Supply Chain

Management
Arturo I Urbán Mendoza
aurbanm@yahoo.com.mx
 Unit 1: Supply Chain Basics

A supply chain is a network of people, processes, resources, and technologies in an organization that
work collectively to produce products and services for an end user, or customer. Supply chains have
existed since people began trading goods and services. They have evolved from exchange trading on
the Silk Trade road in the 1400s through supplying the troops in World War I and World War II to the
complex networks of today’s global supply chains.
Supply chains now consist of multi-national, global networks of companies working together to build
products and provide services. Modern supply chains will be discussed in depth in Unit 3.

What is a Supply Chain?

A supply chain is a network of individual functions within an organization that begins with the
development of a strategic plan and ends with the delivery of a product or service. Those functions are
listed below; each is explored in subsequent learning blocks:
•• Demand Planning
•• Supply Management and Procurement
•• Inventory Management
•• Warehousing Operations
•• Manufacturing and Service Operations
•• Transportation Operations
•• Customer Service Operations
 Unit 1: Supply Chain Basics

It is immensely dangerous to business health to manufacture a product without first planning what
inventory will be required and when it will be needed. It is equally risky to attempt to obtain goods and
materials from suppliers without a demand plan that feeds procurement purchase requisitions in order
of priority based on need dates and supplier lead times. Without linkages in the entire supply chain,
chaos would occur and the company would soon have to close its doors. Now it is easier to see that the
demand plan drives and signals procurement for the orderly acquisition of goods and materials, which
in turn enables an organization to receive and stock inventory in a warehouse, etc.

For example, before tomato sauce can be made available to consumers, it goes through many steps
from farmers to retailers. Farmers buy seeds and fertilizers to grow tomatoes, which are sold as raw
material to food processors that employ their factories to convert the tomatoes into tomato sauce,
juice, canned tomatoes, and ketchup. To convert the fresh tomatoes, processors need to purchase
other raw materials, such as vinegar, salt, spices, cans, and labels; therefore, food processors must
work with many different suppliers. The finished products are then combined into larger packages,
transported to warehouses, and subsequently distributed to grocery stores.
 Unit 1: Supply Chain Basics

There are often levels of suppliers within a supply chain called tiers. Suppliers that sell directly to
factories or main operators are referred to as tier one suppliers; suppliers that sell to tier one suppliers
are referred to as tier two suppliers. This cycle continues into tier three suppliers, tier four suppliers,
etc. The final customers who purchases and consumes products and services are called consumers or
end customers. End customers’ needs and wants are the driving force behind the entire supply chain.
They are the ones who create demand and ultimately pay for all the product and service functions in
supply chains. Without end customers, supply chains would collapse due to a lack of demand for
products and services.

Therefore, at any point in the supply chain, focus on the needs and wants of end customers must be
maintained. For that to occur, careful attention must be placed on the values and expectations of each
element of the supply chain leading to end customers; this approach, which keeps the end customer in
mind even several steps away from the point of sale, is referred to as the voice of customers.
 Unit 1: Supply Chain Basics

Examples of Supply Chains in Use

All companies are part of at least one supply chain, whether they sell directly to the end customers,
provide services, manufacture products, or extract raw materials from the earth (see Figure 1).
For example, a customer may go to a Walmart store to buy laundry detergent. In this case, the supply
chain begins by planning to satisfy customer needs through a sales forecast for laundry detergent.
Proctor & Gamble, as a manufacturer of detergents, develops a forecast for sales; from that forecast, a
demand plan is developed that enables its procurement department to procure the raw materials used
to make the detergent along with plastic containers, labels, and other necessities. These procured
items are received, stored, and then used in the manufacturing process. The individual completed
containers of detergent are then packaged in boxes for shipment, transported to distribution centers,
and ultimately delivered to retailers like Walmart.
Another supply chain example is based on a customer who needs to purchase laptop computers online.
The supply chain includes:
• Defining how many laptops might be sold in a given period (like an annual sales forecast)
• Creating the demand plan to procure the necessary components (inventory) from suppliers to
assemble the laptops
• Designing the value-added facility where final laptop assembly will occur
• Ensuring a system exists to control and issue the inventory
• Implementing a team of customer service representatives to take orders and interface with end
customers, including Internet live chat to answer questions and provide recommendations
• Ensuring assembled laptops are adequately packaged for transportation
Unit 1: Supply Chain Basics

