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GABORONE UNIVERSITY COLLEGE OF LAW AND PROFESSIONAL STUDIES

ADVANCED DIPLOMA IN PURCHASING AND SUPPLY CHAIN MANAGEMENT

YEAR 1: SEMESTER 2

SCM I02: SUPPLY CHAIN MANAGEMENT

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MODULE OVERVIEW

The module introduces the student to different supply chain networks and strategic arrangements
entered into by organizations in order to facilitate the fallow oaf goods from manufacturers to the
consumers. The main focus of the module is build the student understands of the development
and sustenance of business relationship among supply chain member organizations. Among
others, the module covers the following topics: transportation, warehousing, use of information
technology in the supply chain, building relationship with suppliers and customers and supply
chain for service industry.

Module objectives

After completing this module, student should be able to

 Explain the current issues in supply chain management

 Describe the challenges facing supply chain managers today
 Explain the role played by information in facilitating supply chain relationships
 Describe the process of supplier assessment and supplier evaluation
 Explain the impact of information technology in supply chain data exchange

Assessment

Assignment1 5%
assignment 2 5%
Mid semester examinations 20%
Final examination 70%
Total 100%

Attendance: Class attendance will be monitored and attendance record has direct bearing on
continuous assessment marks. Regular attendance and participation is encouraged as it is very
helpful to the student. If student’s attendance falls below 75%, he/she may be required to retake
the module.
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Module contents

1. Core activities of supply chain management……………………………………………….. 5

 Definition of supply chain management

 Major activities of supply chain management
 Supply chain and logistics management
 Challenges Facing Supply Chain Managers

2. Transportation and Material flow…………………………………………………………18

 Different modes of transport

 Ownership of transport
 Routing of road transport
 Material flow
 Warehousing

3. Supply chains /distribution channels for goods and services……………………………36

 Distribution channels for consumer goods

 Distribution channels for industrial goods
 Distribution channels for services
 The role of supply chain intermediaries
 Factors to consider when choosing distribution channels

4. Role of Information Systems and Technology…………………………………………54

 Importance of Information in an Integrated Supply Chain Management Environment

 Inter-organisational Information Systems
 Information Requirements Determination for a Supply Chain 10lS
 Information Technology Applications for Supply Chain Management
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5. Supply Chain collaboration and performance management …………………………79

 Internal and external supply chains

 Inter-organizational collaboration in Supply Chains
 Importance of Time
 Performance Measurement

6. Developing and Maintaining Supply Chain Relationship………………………………94

 Conceptual Model of Alliance Development

 Developing Trusting Relationships with Partners in the Supply Chain
 Resolving Conflicts in a Supply Chain Relationship

7. Future Challenges in Supply Chain Management……………………………………111

 Sharing Risks in Inter-organisational Relationships

 Managing the Global Supply Chain
 Greening of the Supply Chain
 Design for Supply Chain Management
 Intelligent Information Systems

CHAPTER 1: CORE ACTIVITIES OF SUPPLY CHAIN MANAGEMENT

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1.0. Introduction

All organizations are part of one or more supply chains. Whether a company sells directly to the
end customer, provides a service, manufacturers a product or extracts material from the earth, it
can be characterized within the context of its supply chain. Until recently, however,
organizations focused primarily on their direct customers and internal functions, and placed
relatively little emphasis on other organizations within their supply chain network. Supply chain
management (SCM) is replacing more of the traditional terms used to describe the management
of material and service flows. These include physical distribution, materials management,
production scheduling, logistics, channel management, industrial logistics or logistics of
distribution.

1.1. Chapter Objectives

On completion of this chapter, the student is expected to be able to:

 Define supply chain management

 Describe the different activities of supply chain management
 Analyze the key drivers of supply chain management in today’s business environment

1.2.Definition of Supply Chain Management

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Supply Chain Management: The ‘supply chain’ encompasses all activities associated with the
flow and transformation of goods from the raw materials stage to the end user (along with the
associated information flow).Supply Chain Management is the integration of these activities,
through improved supply chain relationships, to achieve a sustainable competitive
advantage. .Supply chain encompasses all activities associated with the flow and transformation
of goods from the raw material stage (extraction) ,through to the end use as well as the
associated information flows . Materials and information flow both up and down the supply
chain

Internal functions – the processes used by the firm to transform the inputs into finished goods
and services. They Include:

 Research activities
 Order processing
 Getting quotations of prices
 Product engineering
 Manufacturing process –scheduling
 Giving possible delivery dates
 Delivery arrangements

Upstream external functions- relates to those firms which supply inputs to the firm

 Selecting the right suppliers

 Meeting performance expectations
 Employing appropriate contract agreements
 Managing supplier relationships
 Joint research activities
 Joint product development activities

Downstream external function – involves all the distribution channels taking the firms’ products
to the final users
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 Order processing
 Packaging, storing and handling of materials
 Warehousing
 Dealer networking
 Sales operataions
 Selection of transporters
 Follow up activities

1.3. Drivers of supply chain management

Many other factors are encouraging organisations to improve the management of their supply
chains. The following list suggests some of these pressures: K D
 Customers are more knowledgeable, and demand higher quality, lower costs and better
service.
 Competition is getting fiercer, and organisations must look at every opportunity to remain
competitive.
 There is changing power in the supply chain. Very large retail chains, such as Wal-Mart,
Tesco, Toys-R-Us and McDonald’s, demand customized logistics from their suppliers.
 Other changes in retail markets include the growth of 24-hour opening, home deliveries,
out-of-town malls, retail parks, telephone and on-line shopping.
 International trade continues to grow. This is encouraged by free trade areas such as the
European Union and North American Free Trade Area.
 Organisations are introducing new types of operation, such as just-in-time, lean
operations, time compression, flexible manufacturing, mass customization, virtual
operations, and so on.
 Some organisations are turning from a product focus (where they concentrate on the end
products) to a process focus (where they concentrate on the way products are made). This
encourages improvement to operations, including logistics.
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 There have been considerable improvements in communication. These allow electronic

data interchange (EDI), item coding, electronic fund transfer (EFT), e-commerce, shared
knowledge systems, and other new practices.
 Organisations are outsourcing peripheral activities and concentrating on their core
operations.
 Organisations are increasing co-operation through alliances, partnerships, and other
arrangements. This integration is important for logistics, which is usually the main link
between organisations in a supply chain.
 Managers are recognising the strategic importance of the supply chain management.
 Attitudes towards transport are changing, because of increased congestion on roads,
concerns about air quality and pollution, broader environmental issues, government
policies for the real cost of road transport, privatization of rail services, deregulation of
transport, and a host of other changes.

This is, of course, only a partial list and there are many other pressures for change, including
uncertain market conditions, political change, deregulation of business, rising costs, shortage of
skilled staff, fluctuating exchange rates, and so on.

1.4.The activities of supply chain management

According to Waters (2003), the following activities are normally included in supply chain
management.
 Customer service: Everyone who works in procurement or supplies must remember that
they select, procure, store, or distribute products to meet customer needs. Storekeepers
do not store drugs just for the purpose of storing; they store products to ensure that
commodity security exists for every customer to obtain and use the health commodities
when they need them. In addition to serving the needs of the end customer—the
customer seeking health services—each person in the process is also serving the needs
of more immediate customers. Storekeepers provide customer service when they issue
medicines to the health facility, and the central medical stores provide customer service
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when they issue commodities to the district. The logistics system ensures customer
service by fulfilling the six rights. Each activity in the logistics cycle, therefore,
contributes to excellent customer service and to ensuring commodity security.
 Transportation: Customer service ultimately depends on the ability of the physical
distribution system to transport products on time and without damage. Therefore the
choice of transportation mode is vital to the successful implementation of a marketing
strategy. The five major transport modes are: Rail, Air, Water, Road and Pipeline. Each
have got its advantages and disadvantages. Inward transport or traffic actually moves
materials from suppliers to the organisation’s receiving area. This has to choose the type
of transport (road, rail, air, and so on), find the best transport operator, design a route,
make sure that all safety and legal requirements are met, get deliveries on time and at
reasonable cost, and so on
 Storage and Distribution: After an item has been procured and received it must be
transported to the service delivery level where the client will receive the products. During
this process, the products must be stored until they are sent to the next lower level, or
until the customer needs them. Almost all businesses store a quantity of stock for future
customer needs.
 Inventory management: The organization should seek to strike a balance between holding
costs and ordering costs of inventory. High inventory levels are favoured by marketers
because they minimize customer complaints based on stock outs. The finance department
of the organization seeks stock minimisation in order to maintain liquidity of the
business. Two related inventory decisions are to know how much and when to order so
that we meet the needs of the customers efficiently. How much to order depends on the
cost of holding stock and order processing costs. Orders can be small and frequent or
large and infrequent. Small frequent orders raise order processing costs but reduce
inventory carrying costs. Large infrequent orders raise inventory holding costs but lower
order processing expenditure.
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 Quantification. After products have been selected, the required quantity and cost of each
product must be determined. Quantification is the process of estimating the quantity and
cost of the products required for a specific order
 Information flows and order processing: Reducing time between a customer placing an
order and receiving the goods is a significant measure of efficiency especially in fast food
outlets like K F C, Hungry Lion, and Chicken Inn etc. A computerised link between
sales person and order processing department may be effective. Many order processing
systems are characterised by unnecessary delays. To ensure improvements in this area,
basic questions needs to be answered e.g. what happens when a sales representative
receives an order, what happens when it is received in the orders department? How long
does it take to check inventory? What are the methods of checking inventory? If a
company employs a computerised system, all these questions will be answered by just a
click of the mouse
 Procurement or purchasing. The flow of materials through an organisation is usually
initiated when procurement sends a purchase order to a supplier. This means that
procurement finds suitable suppliers, negotiates terms and conditions, organizes delivery,
arranges insurance and payment, and does everything needed to get materials into the
organisation. In the past, this has been seen as a largely clerical job centered on order
processing. Now it is recognized as an important link with upstream activities, and is
being given more attention.
 Receiving makes sure that materials delivered correspond to the order, acknowledges
receipt, unloads delivery vehicles, inspects materials for damage, and sorts them.
 Order picking finds and removes materials from stores. Typically materials for a
customer order are located, identified, checked, removed from racks, consolidated into a
single load, wrapped and moved to a departure area for loading onto delivery vehicles.
 Outward transport takes materials from the departure area and delivers them to
customers (with concerns that are similar to inward transport).
 Recycling, returns and waste disposal. Even when products have been delivered to
customers the work of logistics may not be finished. There might, for example, be
problems with delivered materials – perhaps they were faulty, or too many were
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delivered, or they were he wrong type – and they have to be collected and brought back.
Sometimes there are associated materials such as pallets, delivery boxes, cable reels and
containers (the standard 20 foot long metal boxes that are used to move goods) which are
returned to suppliers for reuse. Some materials are not reused, but are brought back for
recycling, such as metals, glass, paper, plastics and oils. Finally there are materials that
cannot be used again, but are brought back for safe disposal, such as dangerous
chemicals. Activities that return materials back to an organisation are called reverse
logistics or reverse distribution.
 Location. Some of the logistics activities can be done in different locations. Stocks of
finished goods, for example, can be held at the end of production, moved to nearby
warehouses, put into stores nearer to customers, passed on to be managed by other
organisations, or a range of alternatives. Logistics has to find the best locations for these
activities – or at least play a significant role in the decisions. It also considers related
questions about the size and number of facilities. These are important decisions that
affect the overall design of the supply chain.
 Communication. Alongside the physical flow of materials is the associated flow of
information. This links all parts of the supply chain, passing information about products,
customer demand, materials to be moved, timing, stock levels, availability, problems,
costs, service levels, and so on. Co-coordinating the flow of information can be very
difficult, and logistics managers often describe themselves as processing information
rather than moving goods. Christopher supports this view by saying that, ‘Supply chain
competitiveness is based upon the value-added exchange of information’. The Council of
Logistics Management also highlights the combination of materials and information flow
in their definition:

1.5.Current trends in supply chain management

 Improving communications: The efficient transfer of information has been particularly

useful for purchasing, which has developed into e-purchasing or e-procurement. This
comes in many forms, all based on the direct exchange of data between a supplier’s
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computer and a customer’s. Two associated technologies have developed to support

Electronic Data Interchange (EDI). The first is item coding, which gives every package of
material moved an identifying tag. The tag is usually a bar code or magnetic stripe that
can be read automatically as the package moves through its journey. Then the logistics
system knows where every package is at any time, and automatic materials handling can
move, sort, consolidate, pack and deliver materials. The second technology is electronic
fund transfer (EFT). When the delivery of materials is acknowledged, EFT automatically
debits the customer’s bank account and credits the supplier’s. This completes the loop,
with EDI to place orders, item coding to track the movement, and EFT to arrange
payment.
 Improving customer service: When customers decide to buy something, they want it
delivered as soon as possible; suppliers want to keep customers happy with fast service,
and with no products hanging around and clogging the supply chain. Ideally, the lead
time should be as close to zero as possible, and one approach to this uses synchronized
material movement. This makes information available to all parts of the supply chain at
the same time, so that organisations can coordinate material movements, rather than wait
for messages to move up and down the chain.
 Improved efficiency: It is normally in everyone’s interests to make logistics costs as low
as possible. Logistics managers want low costs so that they remain competitive, and their
users want to pay as little as possible. Many organisations have reduced their logistics
costs to levels that affect their whole operations. Lower transport costs, for example,
make it feasible to sell products over a wider geographic area. The cost of transport for,
say, Japanese manufacturers are so low that they can offer goods at prices that are
comparable to those offered by domestic companies. Similarly, efficient transport can
move products quickly over long distances, so there is no need to build traditional
warehouses close to customers.
 Globalisation: Improved communications and better transport mean that physical
distances are becoming less significant. Organisations can become global in outlook,
buying, storing, manufacturing, moving and distributing materials in a single, worldwide
market. As a result, international trade and competition are continuing to rise.
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Organisations used to look for competitors in the same town, but now they are just as
likely to come from another continent. Efficient logistics makes a global market feasible,
and other factors that encourage international trade include less restricted financial
systems, consumer demand for imported products, removal of import quotas and trade
barriers and the growth of free trade areas. You can see the effects in manufacturing,
where producers look for economies of scale in large facilities located in areas with low
production costs. The unit production cost is low, and efficient logistics keeps the
delivered price down. This is the reason why German companies open large plants in
Poland, American companies work in Mexico and Japanese companies work in China.
 Reduced number of suppliers: In the past, organisations have used a large number of
suppliers. This encouraged competition, ensured that they got the best deal and
maintained secure deliveries if one supplier ran into difficulties. The current trend,
however, is to reduce the number of suppliers and develop long-term relationships with
the best. As we shall see later, working closely with a small number of organisations can
bring considerable benefits.
 Concentration of ownership: Large companies can get economies of scale, and they have
come to dominate many supply chains. There are, for example, many shops and transport
companies – but the biggest ones continue to grow at the expense of small ones. The
result is a continuing concentration of ownership, which you can see in many logistics
sectors ranging from food wholesalers to cruise lines.
 Outsourcing: More organisations realise that they can benefit from using specialized
companies to take over part, or all, of their logistics. Using a third party for materials
movement leaves an organisation free to concentrate on its core activities. McKinnon
says hat, ‘Outsourcing has been one of the dominant business trends of the 1980s and
1990s’17 and surveys suggest that around 30 per cent of logistics expenditure is
outsourced in the EU.
 Postponement: Traditionally, manufacturers move finished goods out of production and
store them in the distribution system until they are needed. When there are many
variations on a basic product, this can give high stocks of similar products. Postponement
moves almost-finished products into the distribution system, and delays final
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modifications or customization until the last possible moment. You can imagine this with
‘package-to-order’, where a company keeps a product in stock, but only puts it in a box
written in the appropriate language when it is about to ship an order.
 Cross-docking: Traditional warehouses move materials into storage, keep them until
needed, and then move them out to meet demand. Cross-docking co-ordinates the supply
and delivery, so that goods arrive at the receiving area and are transferred straight away
to a loading area, where they are put onto delivery vehicles. This dramatically reduces
stock levels and associated administration. There are two basic forms of cross-docking. In
the first, packages are moved directly from arriving vehicles and onto departing ones.
This does not really need a warehouse and a simple transfer point is enough. In the
second form there is some additional work as materials arrive in larger packages which
are opened, broken into smaller quantities, sorted, consolidated into deliveries for
different customers and transferred to vehicles. Cross-docking can develop to the point
where nothing actually moves through a warehouse. Any stock is kept within vehicles,
giving stock on wheels. A related arrangement uses drop-shipping, where wholesalers
do not keep stock themselves, but co-ordinate the movement of materials directly from
upstream suppliers to downstream customers. As warehousing is expensive and time-
consuming, these methods can give much more efficient flows, and allow methods such
as quick response and efficient customer response
 Direct delivery: More customers are buying through the Web, or finding other ways of
trading earlier in the supply chain, such as mail order or buying directly from
manufacturers. This has the benefits of reducing lead times, reducing costs to customers,
having manufacturers talking directly to their final customers, allowing customers access
to a wider range of products, and so on. It also means that logistics has to move small
deliveries quickly to final customers. This has encouraged the growth of couriers and
express parcel delivery services such as FedEx, UPS and DHL.
 Other stock reduction methods: Keeping stock is expensive, so organisations continually
look for ways of reducing the amount stored in the supply chain. There are many ways of
doing this. One approach uses just-in-time operations to co-ordinate activities and
minimise stock levels. Another approach has vendor managed inventory, where
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suppliers manage both their own stocks and those held further down the supply chain.
Improved co-ordination reduces overall costs and can give economies of scale.
 Increasing environmental concerns: There is growing concern about air pollution, water
pollution, energy consumption, urban development and waste disposal. Logistics does not
have a good reputation for environmental protection – demonstrated by the emissions
from heavy lorries, use of green field sites for warehouses, calls for new road building,
use of extensive packaging, ships illegally flushing their fuel tanks, oil spillages from
tanker accidents, and so on. On the positive side, logistics is moving towards ‘greener’
practices. Operators use more energy efficient vehicles, control exhaust emissions, reuse
packaging, switch to environmentally friendly modes of transport, increase recycling
through reverse logistics, add safety features to ships, develop brown-field sites, and so
on. They increasingly recognise that careful management can bring both environmental
protection and lower costs. A fair assessment might be that logistics is making progress
on environmental issues, but it has some way to go.
 More collaboration along the supply chain: Organisations in a supply chain increasingly
recognise that they have the same objectives – which are satisfied final customers. They
should not, therefore, compete with each other, but should co-operate to get final
customer satisfaction. This is an important point. It means that competitors are not other
organisations within the same supply chain, but are organisations in other supply chains.

