Supply Chain

Management
Open Elective MBA –JSS CMS
Supply Chain Management

Supply chain management (SCM) is the discipline that manages the flow of
supplies through all of the stages of a production cycle.

SCM applies to any organization that executes projects, produces goods or

provides services, as those activities require a supply chain to maintain a
steady flow of resources. That’s where supply chain management comes in.

The main goal of supply chain management is to make the most of the
resources involved in a supply chain and be as productive as possible.

Supply chain management is very important in the business administration

field because it affects other key business areas such as operations
management, inventory control and quality management.
 What is a Supply
Chain?
A supply chain is a network that
connects a company to suppliers of
raw materials. It is also used to
deliver a product to customers. The
better the supply chain
management, the more of a
competitive advantage the company
has.
Supply Chain Management can be
defined as the management of flow
of products and services, which
begins from the origin of products
and ends at the product’s
consumption. It also comprises
movement and storage of raw
materials that are involved in work in
progress, inventory and fully
furnished goods.
 The key benefits of supply chain management are as follows

Develops better customer relationship and service.

Supply Creates better delivery mechanisms for products and services in

demand with minimum delay.

Chain Improvises productivity and business functions.

Manageme Minimizes warehouse and transportation costs.

nt - Minimizes direct and indirect costs.

Assists in achieving shipping of right products to the right place at the

Advantages right time.

Enhances inventory management, supporting the successful execution

of just-in-time stock models.
Assists companies in adapting to the challenges of globalization,
economic upheaval, expanding consumer expectations, and related
differences.
Assists companies in minimizing waste, driving out costs, and
achieving efficiencies throughout the supply chain process.
 Minimization of supply chain expenses is very
essential, especially when there are economic
uncertainties in companies regarding their wish
to conserve capital.
Supply Cost efficient and cheap products are necessary,
Chain but supply chain managers need to concentrate
on value creation for their customers.

Manageme Increased expectations of clients for higher

product variety, customized goods, off-season
nt - Goals availability of inventory and rapid fulfillment at a
cost comparable to in-store offerings should be
matched.
To meet consumer expectations, merchants need
to leverage inventory as a shared resource and
utilize the distributed order management
technology to complete orders from the optimal
node in the supply chain.
The main functions of Supply
Chain Management include
 Defining business boundaries and relationships: It is the
most important of all SCM initiatives. It relates to the decision on
outsourcing.
 Managing demand and supply: The basic demand is the
demand for the ultimate product or service from the end-user.
 Logistics: It refers to the processes involved in storing, moving,
transporting, or handling material in any other way.
 Purchasing: It acts as a link between the vendors and the
company to get involvement and help of vendors in matters like
Purchase material specification, matching of lot sizes, and
transportation packing.
 Selling system interface: It is directly responsible to help
customers know, select buy pay for and take away the company’s
product
 Manufacturing system interface: It supports SCM by reducing
manufacturing lead times and supplying material that closely
matched customer lot size and time requirements.
 Product design interface: Basic quality of the product sold to
the end-user can be improved substantially by better
collaboration among channel partners.
 Supply Chain Management Process

 The supply chain process is fundamental to good supply chain

management. It is used by companies to make their supply
chain as efficient and cost-effective as possible and deliver
customer value and give them a competitive advantage.
There are five steps to the supply chain process. They are as
follows.
 Planning- In order to control inventory and the
manufacturing process, companies must plan to match
demand with supply. This prevents overspending on
warehouse space or not having raw materials needed for your
manufacturing and slowing down delivery of product.
 Sourcing- This step involves finding those vendors who can
get the goods and services you need when you need them.
Sourcing is how you get supplies when you need them and
meet the demand of your customers.
 Making- Here is where those raw materials you procured are
made into the products that meet your customers’ demand.
This is where assembling, testing and packing occurs. Getting
customer feedback is key to delivering customer value.
 Delivering-Getting your finished product to the customer is
the next crucial step in the SCM process. If you’re not able to
get what you make to your customers all the previous steps
are for naught.
PROCESS OF SUPPLY CHAIN
MANAGEMENT
THE FOUR ELEMENTS OF SUPPLY CHAIN STRATEGY

 Supply chain strategy defines the connection and combination of

activities and functions throughout the value chain, in order to fulfill
the business value proposal to customers in a marketplace.
 An organization's supply chain strategy is shaped by the interrelation
among four main elements
 Industry framework. "Industry framework" refers to the interaction of
suppliers, customers, technological developments, and economic
factors that affect competition in any industrial sector. Within this
framework are four main drivers affecting supply chain design, all of
them interrelated.
 Unique value proposal. The second element, the unique value
proposal, requires a clear understanding of the organization's
competitive positioning in terms of its supply chain. A good approach
to this is the concept of "order qualifiers" and "order winners“
 Managerial focus. Before discussing the fourth element—internal
processes—it is important to explain the linkage and alignment
between an organization's competitive positioning and its supply
chain processes.
 Internal processes. The fourth element, internal processes, provides
an orientation that ensures a proper connection and combination
within the supply chain activities that fall under the categories of
source, make, and deliver.
 INTEGRATING SUPPLY CHAIN
PROCESS