Sometimes reverse logistics might

occur, which require that products (in
this case, the laptop)
returned by the customers travel in
the opposite direction through the
supply chain. Reverse logistics is
a necessary process for product
returns resulting from products that
are defective, products that
require an upgrade or refurbishment,
preventive maintenance, or even
product recalls stemming from
safety or environmental concerns.
Typically, customers will interact with
the customer service department to
determine the nature of a
problem, and customer service
personnel will issue a return material
authorization along with shipping
instructions and other details.
Unit 1: Supply Chain Basics

SCM is a comprehensive approach to the management of the entire flow of data, information,
materials, and services of the individual supply chain functions previously mentioned. The ability to
link these functions and integrate them with other elements in the business process is dictated by the
overall management strategy. Therefore, the management of the supply chain cannot be viewed as an
independent, standalone organization and must be arranged to work in concert with other business
processes, functions, and departments.
The Council of Supply Chain Management Professionals (CSCMP) is a professional organization that
supports the professional development of its worldwide membership. As defined by CSCMP,
Supply Chain Management encompasses the planning and management of all activities
involved in sourcing and procurement, conversion, and all logistics management
activities. Importantly, it also includes coordination and collaboration with channel
partners, which can be suppliers, intermediaries, third-party service providers, and
customers. In essence, supply chain management integrates supply and demand
management within and across companies. Supply Chain Management is an integrating
function with primary responsibility for linking major business functions and business
processes within and across companies into a cohesive and high-performing business
model. It includes all of the logistics management activities noted above, as well as
manufacturing operations, and it drives coordination of processes and activities with
and across marketing, sales, product design, and finance and information technology.
(CSCMP, 2014)
As the CSCMP’s comprehensive definition above makes clear, supply chains have evolved into complex
entities (see Figure 2).
Figure 2. Council of Supply Chain Management Professionals (CSCMP) logo. Acquired from CSCMP.org.
Unit 1: Supply Chain Basics

SCM takes into consideration activities involved in confirming that products from the raw material
stage are turned into finished products and delivered to customers. These activities include:
• Sourcing of raw material and parts
• Manufacturing and assembling
• Warehousing and controlling inventory
• Entering and managing orders
• Finishing, customizing, and packaging
• Distributing across all channels
• Delivering to final customers
• Managing relationships with suppliers
• Managing relationships with customers
• Maintaining the information systems necessary to monitor the above activities
SCM thus coordinates and integrates these activities into a continuous process, linking the entities
together to ensure supply chains are competitive and satisfy customers with the right products at the
right prices.
Unit 2: Supply Chain Strategy

In today’s environment, Supply Chain Management must be an integral element in developing a

corporate strategy. Corporate strategies determine the target markets for companies to pursue, and
companies then decide if they want to compete on price, service, quality, innovation, flexibility, or a
combination thereof. For example, Walmart pursues a low-cost strategy on everyday goods. Many items
offered to consumers at Walmart can be purchased in other retail stores, but they might not be sold at
prices as low as those at Walmart.
In fact, the supply chains of two different retail stores, even selling the same items, can be quite
different. Walmart owns their distribution centers and has their own fleet of trucks to serve their
immense number of retail stores and control the flow and availability of products.
Unit 2: Supply Chain Strategy

