that contain economic value, and are
held in various forms by an organization in its custody awaiting packing,
processing, transformation, use or sale in a future point of time.
Any organization which is into production, trading, sale and service of a product
will necessarily hold stock of various physical resources to aid in future
consumption and sale. While inventory is a necessary evil of any such business, it
may be noted that the organizations hold inventories for various reasons, which
include speculative purposes, functional purposes, physical necessities etc.
From the above definition the following points stand out with reference to
inventory:
 All organizations engaged in production or sale of products hold inventory
in one form or other.
 Inventory can be in complete state or incomplete state.
 Inventory is held to facilitate future consumption, sale or further
processing/value addition.
 All inventoried resources have economic value and can be considered as
assets of the organization.

7.2 Different Types of Inventory

Inventory of materials occurs at various stages and departments of an organization.
A manufacturing organization holds inventory of raw materials and consumables
required for production. It also holds inventory of semi-finished goods at various
stages in the plant with various departments. Finished goods inventory is held at
plant, FG Stores, distribution centers etc. Further both raw materials and finished
goods those that are in transit at various locations also form a part of inventory
depending upon who owns the inventory at the particular juncture. Finished goods
inventory is held by the organization at various stocking points or with dealers and
stockiest until it reaches the market and end customers.

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Besides Raw materials and finished goods, organizations also hold inventories of
spare parts to service the products. Defective products, defective parts and scrap
also forms a part of inventory as long as these items are inventoried in the books of
the company and have economic value.

Types of Inventory by Function

7.5 Types of Inventories - Independent and Dependant Demand Inventories

Inventory Management deals essentially with balancing the inventory levels.
Inventory is categorized into two types based on the demand pattern, which creates
the need for inventory. The two types of demand are Independent Demand and
Dependant Demand for inventories.

 Independent Demand
An inventory of an item is said to be falling into the category of independent
demand when the demand for such an item is not dependant upon the
demand for another item.
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 Finished goods Items, which are ordered by External Customers or
manufactured for stock and sale, are called independent demand items.
Independent demands for inventories are based on confirmed Customer
orders, forecasts, estimates and past historical data.

 Dependant Demand
If the demand for inventory of an item is dependant upon another item, such
demands are categorized as dependant demand.
Raw materials and component inventories are dependant upon the demand
for Finished Goods and hence can be called as Dependant demand
inventories.
Take the example of a Car. The car as finished goods is an held produced
and held in inventory as independent demand item, while the raw materials
and components used in the manufacture of the Finished Goods - Car
derives its demand from the demand for the Car and hence is characterized
as dependant demand inventory.
This differentiation is necessary because the inventory management systems
and process are different for both categories.
While Finished Goods inventories which is characterized by Independent
demand, are managed with sales order process and supply chain
management processes and are based on sales forecasts, the dependant
demand for raw materials and components to manufacture the finished
goods is managed through MRP -Material Resources Planning or ERP
-Enterprise Resource Planning using models such as Just In Time, Kanban
and other concepts. MRP as well as ERP planning depends upon the sales
forecast released for finished goods as the starting point for further action.

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Managing Raw Material Inventories is far more complicated than managing
Finished Goods Inventory. This involves analyzing and co-coordinating delivery
capacity, lead times and delivery schedules of all raw material suppliers, coupled
with the logistical processes and transit timelines involved in transportation and
warehousing of raw materials before they are ready to be supplied to the
production shop floor. Raw material management also involves periodic review of
the inventory holding, inventory counting and audits, followed by detailed analysis
of the reports leading to financial and management decisions.
Inventory planners who are responsible for planning, managing and controlling
Raw Material inventories have to answer two fundamental questions, which can
also be termed as two basic inventory decisions.
a. Inventory planners need to decide how much of Quantity of each Item is to
be ordered from Raw Material Suppliers or from other Production
Departments within the Organization.
b. When should the orders be placed ?
Answering the above two questions will call for a lot of back end work and
analysis involving inventory classifications and EOQ determination coupled with
Cost analysis. These decisions are always taken in co ordination with
procurement, logistics and finance departments

7.3 Inventory Management Concepts

Inventory management and supply chain management are the backbone of any
business operations. With the development of technology and availability of
process driven software applications, inventory management has undergone
revolutionary changes. In the last decade or so we have seen adaptation of
enhanced customer service concept on the part of the manufacturers agreeing to
manage and hold inventories at their customers end and thereby effect Just In Time
deliveries. Though this concept is the same in essence different industries have

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named the models differently. Manufacturing companies like computer
manufacturing or mobile phone manufacturers call the model by name VMI -
Vendor Managed Industry while Automobile industry uses the term JIT - Just In
Time where as apparel industry calls such a model by name - ECR - Efficient
consumer response. The basic underlying model of inventory management remains
the same.

Let us take the example of DELL, which has manufacturing facilities all over the
world. They follow a concept of Build to Order where in the manufacturing or
assembly of laptop is done only when the customer places a firm order on the web
and confirms payment. Dell buys parts and accessories from various vendors.
DELL has taken the initiative to work with third party service providers to set up
warehouses adjacent to their plants and manage the inventories on behalf of
DELL’s suppliers. The 3PL - third party service provider receives the
consignments and holds inventory of parts on behalf of Dell’s suppliers. The 3PL
warehouse houses inventories of all of DELL’s suppliers, which might number to
more than two hundred suppliers. When DELL receives a confirmed order for a
Laptop, the system generates a Bill of material, which is downloaded at the 3PL,
processed and materials are arranged in the cage as per assembly process and
delivered to the manufacturing floor directly. At this point of transfer, the
recognition of sale happens from the Vendor to Dell. Until then the supplier
himself at his expense holds the inventory.

Let us look at the benefits of this model for both Dell as well as Its Suppliers:
1. With VMI model, Dell has reduced its inbound supply chain and thereby
gets to reduce its logistics and inventory management costs considerably.
2. DELL gets to postpone owning inventory until at the time of actual
consumption. Thereby with no inventories DELL has no need for working
capital to be invested into holding inventories.
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 3. DELL does not have to set up inventory operations and employ teams for
operations as well as management of inventory functions.

Supplier Benefits
1. Supplier gets to establish better relationship and collaboration with DELL
with long-term business prospect.
2. By agreeing to hold inventories and effect JIT supplies at the door to DELL,
supplier will be in a better position to bargain and get more business from
DELL.
3. With VMI model, supplier gets an opportunity to engage in better value
proposition with his customer DELL.
4. Supplier gets confirmed forecast for the entire year with commitments from
DELL for the quantity off take.
5. VMI managed is managed by 3PL and supplier does not have to engage
himself in having to set up and manage inventory operations at DELL’s
premise.
6. 3PL Managed VMI holds inventories of all suppliers thereby charges each
supplier on per pallet basis or per sq.ft basis. Supplier thereby gets to pay on
transaction basis without having to marry fixed costs of inventory
operations.
Today most of the Multi National companies have successfully managed to get
their suppliers and 3PL service providers to setup VMI throughout their plants
all over the world and this model has become the order of the day.

Need for Inventory Management - Why do Companies hold Inventories?

Inventory is a necessary evil that every organization would have to maintain for
various purposes. Optimum inventory management is the goal of every inventory

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planner. Over inventory or under inventory both cause financial impact and health
of the business as well as effect business opportunities.
Inventory holding is resorted to by organizations as hedge against various external
and internal
Most of the organizations have raw material inventory warehouses attached to the
production facilities where raw materials, consumables and packing materials are
stored and issue for production on JIT basis. The reasons for holding inventories
can vary from case to case basis.

1. Meet variation in Production Demand

Production plan changes in response to the sales, estimates, orders and
stocking patterns. Accordingly the demand for raw material supply for
production varies with the product plan in terms of specific SKU as well as
batch quantities.
Holding inventories at a nearby warehouse helps issue the required quantity
and item to production just in time.

2. Cater to Cyclical and Seasonal Demand

Market demand and supplies are seasonal depending upon various factors
like seasons; festivals etc and past sales data help companies to anticipate a
huge surge of demand in the market well in advance. Accordingly they stock
up raw materials and hold inventories to be able to increase production and
rush supplies to the market to meet the increased demand.

3. Economies of Scale in Procurement

Buying raw materials in larger lot and holding inventory is found to be
cheaper for the company than buying frequent small lots. In such cases one
buys in bulk and holds inventories at the plant warehouse.

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4. Take advantage of Price Increase and Quantity Discounts
If there is a price increase expected few months down the line due to
changes in demand and supply in the national or international market,
impact of taxes and budgets etc, the company’s tend to buy raw materials in
advance and hold stocks as a hedge against increased costs.
Companies resort to buying in bulk and holding raw material inventories to
take advantage of the quantity discounts offered by the supplier. In such
cases the savings on account of the discount enjoyed would be substantially
higher that of inventory carrying cost.

5. Reduce Transit Cost and Transit Times

In case of raw materials being imported from a foreign country or from a far
away vendor within the country, one can save a lot in terms of transportation
cost buy buying in bulk and transporting as a container load or a full truck
load. Part shipments can be costlier.
In terms of transit time too, transit time for full container shipment or a full
truck load is direct and faster unlike part shipment load where the freight
forwarder waits for other loads to fill the container which can take several
weeks.
There could be a lot of factors resulting in shipping delays and transportation
too, which can hamper the supply chain forcing companies to hold safety
stock of raw material inventories.

6. Long Lead and High demand items need to be held in Inventory

Often raw material supplies from vendors have long lead running into
several months. Coupled with this if the particular item is in high demand

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 and short supply one can expect disruption of supplies. In such cases it is
safer to hold inventories and have control.

Finished Goods Inventory

All Manufacturing and Marketing Companies hold Finished Goods inventories in
various locations and all through FG Supply Chain. While finished Goods move
through the supply chain from the point of manufacturing until it reaches the end
customer, depending upon the sales and delivery model, the inventories may be
owned and held by the company or by intermediaries associated with the sales
channels such as traders, trading partners, stockiest, distributors and dealers, C & F
Agents etc.
Why and when do Organizations hold Finished Goods Inventories?

1. Markets and Supply Chain Design

Organizations carry out detailed analysis of the markets both at national as well as
international / global levels and work out the Supply Chain strategy with the help
of SCM strategists as to the ideal location for setting up production facilities, the
network of and number of warehouses required to reach products to the markets
within and outside the country as well as the mode or transportation, inventory
holding plan, transit times and order management lead times etc., keeping in mind
the most important parameter being, to achieve Customer Satisfaction and Demand
Fulfillment.

2. Production Strategy necessitates Inventory holding

The blue print of the entire Production strategy is dependant upon the marketing
strategy. Accordingly organizations produce based on marketing orders. The
production is planned based on Build to stock or Build to Order strategies.

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While Build to Order strategy is manufactured against specific orders and does not
warrant holding of stocks other than in transit stocking, Build to Stock production
gets inventoried at various central and forward locations to be able to cater to the
market demands.
3. Market penetration
Marketing departments of companies frequently run branding and sales promotion
campaigns to increase brand awareness and demand generation. Aggressive market
penetration strategy depends upon ready availability of inventory of all products at
nearest warehousing location so that product can be made available at short notice
- in terms of number of hours lead time, at all sales locations through out the state
and city.
Any non-availability of stock at the point of sale counter will lead to dip in market
demand and sales. Hence holding inventories becomes a necessity.

4. Market Size, location and supply design

Supply chain design takes into account the location of market, market size, demand
pattern and the transit lead time required to reach stocks to the market and
determine optimum inventory holding locations and network to be able to hold
inventories at national, regional and local levels and achieve two major objectives.
The first objective would be to ensure correct product stock is available to service
the market. Secondly stocks are held in places where it is required and avoid
unwanted stock build up.
5. Transportation and Physical Barriers
Market location and the physical terrain of the market coupled with the local
trucking and transportation network often demand inventory holding at nearest
locations. Hilly regions for example may require longer lead-time to service. All
kinds of vehicles may not be available and one may have to hire dedicated

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containerized vehicles of huge capacities. In such cases the will have to have an
inventory holding plan for such markets.
Far away market locations means longer lead times and transportation delays.
Inventory holding policy will take into account these factors to work out the plan.

6. Local tax and other Govt. Rules

In many countries where GST is not implemented, regional state tax rules apply
and vary from state to state. Accordingly while one state may offer a tax rebate for
a particular set of product category, another state may charge higher local taxes
and lower inter state taxes. In such cases the demand for product from the
neighboring state may increase than from the local state. Accordingly inventory
holding would have to be planned to cater to the market fluctuation.
While in case of exports from the country of origin into another market situated in
another country, one needs to take into account the rules regarding import and
customs duties to decide optimum inventories to be held en route or at destination.

7. Production lead times

FG inventory holding becomes necessary in cases where the lead-time for
production is long. Sudden market demand or opportunities in such cases require
FG inventories to be built up and supplies to be effected.

8. Speculative gain
Companies always keep a watch on the economy, annual state budget, financial
environment and international environment and are able to foresee and estimate
situations, which can have an impact on their business and sales.
In cases where they are able to estimate a increase in industry prices, taxes or other
levies which will result in an overall price increase, they tend to buy and hold huge
stocks of raw materials at current prices. They also hold up finished stock in

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warehouses in anticipation of a impending sale price increase. All such moves
cause companies to hold inventories at various stages.

9. Avoid Certain Costs

Finally organizations hold FG inventories to satisfy customer demand, to reduce
sales management and ordering costs, stock out costs and reduce transportation
costs and lead times.

Why and When to avoid Holding Inventories

Every business organization that is engaged in manufacturing, trading or dealing
with salable products holds inventories in one form another. Inventory is held in
the form of raw materials or in the form of salable goods. Since every unit of
inventoried item has an economic value and is itemized in the books of account of
the company, inventory can be considered to be an asset of the company. Inventory
Management is a critical function performed by planners to balance the inventory
holding so as to ensure that optimum inventory levels are maintained. Any excess
inventory will result in incremental costs of maintaining inventory and affects the
financials of the company as it blocks working capital. Under inventory on the
other hand can seriously hamper the market share. Any customer order that is not
fulfilled due to a stock out is not at all a good sign. Therefore the responsibility of
striking a fine balance in holding lean inventory calls for smart planning and
continuous monitoring of the inventory levels coupled with quick decision-making.
Due to the above factors all organizations generally tend to avoid holding
inventories except at certain times

7.4 Inventory Buildup can be a Sign of Hidden Problems

It has been noticed that inventory buildup in process and manufacturing industries
is often a sign of hidden problems, which lie underneath and are not visible at the

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surface level. In other words one can say that to cover up inefficiencies in the
internal systems, people build up inventories as safety stocks.
Stock build up can occur as a solution to cover up supplier inefficiencies. If the
vendors are not reliable and the flow of raw materials cannot be ensured, there
results a trend to hold buffer inventories in the form of raw materials or semi
manufactured Work in Process inventories.
In other cases inventory buildup can happen due to bad quality. The inventory cost
increase and resultant inventory storage cost can be attributed to cost of quality. If
the production is not consistent with quality, the goods produced will get rejected
leading to an increase in rejected inventory. Secondly, to make up for the loss due
to quality rejection, one would have to increase production and hold finished goods
inventory.
In other cases production delays can lead to buildup of inventories too. Production
delays can be attributed to varied reasons such as bad design of the product,
production layout inefficiencies, production stoppage due to breakdowns, Lengthy
process times etc. Besides these causes, there could be many other problems
related to people and management resulting in slackness on the shop floor, which
can add to inventory holding at various stages.
Such inventory build-ups not only block the working capital and increase un
necessary cost of maintaining and storing the inventories, but also hide the
problems which can cause serious threat to the business. Management should be
watchful to identify any such inventory buildups and investigate into the root cause
and solve such problems.
An inventory buildup at the raw material side as well as the finished goods side
gives cause for worry to the finance controllers. Any non-moving inventory is a
cause for concern because it not only blocks up the funds of the organization but
the incremental cost of holding the inventory keeps increasing over a period of
time and effect the bottom line figures.

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More importantly inventory over a period of time is susceptible to loss, theft,
pilferage and shrinkage. It can also become obsolete and deteriorate over a period
of time if not used within the shelf life.
Hence inventory levels are always on the radar of not only finance controllers, but
of the top management as well.

7.6 Inventory Costs

Inventory procurement, storage and management is associated with huge costs
associated with each these functions. Inventory costs are basically categorized into
three headings:
1. Ordering Cost
2. Carrying Cost
3. Shortage or stock out Cost &
4. Cost of Replenishment
a. Cost of Loss, pilferage, shrinkage and obsolescence etc.
b. Cost of Logistics
Sales Discounts, Volume discounts and other related costs.
1. Ordering Cost
Cost of procurement and inbound logistics costs form a part of Ordering Cost.
Ordering Cost is dependant and varies based on two factors - The cost of ordering
excess and the Cost of ordering too less.
Both these factors move in opposite directions to each other. Ordering excess
quantity will result in carrying cost of inventory. Where as ordering less will result
in increase of replenishment cost and ordering costs.
These two above costs together are called Total Stocking Cost. If you plot the
order quantity vs the TSC, you will see the graph declining gradually until a certain
point after which with every increase in quantity the TSC will proportionately
show an increase.

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This functional analysis and cost implications form the basis of determining the
Inventory Procurement decision by answering the two basic fundamental questions
- How Much to Order and When to Order.
How much to order is determined by arriving at the Economic Order
Quantity or EOQ.

2. Carrying Cost
Inventory storage and maintenance involves various types of costs namely:
 Inventory Storage Cost
 Cost of Capital
Inventory carrying involves Inventory storage and management either using in
house facilities or external warehouses owned and managed by third party vendors.
In both cases, inventory management and process involves extensive use of
Building, Material Handling Equipments, IT Software applications and Hardware
Equipments coupled managed by Operations and Management Staff resources.

a. Inventory Storage Cost

Inventory storage costs typically include Cost of Building Rental and facility
maintenance and related costs. Cost of Material Handling Equipments, IT
Hardware and applications, including cost of purchase, depreciation or rental or
lease as the case may be. Further costs include operational costs, consumables,
communication costs and utilities, besides the cost of human resources employed
in operations as well as management.

b. Cost of Capital
Includes the costs of investments, interest on working capital, taxes on inventory
paid, insurance costs and other costs associate with legal liabilities.

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The inventory storage costs as well as cost of capital is dependant upon and varies
with the decision of the management to manage inventory in house or through
outsourced vendors and third party service providers.
Current times, the trend is increasingly in favor of outsourcing the inventory
management to third party service provides. For one thing the organizations find
that managing inventory operations requires certain core competencies, which may
not be inline with their business competencies. They would rather outsource to a
supplier who has the required competency than build them in house.
Secondly in case of large-scale warehouse operations, the scale of investments may
be too huge in terms of cost of building and material handling equipments etc.
Besides the project may span over a longer period of several years, thus blocking
capital of the company, which can be utilized into more important areas such as R
& D, Expansion etc. than by staying invested into the project.

7.7 Inventory Classification - ABC Classification, Advantages &

Disadvantages
Inventory is a necessary evil in any organization engaged in production, sale or
trading of products. Inventory is held in various forms including Raw Materials,
Semi Finished Goods, Finished Goods and Spares.
Every unit of inventory has an economic value and is considered an asset of the
organization irrespective of where the inventory is located or in which form it is
available. Even scrap has residual economic value attached to it.
Depending upon the nature of business, the inventory holding patterns may vary.
While in some cases the inventory may be very high in value, in some other cases
inventory may be very high in volumes and number of SKU. Inventory may be
help physically at the manufacturing locations or in a third party warehouse
location.

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Inventory Controllers are engaged in managing Inventory. Inventory management
involves several critical areas. Primary focus of inventory controllers is to maintain
optimum inventory levels and determine order/replenishment schedules and
quantities. They try to balance inventory all the time and maintain optimum levels
to avoid excess inventory or lower inventory, which can cause damage to the
business.

ABC Classification
Inventory in any organization can run in thousands of part numbers or
classifications and millions of part numbers in quantity. Therefore inventory is
required to be classified with some logic to be able to manage the same.
In most of the organizations inventory is categorized according to ABC
Classification Method, which is based on pareto principle. Here the inventory is
classified based on the value of the units. The principle applied here is based on
80/20 principles. Accordingly the classification can be as under:
A Category Items Comprise 20% of SKU & Contribute to 80% of $ spend.
B Category Items Comprise 30% of SKU & Contribute to 15% of $ spend.
C Category Items Comprise 50% of SKU & Contribute to 5% of $ spend.
The above is only an illustration and the actual numbers as well as percentages can
vary.
Example: Table of Inventory Listing by Dollar Usage Percentage.

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Advantages of ABC Classification
 This kind of categorization of inventory helps one manage the entire volume
and assign relative priority to the right category. For Example A Class items
are the high value items. Hence one is able to monitor the inventory of this
category closely to ensure the inventory level is maintained at optimum
levels for any excess inventory can have huge adverse impact in terms of
overall value.
 A-Category Items: Helps one identify these stocks as high value items and
ensure tight control in terms of process control, physical security as well as
audit frequency.
 It helps the managers and inventory planners to maintain accurate records
and draw management’s attention to the issue on hand to facilitate instant
decision-making.
 B-Category Items: These can be given second priority with lesser
frequency of review and less tightly controls with adequate documentation,
audit controls in place.
 C-Category Items: Can be managed with basic and simple records.
Inventory quantities can be larger with very few periodic reviews.
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Example: Take the case of a Computer Manufacturing Plant; the various items of
inventory can be broadly classified as under.

Disadvantages
 Inventory Classification does not reflect the frequency of movement of SKU
and hence can mislead controllers.
 B & C Categories can often get neglected and pile in huge stocks or
susceptible to loss, pilferage, slackness in record control etc.

7.8 Operational Challenges in Inventory Management

The latest trend in all industries has been to outsource inventory management
functions to Third Party Service providers. Companies outsource both Raw
Material Inventory as well as Finished Goods to the Service Provider.

In case of finished goods inventory, depending upon the supply chain design, there
may be multiple stocking points at national, regional and state levels. In such an
event each of the warehouse a different service provider may manage operations,
as one may not be able to find a supplier having operations all over the country.
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Therefore the inventory in such a situation will be managed in the Company’s
system as well as in the Service provider’s system. Inventory management and
control becomes a critical function.

The latest trend in all industries has been to outsource inventory management
functions to Third Party Service providers. Companies outsource both Raw
Material Inventory as well as Finished Goods to the Service Provider.

In case of finished goods inventory, depending upon the supply chain design, there
may be multiple stocking points at national, regional and state levels. In such an
event each of the warehouse a different service provider may manage operations,
as one may not be able to find a supplier having operations all over the country.

Therefore the inventory in such a situation will be managed in the Company’s

system as well as in the Service provider’s system. Inventory management and
control becomes a critical function especially in such situations where multi
locations and multiple service providers are involved.

To ensure Inventory control is maintained across all locations, following critical

points if focused upon will help:

1. Establish and outline Operations Process for Service Providers: Draw up

SOP - Standard Operating procedure detailing warehouse operations
process, warehouse inventory system process as well as documentation
process.
Especially in a 3rd Party Service Provider’s facility, it is important to have
process adherence as well as defined management, authorization and
escalation structure for operations failing which inventory operations will
not be under control.

2. Establish inventory visibility at each of the location through MIS Reports:

Draw up list of reports and MIS data for all locations and ensure they are
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 mailed to a central desk in the inventory team for daily review. The
inventory team leader should analyze daily reports of all locations and
highlight any non-conformity and resolve them as well as update the
management.
3. Initiate Daily Stock count procedure to be carried out at all of the locations
and reported back to the inventory desk.
Daily stock count should be able to reflect location accuracy, stock accuracy
as well as transaction summary for the day.

