Pages 1-29

Supply chain management: strategy, planning and operation

Sunil Chopra and Peter Meindl, PHI, 2004.

A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request.

The supply chain not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves.

Within each organization, such as a manufacturer, the supply chain includes all functions involved in receiving and filling a customer request.

A supply chain is dynamic and involves the constant flow of information, product, and funds between different stages.

It is important to visualize information, funds, and product flows along both directions of this chain.

All flows of information, product, or funds generate costs within the supply chain. Thus, the appropriate management of these flows is a key to supply chain success.

Supply chain management involves the management of flows between and among stages in a supply chain to maximize total supply chain profitability.

The primary purpose for the existence of any supply chain is to satisfy customer needs, in the process generating profits for itself.

Supply chain activities begin with a customer order and end when a satisfied customer has paid for his or her purchase.

The objective of supply chain is to maximize the overall value generated.

For most supply commercial supply chains, value will be strongly correlated with supply chain profitability.

Successful supply chain management requires many decisions relating to the flow of information, product, and funds.

The design, planning, and operation of a supply chain have a strong impact on overall profitability and success.

The goal of supply chain operations is to handle incoming customer orders in the best possible manner.

Planning establishes parameters within which a supply chain will function over a specified period of time.

The design, planning, and operation of a supply chain have a strong impact on overall profitability and success.

A supply chain is a sequence of processes and flows that take place within and between different stages and combine to fill a customer need for a product. Page 8.

Page 387

Procurement is the process by which companies acquire raw materials, components, products, services and other resources from suppliers to execute their operations. Sourcing is the entire set of business processes required to purchase goods and services. Sourcing processes include the selection of suppliers, design of supplier contracts, product design collaboration procurement of material and evaluation of supplier performance.

Supplier scoring and assessment is the process used to rate supplier performance. For many firms, price has traditionally been the only dimension that suppliers have been compared on. There are many other supplier characteristics such as lead time, reliability, quality and design capability that impact the total cost of doing business with a supplier. A good supplier scoring and assessment process must identify and track performance along all the dimensions that affect the total cost of using a supplier.

Supplier selection uses the output from supplier scoring and assessment to identify the appropriate suppliers.

Given that about 80 percent of the cost of a product is determined through design, it is crucial that suppliers be actively involved at this stage. Design collaboration allows the supplier and the manufacturer to work together when designing components for the final product. Design collaboration also ensures that any design changes are communicated effectively to all parties involved with designing and manufacturing the product.

The goal of procurement is to enable orders to be placed and delivered on schedule at the lowest possible overall cost.

The role of sourcing planning and analysis is to analyse spending across various suppliers and component categories to identify opportunities for decreasing the total cost.

Effective sourcing processes within a firm can improve profits for the firm and total supply chain surplus in a variety of ways.

It is important that the drivers of improved profits be clearly identified when making sourcing decisions.

When designing a sourcing strategy it is important for a firm to be clear on the factors that have the greatest influence on performance and target improvement on those areas.

When comparing suppliers, many firms make the fundamental mistake of focusing only on the quoted price, ignoring the fact that suppliers may differ on other dimensions that impact the total cost of using a supplier.

Supplier performance must be rated on each of the factors because they impact the total supply chain cost.

Supplier performance should be compared based on their impact on total cost. Besides purchase price, the total cost is influenced be replenishment lead time, on time performance, supply flexibility, delivery frequency, supply quality, in bound transportation cost, pricing terms, the ability of the supplier to

coordinate forecasting and planning, the design collaboration capability of the supplier, exchange rates and taxes and supplier viability.

It is crucial for a manufacturer to collaborate with suppliers during the design stage if product costs are to be kept low. Design collaboration can lower the cost of purchased material and also lower logistics and manufacturing costs.

Page 406

Periodically, each firm must analyse its procurement spending and supplier performance and use this as input for future sourcing decisions.

Supplier performance should be measured against plan on all dimensions that impact total cost such as responsiveness, lead times, on time delivery, quality and delivery accuracy.

Supplier performance analysis should be used to decide on the portfolio of suppliers to be used and the allocation of demand among the chosen suppliers.

