Unit 4: Supply Chain Management

Overview of Supply Chain Management (SCM)

Supply Chain Management (SCM) is the coordination and management of all activities involved in the flow of goods and services — from raw material suppliers to final customers — to deliver products efficiently, cost-effectively, and with high customer satisfaction.

Functions of SCM

• Procurement of raw materials
• Production and manufacturing
• Inventory management
• Warehousing and storage
• Transportation and logistics
• Order fulfillment and customer service

Objectives of SCM

• Reduce total supply chain cost
• Improve product availability and delivery time
• Optimize inventory and warehousing
• Build strong supplier-customer relationships
• Enhance customer satisfaction

Conceptual Model of SCM

The SCM Conceptual Model describes the flow of products, information, and finances among different stages of the supply chain. It generally consists of five key components:

1. Suppliers (Upstream)

• Provide raw materials and components to the manufacturer
• Key activities: Procurement, vendor selection, quality assurance

2. Manufacturer (Production)

• Converts raw materials into finished goods
• Key activities: Production planning, assembly, quality control

3. Warehousing/Distribution Centers

• Store products before delivery to retailers or customers
• Key activities: Inventory management, packaging, sorting

4. Retailers (Downstream)

• Sell products to final consumers
• Key activities: Inventory stocking, order processing, sales

5. Customers

• End users who purchase and consume the product
• Feedback is collected to improve service and demand planning

🔄 Flows in Supply Chain

Suppliers → Manufacturer → Distributor → Retailer → Customer

      ↑             ↑            ↑           ↑           ↑

   Information Flow and Feedback ←←←←←←←←←←←←←←←←

   Payment Flow →→→→→→→→→→→→→→→→→→→→→→→→→→→→→→

Benefits of an Effective SCM System:

• Reduces operational cost
• Improves delivery speed and accuracy
• Enhances competitive advantage
• Promotes collaboration and integration
• Minimizes inventory waste and stockouts

Supply Chain Drivers

Supply chain drivers are key elements that influence the performance, responsiveness, and efficiency of a supply chain. They can be broadly categorized into logistical and cross-functional drivers.

1. Facilities

Locations where products are manufactured, stored, or assembled. Examples: Factories, warehouses, distribution centers.

• Role: Affects production capacity, inventory levels, and delivery speed.

2. Inventory

• Raw materials, WIP (Work-in-progress), and finished goods.
• Goal: Maintain a balance between product availability and inventory cost.
• Key Types: Cycle stock, safety stock, seasonal stock.

3. Transportation

• Movement of goods from one location to another.
• Modes: Air, sea, rail, road.
• Decision: Speed vs. cost trade-off (e.g., air is fast but expensive).

4. Information

• Data used for decision-making in the supply chain.
• Examples: Demand forecasts, inventory levels, order tracking.
• Role: Enables coordination, visibility, and responsiveness.

5. Sourcing

• Selection and management of suppliers.
• Make-or-buy decisions: Whether to produce in-house or outsource.
• Goal: Choose suppliers that offer cost-efficiency, quality, and reliability.

6. Pricing

• Strategies for pricing products and services.
• Impact: Influences demand, inventory, and revenue.
• Example: Discounts during off-season to boost sales.

🎯 Summary Table – Supply Chain Drivers

Measuring Supply Chain Performance

To ensure the supply chain is efficient and effective, we use various performance metrics or KPIs (Key Performance Indicators).

1. Delivery Performance

• Measure: % of on-time deliveries.

Formula:

2. Order Fulfillment Cycle Time

• Time from receiving an order to delivery.
• Goal: Minimize delays.

3. Inventory Turnover Ratio

Formula:

• Purpose: Shows how fast inventory is sold or used.

4. Supply Chain Cost

• Includes costs of warehousing, transport, inventory, labor.
• Goal: Optimize without affecting service.

5. Customer Satisfaction

• Measured via feedback, surveys, Net Promoter Score (NPS).
• Directly impacts loyalty and repeat business.