4. Monthly audits and inventory count should be implemented at all locations

without fail and insist on one hundred percent adherence.
5. Quarterly inventory - wall-to-wall count or half yearly and annual wall-to-
wall count should be implemented depending upon the volume of
transactions as well as value of transactions at each location.
6. Central Inventory team to be responsible for ensuring review of all reports
and controlling inventories at all locations.
7. Inventory reconciliation - involves reconciling physical inventory at site
with the system inventory at 3PL Site and then reconciling 3PL System
stocks with company’s system stock.
8. Visiting major sites and being present during physical stock audits on
quarterly or half yearly basis is very important.
9. Lastly keep reviewing processes and ensure training and re training is
carried out regularly and at all times at site so that a process oriented culture
is imbibed and all operating staff understand the importance of maintaining
processes as well as inventory health.
Inventory is nothing but money to the company. If 3PL vendor is managing the
inventory, needless to say you should have your processes in place to be able to
control and maintain inventory health.

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7.9 Good Inventory Management Practices

Good inventory Management practices in the company help by adding value in

terms of having control over and maintaining lean inventory. Inventory should not
be too much or too less. Both the situations are bad for the company. However
often we see that inventory is not focused upon by the management and hence lot
of inefficiencies build up over a period of time without the knowledge of the
management. It is only when we start a cost reduction drive that the inventory goof
ups and skeletons come out of the cupboard and results in revamping the entire
operations.
those companies, which have always focused on inventory as a principle function
and recognized that the inventory effects their sales, as well as the books of
accounts and profits, have managed to introduce and improve inventory
management processes. Many business models work on lean inventory principle or
JIT inventory along with other models like VMI etc. Inventory management to a
large extent is dependent upon the supply chain efficiency as well as operations.
Inventory management is a management cum operations function. It requires
operational processes to be followed and maintained on the floor and in inventory
management systems. Coupled with operations, it entails continuous study;
analysis and decision making to control and manage inventory levels.
We have covered below briefly few of the points which when followed, can go a
long way in ensuring that the inventory is lean and clean.

1. Review Inventory periodically and revise stocking patterns and norms

Inventory is dependant upon the demand as well as the supply chain delivery
time. Often companies follow one stocking policy for all items. For
example, all A, B & C categories may be stocking inventory of 15 days,
which may not be the right thing that is required. While some items may
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 have a longer lead-time thus affecting the inventory holding, the demand
pattern and the hit frequency in terms of past data may show up differently
for each of the inventory items. Therefore one standard norm does not suit
all and can lead to over stocking of inventory as well as in efficiencies in the
system.

2. Get into detailed inventory planning - One size does not fit all
Understand the inventory types and the specific characteristics of the items
you are carrying. Then build the inventory stocking parameters taking into
account the unique characteristics of the particular inventory.
From amongst your inventory list, you will find that all types of materials
are not of the same value. Some might be very expensive and need to be
carried in stock for a longer period, while another item might have a shorter
lead-time and may be fast moving. Quite a few items often have shelf life
and hence require separate norms and focus to manage such items.
Getting into the detailed understanding will help you identify the inventory-
stocking norm required to manage these characteristics to ensure optimum
efficiency. The solution quite often may not be to carry stocks, rather it may
involve setting up the customer service standard for such items and
specifying a delivery time depending upon the frequency of demand. Quite a
few items often have shelf life and hence require separate norms and focus
to manage such items.

3. Study demand pattern, movement patterns and cycles to build suitable

inventory norms for different categories of inventory
Companies which are into retail segments and dealing with huge inventories
in terms of number of parts as well as value will necessarily need to ensure

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 they practice review of inventory list and clean up operations on ongoing
basis.
Popularly known as catalogue management, inventory norms review should
be carried out based on detailed study of the sales data, demand pattern,
sales cycles etc. Understanding of the business and sales cycles specific to
the product category helps one manage inventories better. For example, in
case of retail garments, with every season certain skus become redundant no
matter how their demand was in the previous months. This helps identify
those stocks which are required to be managed at a micro level and identify
the high value and fast moving items that need to be always on the radar to
avoid stock outs.
It does not help for example to carry standard stocks of all items including
low value items as well as high value items. If the low value items are
locally available and the lead-time is less, one can cut down on the inventory
and change the buying pattern. Similarly high value items too can be
managed by cutting down the delivery lead times and in turn reducing
inventory.
It helps to periodically study the past data and extrapolate the same to identify slow
moving and obsolete items. The dead stocks should be flushed out and active
catalogue .

7.9.1 Inventory Management Systems

Modern day inventory is managed by sophisticated system applications that are

designed to manage complex inventory plans and to a large extent contain
processes that initiate and streamline the operations and inventory management. In
the wake of improvements in the communication technology, companies are
deploying one single ERP system across all factories, offices, departments and
locations, thereby ensuring seamless transactions, visibility and controls.
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Inventory in the earlier days used to be managed by a system known as cardex
system. Bin cards were printed and kept in every bin location. Whenever inventory
was put into the bin or removed, the card had to be updated. Apart from the bin
cards, books or registers were maintained to note down the transactions and reports
were prepared manually. The system was basic and did not provide flexibility to
manage warehouse locations as dynamic locations. The operations being manual
were time consuming.

In the next phase come the basic inventory management systems, which were a
replica of the accounting books containing debit and credit entries along with the
balance and the Cardex System continued to be used to manage the shop floor
operations.

With the ERP System introduction, MM modules are deployed which work in
tandem with procurement and other modules. Inventory modules contain
intelligent applications that manage the inventory, help in analysis, categorization
and to a large extent initiate actions and processes based on auto inputs derived
from other sources.

ERP systems do contain WMS modules, which can be deployed along with the
inventory module to manage the warehouse operations. Basic inventory modules in
ERP do contain location management of inventory but do not support warehousing
operations in detail. WMS System applications are designed to work like an
extension of the inventory system but are stand alone applications that help in
warehousing, control, direct and manage inventory and operations.

In fact a robust system suite comprising of ERP and WMS with interfaces built in
between the two systems can play a major role in managing inventory efficiencies.

Both the systems need to be robust, strong and built to suit the business operations
requirement as well as logistics operations requirements. While the inventory

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management efficiencies depend upon the ERP functioning and features, the
inventory operations management is heavily dependant upon WMS System.

WMS system is different from an ERP based inventory system in the sense that
WMS manages inventory but manages inventory operations and warehouse
operations. Though it mirrors the inventory that lies in ERP, the rest of the
operations that are carried out through WMS are different and operations intensive.

Until a few years ago the inventory operations used to be carried out with basic
WMS where most of the operations were manual. Put away lists and pick lists had
to be printed and issued to the operators, who had to note down the bin location
and the pallet ID etc on the slip and give it back to the operator to do the data entry
into the WMS and update the systems. With the introduction of scanning
technology things became a lot more easier where barcodes labels could be pasted
on the inventory which could then be scanned via hand held or wire less scanners
and the data could get uploaded into the WMS. This was further replaced by RF
scanners, which work in real time basis. Today most of the warehouse operations
are carried on through RF Scanners, which are like the extension of the WMS and
are connected to the system on real time basis. The operators can now download
tasks, carry out the tasks and upload confirmation of task completion into the
system through RF scanners. This has not only improved operations efficiencies
and ensure better house keeping but has greatly improved the inventory as well as
data efficiency.

Both ERP and WMS systems along with RF technology have helped improve
inventory visibility, accuracy and operations efficiency, resulting in faster
operations, leaner inventory and good warehouse management practices.

RF Tag IDs have made an entry into the inventory and supply chain arena and are
currently being adapted by retail and textile industries as well as aero spares
industry etc. Tag IDs will provide inventory visibility at all times through out the
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supply chain and thereby ensure inventory accuracy. They are expected to help cut
down and ease a lot of operational processes too. However exorbitant cost of the
RF tag IDS has been the entry barrier that kept the industries from adapting this
technology. The rates are dropping fast making it viable for all industries to adopt
these into the inventory management and operations systems.

?
Review Questions

i) State and explain different types of Inventory

ii) Why do Companies hold Inventories?
iii) Why and when do companies to avoid holding inventories
iv) There are two Types of Inventories - Independent and Dependant Demand
Inventories, explain them.
v) Explain the concept of Inventory Costs
vi) Inventory Management Systems help in the management of supply chain inventories.
Explain some of them.

FORMULATING SUPPLY CHAIN STRATEGY

Learning Objectives

By the end of this chapter the learner should be able to understand how a supply chain strategy is
formulated.

Strategy formulation refers to the process of choosing the most appropriate course
of action for the realization of organizational goals and objectives and thereby
achieving the organizational vision. The process of strategy formulation basically
involves six main steps.
Though these steps do not follow a rigid chronological order, however they are
very rational and can be easily followed in this order.

1. Setting Organizations’ objectives

The key component of any strategy statement is to set the long-term
objectives of the organization. It is known that strategy is generally a
medium for realization of organizational objectives. Objectives stress the
state of being there whereas Strategy stresses upon the process of reaching
there. Strategy includes both the fixation of objectives as well the medium to
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 be used to realize those objectives. Thus, strategy is a wider term which
believes in the manner of deployment of resources so as to achieve the
objectives.
While fixing the organizational objectives, it is essential that the factors
which influence the selection of objectives must be analyzed before the
selection of objectives. Once the objectives and the factors influencing
strategic decisions have been determined, it is easy to take strategic
decisions.

2. Evaluating the Organizational Environment

The next step is to evaluate the general economic and industrial environment
in which the organization operates. This includes a review of the
organizations competitive position. It is essential to conduct a qualitative
and quantitative review of an organizations existing product line. The
purpose of such a review is to make sure that the factors important for
competitive success in the market can be discovered so that the management
can identify their own strengths and weaknesses as well as their competitors’
strengths and weaknesses.

After identifying its strengths and weaknesses, an organization must keep a

track of competitors’ moves and actions so as to discover probable
opportunities of threats to its market or supply sources.

3. Setting Quantitative Targets

In this step, an organization must practically fix the quantitative target
values for some of the organizational objectives. The idea behind this is to
compare with long term customers, so as to evaluate the contribution that
might be made by various product zones or operating departments.

4. Aiming in context with the divisional plans

In this step, the contributions made by each department or division or
product category within the organization is identified and accordingly
strategic planning is done for each sub-unit. This requires a careful analysis
of macroeconomic trends.

5. Performance Analysis
Performance analysis includes discovering and analyzing the gap between
the planned or desired performance. A critical evaluation of the
organizations past performance, present condition and the desired future
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 conditions must be done by the organization. This critical evaluation
identifies the degree of gap that persists between the actual reality and the
long-term aspirations of the organization. An attempt is made by the
organization to estimate its probable future condition if the current trends
persist.

6. Choice of Strategy
This is the ultimate step in Strategy Formulation. The best course of action
is actually chosen after considering organizational goals, organizational
strengths, potential and limitations as well as the external opportunities.

8.1 Distribution Channel Design and Management

Product distribution (or place) is one of the four elements of the marketing mix.
Distribution is the process of making a product or service available for use or
consumption by a consumer or business user, using direct means, or using indirect
means with intermediaries. The other three parts of the marketing mix are product,
pricing, and promotion.

Channels and intermediaries

Distribution of products takes place by means of channels. Channels are sets of
interdependent organizations (called intermediaries) involved in making the
product available for consumption. Merchants are intermediaries that buy and
resell products. Agents and brokers are intermediaries that act on behalf of the
producer but do not take title to the products.

Channel design
A firm can design any number of channels. Channels are classified by the number
of intermediaries between producer and consumer. A level zero channel has no
intermediaries. This is typical of direct marketing. A level one channel has a single
intermediary. This flow is typically from manufacturer to retailer to consumer.

Category Definition
Intensive The producer's products are stocked in the majority of outlets. This
distribution strategy is common for basic supplies, snack foods, magazines and
soft drink beverages.
Selective Means that the producer relies on a few intermediaries to carry their
distribution product. This strategy is commonly observed for more specialised
goods that are carried through specialist dealers, for example,
brands of craft tools, or large appliances.
Exclusive Means that the producer selects only very few intermediaries.
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distribution Exclusive distribution is often characterised by exclusive dealing
where the reseller carries only that producer's products to the
exclusion of all others. This strategy is typical of luxury goods
retailers such as Gucci.

Channel mix
In practice, many organizations use a mix of different channels; in particular, they
may complement a direct sales-force who typically call on larger customers with
agents who cover the smaller customers and prospects. In addition, online retailing
or e-commerce is leading to disintermediation. Retailing via smartphone or m-
commerce is also a growing area.
Managing channels
The firm's marketing department needs to design the most suitable channels for the
firm's products, then select appropriate channel members or intermediaries. The
firm needs to train staff of intermediaries and motivate the intermediary to sell the
firm's products. The firm should monitor the channel's performance over time and
modify the channel to enhance performance.

Channel motivation
To motivate intermediaries the firm can use positive actions, such as offering
higher margins to the intermediary, special deals, premiums and allowances for
advertising or display.[1] On the other hand, negative actions may be necessary,
such as threatening to cut back on margin, or hold back delivery of product.

Channel conflict
Channel conflict can arise when one intermediary's actions prevent another
intermediary from achieving their objectives. Vertical channel conflict occurs
between the levels within a channel and horizontal channel conflict occurs between
intermediaries at the same level within a channel.

?
Review Questions

i) Formulating supply chain strategy is an important aspect in supply chain management, explain
it.
ii) What is distribution channel design and management?
iii) Managing channels is important in distribution channels, explain its meaning
iv) What is channel conflict?

FORMING STRATEGIC ALLIANCES AND PARTNERSHIPS

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 Learning Objectives

By the end of this chapter the learner should be able to Analyse how strategic alliances are
formulated and how they lead to partnerships within a supply chain environment.

A strategic alliance is an agreement between two or more parties to pursue a

set of agreed upon objectives need while remaining independent
organizations.
This form of cooperation lies between Mergers & Acquisition M&A and
organic growth.
Partners may provide the strategic alliance with resources such as;
 products,
 distribution channels,
 manufacturing capability,
 project funding,
 capital equipment,
 knowledge,
 expertise, or intellectual property.
The alliance is a cooperation or collaboration which aims for a synergy where each
partner hopes that the benefits from the alliance will be greater than those from
individual efforts. The alliance often involves technology transfer (access to
knowledge and expertise), economic specialization, shared expenses and shared
risk.

Terminology
Various terms have been used to describe forms of strategic partnering. These
include ‘international coalitions’, ‘strategic networks’ and, most commonly,
‘strategic alliances’. Definitions are equally varied. An alliance may be seen as the

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‘joining of forces and resources, for a specified or indefinite period, to achieve a
common objective’.
There are seven general areas in which profit can be made from building alliances.

Typology
One typology of strategic alliances conceptualizes them as horizontal, vertical or
inter-sectoral:
 Horizontal strategic alliance:
Strategic alliance characterized by the collaboration between two or more firms in
the same industry, e.g. the partnership between Sina Corp and Yahoo in order to
offer online auction services in China;
 Vertical strategic alliances:
Strategic alliance characterized by the collaboration between two or more firms
along the vertical chain, e.g. Caterpillar's provision of manufacturing services to
Land Rover;
 Inter-sectoral strategic alliances:
Strategic alliance characterized by the collaboration between two or more firms
neither in the same industry nor related through the vertical chain, e.g. the
cooperation of Toys "R" Us with McDonald's in Japan resulting in Toys "R" Us
stores with built-in McDonald's restaurants.
Another typology distinguishes between four forms of strategic alliances:
3. Joint venture,

4. Equity strategic alliance,

5. Non-equity strategic alliance, and
6. Global strategic alliances:
 Joint venture; is a strategic alliance in which two or more firms create a
legally independent company to share some of their resources and
capabilities to develop a competitive advantage.
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  Equity strategic alliance; is an alliance in which two or more firms own
different percentages of the company they have formed by combining some
of their resources and capabilities to create a competitive advantage.
 Non-equity strategic alliance; is an alliance in which two or more firms
develop a contractual-relationship to share some of their unique resources
and capabilities to create a competitive advantage.
 Global Strategic Alliances; working partnerships between companies (often
more than two) across national boundaries and increasingly across
industries, sometimes formed between company and a foreign government,
or among companies and governments.

Advantages
The advantages of forming a strategic alliance include:
 Allowing each partner to concentrate on their competitive advantage.
 Learning from partners and developing competencies that may be more
widely exploited elsewhere.
 Adequate suitability of the resources and competencies of an organization
for it to survive.
 To reduce political risk while entering into a new market.

Disadvantages

 Risk of losing control over proprietary information, especially regarding

complex transactions requiring extensive coordination and intensive
information sharing.
 Coordination difficulties due to informal cooperation settings and highly
costly dispute resolution.

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  Agency costs: As the benefit of monitoring the alliance's activities
effectively is not fully captured by any firm, a free rider problem arises (the
free rider problem seems to be less pronounced in settings with multiple
strategic alliances due to reputational effects).
 Influence costs because of the absence of a formal hierarchy and
administration within the strategic alliance.

9.1 Stages of Alliance Formation

A typical strategic alliance formation process involves these steps:
 Strategy Development: Strategy development involves studying the
alliance’s feasibility, objectives and rationale, focusing on the major issues
and challenges and development of resource strategies for production,
technology, and people. It requires aligning alliance objectives with the
overall corporate strategy.
 Partner Assessment: Partner assessment involves analyzing a potential
partner’s strengths and weaknesses, creating strategies for accommodating
all partners’ management styles, preparing appropriate partner selection
criteria, understanding a partner’s motives for joining the alliance and
addressing resource capability gaps that may exist for a partner.
 Contract Negotiation: Contract negotiations involves determining whether
all parties have realistic objectives, forming high calibre negotiating teams,
defining each partner’s contributions and rewards as well as protect any
proprietary information, addressing termination clauses, penalties for poor
performance, and highlighting the degree to which arbitration procedures are
clearly stated and understood.
 Alliance Operation: Alliance operations involves addressing senior
management’s commitment, finding the calibre of resources devoted to the
alliance, linking of budgets and resources with strategic priorities, measuring
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 and rewarding alliance performance, and assessing the performance and
results of the alliance.
 Alliance Termination: Alliance termination involves winding down the
alliance, for instance when its objectives have been met or cannot be met, or
when a partner adjusts priorities or re-allocates resources elsewhere.

9.2 Strategy Development

Features common to transactions that are natural candidates for strategic alliances
are:
 High impediments to comprehensive contracting resulting in a major degree
of contract incompleteness
 High complexity minimizing the auxiliary potential of the body of law for
resolving issues not specified in the contract
 Both allies have to invest in relationship-specific assets resulting in potential
for mutual hold-ups
 Excessive cost for one party to develop the expertise to carry the transaction
itself (e.g. due to experience curve)
 Transitory or uncertain character of market opportunity making a merger or
vertical integration unattractive
 Need for a local party in a country due to regulatory environment (as is often
the case in China)

9.3 Forming Strategic Partnerships

Establishing partnerships with other businesses allows you to combine your
resources to overcome challenges. By creating an alliance with other organizations
you can develop a synergy that improves your ability to meet the needs of your
target market.

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The right strategic alliance has many benefits for your business. By building a
strategic partnership you reduce your exposure to risk. This is because liabilities
are shared amongst the partners in the alliance. Your combined efforts, skills and
resources can help produce economies of scale and give you a competitive edge.
The right strategic partnership can extend your access to new markets.

Building a strategic alliance is not easy. Many strategic partnerships fail because of
a lack of strategic compatibility or imbalances within the alliance. Another pitfall
is that you may have to share your unique expertise with other organizations. This
may diminish your competitive advantage. The formation of successful business
partnerships can also be hindered by incompatible management styles.

Developing partnerships with other organizations requires the establishment of a

long term mutually beneficial business relationship. Partnerships are based on
trust. Without trust the partnership will fail. All businesses in the alliance need to
act within the best interests of the partnership.

When developing a partnership, it is essential to find an organization that is a good

strategic fit for your business. Conflicting interests will ruin the business
relationship. The goals of the alliance must be mutually agreed upon and must
benefit all parties.

When choosing the right strategic partner, businesses should analyze their external
business environment to identify threats and opportunities. The business can then
form partnerships with organizations that will help limit the impact of threats.
Alternatively, the business can form partnerships with organizations that may help
them capitalize on opportunities.

An analysis of the internal environment should be undertaken. Businesses need to

look at their strengths and weaknesses. Weaknesses can be counterbalanced by
forming alliances with organizations with complementary strengths. To stand the

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test of time, your partnership must be flexible. It must be able to adapt to the
changing needs of all parties in the alliance. When selecting a strategic partner it is
helpful to consider other organizations who already serve your target customer.

Once you have found the right strategic partner, you need to decide on the nature
of your cooperation. You need to agree on areas where you wish to collaborate.
You need to identify the level of cooperation required by each party. Since
business partnerships can be very intricate, it is advisable to appoint a manager to
administer the partnership relationship.

Companies can work together to market complementary products. Promotional

alliances can be formed where strategic partners promote each others products or
services. Logistical alliances can be developed where businesses support each
other in the warehousing and delivery of products. Pricing collaborations can be
created. In a pricing collaboration, customers purchasing products from one
strategic partner become eligible to receive a discount on products offered by
another strategic partner.

Many different types of partnerships exist. An organization can build a vertical

alliance. This is an alliance with an organization in the supply chain. This helps
you control the costs of components and gives you more control over the quality of
your end product. A business can create a horizontal alliance. This is an alliance
with other competitors. In a horizontal alliance, weaker businesses can form a
competitive bloc against a stronger player in the marketplace. A business can
develop a diagonal alliance. This is an alliance with companies from different
industries. If both companies share the same target market, this can help broaden
the offering to the customer.

?
Review Questions

i) What is a strategic alliance?

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 ii) Explain the process of strategic alliance formation
iii) Explain how strategy Development is done
iv) What is the importance of Forming Strategic Partnerships

SUPPLY CHAIN STRUCTURE

Learning Objectives

By the end of this chapter the learner should be able to Analyse the concept of Supply Chain
Structure.

Organizational management structure pertains to the way a company structures its

management and employee positions. Organizational management structure is
depicted in a series of boxes . For example, a president may sit at the top of the
organization. The president may have several vice presidents reporting to him, and
directors report to the vice presidents. Vertical lines used to connect boxes separate
employees by rank. Employees who fall along horizontal lines have the same
company rank.

Height
 A company's organizational management structure can be flat or tall.
Smaller companies usually have very few managers. Most employees are on
the same level, though their duties may vary. Flat organizational structures
are wider than they are tall. That is why flat organizational structures are
often called horizontal management structures. Larger companies tend to be
taller and more vertically oriented. Larger companies require more managers
to make decisions and control the flow of tasks and projects.

Types
 There are three common types of vertical organizational management
structures: product, functional and customer. Companies that use product
organizational management structures divide their departments up by
product types. For example, a retail company may have vice presidents of
housewares, sporting goods and women's clothing. Companies that use
functional management structures divide departments into various functions,
such as marketing, accounting, research and development and finance. A
customer organizational management structure is often used when
companies service different types of customers. For example, a credit card
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 company will often have consumer, corporate, bank and institutional
customers like hospitals.

Advantages
 The advantage of a product organizational structure is that companies can
better focus on their product lines, according to the Reference for Business
website. The product management structure allows companies to focus on
producing, marketing and distributing their products. The advantage of a
functional management structure is that it groups employees by various
talents and skills. Consequently, a functional organizational management
structure allows projects to be completed more efficiently. For example, a
marketing department may employ marketing research, product and
advertising managers. These marketing professionals can combine their
talents to make quicker and more timely decisions. A customer
organizational management structure recognizes vast differences in various
customer types. Therefore, only the most experienced employees are
allowed to deal with certain customers. For example, an account manager
with corporate sales experience may be assigned corporate accounts.

Disadvantages
 The major disadvantage of a product organizational management structure is
duplication of resources. For example, a retail company may employ
separate finance managers for each department when one or two finance
managers could do the job. Functional organizational management structures
may be too narrowly focused. For example, marketing managers may be so
focused on their projects that they lose sight of what other departments are
doing. Thus, company goals may be sacrificed for department objectives and
goals. Companies that use customer organizational management structures
may also overuse various human resources. For example, a separate
marketing manager may be employed for each type of customer, when fewer
managers would be more practical.

