Supply Chain Management

1
 Author’s Note

The objective of every supply chain is to maximize the overall value

generated. Value is from the stand point of consumers. The user decides
what value is for her for which she is willing to pay. Good quality, low
price, timely delivery, variety etc. are values for a consumer.

For the provider (supplier) value a supply chain generates is the difference
between what the final product is worth to the customer and the effort the
supply chain expends in filling the customer’s request. For most commercial
supply chains, value will be strongly correlated with supply chain
profitability, the difference between the revenue generated from the
customer and the overall cost across the supply chain. For example, a
customer purchasing a suit from Big Bazar pays Rs. 12,000, which
represents the revenue the supply chain receives. Big Bazar and firms at
other stages of the supply chain incur costs to convey information, produce
suits, store them, transport them, transfer funds, and so on. The difference
between the Rs. 12,000 that the customer paid and the sum of all costs
incurred by the supply chain to produce and distribute the suit represents the
supply chain profitability. Supply chain profitability is the total profit to be
shared across all supply chain stages. The higher the supply chain
profitability, the more successful the supply chain.

Supply chain success should be measured in terms of supply chain

profitability and not in terms of the profits at an individual stage. Having

2
defined the success of a supply chain in terms of supply chain profitability,
the next logical step is to look for sources of revenue and cost. For any
supply chain, there is only one source of revenue: the customer. At an Airtel
shop, a customer purchasing a mobile phone with connection is the only one
providing positive cash flow for the supply chain. All other cash flows are
simply fund exchanges that occur within the supply chain given that
different stages have different owners. When Airtel pays its supplier, it is
taking a portion of the funds the customer provides and passing that money
on to the supplier. 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.

In a global economy the focus is on managing supply chains ‘efficiently’

and ‘effectively’. There are many examples of firms who could grab a large
market share by building sustainable competitive advantage based on supply
chain excellence.

This text has been developed to help readers understand the concepts of
supply chain management so that they can apply them in real life situations.

Special effort has been made to keep the language simple and as far as
possible free from technical jargons. Wherever difficult industry jargons
have been used, they have been properly explained.

3
The contents are organized in eleven chapters as follows:

Chapter 1: Definition of SCM

Chapter 2: Competitive priorities and Value creation

Chapter 3: Supply Chain Strategies: Hau Lee’s Uncertainty matrix

Chapter 4: Supply Chain Management (SCM)

Chapter 5: Bullwhip Effect

Chapter 6: Vendor Managed Inventory

Chapter 7: Collaborative Planning Forecasting and Replenishments (CPFR)

Chapter 8: Supplier relationship management

Chapter 9: Information Technology and the Supply Chain

Chapter 10: Measuring Supply Chain Performance

Chapter 11: Purchasing & Vendor Management

For further readings recommended books are:

1. Chopra, Sunil and Peter Meindl. Supply Chain Management. Upper Saddle River:
Pearson Prentice Hall, 2004.
2. Designing and Managing the Supply Chain: Concepts, Strategies, and Cases by
David Simchi-Levi, Philip Kaminsky, Edith Simchi-Levi

Readers of this text will further be benefited if they visit following websites:

1. [Link]
2. [Link]
3. [Link]
4. [Link]
5. [Link]
6. [Link]
7. [Link]
8. [Link]

Feedbacks to improve this text are welcome at docdey_delhi@[Link].

4
 Supply Chain Management

Chapter 1: Definition of SCM

It is the management of upstream & down stream relationships with suppliers &
customers to deliver superior customer value at less cost to the supply chain as a whole.

More logical is to call it “demand chain management” because it is led by customer

demand.

Further, instead of defining it as a chain, it should be considered as network of companies

because there will be multiple levels of many suppliers and customers in the total system.

It can also be defined as a collection of processes: Forecasting, Manufacturing, Order

fulfillment, Customer relationship, Customer service and Supplier relationship.

Process View of a Supply Chain

Another view is to define SCM as a collection of cyclical processes that repeatedly takes
place between any two links in a supply chain: Ordering cycle between consumers and
retail; Replenishment cycle between distributor and retail; Manufacturing cycle between
manufacturer and distributor and Procurement cycle between suppliers and the
manufacturer.
Cycle view: processes in a supply chain are divided into a series of cycles, each
performed at the interfaces between two successive supply chain stages

Cycle View of a Supply Chain: Each cycle occurs at the interface between two successive
stages
 Customer order cycle (customer-retailer)
 Replenishment cycle (retailer-distributor)
 Manufacturing cycle (distributor-manufacturer)
 Procurement cycle (manufacturer-supplier)
Cycle view clearly defines processes involved and the owners of each process. Specifies
the roles and responsibilities of each member and the desired outcome of each process.

5
Push/pull view: processes in a supply chain are divided into two categories depending on
whether they are executed in response to a customer order (pull) or in anticipation of a
customer order (push)

Push - pull View of Supply Chains

In a supply Chain, all facilities, functions, activities, associated with the flow and
transformation of goods and services from raw materials to customer, as well as the
associated information flows are united to generate and deliver higher customer value.

What is value for the customer?

Expected quality, timely delivery, variety, low price, quick delivery, correct quantity,
anything that a customer may demand and for which he is willing to pay is value for him.
A supply chain is an integrated group of processes to “source,” “make,” and “deliver”
products to meet customer expectations.

What is Supply-Chain Management?

Supply-chain is a term that describes how organizations (suppliers, manufacturers,

distributors, and customers) are linked together.

6
Supply-chain management is a total system approach to managing the entire flow of
information, materials, and services from raw-material suppliers through factories and
warehouses to the end customer.

Supply Chain is the interconnected set of linkages between suppliers of materials and
services that spans the transformation of raw materials into products and services and
delivers them to a firm’s customers is known as the supply chain. Customer is an integral
part of the supply chain. All stages may not be present in all supply chains (e.g., no
retailer or distributor for Dell)

Flow of value, funds & information in a supply chain

Flows in a supply chain: Three things flow in a supply chain

 Value: from suppliers to consumers
 Information: in both directions
 Finance: from consumers to suppliers

7
Value of a product or a service is in the hands of a customer. A customer will get
attracted to a firm’s product only if he perceives higher value from it. Higher than what
its competitors can deliver.

Hence all the links of a supply chain should try to create and deliver value to the
customer. Thus value travels in the supply chain from the raw material side to the
finished goods side. Cash travels in the opposite direction. Whereas information travels to
& fro in the supply chain.

Three approaches
 SCM seeks to synchronize a firm’s functions with those of its suppliers to match
the flow of materials, services, finance & information with customer demand
 Managing supply chain is in effect managing demand side and supply side
uncertainties
 Managing supply chain is creating and delivering value for customers – more
value than competitors can generate

Hence SCM is more accurately defined as:

A network of connected and interdependent organizations mutually & co-operatively

working together to control, manage and improve the flow of materials and information
from suppliers to the end users.

The Objective of a Supply Chain is to maximize overall value created for the customer.
At every link of the supply chain there is a supplier and a customer. For example a
distributor is a customer for the manufacturer. Supply chain value is the difference
between what the final product is worth to the customer and the effort the supply chain
expends in filling the customer’s request. Value is correlated to supply chain profitability
(difference between revenue generated from the customer and the overall cost across the
supply chain).

Example: Dell receives $2000 from a customer for a computer (revenue). Supply chain
incurs costs (information, storage, transportation, components, assembly, etc.) Difference
between $2000 and the sum of all of these costs is the supply chain profit. Supply chain
profitability is total profit to be shared across all links of the supply chain.

8
Supply chain success should be measured by total supply chain profitability, not profits at
an individual stage
 Sources of supply chain revenue: the customer
 Sources of supply chain cost: flows of information, products, or funds between
stages of the supply chain
 Supply chain management is the management of flows between and among
supply chain stages to maximize total supply chain profitability

Why Supply Chain is important in the present economy?

Supply chain management integrates business functions concerned with the movement of
goods, services and information along the value chain with the goal of creating value for
the ultimate customer. The field of supply chain management is a cross-functional
discipline involving many components of business, including product development,
marketing, demand/supply planning, procurement/sourcing, production, inventory
management, transportation/logistics, customer service, and the management of
relationships between business organizations and their channels of distribution.

In today's complex business environment there is a need to coordinate these supply chain
functions, not only within the firm, but also with business partners and customers. Firms
are recognizing the need for a "total cost" or "systems" approach to supply chain
management. As a result, decision-making cuts across many functional areas and is an
increasingly critical strategic component of successful businesses, large and small.

A supply chain that is synchronized with the fluctuations of customer demand is

considered to be most efficient. Such a firm can increase its production and product
availability if the demand goes up. It can scale down the production if the demand
shrinks.

SCM seeks to synchronize a firm’s functions with those of its suppliers to match the flow
of materials, services & information with customer demand. Basic purpose of supply
chain management is to control the inventory by managing the flow of materials.

A typical manufacturer spends about 60% of its income from sales to buy material &
services. Similarly a service provider spends about 30%. Because materials & services
constitute such a large proportion of the sales income, companies can reap large profits
by a small percentage of reduction in the cost of materials.

To gain market share a firm has to create and maintain competitive advantage. A firm
can create sustainable competitive advantage by either demonstrating product leadership
or by customer intimacy or through operational excellence. Demonstrating product
leadership i.e., product innovation is difficult to achieve. Past history of product or
service innovations have very poor track record. Not many companies could garner
market share through product innovations. Customer intimacy every firm does. May be
your competitors can implement customer intimacy much better than you.

