01a_understanding_the_SC_annotated.pdf

# Understanding supply chain management This topic introduces the fundamental concepts of supply chains and supply chain management (SCM), emphasizing the integrated flow of goods, information, and funds to meet customer demand efficiently [24](#page=24) [7](#page=7) [8](#page=8). ### 1.1 What is a supply chain? A supply chain encompasses all the stages, directly or indirectly, involved in fulfilling a customer request. It can be viewed as a network rather than a linear chain, with the customer being an integral part of it. Key elements include the movement of products, information, and funds in both directions. While the movement of products is essential, not all stages are present in every supply chain [24](#page=24) [7](#page=7). > **Tip:** The term "supply network" might be a more accurate descriptor for modern supply chains due to their interconnected and complex nature [24](#page=24). ### 1.2 Evolution and components of supply chains Historically, supply chains were viewed with more localized boundaries, focusing on individual stages like factories and warehouses. However, modern supply chains are significantly more complex, involving a wider array of entities such as [2](#page=2): * **Supply sources:** Plants, vendors, ports [4](#page=4). * **Warehouses:** Regional and field warehouses acting as stocking points [4](#page=4). * **Customers:** Demand centers or sinks [4](#page=4). These components are associated with various costs, including production/purchase costs, inventory and warehousing costs, and transportation costs. The efficiency of a supply chain is limited by its weakest link, highlighting the importance of integration [4](#page=4) [6](#page=6). ### 1.3 Supply chain management (SCM) Supply Chain Management (SCM) is defined as the efficient integration of suppliers, factories, warehouses, and stores. Its primary goal is to ensure that merchandise is produced and distributed in the right quantities, to the right locations, and at the right time, all while minimizing total system costs subject to satisfying service requirements [8](#page=8). > **Tip:** SCM has moved from a peripheral function ("dismal discipline") to a top corporate priority, as companies seek competitive advantages through efficient delivery [9](#page=9). ### 1.4 The significance of SCM SCM is a critical business function with substantial economic impact. In 2015, US companies spent over 1.4 trillion dollars on supply chain-related activities, accounting for approximately 8.3% of the Gross Domestic Product (GDP). This expenditure was distributed across transportation (63%), inventory (30%), and management (7%). The third-party logistics services market in the US alone generated over 100 billion dollars in revenue over the preceding decade, demonstrating a significant growth rate (CAGR) of about 10% [10](#page=10). In essence, SCM focuses on managing the flow of goods in an integrated manner [11](#page=11). ### 1.5 Macro processes in SCM Effective supply chain management often involves coordinating several macro processes: * **Customer relationship management (CRM):** Encompassing marketing and sales activities [46](#page=46). * **Internal supply chain management (ISCM):** Including manufacturing and warehousing operations [46](#page=46). * **Supplier relationship management (SRM):** Covering sourcing and procurement [46](#page=46). These processes are supported by the flow of information, product flow, and procurement, manufacturing, and sales activities [46](#page=46). ### 1.6 Supply chain coordination Coordination within a supply chain is crucial for optimizing total supply chain profits. However, conflicts can arise due to different objectives (often leading to myopic policies) and a lack of information sharing among the firms involved. Effective coordination ensures that all stages work towards a common goal, rather than optimizing their individual performance at the expense of the overall supply chain [47](#page=47). > **Example:** A simple tea supply chain can illustrate these concepts, involving tea farming, processing, storage, and distribution to customers, with flows of products, information, and funds throughout [21](#page=21) [22](#page=22) [23](#page=23). --- # Trade-offs in supply chain management Supply chain management (SCM) fundamentally involves navigating inherent trade-offs stemming from conflicting objectives and demands across various departments. Successfully optimizing the overall supply chain system requires a careful balancing of these diverse, often competing, priorities [13](#page=13). ### 2.1 Conflicting departmental objectives Different functional areas within a company and its supply chain partners have distinct goals that can create tension: #### 2.1.1 Procurement objectives Procurement departments typically aim for: * Stable volume requirements [13](#page=13) [14](#page=14) [15](#page=15). * Flexible delivery time [13](#page=13) [14](#page=14) [15](#page=15). * Little variation in product mix [13](#page=13) [14](#page=14) [15](#page=15). * Large order quantities [13](#page=13) [14](#page=14) [15](#page=15). * Stability from manufacturing [19](#page=19). * Fast lead times from suppliers [19](#page=19). #### 2.1.2 Warehousing objectives Warehousing aims to: * Maintain low inventory levels [14](#page=14) [15](#page=15). * Achieve low transportation costs [14](#page=14) [15](#page=15). * Ensure quick replenishment from manufacturing [14](#page=14) [15](#page=15). * Minimize inventory on hand [19](#page=19). * Be replenished quickly by manufacturing [19](#page=19). #### 2.1.3 Manufacturing objectives Manufacturing departments focus on: * Long production runs to improve efficiency [15](#page=15) [19](#page=19). * Prioritizing high quality [15](#page=15) [18](#page=18). * Maximizing productivity [15](#page=15) [18](#page=18). * Achieving low production costs [15](#page=15) [18](#page=18). * Altering designs and materials for cost and quality benefits [19](#page=19). #### 2.1.4 Sales department objectives The sales department typically desires: * Short order lead times [16](#page=16) [18](#page=18). * Large inventory holdings [16](#page=16) [18](#page=18). * An enormous variety of products [16](#page=16) [18](#page=18). * Low prices for customers [16](#page=16) [18](#page=18). * Cheap, infinite inventory available immediately from the warehouse [19](#page=19). ### 2.2 The decision-maker's dilemma A supply chain decision-maker must reconcile these competing demands. For instance, sales wants immediate availability of a vast product range at low prices, which directly conflicts with manufacturing's desire for long runs and stable production for cost efficiency. Simultaneously, warehousing seeks minimal inventory to reduce holding costs, requiring rapid replenishment from manufacturing, which may not align with manufacturing's long-run production goals. Procurement, in turn, needs stability from manufacturing and fast supplier lead times, adding another layer of complexity [14](#page=14) [16](#page=16) [19](#page=19). > **Tip:** Understanding these inherent conflicts is the first step toward designing a supply chain that balances operational efficiency with market responsiveness. The core challenge lies in finding a balance that optimizes the *entire* system, rather than individual functions, by acknowledging and managing the necessary trade-offs [13](#page=13). --- # Decision phases and process views in supply chains This topic outlines the distinct phases of decision-making within a supply chain and introduces two fundamental frameworks for visualizing its operational processes [28](#page=28) [34](#page=34). ### 3.1 Decision phases in a supply chain Supply chain decisions are categorized into three distinct phases, characterized by their time horizon, impact, and the level of uncertainty they address [28](#page=28): #### 3.1.1 Supply chain strategy and design This is the longest-term phase, involving decisions that are expensive and difficult to reverse. It requires a significant consideration of future uncertainty. Key decisions include [28](#page=28) [29](#page=29): * **Structure of the supply chain:** Defining which processes each stage will perform [29](#page=29). * **In-house vs. outsourcing:** Determining which activities to perform internally and which to outsource [29](#page=29). * **Facility location and capacity:** Deciding where to produce and store goods [29](#page=29). * **Transportation modes:** Selecting the appropriate methods for moving goods [29](#page=29). * **IT systems:** Implementing necessary technology infrastructure [29](#page=29). #### 3.1.2 Supply chain tactical planning This phase operates with a medium-term focus and is constrained by the strategic decisions made previously. It aims to leverage flexibility to optimize performance, typically based on medium-term demand forecasts. Key tactical decisions include [28](#page=28) [30](#page=30): * **Market sourcing:** Determining which markets will be supplied from which locations [30](#page=30). * **Subcontracting:** Deciding whether to subcontract parts of manufacturing or other operations [30](#page=30). * **Inventory policy:** Establishing rules for inventory levels, including planned build-ups [30](#page=30). * **Marketing promotions:** Planning promotional activities that impact demand [30](#page=30). #### 3.1.3 Supply chain operations This is the shortest-term phase, dealing with day-to-day activities and constrained by tactical decisions. It has minimal uncertainty and focuses on implementing existing policies as effectively as possible to meet actual customer orders. Operational decisions include [28](#page=28) [31](#page=31): * **Order allocation:** Assigning customer orders to available resources [31](#page=31). * **Due date setting:** Establishing delivery dates for orders [31](#page=31). * **Picking lists:** Generating lists for warehouse picking operations [31](#page=31). * **Reverse flows:** Managing returns and product flow back through the supply chain [36](#page=36). > **Tip:** The alignment between these three decision phases is crucial for overall supply chain success [27](#page=27). ### 3.2 Process views of a supply chain Two primary frameworks are used to visualize and understand the processes within a supply chain: the cycle view and the push/pull view [34](#page=34). #### 3.2.1 Cycle view The cycle view divides the supply chain into a series of cycles, each occurring at the interface between two successive stages (or echelons). Each cycle typically comprises six subprocesses [34](#page=34) [36](#page=36): 1. **Customer order placing:** The buyer initiates an order [36](#page=36). 