10.1 How to Design an Organization Structure

One important element of ensuring the efficient operation of a business is
determining the functions of its workers. Especially in the case of new ventures, an
important first step is to determine the purpose of the business or organization.
Once that has been accomplished, the emphasis should be on designing an efficient
organizational structure for a company or business.
1. Develop a clear mission statement for the organization. Focus the
organization structure around the mission statement. The mission
statement should include a strong emphasis on encouraging good

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 communications between workers at every level as well as inspiring
innovation and ensuring efficiency.
2. Decide whether the organization structure will be centralized and
formal or decentralized and informal. For centralized and formal
organizations, the organization structure takes more of a top-down
approach with strictly defined work roles. For decentralized and
informal organizations, there is more of a cooperative approach with
workers often performing a wide range of functions.
3. Determine the nature of the organization structure based on the
mission statement and the formality of the organization structure.
Organization structure can be department based or based on a
particular project or process. Department -based organization structure
is often divided into line functions (such as manufacturing) and staff
functions (such as human resources).
4. Design the overall chain of command for the organization. If there is a
single overall director or leader, determine the title for that role. If
there are dual or multiple leaders, divide the overall company function
between the various roles in a way that makes sense for the particular
organization.
5. Determine the authority and responsibility to be assigned to each
position in the organization structure. Attempt to achieve a minimum
of overlapping functions. Also, attempt to minimize any possible
confusion by subordinates concerning which supervisors to consult
with on specific issues.
6. Add subordinate roles to the chain of command. Determine the
process of reporting from subordinate to supervisor and make
allowances for special circumstances (such as grievance resolution).
Indicate if, where and how interactions across departments or projects
will take place.

10.2 Types of Organizational Structures

An organizational structure is an institution with strategies, policies, commonly
shared values and a specific set of activities working together toward a single
objective. Businesses adopt various organizational models that best match their
agendas.

The Horizontal Organization Structure

Organizational structures define a company's internal setup, the manner in which
authority and information flow and the hierarchical structure. Vertical
organizational structures are most common in large companies; small companies
are more likely to use horizontal organizational structures.
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Function
 Horizontal organizational structures give employees power to make
decisions. Companies with horizontal structures typically rely on the
judgment and estimation of their employees.
Features
 Employees may report directly to the owners of businesses with horizontal
structures. The chain of command has minimal levels in such organizations.

Significance
 Bureaucracy is minimal in horizontal organizational structures. The
emphasis is on teamwork and direct communication, rather than hierarchy
and protocol.

Benefits
 Work often proceeds quickly in companies with horizontal structuresfaster
as employees make decisions on their own. Motivation and satisfaction
levels are likely to be high when employees feel they have a say in the
conduct of the business.

Application
 Horizontal organization structures are common in organizations such as
hotels, hospitals, spas, salons and restaurants.

Line Organizational Structure

 Line organizational structures are informal environments where decision-
makers interact directly with their staff, and decisions are implemented
quickly.

Functional Organizational Structures

 Functional organizational structures are concerned with matching a
propensity for a skill set with a functional department; for example, placing
employees displaying excellent interpersonal skills in a customer service
department.

Bureaucratic Organizational Structures

 Bureaucratic organizational structures are mature and formal structures
where decision-making is implemented from the top-down. Bureaucratic
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 structures involve a complex hierarchical system divided into departments
and divisions which are critical to efficiently carrying out a set of complex
tasks to achieve a main objective.

Network Organizational Structures

 Network structures are concerned with outsourcing jobs, tasks and/or
activities to outside entities to better achieve their goals; reduce operating
costs; take advantages of price discrepancies in the marketplace; export
liability; and harness volunteer-based talent.

Matrix Organizational Structures

 Matrix organizational structures are a combination of functional and line
organizational structures. Matrix structures are the most complex of all the
structures, and are resilient to change. Matrix organizational structures
engineer groups with specific talents and services, using both line and
functional departments to best accomplish particular tasks.

10.3 Advantage & Disadvantage of Organizational Structures

Firms have organizational structures that show the relationship between the
company's employees and the responsibilities of said employees. Each firm's
organizational structure is different and depends on its specific needs. A large
manufacturing firm with multiple factories is likely to have a different
organizational structure than a financial services firm with only one office.
However, there are some basic types of organizational structures, each with its own
advantages and disadvantages.

Vertical Organizational Structure

 A vertical organizational structure is based on the reporting chain from the
head of the company down. It establishes the reporting relationships between
people and their span of control. One disadvantage to this sort of structure is
that it tends to be bureaucratic and does not foster communication between
people at different levels. The advantages include faster decision-making
and better coordination of the company's activities.

Horizontal Organizational Structure

 A horizontal structure is a flatter organizational structure that groups
together people based on their skills or functions. The organizational
structure could group those who work in a specific department together, or
the grouping could be based on those who work in a functional area such as
finance or marketing. One advantage of this sort of flatter hierarchy is that it
is easier for employees to communicate with each other and it facilitates
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 learning. Disadvantages are that as the company grows, there may be a lack
of integration across the different functions or departments

Matrix Organizational Structure

 Businesses working on a specific project could also have a matrix
organizational structure that sets up the relationship among the people
working on the project. The matrix type of project management system
involves putting together people from different functional areas, such as
marketing and systems, to work together for the project time frame. One
advantage of the matrix organizational structure is that people across
different functional areas have a better understanding of their coworkers in
other areas. A disadvantage is that employees are responsible to their project
team as well as to their functional areas. This can create some conflict.

Informal Organizational Structure

 Whatever an organization's formal organizational structure, there is an
informal organizational structure that develops. This informal structure, also
known as the "company grapevine," influences how information flows
within the company. One advantage of such a grapevine is that employees
who interact outside the confines of the formal organizational structure often
cooperate better, benefiting the organization. A disadvantage is that rumors
and gossip can spread through the grapevine.

10.4 Hybrid Structure Advantages & Disadvantages

Organizational structure defines the way in which the people and resources are
organized and coordinated by the authority to achieve the organizational goals.
Hybrid structure, otherwise known as matrix structure, is a type of organizational
structure within a company/organization that is a combination of functional and
divisional structures. It features the efficient use of resources and expertise
development found in functional structures (where the employee's positions are
organized by specialized areas, or functions) and the flexibility among command
found in divisional structures (where employees are organized by the similarity of
their markets and products).

Increased Efficiency
 The major advantage of hybrid structure is the increased efficiency. This
structure makes sure that the right quantity of work is assigned at the right
time to the right professionals, thus making the optimum use of resources
and prevention of waste. This structure works very well even when the
resources are scarce. As the specialized staffs are readily available, projects
are launched quickly, thus increasing the efficiency of the organization.
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Development of Cross-Functional Skills
 In hybrid structures groups are formed considering the specializations as
well as services. Thus employees with different skills are mingled together
which gives an opportunity to learn and develop a variety of skills from
many other participants. This is the main advantage of hybrid structure in
terms of the personal growth of employees, which can be later utilized by
the organization. This also results in minimization of projects costs, as
resources can be shared. Flexibility
 The hybrid organizational structure is more flexible than divisional and
functional structures. There exists a healthy relationship between the senior
managers and junior employees. This helps in addressing all employee
problems easily, thus increasing the effective output from the employees.

Conflicts
 The major disadvantage of hybrid structure is the chance of having conflicts
between corporate departments and divisions. There could be dilemmas
among project managers and department managers regarding deadlines and
resources. Many employees become very much confused about the line of
authority. There can also be confusion regarding the roles and
responsibilities of each employee.

Too Much Administration Overhead

 Waste of time and effort come into picture in case of hybrid organizations.
To resolve the conflicts that happen between divisions and corporate
departments, time and effort get wasted in the form of meetings. Meetings
are also required for better utilization and coordination of staff in case of two
or three concurrent projects.

?
Review Questions

i) What are supply chain organization structure

ii) Explain horizontal organization structure
iii) How can you design an organization structure
iv) Explain the advantages & disadvantages of organizational structures
v) What are the disadvantages of hybrid structures?

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 INTER - ORGANIZATIONAL RELATIONSHIPS
Learning Objectives

By the end of this chapter the learner should be able to:

a) Analyse the concept of inter-organizational relationships and how they help supply chains.

11.1 Types of Inter-organizational Relationships

Interorganizational relationships between businesses or nonprofits are also known
as strategic relationships. The philosophy behind forming an interorganizational
relationship is the idea that both groups can benefit more from working with one
another in some configuration than working independently. As such, there are
several different configurations that suit a variety of business needs.

Alliance
 Frequently identified as a means to improve customer service and reduce
costs, business alliances are created with an agreement between the two
organizations. Both parties to the agreement generally work in tandem to
achieve one or more of a series of different business goals: sales
improvement, investment improvement, or embarking on a joint venture, for
example.

Consortium
 A consortium is a group of businesses or organizations that are united by a
common goal and choose to work together to reach that goal, often by
pooling resources. Organizations that belong to a consortium usually have
less formalized business-to-business interactions than relationships with a
more restrictive agreement. Consortium members conduct their business in
such a way that allows for dialog and communication, but that does not
restrict or impinge on the movements of other members.

Sponsorship
 Sponsorship is a type of interorganizational relationship where one entity
gives financial or other support to another for a set amount of time. A
frequent example of sponsorship is corporate giving, in which large
corporations donate money to nonprofits and charities with no strings
attached, enabling the nonprofits to meet their goals more easily. In addition,
a company may sponsor an art museum or other cultural center by donating
money to make a particular exhibition possible.

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Subsidiary
 A subsidiary inter-organizational relationship is frequently found in the
nonprofit world. Large nonprofit organizations, such as United Way, have
hundreds of local chapters and smaller organizations that fall under the
national organization's umbrella of funding and centralized administration.
This means that all funding for the subsidiary, or member, organization must
go through the umbrella organization in order to reach local groups and
campaigns.

11.2 Inter-organizational Strategies

Firms are facing a growing need to be more competitive. Organizations are facing
unprecedented challenges brought on by increased technological needs and a
growing focus on international business. Firms are looking to inter-organization
relationships in order to meet the challenge. From aerospace to biotechnology,
companies are creating a new type of organizational strategy through inter-
organization adjustments and cross-functional collaborations. The following will
illustrate how inter-organization strategies are helping to create greater flexibility
and agility at a time when adaptation can mean the difference between business
success or failure.

Communication
 Inter-organizational management emerges from one basic need:
communication. Executive management must develop consistent methods to
communicate quality and delivery goals to all levels of employees. They are
also looking for better ways to coordinate initiatives across different
departments. Inter-organizational strategies focus on managing business
processes across functional areas. The goal is to create synergies by
leveraging the innovation of building cross functional teams with cross
functional goals.

Common Language
 Measurable goals related to market share and profits are primarily driven by
competition and pressure from stakeholders, both internal and external.
These goals require improvements to process which are not contained within
one department or function. Failure to include one function in planning
strategy sessions can lead to low customer service, increases in cost
structure, poor delivery and new product innovation. Inter-organizational
strategies focus on creating horizontal relationships which cut across the
entire organization. The challenge is creating a common language across
functions, developing a uniform system of measurement and obtaining the
right data.
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Convergence
 By creating a new approach to decision making and thinking top managers
can create a new paradigm for employees to foster collaborative networks
instead of functional silos. In order to do this, top managers must also
develop their own cross functional expertise. Microsoft founder Bill Gates
calls this need to collaborate "convergence". While technology is at the heart
of automating functions, managers must be capable of identifying the
opportunity. Inter-organization strategies must focus on creating a broader
view of how functional processes fit into the overall strategic direction of the
company. Quality management systems (QMS) like ISO 9001, Six Sigma,
and Lean provide management with a tool-set designed to greatly improve
the efficiency of information flow and communication across the
organization. See Resources for a link to Bill Gate's "convergence" letter.

11.3 Inter-organizational Conflict

With organizations expanding their boundaries into wider areas, encountering
inter-organizational conflict is a possibility. Whereas inter-organizational conflict
deals with friction within an organization, inter-organizational conflict occurs
when two or more organizations create friction.

Types
 The three types of inter-organizational conflict are substantive conflict,
emotional conflict and cultural conflict. Each is dealt with differently.
Substantive
 Substantive conflict occurs when a basic disagreement arises between the
two organizations at a fundamental level. For example, the People for the
Ethical Treatment of Animals would have substantive conflict with an
organization that experiments on laboratory animals.

Emotional
 Emotional conflicts takes place when individuals between the organizations
find themselves reacting on an emotional level–out of fear, jealousy, envy or
stubbornness.

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Cultural
 Inter-organizational conflict also can occur based on cultural needs and
desires. These conflicts are often the result of basic misinterpretation.

Resolution
 Inter-organizational conflict sometimes can be resolved through mediation,
open dialogue or cultural understanding. In some cases, however, due to the
very nature of the various organizations, there can never be a resolution to
the inter-organizational conflict.

11.3.1 Advantages & Disadvantages of Conflict in Organizations

Over time, conflict within organizations may be inevitable. As people compete
within the organization, they can come into conflict with the goals, procedures,
authority figures and individuals in the organization. Conflict can be detrimental,
but surprisingly, it can have some advantages, also.

1. What is Conflict?
 Conflict can crop up in organizations whenever people have contact. People
might disagree about facts or about the soundness of opinions expressed by
those in authority. There might be what we commonly call a "personality
conflict," with one group member making negative remarks about another,
or avoiding that person altogether.
Another form of conflict occurs when people within an organization
agree on the goals, but they disagree on the procedures needed to
reach those goals. Rivalries, power struggles and disagreements about
an individual's role in the organization are common forms of
organizational conflict.

2. Can Conflict be an Advantage?

 The word "conflict" has negative connotations in common use, so we tend to
think that conflict can only be a disadvantage in an organization. This is not
necessarily true. Task conflict, where people disagree about the essence of
the discussion or the directives of a figure in authority, can be constructive.
By hearing conflicting sides, people within the organization may think more
carefully about the issues and make better decisions. People in organizations
who disagree about procedures to accomplish a goal may come up with new
and better procedures. Or, after discussion, group members might feel that
the goal itself might have to be modified. On the other hand, conflict can
have detrimental effects in an organization. It may be harmful to individuals;
weaken or destroy a group; increase tension between groups; or disrupt
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 normal channels of cooperation. In extreme cases, conflict can lead to
violence. Conflict can prevent members of an organization from focusing on
tasks and goals.

Managing Conflict
 Some conflict within an organization may be inevitable, but it is important
to acknowledge that it exists in order to resolve the issues. To put an
effective program of conflict resolution in place, it is important to analyze
the situation to learn what the conflict is really about. Is it a struggle over
goals, territory, or values? How are the individuals in conflict behaving?
 Once the problem is identified, the lines of communication must be open to
allow all parties to express their views. A tactful manager will allow for both
sides to "save face" or embarrassment. Finally, negotiation toward a solution
that everyone can live with will forward the goals of the organization.

11.4 Negative Effects of Conflict within an Organization

An organization is made up of groups of people, and within groups of people
conflicts are inevitable. Part of the measure of a good executive and management
team is how they handle conflict. When conflict management is successful, there
are limited negative effects and the company can move forward in a productive
manner. When management does not offer conflict resolution, there can be many
negative effects on the company. Understanding the negative effects of conflict on
your organization can help emphasize the importance of conflict management.

Insubordination
 A company with weak management develops problems with conflict that
continue for the long term. Employees see that management is unable to
resolve conflicts within the company, and respect for the authority of
management can be eroded. Insubordination develops because employees do
not think management can maintain control over the company.

Drop in Productivity
 Allowing a conflict to continue means that employee attention becomes
more focused on the conflict and not on productivity. As a problem is
allowed to linger, employees will attach more importance to resolving the
issue in their favor rather than attending to worker productivity.

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Lack of Direction
 Conflict can sometimes arise when management is unable to communicate
the direction of the company to employees. Conflict will erupt as employees
are allowed to interpret change within the company in their own way.

Fragmentation
 Conflict creates rival factions. Sometimes those factions are individuals,
sometimes they are groups. Unresolved conflict can create tension between
groups that may normally need to work together. Such rivalries can make
progress within the company difficult.

Lack of New Ideas

 Groups in conflict tend not to collaborate on new ideas. When conflict goes
unresolved it can be difficult to create new ideas the company needs to solve
problems it is facing.

Quality of Work
 If a conflict is allowed to go on long enough, the parties involved may begin
to show more interest in the conflict than in doing their jobs properly.
Product quality can suffer, and in some cases the safety of the employees
can be in jeopardy as well.

Deadlines
 In some companies, deadlines are very important. Groups in conflict may
start to push deadline limits as the conflict becomes more important than
reaching their deadlines. When both sides think they are right and the
conflict is not brought in check by management, the idea that each side must
think they are right before they can move on will begin to affect important
deadlines.
?
Review Questions

i) What is an alliance
ii) Explain the meaning of a consortium
iii) Differentiate between a sponsorship and a subsidiary
iv) Define Inter-organizational strategies
v) What is inter-organizational conflict?
vi) What are the advantages & disadvantages of conflict in organizations
vii) What are the negative effects of conflict within an organization

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 DISTRIBUTION
Learning Objectives

By the end of this chapter the learner should be able to understand distribution as applied in supply
chain management.

In commerce, it means the movement of goods and services from the source
through a distribution channel, right up to the final customer, consumer, or user,
and the movement of payment in the opposite direction, right up to the original
producer or supplier. This takes place in a distribution warehouse.

A distribution warehouse is a building and a place where items for distribution are
stored. In other words, it serves as storage for products from the manufacturer to
the distributor before these products are distributed to various retail customers. For
instance, after the manufacturer manufactures the products, they’d want to
distribute it to customers from all over the world and so, to do this, they are going
to deliver these goods or items to the distributor on a certain area. With such
massive amount of products and items to be distributed, the distributor requires this
distribution warehouse where they can easily store these goods before distributing
to retail stores. Most distribution warehouses even have warehouse storage system
to make storing items and products safer and more convenient.

Who uses a distribution warehouse?

 The Manufacturing Company.

They use the warehouse in order to store the goods and the items that they have
manufactured and are to be delivered to the distributors.

 Third party distributors.

These are the entities that the manufacturing company delivers their products to.
These entities are the ones responsible for supplying a place with certain goods and
products from the manufacturing company.

 Retail stores.
This refers to the stores that sell products in retail. The items they usually place
inside the distribution warehouse are those items that they sell. They use the
warehouse to store the stocks or inventory they have.

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12.1 The Benefits of Having a Distribution Warehouse

Distribution centers or companies need to have a distribution warehouse if they

want to avail of these benefits:

 Time-savings.
A distribution warehouse can really save distributors a lot of time when it comes to
distributing all the items. This is because they no longer have to rummage through
the items just to deliver them to various retail stores. In other words, the
distribution warehouse with its warehouse storage system can give convenience
since it makes the items and the products to be distributed more organized. It can
save workers a lot of time and effort trying to distribute the products or in
managing their products.

 Money-savings.
A distribution warehouse is the best solution to protect the goods or the products
that distributors are trying to distribute to retail outlets. When you have a
distribution warehouse, you are ensuring that all the goods are kept in good
condition and retain their quality. This is because a distribution warehouse is built
to achieve these things. They are usually built with the right temperature that can
help distributors achieve their purpose in terms of preserving the quality and the
condition of the products. This way, they can save a lot of money as they are going
to prevent spoiled goods and damaged items.

 Peace of mind.
Aside from the technical benefits you are likely to get with a distribution
warehouse, you can also benefit a lot from the peace of mind that it’s going to give
you. Since your goods and products are well protected, organized and safe as well
as since your workers won’t have to exert so much effort and time, you will have
the peace of mind that your business will progress.

12.2 Production Issues for Supply Chain

For efficient, effective and economical operation in a manufacturing unit of an

organization, it is essential to integrate the production planning and control system.
Production planning and subsequent production control follow adaption of product
design and finalization of a production process.

Production planning and control address a fundamental problem of low

productivity, inventory management and resource utilization.
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Production planning is required for scheduling, dispatch, inspection, quality
management, inventory management, supply management and equipment
management. Production control ensures that production team can achieve required
production target, optimum utilization of resources, quality management and cost
savings.

Planning and control are an essential ingredient for success of an operation unit.
The benefits of production planning and control are as follows:

 It ensures that optimum utilization of production capacity is achieved, by

proper scheduling of the machine items which reduces the idle time as well
as over use.
 It ensures that inventory level are maintained at optimum levels at all time,
i.e. there is no over-stocking or under-stocking.
 It also ensures that production time is kept at optimum level and thereby
increasing the turnover time.
 Since it overlooks all aspects of production, quality of final product is
always maintained

Retail & Consumer Product Goods

Consumer products companies are working towards eliminating waste and
inefficiencies from the consumer goods supply chain to reduce costs and increase
customer satisfaction. Focus is to provide customers with quality products on time
and at best prices.
Some of the common issues that consumer products industry faces on a regular
basis include:

Inventory
The best performing companies are able to forecast their demand accurately and
tackle variations through proper risk mitigation strategies.
Top companies constantly review their Inventory management techniques to
increase their turnover rate and minimize slow and obsolete inventory. They ask
questions, such as what service levels do they want on their products, what
methods do they use to control inventory i.e push vs pull, cyclic vs stock level
based vs manual replenishment scheme and so forth.

12.3 Consumer Products Distribution Networks

As conditions such as taxes, fuel cost and customer ordering patterns change,
distribution networks need to change as well. Are distribution centers located so
that they minimize costs and provide optimal service is a critical question in this
respect?
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Many companies evaluate their distribution network on lead times and delivery
cost basis. Top companies constantly update their distribution network and
channels in synchronization with the market demand.

Sourcing and Procurement

When consumer packaged goods companies work with multiple suppliers, it is
easy to overlook communication and the relationship between buyer and supplier,
leading to substandard product, increased operations costs and loss of productivity.
Cost is a single most parameter which is given lot of emphasis while procuring
both direct and indirect material.
Especially in India where the focus is on the relationship and cost of raw materials
procured, it is all the more essential to integrate these diverse perspectives. This
focus on the relationship is called Supplier Relationship Management (SRM), and
it is becoming more accepted in the global market. The objective of cost reduction
is achieved by increasing planned buying and reducing spot purchases. Cost
reduction strategies such as e-procurement, Long term vendor contracts, and
commodity price hedging are becoming increasingly popular in the consumer
goods segment.

Manufacturing
Manufacturing of consumer products has evolved with changes in technology. The
focus has been to increase through put rate, quality and flexibility of
production. With advances in automation and lean manufacturing techniques
production of consumer goods has undergone a sea transformation from being
batch processes to continuous processes; it has become less labour intensive and
more flexible to changing product mix.

Transportation
Top companies are able to isolate demand to the point where they are able to make
direct shipments to customers from their plants or goods warehouses. Transport
management system are being used to integrate inbound and outbound
transportation as well as manage inter-facility transfers.

12.4 Distribution Operations

Companies that do not have the internal capabilities or wish to quickly expand
their distribution networks are relying on consumer products Logistic Service
Providers (LSPs). LSPs can also provide seasonal processing and storage relief.
The current business climate dictates reductions in operating expenses and greater
productivity.  As a result, the goal of more flow and less storage is being
accomplished by many companies by using more advanced WMS solutions to
provide improvements to their distribution operations
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Broadly, retail and consumer product goods supply chain has taken two diverse
paths with large retailers integrating their supply chain practices both upstream and
downstream with suppliers and wholesalers, and smaller players specializing in
delivering customized product and services to their customers using JIT principles.
Retail and SCM collaboration is also extremely complex due to both market
pressures of delivering rapid response, and long lead times related to low cost
country sourcing.

Lean in-store logistics, efficient warehousing and staffing using cross docking
significantly, focused cooperation, demand replenishment including customers in
planning process, integrated organization are some of the levers with highest
importance for an efficient and effective SCM strategy for Retail. At the strategy
level, joint optimization of logistics with the suppliers, integrated IT solution for
management of goods receiving, high share of cross docking, fully automated
notification system, highly efficient replenishment and restocking processes, fully
automated ordering and high forecast accuracy are some of the key areas which
defines the efficiency of the retail supply chain.