9
However, there are many cases in which firms have dominated the market place by
showing operational excellence. Dell, Wal Mart, ITC, Zara, Whirlpool etc have created
unique positions in the market place by designing supply chain in an innovative fashion.

With globalization the cost of inbound and out bound logistics has sky rocketed.
Managers face a challenge to control the cost of logistics to remain competitive.

With technological advancement the product life cycles are shortening. The window of
opportunity to make profit from a product is becoming narrow. Hence the stress on
supply chain to develop, market and support the product at a faster pace.

These are some of the reasons that have brought focus to the study of supply chain.

Why supply chain management?

 In 1997, American companies spent $862 billion, or about 10% of GNP on supply
chain related activities which include the cost of movement, storage and control
of products across the supply chain.
 Most of these costs include unnecessary cost components due to redundant stock,
inefficient transportation strategies, and other wasteful strategies in the supply
chain

 Example: Wal-Mart
In 1979, Kmart was one of the leading companies in the retail industry, with
1,891 stores and average revenues per store of $7.25 million. At that time Wal-
Mart was a small niche retailer in the South with only 229 stores and average
revenues about half of those of Kmart stores. In 10 years Wal-Mart transformed
itself; in 1992 it had the highest sales per square foot and the highest inventory
turnover and operating profit of any discount retailer. Today Wal-Mart is the
largest and highest profit retailer in the world. How did Wal-Mart do it? The
starting point was a relentless focus on satisfying customer needs; Wal-Mart’s
goal was simply to provide customers with access to goods when and where they
want them and to develop cost structures that enable competitive pricing. The key
to achieving this goal was to make the way the company replenishes inventory the
centerpiece of its strategy. This was done by using a logistics technique known as
cross-docking. In this strategy, goods are continuously delivered to Wal-Mart’s
warehouses from where they are dispatched to stores without ever sitting in
inventory. This strategy reduced Wal-Mart’s cost of sales significantly and made
it possible to offer everyday low prices to their customers.

WalMart also implemented Vendor Managed Inventory (VMI) for many of its
suppliers starting with Pampers (Baby diapers) of Proctor & Gamble.

Right from the first store that WalMart opened, it was connected with the head
quarter with electronic data interchange facility. It helped WalMart to track
consumer demand on a real time basis and arrange replenishment. This has

10
 reduced the the mismatch between demand and supply and helped in increasing
customer satisfaction.

Example: Home Depot

 Moves over 85 percent of its merchandise directly from suppliers to stores,
avoiding warehouse altogether
 In addition, due to very high volume of goods the shipments are mostly in full
truck loads, resulting into more savings
 The strategy saves money by eliminating an expensive network of Distribution
Centers. But it also carries substantial risks in terms of customer service. A poorly
managed supply chain can result in heavy stock-outs.

Example: Dell’s direct business model

 Selling PCs direct to customer
 Outsourcing component manufacturing
 Virtual integration with the suppliers resulting in less inventory. The third party
logistics company matches the Sony monitors with Dell computers and deliver it
to the customer
 Direct relationship with customer enables Dell to understand the customer needs
and segment the market to offer value added services
 IBM and HP all move to emulate Dell business model
 Dell carries 8 days of inventory, while, IBM and Dell have targets to carry 4
weeks of inventory

Supply Chains in India

 Sony India reduced inventories by 70% just six months after it began its SCM
initiative
 Maruti wired all its suppliers and 60% of business transactions are now online
 Samsung manages a 5,000-dealers' online network with just 15 employees
 Mahindra & Mahindra's tractor division aims for a reduction of 48% in
inventories, 30% in logistics costs and a cutback in production cycle from a
month to a week
 Asian Paints mixes the colour with the (pastel shade) base paint to create a shade
as demanded by the customer. This enables Asian Paint to carry less inventory at
retail, minimizes demand and supply mismatch and boosts customer satisfaction.
 All these companies have one thing in common.
 They are among the early adopters of Supply Chain Management systems
in the country
 They went out all by themselves, setting a path for others to learn from.
(Source: “Pulling Power”, DATAQUEST; 31 October 2001.)

Example: Procter & Gamble

 Strategic Relationship between suppliers & manufacturers may have significant
impact on Supply Chain to reduce cost
 P&G estimates that it has saved retail customers USD 18 million in 18 months by
its supply chain initiatives

11
  Essence of this approach lies in suppliers and manufacturers working together to
create business plan to eliminate the sources of wasteful practices across the entire
supply chain
 Key issues are
 What are various business plans and partnerships that can best reduce cost
for all partners and improve service level?
 Which one is appropriate?
 What incentives and performance measures should be used?
 How should the benefits resulting from strategic partnership be shared?
 Should a portion of saving be transferred to customers?
 National Semiconductor

Example: In two years National Semiconductor reduced distribution cost by 2.5

percent, decreased delivery time by 47 percent and increased sales by 34 percent
 By closing six warehouses around the globe
 Air freighting microchips to customers from a new centralized distribution centre
in Singapore
 National Semiconductor
 Key issues in this case are
 What is the trade off between increased cost of faster transportation versus
savings due to reduction in inventory level by shifting to a centralized
distribution system
 What is the best distribution system – Centralized or Decentralized

Example: Nabisco Inc.

 Delivers 500 types of cookies & more than 10,000 types of candies to over 80,000
buyers and spends more than USD 200 million a year in transportation cost alone
 Problem is ‘too many trucks arrive at or depart from their destinations half empty’
– adding to cost
 As a trial Nabisco shared warehouses and trucks with 25 other manufacturers
resulting into substantial savings

Example: Dayton Hudson Corporation

 Target stores of Dayton Hudson relies on very close relationships with its
suppliers
 They may agree to buy certain number of Italian bowls from a supplier without
specifying style and colour
 Near the delivery date Target forecasts the styles and colours that are likely to sell
 Manufacturer can produce trial lots for sale to determine whether particular style
will actually sell

Example: Korean Industrial Relay Manufacturer

 Problems faced:
 70% service level – only 70% orders are delivered on time
 Inventory keeps piling up – mostly of items for which there is no demand

12
  Inventory turnover ratio is four – much below the industry average of nine
times
 Strategies that can increase service level will also help in inventory
liquidation resulting into higher profit

Integrated Supply chain

For a firm a supply chain if not managed properly can turn out to be a chaos. This may be
due to the independent decisions of each supply chain member. In order to avoid this
firms wish to gain control over major suppliers. By this they can exercise control over
cost, quality & timely delivery of raw materials.

Such a control can be exercised by either backward integration or through agreement.

Under agreement a firm decides the guide lines for each supplier who in turn, enters into
agreements with their suppliers.

A supply chain can be integrated by sharing information in advance. If suppliers get to

know the firm’s requirements well in advance, they can plan well for making the
materials available on time and at lower cost. Similarly if a firm can know the
requirements of its major clients in advance it can lower its cost of operation by proper
planning.

13
 Materials Management

Supermarket A Supermarket B
distribution center distribution center

Distribution
Transportation
domain of
services supplier
responsibility

FG storage

Transformation
Production domain process and
of responsibility WIP storage

Purchasing
domain of
responsibility
RM storage

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

14
 Chapter 2: Competitive priorities and Value creation

Competitive Priorities

In 1984 Hayes and Wheelwright suggested that companies compete in the marketplace by
virtue of one or more of the following competitive priorities:-

 Quality
 Lead-time
 Cost
 Flexibility

Many authors and practitioners have added to and adapted this list over the years.

Foo and Friedman (1992) for example proposed a set of six competitive priorities, adding
`Service' and `Manufacturing Technology' to the above while expanding `Time' into:

 `time to market' and

 `Lead times'.

Others have added

 `Innovation',
 `Dependability' etc.

Quality, time, cost and flexibility can be defined in various different ways to include,
for example:

Dimensions of quality:

 Performance - the primary operating characteristics.

 Features - optional extras (the "bells" and "whistles").
 Reliability - likelihood of breakdown.
 Conformance - conformance to specification.
 Technical durability - length of time before the product becomes obsolete.
 Serviceability - ease of service
 Aesthetics - look, smell, feel, taste.
 Perceived quality - reputation.
 Value for money.

Dimensions of time:

 Manufacturing lead time.

 Due date performance.
 Rate of product introduction.
 Deliveries lead time.

15
  Frequency of delivery.

Dimensions of price and cost:

 Manufacturing cost.
 Value added.
 Selling price.
 Running cost - cost of keeping the product running.
 Service cost - cost of servicing the product.
 Profit.

Dimensions of flexibility

 Material quality - ability to cope with incoming materials of varying quality.

 Output quality - ability to satisfy demand for products of varying quality.
 New product - ability to cope with the introduction of new products.
 Modification - ability to modify existing products.
 Deliverability - ability to change delivery schedules.
 Volume - ability to accept varying demand volumes.
 Product mix - ability to cope with changes in the product mix.
 Resource mix - ability to cope with changes in the resource mix.

