SCM Part 1 Introduction to Supply Chain Mgmt AY 24-25 LESSON 2.pdf

# Introduction to supply chain management This section provides a foundational understanding of supply chain management (SCM), its strategic importance, optimization potential, key definitions, and performance metrics [1](#page=1) [4](#page=4) [57](#page=57) [58](#page=58). ### 1.1 The what and how of supply chain management Supply chain management (SCM) is a crucial aspect of competitive business strategy. It encompasses the management of all activities related to the flow of goods, services, information, and finances from the initial supplier to the final customer. The core of SCM lies in optimizing this flow to achieve competitive advantage [1](#page=1) [4](#page=4) [57](#page=57) [58](#page=58). ### 1.2 Supply chain as part of a competitive business strategy The supply chain is intricately linked to a company's overall competitive strategy. Effective SCM can be a significant differentiator, enabling companies to achieve strategic goals such as cost leadership, product differentiation, or responsiveness to customer needs [4](#page=4). ### 1.3 SCM, the potential of optimization A primary focus of SCM is the optimization of its various components and processes. This optimization aims to improve efficiency, reduce costs, enhance customer satisfaction, and increase overall profitability [4](#page=4). ### 1.4 SCM definitions, drivers, and performance #### 1.4.1 Defining supply chain management Supply chain management involves the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Crucially, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, SCM integrates supply and demand management within and across companies [1](#page=1) [4](#page=4) [57](#page=57) [58](#page=58). #### 1.4.2 Drivers of supply chain performance Supply chain performance is influenced by three fundamental categories of elements [5](#page=5): * **Fundamental elements:** These are intrinsically linked to the existing network structure of the supply chain [5](#page=5). * **Company-related elements:** These relate to how the business itself is managed and operates [5](#page=5). * **Society-related elements:** These are influenced by the dynamic and changing global environment, often characterized as VUCA (Volatile, Uncertain, Complex, Ambiguous) [5](#page=5). #### 1.4.3 Supply chain performance measurement A critical aspect of SCM is the accurate and effective measurement of its performance. This involves establishing relevant metrics and continuously monitoring them to identify areas for improvement [5](#page=5). > **Tip:** Understanding the interplay between fundamental, company-related, and society-related elements is key to diagnosing performance issues and identifying appropriate optimization strategies within a supply chain. --- This study guide section summarizes the introductory concepts of supply chain management based on the provided document content, focusing on its definition, strategic role, optimization potential, and performance drivers. --- # Drivers of supply chain performance Supply chain performance is driven by fundamental elements linked to the existing network and company-related elements managed by the business, all within a dynamic societal context. Five key drivers of supply chain performance are identified: facilities, inventory, transportation, sourcing, and pricing [16](#page=16) [31](#page=31) [39](#page=39) [47](#page=47) [5](#page=5) [9](#page=9). ### 2.1 Facilities Facilities are physical locations within the supply chain that can influence performance by increasing responsiveness through a greater number of, more flexible, or higher-capacity facilities. Decisions regarding facilities involve balancing costs associated with facility type, location, and capacity against inventory and transportation costs. An increase in the number of facilities escalates facility and inventory costs, while potentially decreasing transportation costs and enhancing responsiveness. Conversely, improving facility flexibility and capacity utilization might increase facility costs but can reduce inventory expenses and boost responsiveness [10](#page=10). **Components of facilities decisions include:** * **Location (size & number):** This involves deciding where to place facilities, considering centralization for economies of scale versus decentralization for responsiveness. Macroeconomic factors, labor costs and quality, infrastructure availability, customer proximity, other facility locations, and tax effects are crucial considerations [13](#page=13). * **Level of automatization:** More technologically advanced warehouses can achieve higher throughput levels [13](#page=13). Offshoring production or other operational activities is also a key consideration, with potential advantages and disadvantages needing evaluation. A common pitfall in offshoring is focusing solely on unit cost rather than total cost and neglecting potential critical risks. Total cost management for offshoring encompasses supplier price, terms, delivery costs, inventory and warehousing, quality costs, duties and taxes, risk costs, procurement staff costs, infrastructure, tooling, and exchange rate impacts [14](#page=14) [15](#page=15). > **Tip:** When evaluating facility decisions, consider the trade-off between responsiveness and efficiency. For example, a network with 26 distribution centers (DCs) can support same-day/next-day order response times, while a network with one DC might be suited for a one-week order response time [11](#page=11) [12](#page=12). ### 2.2 Inventory Inventory plays a critical role in the supply chain by managing the mismatch between supply and demand, exploiting economies of scale, reducing costs, and improving product availability. Inventory decisions significantly affect assets, costs, responsiveness, material flow time, and financial results [17](#page=17). **Inventory management involves