1.6.Challenges facing supply chain managers

 Implementing an integrated supply chain – problems occur in the implementation of

information systems since different firms have different levels of information technology
systems. Unavailability of information also posses the challenge.
 Inventory management – the need to expedite late shipments .delays in shipment due to
customs, borders, adverse weather conditions, poor communication and human error.
 establishing trust among supply chain members – contacts that are agreed between
supply chain parties are difficulty to operate because of lack of trust , legal experts
provide advice that is not easy to put into practice
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 Conflict management – inter-organisational conflicts occur among supply chain

members, thus eroding the trust and relationships. it is not easy to manage conflicts
among parties .
 Unable to apply the right metrics to manage supply chains effectively: Finding and
implementing the right metrics remains a problem in supply chain management. This
includes disputes about the right metrics between supply chains, product lines or
departments within a company, agreeing on definitions and calculations, having too many
metrics or too few metrics, difficulty benchmarking and difficulty finding metrics that are
supported 'of-the-shelf' in reporting tools.
 Difficulty prioritizing supply chain improvement efforts: Companies struggle to identify
where to deploy their expert resources and in what sequence. Problem solvers are scarce;
you want them to work on those problems that have the biggest impact on your supply
chain performance. This includes lack of a standard approach (every group has their own
methods with varying results), internal politics, lack of fact-based prioritization,
capabilities/skills are limited to few key individuals.
 Performance is lagging: Whether the organisation is driven by the need to reduce costs or
inventory, need to improve customer satisfaction, or want to increase the speed to
respond to market changes, performance gaps continue to make it on our top 5 list. Do
you know how to improve the performance of a lagging metric without negatively
impacting your other key metrics?
 Complexity of supply chains: Serving many different customers with a wide variety of
products and services may result in a complex, global, network of suppliers, factories,
warehouses, transporters, customers and others. The complexity of such a network is hard
to unravel and makes it difficult to find where and why problems occur. This includes
challenges like: "We don't know what our supply chains are", "What is the right number
of supply chains?", the desire to standardize processes.
 Finding and holding on to supply chain talent: Although supply chain management is
now a generally accepted and understood function in a company, it is difficult to find true
supply chain talent. Supply chain management covers multiple disciplines and it can
therefore be difficult to find that all-round supply chain person. There not many people
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in organizations with wide knowledge of planning, sourcing, manufacturing, distribution

and order management functions? This includes problems like finding the right people,
reducing attrition and developing hiring, training and redeployment plans.

1.7. Chapter summary

 Every organisation creates products to satisfy customer demand. The operations that
create these products need an effective and efficient flow of materials. In this sense,
‘materials’ are all the goods and services needed to create products.
 Logistics is the function that is responsible for the flow of materials into, through and out
of an organisation.
 Materials move through a series of related activities and organisations between initial
suppliers and final customers. These form a supply chain. Each product has its own
supply chain.
 There are many possible structures for supply chains, but the simplest view has materials
converging on an organisation through tiers of suppliers, and products diverging through
tiers of customers.
 Although it is a single function, logistics consists of a series of related activities. These
range from procurement at the beginning of operations, through to physical distribution at
the end.
 An overall aim for logistics is to achieve high customer satisfaction or perceived product
value. This must be achieved with acceptable costs.
 Every organisation depends on the movement of materials, and the way this is done
affects costs, profits, relations with suppliers and customers, customer service, and
virtually every other measure of performance.
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CHAPTER 2: TRANSPORTATION AND MATERIAL FLOW IN THE SUPPLY CHAIN

2.0. Introduction

Transportation and movement of goods is certainly one of its main components of supply chain
management. In this chapter, we look at transport, which is concerned with the movement of
goods between facilities.

2.1. Chapter objective

 Define the concept of transport rate
 Describe the different modes of transport
 Evaluate the suitability of each mode of transport for a given situation
 Explain the advantages and disadvantages of each mode of transport
 Evaluate the advantages and disadvantages of self owned vehicles
 Evaluate the advantages and disadvantages of third party logistics
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2.2.Transport rate

If an organisation uses third-party transport, the price of moving a unit of material between
locations is the rate or tariff. This is set by the cost of the service provided, value to the
customer, the distance moved, weight, size and value of goods, complexity of journey, and so on.
This rate is an important consideration for logistics, and can affect whole patterns of movement.
 If an item costs $20 to make in town A and $25 to make in town B, then the maximum
rate worth paying to move from A to B is $5.
 If the rate is actually $3, producers in town A will export to B, customers in town B pay
less for the item, price sensitive demand will rise, logistics companies grow to move the
item, competition encourages producers in town B to look for cost savings, some
producers in B may divert to other products that they can trade back to town A. Trade
rises and everyone seems happy.
 If, however, the rate is actually $6, none of this happens, and everyone seems to lose out.
You can find many examples of this effect.
 There is a common view that more expensive fuel, vehicles and drivers are making
transport more expensive.
 The costs for particular journeys vary considerably with conditions, but it is fairer to say
that the relative cost of transport is actually falling. This is largely due to more efficient
operations and vehicles, but also due to changes in fuel prices and taxes. Partly as a result
of this, the overall amount of trade is rising.
 Relatively cheap transport also changes the shape of supply chains, as organisations can
cover a wider area from a facility.
 The rate is clearly important, but service users seem to have little influence in setting it.
 A large organisation negotiating freely with a transport company may have some
flexibility.
 The transport industry is very competitive, and large customers can get good deals.
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 They also have the option of running their own fleets if external operators charge too
much.
 Often, however, the rates are fixed by agreement between transport companies,
government policies, or monopoly suppliers.

Shipping conferences, for example, quote agreed rates between destinations, cartels of major
transport operators use industry agreed rates, and government owned rail and road industries fix
prices through their monopoly.

Transport is one of the most expensive parts of supply chain management but users often have
little control over it. In practice, organisations do have more influence, as they can make a series
of decisions about the form of transport.
 What mode of transport is best?
 Should we run our own transport or use a third-party carrier?
 What kind of vehicles should we use?
 How do we deal with international transport?
 What routes should we use?
 Can we back-haul?

Every organisation faces these questions, but they come to different answers that depend on
particular circumstances. We can give some general advice, and will start by looking at the
question of the transport mode.

2.3. Mode of Transport

The mode of transport describes the type of transport used. There are basically five different
options – rail, road, water, air and pipeline. Each mode has different characteristics, and the best
in any particular circumstances depends on the type of goods to be moved, locations, distance,
value and a whole range of other things.

2.3.1.Rail transport
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Rail transport is most commonly used for heavy and bulky loads over long land journeys. Trains
can maintain a consistent, reasonably high speed, and can link with other modes to carry
containers and bulk freight. Rail services are organised in different ways. They are almost
invariably public carriers (giving a service to all other organisations) rather than private carriers
(carrying goods for one organisation). This public service is often considered so important that it
is run by the state. Even when the rail service is not nationalized, it is allowed a (near)
monopoly.

The number of carriers is inevitably small when compared with, say, road transport. The main
reason for this is the large investments needed for tracks, rolling stock and terminals.
 Costs can be reduced by sharing facilities. Some countries have several train operators
using commonly owned tracks, or tracks owned by another company. Such arrangements
are not common and they present obvious problems for operations.
 One advantage of rail is that once the infrastructure is in place, it has very high capacity
and low unit costs. This is another factor that discourages competition, as a track built by
one organisation between two points, will generally have enough capacity to meet all
demand, and it becomes unviable for a competitor to open parallel facilities.
 Another advantage of rail is that the unit transport cost is low, so it can be used to move
large volumes of relatively low-priced materials, such as coal and minerals. For this
reason, rail transport is more common in the earlier, upstream, parts of the supply chain.
You are more likely to see organisations using rail for inbound raw materials than
outbound finished goods.
 The main disadvantage of rail is its inflexibility. All train services have to be timetabled
in advance, so that they can all fit onto the same tracks. This leaves little flexibility for
last minute or emergency deliveries.
 Despite this, train operators can provide a number of different services, perhaps offering
merry-go-round services (where a train continually moves between two locations, such as
a port and a factory), full train services (where customers hire an entire train), full wagon
load attached to scheduled services, container transport, or shared wagons on scheduled
services.
 22

 A more obvious concern is that trains can only travel along specified routes between
fixed terminals, and cannot stop at intermediary points. Most customers are some
distance away from these terminals, so they have to transfer goods by road at both ends
of the journey.

The problem of limited access is common to several modes of transport, but there are ways of
overcoming its effects. The most obvious is to locate facilities near to rail terminals (or ports,
airports, container ports or appropriate terminals). If demand is big enough, it is worth building
special facilities. A power station, for example, might find that it is cheaper to build a special rail
line to a coal mine, than to use trucks.

2.3.2. Road transport

Road is the most widely used mode of transport and is used – at least somewhere – in almost all
supply chains. Its main benefit is flexibility, being able to visit almost any location. Although the
maximum speed on roads is limited, this ability to give a door-to-door service avoids transfers to
other modes and can give a shorter overall journey time. You can see this effect if you want to
travel between, say, Paris and Brussels. The plane travels faster, but when you add on the travel
times to and from the airports, check-in and boarding, it is faster to catch a bus between the city
centers. Nonetheless, travel speed can be an important consideration, especially as roads are
becoming more congested and vehicles are likely to move even more slowly.

Road transport has the advantage of being able to use extensive road networks. Unlike rail, these
already exist, so users do not have to build and maintain their own tracks. Also, vehicles do not
have to keep to such rigid timetables, so they can go on journeys at short notice and with little
planning. The following list mentions some of the more important types.
 Delivery vans are the small delivery vehicles which can carry a tonne or two in a sealed
body. Smaller vans are based on car designs, while larger ones – such as Luton Box vans
–are like small removal vans.
 Flat-bed lorries are basic, rigid vehicles with two or three axles, and a flat platform that
is used to stack materials. Materials are tied on, or small sides are added.
 23

 Box-bodied lorries are like the flat beds, except they have bodies added, traditionally
with access from the rear. These give more protection than flat beds.
 Articulated lorries, are more maneuverable than rigid lorries, so they can be bigger, up to
the legal weight limit. There are many variations on the theme of trucks that bend in the
middle. A common format has a two- or three-axled tractor and a two- or three-axled
trailer.
 Lorry and trailer, which combine a rigid lorry pulling a two-axle trailer. This gives
greater capacity than an articulated lorry, but maintains some of its maneuverability.
Many different formats have been tried. In Sweden, for example, they use articulated
lorries with trailers, giving two, or even three, points of articulation. In Alberta, Canada,
they use two trailers to move loads.

2.3.3.Water

Both rail and road transport has the obvious limitation of only being used on land. Most supply
chains use shipping to cross the oceans at some point, and over 90% of world trade is moved by
sea. You can see the importance of shipping to a country like the UK, where 95% of freight
arrives or leaves by ship, shipping is the fifth largest service sector exporter, the City of London
insures 25% of the world’s marine risk, the marine and repair business is one of the largest in
Europe, there are 300 ports around the coast, and the surrounding waters are among the busiest in
the world.

There are basically three types of water transport – rivers and canals (usually called inland
waterways), coastal shipping (moving materials from one port to another along the coast) and
ocean transport (across the major seas).

Realistically, though, most shipping is done by large vessels travelling through the world’s
shipping lanes. Some countries are fortunate enough to have a coastline that can be used for
international transport, and cities such as Rotterdam, Hong Kong and New York have developed
huge ports. The world’s 20 biggest ports handle over half of all world trade. Some form of
shipping is largely unavoidable for long journeys. There are many different types of vessel for
 24

various cargoes. Ships get considerable economies of scale, so many aim at moving big loads at
low unit costs.
 General cargo ships are the standard design, with large holds that carry any type of
cargo. Most of these are loaded by crane, although some have side doors that allow
vehicles to drive on and off. Many ports around the world do not have facilities to handle
the more specialized ships mentioned below, so these general-purpose vessels are very
widely used.
 Bulk carriers carry large quantities of cheap bulk materials in large holds, such as grain
or ores.
 Tankers carry any liquid, but by far the biggest movements are oil. Because of the
economies of scale, these ships are built as big as possible.
 Container ships are specially designed to carry standard containers and their capacity is
commonly rated in TEUs (20-foot equivalent units) or FEUs (40-foot equivalent units). A
 typical container ship carries around 5000 of these, with larger ones carrying 10,000.
 Ferries are usually RO-RO (roll-on roll-off) vessels that carry road vehicles over
relatively short distances. There are, however, longer RO-RO routes between, say,
Europe and America.
 Barges, which are towed behind ocean-going tugs. These are used for shorter routes
where sea conditions are fairly reliable, such as between the USA and Puerto Rico. They
have the advantage of being cheaper to run than normal ships.
 Combination ships. In addition to the specialised ships, many other designs are used,
often to allow for dominant patterns of trade. Examples of such combination ships are the
RORO/ container ships that carry vehicles imported into the USA and return with bulk
grain to Japan, and the oil-bulk vessels that carry oil from the Middle East and return
carrying ores. One useful combination is passenger/container, as the passengers are
ensured priority treatment in ports.

The main drawback with water transport is, of course, its inflexibility in being limited to
appropriate ports. Journeys from suppliers and to customers inevitably need a change of mode,
even if they are close to ports. In St Austell, UK, for example, china clay works are very close to
 25

specialized ports in Fowey, but the clay still has to be transported to the quayside. The other
problem with shipping is that it is relatively slow, and needs time to consolidate loads and
transfer them at ports.

One interesting aspect of shipping is the continued existence of conference services. This means
that all carriers in a given area agree to charge a common price and regulate the frequency of
their service. The justification of this cartel is that it guarantees a more regular service than
would otherwise be available. However, many people question this idea of price fixing, and non-
conference lines now offer deep discounts.

2.3.4.Air

Because of its low unit costs, water transport is the most common mode for international
transport. Sometimes, though, its slow speed is unacceptable. Passengers account for most airline
business, with eight billion passenger kilometres flown a year in the UK.

Airlines also carry a significant amount of freight, for products where speed of delivery is more
important than the cost. In practice, this limits airfreight to fairly small amounts of expensive
materials. Perhaps the most common movements are documents and parcel deliveries, with
carriers such as Federal Express and UPS.

There are three main types of operation.

 The first type is regular service, where major airlines use the cargo space in passenger
aircraft that is not needed for baggage.
 The second type is cargo service, where operators run cargo planes on regular schedules.
These are public carriers, moving goods for any customers.
 The third type is charter operations, where a whole aircraft is hired for a particular
delivery.

2.3.4.1.Problems with airlines

 26

Airlines have problems getting materials to and from their journeys. There are all sorts of
facilities located around major airports for moving materials from sources onto the right planes,
and then away from planes and out to customers. Unfortunately, these transfers again take time,
and can reduce the benefits of air travel.

Another problem for airlines is their costs, over which they have very little control. They have a
combination of high fixed costs (aeroplanes are expensive to buy) and high variable costs (due to
fuel, landing fees, staff, and so on). It is expensive to keep planes flying, and there is no real way
of reducing these costs.

Competition can also be fierce, putting a limit on the amount they can charge, and this frequently
sends new airlines into bankruptcy.

2.3.5. Pipeline

The main uses of pipelines are oil and gas together with the utilities of water and sewage. They
can also be used for a few other types of product such as pulverised coal in oil. Pipelines have
the advantage of moving large quantities over long distances. Unfortunately, they have the
disadvantages of being slow (typically moving at less than 10 km per hour), inflexible (only
transporting between fixed points), and only carrying large volumes of certain types of fluid. In
addition, there is the huge initial investment of building dedicated pipelines. Despite this initial
investment, pipelines are the cheapest way of moving liquids – particularly oil and gas – over
long distances. Local networks can add flexibility by delivering to a wide range of locations
(such as supplies of water and gas to homes).

2.4. Choosing the mode of transport

Sometimes the choice of transport mode seems obvious: if you want to move heavy items
between Singapore and Brisbane you will use shipping. For land journeys, many organisations
seem happy to put materials on lorries without much thought for the alternatives. In practice, the
 27

choice of mode depends on a variety of factors. Perhaps the main ones are the nature of materials
to move, the volume and distance. Other factors include:
 value of materials- as expensive items raise inventory costs and encourage faster modes
 Importance- as even low-value items that would hold up operations need fast, reliable
transport.
 transit times- as operations that have to respond quickly to changes cannot wait for
critical supplies using slow transport
 reliability- with consistent delivery often being more important than transit time
 cost and flexibility to negotiate rates
 reputation and stability of carrier
 security, loss and damage
 schedules and frequency

2.5. Ownership of Transport

.The choice is essentially between privately owned, public or a combination of the two. With
transport we again meet this decision. Is it better for an organisation to run its own transport
fleet, to use public transport, or a combination of the two? With transport the more common
terms are in-house or own account transport compared with third-party transport.

2.5.1. Own account transport

 This has an organisation using its own transport fleet to move its materials. The most
common form of private transport has large companies running their own fleets of trucks.
This has the advantage of flexibility, greater control, closer integration of logistics and
easier communications. Transport can also be tailored to the organisation’s needs, with
the best type of vehicles, fleet size, delivery schedule, customer service, and so on.
 Own account transport can be expensive and an organisation should only run its own fleet
when it is cheaper than using a specialist third-party carrier. Essentially, this means that
own account transport must be run as efficiently as a specialized transport company.
There are, however, potential cost savings as there is less pressure for transport to make a
profit, possible tax advantages, and development grants.
 28

 There are also intangible benefits, such as the marketing benefits of vehicles painted in
identifiable livery and an impression of reliability and long-term dependability.
 Only larger organisations can afford the capital investment and costs of running their own
fleet. There are, however, ways of avoiding these costs. Most own account fleets are
financed by some form of hiring or leasing, which gives a means of acquiring vehicles
without having to find all the capital.
 Hire purchase, for example, spreads the payments over some period, while long-term
hiring allows more flexible use. When you see a truck painted in J. Smith’s delivery, it
does not necessarily mean that J. Smith actually owns the vehicle. He or she is more
likely to be leasing it from a company that looks after maintenance, overheads, repairs,
replacements and other running costs, in return for a fixed fee.