Meanwhile, smaller retail stores such as boutiques and other specialty shops do not have as many retail
outlets, and the products they offer are not guaranteed to have the lowest prices; additionally, they do
not have their own trucks or warehouses, so they must depend on other supply networks for product
availability. The competitive strategies companies choose influence
product price, delivery time, variety, and quality.
Walmart customers shop at that store primarily because of the low
price, but consumers may shop at boutique retail stores because of
unique product offerings and additional services offered, like gift
wrapping and engraving.
Supply chains are designed to fit strategically with defined
corporate strategies; the numerous organizations and activities in
supply chains work together to contribute to the overall goals and
objectives associated with those strategies. Understanding customers and supply chain capabilities is
important when determining if certain supply chains will be able to
support corporate strategies.
The business plan, which includes the competitive strategy, should
support consumer demand and the ability to provide products and
services, which in turn drives the supply chain as it seeks to fill
customer orders. Several functions within organizations—research and development, procurement,
finance, manufacturing, etc.—work together to support their specific supply chains. If the strategic
goal for a company is low costs, these functions need to contribute to that goal, such as designing a
transportation network that minimizes expenses and procurement’s seeking of low-cost suppliers.
Unit 3: Modern Supply Chains
The Global Economy
In the late 1980s, the U.S. experienced an increased in foreign competition, and China’s economic
strategy became more aggressive as the country opened its borders to begin trading globally.
This era was characterized by:
Intense competition among industries
Growing companies were capturing more international market share using different
strategies
Rapid increases in technology and products with shorter product life cycles like personal
computers, mobile devices, and global positioning systems
The ability to coordinate worldwide supply chain activities by using international data networks and
the Internet became critical in the 1990s. If companies wanted to stay in business, they had to take
coordinated steps to manage the flow of goods, services, funds, and information from suppliers around
the world to end customers around the world.
From 2000 to the Present
From the year 2000 to the present day, companies have needed to develop strong relationships with
suppliers to remain competitive. Cooperation with suppliers became critical, replacing the sometimes
adversarial nature of those relationships.
This recent cooperative supply chain approach of integrating suppliers as teammates has brought about
strategies such as improved supplier development, supplier design involvement, the use of full service
suppliers, evaluating suppliers on total value, long-term supplier relationships, and strategic cost
management. As the supply chain is integrated with the overall business strategy, the impact of
ecommerce will continue to reshape business strategies and the supply chains needed to conduct
business globally. In response to the challenges presented by worldwide competition and trade,
business strategies and processes will continue to evolve to meet the needs of rapidly changing
technology and, of course, to continue meeting customers’ expectations.
Unit 3: Modern Supply Chains

Supply Chain Management Principles

SCM is estimated to influence as much as 80% of the costs associated with the total costs of delivering
the final product or service. For this reason, optimizing inventory expenses, choosing efficient
transportation carriers, working closely with suppliers, and making sure forecasts are synchronized with
the demand plan are examples of functions that have become critical within organizations in recent
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years. From global sourcing to global customers and from brick-and-mortar stores to ecommerce, the
coordination and integration of the processes to plan, procure, produce, and deliver products to
customers is essential.
To meet the needs of customers and achieve the goals of the organization, it is imperative all the
functions of the supply chain are integrated and employees understand their impact on others within
this broader function. Companies have invested in comprehensive Enterprise Resource Planning (ERP)
systems, and today SCM is an integral part of the broader business; it is woven into the fabric of a
business, not a standalone element operating in a vacuum.
Unit 3: Modern Supply Chains
 Unit 4: Demand Planning

Demand forecasting is an estimate of a company’s future needs and forms the

basis for a credible demand plan. Typically, sales forecasting defines what
customers will buy over a defined period, usually one year. In turn, the
demand planning function defines what inventory and resources are needed to
support the sales forecast.
As an example, a commercial baker sells cakes, cookies, and breads. The
company forecasts, or predicts, how many cakes and cookies its customers
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might purchase categorized by size and type. These quantities and variations translate into raw
material requirements and other resources needed to manufacture finished products. The forecasting
part in this example is the finished products of cakes, cookies, and breads, and the demand plan
defines the ingredients, ovens, mixers, and equipment used, as well as the number of people preparing
the baked goods.
Demand planning is the process of planning goods, materials, and resources required for procurement
and manufacturing to support the sales forecast. The process starts with the general requirements
defined by the sales department for finished or semi-finished products (which require additional
manufacturing steps to become finished products; they are also called work in process). The plan
further enables the generation of procurement requisitions for raw materials and other goods and
materials. The demand planning function also defines other resources needed for manufacturing like
mixing and baking equipment along with personnel staffing to perform the necessary operations.
 Unit 5: Procurement

