Introduction to SC - Basics

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Introduction to Supply Chain - Basics

Introduction

What are the basic components of a supply chain? And how do they work together? Themajority of companies today utilize five supply chain components to get products into themarketplace. The five components are Suppliers, Manufacturers, Distributors, Retailers,and Consumers.

Lets walk through a high-level example using a stereo. An electronics companys Supplierswork with their own suppliers to send multiple components and parts to the electronicscompanys Manufacturing sites. There, the stereo is assembled, packaged, labeled, andsent to a vast number of different Distributors. These distributors work with Retailers,catalogers, and other customers to sell the stereo. Finally, you as the Consumer walk into a

retailer and purchase it. Connecting the five basic components together are three itemsflowing up and down the supply chain. The three items are Products, Information, andFinancial Resources.

Effectively integrating and managing the supply chain components and processes not onlyhelps to reduce costs and improve customer service. It can also provide a new set ofcapabilities which may help a company increase revenues and achieve a competitiveadvantage in the marketplace.

In this course, youll start to learn how activities across the supply chain should beperformed to achieve this integrated supply chain management.

Introduction to Supply Chain is a 3-part course series.

Introduction to Supply Chain Basics provides an overview of supply chaincomponents and activities and discusses the criticality of having an integratedsupply chain.

Introduction to Supply Chain Pitfalls and Opportunities provides an overviewof the common pitfalls, or problems, that companies face in designing and managingsupply chains. But you dont just learn what the problems are. You also find outabout opportunities, or solutions, that companies can implement in order to avoidthese pitfalls and achieve real value.

Introduction to Supply Chain Value Chain Case Study provides an opportunityto apply what youve learned in the Basics and Pitfalls and Opportunities coursesto a case company. The case study involves an electronics manufacturer whoserollout of a new line of high-definition televisions is in jeopardy due to supplyproblems with a low cost component the remote control devices.

After you complete the Introduction to Supply Chain Basics course, you should be ableto:

Explain the concept of integrated supply chain management

Justify the use of integrated supply chain management in order to achieve real valueand a competitive advantage

Course Objectives

Overview

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Page 1 of 22Transcript

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Supply Chain Components

It's Wednesday night, but it sure feels like the week has been longer than 3 days. You've

been up until all hours working on a major project. Not to complain... but you can feel thedark circles forming under your eyes. But... on the positive side, only two days left 'til theweekend. And you're done for the night, at least. Just one stop left before you get to yourapartment: the local grocery store to pick up a frozen pizza and some beer.

You pull into the parking lot and drag your tired self in. With your eyes barely still open yougrab a six-pack of beer and head for the Frozen Foods aisle. You locate the pizza andopen the freezer door to snatch your favorite brand... you know... one of those rising crustones. The regular frozen ones just don't cut it. Taste like cardboard. Bad cardboard. Butthe pizza isn't there. Sure, there are others. But not the one you want. The product label isthere - taunting you with the price and name. But no pizza. Gone. All you can see is theback of the freezer. "It's out of stock," a store employee tells you. "We'll get a shipmenttomorrow. Actually, several people have been looking for it... must be a popular item," headds.

Why was this product out-of-stock? Especially if there was high demand for it, as the storeemployee indicated. While this is a very minor example, it highlights a problem that occursin supply chain management - the focus of this course.

According to the International Center for Competitive Excellence (1994), integrated supplychain management can be defined as "the integration of key business processes from enduser through original suppliers that provides products, services, and information that addvalue for customers and other stakeholders." Adds value for customers and otherstakeholders? What does that mean? Defining what value and competitive advantagemeans for the supply chain will be among the primary focal points of this course.Additionally, how companies are using information technology and other means to achievethese ends will be explored.

Lambert, Stock, and Ellram, Fundamentals of Logistics Management, (New York, New York: Irwin McGraw-Hill,1998), pp. 275-277.

So, if that pizza hadbeen in the store, how would it have gotten there? The answer - itwould have traveled through the pizza manufacturer's supply chain. Then you would havebeen able to enjoy it, instead of going home with some other brand. That you really didn't

want. But, anyway, back to the course.

A typical supply chain consists of five main components:

Suppliers. Source of raw materials, component parts, semi-manufacturedproducts, and other items that occur early in the supply chain - unfinished or non-consumable products.

Manufacturers. Makers of products. Many consider them to be the heart of thesupply chain. Actually, both suppliers and manufacturers are producers of products.Suppliers produce components or subassemblies, while manufacturers perform thetask of final assembly or product integration.

Distributors. Responsible for the packaging, storing, and handling of materials atreceivingdocks, warehouses, and retail outlets.

Components

Overview




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Retailers. These are the manufacturer's customers - the stores that buy the actualproducts. Throughout this course, retailers will also be referred to simply ascustomers.

Consumers. This is you - the person who goes into a store and buys the product.Like the pizza.

The majority of companies today utilize all five components in the supply chain in order toget products into the marketplace. Not all firms have utilized this exact supply chain model,however. One company has skipped the distributors component of the supply chaincompletely. The company simply takes orders - pulling the components from inventory sentby its suppliers - and performs final assembly (the manufacturer's role) and ships thecomputers directly to consumers.

Supply chains also exist for services, although they will not be covered directly in thiscourse. For example, a commercial bank has a supply chain, as evidenced by the fact thatfinancial transactions flow along different components or elements of the supply chain.Inventory is represented in this example by each bank teller's capacity, or time to servecustomers. An out-of-stock would occur when consumers have to wait in line for service. Amajor challenge for banks is to effectively manage this availability of its teller resources.

