What is supply chain management?

• Supply chain management (SCM) is the management of a network of interconnected businesses involved in the provision of product and service packages required by the end customers in a supply chain. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption.

InboundLogistics Production Outbound

LogisticsMarketing

& Sales Service

Purchasing & contractingResearch & development

Human resources management & trainingIT systems

Porter’s value chain within the enterprise

PRIMARY VALUE-ADDING ACTIVITIES

Finance, planning, etc.

SUPP

ORT

ACTI

VITI

ESM

argin

M1:U1:1.1-1

Value Chain

Customer’sCustomerCustomerBuyer

Delivery of a superior value: Quality, Flexibility,Innovation & Value flow to the customer

Demands for low pricing, high quality; Customer; Supplier Integration across a responsive & flexible supply chain

SupplierSupplier’sSupplier

Value acquisition from Suppliers

Value added inproduction

Value delivery tocustomers

Supply Chain Varies

• Supply Chain varies from organization to organization and the it must be defined.

SZS’ Supply Chain (Northern Operations)

Supply chain varies from organization to organization.SZS’ Supply Chain is as follows1. The store submits purchase requisition to the procurement. Note: Store

is using FIFO method with Warehousing Management System.2. The procurement department issues a purchase order against the

purchase requisition.3. The supplier is intimated.4. The supplier delivers the food and beverage stock to the store via

inbound logistics.5. The store intimates the logistics department who are using TTMECS (A

TMS System).6. Outbound logistics with supply to the site.7. New demand sent to the store from the site.

• Change in Customer Buying Habits– Demand changes frequently– Shorter product lifecycle– Increased cost of holding inventory

• Increased Competition– Multiple buying options for customer– Hence, need of making product accessible to customer– Minimize the cost – Efficient distribution result

Need for SCM

• Increasing pressure of profit margins earned– Emphasis on integration of SCM process– Helps in cost cutting

• Technology Driven World– Information plays an important role– Product availability has increased

Need for SCM Continued

Vision, Mission, Goals..

Vision focuses on the long term, i.e., where the organisation aspires to be in the future. Vision is broad & general.

Mission represents what the company considers its basic roleto be. Mission is more concrete.

Strategy is the way of achieving the goals.

Policies define the principles and guidelines to be complied with.

Goals are aligned with the mission & are more specific.

M1:U3:3.3-2

How competitive are your firm’s products or services?

Regularly obtain feedback from actual or potential customers.

• Quality

• Availability

• Customer service & responsiveness

• Low cost

=

Benefitscustomersseek

M1:U4:4.4-5

Purchase Specification

Specifyingthe quantity

Specifying the required

product/service

Specifyingthe delivery

requirements

Specifyingsupplier service/responsiveness

Other information

needed by thesupplier

ITC M2:U3:3.1-1

Purchase Specification

Ensure continuity of production

Innovate

Improve quality

Reduce total costs

Respondquickly to market

changes

Better Supply Chain Management helps a firm to...

M1:U4:4.4-3

SZS Business Volume

The technique enables individual minimum/maximum levels of inventory

to be easily determined by classifying inventory into three categories

ITC M11:U3:3.3-2

Calculating the average usage value of purchased items

Item. No

Average usage

per week

X Unit value (price)

= Average usage value

per week1 3 $ 2.5 $ 7.5

2 2.5 $ 1 $ 2.5

3 20 $ 5 $ 100

4 175 $ 2 $ 350

5 1 $ 10 $ 10

6 15 $ 2 $ 30

ITC M11:U3:3.3-3

ITC

ItemNo.

WeeklyUsageValue

Totalvalue

ranking

CumulativeUsageValue

Percentageof totalusagevalue

Cumulativepercentage

of totalusagevalue

ABCclassification

4 $ 350 1 $ 350 70 % 70 % A3 $ 100 2 $ 450 20 % 90 % B6 $ 30 3 $ 480 6 % 96 % C5 $ 10 4 $ 490 2 % 98 % C1 $ 7.5 5 $ 497.5 1.5 % 99.5 % C2 $ 2.5 6 $ 500 0.5 % 100 % C

Ranking and ABC classification of purchase items

M11:U3:3.3-4

When designing an inventory or product coding system, the code used should: Be as brief as possible Relate uniquely to one individual part or product Allow for all parts currently in use as well as all foreseeable parts Be acceptable to all users of the code Take account of any relevant legislation, industry standards etc.