Eight competitive priorities – Firms compete on the basis of a mix of

 Based on Cost
o Low cost operation – Nirma, T – Series, Wheel Detergent, Wal
Mart, Southwest airlines

 Based on quality
o High performance design – Intel microprocessor chips, Mercedes
car, SAP ERP software
o Consistent quality – Since customers do not accept erratic quality,
in order to survive all firms have to deliver consistent quality

 Based on time
o Fast delivery time – Quick to deliver
o On time delivery – For customer satisfaction, Drycleaners, tailors
must stick to the committed delivery dates; Courier companies try
to deliver before the committed time
o Development speed – Companies may lose competitive edge and
market share if they are late in developing and introducing new
product or service

 Based on Flexibility

16
 o Customization – If individual requirements can be met, more
customers will be attracted
o Volume flexibility – If demand goes up, firm should be able to
ramp up the production; as demand shrinks, firm should be able to
scale down the production

New Definitions of Value

From the customer's point of view, your company exists only to create value for them, to
provide them with results.

In the new rapidly changing economy, the focus must be on the way in which the nature
of value is changing, involving new ways to price goods, innovation and emotion. The
implication of these new forms of exchange is a transfer of power from the producer to
the customer. There are multitudes of values present in every buyer-seller exchange:
economic, informational and emotional. These exchanges increasingly happen so fast that
there is no time to translate them into precise monetary terms. Businesses will need to
identify these hidden values and think more accurately about their worth before accepting
the price proposed. The implications are profound. Companies will need to think in terms
of offers, which involve merging products and services to exploit their knowledge to give
customers a value-added experience, not just "selling them stuff".

Value Innovation

Why do some companies achieve sustained high growth in both revenues and profits? In
a five-year study of high-growth companies and their less successful competitors,
researchers found that the answer lies in the way each group approach strategy. The
difference in approach was not a matter of managers choosing one analytical tool or
planning model over another. The difference was in the companies' fundamental, implicit
assumptions about strategy. The less successful companies took a conventional approach:
their strategic thinking was dominated by the idea of staying ahead of the competition. In
stark contrast, the high-growth companies paid little attention to matching or beating their
rivals. Instead, they sought to make their competitors irrelevant through a strategic logic
called value innovation

Customer Value Proposition

Your company should deliver a particular customer value proposition to a definable

market in order to exist. Competition is all about value: creating it and capturing it.

Value chain analysis

Michael Porter in 1985 introduced in his book ‘ The competitive advantage’ the concept
of the Value Chain. He suggested that activities within the organisation add value to the
service and products that the organisation produces, and all these activities should be run
at optimum level if the organisation is to gain any real competitive advantage. If they are

17
run efficiently the value obtained should exceed the costs of running them i.e. customers
should return to the organisation and transact freely and willingly. Michael Porter
suggested that the organisation is split into ‘primary activities’ and ‘support activities’.

Primary activities

Inbound logistics : Refers to goods being obtained from the organisations suppliers ready
to be used for producing the end product.

Operations : The raw materials and goods obtained are manufactured into the final
product. Value is added to the product at this stage as it moves through the production
line.

Outbound logistics : Once the products have been manufactured they are ready to be
distributed to distribution centres, wholesalers, retailers or customers.

Marketing and Sales: Marketing must make sure that the product is targeted towards the
correct customer group. The marketing mix is used to establish an effective strategy, any
competitive advantage is clearly communicated to the target group by the use of the
promotional mix.

Services: After the product/service has been sold what support services does the
organisation have to offer. This may come in the form of after sales training, guarantees
and warranties.

With the above activities, any or a combination of them, maybe essential for the firm to
develop the competitive advantage which Porter talks about in his book.

Support Activities

18
The support activities assist the primary activities in helping the organisation achieve its
competitive advantage. They include:

Procurement: This department must source raw materials for the organisation and obtain
the best price for doing so. For the price they must obtain the best possible quality

Technology development: The use of technology to obtain a competitive advantage

within the organisation. This is very important in today’s technological driven
environment. Technology can be used in production to reduce cost thus add value, or in
research and development to develop new products, or via the use of the internet so
customers have access to online facilities.

Human resource management: The organisation will have to recruit, train and develop
the correct people for the organisation if they are to succeed in their objectives. Staff will
have to be motivated and paid the ‘market rate’ if they are to stay with the organisation
and add value to it over their duration of employment. Within the service sector eg
airlines it is the ‘staff’ who may offer the competitive advantage that is needed within the
field.

Firm infrastructure: Every organisations needs to ensure that their finances, legal
structure and management structure works efficiently and helps drive the organisation
forward.

As you can see the value chain encompasses the whole organisation and looks at how
primary and support activities can work together effectively and efficiently to help gain
the organisation a superior competitive advantage.

The Difference between a Supply Chain and a Value Chain

Understanding how the Supply Chain integrates with the Value Chain will add to your
profitability.
“Value” is defined as “any activity that increases the market form or function of the
product or service.” And in today’s business climate, you need to maximize the value of
every process in your business.
The Supply Chain focuses on the activities involved with acquiring raw materials and sub
assemblies, then getting them through your manufacturing process smoothly and
economically. Value Chain Management looks at every step, from raw materials
(including those your suppliers’ suppliers use) to your customers and the eventual end
user, right down to disposing of the packaging. The goal is to deliver maximum value to
the end user for the least possible total cost. And it involves you, your suppliers and your
suppliers’ suppliers.

So how do you turn your Supply Chain into a Value Chain?

By applying Lean Manufacturing Principles.

19
It’s simple in principle, straight-forward in execution, glorious in results. By adding value
and cutting waste (the foundations of Lean Manufacturing) at any and every point in the
Supply Chain, you create greater value in your end result, making it more valuable to
your customers and/or end users.

Toyota Production System (TPS), or Lean System

Most resources used in the process of delivering a product or service add value—some do
not. Those resources consumed that do not add value—be they people, time, or
equipment—should be eliminated. This is the essence of the famous Toyota Production
System (TPS), or Lean, as the system is known in the United States.

When Taiichi Ohno became manager of Final Assembly in the Manufacturing

Department of Toyota Motor Corporation in 1945, he faced a huge challenge. Toyota
had become highly inefficient during the Second World War and Kiichiro Toyoda's Just-
in- Time system had completely collapsed.

Just-in-Time dictates that parts are delivered to the right part of the assembly line, at the
right time and in the right amount. However, for this to work effectively, Ohno realized
that another factor had to be controlled: quality. Parts must be flawless and defects must
be eliminated before progressing along the line. This is when jidoka, the second pillar of
what would later become the Toyota Production System, entered the picture.

In seeking to re-implement Just-in-Time, Ohno turned to a much earlier invention of

Kiichiro's father, Sakichi Toyoda; a loom which would stop automatically when a thread
broke. He realized if this jidoka (self-regulation) could be applied to machines in the car
plant, not only would product quality improve, but workers would also be able to
supervise multiple machines, thus increasing efficiency.

At each worksite, groups were formed to find ways to rationalize operations always
bearing in mind Ohno's words, "eliminate muda, mura, muri completely." Out of these
discussions came the Kanban system as a means of improving communication between
processes and the andon system. The andon cord empowered workers to stop the entire
production line if any complications arose, thus adding a human check to jidoka. Andon

20
boards also informed workers of the whereabouts and nature of the problem.

Ohno was unconcerned about the consequences of stopping the entire line, knowing that
instant identification of the problem would lead to improvement of the processes in the
long-term.

In 1970, after years of experimentation and strenuous team efforts, the entire system, with
all the innovations and improvements that had been added to it over the years, came to be
known as the "Toyota Production System." It was a result of the spirit of kaizen
(continuous improvement) which the plant workers shared and which the Toyota family
around the world continues to share today in all aspects of its work.

Never pass defective items to the next process. Assembly line worker pulls the andon
cord

The andon board displays the location and nature of the problem
* waste, unevenness, overburden

Taiichi Ohno created the TPS in the mid-20th century. Ohno founded the system on five
core principles that, if consistently applied, could improve production quality and most
importantly reduce or eliminate waste. They are:

• Muda: A Japanese word referring to anything that is wasteful and doesn't add value.
• Process Focus: Managers work cross-organizationally to develop and sustain robust
business processes.

21
• Genchi Genbutsu: A Japanese phrase that refers to collecting facts and data at the
actual site of the work or problem.
• Kaizen: A Japanese word for continuous and incremental process improvement.
• Mutual Respect: Toyota values a strong relationship between management, employees,
and business partners.

By grasping these core ideas you can begin to apply them to make your supply chain lean
and efficient. Most importantly, you will be able to identify what we call “Seven Deadly
Supply Chain Sins”—the wastes that keep supply chain management from achieving its
full business potential. These “sins” are overproduction; delay/waiting;
transportation/conveyance; motion; inventory; over-processing; and defects/corrections.

Gemba Kaizen

Kaizen Definition

KAIZEN is a Commonsense Approach to Low Cost

Management. It focuses on MUDA elimination

What is MUDA?

Muda means any wasteful activity or any

obstruction to smooth flow of an activity

Activity = Work + Muda

Expenditure = Cost + waste

That is, for each activity there is expenditure and every work there is a cost associated.
Any expenditure on the Muda is a waste!

Therefore, Less Muda = More happy clients (as it impacts on quality, cost and
delivery of products and services).

What is Gemba?

Gemba - Real place - (in our context Work Place)

Gembutsu - tangible objects found at the Gemba

Gemba is where Value Is Added. (The Managers cabin is not a Gemba !)

What is Gemba Kaizen®?

