Y2 Ops & SC - 25-26 - Lesson 2 - Supply Chain Networks, and Sourcing1.pdf

# Understanding supply chain definitions and components This topic introduces the fundamental definition of a supply chain, its constituent components, and the intricate flows of materials and information within it, along with models used for describing and managing these processes [4](#page=4). ### 1.1 Defining a supply chain A supply chain encompasses the relationships and flows between a series of operations and processes that collectively deliver value in the form of products and services to the final consumer [4](#page=4). > **Tip:** Think of a supply chain as an extended enterprise, a network of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer [4](#page=4). ### 1.2 Terminology and flow within a supply chain * **Bidirectional Flow:** Materials and information flow in both directions within a supply chain [5](#page=5). * **Key Terminology:** * **Tiers:** Different levels of suppliers (e.g., Tier 1, Tier 2) [5](#page=5). * **Supply Side:** The side of the chain that provides the product or service [5](#page=5). * **Demand Side:** The side of the chain that consumes the product or service [5](#page=5). * **Upstream:** Refers to the direction towards the origin of the materials or components [5](#page=5). * **Downstream:** Refers to the direction towards the end consumer [5](#page=5). > **Example:** In a bicycle supply chain, the upstream components might include raw material suppliers for metal and rubber, while downstream would be the retail stores selling bicycles to consumers [7](#page=7). ### 1.3 Models for describing supply chain processes #### 1.3.1 The SIPOC model The SIPOC (Suppliers, Inputs, Process, Outputs, Customers) model is a tool used to describe the logistics supply chain by outlining its key elements. It visually represents the flow of information and materials from suppliers through internal processes to customers [8](#page=8). #### 1.3.2 The SCOR model The Supply Chain Operations Reference (SCOR) model is a standardized framework designed to describe, measure, and improve supply chain processes [11](#page=11) [9](#page=9). * **Purpose:** It helps in creating and managing supply chains by linking operational building blocks within and between companies. The management of processes across the entire chain is crucial for efficiency [10](#page=10) [9](#page=9). * **Focus Areas:** The SCOR model traditionally has four key focus areas: * Process [11](#page=11). * Performance [11](#page=11). * People [11](#page=11). * Best Practices [11](#page=11). * **Operational Scope:** * The standard SCOR model includes six primary management processes: Plan, Source, Make, Deliver, Return, and Enable [12](#page=12). * The SCOR digital standard expands on this, including Order and Transform in place of Make [12](#page=12). ### 1.4 Orchestrating the supply chain: synchronizing demand and supply Effective supply chain management involves synchronizing demand and supply across all phases of satisfying customer needs. This synchronization is supported by models like SCOR [12](#page=12). ### 1.5 Supply chain performance objectives Supply chains compete and are measured against several key performance objectives: * Quality [13](#page=13). * Speed [13](#page=13). * Dependability [13](#page=13). * Flexibility [13](#page=13). * Cost [13](#page=13). * Sustainability [13](#page=13). --- # Lean versus agile supply networks This section distinguishes between lean and agile supply networks and explores the risks associated with a mismatch in network strategy. ### 2.1 Understanding supply chain networks A supply chain network refers to the interconnected system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Understanding the different types of supply chain networks is crucial for effective operations management [3](#page=3). ### 2.2 Differentiating lean and agile supply networks The core distinction between lean and agile supply networks lies in their primary objectives and how they respond to market demands [3](#page=3). #### 2.2.1 Lean supply networks Lean supply networks are designed to eliminate waste and minimize costs by ensuring a smooth and efficient flow of goods. Their focus is on predictability and efficiency, aiming to deliver products at the lowest possible cost through optimized processes and reduced inventory [3](#page=3). > **Tip:** Lean principles are best suited for stable demand environments where product variety is low and predictability is high. #### 2.2.2 Agile supply networks Agile supply networks, conversely, are built to respond rapidly and flexibly to unpredictable market changes and customer demands. Their strength lies in their ability to adapt quickly to shifts in demand, product variety, and customization requirements [3](#page=3). > **Tip:** Agile networks excel in volatile markets with high product differentiation and fluctuating customer needs. #### 2.2.3 Risks of mismatch in network strategy A significant risk in supply chain management arises from a mismatch between the chosen network strategy (lean or agile) and the actual market conditions or product characteristics. Implementing a lean strategy in a highly volatile market, or an agile strategy in a predictable, cost-sensitive market, can lead to inefficiencies and increased risks [14](#page=14). * **Lean strategy in a volatile market:** May result in stockouts, lost sales, and an inability to meet changing customer preferences due to rigid processes and low inventory [14](#page=14). * **Agile strategy in a stable market:** Can lead to higher operational costs due to excess capacity, frequent small batches, and complex coordination, failing to achieve the cost efficiencies that a lean approach would offer [14](#page=14). Effectively aligning the supply network's capabilities with market demands is therefore a critical strategic decision [14](#page=14). --- # Supplier relationships and sourcing strategies This topic explores the intricacies of managing relationships with suppliers and the strategic approaches