In another service example, trucking companies typically have a measurable amount ofcapacity in terms of trucks or vehicles available for service. Much like the bank tellerexample, this capacity must be managed carefully, as it represents a valuable and scarceresource. Also, like the bank tellers, these productive resources are "perishable," in that thecapacity is available only for specific periods of time. If unused, it is not possible to accessthis same capacity at a future point in time..

Is anyone else involved in the supply chain?

Is the supply chain limited to the five components just mentioned (suppliers, manufacturers,distributors, retailers, and consumers)? Definitely not! Actually, there are many otherplayers in the supply chain who also play valuable and important roles in getting productsto the end consumer. For example, consider the facilitating roles outside parties, such asthe following, play in important areas of the supply chain:

Logistics providers. Perform individual tasks such as transporting products fromone place to another, or operating strategically placed warehousing or distributionoperations. Sometimes, logistics providers offer multiple, integrated services, in

which case they may be referred to as third party logistics providers.

Contract manufacturers. Provide subcontract manufacturing for manufacturers. Asfirms specialize and focus on core competencies, the use of contract manufacturers,or "co-packers" has become a well-accepted practice.

Information-based service providers. Refers to firms which have either softwareor other information technologies which assist with the activities of supply chainplanning and/or execution. Information-based service providers may include IT firms,which provide and manage systems for individual firms and for overall supplychains.

Financial institutions. Includes banks and other financial institutions, which providesupply chain services such as freight payment and billing, inventory financing, andinter-firm transaction management. Services may be for individual firms orcombinations of firms in the supply chain.

Components (continued)




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There are several main activities that cut across the components of the supply chain, aswell as link them together.

Purchasing

Order processing

Demand planning

Inventory management

Warehousing

Transportation

Customer service

The activities of the Supply Chain will be explored in greater detail in the upcoming topic,Supply Chain Activities?

Looking again at the supply chain model introduced earlier in this module, you can see thatthree items flow along the chain, connecting the five components. These items are:

Product

Information

Financial resources

This topic will be investigated further in the upcoming topic, Integrated Supply Chain.

If a company produced a product fifty years ago as consumer demand exploded after

Historical Focus

Flows

Activities




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World War II, for the most part it could be fairly confident that consumers would purchase it."If we made it, they would buy it," one manager commented.

But times changed quickly. The use of information technology accelerated, marketsglobalized, political economies stabilized... causing the boundaries of the world to suddenlybecome much smaller. As a result, an increasing number of world-class companiesemerged and began competing on a global basis. What did companies do? Once they

realized that their survival was threatened, they began to change. The different decadeshave seen the following shifts:

1970s. Companies focused on making internal changes. While these changesmainly emphasized reducing inventories and distribution costs, they also targetedreductions in plant lead times, supplier lead times, and safety stock. In addition,other pressures, such as skyrocketing fuel prices and interest rates as high as 20%,forced firms to focus on transportation and inventory management.

1980s. The decade of the '80s saw three major movements. Over the first severalyears, manufacturers focused on reengineering supply chain cost structures to loweroperating costs and assets. The second major movement of the decade was a shiftfrom cutting costs towards improving customer service. Finally, the third movement

involved the internal integration of logistics within companies.

1990s. Customer service continued to be a focal point of manufacturers' initiatives inthis decade. Companies entered into new arrangements with existing channelpartners as well as rationalized existing distribution channels. Firms began to realizethe importance of forming external partnerships, versus solely focusing oncooperation and communication within their own walls. The '90s also brought abouta trend towards integrated logistics. Figures indicate that 60% of all companiestoday have made significant progress toward having an integrated logistics system.

2000s. Initiatives resulting from an emphasis on technology, such as RFID (radiofrequency identification), continue to emerge and evolve. Increased global sourcingand collaboration on design, forecasting, and planning among supply chain

members have also emerged as key areas in the 2000s. As a result, there is astrategic growth in both national and international supply chain alliances. And whileglobalization has increased, environmental, social and security considerations areplaying a greater role in supply chain decisions.

At the end of the '90s, a new focus began to emerge - an emphasis on integrated supplychain management. But what is this? And how is it different from what was done inprevious decades?

As shown below, the traditional view of the supply chain considers the individual

companies and elements within a firm as separate, "functional" entities.

Traditional View of Supply Chain




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Under this model, the different components of the supply chain often end up battling oneanother in their endeavors towards sometimes-conflicting objectives. Doesn't sound ideal?You're correct. This undesirable situation results in a supply chain that is both inefficientand unresponsive to customer needs.

Thus, companies have improved their level of integration across the supply chain, asshown in the graphic below.

Companies have realized the power of supply chain management. That a supply chain canbe a tool to create value, not just save money. These companies are now using rapidlyadvancing information technology, such as the Internet, to redefine their supply chainstructures, reach out to new customer segments, and design new products and services forcustomers.

What are these companies getting out of the deal? Anything? Try an increase in marketshare, improved profits and return-on-markets, and an increase in the overall value of thefirm. Not bad, huh?

Supply Chain Activities

Progressive View of Supply Chain




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To get products, like a pizza, from one component to another in the supply chain takes thehelp of several activities, or processes. This topic will highlight the following activities,common to most supply chains:

Purchasing. Activities related to the purchase of all goods and services required bya particular company to operate.