Similarly, an optimum network should focus on all the four aspects namely,
network structure optimization i.e. having optimal number of platforms, delivery
mode optimization whether direct or through Distribution Channels (DCs),
inbound transport optimization and outbound optimization are a must for a better
delivery mechanism. Inventory planning to reduce stock-outs, inventory, ordering
cost etc. leading towards demand fulfilment, cost minimization and capacity
utilization are some of the key levers for optimizing inventory management.
Choosing the right combination of replenishment methods (pull vs push) also goes
a long way in better inventory management.

While inventory turns is the main KPI for evaluating retail supply chain agility,
logistics cost KPI allow firms to evaluate the efficiency of their logistics and SCM
operations. The combination of supply chain agility and efficient SCM practices is
the key to long term competitiveness and prosperity of retail firms in a global
supply chain context and are not limited to:

 Strategic decisions such as Integrated Organization Design, Delivery

Mechanism Analysis, Restocking and Shelf Management, Warehousing and
Staffing solutions, Replenishment decisions etc.
 Network structure optimization on number of platforms, location etc.,
Delivery mode optimization on warehouses, DCs, cross docking etc.,
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 Inbound and Outbound transport optimization on routing and scheduling ,
Consolidation etc.
 Inventory management & replenishment planning based on Pull Vs Push
Analysis, Integration of Vendors, DC’s in replenishment planning etc.
 Operational Management such as Effective Labour Utilization with
standardizing ordering and sorting procedures, Shrink Management with
proper department and lane layouts, Inventory Management with linkages to
demand , Performance Management with focus on front end and
administration
 Information Technology Integration with emphasis on In-store operations
and Customer support, Supply chain management via advanced planning
scheduling, procurement management etc.

12.5 Production Planning

Production planning is one part of production planning and control dealing with
basic concepts of what to produce, when to produce, how much to produce, etc. It
involves taking a long-term view at overall production planning. Therefore,
objectives of production planning are as follows:
 To ensure right quantity and quality of raw material, equipment, etc. are
available during times of production.
 To ensure capacity utilization is in tune with forecast demand at all the time.
A well thought production planning ensures that overall production process is
streamlined providing following benefits:
 Organization can deliver a product in a timely and regular manner.
 Supplier are informed will in advance for the requirement of raw materials.
 It reduces investment in inventory.
 It reduces overall production cost by driving in efficiency.
Production planning takes care of two basic strategies’ product planning and
process planning. Production planning is done at three different time dependent
levels i.e. long-range planning dealing with facility planning, capital investment,
location planning, etc.; medium-range planning deals with demand forecast and
capacity planning and lastly short term planning dealing with day to day
operations.

12.6 Production Control

Production control looks to utilize different type of control techniques to achieve
optimum performance out of the production system as to achieve overall
production planning targets. Therefore, objectives of production control are as
follows:
 Regulate inventory management
 Organize the production schedules
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  Optimum utilization of resources and production process
The advantages of robust production control are as follows:
 Ensure a smooth flow of all production processes
 Ensure production cost savings thereby improving the bottom line
 Control wastage of resources
 It maintains standard of quality through the production life cycle.
Production control cannot be same across all the organization. Production control
is dependent upon the following factors:
 Nature of production (job oriented, service oriented, etc.)
 Nature of operation
 Size of operation
Production planning and control are essential for customer delight and overall
success of an organization.

12.7 Procurement

This is the acquisition of goods, services or works from an external source. It is

favorable that the goods, services or works are appropriate and that they are
procured at the best possible cost to meet the needs of the purchaser in terms of
quality and quantity, time, and location. Corporations and public bodies often
define processes intended to promote fair and open competition for their business
while minimizing exposure to fraud and collusion.

12.7.1 Procurement Process

Procurement may involve bidding process known as tendering. A company or
organisation may require some product or service. If the price exceeds a threshold
that has been set (e.g.: government department procurement policy: "any product
or service desired whose price is over X must be put to tender"), depending on
policy or legal requirements, the purchaser is required to state what is required and
make the contract open to the bidding process. The concept of total cost also comes
into play. At times, not just price, but other factors such as reliability, quality,
flexibility and timing, are considered in the tendering process. A number of
potential suppliers then submit proposals of what they will provide and at what
price. Then the purchaser will usually select the lowest bidder; however if the
lowest bidder is deemed incompetent to provide what is required despite quoting
the lowest price, the purchaser will select the lowest bidder deemed competent. In
the European Union, strict rules on procurement must be followed by public
bodies, with contract value thresholds determining the processes required (relating
to advertising the contract, the actual process etc.).

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12.7.2 Procurement Steps
Procurement life cycle in modern businesses usually consists of seven steps:
 Identification of need:
This is an internal step for a company that involves understanding of the company
needs by establishing a short term strategy ( three to five years) followed by
defining the technical direction and requirements.

 Supplier Identification:
Once the company has answered important questions like: Make-buy, multiple vs.
single suppliers, then it needs to identify who can provide the required
product/service. There are many sources to search for supplier; more popular ones
being Ariba, Alibaba, other suppliers and trade shows.

 Supplier Communication:
When one or more suitable suppliers have been identified, requests for quotation,
requests for proposals, requests for information or requests for tender may be
advertised, or direct contact may be made with the suppliers. References for
product/service quality are consulted, and any requirements for follow-up services
including installation, maintenance, and warranty are investigated. Samples of the
P/S being considered may be examined, or trials undertaken.

 Negotiation:
Negotiations are undertaken, and price, availability, and customization possibilities
are established. Delivery schedules are negotiated, and a contract to acquire the P/S
is completed.

 Supplier Liaison:
During this phase, the company evaluates the performance of the P/S and any
accompanying service support, as they are consumed. Supplier scorecard is a
popular tool for this purpose. When the P/S has been consumed or disposed of, the
contract expires, or the product or service is to be re-ordered, company experience
with the P/S is reviewed. If the P/S is to be re-ordered, the company determines
whether to consider other suppliers or to continue with the same supplier.

 Logistics Management:
Supplier preparation, expediting, shipment, delivery, and payment for the P/S are
completed, based on contract terms. Installation and training may also be included.
 Additional Step - Tender Notification:
Some institutions choose to use a notification service in order to raise the
competition for the chosen opportunity. These systems can either be direct from

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their e-tendering software, or as a re-packaged notification from an external
notification company. A typical sourcing and procurement effort involves
understanding the requirements/specifications of the goods/services to be sourced,
inviting bids from suppliers, evaluating them, selecting a set of suppliers and
taking inputs (on the lead time and suitability of the supplied items)  from the
internal customer about the performance of the supplier. Strategic sourcing is when
this becomes a cyclic process wherein the feedback (supplier scorecard) on the
services/goods provided by the internal customer is analyzed (by a spend
assessment exercise and supplier benchmarking) and used in future sourcing
efforts. This cyclic nature of the process is the most important part and helps to
further improve the whole procurement process.
A strategic sourcing process provides the opportunity to realize sustained long term
cost savings. Effective implementation can help achieve cost savings of as much as
15% of the addressable sourcing spend.

With increasing global competition, companies need to improve their bottom line
to maintain/increase their margins. This makes it imperative for a firm to look for
low cost destinations like China and India. The cost effect can either be in terms of
availability of low-cost labour, raw materials or finished goods (for retailers) or a
combination of any of the three. Global sourcing, in-spite of its many benefits,
brings in a lot of complexities to the supply chain most important of them being
international logistic management. Some of the issues that need to be addressed
are:

 Sound technology support

 Hidden costs identification to make it successful in the long run
 Setting up international sourcing offices/warehouse etc.
 Reduction of supply chain visibility
 Lack of transparency
 Takes time to set up the supply process at a location far from the home
operations
 Long term view of the country from which sourcing is done (to ensure the
savings are a continued process and not one-time)
 Clear understanding of the requirements
 Distance factor increases the uncertainty in the whole procurement process
 Quality assurance
Even for firms with an established global sourcing network there is a significant
untapped savings potential that can be realized by strategically addressing each of
the above issues.

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 e-Procurement or e-Sourcing refers to the technological platform provided to the
whole sourcing process. It can be used to specify the functional specifications
required for the items to be sourced, to have e-auctions and to evaluate suppliers.
E-Procurement helps in:

 Streamlining the whole process

 Provides visibility
 Reduce cost and complexity
 Increase accuracy
 Faster solution
 Reduced paperwork
Strategic sourcing is a continuous process and as a company moves up the maturity
ladder the opportunity widens. A strategic sourcing process if performed
effectively has the potential to provide the single biggest cost reduction
opportunity for a company.

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12.8 Transportation and Logistics
This refers to the effective management of the whole network of flow (of material, services and
information) across the supply chain including the storage facilities and 3PLs.

Benefits of an effective logistics and distribution network

An efficient logistics and distribution system affects the whole supply chain. In its absence, the
firm may lose out to its competitors in spite of a having a better product and better value
proposition. The logistics network forms backbone of the supply chain connecting various
functions together.

Benefits of an effective logistics and distribution system:

 Lower costs due to better utilization of resources

 Faster cash-to-cash cycle
 Lesser inventory levels
 Increased reliability of delivery to customers
 Decreased response time

Questions/Issues

 How to minimize the total landed cost (production, inventory handling and transportation
cost) within acceptable service levels?
 In-case of global sourcing, how to manage the complex logistic network?
 Where to locate your new warehouse to reach your changing customer base?
 Does consolidation of DCs make sense for my firm?
 Which mode (air, water, road (LTL or FTL)) to use in which lane?

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 What should be the capacity of each lane?
 How will the service levels be affected for a given change in my distribution network?
 How will my distribution network affect inventory levels?
 Should a firm collaborate with another firm (might be competitor as well) for a common
warehouse/transport network for mutual benefit?


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A well organized, transparent and effective logistics and distribution network greatly enhances
customer satisfaction levels and cost reduction opportunities. Aqua MCG provides a complete
end-to-end solution to all your logistics and distribution needs to achieve best-in-class supply
chain performance.

12.9 Managing Supply Chain

The diagram below illustrates how supply chain is evolving into a more integrated end-to-end,
customer-driven supply chain – which is well integrated across the business and all its
stakeholders and service providers.

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The On-demand supply chain would focus on elements such as:

 Excellent synchronization between supply & demand through efficient planning &
forecasting
 Integrating & co-ordinating business functions horizontally across the supply chain
 Developing outcomes that have been mutually decided & beneficial, to strengthen
relationships
 Managing the supply chain cycles for planning to order-to-delivery
 Developing flexible cost structures that focus on variable cost structures rather than fixed
costs
 Collaboration and sharing of information & risks with partners to reduce overall exposure
 Efficiently using real-time data to create customer-centric supply chains that are totally
demand driven and customer-driven
We will look at some of the key points in detail.

12.9.1 Synchronizing Supply & Demand

Understanding demand patterns and efficient planning of supply is the constant endeavor of all
supply chain planners. Responsive supply chains are typically characterized by an early
understanding of demand signals through minimum distortion of the POS (point of sales) data in
near real time.

Ability and flexibility are key strengths that come through from responsive supply chains. This
kind of synchronized supply chain planning leads to competitive advantage that helps provide
superior customer service; it also reduces waste and losses due to the suboptimal planning and
inventory deployment.

In a growing economy like India, the constant fluctuations in demand and bottle-necks due to
infrastructure, pose additional challenges to supply chain planning; but this must still be the area
of continued focus as this can enable organizations to respond to constant changes in the market
place.

12.9.2 New Product Introduction

Innovation is the key to future success. It is also critical for a company to maintain profitable
growth especially in view of the increasingly competitive Indian marketplace.

All successful companies are distinguished by their ability to efficiently bring innovation to the
market- quickly and ahead of the competition. Effective product launch is obviously a key
element in the innovation process. This however requires process integration and alignment of
objectives across the internal and external elements of the value chain.

Leveraging the capabilities of value chain partners, like suppliers and channel members, in a
collaborative approach can help bring products / services to the market faster, smarter and
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cheaper. This means integrating with suppliers & supply chain providers during the entire
process of design, development, production and service. After identifying and evaluating these
capabilities / resources it is also important to nurture them. Innovation is undoubtedly the biggest
competitive advantage and differentiator in the future, but your supply chain needs to support it!

12.9.3 Efficient Customer Order Fulfillment

Customer orders start with the order entry process and involve efficient maintenance of customer
database, opportunity evaluation for cross- sell, up-sell, back-order processing and post order
fulfillment transactions. Customer Order Management being an important customer touch-point
means a direct impact on customer satisfaction levels. The company’s ability to receive customer
orders through multiple channels, and subsequently understand and respond to customer needs
forms part of customer order management.

Many companies have adopted new technologies that churn data and extract meaningful insights
to further enhance fulfillment capabilities. Companies are leveraging technology to enable
supply chain visibility to efficiently accept orders & adhere to promised delivery dates. This
helps in facilitating processes down the line like planning & scheduling.
Therefore, technology has played an important role in integrating the company’s order
management process with the customer’s planning and procurement processes. Overall, this
means an evolved on-demand supply chain.

12.9.4 Logistics Services

 Today's market demands:

 More stocking locations
 Frequent ordering
 Smaller order sizes
 More sophisticated modes of transportation
 Multi-channel distribution
 Configure-to-order capabilities, among others
Customers are becoming more knowledgeable & demanding. They have higher service-level
expectations which mean higher degrees of responsiveness and customization from the company.
Customers today expect on-time deliveries and value-add services like real-time order tracking
information. Innovations in technologies & logistics solutions have also been able to create new
customer distribution channels and even existing channels are under pressure to change, to retain
the market position a company holds.

Accurate & efficient logistics management and servicing means Customer satisfaction &
retention coupled with continued sales growth. This type of decentralized supply chain models
and tighter trading partner collaborations, especially in view of rising transportation costs and
other complexities in the system, means new and improved visibility.

Management tools can also help combat any inefficiency that arises in warehouse management,
manpower, transportation, space utilization, inventory management and shipments. To

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summarize, it has ever more critical for companies to implement scalable yet cost-effective
strategies in logistics.

This rings ever more true in the back drop of the current economic conditions, which fiercely call
for an increase in profitability, improvement in quality & reduction in costs. A mammoth
challenge, but possible to execute.

?
Review Questions

i) Define distribution in supply chain

ii) What is a distribution warehouse
iii) Who uses a distribution warehouse?
iv) What are the benefits of having a distribution warehouse
v) Explain some production issues for supply chain
vi) What is production control
vii) Define Procurement
viii) What are the benefits of an effective logistics and distribution networ

INFORMATION SYSTEMS FOR SUPPLY CHAIN INFORMATION SYSTEMS

Learning Objectives

By the end of this chapter the learner should be able to analyze different information systems that
are applicable in supply chain management and how they are applied in systems efficiency.

Information is the meaningful material derived from computer data by organizing it and interpreting it in
a specific way and information systems entails the study, development, and applications of devices,
machines and techniques for manufacturing and productive process within the supply chain function in
my case. Microsoft Encarta (2009).

13.1 Types of Information Management Systems

The management of Information is facilitated by the use of Information Technology and Information
Sciences. The popular Information Management Systems with different areas of supply chain can be
listed as follows as discussed by Coase, (1997)

i) Document Management System (DMS)

Electronic data resources in the document form. Generally, the DMS is designed to help the
organizations to manage the creation and flow of documents through the provision of a
centralized repository. The workflow of the DMS encapsulates business rules and metadata in
the Supply Chain function.

ii) Content Management System (CMS)

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The CMS assist in the creation, distribution, publishing, and management of the enterprise
information. These systems are generally applicable on the online content which is dynamically
managed as a website on the internet or intranet. The CMS system can also be called as ‘web
content management’ (WCM).

iii) Library Management System (LMS)

Library management systems facilitate the library technical functions and services that include
tracking of the library assets, managing CDs and books inventory and lending, supporting the
daily supply Chain administrative activities of the library and the record keeping in Logistics.

iv) Records Management System (RMS)

The RMS are the recordkeeping systems which capture, maintain and provide access to the
records including paper as well as electronic documents, efficiently and timely so as to
effectively facilitate the Supply Chain function.

v) Digital Imaging System (DIS)

The DIS assists in automation of the creation of electronic versions of the paper documents such
as PDFs or Tiffs. So created Electronic documents are used as an input to the records
management systems within the Supply Chain function.

vi) Learning Management System (LMS)

Learning management systems are generally used to automate the e-learning process which
includes the administrative process like registering trainees in logistics, managing training
resources, creating courseware, recording results hence providing an online information to
educational supply chains.

vi) Geographic Information System (GIS)

The GIS are special purpose, computer-based systems that facilitate the capture, storage,
retrieval, display and analysis of the spatial data in the Supply Chain function.

Information Systems within Supply Chain

13.2 Materials Requirement Planning (MRP) 1

MRP emerged in the early 1970's as a software application to address inventory and scheduling
issues in manufacturing to support logistics. It was the first of its kind as a system that applied
already known concepts such as order-point methods. MRP addresses questions like which
materials and components are needed, in what quantities and when. The system consists of a set
of logically related procedures and decision rules which uses as inputs the demand information
from the Master Production Schedule (MPS), the inventory status, and the product composition
information (the bill of materials - BOM). The MPS is a time phased production plan containing
actual customer orders and forecasted demand and is the driver of the entire system as Coyle et
al (2003) says.
From the inputs, the system determines
(1) Quantities the company should order and when,
(2) The need to expedite or reschedule arrival dates or needed products
(3) The canceled need for products.
Thus, changes in customer requirements are easily dealt with such a system as production and
logistics plans are automatically revised when the MPS changes.

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Among the benefits of the system is its capability to maintain a reasonable amount of safety
stock and to minimize or eliminate inventories whenever possible. MRP -based systems can also
identify process problems and potential supply chain disruptions long before they occur and take
necessary corrective actions Coyle et al. (2003). The drawbacks of MRP lie mainly in its
assumptions of infinite capacity and fixed lead times. By the late 1990s MRP had its drawbacks
and led to the development of MRP II.

13.3 MRP (Material Requirements Planning) II.

MRP II includes all the functionalities of an MRP and have the following added capabilities as
discussed by Coyle et al. (2003):

i) Feedback: MRP II is sometimes referred to as a "Closed Loop MRP" as it incorporates the

feedback from previous run, which is the work already, progressed on the shop floor. This helps
the system to regularly update all the levels of the schedule.

ii) Resource Scheduling: During scheduling, the system also takes into account the plant and
equipment required to convert raw materials into finished goods. This is also the reason why the
initials now mean Manufacturing Resource Planning. Thus capacity is an integral part of the
system unlike in MRP, however it is only considered after scheduling has been done. Due to this
procedure, it may for example turn out that insufficient time was allowed within the MRP
schedule for the individual operations to be completed.

iii) Batching: Also batching needs to be incorporated into the system if resources need to be
scheduled. 'Lot for Lot', ' Economic Batch Quantity', 'Part Period Cover' are the three types of
batching rules that are widely used by many software packages.
• Lot for Lot: In this scheme orders for materials exactly match production plans.
• EBQ: The Economic Batch Quantity is a method to balance the holding cost with the set up
cost for production.
• Part Period Cover: Here, batches are made to cover a fixed period of demand such as a week.

iv) Software Extension Programs: A number of software extensions are designed and are
available for MRP II to help the scheduling procedure. The most important is Rough Cut
Capacity Planning (RCCP). This was an attempt to match the order load to the capacity available
by pushing orders from overload periods to periods of underload. MRP II helps the company to
manage its logistical function in the following key areas.
 Purchasing - purchase orders
 Production - production scheduling and control, inventory control, capacity planning
 Finance - financial resources needed for material, labor, overhead etc.
 Accounting - actual cash flow projections, production costs, etc
The major benefit of MRP II is also capable of making "what if" analysis. A production manager
can for example see the impact of changing the MPS on the purchasing requirements or capacity
usage. Thus, planning for unexpected events, like machine breakdowns, can be done more
realistically.
Although, a more superior system than MRP, it also has limited capability and flexibility. Like
MRP, it also assumes fixed lead times and similarly batch sizing rules are fixed. Also the system
was far too rigid to implement it across multiple locations and production plants. Hence, the need
for a more integrated and scalable system gave way to the development of enterprise resource
planning (ERP) system in the early 1990's to manage logistics.

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13.4 Enterprise Resource Planning (ERP) Systems
ERP systems are large, complex and configurable softwares that integrate disparate information
systems into a single system. It enhances decision-making as the system retrieves data in real
time for analysis from its various modules. ERP systems are widely used today and form the
basis of many company-wide information systems in logistics. Coyle et al. (2003).

13.5 Electronic Data Interchange (EDI)

EDI is the organization-to-organization, computer-to-computer exchange of business data in a
structured, machine-processable format (Coyle et al. 2003, 464). It eliminates paperwork related
to various business processes such as, purchase orders, pricing, order status, scheduling,
shipping, receiving, invoice payments, contracts, production data, marketing, sales and others. It
also eliminates multiple data entry and improves the speed and accuracy of information. The
need for EDI was realized in the 1960's as a way to reduce expensive communication means,
time consuming paperwork and thus to remain competitive in the industry.
To achieve this objective, a standard focusing on the content of the message, rather than the
method of its transmission was then developed. The Transport Data Coordinating Community
(TDCC) in charge of this effort created the so-called transaction sets for this purpose. They
consist of several data segments that specify the data elements like price, model number and
carrier code. This followed American National Standards Institute's authorization of another
committee, the Accredited Standards Committee (ASC) X-12, to develop a standard between
trading partners based on the TDCC structure in 1979. The internationalization of the EDI
stationary was completed in 1986 with UN's involvement to develop the standard called United
Nations Electronic Data Interchange for Administration, Commerce, logistics, and Transport
(UN/EDIFACT).
To use EDI, trading partners needed a special software and means for electronic communication
in the logistics function. Regarding electronic communication, companies had two options: to
use either direct transmission, that is, a dial-up or a dedicated line to directly connect to a
partner’s computer, or alternatively, a Value Added Network (VAN), both of them being in the
logistics function. VAN involved a third party to provide the means of communication like
Sonera and therefore was more reliable but more expensive. VAN's however allowed to use
different computer systems between trading partners who are involved in logistics through a
method called protocol conversion. Also, VAN's had the advantage of reducing phone bills as
the amount of data transmitted was charged instead of the transmission distance.
EDI works by first translating (EDI Translation software) the document to be sent into a standard
format. Next, the connection is established; usually by dialing the phone number of the VAN.
The message is then sent to an electronic mailbox on the VAN. From the electronic mailbox, the
receiver's software will retrieve the file, interpret the message, check for compliance with EDI
standards and store it in their logistical information management system. Also a 'Functional
Acknowledge' is sent to the sender to inform if the message was received and if it complies with
EDI standards. Now, the message can be translated to produce a hard copy of the message or
transformed into a different format for further processing using the translation software.
A great disadvantage of using EDI was that it was very expensive to implement and operate.
Today, it can cost between 50.000 and 2 million US dollars to implement, which represents a
significant cost for especially small to medium sized businesses (IT Portal, 2003). Also trading
partner agreements, vendor agreements, the role of lawyers and auditors and security are some of
the issues that add complexity to its adoption, not to mention the adjustment time and skilled
human resources required. The translation of company data structures into EDI standards may
also require manual intervention in the process. Thus, its success is a matter of management
support and commitment.

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EDI is and was widely used in the past, as it was the only solution for fast data transmission and
processing. It compressed cycle times and reduced costs associated with communication and
paper. However the emergence of a much cheaper, flexible and ubiquitous technology, the
Internet, has reduced its popularity throughout the years. The Extensible Markup Language
(XML) was developed in the late 1990's to facilitate data transmission over the Internet. XML
will be covered in the next section.