The procurement organization is dependent on procurement requisitions that

are fed from the demand planning organization. The demand plan tells or
signals the procurement organization to initiate procurement of what is
needed by transmitting the requirements in an ERP system. Without linkage to
the demand plan, procurement would not know what to buy and when to buy
it. The demand plan considers when items are needed in inventory against the
supplier’s lead time (the time it takes for a supplier to deliver goods after a
PO is placed).
Procurement personnel receive requirements on purchase requisitions, solicit suppliers for pricing and
delivery, evaluate supplier responses using an evaluation process, negotiate to achieve best value, and
make awards by issuing POs. POs are a company’s authorizing documents and financial commitments to
buy products and services. The procurement organization makes sure products are accurately described
by working with engineering and other internal organizations to avoid confusion about exactly what is
needed.
Procurement is a function that interacts with suppliers globally to achieve the best value for an
organization. Procurement personnel must consider the benefits and risks of working with suppliers in
different countries. The specific issues must be managed across different time zones and cultures, and
different approaches must be used to mitigate supplier disruptions like natural disasters, embargos,
strikes, currency fluctuations, and military conflicts.
Procurement personnel must also manage suppliers after awarding a PO to ensure products and services
are delivered on time, at the value stated on the PO, and at the correct quality level. If suppliers are
not managed and open POs are not tracked, late
 Unit 6: Warehousing
operations
Warehousing personnel perform the receipt, storage, retrieval, and
distribution of procured goods and materials. Initially, goods and materials are
received from suppliers into a warehouse by warehousing personnel who
unload trucks, inspect items to ensure there is no product or shipping damage,
and process the items (now formally part of inventory) to a storage location
until they are needed. Once there is a demand for the stored inventory,
warehousing personnel retrieve or pick the inventory and deliver it to the
intended destination, such as manufacturing for assembly.
As manufacturing personnel complete their assembly operations, they process raw materials and semi finished
goods, sending finished products back to the warehouse. At this point, products could be
stored for further assembly operations or might be packaged and prepared for immediate delivery to a
customer.
Warehouses are not always standalone facilities. In some cases, the storage of raw materials, work in
process, and finished goods use dedicated portions of the manufacturing facility to expedite the
movement of inventory through the various manufacturing processes. In other cases, warehouses and
distribution centers may have roles that are entirely distinct from manufacturing operations and focus
on storage and order fulfillment.
Warehousing operations can be simple floor storage or can include various types of racking for high
storage. Many facilities feature sophisticated, automated material handling systems to increase speed
and accuracy while reducing costs. Functions performed within warehouses or distribution centers have
increased significantly, so this function now plays a greater role in the overall supply chain. From
picking items to repacking them into multipacks and shipping individual orders or full truckloads, the
complexity of warehousing has resulted in a greater focus on the efficiency of these operations and
how they impact the deliveries of customer orders.
Unit 7: Inventory management