Suppliers Manufacturers Wholesalers Retailers

Consumers

INFORMATION

PRODUCT FLOW

CASH FLOW
 Decision Phases in a Supply
Chain
1. Supply chain strategy or design
How to structure the supply chain
over the next several years.
2. Supply chain planning
Decisions over the next quarter or
year
3. Supply chain operation
Daily or weekly operational
decisions
Competitive Strategies
 Competitive strategies refer to the approaches a
company takes to differentiate itself from competitors
and achieve superior performance in the market
 Cost Leadership: Focus on becoming the lowest-cost
producer in the industry.Streamlining operations,
reducing overhead, and optimizing supply chains.
 Differentiation: Offering unique products or services
that stand out in the market. Innovation & Brand
Development, Eg- Apple differentiates itself with
cutting-edge technology and a strong brand.
 Focus : Targeting a specific niche or segment of the
market, Tailoring products and services to meet the
needs of a particular group, Eg Rolex
Supply Chain Strategies

 Lean Supply Chain-Minimizing waste and maximizing

efficiency, Just-in-time (JIT) inventory, continuous improvement
(Kaizen), and demand-driven replenishment.Eg-Toyota
 Ensuring continuity and risk management, Diversifying
suppliers, building buffer stock, and investing in risk
management tools.
 Sustainable Supply Chain- Reducing environmental impact
and promoting social responsibility, Sourcing ethically, reducing
carbon footprints, and ensuring fair labor practices.Eg-Unilever
 Global Supply Chain-Leveraging global resources to optimize
cost and efficiency. Sourcing from low-cost regions, managing
global logistics, and navigating international regulations. Eg-
Apple manages a global supply chain, sourcing components
from multiple countries and assembling products in different
locations worldwide.
 Efficient and Responsive Supply Chains
Primary Goal Supply Demand at Respond Quickly to
the lowest cost demand
Product design Maximize performance Create
strategy at a minimum product modularity
cost to allow postponement
of product differentiation

Pricing strategy Lower margins because Higher margins because

price is a prime price is not a prime
customer driver customer driver
Manufacturing strat Lower costs through Maintain capacity
egy high utilization flexibility to buffer against
demand/supply
uncertainty
Inventory strategy Minimize Maintain
inventory to lower cost buffer inventory
to deal with
demand/supply
uncertainty

Lead-time strategy Reduce, but not at Reduce aggressively,

 1.Why is Amazon building more warehouses as
it grows? How many warehouses should it have and
where should they be located?

2.Should Amazon stock every product it sells?

3.What advantage can bricks-and-mortar players

Discussion - derive from setting up an online channel? How should
they use the two channels to gain maximum
Amazon advantage?
4.What advantages and disadvantages does the online
channel enjoying the sale of shoes and diapers
relative to a retail store?

5.For what products does the online channel offer the

greater advantage relative to retail stores? What
characterizes these products?
MAJOR DRIVERS OF ANY SUPPLY CHAIN

Facilities (for example, Production

unit)
Inventories (for example, Stock of
goods)
Transportation (for example,
Modes and Routes)
Information (for example,
Customer demand)
Links
https://www.youtube.com/watch?v=-vNLpU-47
UE
https://www.youtube.com/watch?v=sWpb-bR0
Uw8
Nestle Supply chain Management Strategy | Pr
ocurement | MBA case study examples with sol
utions (youtube.com)
https://
www.youtube.com/watch?v=FAlO0HhEYF4
https://
www.youtube.com/watch?v=a9UkQCfFvOw
Inventory Management

 We are going to study the role that inventory plays in supply chain and
how the managers use inventory to drive the supply chain. Existence of
inventory is because of the mismatch between the supply and
demand.
 Role played by inventories in the competitive strategy-The
inventory plays a significant role in a supply chain’s ability to perform
well. It helps a company to be responsive or efficient. If a company
possesses a competitive strategy to be more responsive then it can
locate its inventories close to its customers.
Component of inventory decisions
 Cycle inventory-Cycle inventory is the products, materials or raw
ingredients that a company keeps to fulfill its minimum
production quotas.
 Safety inventory
 Seasonal inventory
 Sourcing
TRANSPORTATION

