TOTAL SUPPLY CHAIN MANAGEMENT (TSCM)

TOTAL SUPPLY CHAIN MANAGEMENT (TSCM) Page 1

Objective Maximise the overall value generated is the difference between what the final product is worth to the customer and the effort the supply chains expends in filling the request of the customer Supply chain profitability is the difference between the revenue generated from the customer and the overall cost across the supply chain It is the total profit to be shared across all supply chain stages Supply chain success is measured in terms of supply chain profitability and not in terms of the profits at an individual stage Revenue is from customer positive cash flow All other cash flows are simply fund exchanges that occur within the supply chain given that different stages have different owners All flows of information, product or funds generates costs within the supply chain Supply chain management involves the management of flows between and among stages in a supply chain to maximise total supply chain profitability Decision Phases Three categories - Depending on the frequency of each decision and the time frame over which a decision has an impact, 1. Supply chain strategy or design 2. Supply chain planning 3. Supply chain operation 4. Supply chain strategy Decides how to structure the supply chain over the next several years o chain configuration, o resource allocated and o process at each stage should perform Decisions include o location and capacities of production and warehousing facilities, o the products to be manufactured or stored at various locations, o the method of transportation to be made available along different shipping legs, o the type of information system to be utilised Supply chain planning Under the given configuration decisions are made which has impact on a time frame of quarter to a year Starts with a forecast the coming year or a comparable time frame Planning decisions include o which market will be supplied from which locations, o the subcontracting for manufacturing, o the inventory policies to be followed, and o the timing and size of marketing promotions Companies in the planning phase try to incorporate any flexibility built into the supply chain in the design phase and exploit it to optimise performance Page 2

Companies define a set of operating policies that govern short-term operations Supply chain operation Decisions are taken regarding individual customer order and the time frame is week or days Configuration is fixed and policies are defined Objective is to handle incoming customer orders in the best possible manner Decisions related with o allocation of inventory or production to individual orders, o set a date that an order is to be filled, o generate pick lists at a warehouse, o allocate an order to a particular shipping mode and shipment, o set delivery schedules of trucks, and o place replenishment order Exploit the reduction in uncertainty and optimize performance Expanding Strategic Scope Scope of strategic fit refers to the function and stages that devices an integrated strategy with a shared objective One extreme - operation within a function devices independent strategy Other extreme - all functional areas within all stages of the supply chain device strategy jointly with a common objective Intracompany intraoperation scope: minimises local cost view Strategic fit is considered in one operation within a functional area within a company Resulting collection of strategies will most likely not come close to maximising supply chain profit conflicting local objectives Practices during 1950s and 1960s Intracompany intrafunctional scope: minimise functional cost view Given that many operations together form each function within a firm, managers recognised the weakness of the intracompany intraoperation scope With the intracompany intrafunction scope, the strategic fit is expanded to include all operations within a function The scope of strategic fit expands to an entire function within a stage of the supply chain Intracompany interfunctional scope: maximise company profit view Different functions may have conflicting objectives Functional strategies are developed to support both each other and the competitive strategy. Intercompany interfunctional scope: maximise supply chain surplus view Intracompany interfunctional scope leads to each stage of the supply chain trying to maximise its own profits, which does not necessarily result in the maximisation of supply chain surplus Page 3

When company uses speed as their primary competitive advantage to succeed in the marketplace, intracompany interfunctional strategy performs badly The impediment to create level of speed that customers are demanding lies to a degree within their own boundaries Managing these interfaces becomes a key to providing speed to customers Intercompany scope forces every stage of the supply chain to look across the supply chain and evaluate the impact of its action on other stages as well as on the interfaces This means treating stages in the supply chain that a company does not own as belonging to the company Till now the discussion was on strategic fit under static context players in supply chain and customers do not change over time Dynamics exits product life cycle get shorter and companies try to satisfy the changing needs of individual customers In such situations, a company may have to partner with many different firms depending on the product being produced and the customer being served strategic fit should have agile intercompany scope SCM is an industry term for management of materials, information and finances, as they more along the supply chain from the supplier of the raw materials, to the wholesaler, to the retailers and then to the consumer. A more basic definition of Supply Chain Management (SCM), is supplying the correct product or service, to the correct place in the correct quantity, at the correct time and at the correct cost. SCM is to manage the entire flow of information, material, and services from raw material suppliers through factories and warehouse to the end product. Benefits The benefits of SCM to organizations are as follows : Improved delivery performance quicker customer response and fulfillment rates With the help of SCM the delivery process is improved and in turn the customer satisfaction is higher and response is quicker and therefore there are fulfillment rates. Greater productivity Since the customer response is faster, therefore the productivity is greater. Reduced inventory throughout the chain The inventory process is reduced throughout the network facility i.e. the chain, because of greater productivity as per the customer response. Improved forecasting precision Fewer suppliers and shorter planning cycles By selecting few suppliers with respect to higher customer satisfaction, the cycle SCM also becomes shorter. Improved quality and products that are more technologically advanced SCM also helps in improving the quality of enhanced inter-operational communication and cooperation. More reliable financial information. Material management Material Handling can be defined as the art and science of moving, packaging and storing of substance in any form. It mainly deals with as how to handle the material carefully. It gives us the technical aspects of transporting or moving the goods from one place to another without actually damaging the goods. Page 4