Order processing. Functions needed to fill customers' orders, such as orderreceipt, order picking, and order shipment.

Demand planning. Process of predicting customer demand based on forecasts,actual sales, and current inventory levels.

Inventory management. Encompasses multiple activities to monitor stock levels including forecasting, proper positioning of stock, and the active observation ofproduct age and availability.

Warehousing. The holding of goods with an emphasis on moving product into,through, and out of warehouses in a timely manner.

Transportation. Movement of products from one specific destination to another.May involve one or more of the modes of transport, such as motor, rail, water, air,pipeline, or intermodal.

Customer service. Includes all sales or after-sales related activities that occurbetween the buyer and seller. These functions include order status, post-salesupport, etc.

All seven of these processes can be mapped to and associated with the majority of the fivecomponents of the supply chain (suppliers, manufacturers, distributors, retailers, andconsumers). However, for most, there are a few components that are more closely tied withthat particular activity. These connections will be identified over the next several screens.

Without the purchasing process, manufacturers wouldn't be able to produce any products!Purchasing represents the single largest expense of doing business for companies intoday's marketplace. Thus, purchasing is - and should be - an area that is constantlyinvestigated. It directly contributes to the success or failure of a company.

Purchasing essentially involves all of the components of the supply chain, in thatmanufacturers purchase from suppliers. Distributors purchase from manufacturers.Retailers purchase from distributors. Consumers typically purchase from retailers.However, the main focus of supply chain purchasing is on suppliers and manufacturers.Why? The purchase of material by manufacturers from suppliers is one of the critical

starting points in the supply chain process.

In the past, purchasing was very much a clerical activity. Typically, it consisted of well-established and defined procedures, such as creating purchase orders and communication

Purchasing

Overview




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with suppliers to get pricing information or to obtain status on late products. Today,however, purchasing is a very strategic part of the supply chain process.

The purchasing activity involves the procurement of all necessary materials for amanufacturer: (1)component parts, (2) raw materials, (3)operating suppliers, (4)supportequipment, (5)process equipment, and (6)services. In other words, a tremendous amountof widely varied items. For example, juice manufacturers typically purchase all of theproducts below in order to produce juice:

Ingredients. Includes apple concentrate, raspberry concentrate, orangeconcentrate, and concord grape concentrate.

Packaging. Includes glass, plastic, and corrugated cardboard.

MRO & Utilities. Includes drums, chemicals, pallets, electricity, general suppliers,and gas.

Considerable emphasis is being placed on the following initiatives within purchasing:

Focusing on total net-landed costsCompanies need to look carefully at more than just the initial purchase price ofmaterial when determining what suppliers to work with. They need to determine thetotal cost of having that product delivered.

Exploiting the capabilities of information technologyToday, good manufacturers are trying to establish closer ties to their suppliers. One

of the ways they can do so is through information technology. It may be used for avariety of purposes including inventory status, order status, and financialtransactions.

Supplier relationshipsCompanies today are working to establish partnership relationships with theirsuppliers - a far cry from the adversarial relationships of the past. Thesepartnerships are designed to provide benefits to both parties. True supplierpartnerships involve components such as joint planning, joint operating controls,communications, risk/reward sharing, trust and commitment to each other's success,and investment in financial, technological, and personnel commitments.

Consolidation of suppliers

In the past, firms tended to have large amounts of suppliers. The thought was thatyou could obtain better prices if more players were involved. Now, firms arenarrowing down their pool of suppliers to a select few that will hopefully providethem with top quality service and good prices, as well as function in more of apartnership role.

Order Processing

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Large companies may have thousands of customers. And each of these customers maystock hundreds of different products and order them at different times, in different amounts.How do companies keep all of this information straight? Effective order processing!

Order processing is associated with three of the components of the supply chain:manufacturers, distributors, and retailers. How so? Retailers place orders. Manufacturersand distributors work in conjunction with one another to fulfill these orders.

Order processing involves the following steps:

Customer places order

Order received by manufacturer

Order processed

Credit checked and verified

Order picked and packed

Order shipped to customer

Order received by customer and placed in inventory

Reducing the time involved in these steps - the order cycle time - can contribute to thesuccess of a company's supply chain. A customer's order is, in a sense, what launches and

controls processes within the supply chain. Slow or inaccurate order processing can impactevery segment of the supply chain and result in lost customers.

A technology being used more frequently today in order processing is Electronic DataInterchange (EDI). This technology is defined by Coyle, Bardi, and Langley (1996) as "Thecomputer-to-computer communication between two or more companies that suchcompanies can use to generate bills of lading, purchase orders, and invoices. It alsoenables firms to access the information systems of suppliers, customers, and carriers andto determine the up-to-the minute status of inventory, orders, and shipments. Examples ofinformation transmitted through EDI include bills of lading, purchase orders, invoices, etc. Itenables firms to access the information systems of suppliers, customers, and carriers inorder to determine up-to-the minute status of inventory, orders, and shipments. Iteliminates reams of paperwork for channel members, as well as gives them faster andmore accurate status on their orders.

Demand planning includes both forecasting and production planning. It is associated withthe manufacturers, retailers, and consumers components of the supply chain.Manufacturers do the bulk of the work in both forecasting and production planning.However, in forecasting, retailers often provide manufacturers with point-of-sale (POS)

Demand Planning

Order Processing (continued)




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data. In production planning, manufacturers must work closely with suppliers to ensure thatthe right materials are delivered, so all planned production can occur. And consumers?Well, the tastes and demands of consumers are what drive the overall demand planningprocess in the first place.