A process of Continuously

22
  Identifying
 Reducing
 Eliminating

Muda from our Gemba

Some typical misconceptions on Kaizen

 Kaizen is for workers; It is not for managers
 Kaizen is SMALL improvements only
 Kaizen is only a sort of implemented-suggestion scheme
 Any implemented improvement is Kaizen

When does it become KAIZEN?

 large improvements are made
 small time and small money is used
 bottleneck problem is attacked
 process observation is used
 KAIZEN paradigms are deployed
 management participation exists

Gemba Kaizen® also Focuses on Mura and Muri

What is Mura?

Mura = Inconsistencies in the system

 Happens sometimes?
 Happens some places
 Happens to some people
 One side is ok; the other side is not ok

All this is Mura

What is Muri?

Muri = Physical Strain

 Bend to work?
 Push hard?
 Lift weight?
 Repeat tiring action?
 Wasteful walk?

All this is Muri

Gemba kaizen®, now redefined …..

23
A process of Continuously

 Identifying
 Reducing
 Eliminating

Muda, Mura , Muri (3 Mu) from our Gemba

Carrying out GEMBA KAIZEN® Workshops involve:

 Focused Improvement
 Setting up of Cross-functional teams
 A KAIZEN Time slot (4 to 5 days)
 Applying 5 golden rules of Gemba management
 Avoid spending money (no investment)
 Working in PDCA cycle

Five Golden Rules Of Gemba Kaizen® Workshop

1) Go to the Gemba

2) Check Gembutsu - (item at Gemba)

3) Take Temporary Measures on the spot

4) Find root cause & kill

5) Standardize to Prevent Recurrence

PDCA Cycle: Plan – Do – Check and Act

Improve what you maintain

Maintain what you improve

How to Observe?
 Go to the gemba
 Do cleaning yourself
 Do not sit anywhere
 Do not ask for ideas
 Look first for Muda
 Then look for Mura
 Finally look for Muri

5-S

5S is the foundation of Kaizen. All Gemba Kaizen workshop should start by applying the
concept of 5S.

24
5S is the Japanese concept for House Keeping.

1.) Sort (Seiri)

2.) Straighten (Seiton)
3.) Shine (Seiso)
4.) Standardize (Seiketsu)
5.) Sustain (Shitsuke)

The concept of 5S has been twisted and its real meaning and intention has been lost due
to attempts to keep each element in English word to start with letter 'S', like the real
Nippongo words (seiri, seiton, seiso, seiketsu, and shitsuke). Whoever devised those
equivalent English words did a good job, vv they're close, but the real interpretation is not
exactly the correct one. For the benefit of the readers who would like to develop and
establish their own understanding and applications, the following are the real meaning of
each element in English:

Japanese - English Translations

Seiri - Put things in order

(remove what is not needed and keep what is needed)
Seiton - Proper Arrangement
(Place things in such a way that they can be easily reached whenever they are needed)
Seiso - Clean
(Keep things clean and polished; no trash or dirt in the workplace)
Seiketsu - Purity
(Maintain cleanliness after cleaning - perpetual cleaning)
Shitsuke - Commitment (Actually this is not a part of '4S', but a typical teaching and
attitude towards any undertaking to inspire pride and adherence to standards established
for the four components)

Some key benefits of Kaizen

 Process Improvement
 Observation
 Use of new Paradigms
 Short time
 Zero Investment
 Human Development
 Profits & Savings

In short Kaizen is learn by doing.

Typical Supply Chain ‘wastes’ are:

1. Overproduction: Build first, wait for orders later. Build more than the demand
from customers.

25
 2. Idle time of worker or machine: Any delay between the end of one activity and
the start of the next activity, such as the time between the arrival of a truck for a
pick-up and the loading of the trailer, and the delay between receiving the
customer's order information and beginning to work on fulfilling the order.
3. Transportation/Conveyance: Any kind of unnecessary transport. Out-of-route
stops, excessive backhaul, locating fast-moving inventory to the back of the
warehouse and other transport wastes cause unnecessary material handling
distances to be incurred.
4. Excessive motion: Any kind of unnecessary movement by people, such as
walking, reaching and stretching
5. Inventory: Any logistics activity that results in more inventory being positioned
than needed or in a location other than where needed
6. Waste in production process
7. Rework. Any activity that causes rework, unnecessary adjustments or returns,
such as billing errors, inventory discrepancies and adjustments, and
damaged/defective/wrong/mislabeled product

And Value Chain Management is much more than just optimizing each step in the supply
chain. For example, say you switch to a less expensive package. It might save you
money, but it may cost your customer or the end user more to dispose of it and it might
make your product look “cheap”, both of which would detract from the overall value of
your product. Or you might try reducing warehousing costs by consolidating your
inventories. However, if that action increases your delivery time, it might force your
customers to inventory more items on site, increasing their costs and reducing the value
of your products to them.

How Will Value Chain Management Benefit Me?

By analyzing your supply chain with Value Stream Mapping, and then applying Lean
Manufacturing concepts, you will learn how to “optimize profitability.” It helps you
make or save money, by making your operation more efficient (or less wasteful), faster,
more flexible, and more responsive to your customers’ needs as well as to market forces.

It improves every aspect of your business, from increasing on-time deliveries and
reducing cycle time, to increasing accuracy of forecasts – all with an eye towards beefing
up your bottom line.

According to a survey done by Industry Week Magazine, here are some of the changes
businesses have experienced with Value Chain Management:

Increased Sales 41% Improvement

Costs Savings 62% Improvement
Increased Market Share 32% Improvement
Reduced Inventory 51% Improvement
Higher Quality 60% Improvement
Faster Delivery Times 54% Improvement

26
Logistics Management 43% Improvement
Customer Service 66% Improvement

27
 Chapter 3: Supply Chain Strategies: Hau Lee’s Uncertainty matrix

Fisher has developed a model to help managers understand the nature of demand for their
products and then devise a supply chain that can best satisfy that demand.

Many aspects of product’s demand are important:

 Product Life Cycle
 Demand predictability
 Product variety
 Market standards for lead time and services

According to Fisher the root cause of supply chain problem is mismatch between the
nature of products and the type of supply chain. There are two types of products and two
types of processes:

 Products: Functional & Innovative

 Processes: Stable & Evolving

Demand Characteristics of product

Functional Product Innovative Product

Aspects of Demand Predictable Unpredictable
Product Life Cycle Long Short
Contribution margin Low High
Product variety Limited Many choices
Margin of error in
Low High
forecasting
Salt, Standard apparel, NOKIA E 71, Fashion
Examples
Personal computer garments
Supply Characteristics of processes

Stable Processes Evolving Processes

Breakdowns Less Vulnerable
Yields Stable & Higher Variable & Lower
Quality Problem Less Potentially High
Supply Sources More Limited
Reliable suppliers Many Few

28
Supply Chain Strategies: Hau Lee’s Uncertainty Matrix
Demand Uncertainty
Low (Functional Products) High (Innovative Products)
Fashion Apparel,
Low Grocery, Basic Apparel,
Computers, Pop Music
(Stable) Food, Oil, Gas
Responsive Supply
Efficient Supply Chain
Chain

Hydroelectric power,
High Telecom, Semiconductors,
Health food Products
(Evolving) High end computers
Risk Hedging Supply
Agile Supply Chain
Chain

Understanding supply Chain

Supply chain Responsiveness is the ability to do the following

 Respond to wide ranges of quantities demanded

 Meet short lead times
 Offer a large variety of product
 Build a highly innovative product
 Meet a very high service level

Supply Chain Efficiency

 Responsiveness comes at a cost, while efficiency targets the least

cost alternative

Design features of Efficient & Responsive supply chains:

Factors Efficient Supply Chains Responsive Supply Chains

Make to stock or Standardized Assemble to order, Make to
services order or Customized services
Operations Strategy
Emphasize high volume so that Emphasize product or service
economies of scale is achieved variety
Capacity Cushions Low High
Low, Enable high inventory As needed to enable fast
Inventory Investment
turns delivery time
Shorten but do not increase
Lead Time Shorten aggressively
cost

29
 Emphasize fast delivery time,
Emphasize low prices,
customization, Volume
Supplier Selection consistent quality, on time
flexibility, High performance
delivery
design quality

Efficient Supply Responsive Supply

Chains Chains
Primary goal Lowest cost Quick response
Product design Min product cost Modularity to allow
strategy postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at Aggressively reduce even if
expense of greater costs are significant
cost
Supplier selection Cost and low quality Speed, flexibility, quality
Transportation Greater reliance on Greater reliance on
strategy low cost modes responsive (fast) modes

Drivers and Obstacles of Supply Chain

Drivers: Presence of these helps the supply chain

 Facility: Right size and locations of facility (factory, warehouse, office, branches
etc.)
 Inventory: adequate level of inventory help in achieving customer satisfaction
 Transportation: faster mode of transportation facilitates quicker response to
customers’ orders
 Information: Sharing of information between supply chain links helps in
achieving coordination

Obstacles: These factors create obstacles for the Supply Chain management
 Fragmented ownership of supply chain: creates conflicts among supply chain
partners
 Product variety: more variety poses more challenges in terms of forecasting,
coordination, procurements

30
 Chapter 4: Supply Chain Management (SCM)

Managing flow of information through supply chain in order to attain the level of
synchronization that will make it more responsive to customer needs while lowering costs

Keys to effective SCM

 information
 communication
 cooperation
 trust

Supply Chain Uncertainty

One goal in SCM: Respond to uncertainty in customer demand by managing supply side
uncertainty and without creating costly excess inventory
Negative effects of uncertainty
 lateness
 incomplete orders

Inventory is an insurance against supply chain uncertainty. It is hides all other

inefficiencies and hence known as the mother of all ‘wastes’. To manage fluctuating
demand one can build inventory, to management mismatch between output of one
process and the input of the next process one can keep WIP inventory, to tide over the
erratic supply of raw materials inventory can be used.