 Transportation moves a product between

different stages in a supply chain, and has a
great impact on the efficiency and
responsiveness of a supply chain. Quick
transportation of goods through various
modes or different quantities increases the
responsiveness however lowers the
efficiency.
 Components of transportation decisions
 Mode of Transportation
 Selection of routes and network
 In house or outsourcing
Sourcing

 Sourcing is a critical component of supply chain management, involving

the process of finding, evaluating, and engaging suppliers for goods
and services.
 Effective sourcing strategies are essential for ensuring that a company
can obtain the materials it needs at the right price, quality, and time.
 Key Concepts
 Strategic Sourcing-Long term partnership
 Global Sourcing-Procuring goods and services from suppliers located in different
countries
 Single vs. Multiple Sourcing-Relying on one supplier for a particular good or
service, Using multiple suppliers for the same good or service
 Sustainable Sourcing- Procuring materials and services in a way that considers
environmental and social impacts.
 Supplier Relationship Management- Managing and developing relationships with
suppliers
 Technology and E-Sourcing-Using technology to streamline and optimize the
sourcing process
OBSTACLES TO ACHIEVING STRATEGIC FIT

 Increase in product variety: The demand of customers has been

continuously increasing. There has been a continuous increase in the
demand for customised products.
 Increase in demanding customers: ‘Customer is King’ in today’s
world. There has been an increase in the number of customers who
constantly demand improved services like timely delivery, cost,
product performance, discounts and shorter lead times.
 Smaller product lifecycles: With the increase in the number and types
of products demanded, there has been a decrease in the life cycles of
a large number of products.
 Effect of globalisation: The removal of trade restrictions by various
governments has enabled increased Global Trade.
 Difficulty in execution of strategies: The creation of a successful
supply chain strategy is not very easy. The formulation of the strategy
may be easy; however the execution of this strategy is most difficult
MODULE 2
Designing the Supply Chain Network

 Designing Supply Chain Network for each industry or business

involves arriving at a satisfactory design framework taking into all
elements like product, market, process, technology, costs, external
environment and factors and their impact besides evaluating
alternate scenarios suiting your specific business requirements.
 No two supply chain designs can be the same. The network design
will vary depending upon many factors including location and
whether you are looking at national, regional or global business
models.
 The supply chain network design is defined as a working model that
delineates the overall framework of a supply chain to assess the time
and costs required to bring goods to the market.
What is the Importance of Supply Chain
Network Design?

 Simply mapping a global supply chain network, its flows, timelines,

current costs and revenues generated can generate a bunch of
troubling yet important questions, such as:
 Why are the enterprises’ only suppliers based overseas?
 Why are there so many warehouses, and why in those locations?
 Why is there so much dead stock? Why has more inventory been
ordered?
 Why are freight and trucking costs so high?
 Is the current network design efficient?
 Is the supply chain design aligned with the enterprises' sustainability
goals?
What Are the Benefits of Supply Network
Design?

 Streamlining and potential cost savings

 Reduction in purchase costs and inventory
 Working capital reduction
 Reduction in freight costs
 Route optimization for reducing transit time and fuel costs
 Reduction in network fixed costs (facilities, equipment) and supply
chain variable costs
 Process and cost visibility across the supply chain network
What Factors Are Considered While
Designing a Supply Chain Network Model?

 Define the objectives as aligned with the enterprises' objectives and

the supply chain design, such as capacity issues, inventory
replenishment lead times, customer needs, location of facilities and
sources and so on.
 Collate the required data, such as forecasts and future trends.
 Validate the model with historical "what if" scenarios and compare
the outcome with known results.
 Finalize the supply chain network design and implement it.
TYPES OF SUPPLY CHAIN
NETWORK DESIGN
 Strategic Network Design-Location of
the facilities and sources, production
and warehouse capacities, market
strategies — must be aligned with the
objectives of the business.
 Tactical Network Design-Here,
different ways to optimize the existing
network are explored for implementing
short-term planning decisions.
Some of the key factors that
affect the supply chain network
modeling