Starting with the first process, forecasting involves estimating customer demand. Forecastsindicate the sales amount the manufacturer expects for each item and the time period over

which the sales are projected. As you would expect, accurate and timely information isneeded to do accurate forecasting. Forecasting inventory requirements for materials andparts accurately is a key to effective inventory management.

Production planning is closely related to forecasting. It involves coordinating product supplywith product demand. After a forecast is developed and the current inventory at hand andusage rate is determined, production managers can determine how many units of a specificproduct should be produced to meet consumer demand. Their main concerns are asfollows:

Number of units of a specified product to be produced

Time intervals over which production will occur

Availability of materials and machines to produce the number of units required withinthe specified time frame

This might seem fairly easy, but think about firms that produce multiple products. Thismakes it more complicated. Lines within a manufacturing plant have to changeover fordifferent products, requiring additional time during which no products at all can be

produced. Thus, having precise product planning is essential to minimize this downtimeand reduce costs per unit.

Inventory management is the process of trading off the amount of inventory needed toachieve high levels of customer service with the cost of holding this inventory. Inventoriesare managed at all levels in the supply chain, although those positioned nearer to thecustomer/consumer are among the more critical. Therefore, it is mainly associated with themanufacturers, distributors, retailers and consumers components of the supply chain.

Effectively controlling a company's inventory is necessary for the financial survival of thecompany. Companies can have millions or even billions of dollars tied up in on-handinventory. Not only do they risk on-hand inventory becoming obsolete, but moreimportantly, the money invested in inventory represents capital which could be used inother areas of the company. The carrying cost of inventory - just the cost of holding the

product - has been estimated at 25 - 40% of the value of the inventory itself, on an annualbasis. The cost of holding inventory is even higher when products can devalue over time.What kind of products would this be? Well, not a frozen pizza. But definitely products likecomputers and other high technology items.

Inventory Management

Demand Planning (continued)




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What are supply chain managers at progressive companies doing about this problem?They have incorporated flexibility and quick response into their processes and practices. Inother words, they have begun to pay attention to time. For example, a seat manufacturerwithin the automotive industry receives seat order releases from a car/truck manufacturer.Within four hours, the seat manufacturer will assemble and deliver the components to theautomotive manufacturer. Why so quickly? It provides high value to the automanufacturers supply chain. The automotive manufacturer puts the seats into new cars assoon as they are delivered to the plant, reducing its on-hand seat inventory.

So, why do all this? Companies can achieve higher return on assets, return on investedcapital, and improved return on sales by focusing on shorter, more consistent cycle times,and thus, on their inventory levels. Reducing inventory levels can impact a company'sincome statement, as well as its balance sheet.

The following are three growing initiatives/philosophies within inventory management:

Just-in-Time (JIT)JIT is defined by Coyle, Bardi, and Langley (1996) as "an inventory control systemthat attempts to reduce inventory levels by coordinating demand and supply to thepoint where the desired item arrives just in time for use." This initiative does notindicate, as some may think, that no inventory is held. That would be next toimpossible. What JIT does is to use the goal of zero inventory to concentrate onfinding and eliminating waste in the supply chain, getting as close as possible tohaving no inventory. This is a far cry from what was done in the past, whencompanies stockpiled large inventories so as to have the right quantities on handwhen customers requested them. As you might guess, JIT requires significantchanges in the relationship between suppliers and buyers.

Vendor-managed inventoryThis involves the manufacturer using information from its customers to replenishinventory to agreed- upon stock levels in a retail facility (usually a DC) withoutintervention by the retailer. This information is obtained with the help of EDI. In otherwords, the manufacturer figures out what the retailer needs and then sends it out.Thus, no orders from the retailer are necessary.

Continuous Replenishment Program (CRP)The general concept of Continuous Replenishment Programs is "sell one - makeone." In other words, products shouldn't be produced and delivered until a customersells one, indicating that they need a replacement. However, as you can imaginethis is not reality. Like JIT, CRP is simply a philosophy. It would never be possible toinstantly replace every product that is sold, without having any inventory at all.Having this end goal, though, helps maintain low inventories.

Handfield, and Nichols, Introduction to Supply Chain Management, (Upper Saddle River, New Jersey: PrenticeHall, 1999), p. 8.

Warehousing

Inventory Management (continued)




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What is warehousing linked to? That's easy. It's associated with the distributorscomponents of the supply chain. They are the ones storing products for manufacturers andretailers.

There are three major functions in warehousing:

Movement

Consists of: Receiving. Encompasses unloading products from whatever type of transport

carrier was used, updating warehouse inventory records to reflect the newlyarrived products, inspecting for damage, and verifying merchandise type andcount against actual orders and shipping records.

Transfer and putaway. Movement of the product from receiving dock tostorage location.

Order picking/selection. Involves collecting different products and compilingthem into pre-specified customer orders, and creating packing slips. This isthe focal point of movement.

Shipping. Involves the actual physical movement of assembled orders ontocarrier equipment, the adjustment of inventory records, and the review of

orders that are meant to be shipped. This function, movement, is mostscrutinized because of the focus of companies on improving inventory turnsand increasing the speed of orders from manufacturing to final delivery.

Lambert, Stock, and Ellram, Fundamentals of Logistics Management, (New York, New York: IrwinMcGraw-Hill, 1998), pp. 275-277.