It covers the whole material cycle having the components such as purchasing, receiving and inspection, inventory control, material handling and physical distribution. The main aim in material handling is to handle the goods with care so that it may not get broken. Packaging plays an important role in material handling. A proper packaging with respect to the type of goods is necessary. Example An electronic good is always supported with a thermacol and a box so that it is not damaged. Next is storing of goods i.e. there are some goods with less life. So they are to be stored under deep freezing. Grains and other food materials must be kept in dry place and then it must be transported in a dry & clean containers or boxes. A proper handling of goods leads to better safety and avoidance of damage. Objectives Of Material Management There are many elements that make up a successful material handling. There are primary 4 objectives as follows : Movement Time Quantity Space Movement The movement of product to the warehouse and also out of the warehouse is important. By moving the goods from the warehouse at the time, when demanded must be supplied. Due to this there will be availability of product in the market which satisfy the consumer. It also improves services by quicker delivery of goods. Time The raw materials or the other parts must be made available when demanded otherwise the production process is affected. The product must be made available at the right place and right price. The time is the most important factor. Any delay in either production, manufacturing or delivery of goods might affect the entire product cycle or distribution cycle. Moreover the actual aim should be the implementation of JIT for quicker service when ordered by the customer. Quantity The goods must be delivered in the right quantity as specified by the customer. The movement of goods must be correct between the stations and the customer. Quantity is the important factor because the total number of goods ordered by the customer must be accurate otherwise the inventory of stock will not match if more number of goods are delivered than it is specified and the customer will not be satisfied by goods are missing. Space Page 5

Space is nothing but a area that is provided on hire in a warehouse for storing goods. Since the cost of space is very high, proper utilization of the place must be done. We have to store goods in warehouse in such a way that maximum use of given space is utilized. Inefficient use of space can lead to loss of money & storage of less goods. Principles Of Material Management Applying the ten principles of material handling can overcome many material handling problems. These principles offer commonsense approaches to moving products more efficiently and effectively. The ten principles of material handling are as follows: Planning Principle: All material handling should be the result of a deliberate plan(course of action i.e defined in advanced) where the needs and functional specifications of the proposed methods are completely defined at the outset. Standardization Principle: Material handling methods, equipments, controls and software s should be standardized within the limit of achieving overall performance objectives and without sacrificing needed flexibility and throughput. Work Principle: Material handling work should be minimized without sacrificing productivity of the level of service required of the operation. Ergonomic Principle: Human capabilities and limitations must be recognized and respected in the design of material handling tasks and equipment to ensure safe and effective operation. Unit Load Principle: Unit Loads shall be appropriately sized and configured in a way that achieves the material flow and inventory objectives at each stage in the supply of chain. Space Utilization Principle: Effective and efficient use must be made of all available space. System Principle: Material movement and storage activities should be fully integrated to form a coordinated operational system that spans receiving, inspection, storage, production, assembly, packaging, utilizing, order selection, shipping, transportation and the handling of returns. Functions of Materials Management: Every person, organization or a distinct part of an organization has to perform a set of tasks in order to deliver customer expectations satisfactorily. These sets of tasks are called functions. Materials Planning & Control This is the primary function of Materials Management. The market forecast is converted into production schedules by production planning and control. Materials management prepares the materials plan to meet the production schedule. The plan is then implemented and controlled. Page 6