ITC

Two basic types of coding systems: Simple sequential systems Structured coding systems

M11:U3:3.5-1

STOCK CODING SYSTEMS:SIMPLE SEQUENTIAL CODES

ADVANTAGES DISADVANTAGES

Require no special knowledge or understanding of the product

Easily extendable

Brief

Do not facilitate variety reduction

Harder to remember

Need an index

Easy to make errors

ITC M11:U3:3.5-2

STOCK CODING SYSTEMS:STRUCTURED CODES

ADVANTAGES DISADVANTAGES

Facilitate variety reduction

Allow universal understanding

Easy to use

Built-in index

No duplication of codes

Facilitate error detection

Difficult to customise or design

Limited life

Code length longer

ITC M11:U3:3.5-3

Re-order Level

• Re-order level (or reorder point) is the inventory level at which a company would place a new order or start a new manufacturing run.

Re-order level (ROL) =

Demand in the lead-time + Safety stock (S)

Demand in the lead-time =

Rate of demand/usage (Rd) (e.g., per week)

x Lead-time (L) (e.g., in weeks)

ITC

Where...

ROL = (Rd x L) + S

Re-order level systems - formula:

M11:U4:4.5-2

SWOT Analysis

• SWOT analysis (alternatively SWOT Matrix) is a structured planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. A SWOT analysis can be carried out for a product, place, industry or person. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective.

SWOT AnalysisStrengths:• An effective supply chain• Effective control• Effective use of FIFOWeaknesses:• ERP is lacking complete features as compared to

SAP• PO should be computerized• TTMECS Lacks features as well

SWOT Analysis• Opportunities:• SAP System• System Generated Purchase Order• RFIDs for Inventory Management in store• Threats:• Competing supply chain of Competitors like

Western Industrial Catering.• Ineffective procurement method compared to

competitors.

PESTEL Analysis

• Political • Economic• Social• Technological • Environmental • Legal

ITC

• Lower unit price quotations arise from bigger volume orders

• Lower-risk premium demanded by suppliers

• Less product damages due to bulk and expert handling and storage

M14:U1:1.1-2

Reasons for Opting for Group Purchasing in Disadvantaged Areas

A successful partnership is characterised by:

A high degree of interaction & information sharing

High levels of trust

Mutual interdependence

A focus on costs rather than price

Teamwork

Investment in the relationshipITC M14:U1:1.2-1

How Group Purchasing Helps to Alleviate Disadvantages

Value Addition

OPERATIONS

CONTROL

Requirements& Feedback

InputsCapitalIntellectManagement StaffLandRaw Materials EnergyComponentsFacilities EquipmentInformationTime

TransformationProcessingTransportingStoringExchangingCommunicatingInspecting

Outputs

Goods and/orServices

Requirements & Feedback

Requirements& Feedback

M17:U1:1.2-1ITC

Environmentally Preferable Purchasing (EPP):

The purchase of products & services that have less negative environmental impact

Promotes sustainable consumption!

Demonstrates an organization’s commitment to social & environmental responsibility

Involves making decisions on What To Purchase & Whom to Purchase From

ITC M13:U2:2.4-2

Forming contract management teams

For large contracts you may have“core teams” & “extended teams”

Different contracts require different managers:

“Arms-length” relationships require people who are good at applying contract law

Co-operative relationships require good people managers

M9:U2:2.1-1ITC

Contract Managers: Roles

M9:U2:2.2-1ITC

• Defines team roles• Keeps the team motivated• Ensures team members maintain communication• Is responsible for the contract management plan• Establishes contract management reporting systems• Ensures proper contract administration• Identifies & manages risk• Identifies priorities • Manages the buyer-supplier relationship • Manages disputes• Approves or rejects requests for contract changes • Ensures learning points are fed back into the organisation

Contract Managers: Skills, Competencies & Experience

M9:U2:2.2-2ITC

• An excellent communicator• Relationship builder / good interpersonal skills• Able to focus on issues & not personalities• Has a working knowledge of the technical issues• Respected, influential, & politically aware• Knowledge of risk management techniques• Knowledge of contract law• Ability to see the “big picture”• Skilled in project management techniques• Skilled negotiator

ITC

What makes a good contract?

Know what you want, what you want to avoid & your options if things go wrong

Know your supplier

Aim at “win-win”

Don’t accept unrealistic promises

Avoid ambiguous drafting

Keep technology in mind

Keep intellectual & industrial property in mind

Have a clear dispute resolution clause

Have a clear termination clause

Keep culture in mindM8:U2:2.5-1

Impact/supply opportunity/risk rating

Expenditure

The Supply Positioning Model: 4 types of purchase items

80% of items = 20% of value 20% of items = 80% of value

ITC

M

H

N

L

Bottleneck

Routine

Critical

Leverage

M6:U2:2.4-6

Expenditure rank Product or service Annualexpenditure

Highest

Medium – high

Medium

Low-medium

Low

20% ofitems

80% ofitems

Impactrating

Prioritising purchased items...