are
Government Policies of the Country where plants are to be located.
 Political climate
 Local culture, availability of skilled / unskilled human resources,
industrial relations environment, infrastructural support, energy
availability etc.
 Taxation policies, Incentives, Subsidies etc across proposed plant
location as well as tax structures in different market locations.
 Technology infrastructure status.
 Foreign investment policy, Foreign Exchange and repatriation Policy
and regulations.
Distribution
 Distribution refers to the steps taken to move and store
a product from the supplier stage to a customer stage in
the supply chain.
 Distribution is a key driver of the overall profitability of a
firm because it directly impacts both the supply chain
cost and the customer experience.
 Distribution network performance evaluated along two
dimensions at the highest level:
Customer needs that are met
Cost of meeting customer needs
Elements of customer service
influenced by network structure:
 Response time
 Product variety
 Product availability
 Customer experience
 Order visibility
 Returnability
Supply chain costs affected by network structure
 Inventories
 Transportation
 Facilities and handling
 Information
Design Options for a Distribution
Network
 Manufacturer Storage with Direct Shipping
 Manufacturer Storage with Direct Shipping and In-
Transit Merge
 Distributor Storage with Carrier Delivery
 Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with Consumer
Pickup.
 Retail Storage with Consumer Pickup
 Selecting a Distribution Network Design
E-Business
 E-business (electronic business) is the conduct of online business
processes on the web, internet, extranet or a combination thereof. These
customer-, internal- and management-focused business
processes include buying and selling goods and services, servicing
customers, processing payments, managing production and supply
chains, collaborating with business partners, sharing information,
running automated employee services and recruiting employees.
 E-Business (electronic business) is any process that a business
organization conducts over a computer-mediated network. Business
organizations include any for-profit, governmental, or nonprofit entity.
Their processes include production-, customer-, and internal- or
management-focused business processes.
Function of Electronic Business

 The most important role of electronic business is “electronic value

creation” – the generation of electronic added value. The forms
of electronic added value are usually distinguished in the following
way:
 Structuring value: an online offer achieves an overview of a large
quantity of information
 Selection value: an online offer provides specific database
information upon request
 Matching value: an online offer makes it possible to merge
inquiries from supplier and buyers more efficiently
 Transaction value: an online offer makes a business more efficient
 Coordination value: an online offer allows different providers to
better combine their services
 Communication value: an online offer improves communication
between different consumers
Models of Supply Chain Management

The Continuous Flow Model-The continuous flow model is built around efficiency. It
offers stability in high-volume environments. This classic model is best suited for
manufacturers who produce the same product repeatedly, with little design fluctuation or
alteration.
This model is ideal for commodity manufacturing. Its high level of efficiency is reflected in
low product prices. For manufacturers, margins are based on raw material prices. That
sounds like science to me.
The Fast Chain Model-The fast chain model is built for responsiveness. It’s ideal for
manufacturers who change their product line frequently. This model is the best suited for
trendy products with short life spans. In this example, the manufacturer that can flood the
market before the trend cycle ends is the manufacturer that wins.
This model emphasizes the competitive advantage of the first adopter. But the true driver
of the fast chain is the designer—and the marketing department. Put another way, if you
can create your own trend, you’ll be the first to market. In short, this model is driven by
art.
The Efficient Chain Model- The efficient chain model is for hypercompetitive industries
where end-to-end efficiency is the ultimate goal. This model relies heavily on production
forecasting in order to properly burden and sweat machinery assets. The efficient model
also relies heavily on commodity and raw material prices. In the post-pandemic world,
efficient chains are struggling with capacity issues. Drivers for this are labor shortages,
material shortages, and delays. The bottom line is this. When you miss a forecast, it can
create a ripple effect. This can result in lengthy lead times and inflated prices for
manufacturers up and down the supply chain. And that’s when you hear a lot
of artful language.
Models of Supply Chain Management- Cont
 The Agile Model -The agile model is ideal for manufacturers that deal in
specialty items. This model is finely tuned for small batches of product.
That requires less automation and more expertise. And that additional
value-add in turn allows businesses using this model to command higher
prices. Agile-model businesses can ramp up volume. But past a certain
volume threshold, they typically prove uncompetitive. Compared with
efficient-chain-model businesses, at higher volumes agile businesses get
blown out of the water from a pricing standpoint.
 The Custom-Configured Model- The custom-configuration model
focuses on providing custom setups during production and assembly. Most
often, this setup time occurs at the beginning of a lengthier production
and assembly run process. For example, certain prototype or limited-
production builds fall into custom-configured manufacturing.
 The Flexible Model- The flexible model tries to be the best of all worlds.
It can react to high volume demands during a peak season. On the other
hand, flexible model businesses can manage and absorb stretches of low
or no demand. This model is like a light switch. Flip it on or off as needed.
 MODULE 3
Designing and Planning
Transportation Netwroks
Transportation Network

 A transport network, or transportation network, is a network or

graph in geographic space, describing an infrastructure that
permits and constrains movement or flow. Examples include but
are not limited to road networks, railways, air routes, pipelines,
aqueducts, and power lines.
 Transportation network design is a rapidly-growing analysis approach
that enables companies to create digital “models” of their end-to-end
supply chains to evaluate new strategies and identify breakthrough
performance improvements.
Role of Transportation
 Transportation is the physical link connecting the firm to its suppliers
and customers.
 In a nodes and links scenario, transportation is the link between fixed
facilities (nodes).
 Transportation is an important supply chain driver because products are
really not produced and consumed at the same location.
 Transportation also adds value to the product by providing time and
place utility for the firm’s goods.
 As firms engage in global competition, transportation costs are
becoming even more significant.
 Outbound transportation was clearly the largest component of total
physical distribution costs.
 Cost trade-offs abound in transportation and are typified by trading
lower inventory costs for higher transportation costs
Modes of Transportation