Procurement: Procurement function begins with sourcing the supply after short listing suppliers. An effective method is to rate the vendors on the basis of performance and choose the best. Purchase order is placed on the source and the material is procured from the source. Procurement activity includes preparation placement of purchase order, follow up, transportation and handling. Handling: The material which reaches the company premise is to be unloaded, moved and positioned as per the storage plan. Storage & Preservation: The procured material is to be stored and preserved against internal and external deterioration. Against the authorized demand the material from the store is retrieved and issued. Inventory control Inventory control function controls the inventory levels. Vendor development: The company makes the chosen vendors effective and efficient by providing necessary inputs of training and information. A good vendor is an asset as he makes his customer more effective and efficient. Vendor rating: This system is used continuously to assess strengths and weaknesses of short listed vendors for their effective development. Waste control: Procuring standard material and continuously trying to improve yield is waste reduction. When a product is processed two types of wastes are generated. One type of waste is called as standard scrap. This is accepted as unavoidable. Product that is not right first time is scrap and thereby waste. Non moving obsolete material is another waste. Material management should address these wastes and not only should control but reduce the wastes. Value Analysis: Continuously trying to improve the value of the product mainly by material substitution is a function of the materials management. Scope of Material Management Material Planning: which includes forecasting the material requirement. Purchasing: which includes vendor selection, negotiation, ordering. Storage, Store Keeping and Store accounting: which covers accommodating material, protecting and preserving them, maintain them. Inventory control: includes ordering quantity, setting inventory levels. Material handling: which covers internal movement and transfer of material. Disposal of wastes and obsolete material. Physical distribution: which covers the process of moving finished goods to the ultimate customer. PURCHASE MANAGEMENT Purchase Management is a function of materials management in a company. Their basic function is procuring the inputs for production function. Importance of purchase management: Page 7

As the purchase decisions commit a very large portion of financial resource of the company purchase function is said to be highly important. Purchase personnel deal with large number of external agencies while performing their functions. Hence they represent company s reputation in the out side world. As they negotiate and finalize deals worth lot of money for the company their integrity is of utmost importance for the organization. Objectives or goals of purchasing: primary objective or goal of purchasing function is making inputs available to the conversion process at minimum cost to the final output of the company. The inputs to be made available are raw materials, semi finished items, bought out items etc. There are certain parameters to be monitored for fulfilling the system objectives. We can call them goals of purchasing. These goals are popularly known as 5Rs of purchase namely, right price, right quantity, right quality, right place and right time. Right material: The material should be purchased at right time so that it may not result in either excess investment in the stocks. Right price: Right price is determined by allowing reasonable profit for the supplier and insisting and helping to reduce cost. Tender system should be used to identify lowest responsible bidder rather than lowest bidder. It should be noted that the low bidder is not always the best bidder. Right quantity: right quantity of purchase is the one that ensures no excess and no shortage. The right quantity can be determined on the basis EOQ analysis to determine the right quantity for purchase. It describes the size of the order at which the ordering cost and the inventory cost will be minimum. Right place: is the one where the item is going to enter. If the item is not available here, when needed, it is in short supply for the process. Right source: The suppliers are not only supplying the required material but they also supply the information such as probable market condition, general industrial climate and business envt. Right time: is as decided by production schedule for meeting customer s requirements. Right terms of contracts: terms in a contract are legally implemented. In case of dispute between supplier and customer, courts will go by the terms decide who is wrong. Hence right terms are those, which protect the interests of the company. At the same time right terms ensure that neither parties do anything illegal. Fundamentals of Purchasing: Raw material: are the items which are purchased in their natural state which need further processing. Components: Components are the finished product which are assembled to form finished product. Consumable stores and supplies: These are the items which are normally requires in the manufacturing operations but which do not enter into the finished product. Page 8