M2:U5:5.4-16

Action Point 5.4-4

ITC

The supply positioning model as a basis for prioritising

ITC M2:U5:5.4-15

80% of items = 20% of value 20% of items = 80% of value

M

H

N

Expenditure

Impact

L

Confce.roomhire

Electricmotors

Valves

Welding

mater.

Tran-sistors

Nuts &bolts

Speakers

Casings

Suppl.Cleaning

H

M

LN

Give your highest priority to items that represent high levels of both expenditure and of impact!

Micro-valves

Tuningdevices

80/20 Rule

• 20 % Efforts & Planning gives 80 % Results !

Year /quarter

DemandCentredmovingaverage

Trend Seasonal variation

Y1/Q1 127

Y1/Q2 155144

Y1/Q3 165 143 +22141

Y1/Q4 130 139 -9136

Y2/Q1 115 135 -20133

Y2/Q2 134 133 +1132

Y2/Q3 155 132 +23132

Y2/Q4 123 134 -11136

Y3/Q1 118 137 -19137

Y3/Q2 147140

139 +8

Forecasting demand for Rice

ITC M2:U4:4.2-18

Year /quarter

DemandCentredmovingaverage

Trend Seasonal variation

Y3/Q3 160 142 +18143

Y3/Q4 135 145 -10146

Y4/Q1 131 148 -17149

Y4/Q2 159 151 +8152

Y4/Q3 172 154 +18156

Y4/Q4 146

Y5/Q1 147

Y5/Q2

Y5/Q3

Y5/Q4

Forecasting demand for item Rice (Cont’d)

ITC M2:U4:4.2-19

Switching costs

Can be:Costs related to negotiating a contact

Re-training of staff

Changes in processes & design

Obsolescence of old stock

Penalties for terminating the previous contract

Inefficiencies in start-up phase, etc.ITC M4:U5:5.2-2

Switching costs

• Offering benefits & discounts for customer loyalty

• Developing strong links with your executive and/or technical staff

• Providing free training and other services

Suppliers may try to build in switching costs by:

ITC M4:U5:5.2-4

Buyer Characteristics

Strong negotiators who are comfortable with arms-length relationships (spot purchases and when entering into term contracts)

If switching costs are high, the person managing the contract need to be good at establishing and maintaining a co-operative relationship

ITC M4:U5:5.6-1

The Performance Equation

Performance Capability Motivation= x

Evaluate the supplier’s ability

to supply your company

Determining appraisal criteria...

M5:U2:2.5-1ITC

Evaluate the supplier’s interest &

potential commitment

Your appraisal criteria will relate to:

ITC M5:U3:3.2-1

• Cost• Quality• Availability• Supplier Service• Responsiveness

 What is the 7 R’s Rule?The 7 R‘s Rule describes how customer service can be created

through integrated logistics: • Having the right product• in the right quantity• in the right condition• at the right place• at the right time• for the right customer• at the right cost

Inadequate functioning of any of these areas can result in poor customer service

ITC M10:U3:3.3-2

The Role of PackagingThe physical characteristics of goods (solid, liquid, gas) affect the way they can be handled.

Packaging has two important roles in relation to transport:1) Protectionensuring that the goods are adequately protected for transport in conjunction with the type of vehicle being used

2) Optimising volumetric capacity & facilitating handlingallowing goods to be stacked more readily

Because of the volumes and the materials involved, packaging is increasingly becoming an environmental issue

ITC M10:A:2.1-1

Commonly used packaging materials:

Natural materials (jute, cardboard, wood) as well as various types of plastic and metals are used for many break bulk goods

Materials such as straw, paper, chipped & moulded polystyrene, etc. are used to fill free space in boxes & cartons

Metals, plastic, glass, etc. is also used for specialised containers

Remember that weak packing will result in losses & damage but too strong packing will be unnecessarily expensive

Buyers should take a proactive role in specifying dimensions, type & capacity of packaging provided by suppliers

Packaging instructions

• Packaging is usually the supplier’s responsibility

but the buyer can influence how it is done!

• Dimensions of packaging should match standard storage location sizes in stores to efficiently use the space

• Buyers could specify dimensions, type and capacity of packaging

ITC M10:A:2.6-1

Crux• SCM• Value Chain• Delivery Process• Variation Of Supply Chain• Need For Supply Chain• Vision, Mission, Goals• Competitive Advantage• Purchase Specification• Benefits of Supply Chain• ABC Analysis• Inventory Coding System• Re-Order Level• SWOT Analysis• PESTEL Analysis• Group Purchasing• The Transformation Model• Environmentally Preferable Packaging• Contract Management• Supply Positioning• 80/20 Rule• Packaging