13.6 Extensible Markup Language (XML)

“XML is a protocol for containing and managing information on the Internet. It is a family of
technologies that can do everything from formatting documents to filtering data” (Ray 2001, 2).
Despite its name, XML is not a markup language like the Hyper Text Markup Language
(HTML). “It provides a framework -the rules and the tools for creating your own markup”
(Fitzgerald 2001, 20). “A markup language is a set of symbols that can be placed in the text of a
document that enhances to demarcate and label the parts of a document” Coyle et al. (2003).
To create an XML document, another file called, an XML Schema is required. The Schema
defines all the rules that the document must adhere to and validates the document. Once, the
document is validated, a style sheet is applied on the document so as to output a desired format.
Thus the content of the file is kept separately from its presentation. “With this feature, it is easier
to reuse and refit the content for various needs” (Fitzgerald 2001, 37). XML evolved mainly out
of two markup languages, the Standard Generalized Markup Language (SGML) and HTML.
SGML was developed in the 1970's and became a standard in 1980. Although, powerful and
comprehensive, it never enjoyed broad popularity due to its complexity Coyle et al. (2003).
Consequently, HTML was developed in the early 1990's as a very easy to understand, but at the
same time, inflexible, markup language in CERN. Despite HTML's success, Web's flourishment
in the 1990's demanded a more complex language to structure, store and transfer information
over the Web. Thus work on XML began in 1996 and continued until its standardization in 1998
by the World Wide Web Consortium (W3C), a body formed to standardize web-related
technologies.
Below are XML's features and advantages:

i) XML is free
No proprietary rights exist over XML, so anyone can use XML for free.

ii) XML is structured

As text is expressed in a clear and logical way, softwares and humans can organize, find and
interpret documents and data quickly and accurately.

iii) XML is the basis for a file format

As XML is so well structured, XML documents can be shared between entirely different
computer and software systems. This will make XML, the backbone of electronic commerce
worldwide.

iv) XML is open

XML recommendations are managed by W3C. Unlike private firms, W3C shares all drafts of
XML-related working papers so that the community stays up-to-date with future enhancements
and prepare accordingly.

v) XML is nonproprietary
It is not owned by a proprietary company or tied to a specific software or hardware.

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vi) XML is platform independent
Although some of the applications to create XML may not be platform independent, XML itself
is. Coyle et al. (2003).
Also, XML compared to previous inter-enterprise communication technologies like EDI has
many benefits.
 XML is web based and therefore much cheaper to use compared to VAN's.
 It is also in a human readable format, and new applications and businesses can be easily
added to the network (Remarkable e-Business 2002).
 It is anticipated that XML will not replace EDI entirely in the short run due to heavy
investments in EDI infrastructure but the superiority of XML is undeniable.
There are also translation softwares available on the market such as Vitria's BusinessWare EDI
module that convert EDI documents into XML and vice versa Coyle et al. (2003). The
conversion is required when, for example, customer's online orders are translated into purchasing
orders by the vendor and sent to its supply chain partners using the existing EDI infrastructure.
Due to the above-mentioned characteristics of XML, many businesses, today, use XML and
XML based technologies such as web services for inter-enterprise communication.
However XML has its own problems, mainly because of its high degree of flexibility. Today,
there is an abundance of XML based frameworks (vocabularies) that compete with each other to
become the standard for B2B communication. “For XML messages to be interpreted by other
businesses, the companies have to agree on an XML-based B2B standard (mainly for schemas),
which defines the document formats, allowable information and process descriptions”
(Rautajoki, T 2003, 26). So far, common standards mostly exist in vertical industries. One
example is RosettaNet, which is popular among major information technology, electronic
components, and semiconductor manufacturing companies. Also the Open Travel Alliance's
Standards (travel industry) enjoyed somewhat broader adoption Coyle et al. (2003). These
standards however, only serve specific industries and a cross-industry standard must be in place
to facilitate global communication. Web services and ebXML are two standards that are
attempting to achieve this objective during the last few years.

13.7 Web Services

“Web services are software programs that use XML to exchange information with other software
via common Internet protocols” (Deitel, DuWaldt & Trees 2003, 23). These softwares can send
requests and possibly respond to other computers' requests. Although the basic standards and
ideas had existed for several years, Hewlett-Packard was the first software vendor to introduce
the concept of web services with its e-Speak product in 1999 (Deitel et al. 2003).
Web services can perform a great variety of tasks, often referred to as methods or functions. A
financial application for example might invoke a function on a remote computer to return the
current value of a certain stock.
The big benefit of web services is that they allow applications written in different programming
languages and on different platforms to communicate. This is possible through the use of
common XML standards. There had also been earlier attempts to facilitate the communication of
applications between disparate systems. OMG's Common Object Request Broker Architecture
(CORBA) and Microsoft's Distributed Component Object Model (DCOM) were for example two
technologies that allowed two applications running in different locations to communicate Coyle
et al. (2003).
The drawbacks of these technologies were that they were proprietary and not interoperable.
Three technologies that are all XML-based constitute the core infrastructure of Web services
Coyle et al. (2003). The Simple Object Access Protocol (SOAP), Web Services Description
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Language and Universal Description, Discover and Integration (UDDI) are the technologies that
deliver Web services.
“The purpose of SOAP is to enable data transfer between systems distributed over the network”
(Deitel et al. 2003, 33). A SOAP message is sent by the requesting application to invoke a
method provided by a web service. The Web service uses the information contained in the
message to perform the function and may respond via another SOAP message. SOAP consists of
a set of standardized XML schemas and the messages have three components: an envelope,
header and body. The envelope wraps the header and body elements; the header is an optional
element that provides information regarding topics such as security and routing; the body
contains application specific data that is being communicated (Deitel et al. 2003). SOAP is
layered over an Internet protocol such as HTTP or SMTP.
“WSDL is an XML based language through which a Web service can convey to other
applications the methods that the service provides and how those methods can be accessed”
(Deitel et al. 2003, 34). WSDL documents make Web services self-describing which saves a lot
of effort for the developers of applications aimed at using the services. A WSDL document
includes information regarding a particular Web service's capabilities, location, the kind of
messages it can send and receive, what Internet protocols to use to connect and the information
required to invoke a function. Although, WSDL documents are complex, their generation is
simple as many Web services development tools generate them automatically when a Web
service is developed.
UDDI is used to publish and locate web services on a network. Companies can use a standard
XML based format to describe their electronic capabilities and business processes. The
specification also provides a standardized method of registering and locating the descriptions on
a network such as the Internet (Deitel et al. 2003). Registries maybe public or private, allowing
only approved partners to access them. The largest and most comprehensive public registry is the
UDDI Business Registry (UDDI), which was developed to facilitate the formation of new
business relationships (Deitel et al. 2003). UDDI's contain information in three levels of detail:
white -, yellow - and green pages. White pages convey the least information, that is, their contact
information and a textual description of themselves. Yellow pages provide classification
information and details on companies' electronic capabilities. Green pages list technical data
relating to services and business processes (Deitel et al. 2003).
Web services are a promising new technology. However, because it is new, a set of issues plague
it’s widely adoption at this stage.
First of all, the standards that Web services are based on, SOAP, WSDL and UDDI, are still in
development. So far, only SOAP has managed to become the World Wide Web Consortium's
(W3C) recommendation. Also intellectual property claims by Microsoft and IBM, who
significantly contributed to the development of SOAP and UDDI threaten the free use of the
technology. Other barrier to adoption is the lack of security standards for Web services as well as
their slowness for high-performance (Deitel et al. 2003). Finally, the framework is “considered to
be "light-weight", as it leaves some of the technological elements open and to be solved by the
implementer” (Deitel et al. 2003). Alternatively, ebXML provides a more sophisticated and
robust mechanism for complex business collaboration services which is presented in the next
section.

13.8 Electronic Business XML (ebXML)

ebXML is an open infrastructure that has similar objectives to those of web services. “ebXML
provides companies with a standard method to exchange business messages, conduct trading
relationships, communicate data in common terms and define and register business processes”
within the logistics function (ebXML 2003).

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Work on ebXML began in 1999, a joint effort by Organization for the Advancement of
Structured Information Standards (OASIS) and the United Nations Center for Trade Facilitation
and Electronic Business (UN/CEFACT).
The project delivered five layers of substantive data specifications in logistics, including XML
standards for:
• Business processes
• Core data components
• Collaboration protocol agreements
• Messaging
• Registries and repositories (ebXML 2003)
The Business processes specification provides a generic meta-model for logistics to describe
their processes. The specification, in its core, determines the trading partners' role in the
transaction, the exchanged documents, their sequence and the information contained in them
Deitel et al. 2003).
The data items that are exchanged between businesses are referred to as core data components.
Data items are, typically, frequently used terms such as invoice. The term invoice may however
have a different meaning across industries. In one industry, invoice may relate to a statement of
charges, and in another, may be used to describe international shipping (Virevesi, J 2003). Thus,
this ebXML specification aims to identify a set of common semantics to be used between
businesses so as to enhance information interoperability. Therefore businesses can re-use them
across multiple business situations without the risk of causing ambiguity.
Collaboration protocol agreements (CPA) seek to automate much of the process of discovering
and establishing partnerships, especially in situations where the businesses have not collaborated
before Deitel et al. 2003). and this can extend to the logistics function. A CPA is created through
a Collaboration Protocol Profile (CPP). This is an XML document that describes businesses,
both, technological and business capabilities and is stored in an ebXML repository. From
repositories, potential trading partners can search for these documents and establish trading
relationships. Once parties agree on the terms to do e-business, the CPA becomes legally
binding.
Messaging refers to a secure and reliable method of sending information over a network.
Technical issues relating to the packaging, transferring and routing of messages over the web are
addressed in this specification. The technology is based on SOAP but it provides higher security
through the use of strong cryptographic techniques and digital signatures.
Registries and repositories provide a way for potential business partners to submit and search a
variety of documents with the intention of enabling collaboration. Documents relating to
business capabilities of businesses including CPA’s can be queried in order to find a business
partner in the logistics function.
The Registry Information Model of ebXML dictates all classes and attributes a registry may
have. Within the model, "slots" are used to add arbitrary attributes to Registry object instances
(ebXML 2004). This feature allows companies to add arbitrary attributes to their descriptions.
Thus, certain attributes could be used here to convey trust such as certificates and standards (e.g.
ISO 9000). A common notation for such attributes must be in place however in order to make
queries involving such attributes more efficient.
The registry can be also be used for the submissions of schemas that define industry-wide
messages and vocabularies as well as industry-specific business models (Virevesi, J 2003).
Overall, ebXML offers a more comprehensive and reliable framework compared to Web
services. It takes collaboration to a higher level through valuing business process semantics and
document content standardization as fundamental enablers of successful business collaborations
Deitel et al. 2003). Finally, ebXML is a vendor independent technology (unlike Microsoft’s

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BizTalk framework for XML) which functions across all platforms and therefore seeks to
achieve maximum interoperability also at the technical level. Also, the recent approval of the
four ebXML OASIS Standards (which now includes the ISO 1500 annotation) by the
International Standards Organization (ISO) is likely to have a reinforcing effect on the effort to
promote an open and reliable framework for communication and collaboration in the future that
involves the logistics collaboration.

13.9 Information Systems and Decision Making

Facility- determining the location, capacity and schedules of a facility requires information on
the trade-offs arrange efficiency fleets, and flexibility demand exchange rates and so on.
i) Inventory –Setting optimal inventory policies requires information that includes
demand pattern, cost of carrying inventory, cost of stocking out and cost of ordering
ii) Transportation
iii) Deciding on transportation networks, routings, modes, shipments and vendors,
requires information including cost, customer locations, and shipment sizes to make
good decisions. Use the information to integrate operations with those of suppliers
iv) Sourcing- Information on product margins , prices, quality, delivery lead times and
so on, are all important in making sourcing decisions .Given sourcing deals with
enterprise transactions, there is also a wide range of transactional information that
must be recorded in order to execute operation.
v) Pricing and revenue management-To et pricing policies, one needs information on
demand both its volume and various customer segment willingness to pay as well as
many supply issues such as the product margin, lead-time and availability. Using this
information firms can make intelligent pricing decisions to improve their supply
chain profitability.
In conclusion information is crucial to making good supply chain decisions at all levels which
are strategy, planning and operations.

13.9.1 Importance of Information Systems and an Integrated Supply Chain

Environment
Prior to 1980s the information flow between functional areas within an organization and between
the logistics member organizations were paper based. The paper based transaction and
communication is slow. During this period, information was often over looked as a critical
competitive resource because its value to logistical members was not clearly understood. IT
infrastructure capabilities provide a competitive positioning of business initiatives like cycle time
reduction, implementation, implementing redesigned cross-functional processes. Several well-
known firms involved in supply chain relationship through information technology.

Three factors have strongly impacted this change in the importance of information.

 First, satisfying in fact pleasing customer has become something of a corporate

obsession. Serving the customer in the best, most efficient and effective manner has
become critical.
 Second information is a crucial factor in the managers' abilities to reduce inventory.
 Human resource requirement to a competitive level. Information flows plays a crucial
role in strategic planning.

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  Logistic organizational dynamics in information
All enterprises participating in logistics management initiatives accept a specific role to perform.
They also share the joint belief that they and all other logistical participants will be better off
because of this collaborative effort. Power within the logistical is a central issue. There has been
a general shift of power from manufacturers to retailers over the last two decade. Retailers sit in
a very important position in terms of information access for the supply chain. Retailers have
risen to the position of prominence through technologies. The Wal-Mart & P&G experiences
demonstrate how information sharing can be utilized for mutual advantage. Through sound
information technologies Wal-Mart shares point of sale information from its many retail outlet
directly with P&G and other major logistics. The development of Inter organizational
information system for the logistics has three distinct advantages like cost reduction,
productivity, improvement and product/market strategies.

Deitel et al. 2003). Have identified five basic levels (nodes) of participation of individual firms
with in the inter-organizational system.

1. Remote Input / Output node: In this case the member participates from a remote location
within       the application system supported by one or more higher-level participants.
2. Application processing node: In this case a member develops and shares a single application
such as an inventory query or order processing system.
3. Multi participant exchange node: In this case the member develops and shares a network
interlinking itself and any number of lower level participants with whom it has an established
business relationship.
4. Network control node: In this case the member develops and shares a network with diverse
application that may be used by many different types of lower level participants.
5. Integrating network node: In this case the member literally becomes a data
communications/data processing utility that integrates any number of lower level participants
and applications in real times.
Four fundamental mistakes made when determining information technology requirements in the
logistical function are as follows:

1. Viewing system as functional instead of cross-functional.

2. Interviewing managers individually instead of jointly.

3. Not allowing for trial and error in detail design process.

4. Asking the wrong question during the interview.

 Information and Technology: Application of Supply Chain

In the development and maintenance of logistics information systems both software and
hardware must be addressed. Hardware includes computer's input/output devices and
storage media. Software includes the entire system and application programme used for
processing transactions management control, decision-making and strategic planning.
Recent development in logistical software is:

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 1. Base Rate, Carrier select & match pay (version 2.0) developed by Distribution
Sciences Inc. which is useful for computing freight costs, compares transportation mode
rates, analyze cost and service effectiveness of carrier.

2. A new software programme developed by Ross systems Inc. called Supply Chain
planning which is used for demand forecasting, replenishment & manufacturing tools for
accurate planning and scheduling of activities.

3. P&G distributing company and Saber decision Technologies resulted in a software

system called Transportation Network optimization for streamlining the bidding and
award process.

4. Logitility planning solution was recently introduced to provide a programme capable

managing the entire supply chain.

 Electronic Commerce:
It is the term used to describe the wide range of tools and techniques utilized to conduct
business in a paperless environment within the logistics. Electronic commerce therefore
includes electronic data interchange, e-mail, electronic fund transfers, electronic
publishing, image processing, electronic bulletin boards, shared databases and
magnetic/optical data capture. Companies are able to automate the process of moving
documents electronically between suppliers and customers.

 Electronic Data Interchange (Refined)

Electronic Data Interchange (EDI) refers to computer-to-computer exchange of business
documents in a standard format. EDI describe both the capability and practice of
communicating information between two organizations electronically instead of
traditional form of mail, courier, & fax. The benefits of EDI (refined) are

1. Quick process to information.

2. Better customer service.

3. Reduced paper work.

4. Increased productivity.

5. Improved tracing and expediting.

6. Cost efficiency.

7. Competitive advantage.

8. Improved billing.

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Though the use of EDI in logistical partners can overcome the distortions and exaggeration in
supply and demand information by improving technologies to facilitate real time sharing of
actual demand and supply information.

 Bar coding and Scanner:

Bar code scanners are most visible in the check-out counter of super market.  This code specifies
name of product and its manufacturer. Other applications are tracking the moving items such as
components in PC assembly operations, automobiles in assembly plants.

 Data warehouse:
Data warehouse is a consolidated database maintained separately from an organization's
production system database. Many organizations have multiple databases. A data warehouse is
organized around informational subjects rather than specific business processes. Data held in
data warehouses are time dependent, historical data may also be aggregated.

Review Questions

i) Mention the types of information management systems that you know

ii) What is Materials Requirement Planning (MRP) 1
iii) Define MRP (Material Requirements Planning) 1
iv) What is electronic data interchange (EDI)
v) Discuss Electronic Business Xml (EBXML)
vi) How does information systems help in and decision making
vii) Discuss bar coding and scanner technology in supply chain.

MARKET RELATIONSHIPS
Learning Objectives

By the end of this chapter the learner should be able to analyse:

a) The concept of market relationships and its applications in supply chain management.

b) How global issues affect relationships in supply chain.

Serving clients in a transparent manner has been a longstanding practice for companies.
Companies’ commitment to greater transparency – to always putting their clients' best interests
first – ensures success for all stakeholders in relationship management.
This part contains information and illustrations to assist you in understanding the types of
investments and business arrangements for these relationships.

14.1 Market Relationship with Stakeholders

Using marketing techniques to strengthen stakeholder relationships makes an important
contribution to organizational success. Audience research, targeted communication, perception
management and customer relationship management are established marketing techniques that
organizations can use to manage stakeholder relationships. According to the Chartered Institute
of Marketing, senior marketers should be responsible for devising the right stakeholder
relationship strategy in terms of message, format and communication channel.
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Audience
 Market research helps to identify the organization's stakeholders and prioritize its
communication requirements. The target audience could include shareholders, investment
analysts, customers, employees, labor unions, suppliers and business partners, members
of the local community, government agencies and industry regulators.

Communication
 As organizations face increasing scrutiny from stakeholders, they need to communicate
with greater clarity using marketing techniques. Communication must become proactive
rather than reactive. By developing and implementing a communication strategy,
organizations can build relationships based on understanding and support among
stakeholders. According to the website Accountability, strengthening stakeholder
engagement results in improved "knowledge, innovations in products, processes and
strategy, reputation, relationships and license to operate."

Engagement
 Organizations should use the techniques of customer relationship management (CRM) to
strengthen relationships with their stakeholders, according to Stamp Consulting. The
consultancy described how educational establishments were using CRM strategies to
differentiate themselves through improved communication at every stage of their
business cycle from student recruitment to building lifetime relationships with alumni.

Social Media
 Marketing can help strengthen stakeholder relationships by using social media
techniques. Monitoring the content of blogs, forums and social networking sites can help
organizations assess stakeholders' attitudes and develop an appropriate response. Setting
up a stakeholder forum also allows stakeholders to share their views, while enabling the
organization to manage and monitor the debate.

Press Relations
 Organizations can issue press releases and articles, as well as personalized
communication, to build understanding and awareness among stakeholders. Building
relationships with journalists and others who influence public opinion can help to build
positive comment in the press and influence stakeholder attitudes.

14.2 Global Issues

Political, Economic, Social and Technological (PEST) analysis describes a framework of macro-
environmental factors used in the environmental scanning component of strategic management.
Some analysts added Legal and rearranged the mnemonic to SLEPT; inserting Environmental
factors expanded it to PESTEL or PESTLE, which is popular in the United Kingdom. The model
has recently been further extended to STEEPLE and STEEPLED, adding Ethics and
Demographic factors. It is a part of the external analysis when conducting a strategic analysis or
doing market research, and gives an overview of the different macro environmental factors that
the company has to take into consideration. It is a useful strategic tool for understanding market
growth or decline, business position, potential and direction for operations. The growing
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importance of environmental or ecological factors in the first decade of the 21st century have
given rise to green business and encouraged widespread use of an updated version of the PEST
framework. STEER analysis systematically considers Socio-cultural, Technological, Economic,
Ecological, and Regulatory factors.

The basic PEST analysis includes four factors that affect supply chains in the global
environment:
 Political factors are basically to what degree the government intervenes in the economy.
Specifically, political factors include areas such as tax policy, labor law, environmental
law, trade restrictions, tariffs, and political stability. Political factors may also include
goods and services which the government wants to provide or be provided (merit goods)
and those that the government does not want to be provided (demerit goods or merit
bads). Furthermore, governments have great influence on the health, education, and
infrastructure of a nation.
 Economic factors include economic growth, interest rates, exchange rates and the
inflation rate. These factors have major impacts on how businesses operate and make
decisions. For example, interest rates affect a firm's cost of capital and therefore to what
extent a business grows and expands. Exchange rates affect the costs of exporting goods
and the supply and price of imported goods in an economy.
 Social factors include the cultural aspects and include health consciousness, population
growth rate, age distribution, career attitudes and emphasis on safety. Trends in social
factors affect the demand for a company's products and how that company operates. For
example, an aging population may imply a smaller and less-willing workforce (thus
increasing the cost of labor). Furthermore, companies may change various management
strategies to adapt to these social trends (such as recruiting older workers).
 Technological factors include technological aspects such as R&D activity, automation,
technology incentives and the rate of technological change. They can determine barriers
to entry, minimum efficient production level and influence outsourcing decisions.
Furthermore, technological shifts can affect costs, quality, and lead to innovation.
Expanding the analysis to PESTLE or PESTEL adds:
 Legal factors include discrimination law, consumer law, antitrust law, employment law,
and health and safety law. These factors can affect how a company operates, its costs, and
the demand for its products.
 Environmental factors include ecological and environmental aspects such as weather,
climate, and climate change, which may especially affect industries such as tourism,
farming, and insurance. Furthermore, growing awareness of the potential impacts of
climate change is affecting how companies operate and the products they offer, both
creating new markets and diminishing or destroying existing ones.
Other factors for the various offshoots include:
 Demographic factors include gender, age, ethnicity, knowledge of languages, disabilities,
mobility, home ownership, employment status, religious belief or practice, and income
level.
 Regulatory factors include acts of parliament and associated regulations, international
and national standards, local government by-laws, and mechanisms to monitor and ensure
compliance with these.

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Applicability of the Factors
The model's factors will vary in importance to a given company based on its industry and the
goods it produces. For example, consumer and B2B companies tend to be more affected by the
social factors, while a global defense contractor would tend to be more affected by political
factors. Additionally, factors that are more likely to change in the future or more relevant to a
given company will carry greater importance. For example, a company which has borrowed
heavily will need to focus more on the economic factors (especially interest rates).
Furthermore, conglomerate companies who produce a wide range of products (such as Sony,
Disney, or BP) may find it more useful to analyze one department of its company at a time with
the PESTEL model, thus focusing on the specific factors relevant to that one department. A
company may also wish to divide factors into geographical relevance, such as local, national, and
global

Use of Pest Analysis with Other Models

The PEST factors, combined with external micro-environmental factors and internal drivers, can
be classified as opportunities and threats in a SWOT analysis for the planet’s supply chains.

14.2.1 Strategic Modeling and Location

Writing a strategic planning model may seem difficult, but it's actually fairly easy to do when
setting up your business. The more difficult task--and a critical one--is to actually apply your
strategic planning model to the operation of your business in a new business adventure. Making
sure that you are working in accordance with your strategic plans will be critical to the success of
your business in supply chains.

This can be done by following the following criteria.

Instructions
1. Draft a mission statement. A mission statement is a general statement about the
purpose of your company, why it exists, and what services you provide. For
example, a mission statement for a tax-preparation company might be "TaxCo
provides taxpayers with assistance in preparing their tax returns, offering a
painless process that results in a more accurate return."

