CHAPTER 1: SUPPLY CHAIN MANAGEMENT Services – is something done for someone

else. Sometimes people are paid for their

Supply Chain – a supply chain is the alignment
service, sometimes they are not.
of firms that bring products or services to
market. - Intangible
- Cannot be inventories.
- Consists of all stages involved, directly,
- Direct interaction between customer
in fulfilling a customer request. The
and process
supply chain not only includes the
- Knowledge intensive, not easy to
manufacturer and suppliers, but also,
automate.
transporters, retailers, and customers
themselves. Value Chain
Supply Chain Management - A linear map of the way in which value
is added by means of a process from
- Is primarily concerned with the
raw materials to finished product.
efficient integration of supplies,
factories, warehouses, and stores. Poster’s Value Chain
- Has been defined as the “design,
Support Activities
planning, execution, control, and
monitoring of supply chain activities. - Firm Infrastructure – general
management, accounting, finance.
The goods-services continuum
- Human Resources Management –
Pure Goods – food products, chemical, mining recruitment training development
- Technology Development – Research
Core Goods – appliances, Automobiles, Data
and Development
Storage Systems.
- Procurement – purchasing of raw
Core Services – Hotels, Airlines, Internet materials, machines, supplier.
Services, Providers.
Primary Activities
Pure Services – University, Medical,
- Inbound Logistics – raw materials,
Investment.
handling and warehousing.
Participants involved in the Supply Chain - Operations – machining, assembling,
testing.
1. Producers - Outbound Logistics – warehousing
2. Distributors and distribution of finished goods.
3. Retailers - Marketing and Sales – advertising,
4. Customers promotion, pricing, relationship.
5. Service Providers - Service – installation, repairs, and
Operations – refers to manufacturing and spares.
service processes used to transform the 5 Major Supply Chain Management Drivers
resources employed by a firm into products
desired by customers. Production – refers to the capacity of a supply
chain to make and store products.
Supply Chain – refers to processes that move
information and material to and from the Two Approaches of Production
manufacturing and service process of the firm.
- Production focus – a factory that
Supply Chain Process takes a product focus perform the
range of different operations required
- Planning to make a given product line from
- Sourcing fabrication of different products parts
- Making to assemble of these parts.
- Delivering - Functional focus – a functional
- Returning approach concentrates on performing
Goods – goods are items, articles, products, or just a few operations such as only
commodities that customers purchase from making a select group of parts or only
companies. doing assembly.

- Tangible 3 main approach in warehousing

- Can be inventories. - Stock Keeping Unit
- No interaction between customer and - Job lot storage
process - Crossdocking
- Production can be automated easily.
Inventory Advantages

• Is spread throughout the supply chain - Flexible

and includes everything form raw - Relatively cheaper
material to work in process to finished - Helps carry goods from one place
goods that are held by the to another.
manufacturers, distributors, and
Limitation of Road Transportation
retailers in a supply chain.
- Not economical for long distance
Pros
transporting
- Quicker response time - Not recommended on heavy or
- Decreased risk of shortages bulk goods recommended on
- Quick replenishment heavy or bulk goods due to high
costs.
Cons
Air
- Inventory Costs
- Negative effect on cash flow - Air freighting is commonly used by
- Risk of obsolete inventory/loss companies who work with short
- Risk of natural disasters lead times.
- Higher insurance premiums.
Advantages
3 basics decision on Inventory
- Fastest mode of transport
- Cycle Inventory – needed to satisfy - Useful for location which are not
demand for the product in the period accessible by other means.
between purchases of the product. - Reduce lead time.
- Safety Inventory – held as a buffer - Improve service levels.
against uncertainty.
Disadvantages
- Seasonal Inventory – demand that
occur at a certain times of the year. - Expensive
- Not suitable for heavy and bulky
Location
goods
- Refers to the geographical site of - Not costs efficient for short travel
supply chain facilities. distance.
- It also includes the decisions related to
Rail
which activities should performed in
each facility. - Uses freight trains for the delivery
of merchandise and powered by
Factors when choosing a right Location.
diesel, electricity, and steam.
- cost of facilities
Air
- cost of labors
- workforce and skills availability Advantages
- taxes and tariffs
- proximity to suppliers and customers - Faster than road transport
- infrastructure conditions - Suitable for heavy goods in large
quantities over a long distances
Transportation - Cost effective
- to the movement of everything form Disadvantages
raw materials to finished goods
between different facilities in a supply - Relatively expensive for carrying
chain. goods over short distances
- Not accessible in remote parts of
6 basic models of transportation the country
- Not flexible in terms of time
Truck
schedule and unloading of goods.
- Truck Load (TL) – TL pricing display
Water
the economic scale with respect to the
distance travel. - Uses ships and large commercial
- Less Than Truck Load (LTL) – are vessels that carry billion of tons of
small lots, usually less that half of a TL. cargo.
For shipments that are large to be
mailed as small packages.
 - Effective for significantly large Roles and Responsibilities of the
quantities of goods that are non- Organization:
perishable in nature.
- Identifying suppliers and
Advantages evaluating their capabilities
- Negotiating contacts and terms
- Economical mode of transport for
with suppliers
bulky and heavy
- Managing supplier relationships
- Low maintaining routes
and performance
- Promotes international trade
- Developing procurement
Disadvantages strategies and policies
- Monitoring supplies compliance
- Slow moving mode of transport with contractual agreements and
- Affected by weather conditions regulations
- Requires large investment on ships - Analyzing purchasing data and
and maintenance. identifying opportunities for cost
Pipeline savings and process improvement.