several key components and decisions:** * **Cycle inventory:** This is the average amount of inventory used to satisfy demand between supplier shipments and is a function of lot size decisions [27](#page=27). * **Safety inventory (safety stock):** Held to buffer against demand exceeding expectations and to counter uncertainty. The decision to install safety inventory involves determining the appropriate product availability level, the quantity of safety inventory needed, and actions to reduce it without compromising availability [27](#page=27) [30](#page=30). * **Seasonal inventory:** Built up to manage predictable demand variability, balancing the cost of carrying additional inventory against the cost of flexible production [28](#page=28) [29](#page=29). * **Level of product availability (Service level % - Probability of stock-out):** This represents the fraction of demand met on time from inventory. High availability enhances responsiveness but increases costs, requiring a trade-off between customer service and cost [28](#page=28). **The Economic Order Quantity (EOQ) model, also known as Camp's formula, helps determine the optimal order quantity to minimize the sum of ordering costs and inventory costs.** [18](#page=18) [24](#page=24). * **Ordering costs (F):** Fixed costs associated with placing an order, such as administrative costs, cleaning, or setup costs. The total order cost is given by $F \times \frac{D}{Q}$, where $D$ is the demand quantity and $Q$ is the order quantity [20](#page=20). * **Inventory costs (Stock costs):** Costs of holding inventory, typically expressed as a percentage ($h$) of the purchasing price ($P$). Average inventory is $Q/2$. Total inventory cost is $h \times P \times \frac{Q}{2}$ [21](#page=21). * **Total costs:** The sum of total order costs and inventory costs. The EOQ is the quantity $Q$ that minimizes this total cost, found where the derivative of total cost with respect to $Q$ is zero [22](#page=22) [23](#page=23). The EOQ formula is: $$Q = \sqrt{\frac{2FD}{hP}}$$ [24](#page=24). > **Tip:** While EOQ provides a foundational model, real-world inventory decisions must also account for safety stock, seasonal demand, and desired service levels. ### 2.3 Transportation Transportation is fundamental to the supply chain as it moves products between stages, influencing both responsiveness and efficiency. Faster transportation improves responsiveness but reduces efficiency, while slower methods increase efficiency but decrease responsiveness. Transportation also interacts with inventory and facility decisions, allowing firms to optimize the balance between responsiveness and efficiency by adjusting facility locations and inventory levels [32](#page=32). **Key transportation decisions include:** * **Design of transportation network:** This involves selecting modes, locations, and routes, deciding between direct shipments or using intermediate consolidation points, and potentially combining multiple supply or demand points in a single run [36](#page=36). * **Choice of transportation mode:** Options include air, truck, rail, sea, and pipeline, each with different speeds, shipment sizes, costs, frequencies, and flexibility. Information goods can be transported via the Internet [36](#page=36). The overall trade-off in transportation is between responsiveness and efficiency. Using faster transport modes increases responsiveness and transportation costs but can lower inventory holding costs [36](#page=36). > **Tip:** When selecting a transportation mode, managers must consider not only unit costs but also the cycle, safety, and in-transit inventory costs that result from each mode. Modes with higher transportation costs can be justified if they lead to significantly lower inventory costs [38](#page=38). Full Truck Load (FTL) costs are driven by load, distance, and the availability of backhaul freight. Optimization within FTL can also be achieved by improving palletization to utilize vertical space [34](#page=34) [35](#page=35). ### 2.4 Sourcing Sourcing encompasses the business processes required to purchase goods and services. It involves deciding whether tasks will be performed internally (in-house) or by a third party (outsourcing). Sourcing decisions are crucial as they impact a supply chain's efficiency and responsiveness [40](#page=40) [43](#page=43) [7](#page=7). **Key aspects of sourcing include:** * **Role in the supply chain:** Sourcing can involve contracting as a form of hedging, exploiting economies of scale, and determining whether to use single-source or multiple-source strategies [40](#page=40). * **Chain thinking:** Aims to increase the total surplus shared across the supply chain [40](#page=40). * **Sourcing teams:** Evaluate various sourcing and purchasing aspects like price, quality, flexibility, and after-care [40](#page=40). * **Total Cost of Ownership (TCO):** This is a critical evaluation metric that goes beyond purchase price to include R&D, payment terms, warranty, specifications, production capacity, packaging, obsolescence, expediting, transaction costs, inventory carrying costs, transportation, purchasing administration, and warehousing [41](#page=41) [42](#page=42). **Sourcing decisions' impact on competitive strategy:** * Companies may outsource to responsive third parties if developing capabilities in-house is too expensive [43](#page=43). * Responsive processes might be kept in-house to maintain control [43](#page=43). * Strategically important products or services often lead to activities being kept in-house, even if external procurement could be cheaper from a supply chain perspective, due to considerations like image, risk analysis, and product development [43](#page=43). **Components of sourcing decisions include:** * **Supplier selection:** Determining the number of suppliers and the criteria for evaluation and selection, which should be multidisciplinary and