Office supplies: They are the indirect material which are consumed in the office. E.g stationery, pencils etc. Office appliances: PCs, calculator, air condition etc. Spares and tools: they include tools and parts required for repair, maintenance such as nuts, bolts etc. Machines and equipments: Various types of machines and equipments which are required for different types of manufacturing operations e.g truck, driller etc. Objectives of Purchasing To avail the materials, supplies and equipment at the min. possible cost. To ensure the continuous flow of production. Purchasing dept helps in ensuring the uninterrupted production flow through continuous flow of raw material. To increase the asset turnover. The efforts of purchase dept result in the formation of fixed asset and maintenance of certain level of investments in inventories. The investment of both should be kept min. To develop the alternate source of supply. To established and maintain the good relation with the suppliers. To achieve max. integration with the other department of the company. Production dept. Engineering dept. Marketing dept. Finance dept. Efficient recordkeeping and management recording. Steps of purchasing Recognition of need. Selection of the supplier. Placing the purchase order. Follow up[ the order. Receiving and inspection of the material. Payment of the invoice. Maintenance of the record. Maintenance of the vendor relation Purchase Systems In an organization all activities are carried out according to systems and procedures for reducing variations and errors. This makes performing the function simple and less prone to errors. These systems are pre purchase system, ordering system, post purchase system. Pre purchase System This system lays down how purchase activity is initiated. Various activities controlled by this system are requisitioning, selection of suppliers and obtaining & evaluating quotations. Requisitions: Requisition(demand) for an item may be made by anyone in the organization. Requisition for an item shall be made in a standard format. This format ensures all relevant information like quantity, specifications etc. and gets the purchase authorized by competent authority in the organization. Thereby making purchase activity easier and less time consuming. Traveling requisitions: in an inventory system where an item is made a stock item to be perpetually(continually) maintained at a minimum level, purchase activity is triggered by stores function based on ROL. The requisition is a permanent document with specification, authorization and quantity required permanently Page 9

marked on it. The traveling requisition returns to indenting department after purchase is initiated. Inquiries: pre purchasing system prescribes standard formats for making inquiries in the market for supply of a particular product. These are standard forms boldly declaring that they are not explicit or implicit purchase orders. Ordering system Purchase order is the most important element in ordering system. Purchase manager releases the purchase order after selecting the supplier and finalizing the price and other conditions of sale. Once the purchase order is raised and accepted it becomes a legal document. Contents of the purchase order are: purchase order reference(quotation, recommendation) number description of materials and specifications quantity required and delivery schedule price and discounts shipping instructions location where the material is to be shipped signature of the authorized officer detailed terms and conditions several number of copies made to be forwarded to various recipients. Original and a copy is sent to the supplier for acknowledgment of the original order. This acknowledgment is acceptance of terms and conditions of purchase order. One copy is sent to the receiving department for making necessary receiving arrangement. One copy is sent to the indenting department for information. One copy is sent to finance department for organizing payment to the supplier. Post purchase system This system includes follow up procedures, receipt and checking invoices. Follow up procedures: follow up is an expensive activity for an organization. Hence this should be minimized and made more effective. A sound procedure for follow up is required to eliminate duplication and ineffectiveness. Follow up responsibility is assigned to buyers responsible for areas in which suppliers are situated. Receipt: A systematic record of all receipts, carrier details and descriptions is maintained. This record is in chronological sequence of arrival of supplies. The system ensures that inspection of consignments received is arranged in time and payment to suppliers for accepted consignments is organized. In many organizations a receipt section handles this activity centrally. Invoice checking supplier sends his invoice to customer s finance department for payment for the goods supplied. Invoice checking system ensures that the invoice is checked against the PO terms, receipt details, quantity received, inspection reports [accepted quantity and rejected quantity], losses, damages etc. this system helps materials management to coordinate with finance department for payment to suppliers. Special purchasing systems Forward buying: when an organization enters into a contract with another company for buying an item for a period as long as a year or more it is called forward buying. Forward buying is a commitment for a long period. This Page 10

