CHAPTER 2

Supply Chain Management

SCM (CSCMP Definition)

• The integration of key business processes from end user through original suppliers, that provides products, services, and information that add value for customers and other stakeholders.

• 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 Network Structure

Members of the Focal Company’s Supply Chain

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Tier 1Customers

Tier 2Customers

Tier 3 toConsumers/

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Figure 2-2

The SCM FrameworkElements and Key Decisions

2. What processes should be linked with each of these key supply chain members?

Supply chain business processes

Supply chain management components

Supply chain networkstructure

1. Who are the key supply chain members with whom

to link processes?

3. What level of integrationand management should be applied or each process link?

Figure 2-3

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Tier 1Supplier

Tier 2Supplier

SUPPLY CHAIN MANAGEMENTIntegrating and Managing Processes Across the Supply Chain

LogisticsPurchasing Marketing & Sales

R&D

Customer Consumer/End-user

CUSTOMER RELATIONSHIP MANAGEMENT

CUSTOMER SERVICE MANAGEMENT

DEMAND MANAGEMENT

ORDER FULFILLMENT

MANUFACTURING FLOW MANAGEMENT

PROCUREMENT

PRODUCT DEVELOPMENT AND COMMERCIALIZATION

RETURNS

PRODUCT FLOWProduction Finance

Manufacturer

Information Flow

Source: Douglas M. Lambert, Martha C. Cooper, Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”, The International Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 2.

Figure 2-1

Issues Affecting Channel Structure

• Make versus buy: outsourcing

• Postponement: shifting the risk

- Postponing changes in the form and identity of the product to the last possible point in the marketing process

- Postponing inventory location to the last possible point in time

Issues Affecting Channel Structure

• Risk -economies of large scale production-reduction in logistics costs-reduction of stockouts-reduction of uncertainty

• Local laws• Social and behavioral variables• Physical factors: geography, size of market,

concentration of markets• Technological factors

• Type of distribution-Intensive distribution: chewing gum…-Selective distribution-Exclusive distribution• Seasonality

Issues Affecting Channel Structure

Product characteristics

• Value• Technicality• Market acceptance• Substitutability• Bulk• Perishability

Issues Affecting Channel Structure

Customer service objectives

• Whatever requested and required by the customer...

(e.g. availability, order cycle time...)

Logistics Supports Marketing

• According to Kotler and Armstrong;– marketing management - determining the needs

and wants of target markets and delivering the desired satisfactions more effectively and efficiently than competitors

– Impact of marketing concept ----customer orientation

– Marketing/logistics interfaces focus on physical distribution activities...

Logistics Adds Value by Creating Utility

• FORM UTILITY is the process of creating the good and service, or putting it in the proper form for the customer to use. (from raw materials to finished goods)

• POSSESSION UTILITY is the value added to a product or service because the customer is able to take actual possession. (by credit arrangements, loans...)

• TIME UTILITY is the value added by having an item when it is needed.

• PLACE UTILITY means having the item or service available where it is needed.

Marketing-Logistics Interaction

• Time and place utility –customer service level –customer satisfaction

• Customer service is an output of the logistics system

System Approach/Integration• Logistics is, in itself, a system; it is a network of

related activities with the purpose of managing the orderly flow of goods, information and service with the logistics channel.

• The systems approach simply states that all functions or activities need to be understood in terms of how they affect, and are affected by, other elements and activities with which they interact.

System must be viewed as a whole

Logistics and Supply Chain Management Approach

Systems Approach

• The sum of a series of activities is greater than its individual parts.

• Trade-off analysis-system should be viewed as a whole.

High inventory- High customer service High storage costs High obsolescence risks

TOTAL COST CONCEPT

• “The total cost concept” is the key to effectively managing logistics processes.

• The goal of the organization should be to reduce the total cost of logistics activities, rather than focusing on each activity in isolation.

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• Customer service levels• Transportation costs• Warehousing costs• Order processing/information

systems costs• Lot quantity costs• Inventory carrying costs

MAJOR LOGISTICS COST CATEGORIES

• Inventory carrying costs: capital costs, inventory service cost (insurance and taxes on inventory), storage space costs, inventory risk costs.

• Lot quantity costs: procurement and production related costs varying with changes in order size or frequency.

Order costs, setup costs, capacity lost, material handling cost, price differentials due to buying in different quantities

TRADE-OFF APPROACH IN LOGISTICS

• Central goal of trade off in logistics is to maximize long term profitability and the effective use of assets.

• Examining trade-offs among alternatives and costs, thereby reducing the overall total cost of activites.

• Reduced transportation costs and longer transit times-increased inventory and inventory carrying costs

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Cost Trade-offs Required in Marketing and Logistics

Place/customer service

levels

Product

PromotionPrice

Order processing and information

costs

Warehousingcosts

Transportationcosts

Inventorycarrying costs

Lot quantitycosts

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Source: Adapted from Douglas M. Lambert, The Development of an Inventory Costing Methodology: A Study of the Costs Associated with Holding Inventory (Chicago, IL: National Council of Physical Distribution Management, 1976), p. 7.

Competition

Today the real competition is not company against

company but rather supply chain against supply chain.

Christopher s. 16,38