2.5.2.Third-party carriers
 Specialised transport companies offer a range of services to other organisations. The
advantage of this arrangement is that specialized companies run the transport, leaving the
organisation to concentrate on its core operations.
 By using their skills and expertise the transport operators can give better services, or
lower costs than own account transport.
 They might also be large enough to reduce costs through economies of scale, and they
can get a number of operational benefits.
 They can, for example, consolidate smaller loads into larger ones and reduce the number
of trips between destinations, or they can co-ordinate journeys to give backhauls, where
delivery vehicles are loaded with other materials for the return journey.
 Most third-party transport is provided by common carriers. These are companies like
Unifreight ,African Express and Montle Logistics which move materials on a one-off
basis whenever asked by another organization

2.6.Choice of ownership

There are several factors to consider when choosing the best type of ownership.
 29

 Operating cost: In different circumstances either own account or third-party transport

might be cheaper, and there should be significant other benefits before an organisation
moves away from their cheaper option.
 Capital costs: Capital is always scarce, and even if own account transport seems
attractive, an organisation might find it difficult to justify the investment in vehicles. We
have mentioned alternative arrangements for spreading the costs, so these analyses should
be done carefully before reaching any conclusion.
 Customer service: Organisations must use transport that provides acceptable customer
service in the best possible way. Sometimes, it is impossible to get a third-party carrier
that can meets all requirements, and then own account transport is the only option – and,
of course, vice versa.
 Control: An organisation clearly has greater control over transport – and therefore wider
operations – if it runs its own transport. However, this control might be bought at a high
price, and contract companies might offer equivalent services but without the overheads
and inflexibility of a private fleet.
 Flexibility: The structure and operations of a private fleet are fairly rigid, as you cannot
make quick adjustments to allow for changing circumstances. If there is a sudden peak in
demand, you cannot increase the size of the fleet for a few days, and then reduce it again
when the peak passes. In the same way, the fleet is structured to carry a certain mix of
sizes and modes. Common carriers can make these adjustments much faster, as they rely
on demand from some companies going through a trough while demand from other
companies is peaking.
 Management skills: Managing transport needs specialized skills, which are not readily
available in even the biggest organisation. This gives a strong argument for third-party
carriers. Large transport companies can support the management teams with specialist
skills, knowledge and experience of different conditions. A supporting argument says that
an organisation with weak transport management suffers as it gives worse performance
than competitors and becomes uncompetitive; one with strong transport management may
be diverting valuable talent from the rest of the business.
 30

 Recruitment and training: As well as being the most widely used, road transport is
generally the most labour intensive. This gives high employment costs. There is also a
shortage of skilled drivers, with many organisations finding it difficult to recruit and train
suitable people. Both of these give an incentive to use third-party transport.

There are many factors to consider in the final decision, but overall – in common with
warehousing – there is a clear trend towards third-party carriers. Many organisations – including
the biggest – are reducing their own fleets, using more contract operators, and forming alliances.
Again in common with warehousing, a common option is to use a mixture of own account and
third-party carriers. Then an organisation can use its own transport for core activities, with full
utilization giving low costs. Any other transport needs are left to outside operators who deal with
peaks and unusual demands.

2.7.Other services

An organisation can pass all its transport problems to a third-party carrier, but there are many
other people who can offer their own specialized services. These can provide the special skills
that are not usually available within a single organisation. Some organisations give fairly general
advice, such as management consultants who work in logistics and software companies that
tailor packages for transport. Other experts give more specific services, such as freight
forwarders and shipping agents. Many people might help with transport, and you can get the feel
of their services from the following examples.
 Common carriers: As we have seen, these move materials between two points for any
customer, usually in a one-off delivery using common facilities.
 Contract carriers: These offer transport services, but usually for a longer time. They
take over some, or all, aspects of an organisation’s transport for an agreed period. There
are many possible arrangements, but they typically involve dedicated facilities set aside
exclusively for one organisation.
 Intermodal carriers: Traditionally carriers have concentrated on one type of transport,
such as shipping lines or road haulers. With the growth of intermodal transport, many
 31

companies offer a wider range of services and operate different types of transport. They
typically look after all aspects of a journey between two specified points.
 Terminal services: Materials have to switch from one mode of transport to another, or
move between different operators. These transfers may be done at ports, airports, termi-
nals or container bases, which are run by separate organisations. The terminals do more
than just transfer materials, and they might unload delivery vehicles, sort goods, break
bulk for local delivery, concentrate goods for onward movement, load outgoing transport,
keep track of all movements, and provide any other relevant services.
 Freight forwarders: One problem with third-party carriers is the expense of moving
smaller loads. Unit transport costs fall with increasing quantity, and transport now
focuses on standard loads, such as a full container load. If you only have enough material
to fill part of a container, you have the obvious choice of leaving empty space – but then
you are paying to move a whole container and only using part of it. An alternative is to
use a freight forwarder. These are people who collect relatively small loads, and
consolidate them into bigger loads travelling between the same points. A freight
forwarder might, for example, combine six or seven smaller loads to get a full container,
giving lower unit costs and faster delivery. Freight forwarders also provide all the
administration needed to move materials through their journey, such as documentation,
customs clearance, insurance, and so on.
 Brokers: A broker acts as an intermediary between customers and carriers. Effectively,
they look at the goods to be moved, find the best routes and carriers and negotiate
conditions. There are also specialized brokers who assist with particular parts of the
journey, such as customs brokers who prepare the documents needed for customs
clearance, get materials through customs and move them across international borders.
 Agents: These are usually local people who represent, say, shipping companies. They
give a local presence and act as intermediaries between distant carriers and local
customers, exchanging information, arrangements, and so on.
 Parcel services: These are similar to a Post Office, as they deliver small packages to any
location. Companies such as Federal Express, United Parcel Service (UPS) offer very fast
 32

deliveries to almost any location in the world. Their strength is customer service, as they
offer guaranteed next day delivery over long distances.

2.8.Routing Vehicles

Any organisation involved in transport has to consider many types of problem. The most
important operational details to consider are: the number of vehicles needed, type and size,
special features required, routes used, assignment of loads and customers to vehicles, schedules,
maintenance schedules, measures of service and quality, and so on. We cannot look at all these
problems, but we can illustrate some principles by looking at the question of routing vehicles.

Many methods have been suggested for tackling routing problems but, like location, there are
two general approaches. The first uses geographical arguments to look for the best routes,
regardless of the actual roads. The second looks at the road network and finds shortest routes
through it. Because of the increasing sophistication of electronic maps, the second of these is
probably becoming more popular. The following list suggests some specific methods that have
been proposed.
 Negotiations: Finding acceptable routes is so complicated, with many subjective factors
and people affected, that the best approach is often to negotiate a solution. This may not
give the best technical answer, but it has the support of everyone concerned.
 Adjust previous plans: Many routing problems are fairly stable, like postmen delivering
letters. Then a useful approach has an experienced router reviewing present
circumstances and updating previous routes to allow for any changes. This has the benefit
of being relatively easy and causing little disruption. It also uses a well-understood
procedure and experts can give results that are trusted by the organisation. Unfortunately,
the results can also be of variable and uncertain quality, the routes may take a long time
to design and they rely solely on the skills of a router.
 Other intuitive methods: These include a range of methods that use the skills, knowledge
and experience of routers, who typically use a series of heuristic rules that have been
successful in the past.
 33

 Maps: Schedulers often find it easier to work with some form of diagrams, and the most
popular are simple maps of key features. Then schedulers can draw routes and iteratively
improve them. There are many guidelines to help with this, such as forming routes that
are more or less circular, non-intersecting, no doubling back, and so on. Graphical
approaches have the advantages that they are easy to use and understand, but they are
really only one step better than an intuitive method.
 Spreadsheet calculations: Using maps can show overall patterns, but they lose some of
the details. An alternative is to concentrate on spreadsheet calculations and look at the
patterns in the numbers. A common format for this lists the customers to be visited down
the left-hand side and the time periods across the top.
 Simulation: Simulation is one of the most flexible approaches to solving problems. It
gives a dynamic view by imitating real operations over a typical period. Suppose that you
want some information about proposed routes. You could sit in cabs and watch the
process for some time, and see what was happening. This might give a good idea of the
normal operations, but it would take a long time to get results and people may not work
normally while there is someone watching. An alternative is to simulate the process. You
use a computer to generate some typical features of the journey, and follow progress
through the process. Rather than watching and timing a customer being served, for
example, a computer generates typical service times – and any other features that you
want.
 Expert systems: These specialised programs try to make computers duplicate the thinking
of a skilled scheduler. The basic skills, expertise, decisions and rules used by experts are
collected in a knowledge base. A router then passes a specific problem to an inference
engine, which is the control mechanism. This looks at the problem, relates this to the
knowledge base and decides which rules to use for a solution. Expert systems have been
developing for many years, and some organisations report useful results.
 Mathematical models: Most of the previous approaches rely, at least to some extent, on
the skills of a router. More formal mathematical approaches give optimal – or near
optimal – solutions without any human intervention. In practice, routing has to include so
many subjective and non-quantifiable factors, that optimal solutions in the mathematical
 34

sense may not give the best answers for the organisation. The most common
mathematical approach uses linear programming. These methods are rather complicated,
so they are generally limited to small problems. If, however, you have a problem where
small changes in routes may give significant difference in costs, it is certainly worth
looking at mathematical approaches.

There is a lot of standard software for tackling routing problems, such as Paragon, CAST and
Optrack. Some of this uses standard procedures, but suppliers are often reluctant to publish
details because of confidentiality. It can be a difficult job to compare all the software available
and find the approach that best suits your needs.

2.9.Warehousing

A Warehouse is any locations where stocks of material are held on their journey through supply
chains. Warehouses are an essential part of most supply chains. We have seen the demise of
warehousing predicted again and again, especially with the evolution of the philosophies of just-
in-time, quick response, efficient consumer response, direct store delivery, and continuous flow
distribution.

As we have already seen, the reality is that every organisation holds stocks to give a buffer
between supply and demand. As long as they need to hold stocks of materials, they need
warehouses to hold them. Most warehouses are designed for raw materials collected before
operations, and finished goods during distribution to customers. To a lesser extent, they store
work in progress, consumables and spare parts. In this chapter we are going to look at some of
the main decisions relating to these stores.

When we talk about warehouses storing materials, this is really only part of the story. Many
organisations are using warehouses as convenient locations for doing a range of related jobs.
Obviously, they can be used to inspect, sort materials and break bulk (taking large deliveries and
 35

breaking them into smaller quantities). They might also be used for finishing products, labelling,
packaging, making products ‘store ready’ for retailers, doing other aspects of postponement,
servicing vendor managed inventories, and so on. The overall trend is for warehouses to do more
tasks, positively adding value rather than being a pure cost centre.

2.10. Chapter summary

Transport is responsible for the movement of materials between facilities in the supply chain. It
involves many related decisions about the best mode, ownership, organisation, routes, and so on.
 Transport is an essential part of logistics. E-Commerce can deliver intangible materials,
but most products include goods which need transport for delivery to customers.
 There are five basic modes of transport – rail, road, air, water and pipeline. Each of these
has different features and is best in different circumstances.
 The best transport between two points is usually intermodal, using the best mode for
each leg of a journey. Transfers between modes can cause problems, so the aim is to
create a seamless journey that combines the advantages of different modes.
 Organisations have a choice between owning their own transport, using third party
carriers, or some combination of the two. The best alternative depends on a number of
factors, but there is a clear trend towards outsourced transport.
 Transport managers have to tackle many other problems. One concerns the routes to be
used by vehicles. This is a surprisingly difficult problem, and many ways of tackling it
have been suggested.
 36

CHAPTER 3: SUPPLY CHAINS /DISTRIBUTION CHANNELS FOR GOODS AND

SERVICES

3.0. Introduction

The place element of the marketing mix entails how the products are made available to the final
consumer. This topic focuses on how the business ensures that the buyer obtains the product at
the right place and in right quantities always. The topic considers all processes which are
involved in getting the product or service to the buyer and, ultimately, to the users in the most
economic manner. These processes include the selection of channels, order receiving and
processing, stocking, transporting, delivery and display of products in the outlets.

3.1. Objectives

After working through this topic you should be able to

 Explain the importance of distribution in ensuring customers satisfaction.

 Discuss the factors that influence the selection of distribution channels.
 Illustrate distribution channel structures for customer’s goods, industrial goods and services.
 Differentiate between intensive distribution, selective distribution and exclusive distribution
 Explain the sources of channel conflicts and suggest the ways of resolving them.
 Explain the components of physical distribution.

.
 37

3.2. Definition and importance of distribution

Distribution refers to the marketing activities responsible for making the products available in
adequate qualities in convenient locations at any time when customers want to buy them. (Jobber
2002). It is important that the organization manages its distribution system efficiently so that it
can measure the success of its marketing mix. In most companies, this function is under direct
control of marketing and it is the one that facilitates the selection of organizations that will help
in taking the products to the final consumers. These organizations are known as channels of
distribution

3.3. Channels of distribution

These are means by which the products are moved from producers to the ultimate consumers.
They are decided and selected by the distribution function of the company. The company can use
any channel of distribution depending on the nature of its product, marketing strategy and
nature of the market.

3.3.1. Distribution channels for consumer products

The channels of distribution for different consumer products can be illustrated by the following
diagram.

Fig 3.1 Channels of Distribution for Consumer Products

 38

Jobber (2002)

(i) Producer Direct To Consumer

This method is used with expensive goods for example designer clothes, cosmetics and
jewellery. A producer would prefer this channel because it cuts out distributor profit margins. It
means that the producer either enjoys higher profit margins or offers the product at a lower price
than it would be when intermediaries are used. It is sometimes called direct marketing.

(ii) Producer - retailer - consumer

This channel can be used for products such as vegetables; milk, flowers, meat and others that
have short life span. Such products are termed perishables. It is better to distribute straight to
retailer where consumers can access the product whilst they are still fresh.

(iii) Producer- Wholesaler -Consumer

Wholesalers for example CA Distributors, TRANS Wholesalers and METSEF can order
products in bulk from producers and sell smaller qualities to numerous retailers and consumers.
These wholesalers save small retailers like Lucky “7”, Square Deal and tuck-shop because large
retailers like Shoprite and Choppies can buy directly from the producer. That is why small retail
 39

shops are sometimes offering higher prices than large retailers. The buying power of large
retailers enables them to sell products to their customer at cheaper prices.

iv) Producer -Agent -Wholesale -Retailer - Customer

This long channel is usually used by companies entering foreign markets. The company
delegates the task of selling the products to an agent (who does not take title to the goods) the
agent passes the products to wholesalers (or retailers) and receives a commission on sales.

Before deciding on the channels, the business first analyses its products, resources and the
market then it choose the channel to use. Some companies use multiple channels to distribute
their products.

Activity 3.a
For a product of your choice, describe how it is distributed from the producer to the
consumer.

This is a practical question that requires you to apply your daily experience as you shop around,
For the product that you have selected, identify the producer and explain how the product is
moved to those outlets where you have seen the product ; the nature of the product will also
guide you.

3.3.2 Distribution channels for industrial goods

Manufacturers of industrial products use different channels of distribution from those used for
consumer goods. Instead of using a wholesaler and retailer in between the industrial goods
producer distributes through the agent or distributor. The different distribution channels for
industrial goods are

 From producer - industrial customer

 From producer - agent - industrial customer
 From producer - distributor - industrial consumer
 40

 From producer - agent - distributor - industrial customer.

(i) Producer - Industrial Customer

When a producer uses this channel, he or she supplies the product directly to industrial
customers. This is used for expensive products for example, equipment, diesel locomotives and
air craft. There is need for close liaison between supplier and customers to solve technical
problems and also the amount of money involved makes direct selling and distribution economic
and effective.

(ii) Producer - Agent - industrial customer

Instead of selling to industrial customers using their own sales force, industrial goods
manufacturing companies could employ the services of an Agent who may sell a range of goods
from several suppliers on a commission basis.

This distribution channel is attractive to companies without the reserve to set up their own sales
operations.

The disadvantage is that the producer has little control over the agent who is unlikely to devote
full attention the selling producer’s products because he stocks products from many producers.

(iii) Producer - Distributor - industrial customer

This channel is used for less expensive and more frequently bought industrial goods e.g.
stationary. Distributors have both internal and field sales staff. Internal sales staff deal with
customer generated enquiries, order follow up and checking inventory level. Field sales staff is
responsible for finding new customers and gather market information.

The use of distributors has the advantage that they can be geographically dispersed which
ensures maximum coverage of the market. To the customer the advantage is that they can be
found nearer allowing them to buy small qualities as and when needed.
 41

(iv) Producer - agent - distributor - industrial customer

This channel can be employed by companies which are selling to the international market. These
companies may employ agents in a foreign country. The agent will engage some distributors to
ensure total coverage of the market.

3.2.3 Distribution channels for services

Distribution channels for services are usually short since there is no stock involved, the roles of
a wholesaler, retailer or industrial distributor do not apply. Services can be offered either direct
or using an agent. The following diagram shows two alternatives for distribution of services to
individual customers or industrial customers.

Fig 3.2 Channels of distribution for services

Source: Jobber 2002

(i) Service provider to consumer or industrial customer.

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It applies when the service company deals with its customers directly for example insurance
provider Metropolitan Life Insurance sells its services direct to the individual consumer or
industrial consumer who want insurance service

(ii) Service provider -agent - consumer or industrial customer

A channel intermediary for services usually takes the form of an agent. Agents are used when a
service provider is geographically distant from consumers for example, Metropolitan Life
Insurance can use agents (brokers) to offer its services to the customers so that it can cover all
areas in the country.