commitment is made after studying availability of the item, financial position, EOQ for that item, discounts, etc. Tender buying: There are two types of tendering systems in practice. One is called open tendering system that is adopted by public sector companies. In this case bids are invited by advertisements in papers. On the day of opening the tenders the lowest bidder is chosen for awarding the contract of purchase. This method is time consuming and expensive. Private companies make a list of well known and serious bidders known in the market and invite tenders from these bidders. When the tenders are opened lowest bidder is identified. Blanket orders: order covers a long period like a year. Price is fixed. Delivery is as and when customer desires. Supplier to hold inventory. Benefits are no of orders are less, inventory is passed on to the supplier. Zero stock: Supplier holds the stock for the buyer. Supplier and customer are close to each other. Suppliers production schedule is as per customers. Dedicated supplier and customer. Rate contract: after finalizing the rates through negotiations for a definite period, customer shall buy required quantity from the specified supplier. Railways and other government organizations practice this method. Price shall not be negotiated once again. Rate contracts normally do not specify lead time. Hence suppliers demand higher rates for early delivery. Reciprocity Organizations resort to reciprocal buying when they find it difficult to do business in highly competitive environment. Reciprocal buying is buying form one s own customers. If this is done in conditions of competition, there should not be anything wrong about this. But, in this situation one tries to take care of the other as each one keeps changing the role of customer & supplier. This leads to over all deterioration of product quality and downfall of the pair. Systems contract Purchase order is used as a single document during the course of completing entire transaction. Same document is used as delivery challan at the time of delivery. The document is updated at every stage of the process. Reduction in number of documents and documents preparation is major saving in administration expenses. This results in cost reduction to the value chain. Importance of source Source is the place from where we procure our inputs. These inputs may be in the form of raw material or semi finished items. As outsourcing is gaining importance in business, importance of source is becoming high. Following reasons are considered to be making source an important element in materials management. Source of market intelligence: source is a window through which the buyer organization looks at the world outside. Information about current trends and industrial climate is obtained from the sources.[market conditions, industrial climate, what is new? Crucial for product quality: buyer organizations depend on out sourced components for producing the product which central to the objectives business. Page 11

Reliance on capabilities of supplier to meet tough quality standards is very high in current business environment. Member in the value chain: supply source is an important element in the value chain. Any cost added to the value chain reaches the end user as price. Hence effectiveness and efficiency of the source becomes vital to business. Import substitution, cost reduction, value improvement: as indigenization of sub assemblies, components and spare parts is necessary to reduce the cost of product in competition, buyer organizations turn to supply sources to develop these items. Several trials and corrections may be required to finalize the substitute. In house capacity is generally not available for this kind of trials. A resourceful supplier is very useful in this process. Same logic holds good in other exercises for cost reduction and value improvement. It is quite logical that entire process is not outsourced but isolated developmental activities are invariably done. It is common knowledge that many small scale companies do not have full fledged tool rooms but rely on sources for all tool room activities Integration Definition and scope: Definition: Coordination and planning of all functions for controlling materials in an optimum manner to meet customer expectations at minimum cost. scope Materials management works closely with Production, Finance, Engineering and Quality control in the process of performing the functions to meet the objectives of customer satisfaction. Materials management and Production: As we saw earlier JIT system needs very reliable procurement and delivery systems for inputs and outputs. Hence very close interaction with production department is primary to meet internal customer expectations and customer delight. Only this ensures unfailing satisfaction and delight of the external customer. Scope of materials management function decisions includes suppliers, production support warehouses, transportation service providers and internal departments subordinate to the function. Materials management and Finance: Timely payment to suppliers is important for the smooth working of the supply chain which is fundamental system. Close interaction with finance function is needed to ensure the above. Materials management and Engineering: Materials Management in the course of discharge of their functions plan activities involving change in material inputs. This obviously has an impact on design of the product and process of manufacturing. Hence a close working is necessary between Materials management and Engineering. Materials management and Quality control: For the same reasons that as above, close working is necessary between Materials management and Quality control. Organization & control Page 12

Materials Management is growing in height on account of changes in management thought process. Materials function has moved into board rooms which is an evidence of its importance in corporate structures. Materials Management & Corporate Organization structure: A materials director is usually on the board to give overall directions to the material function in corporate bodies. This provides unity of command and thereby uniform direction. Concept of Centralization & De centralization: As we were discussing earlier it is the need of the organization triggered by product, process and market that ultimately decides how the control should be exercised on the material function. The control may be centralized or decentralized fully or in parts keeping in mind overall need. Centralized control keeps most of the decision making at headquarters level delegating only routine level decision making. Decentralized control delegates decision making to unit level enabling the units to respond to their respective environment. Advantages of Centralization: Combining the requirements of all units to buy in bulk and gain benefits of bulk buying. Interplant transfer of material to deal with emergencies in individual plants. And interplant transfer to utilize excess material available at some plant and thereby reduce overall inventory cost for the company. Buying needs skills specific to the commodity in market specially buying is in large quantities. Knowledge of the market is essential to anticipate market trends in terms of price and availability. Benefits of unity of command. Centralized material research resulting in savings for the company. Advantages of Decentralization: Decentralization overcomes problems posed by significant physical separation between Plants and Central Office. These problems can occur due to information flow. When individual plants are engaged in production of different products, their requirement is product specific and thereby unique. Decentralized control can deal with the requirements effectively, independently. Better coordination with production & other functions of the plant: Production is the internal customer of material management function. Decentralized control enjoys the benefit of being close to the customer. There is also the need to interact with various other functions in the plant. Decentralized control can take decisions based on these interactions effectively. Inventory Management: What is Inventory? Inventory is an unused asset, which lies in stock without participating in value adding process. Unused equipment, raw material, Finished goods, consumables, spare parts, bought out parts, tools, etc. Types Of Inventory Page 13