StorageHousing of products. Can be either temporary or semi-permanent.

Lambert, Doug; Stock, and Ellram, Fundamentals of Logistics Management, (New York, New York: IrwinMcGraw-Hill, 1998), pp. 275-277.

Information transferThis function of distribution is necessary for the prior two functions, movement andstorage, to occur. Examples of information collected and utilized include inventorylevels, throughput levels, stock-keeping locations, inbound and outbound shipments,customer data, facility space utilization, and personnel.

Lambert, Doug; Stock, and Ellram, Fundamentals of Logistics Management, (New York, New York: Irwin

McGraw-Hill, 1998), pp. 275-277.

A commonly used initiative within warehousing is cross-docking. Cross-docking involvesmoving products from the supplier's distribution center through the customer's distributioncenter without putting it away to minimize storing. True cross-docking involves productsbeing in the warehouse for less than 24 hours. In this program, merchandise is delivered to

one side of a distribution center by vendors, is unloaded and immediately reloaded ontooutbound trucks that deliver merchandise to the stores.

This supply chain process involves the selection and management of both internal privatefleets of carriers and external carriers (trucking companies, railroads, shipping companies,

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and airlines). The transportation sector of our society is significant.

Transportation cannot be associated with one specific component of the supply chain.Rather, it is the connection between all of them. Yes... that's how the pizza got from themanufacturer to the distributor. And how it got to the retailer. Well, it wasn't actually therewhen you wanted it, but someone else did get to buy it. So, transportation was used.

There are six types of transportation modes available for companies today.

MotorDominant form of transportation today in most countries. Motor carriers are extremelyflexible in the nature of their service, due to the huge network of roads, enabling them tovirtually deliver directly from anywhere to anywhere. This mode of transportation is usedfrequently because of its ability to carry almost any product, regardless of size and weight.

Motor carriers transport agricultural, manufactured, and consumer goods.

RailUsed extensively globally due to highway congestion in some countries and a lack of goodhighways in others. As a matter of fact, it is often the dominant form of transportation inmany European countries. While rail transport is less flexible and versatile than air andmotor carriers, it is much less expensive. However, it is still at a disadvantage in terms oftransit time, frequency of service, and equipment availability.

AirAlthough this mode of transportation is not used often, it is a good choice for two types ofshipments:

High-value shipments. Shipment for products whose high cost can justify a moreexpensive mode of transportation, such as air.

Emergency shipments. Products that need to be sent somewhere immediately.

However, many progressive companies who are analyzing their transportation systems aspart of supply chain management initiatives are finding that air service may represent avaluable part of their overall transportation network. This has been proven for manycompanies when high inventory carrying costs, associated with less time-sensitive forms oftransportation, were reduced through the use of the air option.

WaterAlthough water is one of the least expensive forms of transportation, it is extremely slow.

Additionally, service is limited to the origin and destination points at which port facilities areavailable. Despite these restrictions, water transport is a popular mode, particularly forlarge amounts of product coming from overseas, and bulky, low-value, high-densityproducts such as coal. To ship by water, companies load their products into a containerand then transport it by rail or motor carrier to a port. The container is then loaded onto acontainer ship and sent to the destination port. Once unloaded, it is again taken by rail ormotor to its final destination.

PipelineThis mode of transportation is used for a very narrow range of product types, such as crudeoil, natural gas, chemicals, and water. Pipelines offer very inexpensive, but slow, transportof products.

IntermodalThis represents the simultaneous use of two modes of transport. It has developed into afrequently used option for shippers recently. While intermodal may take a variety of forms,the two most popular are:

Transportation (continued)




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Motor carriers trailer on railroad flat car ("piggyback")

Container on ships ("containerized movements")

Successful manufacturers today are the companies who are meeting the increasingdemands of retailers. Those who buy and use their products not only want them to be topquality, they also want high quality service - both before and after the sale. Customerservice can primarily be defined as activities designed to reinforce total customersatisfaction and build customer loyalty.

But the benefits of improved customer service are not limited to customers. Manufacturersgain as well. First, satisfied customers are loyal, increasing the firm's product, serviceparts, and service market share. Second, profits can actually be generated from manycustomer support activities such as service parts and services.

Customer service is associated with almost all of the supply chain components. Mainly,however, it is linked with manufacturers, distributors, retailers and consumers.Manufacturers and distributors provide and monitor customer service. Retailers andconsumers receive it.

INTEGRATED SUPPLY CHAIN

As you can see in the graphic below, three major items flow up and down the supply chain:Product, Information, and Financial Resources. We will look at all three in this topic.

Overview

Customer Service




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Just as a river flows downstream, products in a supply chain are said to flow downstreamfrom origin (raw materials) to destination (finished product sold to consumers).Alternatively, product returns and information concerning product demand, both of whichoriginate at the point of sale or use, are thought to flow upstream. Payments by customers

or consumers to retailers, distributors, manufacturers, and suppliers also flow upstream.While these two types of flows are obviously in the opposite direction, they are not inconflict and both are essential to the effective functioning of the supply chain. As can beseen below, there are other aspects of products, information, and financial resources thatflow upstream and downstream in typical supply chains. Click on the terms for moreinformation.

Products. This begins with the rawest of raw materials and goes all the way toproducts that are purchased by customers and consumers worldwide. Productsinclude the physical product itself, plus packaging, labels, etc.