Truck
Air
Rail
Water
PIPELINE
 It is used usually for the transport of petroleum, refined oil, and
natural gas. • Significant initiated fixed cost is incurred in setting up
the pipeline and related infrastructure that does not vary significantly
with the diameter of the pipeline.
 Pipeline operations are typically optimized at about 80-90percent of
pipeline capacity.
 Given the nature of the cost, it is the best-suited mode when
relatively stable and large flows are required.
 Pipeline pricing usually consists of two components1) A fixed
component related to shipper ‘s peak usage 2) charge realting to the
actual quantity transported.
Transportation Network
A well-designed transportation network allows
a NETWORK supply chain to achieve the
desired degree of responsiveness at a low cost.
 Threebasic questions need to be considered
while designing the transportation network
between two stages of a supply chain.
 1)
Should transportation be direct or through
an intermediate site?
 2)Should the intermediate site stock product
or only serve as a cross-docking location?
 3)
Should each delivery route supply a single
destination or multiple destinations?
 Factors Influencing Distribution Network
Design

1. Customer needs that are met

2. Cost of meeting customer needs
The customer needs that meet
influence the company's revenues,
which along with cost decide the
profitability of the delivery network.
 Customer Service consists
 Response time is the time between when a customer places an order
and receives delivery
 Product variety- Product variety is the number of different
products/configurations that a customer desires from the distribution
network.
 Product availability -Availability is the probability of having a product
in stock when a customer order arrives-
 Customer experience -Customer experience includes the ease with
which the customer can place and receive their order
 Order visibility - Order visibility is the ability of the customer to track
their order from placement to delivery-
 Returnability - Returnability is the ease with which a customer can
return unsatisfactory merchandise and the ability of the network to
handle such returns.
Transportation Infrastructure

 It refers to the framework that supports the transport system.

Transport infrastructure consists of fixed installations including
roads, railways, airways, waterways, canals, pipelines, and terminals
such as airports, railway stations, bus stations, warehouses, and
trucking terminals.
 https://
unctad.org/topic/transport-and-trade-logistics/infrastructure-and-servi
ces
TRANSPORTATION INFRASTRUCTURE
MODAL SYSTEMS
 The quality of transportation infrastructure is an essential component
of international competitiveness (Lakshmanan, 2007; OECD, 2013)
that mostly depends on the government for provision and
maintenance.
 QUALITY OF ROADS
 QUALITY OF AIRPORTS
 QUALITY OF PORTS
 QUALITY OF RAILROADS
 Trends in Supply & Demand
 2030: There is no longer a shortage of transport infrastructure since
sufficient investments have been made.
 2030: Industrialised countries have lost their competitive advantage
over emerging countries in terms of transport infrastructure.
 2030: Transport infrastructure development strongly focuses on urban
areas, while rural areas are neglected.
 2030: Strong regulatory measures, such as road tolls and congestion
charges, compensate for the increased need to invest in transport
infrastructure.
 2030: Infrastructure shortages (e.g. insufficient transport
infrastructure) have forced the division of megacities into
decentralized, autonomous „sub-cities“.
key participants in Transportation Environment

 The Shipper-Transportation costs, facility costs,

inventory costs, processing costs, and customer
service level costs
 The Carrier-fixed costs like that for the terminal,
information systems, equipment, vehicles, and
variable costs like fuel costs, personnel costs
 The Receiver or Consignee
 The Government
 The public
Trade-offs CEOs face in managing their supply chain