2. Break your mission statement down into goals. Goals are things that your
company needs to accomplish, either to succeed in your general mission
statement, or to stay afloat as a company. For example, you might have goals like
"Be profitable within five years" or "Have at least a 95% customer satisfaction
rate".

3. Develop strategies to help you reach each of your goals. For example, your
strategy for profitability might be "Spend heavily to increase market penetration
for three years, then push a profitable product on our wide customer base."

4. Develop action plans for each strategy. This involves writing down all the
specific steps necessary to achieve each part of the strategy. For example,
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 "increasing market penetration" might involve having your graphics team design a
new logo, your advertising team design ads using that logo, your marketing team
offering free premiums through those ads, and your database manager gather the
names and email addresses of everyone who uses those premiums.

5. Apply the above four steps to your daily business operations. This is the
hardest part of a strategic planning model, but it is essential. Planning works best
when you follow your plans, so keep a list of your goals, strategies, and action
plans close at hand. Check in every week to make sure you are still forwarding
your overall strategic plan.
?
Review Questions

i) In order for supply chains to be successful, there is need to have market relationship
with stakeholders, explain how it is done.
ii) What are the macro global issues in supply chain
iii) Explain the applicability of the factors to global supply chains
iv) What is strategic modeling and location

STRATEGY OF SUPPLY CHAIN

Learning Objectives

By the end of this chapter the learner should be able to:

a) Analyse the concept of strategy and the process of developing corporate strategy.
b) Analyse Benchmarking as a strategic process.

15.1 Supply Chain Strategy

A company’s supply chain is the execution vehicle its business strategy.  It must be efficient, but
it must also be responsive to today's constantly changing environment with shorter product
lifecycles, fluctuating inventory levels and changing costs. Studies have shown that it's a
company's ability to respond to change that distinguishes leaders from laggards. Being
operationally efficient may positively impact the short term, but it does not lead directly to long-
term profitability.

A company’s supply chain must be both operationally excellent and market responsive.

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But few companies recognize the impact that becoming more responsive will have on their
supply chain. They underestimate the fundamental shifts that are needed to move from being
simply efficient to becoming truly responsive.
It begins with defining holistic processes and Key Performance Indicators (KPIs) that reward
cross-functional, customer-driven metrics through:
 Developing collaborative processes, both within the company and with partners
and customers
 Defining an organization structure that rewards integrated, not siloed thinking
What Separates Leading Manufacturers From Laggards?
Being operationally efficient may positively impact the short term, but it does not lead directly to
long-term profitability.

Here is a four step process for doing that through Supply Chain agility.

Step 1—Build a definition

There is no industry-standard definition for agility. For top performers, agility is well defined for
each organization. For laggards, the term is used in strategy documents, but isn’t defined.

Agility is most frequently defined as manufacturing cycle time, according to our recent study.
However, the most important definition—that is, the one driving the greatest improvement in
customer service, asset utilization, and inventory write-offs—is the ability to have the same cost,
quality, and customer service given at every level of demand variability.

Step 2—Leadership the missing link

The need for agility is felt across the organization, but it can’t be solved by any one function.
Instead, it requires a cross-functional approach. For this reason, the effort has to be led by
someone with authority over every function involved

Step 3—Alignment

Cracking the nut requires a focus in three areas: culture, right-sizing complexity, and rethinking
financial reward systems. Culture is the biggest barrier to achieving agility.

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Companies that have successfully closed their customer service gaps while maintaining high
asset utilization have taken five actions:

Reduced product complexity—To accomplish this, there’s an active focus on product and
customer complexity.

Invested in available-to-promise (ATP) capabilities— To improve visibility, ATP processes

are extended to manufacturing capabilities.

Reduced demand forecast error—Over 60% of companies are experiencing an increase in

demand variability, with new product launch forecast being the largest contributor to this error.
A focus in this area can yield big dividends.

Improved order effectiveness—Successful companies have a significantly higher percentage of

orders that move through their order management systems without manual intervention.

Designed for supply—The focus is on common formulations, platforms, and reuse strategies for
source, make, and deliver.

Step 4—Supporting cycles

Reactive supply chains are unable to play catch-up. On average, the time to sense demand is
three times the time to process an order. Companies that focus on reacting to demand are always
on their back feet.

And, despite the investment in order-to-cash processes, this remains an area of opportunity for
most organizations. Agility increases when the time to sense demand is aligned with the time to
respond to an order. Companies can close this gap by improving demand sensing.

15.2 Supply Chain and Corporate Strategy

Some managers believe that there are universal definitions of good or bad supply chains. We
often see companies attempt to build the most efficient supply chain, regardless of whether their
market strategy is to compete on price. Optimizing cost and inventory may come at the expense
of lead-times, flexibility and risk. Your supply chain needs to compete the same way your
company does. Supply chains cannot be measured in absolutes or designed in isolation of the
corporate strategy. Here are six steps to align your supply chain with your corporate strategy:

1. Define and communicate a clear corporate strategy.

One of the biggest failure points in aligning strategy is when the supply chain organization
doesnt know what to align with. Strategies cannot be too limited and fail to consider and
prioritize all the market requirements and factors on which participants compete (features, price,
delivery, etc). And strategies cannot be platitudes promising all things to all people. Corporate
strategy needs to define how you are going to be different and better than your competitors, and

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it needs to set specific, measurable goals. Then the strategy needs to be communicated to the
organization thoroughly and repeatedly.

2. Identify the areas of your corporate strategy that are enabled by the supply chain.
You need to connect the dots between your strategic goals and how those get delivered by the
company. This process defines what your supply chain needs to be good at, and it allows you to
prioritize supply chain objectives. Ask the question, "What part of my core competence and
competitive differentiation falls within or derives from my supply chain activity?" This step is
especially critical in making in-house/outsource decisions.

3. Align supply chain performance metrics with the corporate strategy.

One of the most common issues we see is the belief that there are standard supply chain
performance measures, and the company should strive to maximize them all. This belief fails to
account for the fact that there are tradeoffs in optimizing different goals. There are also no
absolutes in competitive strategy. Goals should be set based on your performance relative to your
competitors.
We have a client who had operated their supply chain with the goal of shipping product within
one day after an order. But their mature market no longer needed that level of performance.
Relaxing that delivery requirement opened up a significant opportunity for inventory
improvement. It is important to note that they didn't stop delivering in a timely manner or stop
measuring delivery performance; they just re-prioritized their goals to optimize a different
objective.

4. Structure your supply chain to optimize the strategic goals.

This step is where you address the elements of supply chain design: Supply chain network,
locations, supplier selection and business terms, inventory and planning policy, organizational
structure. Supply chains that are optimized for cost efficiency will look different than supply
chains that are optimized for flexibility and responsiveness. Your organization and the skill sets
of your people will be different, too.

5. Align incentives end to end.

Internal performance evaluations and bonus structures need to match the aligned metrics that
have been set. Supplier performance management and business models should align the
suppliers' incentives with yours. Don't forget that channel and demand management are part of
the supply chain, too. Build a robust S&OP process and drive your sales and marketing teams
with objectives that aren't at odds with your supply chain objectives. One common failure is
when sales and marketing have no incentive to control inventory. They will overdrive the
forecast to guarantee availability and then the supply chain organization is left with the excess
inventory.

6. Keep refreshing the strategy and alignment process.

Most companies have strategic planning cycles of one to three years, but we have seen
companies that literally go decades without re-aligning their supply chain strategy. Put your
supply chain strategy on the same schedule as the rest of your planning.

15.3 Best Practices and Benchmarking

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Benchmarking is the process of comparing one's business processes and performance metrics to
industry bests or best practices from other industries. Dimensions typically measured are quality,
time and cost. In the process of best practice benchmarking, management identifies the best firms
in their industry, or in another industry where similar processes exist, and compares the results
and processes of those studied (the "targets") to one's own results and processes. In this way,
they learn how well the targets perform and, more importantly, the business processes that
explain why these firms are successful.
Benchmarking is used to measure performance using a specific indicator (cost per unit of
measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit
of measure) resulting in a metric of performance that is then compared to others.
Also referred to as "best practice benchmarking" or "process benchmarking", this process is used
in management and particularly strategic management, in which organizations evaluate various
aspects of their processes in relation to best practice companies' processes, usually within a peer
group defined for the purposes of comparison. This then allows organizations to develop plans
on how to make improvements or adapt specific best practices, usually with the aim of increasing
some aspect of performance. Benchmarking may be a one-off event, but is often treated as a
continuous process in which organizations continually seek to improve their practices.

15.4 Benefits Benchmarking

In 2008, a comprehensive survey on benchmarking was commissioned by The Global
Benchmarking Network, a network of benchmarking centers representing 22 countries. Over 450
organizations responded from over 40 countries. The results showed that:
1. Mission and Vision Statements and Customer (Client) Surveys are the most used (by 77% of
organizations) of 20 improvement tools, followed by SWOT analysis (72%), and Informal
Benchmarking (68%). Performance Benchmarking was used by 49% and Best Practice
Benchmarking by 39%.
2. The tools that are likely to increase in popularity the most over the next three years are
Performance Benchmarking, Informal Benchmarking, SWOT, and Best Practice Benchmarking.
Over 60% of organizations that are not currently using these tools indicated they are likely to
use them in the next three years.

15.4.1 Collaborative Benchmarking

Benchmarking, originally described Rank Xerox, is usually carried out by individual companies.
Sometimes it may be carried out collaboratively by groups of companies (e.g. subsidiaries of a
multinational in different countries). One example is that of the Dutch municipally-owned water
supply companies, which have carried out a voluntary collaborative benchmarking process since
1997 through their industry association. Another example is the UK construction industry which
has carried out benchmarking since the late 1990s again through its industry association and with
financial support from the UK Government.

15.5 Procedure Benchmarking

There is no single benchmarking process that has been universally adopted. The wide appeal and
acceptance of benchmarking has led to the emergence of benchmarking methodologies. One
seminal book is Boxwell's Benchmarking for Competitive Advantage (1994). The first book on
benchmarking, written and published by Kaiser Associates, is a practical guide and offers a
seven-step approach. Robert Camp (who wrote one of the earliest books on benchmarking in
1989) developed a 12-stage approach to benchmarking.
The 12 stage methodology consists of:

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 1. Select subject
2. Define the process
3. Identify potential partners
4. Identify data sources
5. Collect data and select partners
6. Determine the gap
7. Establish process differences
8. Target future performance
9. Communicate
10. Adjust goal
11. Implement
12. Review and recalibrate
The following is an example of a typical benchmarking methodology:

 Identify problem areas: Because benchmarking can be applied to any business process
or function, a range of research techniques may be required. They include informal
conversations with customers, employees, or suppliers; exploratory research techniques
such as focus groups; or in-depth marketing research, quantitative research, surveys,
questionnaires, re-engineering analysis, process mapping, quality control variance
reports, financial ratio analysis, or simply reviewing cycle times or other performance
indicators. Before embarking on comparison with other organizations it is essential to
know the organization's function and processes; base lining performance provides a point
against which improvement effort can be measured.

 Identify other industries that have similar processes: For instance, if one were
interested in improving hand-offs in addiction treatment one would identify other fields
that also have hand-off challenges. These could include air traffic control, cell phone
switching between towers, transfer of patients from surgery to recovery rooms.

 Identify organizations that are leaders in these areas: Look for the very best in any
industry and in any country. Consult customers, suppliers, financial analysts, trade
associations, and magazines to determine which companies are worthy of study.

 Survey companies for measures and practices: Companies target specific business
processes using detailed surveys of measures and practices used to identify business
process alternatives and leading companies. Surveys are typically masked to protect
confidential data by neutral associations and consultants.

 Visit the "best practice" companies to identify leading edge practices: Companies
typically agree to mutually exchange information beneficial to all parties in a
benchmarking group and share the results within the group.

 Implement new and improved business practices: Take the leading edge practices and
develop implementation plans which include identification of specific opportunities,

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 funding the project and selling the ideas to the organization for the purpose of gaining
demonstrated value from the process.
Costs
The three main types of costs in benchmarking are:
 Visit Costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labor
time.
 Time Costs - Members of the benchmarking team will be investing time in researching
problems, finding exceptional companies to study, visits, and implementation. This will
take them away from their regular tasks for part of each day so additional staff might be
required.
 Benchmarking Database Costs - Organizations that institutionalize benchmarking into
their daily procedures find it is useful to create and maintain a database of best practices
and the companies associated with each best practice now.
The cost of benchmarking can substantially be reduced through utilizing the many internet
resources that have sprung up over the last few years. These aim to capture benchmarks and best
practices from organizations, business sectors and countries to make the benchmarking process
much quicker and cheaper.

Technical/Product Benchmarking
The technique initially used to compare existing corporate strategies with a view to achieving the
best possible performance in new situations (see above), has recently been extended to the
comparison of technical products. This process is usually referred to as "technical
benchmarking" or "product benchmarking". Its use is well-developed within the automotive
industry ("automotive benchmarking"), where it is vital to design products that match precise
user expectations, at minimal cost, by applying the best technologies available worldwide. Data
is obtained by fully disassembling existing cars and their systems. Such analyses were initially
carried out in-house by car makers and their suppliers. However, as these analyses are expensive,
they are increasingly being outsourced to companies who specialize in this area. Outsourcing has
enabled a drastic decrease in costs for each company (by cost sharing) and the development of
efficient tools (standards, software).-

Types
Benchmarking can be internal (comparing performance between different groups or teams within
an organization) or external (comparing performance with companies in a specific industry or
across industries). Within these broader categories, there are three specific types of
benchmarking: 1) Process benchmarking, 2) Performance benchmarking and 3) strategic
benchmarking.
These can be further detailed as follows:

 Process benchmarking - the initiating firm focuses its observation and investigation of
business processes with a goal of identifying and observing the best practices from one or
more benchmark firms. Activity analysis will be required where the objective is to
benchmark cost and efficiency; increasingly applied to back-office processes where
outsourcing may be a consideration.

 Financial benchmarking - performing a financial analysis and comparing the results in

an effort to assess your overall competitiveness and productivity.

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  Benchmarking from an investor perspective- extending the benchmarking universe to
also compare to peer companies that can be considered alternative investment
opportunities from the perspective of an investor.

 Benchmarking in the public sector - functions as a tool for improvement and

innovation in public administration, where state organizations invest efforts and resources
to achieve quality, efficiency and effectiveness of the services they provide.

 Performance benchmarking - allows the initiator firm to assess their competitive

position by comparing products and services with those of target firms.

 Product benchmarking - the process of designing new products or upgrades to current

ones. This process can sometimes involve reverse engineering which is taking apart
competitors’ products to find strengths and weaknesses.

 Strategic benchmarking - involves observing how others compete. This type is usually
not industry specific, meaning it is best to look at other industries.

 Functional benchmarking - a company will focus its benchmarking on a single function

to improve the operation of that particular function. Complex functions such as Human
Resources, Finance and Accounting and Information and Communication Technology are
unlikely to be directly comparable in cost and efficiency terms and may need to be
disaggregated into processes to make valid comparison.

 Best-in-class benchmarking - involves studying the leading competitor or the company

that best carries out a specific function.

 Operational benchmarking - embraces everything from staffing and productivity to

office flow and analysis of procedures performed.

 Energy benchmarking - process of collecting, analyzing and relating energy

performance data of comparable activities with the purpose of evaluating and comparing
performance between or within entities. Entities can include processes, buildings or
companies. Benchmarking may be internal between entities within a single organization,
or - subject to confidentiality restrictions - external between competing entities.

Tools
Benchmarking software can be used to organize large and complex amounts of information.
Software packages can extend the concept of benchmarking and competitive analysis by
allowing individuals to handle such large and complex amounts or strategies. Such tools support
different types of benchmarking (see above) and can reduce the above costs significantly.

Metric Benchmarking
Another approach to making comparisons involves using more aggregative cost or production
information to identify strong and weak performing units. The two most common forms of
quantitative analysis used in metric benchmarking are data envelope analysis (DEA) and
regression analysis. DEA estimates the cost level an efficient firm should be able to achieve in a

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particular market. In infrastructure regulation, DEA can be used to reward companies/operators
whose costs are near the efficient frontier with additional profits. Regression analysis estimates
what the average firm should be able to achieve. With regression analysis, firms that performed
better than average can be rewarded while firms that performed worse than average can be
penalized. Such benchmarking studies are used to create yardstick comparisons, allowing
outsiders to evaluate the performance of operators in an industry. Advanced statistical
techniques, including stochastic frontier analysis, have been used to identify high and weak
performers in industries, including applications to schools, hospitals, water utilities, and electric
utilities.
One of the biggest challenges for metric benchmarking is the variety of metric definitions used
among companies or divisions. Definitions may change over time within the same organization
due to changes in leadership and priorities. The most useful comparisons can be made when
metrics definitions are common between compared units and do not change so improvements can
be verified.

15.6 Optimization of Supply Chain

Supply chain optimization is the application of processes and tools to ensure the optimal
operation of a manufacturing and distribution supply chain. This includes the optimal placement
of inventory within the supply chain, minimizing operating costs (including manufacturing costs,
transportation costs, and distribution costs). This often involves the application of mathematical
modelling techniques using computer software.

Applications
Typically, supply chain managers are trying to maximize the profitable operation of their
manufacturing and distribution supply chain. This could include measures like maximizing gross
margin return on inventory invested (GMROII) (balancing the cost of inventory at all points in
the supply chain with availability to the customer), minimizing total operating expenses
(transportation, inventory and manufacturing), or maximizing gross profit of products distributed
through the supply chain. Supply chain optimization addresses the general supply chain problem
of delivering products to customers at the lowest total cost and highest profit. This includes
trading off the costs of inventory, transportation, distributing and manufacturing. In addition,
optimizing storage and transportation costs by means of product / package size is one of the
easiest and most cost effective initial implementations available to save money in product
distribution.
Supply chain optimization has applications in all industries manufacturing and/or distributing
goods, including retail, industrial products, and consumer packaged goods (CPG).

Approaches and Solutions

The classic supply chain approach has been to try to forecast future inventory demand as
accurately as possible, by applying statistical trending and "best fit" techniques based on historic
demand and predicted future events. The advantage of this approach is that it can be applied to
data aggregated at a fairly high level (e.g. category of merchandise, weekly, by group of
customers), requiring modest database sizes and small amounts of manipulation. Unpredictability
in demand is then managed by setting safety stock levels, so that for example a distributor might
hold two weeks of supply of an article with steady demand but twice that amount for an article
where the demand is more erratic.

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Then, using this forecast demand, a supply chain manufacturing and distribution plan is created
to manufacture and distribute products to meet this forecast demand at lowest cost (or highest
profitability). This plan typically addresses the following business concerns: - How much of each
product should be manufactured each day? - How much of each product should be made at each
manufacturing plant? - Which manufacturing plants should re-stock which warehouses with
which products? - What transportation modes should be used for warehouse replenishment and
customer deliveries?
The technical ability to record and manipulate larger databases more quickly has now enabled a
new breed of supply chain optimization solutions to emerge, which are capable of forecasting at
a much more granular level (for example, per article per customer per day). Some vendors are
applying "best fit" models to this data, to which safety stock rules are applied, while other
vendors have started to apply stochastic techniques to the optimization problem. They calculate
the most desirable inventory level per article for each individual store for their retail customers,
trading off cost of inventory against expectation of sale. The resulting optimized inventory level
is known as a model stock. Meeting the model stock level is also an area requiring optimization.
Because the movement of product to meet the model stock, called the stock transfer, needs to be
in economic shipping units such as complete unit loads or a full truckload, there are a series of
decisions that must be made. Many existing distribution requirements planning systems round
the quantity up to the nearest full shipping unit. The creation of for example, truckloads as
economic shipment units requires optimization systems to ensure that axle constraints and space
constraints are met while loading can be achieved in a damage-free way. This is generally
achieved by continuing to add time-phased requirements until the loads meet some minimum
weight or cube. More sophisticated optimization algorithms take into account stackability
constraints, load and unloading rules, palletizing logic, warehouse efficiency and load stability
with an objective to reduce transportation spend (minimize 'shipping air').
Optimization solutions are typically part of, or linked to, the company's replenishment systems
distribution requirements planning, so that orders can be automatically generated to maintain the
model stock profile. The algorithms used are similar to those used in making financial
investment decisions; the analogy is quite precise, as inventory can be considered to be an
investment in prospective return on sales.
Supply chain optimization may include refinements at various stages of the product lifecycle, so
that new, ongoing and obsolete items are optimized in different ways: and adaptations for
different classes of products, for example seasonal merchandise. There are 4 levels of supply
chain maturity leading to greater optimization. From least mature to most mature, the levels are
stand alone, internal integration, collaboration across partners, and finally full agility.
Whilst most software vendors are offering supply chain optimization as a packaged solution and
integrated in ERP software, some vendors are running the software on behalf of their clients as
application service providers.

Claimed Advantages
Firstly, the techniques being applied to supply chain optimization are claimed to be academically
credible. Most of the specialist companies have been created as a result of research projects in
academic institutions or consulting firms: and they point to research articles, white papers,
academic advisors and industry reviews to support their credibility.
Secondly, the techniques are claimed to be commercially effective. The companies publish case
studies that show how clients have achieved reductions in inventory whilst maintaining or
improving availability. There is limited published data outside of these case studies, and
reluctance for some practitioners to publish details of their successes (which may be
commercially sensitive), therefore hard evidence is difficult to come by.
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Recent Developments
The trend to provide software as a service is a new business model that is now being applied to
building and designing optimization solutions. Services are charged as used, rather than through
licensing installed or hosted software. Companies providing SaaS supply chain solutions include
GT Nexus, Manhattan Associates, SAP, and TradeCard.

15.7 Direct Plant Shipments

Also known as direct shipment, direct plant shipment (DPS) is a method of delivering goods
from the plant to the customer directly. At the same time regional centers, strategically located,
provide overnight shipments to the maximum number of customers. This delivery scheme
reduces transportation and storage costs.
?
Review Questions

i) Define supply chain strategy

ii) Explain supply chain and its relationship to corporate strategy
iii) What is Technical/product benchmarking
iv) What is benchmarking and how is it helpful in supply chain management
v) What is optimization in supply chain
vi) Explain the concept of direct plant shipments in supply chain optimization.

ETHICAL CONSIDERATIONS

Learning Objectives

By the end of this chapter the learner should be able to analyse the concept of ethical
considerations in supply chain management especially by use of CIPS benchmarks.

The best and most successful organizations recognise that they will only prosper in the long term
if they satisfy the aspirations of their stakeholders; including customers, suppliers, employees,
local communities, investors, governments, public interest and environment groups. To satisfy
this intense scrutiny and the demands for greater accountability in society, businesses and other
organisations are increasingly recognising the need to measure, track and report on their social
and ethical performance. Professional Bodies in Supply Chain like The Chartered Institute of
Purchasing & Supply (CIPS) has a Personal Ethical Code with which members undertake to
comply. Their Code sets out principles of:

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  Integrity
 Professionalism
 High standards
 Optimal use of resources and
 Compliance with legal and other obligations and offers guidance in relation to:
 Declaration of interest
 Confidentiality and accuracy of information
 Fair competition
 Business gifts and hospitality and
 Seeking advice.

The CIPS position on Ethical Business Practices in Purchasing and Supply Management expands
on the principles in the Code and addresses business to business ethical issues and social
responsibility issues within supply chains. It also takes into account issues that have arisen
throughout business regarding social responsibility, personal accountability, corporate
governance and so on, which have in turn been addressed in reports produced in recent years;
Turnbull, Nolan and Higgs to name but a few.

Purchasing and supply management professionals are increasingly required to demonstrate that
the supply chains they manage take ethical and social responsibility issues into consideration.
The main reasons for ensuring that supply chains meet these criteria should be professionalism
and moral and legal obligations but other drivers include: Media or consumer pressure. The need
to comply with a particular code of conduct or legal imperative. A requirement to include such
issues in annual financial or social accounts, social audits, ethical investors.

Supply chains that include sources in a particular country or for a particular product which may
be perceived to be high risk.