Downstream processes = Raw materials, work-in-process, and finished goodsmoving towards the customer or end consumer.

Upstream processes = Reverse flows of damaged and returned products to bedisposed of or re-sold. Also includes disposition of used packaging materials, etc.

Information. Products can't be ordered, produced, or distributed without the supportof accurate and detailed information. That is, data on orders, inventory levels,production schedules, shipment dates, order status, etc.

Downstream processes = Information accompanying the downstream flow ofproduct. Includes order confirmation, advance ship notices, and billing/invoicinginformation.

Upstream processes = Information relating to product sales and usage (point-of-sale

scanner information). Also includes information relating to product returns.

Financial resources. And of course, products need to be paid for. Payments flowbetween the various links of the supply chain - manufacturers to suppliers,distributors to manufacturers, retailers to distributors, and consumers to retailers.The flow of financial resources is a function of payment terms, credit terms, returnpolicies, and other terms of trade, all of which need to be tightly managed.

Downstream processes = Credits, deductions, and promotional allowances paid tocustomers from upstream supply chain partners.

Upstream processes = Payments by customers or consumers which flow toretailers, distributors, manufacturers, and suppliers.

Take a look at a product you recently bought on a shopping expedition - say a ski jacket.Can you explain how it arrived at the sporting goods store where you purchased it? How itmoved along the supply chain? How it was transformed as it traversed along the differentcomponents of the supply chain? It didn't start out as the slick, multi-colored, wind-repellant, eight- zippered jacket that you purchased to swoosh down the slopes of theSwiss Alps on. If you travel back down the chain to the various suppliers that provide

materials to the coat manufacturer, you would be able to see piles of zipper components,pieces of fabric, vats of dye, etc. So, how does all of that material end up as a ski jacket onthe racks at a sporting goods store?

Products

Overview (continued)




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Starting at the beginning of a manufacturer's supply chain, consumers indicate theirdemand for certain amounts and types of the ski jackets. Manufacturers develop forecastsbased on this demand and place corresponding orders with suppliers. Next, these suppliersproduce a variety of different items, ranging from raw materials to assembled components.Suppliers then ship the amount of material that has been requested by the manufacturer toa specific site, most likely a manufacturing plant. Materials managers take responsibility forplanning and scheduling the flow of this material. They should work closely with production

schedulers to accomplish these tasks. The various materials sent by the suppliers are thenassembled into a final product, packaged, and sent to a distribution center via one of anumber of modes of transportation (motor, rail, water, air, pipeline, or intermodal).

Manufacturers then use either their own (private) or public warehouses and distributioncenters to store the products. Distributors handle and store the product, while working withtheir customers - normally some type of retailers - to determine when and how to get themtheir requested amount of product. Once the product reaches the retailer, you - theconsumer - are now free to purchase it.

So, why do all this? Companies can achieve higher return on assets, return on net assets,and return on sales by focusing on their cycle times, and thus, on their inventory levels.Some companies use "dock to stock" delivery systems where the products that suppliersdeliver at the beginning of one day end up as finished products by the end of that sameday. Anything else? Paying attention to time and cycle times can also result in less productrework. And that means savings. Which directly impacts the bottom line of a corporation.

A product cannot flow smoothly or successfully from supplier to end consumer without avast array of information to guide it along. Information links every component of the supplychain together and is bi-directional. What are some examples? There are tons. Think aboutthe pizza. Stores record information through point-of-sales data on how many are sold.

This information is often then sent to the manufacturer so they can more accurately plandemand. Also, stores have to somehow let the manufacturer know how many pizzas theywant, through orders. Then, the manufacturer provides information on these orders likewhen they will arrive and if they're late, why they are late. Invoices. Bills of lading. Advanceship notices. So, in other words, a lot of stuff. A lot of information.

The format of this information has changed drastically over the years. Before the '80s,functional areas of a company almost solely used paper-based information. Slow? Possibleerrors? That and worse.

The type of information that travels up and down the supply chain varies widely in type andscope. The chart on the next screen shows the major categories of information normallyshared, and provides some examples of each.

Types of Supply Chain Information

Information Category Examples of Information Contained in C

Product Information Product specifications, price/cost, product sahistory

Customer Information Customer forecasts, customer sales history

Supplier Information Product line, product lead times, sales terms

Information (continued)

Information




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Handfield, and Nichols, Introduction to Supply Chain Management, (Upper Saddle River, New Jersey: PrenticeHall, 1999).

Not only does information have to be shared across the supply chain - it has to beaccurate. Completely accurate? Yes, the more accurate the better. Distorted informationcan cause more damage than having no information at all. Incorrect information in thesupply chain can lead to a number of hazards, such as too much inventory, angrycustomers who didnt receive their products, inefficient transportation routes andschedules, and more.

Financial resources also flow up and down the supply chain. They take the form of invoicesas they flow down the supply chain, and payments as they flow up the supply chain. But it'snot just the manufacturer getting paid, of course. The manufacturer is paying its suppliers,the suppliers are paying their suppliers, consumers are paying retailers, etc.

Order processing is the main supply chain process that involves the flow of payments.From a payment perspective, it encompasses customer credit, invoicing, and accountsreceivable. Customers place orders and pay for products through order processingsystems. Imagine, especially for a large manufacturer, how many different customers anddifferent products they have... how many payments are flowing in and out of the company.Thus, out of necessity, the payment process is highly automated.