Manufacturing: manufacturer s commitment to inventory is deep and duration is long. MRO: Maintenance, repairs and operating supplies. Location inventory: inventory at a fixed location Tools and fixtures Inspection gauges and instruments Stores Management: Normally it is assumed that store is a place where excess material is kept which will be used as and when required. Loss of items, deterioration, inadequacy of what is stored to what is needed are treated as part of life. Process View of Supply Chain A supply chain is a sequence of processes and flows that take place within and between different stages and combine to fill a customer need for a product Two ways to view the processes performed in a supply chain 1. Cycles view and 2. Push/pull view Cycle view Defines the processes involved and the owners of each process Process in a supply chain are divided into a series of cycles Cycles are performed at the interface between two successive stages of a supply chain Supply chain process can be broken down into four process cycles such as o Customer order cycle o Replenishment cycle o Manufacturing cycle o Procurement cycle Each cycles occurs at the interface between two successive stages of the supply chain A cycle view of the supply chain is very useful when considering operational decisions It clearly specifies the roles and responsibilities of each member of the supply chain It helps the designer to consider the infrastructure required to support the processes Push/Pull View Categorises processes in a supply chain based on whether they are initiated in response to a customer order (pull) or in anticipation of a customer order (push) Categorisation is based on the timing of process execution relative to end customer demand Page 14

At the time of execution of a pull process customer demand is known with certainty In case of push process at the time of execution of a process demand is not known and must be forecasted Pull process reactive process Push process speculative process Push/pull boundary in a supply chain separates push process from pull process Very useful when considering strategic decisions relating to supply chain Forces more global consideration of supply chain processes as they relate to a customer order More the pull process better the supply chain Competitiveness And Supply Chain Strategies Competitive strategy of a company defines the set of customer needs that it seeks to satisfy through its products and services Defined based on how customer prioritises product cost, delivery time, variety and quality Targets one or more customer segments and aims to provide products and services that satisfy these customer s needs Some company s competitive strategies are defined around the following High availability of a variety of reasonable quality products at low prices eg: Wal-Mart o Better customer convenience, availability and responsiveness eg: McMaster Carr MRO items - over 200,000 items through catalog and web site Better customisation, and variety at reasonable cost eg: Dell To execute a competitive strategy of a company, all the functions play a role and each must develop its own strategy Supply chain strategy determines the nature of procurement of raw materials, transportation of materials to and from the company, manufacture of the product or operations to provide the service, and distribution of the product to the customer, along with any follow-up service This strategy includes what many traditionally include Supplier strategy Operations strategy, and Logistics strategy Decisions regarding inventory, operating facilities, transportation, and information flows in the supply chain are all part of supply chain strategy Achieving Strategic Fit Strategic fit means that both the competitive and supply chain strategies have the same goal It refers to consistency between The customer priorities that the competitive strategy hopes to satisfy and Page 15