3.3. Functions of channel intermediaries

The functions of channel intermediaries are to reconcile the needs of producers and consumers,
to improve efficiency by reducing the number of transactions or creating bulk; to improve
accessibility by lowering location and the time gaps between producers and consumers, and to
provide specialist services to customers. All these functions have benefits to both the producer
and the consumer.

(i)Reconciling the needs of producers and consumers

Manufacturers typically produce large quantities of a limited range of goods whereas consumers
usually want only a limited quantity of a wide range of goods. The role of channel intermediaries
is to reconcile these conflicting situations. For example, a manufacturer of bar soaps sell through
OK which stocks a wide range of products under one roof because customers buy a wide range
of goods.

(ii) Improves efficiency

Channel intermediaries can improve distribution efficiency by reducing the number

of transactions and creating bulk for transportation. Small producers can benefit by selling to
intermediaries who then combine a large number of small purchases into bulk for transportation.
 43

Without intermediaries, it may prove too costly for each small producer to meet transportation
costs to deliver to the customer. This usually applies to small scale farmers when they sell their
produce; they bring their produce together and hire a truck.

(iii) Improving accessibility

Intermediaries bridge the location and time gap between producers and customers. The location
gap comes from the geographic separation of producers and the customers they serve. Time gap
results from the differences between when manufactures wants to produce and when consumers
wants to buy. For example manufacturer of automobile spare parts may produce from Monday
to Friday but consumers may wish to purchase throughout the week and during the weekends. By
operating during weekends, car accessory outlets (intermediaries) bridge the time gap between
production and consumption.

(iv)Providing specialist services

Channel intermediaries can perform specialist customer services that manufacturers may fall ill
equipped to provide. Distributors may have long standing expertise in such areas as selling,
servicing and installation of products to customers. Producers may fill that these functions are
better handled by channel intermediaries so that they can specialize in other aspects of
manufacturing and marketing activities.

Activity 4b

Why do producers find it necessary to use intermediaries instead of reaching the customers on
their own?

The question requires the benefits that manufacturers obtain from using channel intermediaries
in taking their products to the customers.
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3.4 Factors influencing the selection of channels of distribution

When choosing channel members, there are a number of factors that a company considers. There
are five general categories each with sub factors. These factors are market factors, producer
factors, product factors, competitive factors and legal factors

3.4.1 Market factors

The most obvious point in the selection of channels of distribution is the customer. The
behaviour of consumers and their expectations may detect that the product be sold in a certain
way. For example, consumers may prefer to buy locally and in a particular type of shop. The
company should match these expectations with the way in which the products are distributed.
The location and geographical concentration of customers also affect channel selection. If
customers are concentrated in one area .It is easier for the organization to directly market its
product to them. Direct marketing is also more useful when buyers are few in number and when
they buy large quantities. A large number of customers who are geographically dispersed and
buy small quantities mean that the organisation should use intermediaries to distribute the
product.

In general the market considerations when selecting channel members are the size of the market,
geographic concentration and order sizes.

3.4.2 Product factor

The nature of the product that the business offers influences the selection of channel members.
The following variables pertain to how the product influences its distribution.

 How perishable the product is: Product that expires, deteriorate or rot within a short
space of time are usually sold through the shortest possible channels. For example fresh
milk is sold directly to the processing firm by he farmer; some farmers process on their
own and sell fresh milk direct to retailers. If the fresh milk is processed it into
 45

condensed or powdered milk (which are less perishable) the firm can use longer
channels since it will be no longer perishable.
 Unit value: Low priced products usually follow a long distribution channel for example
convenience goods like tooth paste, bath soap can go through wholesalers and retailers
to the consumer, whilst designer clothes, expensive jewellery and copying machines are
sold directly or through an agent.
 Complexity of the product: Highly technical products necessitate the use of direct selling
in which salespeople will be able to demonstrate their use and arrangements on
guarantees and after sales service are made. Bulky and difficult to handle products may
require direct distribution because distributors may refuse to handle them.
 Stage in life cycle: During introduction and decline stages intermediaries do not agree to
stock the product unlike during growth and maturity stage. When the product is
attractive to the market.

3.4.3 Producer /organization factors

Organizational considerations range from services expected by members, desire to control

channel member, resource availability and management capabilities

 Services expected: If channel members expect excellent services and back up which
the organization cannot be able to offer. It will be vital for the organization to use an
agent.
 Desire for channel control: Organization which desire to control the movement of
their products till they reach the customers would use a shorter channel; whilst those
organizations which do not mind about how the product is later priced, stocked and
shelved would use longer distribution channels. For example coca-cola desires to
have its products reach final consumers at a uniform price so they deliver direct to
retailers.
 Management capacities and resources availability: If the organization does not have
the managerial capabilities to distribute its products it will delegate the distribution
 46

activities to an agent. For example if the organization does not have qualified sales
force and also the recruitment of such personnel can be constrained by lack of
financial resources, the only alternative would be to engage an agent, resulting in a
longer channel of distribution for the products.

3.4.4. Competitive Factors

In some cases a firm might find that alternative channels of distribution are controlled by
competitors through franchising or exclusive arrangements. In this case, an innovative
approach to distribution may be used. The two alternatives would be to recruit a sales force
to sell direct to consumers or to set up a producer owned distribution network. Direct
marketing provides opportunities to supply products in a new way that ensures direct
interaction with consumers.

Activity 4c

Why are consumer goods, industrial goods and services distributed through different channels?

You have to consider the different characteristics of consumer goods that make them require
different distribution strategy from services or industrial goods. Also discuss the characteristics
of industrial goods and services in relation to their distribution strategies.

3.5 Distribution intensity

This refers to the number of intermediaries used at each level of the distribution channel. Three
strategies are available to select from, exclusive distribution, selective distribution and intensive
distribution. (Jobber 2002).

4.5.1 Intensive distribution

This distribution strategy aims at saturating the market by using all available outlets. It is
commonly used by producers of mass market products such as cigarettes, food stuffs, toiletries,
 47

beer and newspapers. Sales are directly related to the number of outlets penetrated. This is
because consumers have a range of acceptable brands from which they can choose, that is, if one
brand is not available in the outlet an alternative is brought. We have previously described these
goods as convenient goods. New outlets are always sought which had not stocked the product.

4.5.2 Selective distribution

A producer can use limited number of outlets in a geographical area to sell its products. The
advantages to a producer are the opportunity to select only the best outlets, to focus efforts to
built close working relationships and to train distributor staff on fewer outlets than with
intensive distribution it reduces the selling and distribution costs. Up market inspirational
brands are often sold in carefully selected outlets. Selective distribution is more likely to be used
when buyers are willing to shop around looking for products. This means it is not necessary for a
company to have its products in all outlets. Products such as audio and video equipment,
cameras, personal computers and cosmetics may be sold in this way.

4.5.3 Exclusive distribution

This is an extreme form of selective distribution in which only one wholesaler, retailer, or
industrial distributor is used in geographic area. Cars are often sold on this basis. For example
Naledi Motors is the sole dealers of Mercedes Benz vehicles in Botswana. This leaves purchasers
with no power to negotiate prices since Mercedes Benz cars can only be serviced from the same
dealer. Buying from a far town would just inconvenience the customer when he/she needs
servicing of the product. The right to inclusive distribution maybe demanded by distributors as a
condition for stocking a manufacturer’s product line. Similarly producers may wish for exclusive
dealing where the distributor agrees not to stock competing lines. Exclusive distribution reduces
competition in a way that may be considered contrary to customers’ interest.

The decision on the strategy to be used is much influenced by the nature of the product, the
marketing strategy and the nature of the market.
 48

3.6 Physical Distribution

Physical distribution is defined as a set of activities concerned with the physical flows of
materials, components and finished goods from producer to channel intermediaries and
consumers. The aim is to provide inventory to intermediaries and customers in the right locations
at the right time. This subject has recently drawn much attention of management because of the
potential for cost saving and improving customer’s service levels. Cost saving can be achieved
by reducing inventory levels using cheaper focus on transport and shipping in bulk rather than
small quantities. Customer service levels can be improved by fast and reliable delivery,
including just-in-time, fast order processing and ensuring that customers do not find stock outs.
Physical distribution management is concerned with striking a balance between inventory cost
reduction and meeting customer service requirements. When all the above aspects are brought
together we come up with what is known as Physical distribution system

3.6.1 Physical distribution system

A system is a set of connected parts managed in such a way that overall objectives are achieved.
The Physical distribution system contains the following parts: customer service, Order
processing, Inventory control, Warehousing, transport and material handling. Below is the
diagrammatic representation of components of the physical distribution system

Fig 3.3: Components of the Physical distribution system

 49

Jobber (2000)

(i)Customer service

The question to guide the marketer here is. “What level of customer service should be provided?
Customer service standards have to be set. For example a customer service standard might be
that 90 % of orders are delivered within 48 hours once placed and 100% are delivered within 72
hours. Higher customers’ service level may be expensive to the organization since high customer
service level means that inventory levels should also be high. Holding funds in form of inventory
has its own costs which need to be considered by the distribution manager before setting
customer service standards. It is also profitable to maintain consistency since this might be
valued by other customers, for example a customer’s services standard of guaranteed delivery
within 5 working days may be valued. This is an aspect that needs considerable attention because
it differentiates between suppliers. Developments in technology are enabling distribution
companies to offer customers the ability to integrate their delivery operations with other business
functions.

(ii) Order processing

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Reducing time between a customer placing an order and receiving the goods is a significant
measure of efficiency especially in fast food outlets like K F C, Hungry Lion, and Chicken Inn
etc. A computerised link between sales person and order processing department may be
effective. Many order processing systems are characterised by unnecessary delays. To ensure
improvements in this area, basic questions needs to be answered e.g. what happens when a sales
representative receives an order, what happens when it is received in the orders department?
How long does it take to check inventory? What are the methods of checking inventory? If a
company employs a computerised system, all these questions will be answered by just a click of
the mouse.

(iii) Inventory Control

The organization should seek to strike a balance between holding costs and ordering costs of
inventory. High inventory levels are favoured by marketers because they minimize customer
complaints based on stock outs. The finance department of the organization seeks stock
minimisation in order to maintain liquidity of the business. Two related inventory decisions are
to know how much and when to order so that we meet the needs of the customers efficiently.
How much to order depends on the cost of holding stock and order processing costs. Orders can
be small and frequent or large and infrequent. Small frequent orders raise order processing costs
but reduce inventory carrying costs. Large infrequent orders raise inventory holding costs but
lower order processing expenditure. Therefore a trade-off between the two costs is required to
achieve an economic order quantity (EOQ). The point at which total costs are lower. The
economic order quantity is numerically calculated by use of the following formulae

EOQ = 2DO

1C
 51

Where

D = Annual demand in units.

O = Cost of placing an order

1C = Annual inventory holding cost per unit

C = Cost of one unit of the product

Example

Annual demand = 4000 units

Cost of placing an order = $4

Annual inventory holding cost per unit = 10% of the unit price

Cost of one unit = $2

EOQ = 2 x 4000 x $4

0.10 X $2

$32000

$0.20
 52

= 160 000

= 400 Units per Order.

Therefore the most economic order size taking into account inventory and order processing costs
is 400 units.

(iv) Warehousing

Warehousing involves all the activities required in the storing of goods between the time they are
produced and the time they are transported to the customers. These activities include breaking
the bulk, making up product assortment for delivery to customers, storage and loading. Storage
Warehouses hold goods for moderate or longer time periods where as distribution centres
operate as central locations for the fast movement of goods. Warehousing strategy involves
determination of the location and number warehouses to be used, at one extreme is one large
central warehouse to serve the entire market. At the other extreme are a number of smaller
warehouses that are based near to local markets. The optimum number and location of
warehouses is a balance between customer service and cost considerations.

(v) Transportation

Customer service ultimately depends on the ability of the physical distribution system to
transport products on time and without damage. Therefore the choice of transportation mode is
vital to the successful implementation of a marketing strategy. The five major transport modes
are: Rail, Air, Water, Road and Pipeline. Each have got its advantages and disadvantages

Activity 4 C
 53

Suggest a product of your choice and describe its physical distribution system, suggest the
advantages of the transportation mode that you have chosen.

First part: any product can do explain the order processing, warehouse and transportation of
the products

Second part: suggest the advantages of the transportation that you have chosen. The advantages
depend on the nature of the product, cost efficiency, distance of the market from point of
produce.

(vi) Material handling

Material handling involves the movements of products between warehouses and transportation
deports. Modern storage facilitates a higher level of automation, in some cases robots are used to
conduct material handling tasks. The lowering human element in locating inventory and
assembling orders has reduced error and increased the speed of these operations. Two key
developments in material handling are unit handling and containerization. Unit handling
achieves efficiency by combining multiple packages onto pallets that can be moved by forklifts
s. (We usually see this in departmental stores like Hyper, Macro and Trade World).
Containerization involves the combining of many quantities of good e.g. car components into a
single container. An important element in material handling is the quality of packaging. It is
necessary to evaluate not only the appearance and cost of packaging but also the ability to
repackage into larger quantities for transportation. Packages must be strong enough to sustain
the forces of physical distribution such as harsh handling and stocking.

Summary

In this topic we discussed how products are moved from the producer to the final consumer of
the product. We discussed various channels of distribution for both industrial and consumer
goods. Distribution channels perform a number of functions which adds value to the products.
 54

We identified the various factors that affect the choice of the distribution channels to be used as
well as conflicts that arise between channels and producers and how they can be solved and the
components of a physical distribution system .

Self assessment exercise

1. Briefly describe the distribution channels for consumer products can utilize

2. Why is it that companies can distribute their products using different channels

3. Discuss the benefits of using distribution channels instead of marketing directly to customers

4. Regardless of the length of the time a channel members and producers have known each other,
conflicts usually occur between these two parties .Identify the common sources of channel
conflicts and suggest possible ways of resolving such conflicts

5. Physical distribution system is a composition of a number of activities, Identify and elaborates

on the components of a physical distribution system

CHAPTER 4. ROLE OF INFORMATION TECHNOLOGY AND SYSTEMS IN THE

SUPPLY CHAIN

4.0. Introduction

Supply chain management (SCM) is the 21st century global operations strategy for achieving
organizational Competitiveness and Companies are attempting to find ways to improve their
 55

flexibility and responsiveness and in turn competitiveness by changing their operations strategy,
methods and technologies that include the implementation of SCM paradigm and information
technology (IT). The market is electronically connected and dynamic in nature. Therefore,
companies are trying to improve their agility level with the objective of being flexible and
responsive to meet the changing market requirements. In an effort to achieve this, many
companies have decentralized their value-adding activities by outsourcing and developing virtual
enterprise (VE). All these highlight the importance of information technology (IT) in integrating
suppliers/partnering firms in virtual enterprise and supply chain.

4.1. Chapter objectives

After working through this chapter, the student is expected to be able to

 Define information technology

 Explain the role of information technology in a supply chain environment
 Explain Inter-organisational Information Systems
 Describe the Information Requirements Determination for a Supply Chain 10lS
 Explain Information Technology Applications for Supply Chain Management

4.2. Definition of Information Technology

Information technology (IT) is the application of computers and telecommunications equipment

to store, retrieve, transmit and manipulate data, often in the context of a business or other
enterprise. The term is commonly used as a synonym for computers and computer networks, but
 56

it also encompasses other information distribution technologies such as television and

telephones. Several industries are associated with information technology, such as computer
hardware, software, electronics, semiconductors, internet, telecom equipment, e-commerce and
computer services.

Information technology is an enormously vibrant field that emerged at the end of the last century
as our society experienced a fundamental change from an industrial society to an “information
society.” From its inception just half a century ago, computing has become the defining
technology of our age, changing how we live and work. Computers are integral to modern
culture and are a primary engine behind much of the world's economic and social change

4.3. Supply chain management and information technology

The supply chain management (SCM) is concerned with the flow of products and information
between the supply chain members that encompasses all of those organizations such as suppliers,
producers, service providers and customers. These organizations linked together to acquire,
purchase, convert/manufacture, assemble, and distribute goods and services, from suppliers to
the ultimate and users.

Today, information and technology must be conceived of broadly to encompass the information
that businesses create and use as well as a wide spectrum of increasingly convergent and linked
technologies that process the information with the emergence of the personal computer, optical
fiber networks, the explosion of the Internet and the World Wide Web.

The cost and availability of information resources allow easy linkages and eliminate information-
related time delays in any supply chain network. This means that organizations are moving
toward a concept known as Electronic Commerce, where transactions are completed via a variety
of electronic media, including electronic data interchange (EDI), electronic funds transfer (EFT),
bar codes, fax, automated voice mail, CD-ROM catalogs, and a variety of others. The old
“paper” type transactions are becoming increasingly obsolete.
 57

Figure 4.1. An Integrated supply chain model

Hadfield. R. B.Nichols E.L.Jr. (1999)

Leading-edge organizations no longer require paper purchase requisitions; purchase orders,

invoices, receiving forms, and manual accounts payable “matching” process. All required
information is recorded electronically, and associated transactions are performed with the
minimum amount of human intervention. Recent developments in database structures allowed
part

4.5. Importance of information in an integrated supply chain environment

 Information is the key to the decision making in Business. Prior to the 1980s, a
significant portion of the information used to flow between functional areas within an
organization, and between supply chain member organizations, were paper-based. In
many instances, these paper-based transactions and communications were slow,
unreliable, and error prone
 58

 However, firms are now recognizing the vital importance of information and the
technologies that make this information available.
 The information systems and the technologies utilized in the supply chain represent one
of the fundamental elements that link the organizations into a unified and coordinated
system. In the current competitive climate, little doubt remains about the importance of
information and information technology to the ultimate success, and perhaps even the
survival, of any supply chain management initiative.
 Cycle time reduction, implementing redesigned cross-functional processes, utilizing
cross-selling opportunities and capturing the channel to the customer.
 Timely and accurate information is more critical now than at any time. Three factors have
strongly impacted this change in the importance of information.