Companies today use electronic data interchange (EDI) to allow for electronic fundstransfer (EFT) in the payment process. Companies can order and pay for products withoutfaxing or sending invoices through the mail. Using EDI, manufacturers and their customerscan transmit information about specific invoices back and forth. Customers can alsoreceive electronic credit for damaged merchandise that has been marked down, thrownaway, or returned to the manufacturer.

Payment flows are affected by terms of trade between players in the supply chain, such aspayment terms, credits, return policies, consignments, etc. By changing the terms of trade,the physical flows of products can also be affected. For effective supply chainmanagement, then, companies must define the appropriate financial flow so that the threeflows (product, information, and financial resources) are well coordinated.

conditions, and quality

Production Process Information Capacities, commitments, production plans

Transportation Information Carriers, lead times, cost

Inventory Information Inventory levels, inventory carrying costs, invlocations

Supply Chain Alliance Information Key contacts for each organization, partner rresponsibilities, meeting schedules

Competitive Information Benchmarking information, competitive prodoffering, market share information

Sales and Marketing Information Point-of-sale information, promotional plans

Supply Chain Process and Performance Information Process descriptions, performance measurequality, delivery, time, customer satisfaction,

Financial Resources




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So, you've now learned what a supply chain looks like. And how it works. You can noweasily describe how that missing frozen pizza traveled from one end of the supply chain tothe other, even if it never did make it to the grocery store where you wanted to buy it...You have been exploring how activities within the supply chain should be performed to

achieve integrated supply chain management. But why is this integrated supply chainconcept so important, anyway? What is the value of having an integrated supply chain?Companies in the past didn't and even today, many dont have an integrated logisticssystem. So why should anyone take on this task? Isn't it a tremendous amount of effort andchange? Yes, but the rewards far outweigh what companies have to put into the initiatives.

Remember the reference to value in the beginning of this course? Here's where it comesinto play. Companies can obtain high amounts of value from having an integrated supplychain. Think about what this course has said on supply chain management in the past.Remember? Cost savings! That's almost solely what companies thought they could obtainfrom supply chains. Now companies have realized that they can do more than just cutcosts. They can use supply chain management to generate significant amounts of value fortheir customers, and in turn, themselves.

With an integrated supply chain, firms gain more of a customer service focus. They alsoreduce waste and become faster and more flexible, while maintaining the highest of qualitystandards. In general, they are better than the competition, and keep implementingcontinuous improvements to stay in that position. Sound ideal? Most companies and theirmanagers would vehemently agree, although the vast majority is far from achieving thisstate.

Companies that have not integrated their own logistics systems are still focused onfunctional goals, which are departmentally-driven rather than customer-driven. Functionalgoals refer to objectives that are developed by and for one department, such as marketingor purchasing, versus more process-oriented type goals (i.e. improvedorder cycle time).These non-progressive companies have the following five main characteristics:

Disconnected product and information flows

Limited ability to respond to customer requests

Unpredictable product delivery/fill rate

Limited visibility on shipment information

Performance based on functional activities

As we've talked about several times already in this module, today's marketplace is ultra-competitive, with a proliferation of players all battling one another for a bigger share of their

industry. So, what can companies do? Give up? No... but they do have to completelychange the way they think and act. In the past, companies could be successful by creatinga unique strategic position in the marketplace. Now that isn't enough. Competitors caneasily copy their position - and then often go forth to achieve it better and more cheaply. To

Definition of Competitive Advantage

Business Issues of Non-Integration

The Value of an Integrated Supply Chain




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combat this, firms must also execute well. That's the secret. Unique strategic positioningandexcellent execution. If a company accomplishes both, they will have achievedcompetitive advantage.

You just got the definition of competitive advantage. Companies achieve this lofty goal bycreating a unique strategic position in the marketplace. And executing the stellar strategywell. But to say something is easy. To achieve it, on the other hand, is slightly tougher.Well, actually, a lot tougher. Let's talk about it.

As already mentioned, the two components of competitive advantage are unique strategicpositioning and excellent execution. To achieve both of these items takes a lot. First, andabove all, companies need to be flexible in their planning and quick in their reactions tochange. Second, they need to take advantage of all information that is available about theirperformance. Third, firms need to position themselves and then execute using the sum

total of their organization - people, technology, processes, and culture.

CONCLUSION

Lets review a few key points about supply chain management.

Components. A typical supply chain has five main components: suppliers, manufacturers,distributors, retailers and consumers. Others who may play a valuable role in supply chainsinclude logistics providers, contract manufacturers, information-based service providers,and financial institutions.

Activities. The basic supply chain activities performed by all channel members include:

Purchasing

Order processing

Demand planning

Inventory management

Warehousing

Transportation

Customer service

Channels and flows. Products get to stores via several possible channels that mightinclude some or all of the following supply chain components: suppliers, manufacturers,distributors, and retailers. Certain companies, like Dell Computer and amazon.com, selldirectly to consumers and use channels that avoid middlemen and retailers. These flows tothe ultimate consumer include product as well as information and financial resources.Additionally, some flows go back upstream such as product returns and financial payments.

Integration. Departments within a company need to think about the entire supply chain,and not just their individual group, when making decisions. Changes in logistics

Course Summary (continued)

Course Summary

Achieving Competitive Advantage




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levers (i.e. purchasing, inventory control, transportation, etc.) can cause a chain reactionwithin a company and with its supply chain partners. For example, attempting to savemoney on transportation by using a slower shipping mode might require holding moreinventory and delaying shipments to end customers.