 Inventory versus service-Sales professionals normally requests high inventories to ensure meeting
their customers’ orders. Finance professionals, however, prefer lower inventories to keep working
capital low. Executives thus have to choose between building inventories to ensure availability to
customers against the cash they can free up by reducing their stock levels.
 Large batches versus frequent runs-It’s no secret that manufacturing plant managers prefer
scheduling production at one item at a time at the largest lot size or batch possible. Single runs are
convenient and offer more efficient output at less downtime from fewer changeovers. Running
multiple times at fewer quantities, however, results in lower inventories as output would synchronize
more effectively with demand.
 Large orders versus small orders- Some vendors tempt business clients with discounts for large
order quantities. For the customer, the price discount means lower costs in materials or components
translating to better profit margins for a finished product. Large volume orders, however, also mean
higher inventories over a period of time, a higher risk of obsolescence, and increased storage costs.
Smaller orders delivered more frequently would not only solve the inventory, obsolescence, and
storage issues but also can improve service to end-users as the probability of run-outs is avoided
because vendor delivery lead times are likely shorter.
 Local versus global sourcing-Sourcing from international vendors generally brings lower material
pricing opportunities but because of the geographical distance, it would mean longer lead times and
slower capability to respond to changing demand.
 Local sourcing, on the other hand, provides quicker response to changing demand but carries the risk
of higher vendor prices especially if clients prefer local suppliers to keep inventory and deliver at small
lot sizes. Several European furniture dealers source products from Asia because of the high prices of
local tables & chairs in their home countries.
 Full loads versus LTL’s-Firms often face the quandary of whether to wait until orders fill up a truck or
deliver less-than-truckload (LTL). The former optimizes freight costs while the latter emphasizes
customer service. Many small- and medium-enterprises opt for smaller trucks or motor-cycle couriers
to deliver goods fast to customers. Large flour distributors usually will stick with fully loaded large
delivery vehicles as their profit margins are sensitive to high freight charges.
Tailored Transportation
 Tailored transportation is nothing but customised transportation of products by using
various types of transportation networks and modes based on the product and customer
characteristics. Tailored transportation is a tool in the hands of supply chain managers to
bits of help reduces the total costs to the firm.
 Tailored transportation is the use of different transportation modes and networks based
on product and customer characteristics. Most firms sell a variety of products and serve
many different customer segments. A firm that sells office supplies and furniture will have
a very different tailored transportation strategy than a firm that sells bulk oil products.
 With the help of tailored transportation, a firm is able to manage each of its customers
cost-effectively and with suitable responsiveness, some of the things to be kept in mind
while adopting tailored transportation are –
 Customer density and distance – Firms consider tailored transportation on the basis of
customer density and distance from the warehouse while designing transportation
networks.
 Size of the customer – Firms must consider tailored transportation by the size of the
customer while designing transportation networks. Large customers can be supplied
using a truckload carrier, whereas the smaller customers will require a less-than-truckload
carrier or Milk Runs.
 Product value and demand – Firms must consider tailored transportation by-product value
and demand. The level of inventory aggregation and the modes of transportation used in
a supply chain network should vary with the demand and value of the product. High-value
products within high demand must be subject to disaggregate cycle inventory and
aggregate safety inventory.
MODULE 4 –SOURING &
PRICING
Sourcing & Pricing

Sourcing - Sourcing is an upstream part of

the supply chain: It’s the process of
strategically choosing the right services
and goods that a company needs to run
its business. Sourcing is also the act of
buying goods, including seller selection,
contract negotiation, and measuring the
long-term performance of your suppliers.
Sourcing Functions Include (But Are Not
Limited To)

 Acquiring raw materials

 Decisions on outsourcing or in-house performance
 Supplier selection
 Contract negotiation—request for quote (RFQ), request for proposal (RFP) and
request for bid (RFB)
 Product design
 Manufacturer collaboration
 Procurement
 Understanding the cost of goods sold (COGS)
 Inventory controls/turnover
 Product Quality
 Financial impacts
Insourcing
 Insourcing is a business practice in which work that would otherwise
have been contracted out is performed in-house.
 Insourcing often involves bringing in specialists to fill temporary
needs or training existing personnel to perform tasks that would
otherwise have been outsourced.
 In-house refers to an activity or operation that is performed within a
company, instead of relying on outsourcing. The firm uses its own
employees and time to perform a business activity, such as financing
or brokering.
 This is the opposite of outsourcing, which involves hiring outside
assistance, often through another business, to perform those
activities.
Outsource

 According to the Outsourcing definition, it is a technique of appointing

another firm or company for a specific task. To simplify, we can say
that it is the business practice to set a specific third-party to give
services previously done by the company’s staff.
 Outsourcing is a business practice in which a company hires a third
party to perform tasks, handle operations or provide services for the
company.
 The outside company, which is known as the service provider or
a third-party provider, arranges for its own workers or computer
systems to perform the tasks or services either on-site at the hiring
company's own facilities or at external locations.
Reasons for outsourcing

 Companies often outsource as a way to lower costs, improve

efficiencies and gain speed.
 Companies that decide to outsource rely on the third-party providers'
expertise in performing the outsourced tasks to gain such benefits.
 The underlying principle is that because the third-party provider
focuses on that particular task, it is able to do it better, faster and
cheaper than the hiring company could.
 lower costs (due to economies of scale or lower labor rates)
 increased efficiency
 access to skills or resources
 lower ongoing investment in internal infrastructure
 accelerated time to market
Some of the risks of outsourcing
include
 Slower turnaround time
 Lack of business or domain knowledge
 Language and cultural barriers
 Time zone differences
 Lack of control
 Lack of communication
 Delay of the project
 No complete control over the third-party actions
 Language and time zone barriers
TYPES OF OUTSOURCING