 Satisfying customers have become something of a corporate obsession. Serving the

customer in the best, most efficient and effective manner has become critical, and
information about issues such as order status, product availability, delivery schedules,
and invoices has become a necessary part of the total customer service experience.
 Information is a crucial factor in the managers’ abilities to reduce inventory and human
resources requirements to a competitive level.
 Information flows play an essential role in the strategic planning for and deployment of
resources.
 The need for virtually seamless bonds within and between organizations is a key notion
in the essential nature of information systems in the development and maintenance of
successful supply chain. That is, creating inter-organizational processes and link to
facilitate delivery of seamless information between marketing, sales, purchasing, finance,
manufacturing, distribution and transportation internally, as well as inter organizationally,
to customers, suppliers, carriers across the supply chain will improve fill rates of the
customers service, increase forecast accuracy, reduction in the total inventory and savings
in the company’s’ transportation costs - goals which need to be achieved.
 59

Inaccurate or distorted information from one end of a supply chain to the other can lead to
tremendous inefficiencies such as excessive inventory investment, poor customer service, lost
revenues, misguided capacity plans, ineffective transportation, and missed production schedules.
Suitable technologies such as bar codes and scanners have been developed and applied in the
portions of supply chain to remove inaccuracy.

In supply chain-management, the suppliers, producers, customers are the members and are linked
through the ultimate level of integration.
In an integrated supply chain environment, the importance of IT can be summarized as
 To speed up the communication between parties
 To reduce /eliminate errors in the information communicated between parties
 Redesigning of cross functional process
 Cycle time reduction
 IT infrastructures supports and maintains the integration of organisational supply chains
 IT infrastructures link organizations in a supply chain as a unified unit
 to build up and sustain supply chain relationships

4.6. Types of Information Shared By Supply Chain Members

Information sharing is only an enabler for better coordination and planning of the supply chain.
Accordingly, companies must develop capabilities to make use of information. Typically, the
following types of information are of relevance (Lee and Whang),
 Inventory level: This includes all kinds of inventory, such as material, work in progress,
finished goods, and goods in transit.

 Sales data: Ultimate sales data lessen the negative effects of distorted demand
information when simulated with visible end consumer demand.

 Sales forecast: Since companies adapt their plans to their forecasts, it is important to
share these expectations. If sales data are shared, every company in the supply chain
could do their forecasts based on ultimate sales data. However, different methods might
lead to differing results.
 60

 Order status for tracking and tracing: This supports mainly customer service and reduces
uncertainty in the supply chain and for the ultimate customer.

 Production and delivery schedules: The different tiers in a supply chain can align their
operations to support the whole process if production and delivery schedules are shared,
as is the case for just-in-time relationships.

 Capacity: Sharing capacity information, especially production and transportation

capacities, can mitigate shortage and gaming behavior and supports supply chain
planning.

 Performance metrics: This includes all performance metrics that are relevant for the
whole process under consideration. Examples are quality data, lead times, queuing
delays, and service performance, to name a few.

In addition to the points listed, cost accounting figures are also of high relevance. Information
about selling price, salvage value, variable production cost, and fixed production cost, etc., are
important to complete the informational foundation necessary for optimal decisions. However,
this kind of information is highly sensitive. The benefits of such shared information are
undisputed and all information mentioned before could be used in highly integrated and aligned
organizations for better decisions. Nevertheless, there are obstacles that prevent companies from
sharing such information. This is mainly based on the prevailing belief that information
represents power and sharing it would lead to a loss of power and threaten the sharer’s position
in the supply chain. Traditionally, relevant information has been a substantial source of strategic
advantage, which is in line with economic theory, where a monopolistic promises to retain all
profits. Profits associated with superior information are often referred to as informational rent. In
such a constellation, however, available and retrievable information can only be exploited, but
not properly leveraged. This is a major challenge for supply chains.

4.7. Quality of Information

Another aspect of information sharing is the quality of shared information. Quality in general has
many dimensions and its meaning depends highly on the context. One widely accepted definition
 61

of quality is provided by the International Organization of Standardization (ISO). They define

quality as the degree to which a set of inherent features of a product or service fulfills customer
requirements. In the context of SCM, quality can be interpreted as the fulfillment of customer
requirements in terms of physical-functional specifications of products or in terms of an expected
outcome of processes.

Quality of information in supply chains can be interpreted similarly. In contrast to the customer
orientation of entire supply chains, all supply chain members who rely on information are
addressees, and therefore customers of information. Therefore, quality of information must be
defined according to how the information is perceived and used by each supply chain member
separately. Sometimes it has been presented ten dimensions of information quality that
characterize the overall quality of information:
 Relevance: The information addressee’s needs define the relevance of information. This
does not mean that irrelevant information is of poor quality but in the wrong context, it
might be irrelevant.
 Accuracy: Information should reflect the underlying reality. Problems may arise when
information becomes too accurate for its purpose and lead to an information overload.
 Timeliness: In contrast, information can rarely be too timely. With time as an increasingly
important competitive factor, the importance of fresh and up- to-date information
increases too.
 Completeness: Completeness of information has to be seen in light of its context.
 Coherence: Though a separate dimension, it heavily relies on accuracy and/or timeliness.
When information is incoherent, it usually is inaccurate and/or already too old.
 Format: The underlying form refers to the way information is presented.
 Accessibility: With increasing accessibility, the quality of information increases as well.
Information that cannot be obtained when needed is of very limited value. Accessibility is
strongly associated with timeliness of information.
 62

 Compatibility: This refers to how well information can be processed with tools and
combined with other information.
 Security: Security can be divided into logical security, which refers to fraud protection,
and disaster recovery, which refers to natural disasters and facility failure.
 Validity: Information is valid when its truth can be verified and it satisfies appropriate
standards related to the other dimensions

4.8. Effects of Social Media on Information and Knowledge Flows in the Supply Chain
Distributed and asymmetric information and knowledge in the supply chain, captured using
social media can have a number of direct effects.
 Amount of Information Flows: Social media offers the opportunity to gather information
from a broad range of users in the supply chain. Because information is gathered from a
broad range of participants, information that not might normally be made available can be
embedded in supply chain discussions. As a result, social media helps generate a greater
amount of information.
 Visibility of Information Flows: With social media, information becomes visible to
anyone who has access to the application and discussions. Further, sources of information
can be clearly enumerated. Posted information potentially provides clear trails of
information sources and uses over time. Visibility through identification can build
personalization into the information flows. Additionally, steps such as including a picture
of the person, place or thing being discussed, further facilitates visibility.
 Direction of Information Flows: Classic organization structures send information down
from top to lower level managers. Similarly, in the supply chain, information and
knowledge tend to flow in specific directions, e.g., orders from customers, logistic
directions for shipments, etc. However, if social media is embedded in supply chain
processes then information and knowledge flows in multiple directions. Initiating,
replying and responding, result in feedback and provide multiple directions of flows of
information, capturing information from various pockets in the supply chain.
 63

 Depth of Information Flows: “Depth” of information comes from the availability of

multiple views. A broad range of participants, potentially each with access to private
information, can generate different perspectives on the same and on different issues.
Assembling those views provides “depth” around that issue. Since social media facilitates
gathering information and knowledge from multiple sources, social media helps generate
greater “depth” of information through those multiple views.
 Velocity of Information Flows: Since information is available to and gathered by
participants throughout the supply chain, information is rapidly and broadly disseminated
information and does not get “stuck.” Critical information can be forwarded to those who
need or want the information, as it occurs. For example, logistic information can be
routed to those coordinating logistics. Information is initiated; feedback is generated in
response, etc. Accordingly, social media increases the velocity of information flows.

4.9. Supply chain information technology applications

Below is some of the supply chain information technology applications used

(ii). Electronic Data Interchange (EDI)

Introduced in the 1970s and popularized in the 1980s, Electronic Data Interchange (EDI)
technology has been widely used by firms in supply chains to facilitate transactions and
information exchanges.

EDI is defined as computer to computer exchange of structured data for automatic

processing. EDI is used by supply chain partners to exchange essential information
necessary for the effective running of their businesses.
These structural links are usually set up between organizations that have a long-term
trading relationship. For example, some multiple retailers will supply electronic point of
sale (EPOS) data directly to suppliers, which in turn triggers replenishment of the item
sold. Therefore, the consequence of this type of strong link those suppliers will be able to
build a historical sales pattern that will assist their own demand forecasting activities.
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Because there is no need for employees to collate the information manually, EDI has
many benefits, for examples, it is providing timely information about its customers’ sales
as well as highly accurate and very efficient.
Moreover, it is utilized for sending invoices, bills of lading, confirmation of dispatch,
shipping details and any information that the linked organizations choose to exchange
(Rushton et al., 2000).

Advantages of EDI

The main advantages of using EDI are to enter only informative needs on the computer system
once, and then it is able to speed of transaction and to reduce cost and error rates.

Other benefits of EDI are

 Quick process to information,

 Better customer service,
 reduced paper work
 increased productivity,
 improved tracing and expediting,
 Cost efficiency and improved billing.
 reduced labour cost and material cost associated with printing ,mailing and
handling paper based transactions
 reduced telephone and fax transmission
 reduced clerical costs

Through the use of EDI supply chain 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.

Although companies gain a lot of benefits from EDI, it is often the mismatch between EDI’s
expectations and the company's activities undertaken to achieve the desired performance. Also
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larger organizations are major adopters of EDI, whereas Small and Medium Enterprises (SME)
often do not use EDI.

(ii). Bar coding and Scanner

 Bar Codes are the representation of a number or code in a form suitable for reading by machines
(Rushton et al.,2000).
 Bar codes are widely used throughout the supply chain to identify and track goods at all stages in
the process.
 Bar codes are a series of different width lines that may be presented in a horizontal order, called
ladder orientation, or a vertical order, called picket fence orientation. For example, goods
received in a warehouse may be identified by the warehouse management system and added to
stock held in the warehouse.
 When put away, the bar code is used to associate the storage location with the bar-coded stock,
and on dispatch the stock record is amended.
 The use of bar codes can speed up operations significantly.
 On the other hand, the problems can occur if bar codes are defaced or the labels fall off in transit.
The maintenance management must be applied for extending the long-life period of this
equipment
 Bar code scanners are most visible in the check out counter of super markets and hyper markets.
 This code specifies name of product and its manufacturer.

(iii).Enterprise Resource Planning (ERP) Systems

Enterprise Resource Planning (ERP) Systems are Enterprise-wide Information Systems used for
automating all activities and functions of a business. These are transaction-based information
systems that are integrated across the whole business. Basically, they allow for data capture for
the whole business into a single computer package which’s give a single source for all the key
business information activities, such as customer orders, inventory and financials.
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 ERP systems have become enterprise-wide transaction processing tools which capture the
data and reduce the manual activities and task associated with processing financial,
inventory and customer order information.
 ERP system achieve a high level of integration by utilizing a single data model,
developing a common understanding of what the shared data represents and establishing
a set of rules for accessing data.
 In addition to the huge costs that are involved in procuring an ERP application,
installation of such systems will entail widespread change within the organization.
 It will have implications in terms of Business Process Reengineering (BPR), changes in
organizational structure, people and change management.
 Many companies have benefited from using this system whilst some have experienced
severe problems with their application. Generally, they also require a lot of customization
and training for each user.

(iv). Warehouse Management Systems

Warehouse management systems are systems that control all the traditional activities of
warehouse operations.

 Areas covered usually include receipt of goods, allocation or recording of storage

locations, replenishment of picking locations, production of picking instructions or lists,
order picking, order assembly and stock rotation.
 Some systems are used in conjunction with radio frequency (RF) communication
equipment. This equipment can be mounted on fork-lift trucks.
 The warehouse management system communicates with the RF system and directs the
activities of the warehouse staff (Thongchattu et al, 2007). For example, when picking
that it will provide the tasks for the operative to carry out. Once the task is complete the
operative updates the system and is directed to the next task.
 This has the advantage of updating the stock holding in real time. There are highly
sophisticated systems that control the operations of fully automated warehouses.
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 This may include automated storage and retrieval systems (AS/RS), automated guided
vehicles (AGVs), and the many other devices that are relatively common in today’s
modern warehouse such as, conveyors, carousels, sortation systems, etc.
 A number of computer models have now been developed to assist in the planning of
warehouse design and configuration.
 These are generally very sophisticated 3D simulation models that provide a graphic,
moving illustration on the computer screen of the layout of the warehouse.

(iv) Transportation Management Systems

Transportation Management Systems provide more visibility into shipments and orders.
Scheduling issues are also addressed on time. Multiple transportation options can be explored as
a result of earlier visibility into the supply chain. Timely communication and status reports can
also be obtained. By having control on its supply chain, businesses can make efficient routing
decisions.. Implementation of the new system resulted in target vendors submitting the relevant
freight information electronically with increased speed and efficiency. The new system resulted
in improved cost controls, better labour planning and reduced administrative overheads.

(v). Inventory Management Systems

During the mid to late 1990s, retailers began implementing modern inventory management
systems, made possible in large part by advances in computer and software technology.

 The systems work in a circular process, from purchase tracking to inventory monitoring
to re-ordering and back around again.
 Having an effective, efficient inventory control system, or inventory management system,
is imperative. Wal-Mart's system helps it maintain its signature "everyday low prices" by
telling store managers which products are selling and which are taking up shelf and
warehouse space. Inventory management systems are the rule for such enterprises, but
smaller businesses and vendors use them, too.
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 The systems ensure customers always have enough of what they want and balance that
goal against a retailer's financial need to maintain as little stock as possible. Mismanaged
inventory means disappointed customers, too much cash tied up in warehouses and
slower sales. Factors such as quicker production cycles, a proliferation of products, multi-
national production contracts and the nature of the big-box store make them a necessity.
 Modern inventory management systems must have the ability to track sales and available
inventory, communicate with suppliers in near real-time and receive and incorporate
other data, such as seasonal demand.
 They also must be flexible, allowing for a merchant's intuition. And, they must tell a
storeowner when it's time to reorder and how much to purchase.

4.9. Emerging and New Information Technology Solutions for Supply Chain Management

(i). Radio Frequency Identification (RFID)

 The bar code was intended to improve efficiencies in the retail space, but the bar code
cannot uniquely identify the specific object such as when items are produced, the lot of
the items was made and when will the items expire.
 Both RFID and Bar codes are indeed, quite similar, both being auto-ID technologies,
which are intended to provide item identification.
 The primary difference is the reading data from the items. In bar coding, the reading
device scans a printed label with optical laser or imaging technology and in RFID; the
reading device scans a tag by using radio frequency signals
 The need to minimise operating costs and employed assets has resulted in the adoption of
radio frequency technology to track inventories within a supply chain down to the item
level, thus reducing channel volume and enhancing forecasting and planning capabilities
(D’Avanzo et al.,2004).
 RFID is a type of automatic identification system. The purpose of an RFID system is to
enable data to be transmitted by a portable device, called a tag, which is read by an RFID
reader and processed according to the needs of a particular application. The data
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transmitted by the tag may provide identification or location information, or specifics

about the product tagged, such as price, colour, date of purchase, etc. (EPIC, 2002).
 The tag is a microchip connected to a small antenna. The chip can capture a certain
amount of data. The radio waves via which the tag and the reader communicate with each
other can vary from low frequency (125 KHz) to microwave frequency (6 GHz).
 The impact of RFID from a supply chain perspective includes: supply chain inversion,
pressure on inventory, increased regulation and legislation, cost control, connectivity and
visibility.
 Supply chain inversion concerns shifting from a push system to a pull system. Pressure
on inventory is related to the use of RFID to reduce lead times of information through
faster and more reliable registration and increased visibility in the supply chain.
 In terms of increased regulation and legislation, government regulation has led to more
product information and safety requirements.
 RFID has been used for traceability and visibility of products. In terms of cost cutting,
RFID is used to reduce labour costs.
 Other practical applications of RFID include authentication (Coronado et al 2004) and
shrink prevention.
 In terms of authentication, the use of electronic sealing through RFtags can warrant the
authenticity and origin of a product.
 RF tags can be used to prevent non-malicious and malicious shrinks. Non-malicious
shrink is associated with product handling. Malicious shrink is usually associated with
theft and fraud.
 RFID systems have permitted the tracking of work-in-progress in automotive
manufacturing and computer hardware manufacturing.
 Tags are re-used on other components or products or they may remain permanently fixed
to the product to provide a secure serial number.

(ii). Software Agents

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Artificial Intelligence emerged into the paradigm of software agents with the application area of
multi-agent systems. A software agent is a software system, which has attributes of intelligence,
autonomy, perception or acting on behalf of a user.

 Agents can behave autonomously or proactively. The intelligence of an agent refers to its
ability of performing tasks or actions using relevant information gathered as part of
different problem-solving techniques such as influencing, reasoning and application
specific knowledge. Java has been the most common tool for building such intelligent
agents which are increasingly becoming mobile. There are only four essential types of
intelligent software agents:
 Buyer agents or shopping bots - Buyer agents travel around network (i.e. the internet)
retrieving information about goods and services. These agents, also known as 'shopping
bots', work very efficiently for commodity products such as CDs, books, electronic
components, and other one- izefits-all products. Amazon.com is a good example of a
shopping bot. The website will offer you a list of books that you might like to buy on the
basis of what you're buying now and what you have bought in the past.
 Monitoring and Surveillance Agents are used to observe and report on equipment, usually
computer systems. The agents may keep track of company inventory levels, observe
competitors' prices and relay them back to the company, watch stock manipulation by
insider trading and rumors, etc.
 User agents (personal agents) - User agents, or personal agents, are intelligent agents that
take action on your behalf. In this category belong those intelligent agents that perform
tasks like checking your e-mail and sorting it according to the user's order of preference,
and alert you when important emails arrive; Play computer games as your opponent or
patrol game areas for you; Assemble customized news reports for you. There are several
versions of these, including news hub and CNN.
 Data mining agents - This agent uses information technology to find trends and patterns
in an abundance of information from many different sources. The user can sort through
this information in order to find whatever information they are seeking. Classification is
one of the most common types of data mining, which finds patterns in information and
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categorizes them into different classes. Monitoring and Surveillance agents and Data
mining agents are being considered for applications in SCM.. These agents usually
monitor complex computer networks that can keep track of the configuration of each
computer connected to the network.

(iii). Decision Support Systems

Decision Support Systems (DSS) are a specific class of computerized information systems that
supports business and organizational decision-making activities. A properly designed DSS is an
interactive software-based system intended to help decision makers compile useful information
from raw data, documents, personal knowledge, and/or business models to identify and solve
problems and make decisions.