'Ethics' in purchasing and supply management can relate to a wide range of issues from doubts
about suppliers' business procedures and practices to corruption. The vocabulary associated with
this field can, in itself, be confusing, and includes such terms as:

 Fair-trade
 Ethical trading
 Ethical sourcing
 Social accountability
 Social auditing
 Corporate social responsibility
 Corporate citizenship
 Codes of conduct
 Reputation assurance

16.1 Audience, Objective and Scope

The CIPS and other Professional bodies like KISM’s position on Ethical Business Practices in
Purchasing and Supply Management is intended primarily for purchasing and supply
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management professionals but it applies equally to anyone who has responsibility for managing
the supply of goods or services from an external source. The purchasing and supply management
professional has a responsibility to at least be aware, if not have a thorough understanding, of
ethical issues in purchasing and supply management and to endeavour to address problem areas
in a positive manner.

The objective of this practice document is to identify the major ethical issues in purchasing and
supply management and to offer some guidance. However, its coverage cannot be exhaustive.
Purchasing and supply management professionals work in a wide range of environments, and
different industries and sectors will interpret these issues in different ways. Purchasing and
supply management professionals should identify the values that are specific to their own
employing organisation and its stakeholders in order to incorporate these into their policy on
ethical purchasing and supply management.

Every organisation requires an ethical policy or code of conduct. CIPS believes that purchasing
and supply management professionals should universally apply the practice set out in this
document and should encourage their own organisations to include good ethical business
practices in all areas of their work. Source: The Institute of Social and Ethical

Accountability Purchasing and supply management professionals should also involve all
stakeholders in this process. It is vital that an organisation's chief executive officer visibly
endorses the organisation's ethical policy. This CIPS practice document provides a basis which
purchasing and supply management professionals may find of use in initiating a change of
culture within their employing organisation, where appropriate.

UK public sector purchasers are reminded that the Government's policy is that all public
procurement of goods, services and works is to be based on value for money. Public sector
purchasers also have to comply with the EC procurement rules. CIPS has produced guidance
notes to help purchasing and supply management professionals understand and address the issues
covered in this practice document. All this may, at a future date, address additional social
responsibility issues such as sourcing from countries with oppressive regimes or poor human
rights records. Separate positions on Environmental Purchasing and Supply Management will be
looked at subsequent editions of modules.

16.2 Business to Business Ethics

The CIPS Personal Ethical Code is the starting point for business to business ethics in Supply
chains. This section provides guidelines for purchasing and supply management professionals in
dealing with business to business ethical issues in their supply chains.

Those in the public sector must be aware of the compliance criteria they must meet; others may
need to satisfy standards of ethical practice and look to organisational reputation. Purchasing and
supply management professionals in some industries face complex problems in addressing
ethical and social responsibility issues and may lack codes or standards of practice. Many of
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these issues are extremely sensitive. CIPS encourages purchasing and supply management
professionals to consider the long term implications of their actions and to question objectives
that may unintentionally have negative ethical consequences. An example may be an immediate
objective to create savings by rationalising the supply base - but this may then result in smaller
suppliers failing to be developed and a monopoly situation beginning to emerge.

Purchasing and supply management professionals should seek appropriate guidance, be open
about concerns, and engage positively with suppliers and internal customers or peers, however
difficult that may be. The resource implications of addressing these issues must be balanced
against the potential risk to the reputation of the organisation and, in the public sector, the
organisation's requirement to comply with the EC procurement rules.

Everyone involved in purchasing and supply management in an organisation should be aware of

the organisation's ethical policy and be actively encouraged to embrace its principles. Purchasing
and supply management professionals have a responsibility for the supply chains from which
goods, services and works come into their organisation or directly to their customers. Best
practice purchasing and supply management includes developing and understanding suppliers'
operations and offering guidance and support when improvement is necessary or appropriate.
CIPS believes this should include ethical as well as commercial and technical guidance and
support.

Encouraging suppliers to comply with an organisation's ethical policy can take place in parallel
with the development of monitoring procedures, and may need to take place over a period of
time, or be introduced in phases. Purchasing and supply management professionals should
consider the effect on suppliers of compliance costs, and seek guidance about existing codes that
may be applicable to their business so that new codes are not unnecessarily created. This may
well require helping the organization confront long-standing custom and practice which is of
dubious ethical standing but which has the appearance of being a sectoral norm.

16.3 Transparency, Confidentiality and Fairness

The purchasing and supply management process should be as transparent as possible, within
commercial and legal constraints. This means being open with all those involved so that
everyone, especially suppliers, understands the elements of the process, that is, the procedures,
timescales, expectations, requirements, criteria for selection and so on.

Suppliers' confidential information must not be disclosed to any third party or used in any way
without the consent of the supplier. In particular, it must not be shared with other suppliers. This
is particularly important when an output-based specification is being. Although it is acceptable
business practice to share ideas amongst suppliers in order to develop the most appropriate
solution, suppliers' confidence should be respected. Everybody involved in purchasing and
supply management should understand the implications of commercial confidentiality and it is
the responsibility of the purchasing and supply management professional to reiterate this to
colleagues at the start of each new project.
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No relevant information should deliberately be withheld by either party (unless it has been
obtained from another supplier in commercial confidence), nor should any misleading
information be given.

In general, when a supplier asks for clarification during the procurement process the purchasing
and supply management professional should give all suppliers involved the information
requested. However, if a supplier asks an insightful question the answer should not be circulated
to the other suppliers as to do so may remove the competitive advantage the supplier is seeking
to provide. The purchasing and supply management professional is obliged to use best judgement
in every case, seek advice if in doubt and act in an appropriate and professional manner.

Unsuccessful suppliers should be debriefed with as much transparency about the procurement
process as can be provided, e.g. on the weaker aspects of their tender. All suppliers should be
treated fairly and evenhandedly at all stages of the procurement process.

Suppliers who are known to have no prospect of winning the business should not be invited to
tender (unless there is an obligation to invite all suppliers who have expressed an interest in
tendering, as in the case of the Open Procedure in the EC procurement rules).

Unless they are aware of all the circumstances, suppliers should not be required or encouraged to
undertake activities or incur cost when there is little chance of their obtaining business within a
reasonable period.

Use of Power

Power is a key element in supply relationships. Purchasing and supply management

professionals should understand how to use the purchasing power of their organisation
appropriately. For instance, it is common practice to aggregate requirements as a means of
leverage to secure greater value for money.

Purchasing and supply management professionals are responsible for determining the extent to
which power should be used in relationships with suppliers. The exertion of undue influence or
the abuse of power, as well as being unprofessional, may contravene relevant legislation and is
unlikely to achieve long-term best value for money. Purchasing and supply management
professionals should discourage the arbitrary or unfair use of purchasing power or influence.

Purchasing and supply management professionals should ensure compliance with all applicable
legislation such as restraint of trade and anti-trust legislation, the Competition Act 1998 (in
particular Chapter II, Abuse of Dominant Position), and the Treaty of Amsterdam (Articles 81
and 82, which address anti-competitive practices and abuse of dominant position).
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Corruption

Purchasing and supply management professionals should seek to encourage the application of
both the word and the intention of the CIPS Personal Ethical Code. Purchasing and supply
management professionals must not tolerate corruption in any form. CIPS believes that there is
no excuse for corruption and it can never be blamed on naïveté, lack of professional knowledge
or poor management. Purchasing and supply management professionals aware of any corrupt
activity have a duty to the profession and to their employing organisations to alert their senior
management.

Bribery is a criminal offence in the UK (and in most other countries).

CIPS fully supports the Organisation for Economic Co-operation and Development (OECD)
convention on combating bribery of foreign public officials in international business
transactions. In the UK, legislation now makes it a criminal offence for UK citizens to do this,
thus outlawing practices common in some international markets for example facilitation
payments.

Purchasing and supply management professionals have a responsibility to determine what is

acceptable behaviour between suppliers and colleagues, irrespective of their role or status in the
organization and to influence policy makers to define standards.

Suppliers often liaise directly with end users and other internal customers. The purchasing and
supply management professional should not necessarily discourage such liaison, indeed
maintaining product development awareness amongst users may well make it essential, but
should develop organisation-wide policies and educate colleagues about unacceptable or
unethical relationships with suppliers.

Declaring Interest

Purchasing and supply management professionals should encourage colleagues to declare any
material personal interest which may affect, or be seen to affect, their impartiality or judgement
in respect of their duties. Examples include owning a significant shareholding in a supplier or
close family members being employed by a key supplier.

Business Gifts, Hospitality and Undue Influence

Organizations should have a clear policy on accepting business gifts. Purchasing and supply
management professionals should encourage colleagues to comply with any such policy. CIPS
believes that normally the only acceptable gifts are items of small intrinsic value, such as desk
diaries.

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Purchasing and supply management professionals and others involved in the supply chain should
not accept hospitality which may be perceived as influencing their judgement or impartiality in
any way. Hospitality accepted should never be excessive or frequent, should be managed openly
and carefully, and be capable of being reciprocated. The same rules apply in relation to gifts or
hospitality offered to close family members.

It is generally unethical to accept travel or subsistence payments from suppliers during product
familiarization visits. Acceptance of equipment, samples and demonstration models from
suppliers without contractual protection can be dangerous e.g. due to a lack of clarification on
liability and indemnity. In particular, the ethical implications of appearing to accept these offers
without full transparency can be damaging to both the buyer and the buying organisation.

Staff should not accept anything that their taxation authorities would consider to be a taxable
benefit. Free issues from the buying organisation e.g. of items for incorporation in rigs, products
etc are, in most cases, acceptable business practice.

Payment to be an Approved Supplier

Purchasing and supply management professionals should not request payment from suppliers as
a condition of being placed on an approved or preferred supplier list. Suppliers should be
selected on the basis of meeting appropriate and fair criteria. See section on Supplier Imposition.

Payment towards Joint Projects

Purchasing and supply management professionals may invite suppliers to contribute towards the
costs of joint projects or initiatives such as sector-wide supplier databases, marketing a new
product range or investing in a new IT system, provided there are clear and tangible business
benefits to the supplier. This process should be undertaken carefully and fairly and must not
discriminate against suppliers, for example small and medium-sized enterprises (SMEs).
Suppliers should not be selected solely on the basis of their financial contribution.

Payment to Agreed Terms

Purchasing and supply management professionals should ensure that their suppliers understand
and agree to the negotiated payment terms. Payment terms are the subject of EU legislation Late
Payment of Commercial Debts (Interest) Act 1998. Late payment undermines the organisation's
credibility. Buying organisations should try to ensure that valid invoices are paid in accordance
with the agreed terms and in the agreed way.

Purchasing and supply management professionals should work with colleagues to ensure that
their employer's business processes enable payments to be made promptly. Any problem with an
invoice should be addressed and resolved appropriately in order that the invoice can be
processed.

Barter

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Barter is trade by exchange of goods or services for other goods or services. There is no
exchange of money and, as barter is not usually a condition of contract between two parties,
coercion is not an issue. Where is it appropriate, barter is acceptable business practice, provided
both parties have a current business need for the goods/services of the other party.

Reciprocal Trading

Reciprocal trading (countertrade) which makes being a customer of an organisation a condition

for being a supplier is generally unacceptable business practice. CIPS has a separate position on
practice document which details the CIPS view on this matter. In essence CIPS believes
reciprocal trading to be only acceptable when:

 There is no coercion
 Both parties are in agreement and
 There is mutual benefit and transparency

16.4 Supplier Relationships and Competition

Most organisations purchase some commodities and services tactically, using short-term
contracts, and others, for reasons of strategy, security or leverage, by means of longer-term
arrangements.

From time to time, longer-term agreements with suppliers should be subject to open and
transparent competition:

 To provide new or alternative suppliers with an opportunity to win the business.

 To enable the buying organisation to access and obtain the best current market offering.

Supplier Mistakes

A mistake is a non deliberate error. CIPS has a separate detailed position on practice on this
subject, the essence of which is as follows:

Purchasing and supply management professionals should adopt a professional and understanding
approach to the supplier when a mistake is brought to light unless of course it becomes apparent
that the mistake was not a mistake at all but a deliberate attempt to gain unfair advantage.
Purchasing and supply management professionals should search for anything that looks odd or
unusual in a supplier's offer and seek clarification prior to contract award.

Mistakes identified post-contract award should be investigated impartially and ethically with a
view to generating options for resolution.

Supplier imposition is the situation in which a customer or end user stipulates that a particular
supplier should be used. In many cases there is a valid reason for this. However, purchasing and
supply management professionals should always challenge such a situation since it can lead to

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established internal business controls being ignored and the quest for the best value for money
solution being compromised.

Purchasing and supply management professionals should, through act or influence, only use or
permit supplier imposition where there are transparent and objective reasons for it. An example
is when there is only one supplier with the capability to ensure the required level of quality
required by the customer, and where existing contractual relationships can be respected.

There are sometimes cases where supplier imposition appears to have happened but in reality
there has been a misunderstanding e.g. where end users are asked to use framework contracts
without fully appreciating the procurement process that was undertaken to create the contract.
Purchasing and supply management professionals must ensure that the decision making process
for appointing suppliers is visible and transparent.

16.5 Size, Maturity and Location

It is good practice to balance the risk of awarding contracts to new or small suppliers with the
opportunity of encouraging new business to flourish. It is not good practice to exclude suppliers
simply because they are small or new to the market. Capability and experience are examples of
relevant supplier selection criteria.

Purchasing and supply management professionals should consider the magnitude of business
they award to a supplier, the impact on that supplier and the level of dependence that may be
created. Serious consequences for the supplier can result if business is removed at a later date. It
may, in certain circumstances, be wise to agree exit strategies during contract finalisation so that
social and other factors can be taken into consideration.

Purchasing and supply management professionals should, wherever possible, be aware of

opportunities to support the local community and SMEs whilst maximising opportunities for
global sourcing when this is appropriate.

16.6 Social Responsibility

The CIPS position on Ethical Business Practices in Purchasing and Supply Management distils
aspects of current developments in the area, including:

 The Ethical Trading Initiative (ETI) Base Code

 The Core Conventions of the International
 Labour Organisation (ILO)
 The UN Declaration on Human Rights SA8000 (a standard relating to social
accountability developed by the Council on Economic Priorities Accreditation Agency in
New York - now known as Social Accountability International (SAI) Purchasing and
supply management professionals should not assume, however, that compliance with the

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 CIPS position necessarily implies compliance with any of the above codes or standards as
there are some differences between them.
Purchasing and supply management professionals should work with new and current suppliers to
improve their status in respect of all aspects within this CIPS practice document. The CIPS
position on Social Responsibility Issues in Purchasing and Supply Management is as follows. It
forms a key part of the CIPS position on Ethical Business Practices in Purchasing and Supply
Management.

Employment is Chosen (No Forced Labour)

Employees should be free to choose to work for the supplier, i.e. their employer. Employees
should be free to leave the supplier after reasonable notice is served Suppliers should not use
forced, bonded or non-voluntary prison labour.

Employment Relationships

Suppliers should establish recognised employment relationships with their employees that are in
accordance with their national law and good practice Suppliers' employees should be provided
with an easy to read contract of employment with particular clarity in relation to wage levels. In
the event that employees are unable to read, the contract of employment should be read and
explained to them by a union representative or another appropriate third party. Suppliers should
not seek to avoid providing employees with their legal or contractual rights

Freedom of Association

Suppliers should not prevent or discourage employees from joining trade unions Suppliers'
employees should be able to carry out reasonable representative functions in the workplace.
Suppliers should not discriminate against employees carrying out representative functions.
Where the law restricts freedom of association and collective bargaining, suppliers should
facilitate alternative means of representation

Living Wages Are Paid

Wages and benefits should at least meet industry benchmarks or national legal standards. As a
minimum, the wages paid to suppliers' employees should meet their basic needs. Suppliers
should not make deductions from wages unless permitted by national law or with the permission
(without duress) of the employee. Suppliers should always pay in cash and not in kind, e.g.
goods, vouchers

Suppliers’ Employees’ Working Hours

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Working hours should comply with national laws or industry standards Suppliers' employees
should not be expected to work more than 48 hours per week on a regular basis. On average,
suppliers' employees should be given one day off approximately every seven days Suppliers
should not pressurise employees into working overtime; overtime should be voluntary and not be
demanded on a regular basis; where overtime is requested by the employer it should be
reimbursed at an appropriate rate and should not exceed 12 hours in any week

Suppliers’ Treatment of Employees

Under no circumstances should suppliers abuse or intimidate, in any fashion, employees. Any
disciplinary measures should be recorded. Suppliers should have a grievance/appeal procedure
that is clear, easy to understand and should be given to the employee in writing. In the event that
suppliers' employees are unable to read, the grievance/appeal procedure should be read and
explained to them by a union representative or another appropriate third party.

Law

Suppliers should always work within the laws of their country

Health and Safety

Suppliers should assign responsibility for health and safety to a senior management
representative. Suppliers should have appropriate health and safety policies and procedures and
these should be demonstrable in the workplace. Suppliers' employees should be trained in health
and safety policy and procedures. Suppliers should monitor compliance with health and safety
policy. Suppliers should provide employees (at the supplier's expense) with any necessary health
and safety equipment, e.g. gloves, masks, helmets. Working conditions should be comfortable
and hygienic. Suppliers should identify specific hazards, e.g. substances or equipment, and
should implement processes to minimize risk. Suppliers' employees should have access to clean
Toilets. Suppliers' employees should have regular break and have access to water suitable for
drinking and washing as a minimum.

Child Labour

In principle, CIPS is against the use of child labour and believes its long-term elimination is
ultimately in the best interests of children. However, the elimination of child labour must always
be undertaken in a manner consistent with the best interests of the children concerned.
Purchasing and supply management professionals should seek to ensure that their organisation's
suppliers comply with the following:

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Suppliers shall develop or participate in and contribute to policies and programmes which
provide for the transition of any child found to be performing child labour to enable her or him to
attend and remain in quality education until no longer a child. Suppliers shall not employ
children and young persons under 18 at night or in hazardous condition.

In any event the course of action taken shall be in the best interest of the child, conform to the
provisions of ILO Convention 138 and be consistent with the United Nation's Convention on the
Rights of the Child In this context, 'child' refers to any persons less than 15 years of age, unless
local legislation on the minimum age stipulates a higher age for work or mandatory schooling, in
which case the higher age shall apply 'Young person' refers to any worker over the age of a child,
as defined above, under the age of 18.

Discrimination

Suppliers should have a policy of equality for all in the workplace with no discrimination on the
basis of race, caste, religion, nationality, age, gender, marital status, sexual orientation, disability,
union membership or political.

16.7 Personal Ethical Code of the Chartered Institute of Purchasing & Supply

1. Members of the Institute undertake to work to exceed the expectations of the following Code
and will regard the Code as the basis of best conduct in the purchasing and supply profession.

2. Members should seek the commitment of their employer to the Code and seek to achieve wide
spread acceptance of it amongst their fellow employees.

3. Members should raise any matter of concern of an ethical nature with their immediate
supervisor or another senior colleague if appropriate, irrespective of whether it is explicitly
addressed in the Code.

4. Members shall always seek to uphold and enhance the standing of the purchasing and supply
profession and will always act professionally and selflessly by:

(a) Maintaining the highest possible standard of integrity in all their business relationships both
inside and outside the organisations where they work.

(b) Rejecting any business practice which might reasonably be deemed improper and never using
their authority for personal gain.

(c) Enhancing the proficiency and stature of the profession by acquiring and maintaining current
technical knowledge and the highest standards of ethical behavior.

(d) Fostering the highest possible standards of professional competence amongst those for whom
they are responsible.

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(e) Optimizing the use of resources which they influence and for which they are responsible to
provide the maximum benefit to their employing

Organization

(f) Complying both with the letter and the spirit of:

(i) The law of the country in which they practice

(ii) Institute guidance on professional practice

(iii) Contractual obligations.

5. Members should never allow themselves to be deflected from these principles.

Guidance

6. In applying these principles, members should follow the guidance set out below:

(a) Declaration of interest - Any personal interest which may affect or be seen by others to
affect a member's impartiality in any matter relevant to his or her duties should be declared.

(b) Confidentiality and accuracy of information – The confidentiality of information received

in the course of duty should be respected and should never be used for personal gain.
Information given in the course of duty should be honest and clear.

(c) Competition - The nature and length of contracts and business relationships with suppliers
can vary according to circumstances. These should always be constructed to ensure deliverables
and benefits. Arrangements which might in the long term prevent the effective operation of fair
competition should be avoided.

(d) Business gifts - Business gifts, other than items of very small intrinsic value such as business
diaries or calendars, should not be accepted.

(e) Hospitality - The recipient should not allow him or herself to be influenced or be perceived
by others to have been influenced in making a business decision as a consequence of accepting
hospitality. The frequency and scale of hospitality accepted should be managed openly and with
care and should not be greater than the member's employer is able to reciprocate.

Decisions and Advice

7. When it is not easy to decide between what is and is not acceptable, advice should be sought
from the member's supervisor, another senior colleague or the Institute as appropriate.

Advice on any aspect of the Code is available from the Institute.

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 ?
Review Questions

i) Discuss ethical considerations in supply chain

ii) What is business to business ethics
iii) Discuss transparency, confidentiality and fairness in purchasing and supplies.
iv) Corruption is a vice in supply chain, discuss
v) Declaring interest in supply chain is very important. discuss

8.1 Supply Chain Management in Global Context

If you go to a Supermarket and pick up a few items of the shelf from electronics
and white goods or even clothes and look at the labels, chances are that you will
find them having been manufactured in China or Mexico. The coffee pods you buy
to use for your every day use comes from Africa. Computers have been shipped
out of South American Factories and Soft furnishings on the shelves are from India
and Hong Kong.
Global markets are expanding beyond borders and re-defining the way demand and
supplies are managed. Global companies are driven by markets across continents.
In order to keep the cost of manufacturing down, they are forced to keep looking to
set up production centers where cost of raw materials and labor is cheap. Sourcing
of raw materials and vendors to supply the right quality, quantity and at right price
calls for dynamic procurement strategy spanning across countries.
With the above scenario you find companies procuring materials globally from
various vendors to supply raw materials to their factories situated in different
continents. The finished goods out of these different factory locations then pass
through different chains of distribution network involving warehouses, exports to
different countries or local markets, distributors, retailers and finally to the end
customer.
In simple language, managing all of the above activities in tandem to manage
demand and supply on a global scale is Supply Chain Management. As per
definition SCM is the management of a network of all business processes and

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activities involving procurement of raw materials, manufacturing and distribution
management of Finished Goods. SCM is also called the art of management of
providing the Right Product, At the Right Time, Right Place and at the Right Cost
to the Customer.

8.2 Why SCM Strategy is Important for Corporate Strategy

Supply Chain Strategies are the critical backbone to Business Organizations today.
Effective Market coverage, availability of Products at locations which hold the key
to revenue recognition depends upon the effectiveness of Supply Chain Strategy
rolled out. Very simply stated, when a product is introduced in the market and
advertised, the entire market in the country and all the sales counters need to have
the product where the customer is able to buy and take delivery. Any glitch in
product not being available at the right time can result in drop in customer interest
and demand which can be disastrous. Transportation network design and
management assume importance to support sales and marketing strategy.
Inventory control and inventory visibility are two very critical elements in any
operations for these are the cost drivers and directly impact the bottom lines in the
balance sheet. Inventory means value and is an asset of the company. Every
business has a standard for inventory turnaround that is optimum for the business.
Inventory turnaround refers to the number of times the inventory is sold and
replaced in a period of twelve months. The health of the inventory turn relates to
the health of business.
In a global scenario, the finished goods inventory is held at many locations and
distribution centers, managed by third parties. A lot of inventory would also be in
the pipeline in transportation, besides the inventory with distributors and retail
stocking points. Since any loss of inventory anywhere in the supply chain would
result in loss of value, effective control of inventory and visibility of inventory
gains importance as a key factor of Supply Chain Management function.

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 ?
Review Questions

i) Explain the concepts underlying strategic supply chain management.

ii) Define supply chain management in relation to corporate strategy.

iii) Why is supply chain management strategy important to corporate strategy?