 On shoring. Relocating work or

services to a lower-cost location in the
company's own country.
 Offshoring. Relocating work or
services to third-party providers
overseas.
 Nearshoring. Relocating work or
services to people in nearby, often
bordering regions and countries.
 Supplier Scoring and Assessment
 Supplier scoring means objectively evaluating your suppliers against
predetermined criteria (the vendor scorecard). The more criteria a
supplier meets, the higher their score will be.
 Some of the most common supplier evaluation criteria include quality,
pricing, delivery time, capability, and ethical sourcing.
 “Supplier evaluation is the process of assessing and approving potential
suppliers through quantitative and qualitative assessments. The purpose
is to compile a list of the best suppliers available. A supplier evaluation
also examines current suppliers to measure and monitor their
performance in order to reduce costs, mitigate risks and drive
improvement”
Benefits of Conducting a Supplier Evaluation

 Increase performance visibility-When companies do not have data on how

their suppliers are performing, supplier management tends to be based on
assumptions. The simple act of measuring performance can be even more
dramatic when companies award additional business on the basis of suppliers
meeting performance goals.
 Leverage the supply base. By measuring supplier performance, an enterprise
can set a threshold for its suppliers that can yield higher-quality results.
Companies can develop new products and services based on a better
understanding of their suppliers’ capabilities and performance levels.
 Mitigate risk. Insight into supplier performance and business practices helps
reduce business risk, particularly given companies’ increasing dependency on key
suppliers. Risks can be financial or operational, and increase with geographic
distance.
 Align customer and supplier business practices. Ideally, suppliers should
run their business in alignment with their customers by sharing the same
business ethics, pursuing similar standards of excellence and committing to
sustainability and continuous improvement.
 Improve supplier performance. The goal of supplier assessment should be to
evaluate supplier performance and improvement. While simply measuring
performance has a positive effect, supplier assessment can be most effective
when it leads to continuous improvement activities that demonstrably enhance
supplier performance.
https://www.warehouseanywhere.com/resources/3pl-vs-4pl-
logistics-definition-and-comparison/
1,2,3,4 & 5 PL

 1PL - First-Party Logistics-An enterprise that sends goods or products

from one location to another is a 1PL. For example, a local farm that
transports eggs directly to a grocery store for sale is a 1PL.
 2PL - Second-Party Logistics-An enterprise that owns assets such as
vehicles or planes to transport products from one location to another is a
2PL. That same local farm might hire a 2PL to transport their eggs from the
farm to the grocery store.
 3PL - Third-Party Logistics-In a 3PL model, an enterprise maintains
management oversight, but outsources operations of transportation and
logistics to a provider who may subcontract out some or all of the
execution.
 4PL - Fourth-Party Logistics-In a 4PL model, an enterprise outsources
management of logistics activities as well as the execution across the
supply chain. The 4PL provider typically offers more strategic insight and
management over the enterprise's supply chain.
 5PL - Fifth-Party Logistics-A 5PL provider supplies innovative logistics
solutions and develops an optimum supply chain network. 5PL providers
seek to gain efficiencies and increased value from the beginning of the
supply chain to the end through the use of technology like blockchain,
robotics, automation, Bluetooth beacons and Radio Frequency
Step 3: Solicitation Process
Once a requisition is approved and PO is generated, the
procurement team will develop an individual procurement plan and
sketch out a corresponding solicitation process. The scope of this
individual solicitation plan depends ultimately on the complexity of
the requirement.

Once the budget is approved, the procurement team forwards

several requests for quotation (RFQ) to vendors with the intention
Spot Contracts – What are they?
Important Links

 https://prezi.com/_vz_txm-1pxk/designing-and-planning-transportatio
n-networks
/
 https://
www.tutorialspoint.com/supply_chain_management/supply_chain_ma
nagement_pricing_and_revenue.htm
Assignment-1
 What is Demand Forecasting? Explain the different types of traditional
forecasting methods in Demand forecasting.
 Explain the concept of coordination in the supply chain and the
obstacles to supply chain management
 Explain the following concepts
a) CPFRP- Collaborative Planning, Forecasting and Replenishment
(CPFR)
b) Demand Management and Customer Service
c) Bulk and Spot Contracts
 Explain the role of Vendor Managed inventory in the supply chain
process. Present a suitable case to support your answer.
Bullwhip Effect