Unit 7: Inventory Management

Inventory management is an important function to control assets in the supply
chain. Individuals working in the supply chain should have an understanding of
the roles, costs, and benefits of inventories. Inventory is often obtained from
suppliers in the form of raw materials and other goods and materials as a
result of POs placed by the procurement department. Inventory also comes in
the form of work in process and finished products from manufacturing
operations.
It may seem obvious that inventory is controlled and managed in a warehouse
because this is where the majority of inventory is physically stored. However, the management of
inventory, or inventory management, is a function that actually involves the entire supply chain.
Inventory management starts with close integration with demand planning and continues until products
are successfully delivered to customers.
Inventory management is the process of controlling and managing goods, materials, and products to
maximize efficiency and profitability. It controls how efficiently resources are utilized in producing
products and services for customers. Inventory management systems and personnel interact with
warehousing, transportation, demand planning, procurement, and other personnel throughout the
company.
Companies continually strive to reduce their inventory levels as one approach to reducing operating
costs and increasing competiveness. Inventory costs are often one of the largest cost elements in an
organization. Inventory management systems are generally part of a broader company-wide ERP system
that monitors inventory availability at all levels from raw materials to finished goods.
 Unit 8: Manufacturing and
service operations
Manufacturing organizations convert raw materials and other procured items
into final products that can be delivered to a customer. In order to fabricate
products in a manufacturing organization, there must be an accurate sales
forecast that is converted into a demand plan; those requirements are sent to
procurement to obtain raw materials, equipment, space, and other resources.
To aid in this process, the company-wide ERP system includes modules for
forecasting, requirements planning, work order scheduling, and links to other
business systems.
Products cannot be manufactured and services cannot be delivered unless tools are available. This
means demand planning must accurately determine what is needed and when it will be required. If
procurement does not purchase the materials or if transportation does not deliver them when needed,
then the conversion, or manufacturing process, will fail. It is also critical conversions are done with
high quality to avoid customer service issues and to avoid costly defects that are often returned
through the reverse logistics process. Manufacturing is dependent on demand planning to schedule the
assembly work, on procurement to buy needed items, on the warehouse to deliver items for assembly,
and on inventory management to ensure the right items are available at the right time.
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Manufacturing organizations are generally part of a company’s operations that also includes service
operations. Service operations personnel are responsible for products that require routine
maintenance, repairs, and warranty work. For example, if an automobile is recalled or needs repair or
periodic maintenance, it is not sent back to the factory where it was
 Unit 9: Transportation
An appropriate way to understand the field of transportation operations is to
consider the economic perspective: transportation involves the physical
movement of people and goods between origin and destination points. From a
business standpoint, transportation links partners and facilities that are
separated geographically in a company’s supply chain, such as customers,
suppliers, distributors, plants, warehouses, and retail outlets. Transportation
also provides the links between diverse entities spread across the global supply
chain and connects the supply chain by moving inventory with trucks, trains,
planes, ships, and pipelines. Any combination of two or more of these modes
to achieve a delivery requirement is call intermodal transportation.
Transportation operations involve ensuring the flow of inventory from points of origin in the supply
chain to points of use and consumption. The three primary components in transportation operations are
inbound, outbound, and reverse logistics. Inbound logistics supports the procurement of materials and
goods from supplier locations, outbound logistics supports the distribution of materials and goods to
customer locations, and reverse logistics supports product returns, recycling, reuse of materials, and
waste disposal.
Transportation focuses on the timely movement of materials and products within and between
organizations. In order to control costs, goods must move at the right time from the right place to the
right place, while ensuring the correct product, quantity, and quality are ensured. When this is
achieved, inventory is reduced, which reduces expenses. Transportation operations have grown in
complexity because the options for multiple (intermodal) modes of transportation—air, rail, truck,
sea—and their combination can vary daily depending on a number of factors: cost, values, dimensions,
weights, time-definite delivery requirements, and other factors like hazardous or refrigerated cargo.
For today’s supply chain professional, it is essential to understand the roles of the different modes of
commercial surface transportation (railways, road, water, pipeline), commercial modes of air
transportation, and the selection criteria for operating carriers to move products in a cost- and timeefficient
manner
 Unit 10: Customer service
While customer service is presented as the last learning block, it actually
threads its way throughout the supply chain. Customer service is essentially
the delivery of customer satisfaction and covers all aspects of the supply
chain. Customer service focuses on identifying and meeting customers’ needs,
wants, and expectations before, during, and after they buy products. It
constantly interfaces with logistics and transportation to ensure products get
to where they belong, on time.
Customer service also interfaces with operations, warehousing, and inventory,
which assist in ensuring customers receive products when they need or want them while simultaneously
managing inventory to control costs. The function of customer service is essential to any organization,
whether in the private sector (e.g., manufacturers, wholesalers, retailers, carriers, and third-party
logistics providers) or the public sector (e.g., government agencies, airports, ports, and terminals).
The demands have increased significantly, so it is crucial for anyone employed in supply chains to
understand the key elements of customer service like distribution channels, e-commerce, brick and
mortar stores, and reverse logistics. This function also requires individuals to understand the skills
needed to handle customer complains effectively, address customer concerns, and communicate
consistently within organizations to satisfy customers. Within the modules of an ERP system or in
standalone systems, customer service is supported by:
• Inventory stock status
• Customer contact management
• Sales force management
• Customer relationship management (CRM) systems
Customer service can be a discriminator for a company to maintain excellent customer satisfaction
based on the processes for taking orders, resolving problems, and ensuring timely delivery.