to sourcing goods and services. ### 3.1 Understanding supplier networks and partnerships Supplier networks focus on the entities involved in supplying a business and the nature of the relationships established with them. This is distinct from supply chain networks, which are concerned with the infrastructure setup. Within these networks, various forms of partnerships can be developed with suppliers [15](#page=15) [16](#page=16). ### 3.2 Sourcing strategies Sourcing strategies determine how an organization obtains the goods and services it needs. There are four key approaches to sourcing [17](#page=17): * **Inbound logistics:** This strategy focuses on the processes and relationships involved in receiving and managing raw materials, components, and finished goods from suppliers [17](#page=17). * **Operations:** This approach deals with sourcing strategies related to the transformation of inputs into outputs within the organization [17](#page=17). * **Outbound logistics:** This strategy concerns the sourcing of services and processes related to distributing finished goods to customers [17](#page=17). * **Aftermarket:** This strategy involves sourcing services and parts related to the support and maintenance of products after they have been sold to customers [17](#page=17). ### 3.3 Strategic sourcing using the Kraljic matrix Strategic sourcing involves analyzing sourcing categories, rather than individual suppliers, to develop appropriate strategies. The Kraljic matrix, referred to in the document as "supply risk vs. criticality to business," is a tool used for this purpose. It classifies sourcing items based on two dimensions [18](#page=18): * **Supply risk:** This refers to the potential for disruption in the supply of an item, including factors like scarcity, supplier dependency, and logistical challenges [18](#page=18). * **Business criticality:** This dimension assesses the impact of an item on the organization's profitability and its ability to operate effectively [18](#page=18). The matrix typically results in four categories, each requiring a distinct sourcing strategy: * **Non-critical items:** Low supply risk, low business criticality. These items are often standardized and readily available. The strategy is typically to simplify and automate the purchasing process, often through e-procurement [18](#page=18). * **Leverage items:** Low supply risk, high business criticality. These items offer significant spending power. The strategy is to exploit purchasing power through competitive bidding and negotiate favorable terms [18](#page=18). * **Bottleneck items:** High supply risk, low business criticality. These items are important for operations but do not represent a large portion of spending. The strategy is to ensure supply security by securing contracts and potentially holding buffer stock [18](#page=18). * **Strategic items:** High supply risk, high business criticality. These items are crucial for the business and face significant supply challenges. The strategy is to build long-term partnerships and collaboration with suppliers to ensure supply and foster innovation [18](#page=18). > **Tip:** Understanding the Kraljic matrix is fundamental for aligning sourcing efforts with overall business objectives and managing supply chain risks effectively. ### 3.4 Supplier selection and management The supplier selection process is a critical component of the broader sourcing process, which typically begins with defining demand specifications, followed by an overview of the supply market, the development of a sourcing strategy, and then the actual supplier selection. The final step in the sourcing process is contracting the supplier [19](#page=19). Procurement encompasses both sourcing and purchasing. The purchasing process follows sourcing and includes activities such as [19](#page=19): * Phasing in new suppliers [19](#page=19). * Ordering and receiving deliveries [19](#page=19). * Measuring supplier performance [19](#page=19). * Improving or developing a supplier's capabilities [19](#page=19). * Phasing out suppliers when necessary [19](#page=19). Managing suppliers involves identifying and addressing gaps in the supply side of the business. Similarly, managing customers involves identifying and addressing gaps on the demand side [20](#page=20) [21](#page=21). > **Example:** A manufacturing company identifies that a critical component has a high supply risk due to limited suppliers and is highly critical to their final product's functionality. Using the Kraljic matrix, this component would fall into the "Strategic items" quadrant, necessitating a close, collaborative partnership with the supplier to ensure consistent supply and explore joint development opportunities. --- # Supply chain dynamics and the bullwhip effect This topic explores the dynamic behavior within supply chains, specifically focusing on the amplification of demand variability known as the bullwhip effect [22](#page=22). ### 7.1 Understanding supply chain dynamics Supply chain dynamics refers to the study of how demand and order information changes as it moves through a supply chain. In an ideal scenario, demand at each stage of the supply chain would mirror the actual end-customer demand. However, in reality, variations in demand tend to amplify as they propagate upstream from the retailer to the manufacturer and then to the raw material supplier. This amplification is often described as the bullwhip effect [22](#page=22) [23](#page=23). ### 7.2 The bullwhip effect The bullwhip effect is a phenomenon in supply chain management where demand variability increases as one moves upstream in the supply chain from the customer to the supplier. This means that small fluctuations in customer demand can lead to much larger fluctuations in orders placed by retailers to wholesalers, by wholesalers to distributors, and by distributors to manufacturers [22](#page=22) [23](#page=23). **Causes of the bullwhip effect:** * **Demand forecast updating:** Each member of the supply chain forecasts demand based on the