Typical information that a decision support application might gather and present would be:

 an inventory of all of your current information assets (including legacy and relational
data sources, cubes, data warehouses, and data marts),
 comparative sales figures between one week and the next,
 projected revenue figures based on new product sales assumptions;
 the consequences of different decision alternatives, given past experience in a context
that is described

In SCM, there is always a likelihood of having disagreements among parties for a certain
decision making process. This phenomenon gets worse, when the business environment becomes
more competitive and turbulent.
Accordingly Decision Support Systems (DSS) have been integrating in various areas like
logistics, inventory management, facility design, sales analysis etc.
Specific technologies that may be utilised for effective supply chain management include the
following
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 SQL interface –The SQL interface provides direct link to databases of demand
forecast ,orders ,inventory ,processes ,product information ,logistics information.
 expert systems rules- expert systems can apply and test validity of production rules of
thumb ,analyse the schedule and recommend policy changes that yield cost saving
 Scheduling algorithm – the scheduling algorithm tool should be able to develop schedules
based on information in its database. The scheduling tool should contain algorithms
based on traditional operations research algorithms, including capacity balancing, lot
sizing, just in time scheduling and material flow adjustments.
 Linear programming capabilities –the software tool should have the capability to
formulate any leaner, nonlinear or mixed integer model. Direct link should be available to
the best commercially available optimizers .special algorithm are needed for large scale
non linear problems and decision making under risk and uncertainty.
 Blocked scheduling – It is a combination of linear programming and expert system rules.
 Multistage scheduling- Linear programming can allocate production across plant and
optimally distribute products to warehouse and demand centre.

(iv). Web Services

Web services are application interfaces accessible via Internet standards that use XML and that
employ at least one of the following standards: Simple Object Access Protocol (SOAP), Web
Services Description Language (WSDL) or Universal Description, Discovery and Integration
(UDDI).

These standards, and the next generation standards that are being built on them, are defining the
way that forward-thinking enterprises manage lightweight integration tasks. In the view of Sun
Microsystems (2004), web services interoperability for supply chain management is being used
to support business-to-customer models.

 The computing giant provided an example where retailers offer electronic goods to
consumers. To fulfil orders, the retailer has to manage stock levels in warehouses
(Coronado et al 2004).
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 A typical business-to-business model is used when an item in stock falls below a certain
threshold.
 In that case the retailer must restock the item from the relevant manufacturer’s inventory.
 In order to fulfil a retailer’s request, a manufacturer may have to execute a production run
to build the finished goods.
 In reality, a manufacturer would have to order the component parts from its suppliers and
that may be a manual process which is supported through the use of fax.

(v). Electronic Commerce

Electronic commerce refers to the wide range of tools and techniques utilized to conduct
business in a paperless environment. 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. This system provides access to customers all over the world and
thus eliminates geographical limitations.
 Some of the E-commerce applications with applications in B2C (Business to Consumer)
and B2B (Business to Business) space, which are changing the dynamics of Supply Chain
Management include:
 E-tailing: using the Internet for selling goods over the internet. The archetypal e-tailing
application is that of a bookseller such as Amazon. This company is renowned for the
fact that it only sells books over the internet and doesn't even take telephone orders.

Customers of Amazon interact with its website and carry out a number of functions including:

 browsing readers’ reviews of books;

 reading feature articles about books and authors similar to those found in magazines and
newspapers;
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 searching for details of a book based on information such as the author's name or the title
of the book;
 browsing the books which are the Amazon bestsellers;
 ordering books using credit cards or some other similar payment method;
 Tracking the progress of an order.

(vi). E- Procurement.

The term procurement is used to describe the purchase of goods and services which are not
directly used in the main business of a company. For example, a car manufacturer will procure
stationery for its employees or procure training courses for them to attend in order to improve
their skills. An e-procurement system which would automatically take the form produced by the
person making the procurement, check that it satisfies all the company rules for procuring the
item that is required, carry out authorization if it is below a certain limit or send the form to
someone who can carry out authorization and then log the purchaser into the site of the supplier.
He or she is then able to use this site to make the purchase, quoting an automatically generated
procurement requisition number.

(vii). E-Auctions

These are sites on the web which run conventional auctions. There are two types of auction:

Those that are carried out in real time, where participants log in to an auction site using a
browser at a specified time and bid for an article until the highest price is reached and no other
bids are forthcoming. The other type of site – and the most common – is where an item is offered
for sale and a date advertised after which no more bids are accepted. Such sites make a profit
from two sources: first they usually charge a commission on the items that are sold and, second,
they display adverts which are viewed by visitors to the site. The auction site will then receive
some fee for displaying the advert, a further fee if a visitor clicks on an advert and it takes them
to the advertiser's website and another fee if they purchase something from this site. Again, this
is just an online analogue of a conventional business
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(viii). Electronic Supply Chains

Electronic Supply Chains (ESC) refers to those supply chains that are electronically facilitated
between or among participating firms. Also called Virtual Supply Chains, these are realized in
two forms, EDI-based or Internet based.

 EDI generally connects firms through proprietary Value Added Networks (VAN),
whereas the Internet generally connects firms through open networks which use standard
protocols.
 The ESC links trading partners to allow them to buy, sell and move products, services
and cash Due to the low implementation costs, the introduction of the Internet has
brought about opportunities that allow firms to transact with other enterprises
electronically.
 New types of intermediaries have been created as a result of virtual supply chains.
 The e-supply chain also envisages use of internet-based applications to transact and
exchange information like product and inventory information with their downstream or
upstream trading partners.
 Supply Chain initiatives like Collaborative Planning, Forecasting and Replenishment
(CPFR), Vendor Managed Inventory (VMI), Efficient Customer Response (ECR) and
Quick Response have been increasingly facilitated in the new e-supply chain paradigm.
Information sharing among suppliers manufacturers, distributors and retailers are greatly
improved.

 Information sharing between members of a supply chain using EDI technology should be
increased to reduce uncertainty and enhance shipment performance of suppliers and
greatly improve the performance of the supply chain system (Srinivasan et al., 1994).

3.10. Reasons for using IT in supply chain

Information sharing between members of a supply chain using EDI technology should be
increased to reduce uncertainty and enhance shipment performance of suppliers and greatly
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improve the performance of the supply chain system. Below are the reasons for using
information technology in the supply chain.

(i).Marketing reasons of IT in SCM:

To compete in a new market, organizations need to be capable of reconfiguring its resources to

meet the changing requirements. This organizations to have an effective supply chain or
physically distributed enterprises.

 Firms are now capable to designing and developing IT platforms as competitive weapons
at a fraction of the cost that prevailed only a few years ago.
 A strategic alignment model for a manufacturing information system that specifically
addresses the requirements of leveraging the emerging developments in information
technologies would be useful.

(ii).Economic reasons:

The market is the driving force for any changes in an organization. Market factors such as
customer requirements, competitors and price force organizations the way they manage their
operations.

 Companies select IT enabled SCM in order for companies to compete in a networked

economy wherein you have to compete in a global market by multiple competitive
performance objectives such as price, quality, flexibility, responsiveness and
dependability.
 The economic reasons here is the cost reason. Though flexibility and responsiveness are
important in order to compete in a global and networked market, the cost still plays an
important role in being competitive.
 Obviously, flexibility and responsiveness are interconnected with cost.
 In order to reduce the cost of production, companies have implemented the concept of
SCM with a view to eliminate non value- adding activities.
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 IT helps to improve the accurate information flow and in turn accurate decisions to
support the business process in an effort to meet the changing market requirements.
 Availability of resources internationally make some companies to opt for global
sourcing and this again demands an IT-enabled SCM with a view to overcome lack of
resources.

(iii).Strategic reasons for using IT in the supply chain.

 Strategic planning of IT in SCM includes organizational issues such as organizational

structure
 It increases the awareness and involvement of top management in business processes,
strategic alliances, and information technology that influence the overall performance of
IT-enabled SCM.
 It links the supply chain operations with top level strategies, suitable information systems
should be selected to develop an effective supply chain. Effective Supply Chains IT
system can support the organization in a more productive manner.
 Use of IT encourages teamwork, collaborative supported work, training and education in
value adding processes and the application of multimedia will enhance the
communication and hence a good decision support system that is flexible and responsive.
 Supply chain IT system can be a supportive facilitator of organisational change––
extending and enhancing organization choice and improving the quality of decision
making and supporter of innovation.
 The emergence of new network technologies and expansion of the Internet can improve
an organization’s internal and external communication capabilities.
 Lower information processing costs make co-ordination and mutual adjustment processes
more efficient, and therefore improves organizational performance (Andersen, 2001).
 It also supports decentralized and less hierarchical organizational structure.
 Electronic communication is less formal, reduces organizational barriers.
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 Electronic communication enhances innovation particularly in large dispersed. However,

there is a need to standardize the information flow and access control to information
along the supply chain.
 IT systems facilitate effective and protected access information in a supply chain

(iv).Technological reasons for adopting IT in supply chain

 Strategic planning involves decisions that affect the long-term performance of an

organization.
 Lack of IT in an organization can make the organization obsolete and not to qualify being
as one of the partners in a virtual supply chain.
 Since the market characteristics have changed, it would be difficult to survive in a global
market without an IT-enabled SCM.
 IT helps to improve collaborative- supported work using different automation that
includes computer-aided design/computer aided manufacturing (CAD/CAM) and CIM.
 IT-enabled SCM facilitate effective technology transfer between partners in a network of
firms.
 Using e-business technologies and hence ultimately providing a fully integrated e-
business process can integrate activities along the value chain. Integration of the physical
processes and e-businesses applications is essential to achieve an effective SCM
 The widespread availability of highly flexible, functional and inexpensive information
and communication technologies provides us with opportunities for a radical redesign of
supply chains.
 Global market and competitiveness center around global outsourcing and partnership and
these signify the ICT-integrated SCM.
 The risk of not having IT enabled SCM is enormous both in terms of survival and
productivity of an organization. For example, competitor action influences the strategies

3.11. Supply Chain Information System Integration Challenges

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The following are some of the problems often cited in the literature both by the researchers and
practitioners when developing an IT-integrated SCM:

 lack of integration between IT and business model

 lack of proper strategic planning,
 poor IT infrastructure,
 insufficient application of IT in virtual enterprise, and
 Inadequate implementation knowledge of IT in SCM

3.12. Future supply chain information technology systems

With the explosion of the internet and the World Wide Web as well as companies’ extranets,
future systems will possess the following characteristics:

 centralized coordination of information flows

 Total logistics management –integrating all transportation, ordering and manufacturing
systems
 Order change notices that trigger cascading series of modifications to production
schedules ,logistics plans and warehouse operations
 Global visibility into transportation resources across business units and national
boundaries
 Global inventory management –ability to locate ant track the movement of every item
 Global sourcing –consolidation of the purchasing function across organizational lines
facilitating purchasing leverage and component standardization across business units
 Intercompany information access –clarity of production and demand information residing
in organizations both upstream and downstream throughout the value chain
 Data interchange- between affiliates and nonaffiliated through standard
telecommunication channels
 Data capture – ability to acquire data about an order at the point of origin and to track
products during movement and as their characteristics change transformation of the
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business from within –managers who can see the big picture and accept the new forms of
business princes and systems
 Improvements in supplier customer relationships – to justify investments in technology
linkages

CHAPTER 5. SUPPLY CHAIN COLLABORATION AND PERFOMANCE

MANAGEMENT

5.0. Introduction

Fundamental to the success of any supply chain is the management of both the material flow of
product and the information flow. For any supply chain to be effective, the flow of material
should not be cannot be interrupted or distorted and should not incur waste or consume
management time in correcting problems. With the Internet enabling rapid information flow,
much of the recent attention has focused on the information flow only, yet even in Internet-
enabled supply chains, the overall success still depends on an uninterrupted and efficient
physical order fulfillment process. This chapter discusses the basics of both material and
information flows and their interactions

5.1. Chapter Objectives

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After studying this chapter, the student is expected to be able to

 Explain what internal supply chain is

 Explain what external supply chain is
 Explain the importance of benchmarking in supply chain management
 Explain the benefits of inter-organisational supply chain collaborations
 Explain the process of supply chain re-engineering

5.2. Internal supply chain

 Internal supply chain refers to the flow of material , transformation and other processes
that occurs within a given organisation
 Internal supply chains maybe complex due to international organizational structures.
Internal supply chain for global organisations may have multiple links that span over the
global locations of the firms
 Organization should develop flowcharts of process that have to be followed within the
organization
 Process map development should use cross functional teams so that all required
operations are included.
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 Team members must be knowledgeable about their part of the supply chain and must also
have an understanding of how each part interface with other parts of the supply chain.
 Each teAm members should follow given instructions in supplying the required
information
 Examples of key processes involved in internal supply chain are order transmittal (sales),
order entry (material planning), order preparation (purchasing, manufacturing,
warehousing) and order shipment (distribution and transportations) team members should
come from all these operations.
 Each team member documents the steps in its portion of supply chain along with current
performance information

5.3. External supply chain

 External supply chain involves the suppliers and the customers who the
organization deals with. Suppliers and customers are the most critical to an
organization’s supply chain management effort
 The key suppliers and customers have to be identified , they provide a great
advantage to the organization’s supply chain initiative
 Several issues have to be addressed in selecting external supply chain members,
these include:
 Identifying the competitive situation that exists between prospective SCM
members. Supply chain initiatives can be productive if the members are not direct
competitors
 Competition among supply chain members may limit collaboration and
relationship building
 All organizations and their representatives must be pursuing similar goals
 The goals of the organizations must be compatible with the SCM initiatives.
 All organizations kin the supply chain should feel that their involvement is
beneficial
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5.4. Inter-Organisational Supply Chain Collaboration

A business agreement between two or more companies at the same level in the Supply chain or
network in order to allow greater ease of work and cooperation towards achieving a common
objective

4.4.1 Benefits of inter-organisational supply chain collaboration

The specific benefits of inter-organizational supply chain collaboration include, establishing

contacts across the supply chain, gaining insights into current organizations practices and
identifying opportunities for joint projects between supply chain members

Establishing contacts across supply chain

 Participants become acquainted to key personnel in each other’s organizations

 It provides the organizations with the real persons to deal with
 Having a real contact to deal with eliminates delays and unforeseen problems
 It allows for quick response

Gaining insights into current organisational practices

 Provides forum for organizations to discuss their current practices

 Provides opportunities for discovery of problems formulation of remedies
 Facilitates formulation of performance standards among supply chain members taking
into consideration the circumstances of all members

Joint projects between supply chain members

 Supply chain members can jointly take up research projects

 Product development projects
 Information’s systems development projects

5.5.Supply chain performance

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In order to assess the performance of an existing supply chain and its related processes
accurately, it is necessary to have objective performance information. This information should
cover a full range of performance areas including.

 Products and services offered

 Sales
 Market share
 Costs
 Quality
 Delivery
 Cycles times
 Asset utilization
 Responsiveness
 Customer service

This information should be gathered and shared with the internal and external supply chain
members. Decisions to improve supply chain performance should be based on information.
Organizations should be willing to share such information with other supply chain members;
organizations should not be only willing to obtain information from other without sharing
information with others.

5.6. Role of Benchmarking

Benchmarking is the process of identifying, understanding, and adapting outstanding practices

from within the same organizational from other organizations to improve performance. This
involves the process of comparing practices and procedures to those of the best to identify ways
in which an organization can make improvements. The steps in benchmarking process include

 Identifying and understanding your current processes

 Forming a benchmarking team
 Determining what to benchmark
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 Identify benchmarking partners

 Collect data
 Analyse data
 Take action to improve
 Review results

Benchmarking provides means of improving performance.

5.7. The importance of time in supply chain management

 Low prices, quality, delivery and technological performance do not guarantee success in
the supply chain.
 Organisations are now realizing the need to compete basing on time
 Price, quality, delivery and technological performance remain important but other
organizations are differentiating their service through time.
 Organizations are realizing the importance of getting the products and services to the
customers faster than competitors.
 Making the products reach the customer in the possible time is one of the major forces
pushing organizations to participate in supply chain management initiatives
 Adopting an integrated supply management approach provides the means for
organizations to reduce their cycle times.

5.7.1. Cycle Time

Cycle time is the total elapsed time required to complete a business process. Almost 3-5% of the
time elapsed in a business process is only devoted to real work; the rest of the time is spent on
counterproductive activities and events. Cycle time reduction is not about reducing the
transaction time; it is concerned with completing the business process effectively
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By focusing on key processes, supply chain member organization can make significant
improvements in cycle performance, improvements that can provide a source of competitive
advantage for the supply chain.

In order to effectively compete on the basis of time, a number of other supply chain capabilities
ought to be improved simultaneously, thus, quality, flexibility, customer service, cost and

 The time sensitive business environment presents new challenges to supply chain
managers.

5.7.2. Causes of long cycle times

Waiting – long cycle times occur due to waiting periods that happen between successive
processes /steps. The time spent on real process might be less than time spent on waiting. Supply
chain managers should ask:

 what are the causes of long waiting time

 what actions can be taken to reduce the long waiting times
 does the organization have additional capacity in terms of
facilities ,equipment and personnel to reduce waiting periods

Non value added activities –when analysing the supply chain process, it is important to
determine the value that each step of the process is adding some steps in the process may add
less value than the time they take

Check whether all activities add value, for examples if cycle time is long because of poor deliver
of suppliers, then find ways to improve the performance of the suppliers

Serial versus parallel operataions - many supply chains have processes where activities are done
in series (activity 1 is done first and activity 2 only starts after completion of activity 1). An
apparel operataions entails the execution of part of activity 2 whilst activity 1 is still in progress.
This reduces the cycle time.
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Repeating process activities – a significant cause of poor supply chain cycle time performance
has to repeat process steps due to product or service quality issues. The supply chain manager
should ask:

 are they parts of the process that are repeated sue to inability to get it right the first time
 What are the causes of these problems?
 What actions are necessary to resolve these problems?

Batching – Batching occurs when some quantity of materials, orders and so on is accumulated at
one step in the process or organization in the supply chain before it is released to the next process
step or supply chain member organization .the supply chain manager should justify the rationale
for batching if batching is not justified it should not be used at the expense of time.