consider TCO [45](#page=45). * **Procurement:** The process of acquiring goods and services [45](#page=45). > **Tip:** Adopt a "Think Global - Act Local" approach in strategic sourcing [46](#page=46). ### 2.5 Pricing Pricing determines the amount charged to customers and significantly influences the required supply chain responsiveness and the demand profile the chain must serve. Pricing strategies can be employed to align demand and supply, with the ultimate objective of increasing firm profit. Pricing also affects the expected responsiveness and market profile [48](#page=48). **Key components of pricing decisions:** * **Pricing and economies of scale:** Providers must price activities to reflect economies of scale. This can improve supply chain efficiency but may introduce intermediate sales. Strategies like "everyday low pricing" versus "high-low pricing" (promotions) lead to different demand profiles [49](#page=49). * **Fixed price versus menu-pricing:** When marginal supply chain costs or customer value vary significantly, a pricing menu can be effective. However, this can sometimes lead to customer behaviors that negatively impact profits [49](#page=49). **Financial metrics are closely linked to pricing and impact supply chain performance:** * **Cash-to-cash (C2C) cycle:** This metric approximates the average time from when cash is spent as a cost to when it is returned as collected revenue. It is calculated as [50](#page=50) [53](#page=53): $$C2C = \text{Weeks Payable} + \text{Weeks in Inventory} + \text{Weeks Receivable}$$ [50](#page=50) [53](#page=53). * **Stock turns (Inventory turnover):** Measures inventory performance by dividing the yearly cost of goods by the average value of stock, indicating how many times inventory is refreshed annually [53](#page=53). * **Turnover time of inventory:** Measures the average time goods are held in inventory, calculated by first finding the stock turn rate and then expressing it in days (365 days / stock turn rate) [53](#page=53). > **Example:** If a company has average days in stock of 40, payment terms to suppliers of 30 days, and payment terms from customers of 50 days, the cash-to-cash cycle is: $40 \text{ days} + 50 \text{ days} - 30 \text{ days} = 60 \text{ days}$. This means the company needs to finance its expenditures for 60 days [51](#page=51). Pricing and payment terms directly influence the C2C cycle by affecting the "Weeks Payable" and "Weeks Receivable" components. Initiatives to positively impact C2C can involve reducing inventory days, increasing supplier payment terms, and decreasing customer payment terms. Addressing these areas requires collaboration with various departments, including procurement, logistics, and sales [50](#page=50) [55](#page=55). --- # Supply chain trends and optimization This section delves into emerging trends in supply chain management and explores how supply chain operations can be optimized, emphasizing strategic alignment with competitive business strategies. ### 2.1 The strategic alignment of supply chain strategy with competitive business strategy The effective integration of supply chain strategy with overall business strategy is paramount for achieving competitive advantage. A well-defined supply chain strategy can significantly enhance a company's ability to meet customer demands, reduce costs, and improve responsiveness, all of which contribute to its competitive positioning. This alignment ensures that supply chain efforts directly support the achievement of broader business objectives [4](#page=4). ### 2.2 Supply chain optimization and its potential Optimization within supply chain management refers to the process of improving supply chain operations to maximize efficiency, minimize costs, and enhance customer satisfaction. The potential for optimization is vast and can be realized through various means, including better inventory management, streamlined logistics, improved forecasting, and enhanced collaboration among supply chain partners [4](#page=4). > **Tip:** Recognizing and leveraging the potential for optimization is a key differentiator for leading supply chain organizations. ### 2.3 Emerging trends in supply chain management The field of supply chain management is constantly evolving, driven by technological advancements, changing customer expectations, and global economic shifts. Key trends observed in supply chain management include [57](#page=57): * **Digitalization and Technology Adoption:** Increased use of digital tools, automation, artificial intelligence (AI), and the Internet of Things (IoT) to enhance visibility, efficiency, and decision-making across the supply chain [57](#page=57). * **Sustainability and Circularity:** Growing emphasis on environmentally friendly practices, ethical sourcing, and the implementation of circular economy principles to reduce waste and ecological impact [57](#page=57). * **Resilience and Agility:** Building more robust and adaptable supply chains capable of withstanding disruptions, such as natural disasters, geopolitical events, or economic downturns [57](#page=57). * **Customer Centricity:** Shifting focus towards meeting specific customer needs and preferences, leading to personalized logistics and delivery options [57](#page=57). * **Data Analytics and Predictive Insights:** Leveraging big data and advanced analytics to gain deeper insights into supply chain performance, predict future demand, and proactively identify potential issues [57](#page=57). * **Globalization and Nearshoring/Reshoring:** Complex global networks are being re-evaluated, with a trend towards diversifying sourcing and sometimes bringing production closer to end markets for better control and reduced lead times [57](#page=57). --- ## 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 Management (SCM) | The management of the flow of goods and services, involving the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption. | | VUCA | An acronym representing Volatile, Uncertain, Complex, and Ambiguous conditions, describing the nature of the modern business environment. | | Competitive Strategy | A long-term plan for achieving a competitive advantage by offering superior value to customers. | | Supply Chain Strategy | A plan detailing how a supply chain will be designed and operated to meet the strategic objectives of the firm. | | Supply Chain Structure | The design of the physical network of facilities and the allocation of capacity and roles among them. | | Efficient Supply Chain | A supply chain that aims to minimize costs, often achieved through high utilization, low inventory, and minimal lead times. | | Responsive Supply Chain | A supply chain that aims to respond quickly to customer demands, often characterized by high inventory, multiple facilities, and fast transportation. | | Logistical Drivers | Elements of the supply chain that relate to the physical movement and storage of goods, including facilities, inventory, and transportation. | | Cross-Functional Drivers | Elements that span multiple business functions and are critical for supply chain performance, such as information, sourcing, and pricing. | | Facilities | Physical locations in the supply chain, such as manufacturing plants, distribution centers, and retail stores, that are involved in storing or processing goods. | | Inventory | Goods or materials kept on hand to meet anticipated demand or to facilitate production. | | Transportation | The movement of goods from one location to another, utilizing various modes like trucks, trains, ships, and airplanes. | | Information | Data and knowledge that flows through the supply chain, enabling coordination, planning, and decision-making. | | Sourcing | The process of identifying, evaluating, selecting, and managing suppliers for goods and services required by a company. | | Pricing | The strategy and tactics used to determine the amount charged for products and services, impacting demand and profitability. | | Strategic Fit | The alignment between a company's competitive strategy and its supply chain strategy, ensuring they support each other. | | Offshoring | The practice of relocating business processes or manufacturing facilities to another country, often to reduce costs. | | Total Cost of Ownership (TCO) | A comprehensive assessment of all costs associated with acquiring, owning, operating, and maintaining an asset or system over its lifespan. | | Economic Order Quantity (EOQ) | A formula used to determine the optimal order quantity that minimizes the total cost of ordering and holding inventory. | | Cycle Inventory | The average amount of inventory held to satisfy demand between supplier shipments; it is a function of lot size decisions. | | Safety Inventory | Extra inventory held to buffer against unexpected increases in demand or disruptions in supply, aimed at preventing stock-outs. | | Seasonal Inventory | Inventory built up in anticipation of predictable seasonal increases in demand, to balance the cost of carrying inventory against the cost of flexible production. | | Product Availability (Service Level) | The probability that a product will be in stock when a customer places an order, often expressed as a percentage. | | Stock-out | A situation where there is no inventory available to meet customer demand. | | Cash-to-Cash (C2C) Cycle | A metric that measures the average time it takes for a company to convert its investments in inventory into cash from sales, calculated as Days Inventory + Days Receivables - Days Payables. | | Stock Turns (Inventory Turnover) | A financial ratio that measures how many times inventory is sold or used over a specific period, indicating inventory management efficiency. | | Turnover Time of Inventory | The average number of days a company holds its inventory before selling it, calculated from the stock turn ratio. | | Full Truck Load (FTL) | A type of freight transportation where a single truck is used to carry a shipment for one customer, optimizing space utilization. | | Push System | A production or inventory strategy where goods are manufactured or ordered based on forecasted demand, pushing them towards the customer. | | Pull System | A production or inventory strategy where goods are manufactured or ordered based on actual customer demand, pulling them through the supply chain. | | Sales and Operations Planning (S&OP) | A process that helps companies align their sales forecasts with their operational capabilities, ensuring balanced production and demand. | | Electronic Data Interchange (EDI) | A technology that enables the electronic exchange of business documents between trading partners in a standardized format. | | Customer Relationship Management (CRM) | A strategy and technology for managing all of a company's relationships and interactions with customers and potential customers. | | Enterprise Resource Planning (ERP) | A type of software system that organizations use to manage day-to-day business activities such as accounting, procurement, project management, risk management and compliance, and supply chain operations. | | Radio-Frequency Identification (RFID) | A technology that uses radio waves to identify and track tags attached to objects, commonly used for inventory management and logistics. | | Incoterms | International commercial terms that define the responsibilities of sellers and buyers in international transactions, particularly regarding the delivery of goods. | | Hedging | A strategy used to offset potential losses or gains that may be incurred by a companion entity. | | Economies of Scale | The cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output decreasing as scale increases. | | Value Added Logistics (4PL) | A supply chain model where a third-party logistics provider manages all other logistics providers and functions for a client. |