Factors that contribute to uncertainty

 inaccurate demand forecasting
 long variable lead times
 late deliveries
 incomplete shipments
 product changes batch ordering
 price fluctuations and discounts
 inflated orders

Lack of SC Coordination and the Bullwhip Effect

 Supply chain coordination – all stages in the supply chain take actions together
(usually results in greater total supply chain profits)
 SC coordination requires that each stage take into account the effects of its actions
on the other stages
 Lack of coordination results when:
o Objectives of different stages conflict or
o Information moving between stages is distorted

31
 Chapter 5: Bullwhip Effect

Fluctuations in orders increase as they move up the supply chain from retailers to
wholesalers to manufacturers to suppliers
The longer lead times of information and material are, the stronger the effect is.
Distorts demand information within the supply chain, where different stages have very
different estimates of what demand looks like
Results in a loss of supply chain coordination
Examples: Proctor & Gamble (Pampers); HP (printers); Barilla (pasta)

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review

Example - Procter & Gamble: Pampers

 Smooth consumer demand
 Fluctuating sales at retail stores
 Highly variable demand on distributors
 Wild swings in demand on manufacturing
 Greatest swings in demand on suppliers

The Effect of Lack of Coordination on Performance

 Manufacturing cost (increases)
 Inventory cost (increases)
 Replenishment lead time (increases)

32
  Transportation cost (increases)
 Labor cost for shipping and receiving (increases)
 Level of product availability (decreases)
 Relationships across the supply chain (worsens)
 Profitability (decreases)

The Bullwhip effect reduces supply chain profitability by making it more expensive to
provide a given level of product availability

Recent research conducted at MIT and Stanford Universities identifies several causes for
the bullwhip effect, including long lead times, the use of various forecasting tools, price
fluctuation, and volume and transportation discounts. These research findings have led to
the development of new techniques allowing manufacturers and suppliers to reduce
upstream variability in the supply chain, thereby improving operational efficiency,
lowering costs, and increasing service levels.

The Causes of Bullwhip Effect

 Inaccurate Demand Forecast
 Long lead times
 Order Batching
 Price fluctuation due to short term promotional sales
 Shortage Gaming - Inflated orders

Consequences of the Bullwhip Effect

1. Lower revenues.
Stockouts and backlogs mean lost sales, as customers take their business
elsewhere.
2. Higher costs.
High carrying cost
Stockout cost
Distributors need to expedite orders (at higher shipping expenses)
Manufactures need to adjust jobs (at higher setups and changeover expenses,
higher labor expenses for overtime, perhaps even higher materials expenses
for scarce components.)
All entities in the supply chain must also invest heavily in outsized facilities
(plants, warehouses) to handle peaks in demand, resulting in alternating under
or over-utilization.
3. Worse quality.
Quirky, unplanned changes in production and delivery schedules disrupt and
subvert control processes, begetting diverse quality problems that prove costly
to rectify.
4. Poorer service.
Irregular, unpredictable production and delivery schedules also lengthen lead
time, causing delay and customer dissatisfaction.

33
Managerial Levers to Achieve Coordination
1. Aligning Goals and Incentives
2. Improving Information Accuracy
3. Improving Operational Performance
4. Designing Pricing Strategies to Stabilize Orders
5. Building Strategic Partnerships and Trust

Aligning Goals and Incentives

1. Align incentives so that each participant has an incentive to do the things that will
maximize total supply chain profits
2. Align incentives across functions
3. Pricing for coordination
4. Alter sales force incentives from sell-in (to the retailer) to sell-through (by the
retailer)

Improving Information Accuracy

1. Sharing point of sale data
2. Collaborative forecasting and planning
3. Single stage control of replenishment
a. Continuous replenishment programs (CRP)
b. Vendor managed inventory (VMI)

Improving Operational Performance

1. Reducing replenishment lead time
a. Reduces uncertainty in demand
b. Electronic Data Interchange (EDI) is useful
2. Reducing lot sizes
a. Computer-assisted ordering, B2B exchanges
b. Shipping in Less Than Truck Load (LTL) sizes by combining shipments
c. Technology and other methods to simplify receiving
d. Changing customer ordering behavior
3. Rationing based on past sales and sharing information to limit gaming
a. “Turn-and-earn”
b. Information sharing

Designing Pricing Strategies to Stabilize Orders

1. Encouraging retailers to order in smaller lots and reduce forward buying
2. Moving from lot size-based to volume-based quantity discounts (consider
total purchases over a specified time period)
3. Stabilizing pricing
a. Eliminate promotions (everyday low pricing, EDLP)
b. Limit quantity purchased during a promotion
c. Tie promotion payments to sell-through rather than amount purchased
4. Building strategic partnerships and trust – easier to implement these
approaches if there is trust

34
 Chapter 6: Vendor Managed Inventory

Vendor Managed Inventory (VMI) is a supply chain practice where the inventory is
monitored, planned and managed by the vendor on behalf of the consuming organization,
based on the expected demand and on previously agreed minimum and maximum
inventory levels. Traditionally, success in supply chain management derives from
understanding and managing the tradeoff between inventory cost and the service level.
VMI projects can result in improvements along both dimensions. At least two forms can
be distinguished:

1. A wholesaler (distributor) manages inventory levels for a retailer. VMI in this

context is also called Efficient Consumer Response (ECR). Note that the retailer
still owns the inventory, even though the replenishment order is triggered by the
wholesaler.
2. A manufacturer manages inventory levels for a distributor. Note that the
distributor still owns the inventory, even though the replenishment order is
triggered by the manufacturer.

VMI is based on the belief that supplying parties are in a better position to manage
inventory as they have better knowledge of the goods production capacities and lead
times. Also it is based on the belief that allowing vendors to manage inventory reduces
the number of layers in the supply chain, increasing stock visibility and reducing overall
inventory levels. To enable VMI, sales data must be provided to the vendor via Electronic
Data Interchange (EDI), other electronic means, or via traditional human agents at
outlets.

Other terms for VMI are Continuous Replenishment and Supplier Managed
Inventory.

Origin of Vendor Managed Inventory. History

VMI started in the retail business and grew out of Efficient Consumer Response (ECR),
where consumer satisfaction or rather consumer expectation of stock availability is an
important way to have a competitive edge over others. Wal-Mart is one of the successful
pioneers of this supply chain strategy.

VMI is now gradually progressing towards strategic-partnership based forms. This

influences the way companies plan their inventory, evolving to Collaborative Planning,
Forecasting and Replenishment (CPFR).

Usage of Vendor Managed Inventory. Applications

 Error sensitive industries. Example: Pharmaceutical Sector.

 Multiple outlets, fast-moving consumer goods. Example: Wal-Mart.

35
  Perishable goods. Example: K Mart.
 Valuable and unpredictable components. Example: PC manufacturing.
 Strong competition (small margins). Example: Automotive.

Steps in Vendor Managed Inventory. Process

VMI should be achieved in a number of phases:

1. Communicate expectations of all parties.

2. Retailer/distributor must commit to sharing precise information.
3. Vendor must ensure reliable transmission, receipt, and use of information.
4. Agreement on ordering policy, risk and reward sharing.
5. Commit time and resources.
6. Extensive testing.
7. Implementation and evaluation. Adjust.
8. Appreciate vendors that manage the inventory well. Example: promotion to
Category Captain, profit sharing schemes, etc.

Strengths of Vendor Managed Inventory. Benefits

 Supply Chain level:

o Lower inventory levels at total supply chain level.
o Less overhead.
o Increased sales.
o Reduces human data entry errors.
 Vendors:
o Better insight in customer demand (better resource usage, reduced raw and
finished goods inventories).
o Improved, more direct communication with customers. Improved market
analysis.
o Increased sales via lower out of stock rates.
o Opportunity to provide category management and other value-added
services.
 Suppliers:
o Reduced replenishment times and lower inventory costs.
o Increased sales through reduced stock outs.
o Less redundancy.

36
 o Build strategic strengths through establishing strong supply chain
relationships.
o Vendor assistance with category management.
 End-users:
o Increased service level.
o Reduced stock outs.

Limitations of Vendor Managed Inventory. Disadvantages

 Success of VMI initiative depends on the strength of relationship between the

vendors and retailers.
 Increased dependency between the parties and increased switching costs.
 Lack of trust to exchange data can result in the ineffective implementation in one
or more of the following forms:
o Inventory invisibility.
o Inventory imbalance.
 Costs of technology and changing organization.
 Extensive data- and EDI testing is needed.
 Loss of necessary shelf space at the selling party may result in less attention by
buyers, compared to competitors that are not into VMI yet.
 Special promotions or events need to be communicated beforehand to avoid
replenishment planning mistakes (loss of flexibility).
 Increased vulnerability for non-foreseeable risks such as employee strikes,
hurricanes, etc. due to lower inventory levels.
 Most of the benefits are for the end client and for the selling party, while the
vendor does much of the work.