Excessive Controls – excessive rules and procedures that have to be followed tent to delay the
processes .a common internal example is the purchases order processing. How many signatures
are needed in the name of approval before the order begin to be proceed

Other reasons include

 Lack of synchronization in materials movement

 Ambigeous goals and objectives
 Poorly designed procedures and forms
 outdated technology
 lack of information
 poor communication
 limited coordination
 limited cooperation
 lack of /ineffective training

5.7.3. Opportunities for cycle time reduction across the supply chain
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Opportunities for cycle reduction exist for both intra-organisations and inter-organisational basis.
To achieve a reduced cycle time, a number of supply chain activities need to be reviewed:

 Material planning and scheduling

 Purchase order cycle
 Inbound transportation
 Material receipt /inspection
 Material review activities
 Manufacturing process
 Customer order processing
 Warehousing operataions
 Outbound transportation
 Returns material/ reverse logistics

To achieve cycle time reduction, the following steps are necessary

 Establish a cycle time reduction team

 Develop an understanding of the given supply chain and current cycle time performance
 Identify opportunities for cycle time reduction
 Develop and implement recommendations for cycle time reduction
 Measure process cycle time performance
 Conduct continuous improvements effort for process cycle time reduction

5.7.4. Critical success factors for cycle time reduction

Critical success factors are:

 Top management support

 A commitment to significant cycle time reduction goals
 Use of cross –functional teams with team members that posses thorough process
knowledge
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 Application of TQM tools (process mapping, Pareto analysis, fishbone diagrams)

 Training in cycle time reduction approaches
 Establishing, monitoring and reporting formal cycle –time performance measures
 Application of information systems and technology and
 Collaboration with supply chain members

4.8. Supply chain performance measures

This is matrices used by supply chain members to assess the performance of their partners.
Organisataions can also asses their own performance using these measures. Performance
measures should meet certain characteristics. A number of suggestions have been offered by
various experts on the subject of designing PMS. A number of characteristics that are found in
effective performance measurement systems include the following.

 Inclusiveness (measurement of all pertinent aspects)

 Universality (allow for comparison under various operating conditions)
 Measurability (data required are measurable) and
 Consistency (measures consistent with organization goals)

According to Gunasekaran et al. (2001), for effective management in a SC, measurement goals
must consider the overall SC goals and the metrics to be used. These should represent a balanced
approach and should be classified at strategic, tactical and operational levels, and be financial
and nonfinancial measures, as well.

Below is a list of desirable characteristics of SCPM derived from different sources (Beamon,
1999; Gunasekaran et al., 2001; Gomes et al., 2004; Tangen, 2005; and Thakkar et al., 2009).
Some of these apply to all measures and some apply to a limited number of a firm's measures. It
is also very difficult to fulfil all requirements suggested in literature when designing a PMS
(Tangen, 2005). Supply chain performance measures should:

 Be simple and easy to use.

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 Have a clear purpose.

 Provide fast feedback.
 Relate to performance improvement, not just monitoring.
 Reinforce the firm's strategy.
 Relate to both long-term and short-term objectives of the organization.
 Match the firm's organization culture.
 Not conflict with one another.
 Be integrated both horizontally and vertically in the corporate structure.
 Be consistent with the firm's existing recognition and reward system.
 Focus on what is important to customers.
 Focus on what the competition is doing.
 Lead to identification and elimination of waste.
 Help accelerate organizational learning.
 Evaluate groups not individuals for performance to schedule.
 Establish specific numeric standards for most goals.
 It must reflect relevant non-financial information based on key success factors of each
business.
 It must make a link to reward systems
 The financial and non-financial measures must be aligned and fit within a strategic
framework.
 Minimum deviations should exist between the organizational goals and measurement
goals;

5.8.1. Common Frameworks and Models for Performance Measurement

A number of frameworks and models for performance measurement have been developed, since
1980s (Bititci et al.,2000).These frameworks all have their relative benefits and limitations.
Literature review indicates that empirical and theoretical validity of some of the frame works are
established whereas information about others is not available. This section is an attempt to study
and analyze few widely cited measurement systems.
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(i).Balanced Score Card (BSC):

BSC proposes that a company should use a balanced set of measures that allows top managers to
take a quick but comprehensive view of the business from four important perspectives. These
perspectives provide answers to four fundamental questions (Tangen, 2004):

(i). How do we look to our shareholders (financial perspective)?

(ii).What must we excel at (internal business perspective)?
(iii). How do our customers see us (the customer perspective)?
(iv). How can we continue to improve and create value (innovation and learning
perspective)?

Figure 5.1. Balanced Score Card

(Source: Tangen, 2004)

 The BSC includes financial performance measures giving the results of actions already
taken.
 It also complements the financial performance measures with more operational non-
financial performance measures, which are considered as drivers of future financial
performance.
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 By giving information from four perspectives, the BSC minimizes information overload
by limiting the number of measures used.
 It also forces managers to focus on the handful of measures that are most critical.
 Further, the use of several perspectives also guards against sub-optimisation by
compelling senior managers to consider all measures and evaluate whether improvement
in one area may have been achieved at the expense of another.

Weakness of BSC

 The main weakness of this approach is that it is primarily designed to provide senior
managers with an overall view of performance. Thus, it is not intended for (nor is it
applicable to) the factory operations level.
 Further, they also argue that the BSC is constructed as a monitoring and controlling tool
rather than an improvement tool.
 Furthermore, Neely et al. (2000) argue that although the BSC is a valuable framework
suggesting important areas in which performance measures might be useful, it provides
little guidance on how the appropriate measures can be identified, introduced and
ultimately used to manage business.
 They further conclude that the BSC does not consider the competitor perspective at all.
 It does not specify any mathematical logical relationships among the individual’s
scorecard criteria. It is thus difficult to make comparisons within and across firms using
BSC (Soni et al., 2010). BSC is more like a strategic management tool, rather than a true
complete PMS (Gomes et al., 2004).

(ii). Performance Prism:

The performance prism framework suggests that a PMS should be organised around five distinct
but linked perspectives of performance (Neely et al., 2001):

 Stakeholder satisfaction (Who are the stakeholders and what do they want and
need?);
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 Strategies (What are the strategies we require to ensure the wants and needs of our
stakeholders?)
 Processes (What are the processes we have to put in place in order to allow our
strategies to be delivered?);
 Capabilities (The combination of people, practices, technology and infrastructure
that together enable execution of the organisation’s business processes, both now
and in the future, and what are the capabilities we require to operate our
processes?);
 Stakeholder contributions (What do we want and need from stakeholders to
maintain and develop those capabilities?)

Figure 5:2. Performance Prism

(Tangen, 2004)

The performance prism has a much more comprehensive view of different stakeholders (e.g.
investors, customers, employees, regulators and suppliers) than other frameworks. Neely et al.
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(2001) argue that the common belief that performance measures should be strictly derived from
strategy is incorrect.

It is the wants and needs of stakeholders that must be considered first. Then, the strategies can be
formulated (Neely et al., 2001). Thus, it is not possible to form a proper strategy before the
stakeholders and their needs have been clearly identified.

The strength of this conceptual framework is that it first questions the company’s existing
strategy before the process of selecting measures is started. In this way, the framework ensures
that the performance measures have a strong foundation.

The performance prism also considers new stakeholders (such as employees, suppliers, alliance
partners or intermediaries) who are usually neglected when forming performance measures.

Although the performance prism extends beyond “traditional” performance measurement, it

offers little about how the performance measures are going to be realised. Another weakness is
that little or no consideration is given to the existing PMSs that companies may have in place
(Medori et al., 2000).

(iii).Time-based Performance Measures

In the literature, four time-based measures appear most frequently, they are:

(i). New product development time;

(ii). Manufacturing lead time;
(iii). Delivery speed; and
(iv). Responsiveness to customers.

The popularity of these measures suggests that new product development, manufacturing,
delivery, and customer service are key integrated strategic processes contributing to supply-chain
time-based performance. The arguments supporting the competitive value of supply-chain time-
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based performance have been shown primarily by means of case studies and anecdotal evidence
(Jayaram et al., 2000).

CHAPTER 6: DEVELOPING & MAINTAINING SUPPLY CHAIN RELATIONSHIPS

6.0. Introduction

Today, business units do not compete with each other individually on the market, but as
members of a supply chain, delivering the goods or service to their consumers in joint
collaboration. Participants cooperate in the process of purchasing, production and selling; their
mutual interest is to satisfy consumer demand, thus all the basic material and spare parts
producers, product assemblers, processing units, wholesalers and retailers are parts of a chain, if
they collaborate in and coordinate these processes. This collaborated supply chain view of
companies is a business philosophy founded on trust, commitment, cooperation, mutual
objectives and executive managerial support, as well as the acceptance and understanding of
mutual dependence. The business relationship among the players defines the performance of the
supply chain; therefore, particular attention should be paid to the examination of this element
when the overall performance of a chain is being evaluated.
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6.1. Chapter objectives

After studying this chapter, the student is expected to be able to:

 Define supply chain strategic alliances

 Explain the benefits of strategic alliances in a supply chain.
 Explain the benefits of trust in the supply chain
 Describe the models of supply chain trust
 Explain the sources of supply chain conflicts

6.2. Supply chain alliance development

Alliance is defined as any “independently initiated inter-firm link that involves exchange,
sharing or co-development”. Alliances can be seen as inter-organisational forms that use
resources and governance arrangements from more than one existing organisation (Inkpen,
2001). Such resources can include partners’ contributions of capital, technology or firm-specific
assets. Supply chain alliances take place when organisations at related points in the supply chain
agree to work in a cooperative rather than adversarial manner:

 Strategic alliances are characterized by the following features. First, the partnering firms
remain independent after the alliance is formed. Second, because of this independence,
there is uncertainty as to what one party expects the other party to do. This phenomenon
is referred to as behavioural uncertainty. Third, the firms forming the alliance are
mutually interdependent (Parkhe, 1993), and consequently, are vulnerable to one another.
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 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 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.
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 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.

6.2. A conceptual model of alliance development

The general model for strategic alliance has a number of vertical; and horizontal components.
The vertical components are

 The strategic component –examines how the strategic expectations and evaluations of
alliance effectiveness evolve as alliance progresses through development stages
 The process component –outlines the stages of alliance required steps for formation,
implementation and maintenance of alliance
 The operational component -positions the development of search and selection criteria
and operating standards for managing an alliance.
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Figure 6.1. A conceptual model of alliance development

The horizontal stages are:

Level 1 –alliance conceptualization – it begins when a firm determines a collaborative

arrangement has appeal and provides a potential alternative to the current arrangement. This
level involves significant joint planning to determine what the ideal strategic alliance would be in
an ideal world and then project what a more realistic type of alliance might be. This is the first
stage when the organization realizes that there is need for alliance. The realization is often
triggered by:

 Actions of global competitors

 Industry consolidation
 Alternative distribution networks and retail formats
 Major technological changes in an industry
 Quality problems
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 Organizational restructuring process where other business aspects are outsourced

 The need to effectively serve the customers

The organization becomes aware of the problem and manager s are convinced that alliance
building could solve the problem

Sometimes the organization gets into alliance in order to exploit an opportunity that it realizes.

Level 2 –alliance pursuance – the decision to form an alliance is finalized and the firm
establishes the strategic and operational considerations that will be used to select the alliance
partner.

 The firm initializing the alliance will define and clarify its strategy
 The firms searches for detailed information concerning the intended changes
 The initial goals are established and reviewed
 The secondary goals are identified; the secondary goals help to identify the strategic and
operational characteristics that the selected firm should posses to qualify as a potential
alliance partner.
 the selection criteria is defined
 the selection criteria helps to reduce the number of potential partners
 When potential partners are identified, the next step is to establish whether they are
willing to partner.
 the goals for the alliance have to be clarified

Table 6.1 shows the different types of alliance goals

Table 6.1. Types of alliance goals

Manufacturing perspective Material supplier perspective

Alliance  Improved inbound operations  Increased sales volume
goals  Reduced costs  Increased customer loyalty
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 Reduced inventory  Provide value added services

 Improved quality  Increased switching cots
 Reduced lead time  Reduced costs
 Stabilize supply and price
 Increase utilization of supplier’s
technology and expertise
 Shorter concept to market product
development

Alliance Manufacturing perspective Distributor Perspective

goals
 Increases sales volume  Fresher products
 Increased availability  Reduce delivery costs
 Increased freshness  Incresed profitability
 Reduce damage  Reduce inventory
 New product innovation  Increase returns
 Lower inventory costs  Tailor products
 Invoicing accuracy  Configuration
 Improve pricing /promotions  Improve customer values
 Improve customer service
 Improve order commitment

Alliance Manufacturer perspective Service supplier perspective

goals
 Improve coordination between  Service provider perspective
transportation and product supply  Increase market share
 Reduce carrier base growth in key accounts
 Breakthrough reductions in cost  Manage operational
 Breakthrough improvements in variability
service  Provide value added service
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 Improved warehousing and  Increase profitability

distribution labour productivity  Develop close relationships
and space utilization with industry leaders
 Maintain flexibility in product  Satisfy manufacturer
supply customers
 Achieve consolidation benefits  Ensure future competitive
 Build support for industry wide positioning
supply chain initiatives

Different criteria used to asses potential partners

 Company profile information

 Management capabilities
 Personnel capabilities
 Cost structure
 Total quality management philosophy and programs
 Process and technological capabilities
 Financial capability stability
 Production scheduling and control system
 environmental regulations compliance
 Information system capabilities
 Supplier sourcing strategies
 Long- term relationship potential

Level 3 –alliance confirmation – focuses on partner selection and confirmation .managers

determine the strategic and operational expectations for the arrangements through joint meetings
with alliance partner and the relationship is solidified . at this stage both firms confirm their
commitment to the alliance and the terms of the alliance contract. In addition to the contract,
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both parties must determine the expected effectiveness standards for the alliance .some of the
factors that have to be considered are:

 How to manage the length of the relationship and under what conditions the alliance
should be terminated
 How to manage power imbalances when one part has more power than the other in the
relationship
 How to manage managerial imbalances when alliance partners fail tio provide equal
managerial support in terms of the number of key contacts within each of their
organizations
 How to manage conflict when one supply chain member engages in behaviour destined to
injure ,thwart ,or gain scarce resources at the expense of the other partner
 how to jointly allocate actual net benefits ,in terms of the costs required to develop and
manage the alliance ,as well as resulting benefits that accrue to each party
 How to develop a suitable match between the parties, in terms of developing cohesive
arrangements based on management styles and corporate cultures building trust is an
important part of this stage of the process. .

In addition to these agreements, the parties should also work out specific details of joint
operating standards .some of the specific details that must be worked out include:

 What are the defined procedures which allow each alliance partner to know exactly what
its roles and responsibilities are in order to reduce duplication of effort and establish
accountability?
 How will the partner measure, specify and quantify operational performance .These
measures must be tracked down on an ongoing basic to improve operational activities and
include frequent joint appraisal to solve any problems as they arise.
 What type of information will be shared and how frequently will the information transfer
occur
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 How responsive will each partner be to special request made by the other party and how
can communication be improved through technology adoption.

Level 4- Alliance implementation/continuity- creates a feedback mechanism to administer and

assess performance continuity to determine whether the alliance will be sustained, modified or
terminated. Should a conflict arise, the firm may need to explore different types of conflict
resolution mechanisms.

 After a certain period of time, the parties may fail or continue to meet the targets set in
the agreement. If one party experiences problems, both parties should seek to solve the
problem together.
 Through, joint problem solving the alliance relationship will continue.
 Following the initial implementation, partners will evaluate the strategic and operational
aspects of the agreement by determining each partner’s adherence to set standards.
 These evaluations are formally undertaken by both parties.
 If comparison reflects that the strategic and operational targets are being mart for both
parties. The alliance is sustained in its current form.

If the alliance is sustained :

 The partners perform an ongoing perceived alliance effectiveness and adherence to

operating standards
 Revise strategic goals and operating standards based on competitive conditions and
changing needs
 View the alliance as a permanent system that continually moves between assessment –to
evaluate strategic effectiveness and operating standards and administration
 Agree to sustain the alliance as it is until the alliance needs to be modified or the alliance
need to be terminated because it has outlived its strategic effectiveness or failed to meet
operating standards.

6.4. Benefits Strategic Alliances

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(i).Technological Sophistication: An exchange of technology to compliment your core strengths

shores up your core weakness and improves production capabilities to better serve customers.
Technical hotlines and on-site technical support are regularly available from suppliers with
whom you’ve developed alliances.

(ii).Training: Learning curve commitment. Cost savings are passed along as experience is gained
in producing a new product, and discounts are available on start-up products to encourage early
sales. Better sales and technical training for your employees is an important benefit in partnering
with your suppliers. More manufacturers and distributors are developing training programs for
dealers. This is an added benefit in the seller/buyer relationship.

(ii).Increase Market Share: Co-branding such as snack manufacturers who are now mixing two
nationally known names and logos on a single product. Access to new markets both domestic
and international. Partnering can provide the benefit of positioning for future needs not yet
known to you or your industry.

Through partnering, one company can assist another in leapfrogging current industry leaders.

Cooperating with newer firms more willing to pursue a riskier development strategy to gain
market shares does this. This strategy can aid companies, large and small, in more rapidly and
efficiently reaching their collective goals.

 Opportunity to develop a private labeling or branding identity.

 Sales lead and help in procuring new business
 Opportunity to expand business with new or related product innovations and service
offerings.
 Preferred supplier status awards to suppliers that have proven their performance abilities.
 Reduce direct competition.
 Create marketing synergism to the consumer through cross promotion like Blockbuster
and Dominos did. This can easily be done at the local level between, as an example, the
drug store and the dry cleaners.
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 Barriers to market entry by a new player.

 Marketing assistance to support order volume for products as when a small company
develops an alliance with a large company.

(iv).Improved Customer Service: Improved attitude toward customer service. This starts from top
management on down the chain of command. Many manufacturers are partnering with their
dealers and retailers. When the dealer makes a long-term buying commitment to the
manufacturer, the manufacturer helps the dealer in customer service tools and training.