The supply chain capabilities that the supply chain strategy aims to build Major task of chief executive officer (CEO) is aligning all of the core strategies with the overall competitive strategy to achieve strategic fit During the supply chain design a key consideration is the strategic fit A company s success or failure closely linked to the following The competitive strategy and all functional strategies must fit together to form a coordinated overall strategy Different functions in a company must appropriately structure their process and resources to be able to execute these strategies successfully Basic steps to achieve strategic fit Understanding the customer, and supply chain uncertainty Understanding the supply chain capabilities Achieving strategic fit Understanding the Customer and Supply Chain Uncertainty To understand the customer, a company must identify the needs of the customer segment being served Customer demand from different segments may vary along several attributes: The quantity of the product needed in each lot The response time that customers are willing to tolerate The variety of products needed The service level required The price of the product The desired rate of innovation in the product Implied Demand Uncertainty Demand uncertainty reflects the uncertainty of customer demand for product Implied demand uncertainty is the uncertainty in meeting a portion of customer demand and it is the uncertainty the supply chain faces. It is mainly due to the attributes the customer desires Illustration As a supply chain raises its service level, it must be able to meet a higher and higher percentage of actual demand, forcing it to prepare for rare surges in demand. Thus raising the service level increases the implied demand uncertainty even though the product s underlying demand uncertainty does not change. Product demand uncertainty and various customer needs that the supply chain tries to fill affect implied demand uncertainty The following customer needs increases implied demand uncertainty Range quantity required increases Lead time decreases Variety of products required increases Number of channels through which product may be acquired increases Rate of innovation increases Required service level increases Correlation between implied demand uncertainty and other attributes Low Implied High Implied Uncertainty Uncertainty Product margin Low High Page 16

Average forecast error 10% 40% to 100% Average stockout rate 1 % to 2% 10% to 40% Average forced season End markdown 0% 10% to 25% Following supply source capabilities increase the supply uncertainty and hence high implied demand uncertainty Frequent breakdown Unpredictable and low yields Poor quality Limited supply capacity Inflexible supply capacity Evolving production process Implied uncertainty spectrum shows in one end predictable supply and demand, and in the other end highly uncertain supply and demand Understanding the supply chain Important supply chain characteristics are responsiveness and efficiency Supply chain responsiveness includes a supply chain s ability to do the following Respond to wide range of quantities demanded Meet short lead time Handle a large variety of products Build highly innovative products Meet a very high service level Handle supply uncertainty Supply chain efficiency is the cost of making and delivering a product to the customer Cost-responsiveness efficient frontier is the curve showing the lowest possible cost for a given level of responsiveness Shows the cost-responsiveness performance of the best supply chain Firms on the efficient frontier are also continuously improving their processes and changing technology to shift the efficient frontier itself Responsiveness High Low Cost Responsiveness efficient frontier Responsiveness spectrum - Supply chains range from those that focus solely on being responsive to those that focus on a goal of producing and supplying at the lowest possible cost Achieving Strategic Fit Strategic fit is achieved if what the supply chain does particularly well is consistent with the targeted customer s needs and the uncertainty of the supply chain Finding the zone of strategic fit For high level of performance, companies should move their competitive strategy (and resulting implied uncertainty) and supply chain strategy (and resulting responsiveness) towards the zone of strategic fit Page 17

To achieve complete strategic fit, a firm must consider all functional strategic within the value chain Comparison of efficient and responsive supply chains Primary goal lowest cost Respond quickly Product design Max. performance Modularity- Strategy at a min. cost postponement Pricing strategy Lowe margin High margin Mfg. Strategy Lower cost Capacity flexibility Inventory Strategy Minimize Buffer inventory Lead time strategy Reduce Not the Aggressively Expense of cost reduce Supplier strategy cost and quality Speed, flexibility, reliability, quality Other Issues Affecting Strategic Fit Multiple products and customer segments Product life cycle Competitive change over time Multiple Products and Customer Segments Firms often sells multiple products and serves customer segments with very different needs Different products and segments have different implied demand uncertainty Key issue for company is to create a supply chain that balances efficiency and responsiveness given its portfolio of products, customer segments and supply sources Several possible routes a company can take One route set up independent supply chains for each different product or customer segment Feasible if each segment is large enough to support a dedicated supply chain Preferable strategy is to tailor the supply chain to best meet the needs of each product s demand Tailoring the supply chain requires some links in the supply chain with some products, while having separate operations for other links considering efficiency and responsiveness Product Life Cycle As product go through their life cycle, the demand characteristics and the needs of the customer segments being served change As product mature, the corresponding supply chain strategy should, in general, move from being responsive to being efficient Product Implied Product Maturity Uncertainty Introduction Spectrum Changes in supply chain strategy over a product life cycle Competitive Change Over Time Competitor can change the landscape of the market Growth of mass customisation competitors flood the marketplace with product variety, customers are becoming accustomed to having their individual needs satisfied Page 18

Competitive focus today is on producing sufficient variety at a reasonable price As competitive landscape changes, a firm is forced to alter its competitive strategy result in change in supply chain strategy Page 19