Assumptions of Vendor Managed Inventory. Conditions

VMI is usually successful for industries and organizations with the following
characteristics:

 Multiple outlets, because this increases the benefits compared to traditional

inventory management.
 Severe consequences in case of human errors (Pharmaceutical).
 Industries with steady and high volumes (Retail, Consumer Products).
 Industries with high-value inventory and a high level of demand unpredictability
(High Tech).

37
  Management with strong leadership capability to form strategic long term
partnerships (Automotive).

Chapter 7: Collaborative Planning Forecasting and Replenishments (CPFR)

Collaborative Planning, Forecasting, and Replenishment (CPFR) is a collaborative

business practice that enables partners to have visibility into one another's demand, order
forecast and promotional data to anticipate and satisfy future demand. This is done
through a systematic process of information and knowledge sharing.

CPFR links sales and marketing best practices, such as category management, to supply
chain planning and execution processes. In this way product availability can be increased
while reducing inventory, transportation and logistics costs.

CPFR goes beyond current internal system implementations and builds the next level of
information sharing out to trading partners. The objective often is to foster a strategic
partnership and establish an enabling process for all other supply chain improvement
initiatives.

CPFR leverages existing investments in Warehouse Management Systems (WMS),

Forecasting / APS systems, Enterprise Resource Management (ERP) systems, Materials
Requirements Planning (MRP) systems, and Customer Relationship Management
systems.

CPFR is a process for two or more companies in a supply chain to synchronize their
demand forecasts into a single plan to meet customer demand

Parties electronically exchange

 past sales trends

 point-of-sale data

 on-hand inventory

 scheduled promotions

 forecasts

The CPFR Reference Model

The CPFR Reference Model (figure) can be applied to many industries. A buyer and a
seller, as collaboration participants, work together to satisfy the demands of an end
customer, who is at the center of the model. In the retail industry, a retailer typically fills
the buyer role, a manufacturer fills the seller role, and the consumer is the end customer.

38
In other industry segments, such as high technology, the collaboration participants may
differ.

Origin of CPFR. History

CPFR was originally initiated in 1995 by Wal-Mart, Benchmarking Partners, SAP and
Manugistics. The open source initiative was initially called CFAR (for Collaborative
Forecasting and Replenishment, pronounced as See-Far).

Warner Lambert (now part of Pfizer) served as the first pilot for CFAR as one of Wal-
Mart’s key suppliers. The results were announced in 1996 and presented to the Board of
Directors of the Voluntary Interindustry Commerce Standards (VICS) Committee. VICS
established an industry committee to prepare for rolling CFAR out as an international
standard. Later on the standard was renamed CPFR to emphasize the role of planning in
the collaborative process.

Since the publication of VICS Guidelines for CPFR in 1998, over 300 companies have
implemented the process. In 2004, the VICS CPFR committee developed a major
revision of the CPFR model to integrate innovations and overcome shortcomings
identified in the original process.

Steps in CPFR. Process

 Within Strategy & Planning, Collaboration Arrangement is the process of setting the
business goals for the relationship, defining the scope of collaboration and assigning
roles, responsibilities, checkpoints and escalation procedures. The Joint Business Plan
then identifies the significant events that affect supply and demand in the planning
period, such as promotions, inventory policy changes, store openings/closings, and
product introductions.
 Demand & Supply Management is broken into Sales Forecasting, which projects
consumer demand at the point of sale, and Order Planning/Forecasting, which
determines future product ordering and delivery requirements based upon the sales
forecast, inventory positions, transit lead times, and other factors.
 Execution consists of Order Generation, which transitions forecasts to firm demand,
and Order Fulfillment, the process of producing, shipping, delivering, and stocking
products for consumer purchase.
 Analysis tasks include Exception Management, the active monitoring of planning and
operations for out-of-bounds conditions, and Performance Assessment, the
calculation of key metrics to evaluate the achievement of business goals, uncover
trends or develop alternative strategies.

Strengths of CPFR. Benefits

39
  Partner Relationships
o Facilitates flexible relationships
o Facilitates deeper collaboration through interdependencies, joint systems
& processes
 Inventory
o Decrease in inventory levels and safety stocks
o Decrease in storage & financing costs
o Decrease in obsolescence
 Revenue
o Reduction in stock-outs and opportunity costs
o Promotion Efficiencies
o Sales increase from improved customer service
 Process Efficiencies
o Improvements in forecast accuracy
o Order Management
o Purchasing
o Inventory Control
o Production Labor
 Transportation Management
o Strategic Rate Management
o Tactical Rate Management
o Less than Truckload (LTL) Consolidation
o Capacity Utilization
o Demurrage

Limitations of CPFR. Disadvantages

 Applications might differ from industry to industry

 Difficult internal process changes (executive support etc)
 Technical issues (real-time systems integration and interoperability)
 Lack of partner trust
 Cost of implementation
 Benefits difficult to calculate
 Policy not to share internal corporate data such as forecast
 Top management-level commitment

Assumptions of CPFR. Conditions

40
 o Organizational shift to a consumer-centric, inter-enterprise orientation
o The partners clearly see the benefits of a deeper collaboration and of the need for
significant investments in an upgrade of the infrastructure
o The relations between the partners will not deteriorate in the near future

Every Day Low Pricing (EDLP)

Pricing strategy that promises consumers the lowest available price without coupon
clipping, waiting for discount promotions, or comparison shopping; also called value
pricing. EDLP saves retailers the time and expense of periodic price markdowns, saves
manufacturers the cost of distributing and processing coupons, and is believed to generate
shopper loyalty. A manufacturer's successful EDLP wholesale pricing strategy may
reduce volatility in production and shipping quantities and decrease the number of time-
degraded product units that consumers receive. EDLP has been championed by Wal-Mart
and Procter & Gamble. In recent years, other marketers have dropped EDLP in favor of
more traditional strategies, believing that consumers are more motivated by temporary
markdowns and coupon savings. To be successful, EDLP requires every day low costs in
line with the pricing.

41
 Chapter 8: Supplier relationship management

Procurementis purchase of goods and services from suppliers

 On-demand (direct response) delivery requires supplier to deliver goods when
demanded by customer
 Continuous replenishment is supplying orders in a short period of time according
to a predetermined schedule
 Cross-enterprise teams coordinate processes between company and supplier

Purchasing is the management of acquisition process. It involves five steps

 Recognize a need
 Select suppliers
 Place the order
 Track the order
 Receive the order

Supplier Selection
For supplier evaluation criteria start from the competitive priorities of the customer
segments to be served – Service firms in food items: On-time delivery & consistent
quality
 Selecting a new supplier is done on the basis of: Price, Quality & Delivery
o Low Price: Will reduce cost – firms spent sizeable amount in buying
inputs
o Quality: Hidden cost of poor quality can be enormous
o Delivery: On-time delivery can reduce the inventory level

Supplier Certification – a firm cannot do business with each and every supplier. It needs
to select only those suppliers that can meet its expectations in terms of cost, quality,
timely delivery, technology etc.
 Verify that a potential supplier has the capabilities of meeting the expectations of
the buying firm
 Supplier can help the firm in meeting the competitive priorities of the customer
segments that the firm has targeted to serve

Supplier Relation
 Nature of relations maintained with suppliers can affect the quality, timeliness &
price of the firm’s products or services
 Two orientations
o Competitive
o Cooperative
Supplier Relation - Competitive
 Views negotiations between buyer & seller as a zero sum game – one’s gain is
other’s loss
 Buyer tries to

42
 o Beat price down to minimum level
o Push demand as high as possible during boom time
o Reduce demand to almost zero during recession
 Party having maximum clout wins
 Clout: Buyer will have clout if the quantity bought is substantial percentage of the
supplier sale; plus
o Product is standard
o Many suppliers are available

Supplier Relation - Cooperative

 Long term commitment
 Jointly improve quality
 Support from buyer to improve managerial skills, technical skills & capacity
 Few suppliers
 As order volume increases supplier gains repeatability – results in lower cost
 Large & long term contract helps supplier to plan long term

Sole sourcing
 Risky – any problem in supplier’s company may disrupt the production
 Less opportunity to bargain a good price
 Advantage – reduces complexity

Outsourcing
Outsourcing is purchase of goods and services from an outside supplier. Core
competency is what a company does best. It is the collective learning of the organization.
A firm can outsource all activities in which they do not possess core competency. Such
activities should be outsourced from a partner who possess core competency in those
areas – Example Dell and UPS. Then only the entire process will be efficient and
responsive. Customers will be benefited.

Single sourcing is when a company purchases goods and services from only a few (or
one) suppliers – single sourcing is very risky.

E-Procurement
 Direct purchase from suppliers over the Internet
 Direct products go directly into production process a product, indirect products
not
 E-marketplaces: web sites where companies and suppliers conduct business-to-
business activities
 Reverse auction: a company posts orders on the Internet for suppliers to bid on

43
 Chapter 9: Information Technology and the Supply Chain

Developments in IT have influenced supply chain. It has helped firms to overcome the
spatial spread and reduced the time to respond.

A company manufacturing at multiple locations, buying from a wide base of suppliers

who may be geographically dispersed and are sending the produce to a network of
distributors and dealers is immensely benefited by the availability of current information.

In a global economy a company may locate manufacturing facility at a place where raw
material and skilled manpower are available in plenty and is cheap, it may buy materials
across the world and sell in different continents. Information technology helps such a
company to integrate suppliers and customers all over the world.