 Improved customer loyalty was developed by United Airlines through their alliance with
Starbucks.
 Improved product offering becomes possible through alliance buying cooperatives.
Additional product lines become available to the members because of the cooperative’s
buying strength.
 Through alliance relationships, many businesses have found strategies to provide better
and quicker customer service while keeping their costs manageable. Look for companies
that have a similar customer base to yours and enter into a discussion about how to work
together.
 (v).Innovation: The computer and electronics industries have profited greatly from
alliance relationships. Innovation has become commonplace for firms that have chosen to
work together.
 (vi).Cost Savings: In manufacturing elements of your product or entire product that could
be built in plants (owned by others or in joint venture) with up to date technology, cost
savings can be great. Sharing resources, or outsourcing, rather than owning and
operating a manufacturing plant, will allow a synergistic partnering agreement allows you
concentrate on your core strengths. In distribution, it grantees access to orders that can be
economically and efficiently produced also that generates reasonable profit through
alliance relationships.
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(vii).Financial Stability: Partnering in a poor economy or recession makes good sense especially,
when sales are flat and prices are deflating.

 Access to capital is a primary reason for smaller organizations developing alliances with
larger ones. .
 Achieving economies of scale is possible in alliance relationships when partners share
facilities, equipment and employees.
 Prompt payment per agreed terms is a standard in customer/supplier alliance
relationships.
 More potential profit is generally the outcropping of shared resources.
 Alliance relationships allow partners to share the financial risks associated with
developing new products and entering into new markets.

(viii).Supply Chain Improvements: Just-in-time inventory purchasing and supplying as

exemplified by the famous relationship between Wal-Mart and Procter & Gamble. Home Depot
and Dell Computers have also built powerful alliances with their suppliers for cost saving just-in-
time inventory.

Additional supply chain improvement areas available through strategic alliance relationships:

 Management of supply channel conflict

 On-time product delivery
 Prompt response to complaints
 Greater consistency in parts, supplies, semi-assembled, and completed products
 Detailed agreement as to handling of product problems and customer complaints
 Improved supply chain productivity
 Specific (quarterly, yearly, etc.) volume commitments
 Key contacts that are dedicated to your account
 Improved supplier loyalty
 Prompt response to quote requests and price problems
 Confidentiality of shared business strategy
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 Market forecasts for large orders to allow intelligent production schedules

 Improved product quality
 Improved working relationships
 Improved communications through structure to promote operating efficiencies
 Improvement of products/services
 Sharing of information
 Improved culture and business philosophy
 Recognition, award and/or reward system for meeting and/or exceeding established goals

6.6. Developing trusting relationship in the supply chain

In business practice, firms have frequently made deliberate attempts to establish stronger
relationships with suppliers and customers. As a way of reducing costs, increasing efficiency,
improving quality and technology, and enhancing competitive advantage, many firms are
moving away from traditional “arms length” business relationships and are forging closer and
more collaborative ties with supply chain partners. Spekman (1988: 75) argues that “competition
from offshore producers, technological innovations, and shortened product life cycles have
changed buyer-seller relationships.

Traditional arms length contractual relationships no longer suffice, but closer collaborative
approaches are needed.” Anderson and Weitz (1989) argue that the development of inter-
organisational relationships is an approach that combines the advantages of vertically integrated
distribution systems (control, coordination and information processing) with the advantages of
systems utilizing independent chain participants (flexibility, scale economies, efficiency and low
overheads).

Trust is not something that can be easily measured or identified. A number of elements can be
identified to be mainly important in the building of trust among supply chain members, these
include :
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(i).Reliability: If the supply chain partner has acted in a contently positive manner over a giver
prolonged period of time , that partner is considered a reliable member by the other party .
Reliability is based on the integrity or honesty of the other party .integrity refers to the extent to
which the supply chain member has repeatedly acted according to the moral code of standards .If
a person consistently follows the agreed standard, even in unusual situations he or she is
perceived to be reliable and therefore trust in that individual is likely to increase.

(ii).Competency : Competence based trust can be broken down into three areas.

 Specific competency – Trust in the other person’s specific functional area

 Interpersonal competency - The ability of one person to work with people .this is often
referred to as people skill
 Business competence – refers to an individual‘s experience, wisdom and common sense
in respect of doing business

Competency based trust is therefore a powerful integrating mechanism between two parties. If
the supplier or customer is not willing to commit experienced and qualified people to the
relationship, then competency based trust will not be created.

(iii). Goodwill: This is the emotional investment that develops between individuals that thust one
another. It is broken down into two

 Openness with the other party –where each party feels free to share problems and
information with the other
 Benevolence –which refers to the assumption by one party on acknowledged or accepted
duty to protect the rights and interests of the other party

(iv).Loyalty: This type of trust occurs after a period of reliable performance, when one party
develops a certain degree of faith in the other party. This leads one party to believe that the other
party is not only reliable but will perform well in extraordinarily situations and can be relied on
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when it really counts .one can only be certain that another person cares when the situation makes
it possible for that person not to care.

5.7. Conflicts in the supply chain

A Conflict is a situation of tension that results from differing views of a given scenario. Just like
two people working together, distribution channel members also conflict with the manufacturer
or among themselves. Channel conflict is defined as a situation in which one member is
adversely engaged in behaviour designed to endure, misuse or gain scarce resources at the
expense of the original member (Jobber 2002). The intensity of conflicts can range from
occasional, minor disagreements that are quickly forgotten, to major disputes that fuel
continuous bitter relationships. Channel conflicts can be as a result of a number of differences.

(i).Sources of supply chain conflicts

In most cases, sources of channel conflicts are differences in goals, differences in views on the
desired products line carried by channel members, multiple distribution channels and
inadequacies in performance.

(i) Difference in goals :Most channel members (intermediaries) attempt to maximize their own
profit margins, reduce inventory levels, increase sales, lower expenses and receive greater
allowances from supplies. In contrast producers benefit from lower margins, greater channel
inventories, lower promotional expenses and lower allowances given to channel members. These
differing views mean that there are potential areas of disagreement between producers and their
channel members.

(ii) Differences in desired product line: Resellers who grow by adding products line may be
regarded as disloyal by their original suppliers. For example if Coca-Cola is selling its products
through OK, It may l not want OK to stock fruit juices and dairy mix drinks from Dairy Board or
Schweppes, In its view Coca- Cola will be saying OK will not devote much needed time to the
marketing of its products as agreed since it now stocks many competing products. On the other
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hand resellers may not wish to specialize and streamline the lines which they deal with because
carrying a wide range of brands is profitable to them; they will be able to cover the diverse wants
of customers. This will cause conflicts with original suppliers.

(iii) Multiple distribution channels: In trying to achieve market coverage, a producer may use
multiple distribution channels .For example, A producer may decide to sell direct to major (key)
accounts e.g. the government and use channel intermediaries for wide market coverage.
Conflict can arise when a channel member salesperson visits the same customers who have been
visited by manufacturer’s sales person and the channel member salesperson is denied access to a
lucrative order from a key account because it is being serviced directly by the producer. Conflict
may also arise when a producer owns retail outlets that compete directly with independent
retailers that also sell the producers brand. For example, Bata Shoe Company owns a chain of
outlets that compete with others shoe outlets that sell Bata brands. If unauthorized intermediaries
begin to stock and compete with authorized distributors, conflict might occur.

(iv) Inadequate performance: When parties in the supply chain do not perform to expectations
the result is obviously conflict, for example channel members may under perform in terms of
sales, levels of inventory carried, customer service, standard of display and salesperson
effectiveness. On the other hand producers give poor delivery inadequate promotional support,
low profit margins, poor quality goods and incomplete shipment. These can also be potential
areas of conflict.

4.7.1. Avoiding and resolving conflict

Conflicts are not beneficial to the channel members and the producer as well. Efforts must be
made to ensure that once they arise solutions are formulated as quickly a possible. The strategies
that can be used range from developing partnership approach, training in conflict handling,
improving performance, market positioning, channel ownership and coercion

 Developing a partnership approach: There should be a spirit of mutual understanding

and co-operation between the producer and channel members. Producers can help
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channel members with training, finances and promotion support. Distributors in turn may
agree to set higher sales targets and be willing to provide extra resources to support their
selling activities. The objective is to build a relationship that is based on trust. When
conflict arises under such situations, chances are higher that they can be resolved in a
spirit of cooperation. Organizing staff exchange programs can be useful in allowing each
party to understand the problems and intensions; this avoids the rise to conflict.
 Training in conflict handling: Staff who handles conflicts needs to be trained in
negotiation and communication skills. They should be able to handle high pressure
conflict situations without resorting to emotions and blaming behaviour. They should
handle such situations calmly and identify key points of conflicts in both parties and help
them to reach a point of compromise. There are situations where both channel members
and producers benefit from such agreement.
 Market positioning: To reduce or eliminate conflicts from multiple distribution channels,
producers can try to position markets on some logical basis such as by customer size or
type. Alternatively different channels can be supplied with different product lines.
Premium brands can be sold through up market department’s stores while low value
brands are sold through discount retailers.
 Improving performance: Many conflicts occur for genuine reasons e.g. poor delivery by
manufacturers or inadequate sales effort by distributors can provoke frustration and
anger. In such situations the most effective solution is to improve performance to reach
the level that does not initiate conflicts.
 Channel ownership: An effective but expensive way of resolving conflicting goals
between producers and channel members is vertical integration with channel members or
vice versa. When a producer buys a channel member it is called forward vertical
integration. Since the producer and channel member will be under common ownership,
the common objective is to maximize joint profits. Although conflicts may still occur,
the dominant part will be in a position to resolve them quickly.
 Coercion: In some situations, conflict resolution may depend on coercion where one
party forces compliance through the use of its powers. For example producer can
threaten to withdraw supply or withdraw financial support. Channel members on the
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other hand can threaten to phase out the producers products or promote competitive
products and develop own brands. The development of own brands. e.g. Spar’s Save
more brand and Luck 7’s Family Favourite OK’s Pot “O” Gold has strengthened the
retailers’ positions and has given them the advantage of high profit margins
 Arbitration – an arbitrator is an outside third party who is brought in to help settle a
contractual disagreement. Arbitration is the submission of a disagreement to one or more
impartial persons with the understanding theta the parties will abide by the arbitrator’s
decision

CHAPTER 7: FUTURE CHALLENGES IN SUPPLY CHAIN MANAGEMENT

7.0. Introduction

Supply chain management posing a lot of challenges due to the complexity and scale
involving the flow of goods , services and information in the domestic and global context .other
challenges relate to dynamic government regulations and how to comply with product
quality ,safety and usability standards expected by the customer. This chapter explores the
challenges faced by the supply chain manager and the possible strategies to handle them

7.1. Chapter objectives

After studying this chapter, the student is expected to be able to :

 Explain the future challenges facing supply chain managers

 Explain the strategies that can be used by supply chain manager to handle these
challenges
 explain the concept of green supply chain
 Describe the use of artificial intelligence in the supply chain.
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7.1. Challenges facing supply chain managers and future strategies to address them

The challenges include:

 Sharing risks in inter-organizational relationships

 Managing the global supply chain
 “Greening” of the supply chain
 Design for supply chain management
 Intelligent information systems

7.1.1. Sharing risk in inter-organisational relationships

In a supply chain structure, a number of risks exist that have to be managed between
participating organizations. These are discussed below:
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 (i)Confidentiality – in order to function well in a supply chain relationship, there should

be information sharing with regard to product development, sales volumes, sales and
marketing strategies and tactics. It becomes a problems and a change when one member
of the supply chain leaks the other part’s information to the competitors. Leakage of
information gas the potential of damaging the strategies of an organization. As companies
are becoming more and more interlinked with their supply chain members, they should
come up with innovative ways of to manage the risks associated with sharing propriety
information.
 (ii).Research and development – As suppliers and customers are jointly engaging into
research projects for developing new products. The technology that is utilised may be
generated by the two firms. The challenges come with regard to who owns the
technology in respect of the new innovation. Supply chain members should reach a
mutual understanding regarding ownership of technology when they do joint researches.
 (iii).Increased service expectations –most business are focusing on the elements of
business that brings transactions (sales).in futures as customer expectations are
increasing, customers are beginning to lock for pre-transaction services such as trial
periods and post transaction services like servicing of products after sales ,
installation ,maintenance , training. This is a further burden to the supply chain managers
as customers expect these services to be packaged together with the products they busy.
Companies must find innovative way to provide post services to customers in order to
keep them loyal and retain them.
 (iv).Leverage – Power base in the supply chain has shifted from manufacturers to large
distributors and large retailers. It is now difficulty for small supply chain members to
compete effectively given these market imbalances. Supply chain managers will continue
to face such challenges, where they need to facilitate growths oaf small supply chain
members and yet satisfy the demands of the powerful distributors.
 (v). Mass customized products - Customers will continue to demand customized products;
this means that although demand will continue to be stable, customers will look for
highly differentiated products. Product differentiation works against the benefits of
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economies of scale. How are the companies going to organize themselves to provide
customized products in an integrated supply chain?
 (vi).Shared Responsibility: As supply chains continue to evolve , there is increasing
investment into distribution centers ,information systems ,training ,transportation carriers
and new technology , the payoff of such investments is not always evident hence it is a
challenged given the evaluation of executive’s performance mainly on financial
performance. To justify supply chain investments, managers will need to determine who
pays for such investments and who takes the risk as well who is supposed to reap the
rewards when such investment pay off .It is not easy to determine these financial
arrangements. such inter-organizational issues will continue to pose a challenge to supply
chain managers

7.1.2. Managing the global supply chain

Trade continues to accelerate among countries globally, however the growth of global supply
chains pose a lot of challenges to the supply chain managers. Some of the challenges are

 Managing the volatility of exchange rates among currencies

 Different economic structures in countries including different legal perspectives
towards business
 Transportation networks are not advanced in other countries
 In other regions information and communication technology (ICT) is still not yet
advanced as compared to others.
 Negotiations in other countries are characterized by strong cultural backgrounds
 In the face of these challenges, developing a global supply chain, managing global
operataions and shipping to global customers becomes increasingly complex prices.

7.1.3. The greening of the supply chain

The explosion of the Green Supply Chain Management GSCM activity in the practical realm has
led to an increasing body of empirical work regarding both external influences leading to the
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uptake of green supply chain management practices, and their impact on firm performance.
Supply chain managers will play an important role in implementing environmentally friendly
practices in their businesses. Supply chain manager are the primary agents in making changes
about procurement and disposition of materials and are responsible for the entire flow of material
throughout the supply chain. Disposition of surplus material including

 Scrape and waste

 Surplus obsolete or damaged stock
 Surplus obsolete or damaged equipment

In integrating green approaches into the purchasing function, two generic types of orientation are
generally adopted by organizations these are: proactive versus reactive supply chain approaches.
Table 7.1 shows the proactive and reactive environmentally friendly supply chain practices

Table 7.1 proactive and reactive environmentally friendly supply chain practices

Material function Proactive Reactive

Supplier selection  Disclose and label material  Environmental
and evaluation composition issues not
 Consider long term costs of doing included as
business with supplier evaluation criteria
 Reuse packaging and shipping  Dispose of
materials packaging
 Use suppliers who can show materials
evidence of sustainability and well  sole reliance on
managed resources or raw materials EPA regulations
 Require supplier participation in
industry wide environmental panels
and organizations
 Environmental risk assessment
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 Sustainability resource management

Surplus and scrap Careful analysis of material impact prior to After the fact remedial
disposition use in new products actions to solve
environmental problems
Reclaim hazardous material
Dump hazardous waste
and use non-specialists to
take care of the problem
Carrier selection and  Environmental audit for major  Relatively little
transportation of carriers attention paid to
hazardous goods  Extra protection on rail cars and transportation
trucks selection ,except
 Reduction of dumping extra left over when a spill
hazardous materials occurs

Product design  Cradle to grave life cycle analysis of  End of life

packaging and material used at the design stage strategies not part
labeling  Remanufacture of design process
 Recycle corrugated  Dump products at
 Standardized reusable containers end of life
 Label plastic parts for later use  No recycles
 Non reusable
containers
 No plastic
labeling

7.1.4. Design for supply chain management

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Design for supply chain extends the concept of design for manufacturability which refers to the
process of simplifying product designs t allow easier manufacturing and assembly to the
broader scope of the entire flow of material across different supply chain entities .

 Design for supply chain management influences both production and distribution process
for a number of reasons
 It should consider production flexibility and responsiveness,
 Design complexity should be effectively reduced so that the new product can be easily
produced
 Design complexity is reduced by increasing use of standard components, integration of
suppliers and customers early in the process of designing the product
 In many industries, complexity is a difficult aspect to manages and it may be a function
of external factors
 as products are becoming more complex , they are less manufacturable
 Design complexity will continually pose a challenge to supply chain managers

Designing products require a supply chain perspective that is considering the entire process
involved in moving the product to customers including transpiration, storage and material
handling considerations .Some of the critical factors that have to be addressed include the
following:

 Design consideration – the characteristics of the product that makes it transportable with
easy of handling and storability
 Packaging – the degree of protection needed for the product fragility, climatic conditions,
dimensional considerations to fit unitized loads such as warehouse pallets and labeling
identification for automated bar code scanning
 Monetary Density – this is the monetary value per unit of weight such as dollars per
kilogram and is normally inherent in the nature of the product .it determines the mode of
transport and the cost of storage .high value products are less sensitive to transport rates
but are more sensitive to inventory holding costs
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 physical density – this is the ratio of cubic volume of weight .the ratio determines the cost
of transportation and storage .products with high volume to weight ratios are costly both
to transport and to store such products are best produced in local domestic locations in
order to reduce transportation and storage cost .

Product design affects cost of handling and shipping

7.1.5. Intelligent information systems

A major challenge facing companies with integrated supply chain information is how to process
and utilize information available to users within the chain .to deal with this situation, companies
are beginning to introduce “intelligent’ decision support systems .such systems offer a three tired
vehicle that allows:

 Better planning and decision making via intelligent decision support tools
 Network systems with intelligent communication support and
 Enterprise systems that offer intelligent operations response.

Intelligent decision support systems allow users to model variations in product mix, volume and
demand simulation prior to execution of decisions. Such models consider costs, constrains,
business objectives, customer segmentations and other variables.

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