2. **Supplier receives order:** The supplier acknowledges and receives the order [36](#page=36). 3. **Supplier delivers order:** The supplier fulfills and ships the order [36](#page=36). 4. **Buyer receives order:** The buyer receives the delivered goods [36](#page=36). 5. **Supplier markets:** This refers to the availability of products from suppliers [36](#page=36). 6. **Buyer returns (reverse flows):** Handling of any returns from the buyer to the supplier [36](#page=36). The time span from when an order is placed to when it is received is known as the lead time [36](#page=36). > **Tip:** The cycle view is particularly useful for defining clear ownership of processes and for making operational decisions [37](#page=37). #### 3.2.2 Push/pull view The push/pull view categorizes supply chain processes into two types based on their timing relative to a customer order [34](#page=34): * **Push processes:** These processes are speculative and occur in anticipation of a customer order. Production or procurement is based on forecasts. A classic example is making tea that is already stocked in a store; the tea is produced and stocked *before* any customer orders it. These are often referred to as "make-to-stock" systems [34](#page=34) [38](#page=38) [40](#page=40). * **Pull processes:** These processes are reactive and are executed in response to an actual customer order. Production or customization begins only after an order is placed. An example is a handmade violin, where the violin is made *after* a customer orders it. These are often referred to as "make-to-order" systems [34](#page=34) [38](#page=38) [39](#page=39). The point in the supply chain where demand transitions from being forecasted (push) to being based on actual orders (pull) is called the **decoupling point (CODP)** [38](#page=38) [42](#page=42). > **Example:** Assemble-to-order strategies, like customizing laptops online, fall in the middle. Component manufacturing and assembly of base models might be a push process, while final customization and shipping based on a customer order is a pull process [41](#page=41) [42](#page=42). The strategic placement of the decoupling point is a critical design decision, influencing lead times, product variety, and overall supply chain performance [43](#page=43). --- ## 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 efficient integration of suppliers, factories, warehouses, and stores to ensure merchandise is produced and distributed in the right quantities, to the right locations, and at the right time, minimizing total system costs while meeting service requirements. | | Supply Chain | All the stages involved, directly or indirectly, in fulfilling a customer request, encompassing not just product movement but also information and fund flows. | | Total System Cost | The aggregate cost incurred across all stages of the supply chain, from sourcing raw materials to delivering the final product to the customer. | | Lead Time | The time elapsed from the initiation of a process to its completion; in a supply chain context, it can refer to production lead time, order lead time, or delivery lead time. | | Trade-offs | The compromises made when balancing competing objectives within a supply chain; for example, balancing low inventory costs against quick replenishment capabilities. | | Cycle View | A way of visualizing a supply chain by dividing it into cycles that occur at the interface of successive stages, each cycle involving subprocesses like order placement, reception, and delivery. | | Push Process | A supply chain process that is executed in anticipation of a customer order, driven by demand forecasts. Examples include manufacturing components or producing finished goods before they are ordered. | | Pull Process | A supply chain process that is executed in response to a customer order. Production or customization occurs only after a customer places an order. | | Decoupling Point (CODP) | The point in a supply chain where a pull process begins, separating the push and pull portions of the supply chain and allowing for different inventory and production strategies. | | Supply Chain Profitability | The measure of overall value created by a supply chain, calculated as the revenue generated from the customer minus the total costs incurred across the entire chain. It is distinct from the sum of individual profits of each stage. | | Customer Relationship Management (CRM) | The macro process focused on customer interactions, encompassing marketing and sales activities aimed at managing and improving customer relationships. | | Internal Supply Chain Management (ISCM) | The macro process that manages activities within the company, primarily focusing on manufacturing and warehousing operations. | | Supplier Relationship Management (SRM) | The macro process that manages interactions with suppliers, including sourcing and procurement activities to ensure efficient and effective supply of materials and services. | | Coordination | The act of all stages in a supply chain taking actions to optimize total supply chain profits, often requiring information sharing and alignment of objectives to overcome conflicts. |