9.0 Optimizing the Supply Chains

A supply chain is the network of relationships between the upstream and
downstream activities with all stakeholders who are involved in this chain of
relationships. To take an example, if a particular good or service has to be
delivered to the customer, there are raw materials that are needed for the
manufacture, the forms of transport and means of storage for the raw materials, the
transport of the finished goods to the retailers and the logistics involved in getting
the goods to the customer are all parts of the supply chain that extend from the
suppliers to the customers. In other words, there is a chain of relationships between
the firm and the partners involved in this chain. Therefore, supply chains are
comprised of all these stakeholders and the relationships between them determine
the effectiveness of the supply chain. In contemporary times, supply chains can be
sources of competitive advantage as efficient management of the supply chain
leads to cost savings and synergies between the components of the supply chain
leads to greater profitability for the firms. It is for this reason that many business
leaders have focused their energies on optimizing the supply chains for increasing
the top line as well as the bottom line.

9.1 Supply Chains as Strategic Levers

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In times of economic recessions, supply chains can be used as strategic levers as
they can be optimized to perform better than the rivals do so that more profits can
be extracted and lesser costs incurred. The optimization of the supply chain
through just in time or JIT methods of holding inventory, focus on reducing the
COGS or the Cost of Goods Sold by rationalizing the expenditure on the
components of the supply chain all lead to a situation that can be extremely
beneficial to the firms. It is for this reason that many firms like Wal-Mart, Proctor
and Gamble, Tata Motors, and Unilever has focused on rationalizing the activities
that form the supply chain. The point here is that with astute management of the
supply chain, the firms can derive value from the process, which can then translate
into greater profits and lesser costs. Apart from this, the supply chains can also be
of strategic and competitive advantage because a major portion of the cost of goods
sold or COGS is made up of the logistics and the supply chain expenses.

9.1.1 Case Study

The Case of Wal-Mart
To take some real world examples, Wal-Mart is one retailer that has managed its
global supply chain in an adroit and efficient manner. As it operates in various
countries around the world, it needs to have control over its global supply chain
and this is where the company with its focus on local capabilities and global
movement and integration has made its supply chain leaner and meaner. Further,
the company is obsessed with costs and therefore, it focuses exclusively on how to
make its COGS and the logistics aspects of the supply chain efficient and effective.
Apart from this, the single-minded obsession with reducing costs has paid off
handsomely for the company as it retains its number one position in the retailer
market space mainly due to its cost effective strategies that translate into lower unit
prices for the products it stocks. Of course, there are many who believe that the
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company over emphasizes the cost reductions in its supply chain and this has led to
some ethical issues. However, the point here is that in times of economic gloom,
Wal-Mart with its aggressive approach to supply chain management has scored
over its rivals. Without suggesting that ethics should be discarded or ignored, the
fact remains that a concentrated effort to rationalize the supply chain can pay off
well for companies.

9.1.2 Concluding Remarks

Finally, the twin challenges of the Global Supply Chain of the world economy and
the increase in the global complexity of supply chains are formidable and when
taken together with the effect of the ongoing economic crisis, business leaders have
their hands full trying to make decisions on how to meet these challenges.

9.2 What is a Global Supply Chain?

We often hear the words Global Supply Chain in many contexts and repeated
frequently as a concept to denote more trade, foreign companies and even the
ongoing economic crisis. Before we launch into a full-fledged review of the term
and its various manifestations, it is important to consider what exactly we mean
when we say Global Supply Chain.
Global Supply Chain is the free movement of goods, services and people across the
world in a seamless and integrated manner. Global Supply Chain can be thought of
to be the result of the opening up of the global economy and the concomitant
increase in trade between nations. In other words, when countries that were
hitherto closed to trade and foreign investment open up their economies and go
global, the result is an increasing interconnectedness and integration of the
economies of the world. This is a brief introduction to Global Supply Chain.
Further, Global Supply Chain can also mean that countries liberalize their import
protocols and welcome foreign investment into sectors that are the mainstays of its

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economy. What this means is that countries become magnets for attracting global
capital by opening up their economies to multinational corporations to enhance
movement.
Further, Global Supply Chain also means that countries liberalize their visa rules
and procedures so as to permit the free flow of people from country to country.
Moreover, Global Supply Chain results in freeing up the unproductive sectors to
investment and the productive sectors to export related activities resulting in a win-
win situation for the economies of the world.
Global Supply Chain is grounded in the theory of comparative advantage which
states that countries that are good at producing a particular good are better off
exporting it to countries that are less efficient at producing that good. Conversely,
the latter country can then export the goods that it produces in an efficient manner
to the former country which might be deficient in the same. The underlying
assumption here is that not all countries are good at producing all sorts of goods
and hence they benefit by trading with each other. Further, because of the wage
differential and the way in which different countries are endowed with different
resources, countries stand to gain by trading with each other.
Global Supply Chain also means that countries of the world subscribe to the rules
and procedures of the WTO or the World Trade Organization that oversees the
terms and conditions of trade between countries. There are other world bodies like
the UN and several arbitration bodies where countries agree in principle to observe
the policies of free trade and non-discriminatory trade policies when they open up
their economies.
The point here is that Global Supply Chain has had positive and negative effects
and hence a nuanced and deep approach is needed when discussing the concept.
What is undeniable is that Global Supply Chain is here to stay and hence it is better
for the countries in the global economy to embrace the concept and live with it.

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9.3 Achieving Competitive Advantage through Global Supply Chain
Management
In benchmarking the Supply Chain Management (SCM) practices of hundreds of
companies, we have learned that many companies actually achieve competitive
advantage by leveraging the management of their supply chains. Here, we will
explore the most powerful of these SCM competitive advantage principles. The
most important, and the one we will present in this text, is embodied in the
following statements:
 Stick to your core competencies and outsource non-core competencies.
 Coordinate these functions across supply chain partners.
What is a core competency? The answer I hear from many executives is, "It is what
we do well." My response is, "What if you are really good at running the company
cafeteria?" This may be well done, but it does not help the company make money
or achieve advantage over the competition. A more accurate answer to this
question is core competencies are the things we have to do well to achieve
competitive advantage. This may include superior R&D, superior production,
superior marketing, or you guessed it, superior supply chain management. It the
last case, this is a process of identifying what your company has to do well, and at
the same time, identifying what your supply chain partners have to do well so the
overall supply chain is successful.
To do this, I encourage companies to go through a simple, yet often insightful
exercise. Think about one of your supply chain partners and create a 2 by 2 table
with the first column labeled, "What Our Company Does Well," the second column
labeled, "What Our Company Does Not Do Well," the first row labeled, "What
Our Supply Chain Partner Does Well," and the second row labeled, "What Our
Supply Chain Partner Does Not Do Well." I have done this exercise with dozens of
companies to identify what are their core competencies (that they should never let

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someone else do for them) and what are the core competencies of their supply
chain partners.
We are looking for two things here. The first are functions the supply chain partner
does not do well, but are your core competencies. These are functions you can do
for your partners that will tie them more closely to you as either a supplier or a
customer (both of which are sources of competitive advantage.) The second are
functions that the supply chain partner does well, that your company does not.
These are functions you should let your supply chain partner do for you, which will
get the function done better and at less cost to you (again, a source of competitive
advantage. Of course, all these combinations require close coordination with the
supply chain partner to ensure optimal performance of the functions and
elimination of duplication of effort.
In closing, let me provide an example of how this works. Company A is in the
consumer appliance business. Through the 2 by 2 exercise, they identified their
core competencies as their brand name (which they already realized) and their
inventory management capabilities (which they had not previously realized was a
strength of theirs, but not of their major retail partner). The retail partner's core
competency was location and merchandising of their stores that created
considerable exposure for Company A products. This led to Company A taking
over more of the inventory management function for the retailer and led to
Company A training their salespeople to see themselves, "not as account managers,
but as asset managers." This change in orientation led to salespeople seeing their
job as not selling product to retailers, but rather as selling product through the
retailer to the final consumer, to achieve profitability for both companies.
Company A trains their salespeople to act as inventory management consultants to
retailers to help them manage their Company A inventory levels.
Since retailers can depend upon Company A to have the product desired in stock,
and deliver it quickly, salespeople help retailers change their inventory

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management decision rules to carry less inventory (a source of profitability for the
retailers.) In addition, salespeople work with retailers to determine the fast selling
items, which items affect sales of other items, which items create the most store
traffic, and share successful merchandising strategies across non-competitive
retailers. The result is greater profitability for the retailers (one retailer credits
Company A's advice with saving it from bankruptcy) and greater sales for
Company A. Further, since -- from the retailer's perspective -- Company A
provides not only products that create retail store traffic, but also expertise,
retailers are very loyal to this company and work with Company A to sell more of
their product -- often to the exclusion of competitors.
From Company A, we see a manufacturer achieving greater profitability (greater
sales with lower inventory levels) and increasing market share, not just from
making a quality product, but from realizing who are their key customers, what
they value (retail store traffic and sales, with lower inventory levels), and treating
them well -- sources of supply chain management competitive advantage for both
the vendor and the retailer. All achieved because both companies know their core
competencies and outsource non-core competencies to their supply chain partners.

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Review Questions

i) What is optimizing the Supply Chains in the Global Supply Chain Context?
ii) What is Supply Chains as Strategic Levers?

iii) What is a Global Supply Chain?

iv) How can one achieve a Competitive Advantage through Global Supply Chain Management?

10.0 Supply Chain Model and its Relationship to Logistics

Effective supply chain management requires the use of various models and techniques that help
in addressing problems in a supply chain. A good supply chain model is effective in addressing
issues involved in the distribution network configuration. An effective model is also capable of
integrating processes and systems throughout the chain to guarantee the easy sharing of valuable
data and information including forecasts, transportation, inventory, and demand signals. It should
also influence the effectiveness of your inventory management activities.
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10.3 How Can the Route Planning Model Help in Logistics?
Route planning is an effective supply chain modeling technique that is extremely useful in the
field of logistics. This technique supports the effective analysis of the main uses of business
resources while also creating economical routes. It allows the alteration of data so choosing a
large and efficient vehicle to create economical routes is possible. By making some changes in
the variables of the modeling technique used, businesses can easily achieve the efficient and
profitable use of their resources. The model is also beneficial in achieving good results from
certain logistics activities like the distribution of goods.

10.4 Types of Supply Chain Models?

Make-To-Stock Model
A popular supply chain model used in various business organizations at present is the integrated
make-to-stock model. It aims to keep track of customer demands to guarantee the efficient
restocking of the finished goods inventory during the process of production.

Build-To-Order Model
The build-to-order model is also popular. Its benefits include allowing your customers to receive
a customized product rapidly. It also supports mass customization.

Continuous Replenishment Model

Continuous replenishment programs offer the potential for more efficient supply chain processes
through a “pulled” system in which inventory information is shared between organizations and
their suppliers. The supplier monitors inventory levels and automatically replaces materials as
needed, thus allowing suppliers to more effectively plan for production and eliminating the need
for purchase orders and other related paperwork.,

Value Chain Model

A value chain is a chain of activities that a firm operating in a specific industry performs in order
to deliver a valuable product or service for the market. The concept comes from business
management and was first described and popularized by Michael Porter in his 1985 best-seller,

Competitive Advantage:
Creating and Sustaining Superior Performance through Value Chain
"The idea of the value chain is based on the process view of organizations, the idea of seeing a
manufacturing (or service) organisation as a system, made up of subsystems each with inputs,
transformation processes and outputs. Inputs, transformation processes, and outputs involve the
acquisition and consumption of resources - money, labour, materials, equipment, buildings, land,
administration and management. How value chain activities are carried out determines costs and
affects profits."

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The concept of value chains as decision support tools, was added onto the competitive strategies
paradigm developed by Porter as early as 1979. In Porter's value chains, Inbound Logistics,
Operations, Outbound Logistics, Marketing and Sales and Service are categorized as primary
activities. Secondary activities include Procurement, Human Resource management,
Technological Development and Infrastructure.

10.5 What Are the Benefits of Using the Right Supply Chain Model for Your Business?
One of the benefits of implementing a good supply chain model is reduced cost. A good model
can help in finding and eliminating processes that tend to increase your operational costs without
enhancing the value of your products. A reliable model for your supply chain activities can also
help in increasing the efficiency of your business. It eliminates resource wastage and ensures that
organizational processes flow smoothly. Choosing a suitable model for your business also
guarantees increased output and profits and high customer satisfaction rate.
Finding a supply chain model, which perfectly suits your business, is an essential decision to
make especially for businesses in the logistics industry. A wise tip is to understand completely
what your supply chain is all about and what it specifically needs. It is also crucial to make sure
that you have a coherent and efficient supply chain. This is essential in allowing your chosen
model to detect unnecessary and wasteful elements from your business and eliminate them
immediately.

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10.6 Managing Relationships in the Supply Chain
Many companies are standing back and re-evaluating the health of their supply chains. In this
section, we continue with transforming supply chains into integrated value systems, based on a
new book entitled “Supply Chain Redesign” (Handfield and Nichols, Prentice-Hall).
The major areas we will cover in this over the next few lines include:
 Improving supply chain relationships
 Designing products for the supply chain
 Information visibility in supply chains
 The impact of new channels: reverse auctions and exchanges
 Managing costs across the supply chain
 Adopting standards for supply chain systems
 Change management: a critical stepping stone
In this part we begin with the first of these topics, which is one of the most fundamental yet more
difficult requirements for supply chain integration: changing the nature of traditional
relationships between suppliers and customers in the supply chain.
In implementing an integrated value system, organizations are continually faced with the
challenge of managing the “people” part of the equation. Relationship management affects all
areas of the supply chain and has a dramatic impact on performance. In many cases, the
information systems and technology required for the supply chain management effort are readily
available and can be implemented within a relatively short time period, barring major technical
mishaps. Inventory and transportation management systems are also quite well understood and
can be implemented readily. A number of supply chain initiatives fail, however, due to poor
communication of expectations and the resulting behaviors. Managers often assume that the
personal relationships within and between organizations in a supply chain will fall into place
once the technical systems are established. However, managing relationships among the various
personalities in the organizations is often the most difficult part of the SCM initiative. Moreover,
the single most important ingredient for successful supply chain management may well be
trusting relationships among partners in the supply chain, where each party in the chain has
confidence in the other members’ capabilities and actions. Without positive interpersonal
relationships, the other systems cannot function effectively. One supply chain manager expressed
this feeling succinctly:
“Supply chain management is one of the most emotional experiences I’ve ever witnessed. There
have been so many mythologies that have developed over the years, people blaming other people
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for their problems, based on some incident that may or may not have occurred sometime in the
past. Once you get everyone together into the same room, you begin to realize the number of
false perceptions that exist. People are still very reluctant to let someone else make decisions
within their area. It becomes especially tricky when you show people how “sub-optimizing” their
functional area can “optimize” the entire supply chain.”
Materials management vice president, Fortune 500 manufacturer
The experience is not unique to this company. Almost every individual interviewed by the
authors who was involved in a supply chain management initiative emphasized the criticality of
developing and maintaining good relationships with the customers and suppliers in the chain. In
deploying the integrated supply chain, developing trust on both sides of the partnership is critical
to success. In discussing the importance of relationships in supply chain management, trust
building is emphasized as an ongoing process that must be continually managed. In short, trust
takes time to develop but can disappear very quickly, if abused.
In the early stages of supply chain development, organizations often eliminate suppliers or
customers that are clearly unsuitable, whether, because they do not have the capabilities to serve
the organization are not well aligned with the company, or are simply not interested in
developing a more collaborative relationship typically required for successful SCM. After these
firms are eliminated, organizations may concentrate on supply chain members who are willing to
contribute the time and effort required to create a strong relationship. Firms may consider
developing a special type of supply chain relationship with this supplier in which confidential
information is shared, assets are invested in joint projects, and significant joint improvements are
pursued. These types of inter-organizational relationships are sometimes called strategic
alliances. A strategic alliance is a process wherein participants willingly modify basic business
practices to reduce duplication and waste while facilitating improved performance. Strategic
alliances allow firms to improve efficiency and effectiveness by eliminating waste and
duplication in the supply chain. However, many firms lack the guidelines to develop, implement,
and maintain supply chain alliances.
Creating and managing a strategic alliance often represents a major change in the way companies
do business. In creating new value systems, companies must re-think how they view their
customers and suppliers. They must concentrate not just on maximizing their own profits, but
also on how to maximize the success of all organizations in the supply chain. Strategic priorities
must consider other key alliance partners that contribute value for the end customer. Tactical and
operational plans should be continuously shared and coordinated. Instead of encouraging

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companies to hold their information close, trust-building processes promote the sharing of all
forms of information possible that will allow supply chain members to make better, aligned
decisions. Whereas traditional accounting, measurement, and reward systems tend to focus on
individual organizations, a unified set of supply chain performance metrics should be utilized as
well. Finally, instead of “pushing products” into the supply channel, thereby creating excess
inventories and inefficient use of resources, consultative sales processes and “pull” systems
should be utilized. When organizations in a supply chain seek these goals, they may discover the
need to re-design the entire structure of their supply chains.
Strategic alliances can occur in any number of different markets and with different combinations
of suppliers and customers. Alliance configurations can vary significantly. A typical supplier-
customer alliance involves a single supplier and a single customer. A good example is the
relationship between Procter & Gamble and Wal-Mart, who have worked together to establish
long-term EDI linkages, shared forecasts, and pricing agreements. Alliances also can develop
between two horizontal suppliers in an industry, such as the relationship between Dell and
Microsoft. These organizations collaborate to ensure that the technology road map for Dell’s
computers (in terms of memory, speed, etc.) will be aligned with Microsoft’s requirements for its
software. Finally, a vertical supplier-supplier alliance may involve multiple parties, such as
transportation providers who must coordinate their efforts for multi-modal shipments. For
example, trucking companies, must work with railroads and ocean freighters to ensure proper
timing of deliveries for multi-modal transshipments.
All of this sounds reasonable. However, how does one even begin to initiate a strategic alliance?
And under what conditions should they occur? To create and manage a strategic alliance means
committing a dedicated team of people to answering these questions, and working through all of
the details involved in managing the relationship. Unfortunately, there is no “magic bullet” to
ensure that alliances will always work. However, it is reasonable to assume that, like a marriage,
the more you work at it, the more successful it is likely to be!

10.7 Supply Chain Relationships

Vertical relationships:

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These refer to the traditional linkages between firms in the supply chain such as retailers,
distributors, manufacturers, and parts and materials suppliers horizontal relationships: includes
those business agreements between firms that have parallel´ or cooperating positions in the
logistics process.

Transactional
Both parties in a vendor relationship are said to be at arms -length´

Collaborative
Collaboration occurs when companies work together for mutual benefit. Collaboration goes well beyond vague
expressions of partnership and aligned interests. Companies leverage each other on an operational basis
and creates a synergistic business environment in which the sum of the parts is greater than the whole.
The relationship suggested by collaboration is one in which two or more business organizations
cooperate and willingly modify their business objectives and practices to help achieve long-term
goals and objectives. It represents an alternative that may imply even greater involvement than
the partnership or strategic alliance.

Seven Immutable Laws of Collaborative Supply chains

Collaborative Logistics Networks Must Support:

1. Real and recognized benefits to all members
2. Dynamic creation, measurement, and evolution of collaborative partnerships
3. Co-buyer and co-seller relationships
4. Flexibility and security
5. Collaboration across all stages of business process integration
6. Open integration with other services
7. Collaboration around essential logistics flows
Regardless of form, relationships may differ in numerous ways. A partial list of these differences follows:
 Duration
 Obligations
 Expectations
 Interaction/Communication
 Cooperation
 Planning
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  Goals
 Performance analysis
 Benefits and burdens
10.8 Drivers of Relationships in Supply Chains

Defined as compelling reasons to partner; all parties must believe that they will receive significant
benefits in one or more areas and that these benefits would not be possible without a partnerships’ facilitators
are defined as supportive corporate environmental factors that enhance partnership growth and
development; As such, they are the factors that, if present, can help to ensure the success of the
relationships. They are:

1. Communication

Communication is a very important aspect of relationship, and it is considered as “a bilateral

expectation that parties will proactively provide information useful to the partner”.
Communication is defined as the formal and informal sharing of meaningful and timely
information between organizations. Effective communications are key ingredients for achieving
the benefits of inter-organizational collaboration. In a supply chain relationship context, a
buyer’s willingness to share information represents a safeguard to the supplier in the sense that
the buyer can be expected to provide unforeseen information that may affect the operations of
the supplier. Several researchers have found that communication is positively related to trust in
various inter-organizational relationships. Establishing communication mechanisms in supply
chains increases trust building and knowledge sharing, thus leading to effective management of
collaboration.

2. Competence and reputation

Competence refers to the fact whether the transaction partner can perform his/her job
competently. Researchers have found that competence and reputation will contribute positively
in the building of trust in a supply chain relationship. Demonstrated competence leads to
performance satisfaction and may be defined as the degree to which business transactions meet
performance expectations. Competence and reputation is an important foundation for trust.
Empirical evidence supports the link between supplier reputation and trust. Supplier reputation is
the extent to which firms and people in the industry believe a supplier is honest and concerned
about its customers. A favorable reputation is easily transferable across firms and enhances the
credibility of the vendor. If a buying firm assumes the supplier's reputation is well deserved, trust
will be granted on the basis of the supplier's history in relationships with other firms.

3. Personality traits

Considerable research has supported the view that trust between individuals is a function of an
individual’s propensity to trust, determined by one’s personality traits. Trust is defined as a
generalized expectancy held by an individual that the word, promise, or oral or written statement
of another individual or group can be relied on. Individuals hold generalized expectancy to trust

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others, which determines their willingness to trust a partner in specific circumstances. Compared
to situational determinants of trust germane to the specific context of the interaction, personality
traits have been demonstrated to have a significant effect on an individual’s level of trust. A
buyer who believes that the supplier is credible and honest is one who believes that the supplier
will live up to his or her word and has the expertise required to perform the job effectively and
reliably. A trustworthy supplier is one who is perceived to be positively disposed toward the
buyer and willing to make short-term sacrifices with a balanced understanding of unforeseen
circumstances.

4. Social interactions

Social bonds play an important role in the degree of interaction between a suppler and buyer.
Organizational members “bond” through personal and social relationships with their counterparts
in a particular firm. In supply chain relationships social interactions reduce the propensity of a
partner to react negatively to inflexible and unfair. Social bonds also create an informal
environment where closer interpersonal relationships are developed and a better understanding of
mutual needs is fostered. Frequent interaction engenders trust by providing buyers with
information that enables them to predict a supplier’s future behavior with confidence. Social
interaction may also strengthen trust when personal friendship between the buyer and supplier
lead to benevolent intentions toward each other. The representatives in each organization should
develop close personal relationships and enhance mutual understanding.

5. Trust and relationship quality

Trust is considered as a key factor not only in the early stages of a relationship development, but
also is regarded as a substantial factor influencing the continuity of long term and is a necessary
condition for the sustained continuation of a relationship. Dynamics of interactions in exchanges
between people. It is suggested that business relationships characterized by high trust can survive
greater stress and display greater adaptability. If trust exists in substantial levels between
partners, they are more willing to make investment in the relationship and strengthen their
organizational ties. High levels of mutual trust facilitate the effective exchange and enhance
relationship satisfaction and performance. Long-term orientation is one of the key characteristics
of relationship quality. Both buyer and supplier can achieve competitive advantages from long-
term relationships with their partners. Due to its role in shifting the focus to future conditions, it
is suggested that trust is a necessary antecedent of long-term orientation. When the level of trust
is high, the buyer will be more induced to continue the relationship into the future.

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Review Questions
i) Explain different Supply Chain Models and show their Relationship to Logistics.
ii) Why is Supply Chain Management important?
iii) What are the goals of Supply Chain Management?
iv) Explain how Managing Relationships in the Supply Chain help the Supply Chains.
v) Explain the Drivers of Relationships in Supply Chains

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