- Used primarily for crude, Organizational Structure

petroleum, and natural gas. - A company’s purchasing function
- Not flexible and with limited types is critical to the long-term success
of commodities can transport. of a business. Shrewd negotiations
Intermodal with vendors let purchasing
departments economically source
- Use of more that one mode of quality items that are integral to
transportation for the movement the manufacturing process and
of the shipments. essential to providing customers
- Use two or more mode of transport with desirable finished products.
to take the advantages of inherent
economies of each and thus Tier 1 – upper-level function reporting to an
provide the integrated service at executive vice president
lower costs. Tier 2 – mid level function reporting to an
Information executive one level below and executive vice
president.
- Is the basis upon which to make
decisions regarding the other four Tier 3 – lower-level function reporting at least
supply chain drivers. two level below an executive vice president.
- It is the connection between all of Factors affecting purchasing’s position in
the activities and operations in a the organization hierarchy
supply chain.
- The nature of the firm, products,
2 purposes of Information and services
- Coordinating daily activities - The material/sales ratio
- Forecasting and planning - The importance of the supply
management function to senior
management
- The talent of purchasing staff and
PURCHASING ORGANIZATION IN
the extent to which they market
ENTERPRISE
their value-adding contributions.
Purchasing Organization is a department or
“The overriding consideration in a
group within a company that is responsible for
progressive firm is the ability of purchasing
purchasing materials, goods, and services for
to influence market and financial
suppliers.
performance.”
Importance of a Purchasing Organization
4 MAJOR AREA OF PURCHASING
- A well-functioning purchasing
SOURCING AND NEGOTIATING
organization is critical to the
success of an enterprise’s supply - Identifies potential suppliers
management. Effective purchasing - Negotiated with selected suppliers
can help company reduce cost, - Performs the buying of the goods
improve quality, and maintain a and services.
reliable supply goods and services. - By specific items
 - By commodity family - to ensure continuity in supply of
- By service categories raw material
The Operational Support and Follow Up Purchasing Department Activities
- Supporting day-to-day operations - buying
including expediting - expediting
- Preparation and transfer of - inventory control
material releases - transportation
- Strategic and Tactical purchasing - managing countertrade
arrangement
Administration and Support
- insourcing – outsourcing
- Developing policies and - value analysis
procedures - purchasing research
- Administering and maintaining - material forecasting
the purchasing information system - supply management
and database
Form of Purchasing Department
- Determining required staffing
levels CENTRALIZED PURCHASING
- Developing departmental plans
- all the records are kept at one place
- Organizing training and
and under one supervision and
development
control
- Developing measurement systems
- centralization aids in the
Purchasing Research standardized of specifications and
tends towards lower inventory
- Developing long-term material
investments.
forecast
- Conducting value analysis Advantages
programs
- consolidated purchase volumes
- Assessing supplier capabilities
- reduced duplication of purchasing
- Analyzing supplier cost structure
effort
Purchasing Parameters - ability to coordinate plans and
strategies
- Buying the material at the RIGHT
- ability to coordinate and manage
PRICE
company-wide purchasing
- Buying the material of RIGHT
systems
QUALITY
- developing expertise
- In the RIGHT QUANTITY
- managing company-wide range
- At the RIGHT TIME
- From the RIGHT SOURCE Disadvantages
- At the RIGHT PLACE
- specific requirements may not be
- With the RIGHT MODE OF
satisfied
TRANSPORTATION
- centralized standard procedure
Objectives of Purchasing may result in delay
- low skill of staff in buying varied
- to obtain the specific materials and
type of items
supplies of quality
- may overlooked local purchase
- to procure the material and
- adversely affects employee morale
supplies in the time and at the
proper place Decentralized Purchasing
- to procure them at lowest possible
- when manufacturing plants are
ultimate cost
widely dispersed geographically
- to maintain vendor relationship
and manufacture different
- to implement activities such ass
products having materials
make-or-buy analysis, cost
decentralized purchasing is better.
analysis, and value analysis to
- The individual purchasing
reduce cost
department of each plants will
- to keep top management informed
have functional relationship with
about the latest development
the corporate director
- to keep the expenses incurred as
low as possible
Advantages Purchasing Cost
- Speed and responsiveness Price Analysis – a review, analysis or
- Understanding unique operational examination of the price proposed by the
requirements supplier and an assessment or evaluation as to
- Product development support whether or not it is fair and reasonable.
- Ownership
Cost Analysis – involves an examination of the
Disadvantages individual cost elements that collectively
comprise the seller’s total price.
- Organizations losses the benefit of
a bulk purchase Methods used in Price Analysis
- Specializes knowledge may be