Effective sourcing decisions have a significant impact on financial performance.

Good sourcing decisions can improve supply chain performance by aggregating orders, making procurement transactions more efficient, achieving design collaboration with suppliers, facilitating coordinated forecasting and planning with suppliers, designing supply chain contracts that increase profitability while minimizing information distortion, and decreasing the purchase price through increased competition among suppliers.

From the book

Supply Chain Management: Concepts and Cases - Rahul V.Altekar Prentice Hall of India, New Delhi, 2005

Page 4

Supply chain management can be seen as the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory (and related information flows) through the organization and its marketing channels in such a way that current and future profitability are maximized through the cost effective fulfillment of orders.

Supply chain is understood as a process starting from the procurement of raw materials to the ultimate consumption of the finished product linking across supplier-user companies, or the functions inside and outside a company that enable the value chain to make products and provide services to the customer. Page 34 An effective supply chain strategy may be formulated to meet the needs of the market and integrate them with technology to generate the highest level of customer satisfaction while delivering the highest value to the shareholders.

Page 104

To optimize the benefits of lean throughout the supply chain, it is essential for the manufacturing company to build partnerships with suppliers, as if they were departments within their own company. The partnership must work on the basic premise that the manufacturing company will pull only what it consumes and nothing more. The suppliers replace what the manufacturing company has consumed and nothing more. In this way inventories are maintained at their minimum for both supplier and customer.

Achieving this level of trust and efficiency with companys supplier will require frequent communication and extensive sharing of information. Successful partnerships result from inviting each other to strategic planning sessions, attending each others events for process improvements and other joint activities.

The customer and supplier share common goals such as the minimisation of waste and the maximisation of productivity. Greater effort is required, however, to avoid a one sided approach to setting quantitative performance targets. Response time targets for the supplier might be coupled with a commitment by the customer for providing complete information within a reasonable lead time. Page 209

For a company to deliver maximum value to its customers, it must receive maximum value from its suppliers.

Through supplier partnership some firms could double their competitive resources and greatly improve their costs, quality, cycle times, technology and customer satisfaction.

The drivers of partnership are summarized into the following three points.

Brutal competition across the globe is offering better quality, lower prices and less response time for the same product or service. Smart and conscious consumers want more value, reliability, after sales service and smaller batches. Limitations of isolated efforts in creative product differentiation, cost cutting methods and productivity improvement areas.

Supplier partnership is the establishment of a working relationship with supplier organization whereby two organizations act as one. Supplier integration means developing preferred suppliers.

Page 225

Distribution refers to getting the right product to the right place at the right time. Distribution can be defined as the channel structure used to transfer products from an organization to its customers. Distribution organizations manage the activities associated with the movement of materials, usually finished goods or parts, from supplier to the customer.

P 375

The inherent complexity of supply chains is tied to the interdependency of the processes, people and technology at each of the supply chains partners.

P 396

A benchmark is a standard of performance. Benchmarking helps organizations identify standards of performance in other organizations and to import them successfully to their own. It allows organizations to discover where they stand in relation to others. By identifying, understanding, comparing and adapting ones own organization with the outstanding practices and processes of others, an organization can target problem areas, set levels of performance and identify solutions to improve results.

Organisations that accomplish a particular activity at the highest value, i.e. at the lowest cost and / or quality or efficiency are considered best-in-class.

Benchmarking is an ongoing process that generally does not yield quick fixes or panaceas.

p 421

Traditional performance measurement systems are designed for single entities and do not readily support supply chain perspectives.

P 430

SCOR facilitates a standard language, which is set up to help management to focus on management issues. It is used as an industry standard to help management focus across inter company supply chains.

It is also used to describe, measure and evaluate supply chain configurations in order to improve across all areas of the supply chain. However there are several critical success factors for effectively using SCOR. A companys operations strategy must be consistent with and support the business strategy. The business must be organized to support rapid decision making and management practices must be facilitated by appropriate systems and information technology, not defined by them. Finally the performance metrics and targets that are put in place must motivate behavior that produces the required outcome. When these conditions are met, using the model allows companies to compare their own processes with those of other companies, benchmark themselves and compare their own practices with the demonstrated best practices.