Information technology has helped courier companies to economize in pickup and

delivery, optimize network planning, offer late pickup, and improve overall service level.

A bank can offer more convenience to customers through ATMs, net banking, phone
banking, Web site etc. IT has also helped in faster processing of cheques and all other
transactions.

Service sector got a big boos because of IT. Examples are: job sites, music, movie,
software downloads, online education, distribution of technical information, online
reservation of tickets, hotel rooms etc.

We can study effect of IT by identifying three segments:

 Scope of application
 Functionality
 Stage of technological development

Scope of application: IT applications can be divided into

 Transaction Processing System (TPS): Deals with individual transactions and

interactions between different parties. It is governed by logical rules of
operations. Main role is to reduce the time to respond and capture reliable
information. Example stock issue and receipt register, sales order processing in a
computerized system. TPS is the basic building block of IT applications in a firm.

 Management Information System (MIS): MIS goes one level further and helps
managers at different levels to make correct decisions by providing information in
right quantity and at right time. Example: aggregate all stock issues and receipts
of an item over a period of time so that manager can decide about the reorder
point.

 Decision Support system (DSS): it allows managers to use some computer based
models for decision making.

44
Functionality of IT is divided into three categories: Data capture, display and
organization; Communication and Processing

Stages of technological development

 Stand alone applications: Order processing, dispatch advice, inventory control
 Firm level or Inter firm integrated systems for planning: EDI, MRP, ERP
 Integrated systems where computational speed matches operational decision
making requirements: online reservation system

1. The Role of Information Technology in the Supply Chain

2. The Supply Chain IT Framework
3. Customer Relationship Management
4. Internal Supply Chain Management
5. Supplier Relationship Management
6. The Transaction Management Foundation
7. The Future of IT in the Supply Chain
8. Supply Chain Information Technology in Practice

Role of Information Technology in a Supply Chain

 Information is the driver that serves as the “glue” to create a coordinated supply
chain. Also known as integrated supply chain. Bullwhip effect can only be
arrested by having an integrated supply chain in which information is shared in
advance.
 Information must have the following characteristics to be useful:
o Accurate
o Accessible in a timely manner
o Information must be of the right kind
 Information provides the basis for supply chain management decisions
o Inventory
o Transportation
o Facility
Characteristics of Useful Supply Chain Information
 Accurate
 Accessible in a timely manner
 The right kind
 Provides supply chain visibility (information about the customer order)

Use of Information in a Supply Chain

 Information used at all phases of decision making: strategic, planning,
operational
 Examples:
o Strategic: location decisions
o Operational: what products will be produced during today’s production
run

45
 o Inventory: demand patterns, carrying costs, stockout costs, ordering
costs
o Transportation: costs, customer locations, shipment sizes
o Facility: location, capacity, schedules of a facility; need information
about trade-offs between flexibility and efficiency, demand, exchange
rates, taxes, etc.
Role of Information Technology in a Supply Chain
 Information technology (IT)
– Hardware and software used throughout the supply chain to gather and
analyze information
– Captures and delivers information needed to make good decisions
 Effective use of IT in the supply chain can have a significant impact on supply
chain performance
– Increases the frequency of data capture because it is inexpensive
– Allows capture of very recent data about demand: for example point of
sales (POS) data. This helps in better forecasting
The Importance of Information in a Supply Chain
 Relevant information available throughout the supply chain allows managers to
make decisions that take into account all stages of the supply chain
 Allows performance to be optimized for the entire supply chain, not just for one
stage – leads to higher performance for each individual firm in the supply chain

The Supply Chain IT Framework influences all Supply Chain Macro Processes
– Customer Relationship Management (CRM)
– Internal Supply Chain Management (ISCM)
– Supplier Relationship Management (SRM)
– Plus: Transaction Management Foundation

 Customer Relationship Management: The processes that take place between an

enterprise and its customers downstream in the supply chain. Key processes are:
– Marketing
– Selling
– Order management
– Call/Service center
 Internal Supply Chain Management: Includes all processes involved in planning
for and fulfilling a customer order. The ISCM processes are:
– Strategic Planning
– Demand Planning
– Supply Planning
– Fulfillment
– Field Service
 There must be strong integration between the ISCM and CRM macro processes

Supplier Relationship Management: Those processes focused on the interaction between

the enterprise and suppliers that are upstream in the supply chain. Key processes are:
– Design Collaboration

46
 – Source
– Negotiate
– Buy
– Supply Collaboration
 There is a natural fit between ISCM and SRM processes

The Future of IT in the Supply Chain

 At the highest level, the three SCM macro processes will continue to drive the
evolution of enterprise software
 Software focused on the macro processes will become a larger share of the total
enterprise software market and the firms producing this software will become
more successful
 Functionality, the ability to integrate across macro processes, and the strength of
their ecosystems, will be keys to success
Supply Chain Information Technology in Practice
 Select an IT system that addresses the company’s key success factors
 Take incremental steps and measure value
 Align the level of sophistication with the need for sophistication
 Use IT systems to support decision making, not to make decisions
 Think about the future

47
 Chapter 10: Measuring Supply Chain Performance

Key performance indicators for a supply chain are

 Inventory turnover: cost of annual sales per inventory unit
 Inventory days of supply: total value of all items being held in inventory
 Fill rate: fraction of orders filled by a distribution center within a specific time
period

Key Performance Indicators

 Key Performance Indicators: Example

Other Measures of Supply Chain Performance

 Process Control: used to monitor and control any process in supply chain
 Supply Chain Operations Reference (SCOR) helps in establishing targets to
achieve “best in class” performance

The SCOR Model

The Supply Chain Operations Reference model, better known as SCOR is helping global
manufacturers rethink their companies into best-of-class operations. The SCOR model is
a process reference model that has been developed and endorsed by the Supply Chain
Council, as the cross-industry standard diagnostic tool for supply-chain management. It
enables users to address, improve and communicate supply-chain practices within and

48
between all interested parties. It is a management tool spanning from the supplier’s
supplier to the customer’s customer and a toolkit that can be used to define, measure and
manage supply-cain processes. The SCOR model is a pyramid of four levels that
represents the path a company takes on the road to supply chain improvement.

• Level 1 - it provides a broad definition of the plan, source, make and deliver process
types and is the point at which a company establishes its supply chain competitive
objectives.

• Level 2 - it defines the 17 core process categories that are possible components of a
supply chain. A company can configure both its actual and ideal supply chain by
selecting from these core processes.

• Level 3 - it provides a company with the information it needs to successfully plan and
set goals for its supply chain improvements. Planning elements include process
definitions, target benchmarks, best practices and system software capabilities to enable
best practices.

• Level 4 - it focusses on implementation, when companies put specific supply chain

improvements into play. It defines practices to achieve competitive advantage and to
adapt to changing business conditions

49
50
 Chapter 11: Purchasing & Vendor Management

Purchasing Process :

Consists of Objectives, Span of Control, Purchasing cycle, Documents & Types of

Purchase
1. Purchasing Objectives
(a) Support Operational represents
(b) Manage the purchasing process efficiently & effectively
(c) Select, develop & maintain sources of supply
(d) Develop strong relationship with other functional group
(e) Support organizational goals and objectives
(f) Develop integrated purchasing Strategies that support organizational
strategies
2. Span of control of Purchasing
(a) Evaluate and select suppliers
(b) Revised specifications
(c) Act as a primary contact with suppliers
(d) Determine the method of awarding purchasing contact
3. The Purchasing Cycle
(a) Identify or anticipate material and service needs.
(b) Evaluate Suppliers
(c) Select Suppliers
(d) Release and receive purchase requirements
(e) Continuously measures and manage suppliers performance

4. Purchasing Documents
(a) Registration for Purchase
(b) Request for quotation
(c) Purchase Order
(d) Blanket Purchase Order
(e) Other documents & electronic forms

51
 5. Types of Purchases
(a) Raw Materials
(b) Semi finished products & components
(c) Finished Products
(d) Maintenance, repair & operating Items
(e) Production Support Items
(f) Services
(g) Capital Equipment
(h) Transportation & Third Party Purchasing

6. Improving the purchase process

Most companies spend too much time and too many resources managing the
ordering of goods and services; particularly lower value items.