 The bullwhip effect is a supply chain phenomenon describing how

small fluctuations in demand at the retail level can cause
progressively larger fluctuations in demand at the wholesale,
distributor, manufacturer and raw material supplier levels. The effect
is named after the physics involved in cracking a whip.
 In Supply chain management, customers, suppliers, manufacturers,
and salespeople all have only a partial understanding of demand and
direct control over only part of the supply chain, but each influences
the entire chain with their forecasting inaccuracies (ordering too
much or too little).
A few of the most common dependencies
that can cause a bullwhip effect are:

 Lead-time issues such as manufacturing delays

 Less-than-optimal decisions made by supply chain stakeholders at any point
along the chain, for example, customer service or shipping
 A lack of communication and alignment between each link or stakeholder
organization in the supply chain
 Over- or under-reacting to demand expectations, such as ordering too many
units or not enough
 Customer companies, often retailers, wait until orders build up before placing
orders with their suppliers, a practice called order batching
 Discounts, cost changes, and other price variations that disrupt regular
buying patterns
 Inaccurate forecasts from over-reliance on historical demand to predict future
demand
Some Solutions to the Bullwhip
Effect
 Foster supply chain communication and
collaboration.
 Use better forecasting and visibility tools.
 Explore a demand-driven approach to
supply chain management.
What Is Vendor Managed
Inventory?
The vendor-managed inventory definition is a supply chain agreement
where vendors or suppliers manage, maintain, and optimize their
inventory while it’s in the possession of a buyer.
 In other words, it’s an inventory management system where
inventory is replaced for the buyer or retailer without them having to
initiate a purchase order. The buyer or retailer shares their inventory
data with a vendor and the vendor determines order size and
frequency. All you have to do is find a wholesale directory and look up
some suppliers.
 The goal of Vendor Managed Inventory is to provide a mutually
beneficial relationship where both sides will be able to more smoothly
and accurately control the availability and flow of goods.
 Instead of the customer reordering when its supply has been
exhausted, the supplier is responsible for replenishing and stocking
the customer at appropriate levels.
How to make VMI work
 Clarify expectations. There needs to be thorough discussion about how
the system will benefit both organizations in the long term or one of the
parties, particularly the supplier, is prone to disappointment with some
of the short-term results. If these items are not addressed the program
will likely be terminated quickly with neither side gaining any of the
benefits expected from the program.
 Agree on how to share information. If the supplier and customer can
agree to share information vital to restocking in a timely manner, then
the odds of a synchronized system will dramatically improve.
Proprietary information would not have to be shared between the
supplier and customer, but enough information to maintain a steady
flow of goods is necessary.
 Keep communication channels open. When the two parties set out to
implement a VMI program, they need to meet and discuss their goals
and how they need to proceed in order to realize those goals.
Benefits of Vendor Managed
Inventory

Enhanced Inventory alignment

Improved Business
Performance
Better Customer Collaboration
Reduced Costs
More Sales
SCM - Pricing & Revenue

 Pricing is a factor that gears up profits in the supply chain through an

appropriate match of supply and demand. Revenue management can
be defined as the application of pricing to increase the profit
produced from a limited supply of supply chain assets.
 The assets in supply chain are present in two forms,
namely capacity and Inventory.
 Capacity assets in the supply chain are present for manufacturing,
shipment, and storage while inventory assets are present within the
supply chain and are carried to develop and improvise product
availability.
 Thus, we can further define revenue management as the application
of differential pricing on the basis of customer segment, time of use
and product or capacity availability to increment supply chain
surplus.
Revenue management plays a major role in supply chain and has a
share of credit in the profitability of supply chain when one or more
of the following conditions exist

 Theproduct value differs in different

market segments.
 The product is highly perishable or
product tends to be defective.
 Demand has seasonal and other peaks.
 The product is sold both in bulk and in
the spot market.
RM for Perishable Assets

Any asset that loses its value in due course of

time is considered as a perishable item, for
example, all fruits, vegetables and
pharmaceuticals. We can also include
computers, cell phones, fashion apparels, etc.;
whatever loses its value after the launch of
new model is considered as perishable.
 RM for Seasonal Demands
 One of the major applications of revenue management can be seen in
seasonal demand. Here we see a demand shift from the peak to the off-
peak duration; hence a better balance can be maintained between supply
and demand. It also generates higher overall profit.
 The commonly used effective and efficient revenue management approach
to cope with seasonal demand is to demand a higher price during peak
time duration and a lower price during the off-peak time duration. This
approach leads to transferring demand from peak to off-peak period.
 Companies offer discounts and other value-added services to motivate and
allure customers to move their demand to off-peak periods. The best suited
example is Amazon.com. Amazon has a peak period in December, as it
brings short-term volume that is expensive and reduces the profit margin.
 The approach of reducing and increasing the price according to the
demand of customers in the peak season generates a higher profit for
various companies just like it does for Amazon.com.