Benefits. Effective management of supply chain activities and processes helps to reducecosts and improve customer service for companies. Additionally, it provides a new set of

capabilities which may help to increase revenues, improve profitability, and createcompetitive advantage. To achieve competitive advantage, a company must create aunique strategic position in the marketplace and then execute that strategy well.

Examples. Only a small percentage of companies in the world have developed significantexpertise in the area of supply chain management. Progress made by companies such asProcter & Gamble, Dell Computer, and Wal-Mart represent good examples of what mightbe termed best practices in supply chain management.

After you complete the Assessment for this course, you should complete the next course inthis series: Introduction to Supply Chain Pitfalls and Opportunities.

We acknowledge the following sources for content used in the Introduction to Supply Chainseries.

Alster. "Digital TV: What a Mess." Upside. October 1998.

Accenture. Seven Principles of Integrated Demand Chain Management.

Accenture. SC Guiding Principles.

Anderson, Britt, and Favre. "Who Says You Cant Please Customers and Enjoy ProfitableGrowth From Doing So? The Seven Principles of Supply Chain Management." SloanManagement Review. Summer 1996.

"Are You Listening? Record Clubs and Direct Sales." The Economist. April 29, 1995.

Austin, Lee, and Kopczak. "Unlocking Hidden Value in the Supply Chain." 1997.

Berry, Towill, and Wadsley. "Supply Chain Management in the Electronics ProductsIndustry." International Journal of Physical Distribution and Logistics Management. Vol. 24,

No. 10, 1994.

Bilzi. "The Early Adopters are Getting a Jump on HDTV." Broadcasting and Cable.November 16, 1998.

Brain. "How Compact Discs (CDs) Work." How Stuff Works. (www.howstuffworks.com/cd)

Brinkley. Defining Vision: The Battle for the Future of Television. Harcourt Brace. 1998.

Brinkley. "The Dawn of HDTV, Ready or Not." The New York Times. October 26, 1998.

Burt. A Purchasing Managers Guide to Strategic Proactive Procurement. AMACOM. 1996.

Carbone. "Supply Chain Management Gets Outsourced." Purchasing. February 11, 1999.

Carson. "Survey: Manufacturing: The Tijuana Triangle." The Economist. June 20, 1998.

Course References




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Cheng. "Music Makers (Online Music Distribution)." Adweek. March 15, 1999.

Christopher, Martin. Logistics and Supply Chain Management: Strategies for ReducingCost and Improving Service. Pitman Publishing. 1998.

Copacino, William C. Supply Chain Management: The Basics and Beyond. St. Lucie Press.1997.

Coyle, Bardi, and Langley. The Management of Business Logistics. West PublishingCompany. 1996.

Elkin. "HDTV No Longer a Pipe Dream, But Still a Marketing, Branding Challenge."Brandweek. January 19, 1998.

Fischer. "A Hard Days Night at EMI." Transportation and Distribution. March 1996.

Gattorna. Strategic Supply Chain Alignment: Best Practice in Supply Chain Alignment.Gower Publishing Limited. 1998.

Gibson. Telephone interview of Donavan Favreof Accenture. June 24, 1999.

Grover and Lesly. "Unfortunately, Elvis is Still Dead." Business Week. September 1, 1997.

Handfield, and Nichols. Introduction to Supply Chain Management. Prentice Hall. 1999.

Heller. "Digital Dazzles at CES." Discount Store News. January 26, 1998.

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"Home Theater." Fortune Technology Buyers Guide Supplement. Winter 1999.

Hull. The Recording Industry. Allyn and Bacon. 1998.

Kronstain. "HDTV Set to Mature in 1999." Dealerscope Consumer Electronics Marketplace.February 1999.

Lambert, Stock, and Ellram. Fundamentals of Logistics Management. Irwin McGraw-Hill.1998.

Lee and Billington. Managing Supply Chain Inventory: Pitfalls & Opportunities. SloanManagement Review. Spring 1991.

Levitt. "Searching for Harmony." Discount Merchandiser. April 1998.

Littman. "No Alternative: Reality Counters Perception in Music Distribution Biz." MarketingNews. August 3, 1998.

"Music in the Air." Distribution. January 1995.

"1998 The Year in Music." Billboard. December 26, 1998/January 2, 1999.

"Recording Industry Releases 1998 Consumer Profile." Manufacturers Shipments andValue Reports. (www.riaa.com/stats/press/consumer98.htm)

Reed. "Online Sales Go Uptempo." Marketing. January 7, 1999.

"Research and Statistics." NARM Programs and Services.(www.narm.com/programs/research/surv97/index97.htm)




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Rose. "Help! They Need Somebody." Fortune. May 24, 1999.

Silkos. "Can Record Labels Get Back Their Rhythm." Business Week. July 27, 1998.

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Stank and Lackey. "Enhancing Performance Through Logistical Capabilities in MexicanMaquiladora Firms." Journal of Business Logistics. Vol. 18, No. 1. 1997.

Stein and Sweat. "Killer Supply Chains." Informationweek. November 9, 1998.

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Trainer. "BMGCentral Boosts Communication: Distributors New Web Site Enhances Two-Way Flow." Billboard. March 20, 1999.

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Witt. "Reverse Logistics at BMG." Transportation and Distribution. August 1998.

"Why the Compact Disc is Music to Businessmens Ears." The Economist. March 22, 1986.


Introduction to SC - Basics

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