orders they receive from their downstream partner, not on the actual end-customer demand. When demand increases, each stage forecasts a further increase, leading to over-ordering. Conversely, when demand decreases, they forecast further decreases, leading to under-ordering [23](#page=23). * **Order batching:** Companies often order in batches to reduce ordering costs or take advantage of discounts. This can create artificial demand spikes and troughs that do not reflect actual customer demand. For example, a retailer might order a month's supply at once, creating a large order that then gets batched with previous orders by the distributor for forecasting purposes [23](#page=23). * **Price fluctuations:** Promotions and discounts can lead customers to buy more than they immediately need, creating "forward buying." This distorts the true demand pattern and leads to an amplified demand signal upstream [23](#page=23). * **Rationing and shortage gaming:** When a supplier faces a shortage, they may ration products to their customers based on past orders. Customers, anticipating future shortages, may inflate their orders to secure a larger allocation, further distorting demand signals [23](#page=23). **Consequences of the bullwhip effect:** The bullwhip effect leads to several negative outcomes for supply chains: * **Excess inventory:** Over-ordering due to inflated forecasts can result in excessive inventory levels at various stages of the supply chain, leading to increased holding costs, obsolescence, and waste [23](#page=23). * **Stockouts:** Conversely, under-ordering or misinterpreting demand can lead to stockouts, resulting in lost sales, customer dissatisfaction, and damage to the company's reputation [23](#page=23). * **Inefficient production:** Fluctuating order sizes make production scheduling difficult, leading to inefficient use of capacity, higher manufacturing costs, and increased lead times [23](#page=23). * **Increased transportation costs:** Batching orders and dealing with unpredictable demand can lead to less efficient transportation planning and higher costs [23](#page=23). > **Tip:** The bullwhip effect is a fundamental concept in supply chain management that highlights the importance of information sharing and demand signal accuracy throughout the chain. ### 7.3 Mitigating the bullwhip effect Several strategies can be employed to mitigate the bullwhip effect: * **Information sharing:** Sharing actual point-of-sale (POS) data across the supply chain allows all partners to base their decisions on real customer demand rather than on distorted order signals [23](#page=23). * **Reducing lead times:** Shorter lead times reduce the need for long-term forecasts, making them more accurate and less susceptible to amplification [23](#page=23). * **Stabilizing prices:** Implementing everyday low pricing (EDLP) strategies rather than frequent promotions can reduce forward buying and smooth out demand [23](#page=23). * **Eliminating order batching:** Encouraging smaller, more frequent orders can lead to a smoother flow of goods and information [23](#page=23). * **Vendor-managed inventory (VMI):** In a VMI system, the supplier takes responsibility for managing the customer's inventory, using actual POS data to replenish stock. This aligns the supplier's incentives with the customer's actual needs [23](#page=23). --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | Supply Chain | The network of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. | | Lean Network | A supply network designed for efficiency and minimal waste, typically characterized by low inventory and fast throughput. | | Agile Network | A supply network designed for responsiveness and flexibility, capable of adapting quickly to changes in demand or market conditions. | | Supplier Network | Focuses on the relationships and connections between an organization and its direct suppliers, detailing who provides what and the nature of those interactions. | | Supply Chain Network | Refers to the overall infrastructure and setup of how materials and products flow from origin to consumption across multiple entities. | | Partnership (in supply chains) | A close, collaborative relationship between two or more organizations in a supply chain, built on trust and mutual benefit to achieve shared goals. | | Sourcing Approaches | The distinct strategies or methods employed by an organization to acquire goods and services from external providers. | | Kraljic Matrix | A strategic tool used to categorize purchased items or suppliers based on their supply risk and impact on business profitability, guiding sourcing strategies. | | Supplier Selection | The process of identifying, evaluating, and choosing the most suitable suppliers based on predefined criteria to meet an organization's needs. | | Procurement | The comprehensive process of acquiring goods or services, which includes sourcing strategies, supplier selection, purchasing, and supplier relationship management. | | Purchasing | The operational process of buying goods or services, typically following the strategic sourcing and supplier selection phases. | | Bullwhip Effect | A phenomenon in supply chains where demand variability increases as one moves further upstream from the customer to the supplier, leading to inefficiencies. | | SIPOC | A process mapping tool that stands for Suppliers, Inputs, Process, Outputs, and Customers, used to define the scope and elements of a process. | | SCOR Model | The Supply Chain Operations Reference model, a framework used to describe, measure, and improve supply chain processes across different companies. | | Performance Objectives (Supply Chain) | Key metrics used to evaluate the effectiveness of a supply chain, including quality, speed, dependability, flexibility, cost, and sustainability. | | Upstream | The direction in a supply chain moving from the customer back towards the raw material suppliers. | | Downstream | The direction in a supply chain moving from the raw material suppliers towards the ultimate customer. |