Price Competition – when two or more
lacking in purchasing staff
acceptable offers are received and the lowest
- There is a chance of over and
price is selected, the price of the lowest
under-purchasing of materials
offered can be concluded to be fair and
- Fewer chances of effective control
reasonable.
of materials
- Lack of proper co-operation and Comparable to price sold to government –
co-ordination among various the government often enters into contracts
departments with various companies to establish the prices
of items that will be sold to the Government
Hybrid Combination
General Services Administration.
- Many firms operating several
Catalog or Establish Price List – where only
plants whose geographical
one offer is received and the seller has a
locations may not be too widely
published or established prices list or catalog,
scattered and whose products and
available to the general public, which sets forth
material requirements may cover
the price of a commercial item, this fact can be
large numbers of similar parts and
used to find the price fair and reasonable.
materials used in common and in
large quantities, may adopt Market Prices – where an item has an
centralized purchasing approach. established market price, verification of an
equal or lower price also establishes the price
Advantages
to be fair and reasonable.
- Increase productivity
Historical Prices – if the buyer has a history
- Increase efficiency
of the purchase of the item over several years,
- Development of cross-functional
this information, considering inflation factors,
skills
can be used to determine a price fair and
- Flexibility
reasonable.
- Increased employee loyalty
Prices based on prior competition – it may
Disadvantages
be that only one seller will make an offer. If this
- Conflict in reporting is the case and the item was previously
- Scheduling conflict purchased based on a competition, this may be
- Too much employee workload acceptable.
- Too much administration
Independent Estimate – if an independent
overhead
estimate of the item has been prepared prior
Key Processes to the contactic suppliers, and no other
method or information is available, a price can
- Customer Relationship
be compared to the estimate and if it compares
Management
favorably, this can be a basis to find a price fair
- Customer service management
and reasonable.
- Demand management
- Order fulfillment Comparison to a substantially item – often
- Manufacturing flow management an item is very similar to a commercial one but
- Sourcing has added features that are required.
- Product
Sales of the same item to other purchasers
development/Commercialization
– if the seller has no catalog but has sold the
- Return Channel Processes
same item to others in the recent past, the
price can be determined to be fair and
reasonable by verifying with those other
purchasers what price they paid.
SUPPLIER’S APPRAISAL Common Supplier Appraisal Mistakes
- Supplier’s Appraisal – an • Effective supplier appraisal doesn’t
assessment of the supplier’s have to be difficult, but it is vital to
suitability and capability to supply retain focus and avoid making the
specific goods or services, before typical errors that can erode the
awarding a contract. benefits, the most common of which
are…
Importance of Supplier’s Appraisal
- Inconsistent use of the agreed
- for any better in the supply chain measurement
environment, shopping around is - Failing to provide regular feedback
no simple matter. Depending on to suppliers regarding
your industry there may be limited performance.
supplier base servicing your - Neglecting to take notice of
market, and not all suppliers will suppliers input to performance
be equipped to meet the specific discussions
needs of your organization. - Failing to involve suppliers in
- Once you build a pool of approved determining measurement
suppliers that satisfy your criteria, criteria.
the supplier appraisal process - Use of overcomplicated KPIs and
should continue on a cyclic basis, Metrics.
allowing you to review - Suppliers can make mistakes in the
performance and assess if each of appraisal process too, so if you are
your approved suppliers is still the ever involved in supplier appraisal
right fit two, three, four, and five on the customer side, be alert to
years down the line. any overt signs of defensiveness on
the part of a supplier.
Advantages of Supplier Appraisal Process - It may be that the supplier is
- Suppliers that are unlikely to viewing appraisal efforts as a
perform as you wish, can be rationalization measure. In the
identified, and avoided. case, the supplier will need to be
- Weaknesses in approved-supplier reassured that your intention not
performance can be detected and to eliminate vendors, but to
addressed. cultivate a two-way process of
- The process supports and secures continuous improvement.
your organizations and customer
services performance.
- Buy and supplier can work
together to understand and
leverage factors that influence the
ongoing relationship.
Effective Supplier Appraisal Process

• Like any process in supply chain

management, supplier appraisal needs
a systematic approach if it is to deliver
results. The characteristics of an
effective supplier appraisal process
include:
- The characteristics mentioned will
ensure that the appraisal process
is in the main objective and
provides benefits for your
suppliers and your company.
- Ate the same time, there is no harm
in allowing a small degree of
subjectivity, as after all, its not
practical to have measurement in
place to cover everything.