Some of the approaches and methods that can improve the low value purchasing
process:
1. On line requisition system from users to purchasing for low value items for which
users do not require involvement of purchase department, they should get direct
access to the suppliers.
2. Procurement cards is issued to users: Essentially a type of credit card provided to
internal users for purchasing low value items
3. Electronic purchasing through internet substantially reduces cost for order
placement, follow up and funds transfer.
4. Long term purchase agreements
5. On line ordering system to suppliers
6. Purchase process redesign
7. Electronic Data Interchange

Activities of Purchase Departments

1. Buying
- Purchase of RM, components, finished goods or services.
- Specific processes such as supplier selection, evaluation, negotiations,
awarding different contracts.
2. Expediting & Inventory Control

52
 - Contacting suppliers to determine the status of part due shipments; if
necessary increasing the priority.
- Monitoring day-to-day management of inventory.
3. Transportation
- Inbound transportation services.
- Carrier Selection
- Transportation Cost analysis
4. Managing Counter trade arrangements
- Involving international and domestic trade in which goods are exchanged
for goods
5. In sourcing & outsourcing analysis
- Make or Buy decisions
- Often involves strategic analysis of core competencies total cost and extent
of vertical integration

6. Value Analysis
- Organized study of value increase and cost reduction

7. Purchasing research / material forecasting

- Anticipating Short-range & long range changes in material market
- Developing strategic plan for purchase of critical items

8. Strategic supply management

- Developing integrated supply chain
- Suppliers quality assurance

9. Placement of purchasing authority

- Centrally controlled purchasing
- Decentralized purchasing authority

53
Advantages of Centralized purchasing
1. Higher Volume: Leads to favorable prices due to higher volume. May sometimes
delay the purchase due to centralization of purchase process.
2. Reduced duplication of purchase effort
3. Duplication may be avoided for material release form, quality standard, Suppliers
quality control, supplier’s performance evaluation etc.
4. Enables development and coordination of procurement strategy
5. Enables coordination and management of company wide purchasing systems
6. Development of purchase expertise quickly due to volume & variety.
Advantages of decentralized purchasing
i) Speed & responsiveness
ii) Understanding unique operational requirements
iii) Product development support
iv) Ownership
Supply Chain activities & functions
i) Purchasing
ii) In bound transportation
iii) In bound quality control
iv) Receiving & Storage
v) Materials & Inventory Control
vi) Order Purchasing
vii) Production Planning & Scheduling
viii) Warehousing
ix) Shipping
x) Outbound Transportation
xi) Customer Service
Purchase Policies
Policy refers to the set of purposes, principles & rules of action that guides an
organization. Purchase policies include all the directions, both explicit & implicit, that
lead to the aim and ends of a purchase department and help in accomplishment.

What makes an effective policy?

Characteristics of effective policies are:
- Action Oriented

54
 - Relevant
- Concise
- Unambiguous / well understood
- Timely Current
- Guide to problem solving behaviour
Five categories of purchasing policies
- Defining role of purchasing
- Defining the conduct of purchasing personnel
- Defining social & minority business objectives
- Defining buyer seller relationship
- Defining Operational issues.

Now each of the above categories in details:

1. Defining role of purchasing
- Origin & scope of purchasing authority: Such a policy may exclude
purchasing real state, Medical insurance etc. where no direct expertise
available.
- Objectives of purchasing function e.g.
i. To select suppliers that meet purchase and performance
requirement
ii. To purchase material and services that meet quality standards
iii. To provide buyer seller relationship
iv. To treat all suppliers fairly & ethically
v. To support all corporate objectives & policies

- Corporate purchasing office responsibility – This policy details the

relationship and distribution of responsibilities between a central
(Corporate) purchase office and other divisional, business unit level
purchase depts..
- Policy on cross functional decisions e.g.
(a) Make or buy decisions
(b) New product development support
(c) Organization wide cost reduction

55
2. Defining the conduct of purchasing personnel
- Ethics Policy
Details what is ethical purchasing from the view point of management.
- Reciprocity Policy
Reciprocity in purchasing occurs when suppliers are pressurized to purchase
buyer’s product. A reciprocity policy usually describes management’s
opposition to its practice.
- Contact and visit to suppliers
- Former employees representing supplies
- Reporting of irregular business dealings with suppliers

3. Defining Social & Minority Business Objectives

- Supporting minority business suppliers
- Environmental issues

4. Defining Buyer seller relationship

- Suppliers Relationship
- Qualifying and selecting a supplier
- Guidelines for awarding purchase contracts
- Labour & other difficulties at suppliers
- Other policies dealing with buyer seller relationship
i. Management must be cautions about the liabilities associated with
ideas put forth by suppliers
ii. Financial obligation for providing support at the early stage of
product development
5. Policies defining operational issues
- Materials which are hazardous
- Suppliers responsibility for defective material
- Purchased item comparison
- Other Operating policies
i. Compliance with the low of the land
ii. Material disposal
iii. Supplier requested damages in contractual terms and conditions
iv. Suppliers’ use of trade mark

56
Vender rating & Evaluation system
Three types of vendor rating or evaluation system.
- Categorical: Subjective, inputs from the user depts.. used by smaller
organization, Ratings could be excellent, good, fair or poor, easy to
implement less expensive.
- Weighted point system: Flexible system, Suppliers can be ranked on the
basis of performance; qualitative and quantitative factors can be
combined.
- Cost based system: This is a total cost based evaluation system, specific
areas of suppliers non performance identified, Objective suppliers rating,
Needs proper costing data, Greatest potential of supplier improvement.
Details of weighted point supplier measurement & evaluation

Performance Category Weight Score Weighted

score

1. Delivery
- On time 0.10 4 0.4
- Quantity 0.10 3 0.3

2. Quality
- In bound shipment Q 0.25 4 1.0
- Quality improvement 0.10 4 0.4

3. Cost Competitiveness
- Comparison with other 0.15 2 0.3
suppliers
- Cost reduction 0.10 3 0.3
initiatives

4. Service Factors
- Problem solving 0.05 4 0.2
ability
- Technical ability 0.05 5 0.25
- Corrective action 0.05 3 0.15
response
- New Product

57
 development support 0.05 5 0.25

Total Rating 3.55

1= Poor, 3= Average, 5=Excellent

Stores Management

Issues involved in Management of Stores

1. Organization of stores
2. Receiving station
3. Designing and implementing various forms
4. Issues & Requisitions: Capital items, tools, Consumables
5. Tools and Capital equipment
6. Managing sub stores
7. Stock taking and stock verification
8. Layout and location system
9. Storage equipment
10. Material Handling
11. Storage and preservation method.
12. Theft, malpractices and loss; special care for security & Safety

Creating lean supply chain & J.I.T. System

When inventory moves so fast that a firm essentially holds zero inventory on hand, the
firm is following a lean supply chain.
Lean supply chain is a combination of three just - in - time elements.

 JIT purchase
 JIT transportation
 JIT production

All three elements combine to create a supply chain that minimizes inventory and
eliminates wastes.

58
Lean supply chain is also defined as a philosophy that seeks to shorten the time between
the customer order and the shipment to the customer by eliminating waste.
All attempts to establish lean supply chain are directed to achieve flow, pull & striving
for excellence.
Flow: Means that inventory moves through the supply chain continuously with minimal
queuing or non-value added activity being performed.
Pull: Means that customers’ orders start the work process. An upstream work centre will
not create output unless a down stream work centre directly requests (i.e. pulls) that
output. The output is needed and consumed, leading to no inventory of waste.
Striving for Excellence: This means that supply chain must have perfect quality. Any
thing less than perfect quality leads to waste.

Common Type of Supply Chain Wastes

 Over production
 Waiting time
 Excessive transportation & Material Handling
 Unneeded Production Steps
 Excessive WIP
 Unnecessary motion & effort
 Defective products
 Excess Staff
 Incomplete & incorrect information
JIT Purchasing: Features of JIT purchasing system.
 Commitment to zero defects by the buyer & sellers.
 Frequent shipment in smaller lots according to strict quality & delivery
standards.
 Collaborative buyer-seller relationship.
 Stable production schedule sent to suppliers on a regular basis
 Extensive sharing of information between supply chain members
 EDI with suppliers

JIT purchasing

 is an operating philosophy
 does not tolerate high inventory levels
 does not tolerate less than perfect quality

59
  does not tolerate other kind of wastes between buyers & sellers
 does not mean pushing inventory back to supplier
 needs continuous improvement

JIT Purchasing Barriers

 Dispersed supply base

 Historical buyer-seller relationship
 Large number of suppliers
 Suppliers’ quality performance.

JIT Transportation

Produce Supplier Produce

Inspect

Pack

Store

Ship

Transport Carrier Transport

Receive

Inspect

Store

Produce Customer Produce

Traditional JIT

Designing JIT transportation network involves certain steps

 Change the original structure: may require setting up cross-functional team.
 Reduce the number of Carriers
 Use long term contracts
 Use EDI extensively

60
  Implement closed loop system: Pick up and deliver on a regular basis, use
returnable containers to eliminate packing waste
 Efficiently handle material

JIT Production consists of the following elements

 Uniform facility loading & level scheduling

 Set up time reduction
 Inventory pull system with visible signals (KANBAN)
 Facility layout – to reduce movement
 TQM & Continuous improvement
 Product and process simplification
 Flexible workforce featuring team work
 Right performance measures

KANBAN System & KANBAN Pull System

A KANBAN Control System uses a signaling device to regulate JIT flows. KANBAN
means sign or instruction card in Japanese. In a paper less control system containers can
be used instead of cards.
A KAN card instructs a work centre or supplier to produce a standard quantity of an item.
The BAN Card requests a predefined standard quantity of an item to be brought to a work
centre.

Withdrawal KANBAN

M/C Assembly
Center Line

Production KANBAN

When any line takes the first part from the full container, a worker takes the withdrawal
KANBAN from the container and takes the card to machine storage area.

61
There he finds a container of Part A, removes the production KANBAN and replaces it
with withdrawal KANBAN. This authorizes the movement of this container to machine
area.

The freed production KANBAN is placed on a rack by the machine centre authorizing the
production of another lot of material.

Cards are not the only way to signal the need for production of a part, other possible
approaches are:

1. KANBAN Squares – marked space on the floor where material is to be stored.

Empty area authorizes supplying work centers to produce.
2. Container System – empty container signals production. The amount of
inventory is adjusted by adding or removing containers.
3. Coloured Soft Balls – may be sent to production dept. when the assembly area
needs a part.

KANBAN pull system can also be used between different manufacturing facilities and
between manufacturers & external suppliers.

62