6. Forecast Accuracy

• Compares forecasted demand vs. actual demand.
• Helps in improving planning and reducing excess inventory.

📌 Summary Table – Supply Chain KPIs

Core Supply Chain

The Core Supply Chain refers to the main flow of materials, goods, and information from suppliers to manufacturers to customers.

🛠️ Key Activities:

• Procurement of raw materials
• Manufacturing and production
• Distribution and delivery to customers
• Inventory and order management

🎯 Purpose:

To efficiently produce and deliver products to customers while minimizing cost and maximizing satisfaction.

Reverse Supply Chain

The Reverse Supply Chain is the process of moving goods from customers back to manufacturers or sellers.

🔁 Includes:

• Product returns
• Recycling or reuse
• Repair and refurbishment
• Disposal and waste management

🧠 Example: When a customer returns a defective laptop to the company, the product is sent back for repair, recycling, or resale — this is part of the reverse supply chain.

🎯 Importance

• Reduces environmental impact
• Supports sustainability
• Enhances customer service and product recovery

Global Supply Chain

A Global Supply Chain involves sourcing, manufacturing, and distributing products across multiple countries and regions.

🌍 Key Features:

• International suppliers and customers
• Complex transportation and customs processes
• Currency and legal compliance challenges
• Global demand and supply management

🧠 Example: Apple sources chips from Taiwan, assembles iPhones in China, and sells them worldwide — this is a global supply chain.

🎯 Benefits:

• Cost savings (e.g., cheap labor or raw materials)
• Access to global markets
• Competitive advantage

⚠️ Challenges:

• Political instability
• Currency fluctuation
• Long lead times

Inbound and Outbound Logistics

Inbound Logistics

Focuses on the movement of materials into a business — from suppliers to the company.

🧱 Activities

• Receiving raw materials
• Inventory handling
• Transportation from suppliers
• Quality checks

🧠 Example: A clothing factory receives fabric and buttons from suppliers — that’s inbound logistics.

Outbound Logistics

Focuses on the movement of finished goods from the company to customers or retailers.

📦 Activities

• Order processing
• Packaging
• Distribution and shipping
• Delivery tracking

🧠 Example: The same clothing factory ships finished shirts to retailers — that’s outbound logistics.

📊 Comparison Table

Bullwhip Effect in SCM

The Bullwhip Effect refers to the amplification of demand fluctuations as they move upstream in the supply chain (from retailers to manufacturers to suppliers).

🧠 Example: A small increase in customer demand at a retail store causes the retailer to order more from the wholesaler, who then orders even more from the manufacturer, creating a chain reaction of over-ordering and excess inventory.

📉 Causes

• Inaccurate demand forecasting
• Lack of information sharing
• Long lead times
• Bulk ordering or discount buying

🛠️ Solutions:

• Improve demand forecasting
• Share real-time data across the supply chain
• Use JIT and lean practices
• Reduce lead times

Push and Pull Systems

Example

• Push: A biscuit company produces 10,000 packs expecting high Diwali sales.
• Pull: A pizza restaurant only prepares pizza after an order is received.

Lean Manufacturing

Lean Manufacturing is a production approach that aims to eliminate waste and improve efficiency by producing only what is needed, when it is needed.

🛠️ Principles

• Eliminate waste (overproduction, waiting, defects)
• Continuous improvement (Kaizen)
• Just-in-time (JIT) production
• Value stream mapping

🎯 Goal: Deliver maximum value to the customer with minimal resources.

✅ Benefits:

• Lower cost
• Higher quality
• Shorter lead times
• Improved productivity

Agile Manufacturing

Agile Manufacturing is a flexible approach that allows companies to quickly respond to market changes and customer demands.

⚙️ Features:

• Rapid product customization
• Cross-functional teams
• Flexible technology and supply chains

🧠 Example: A fashion brand using agile manufacturing can change designs quickly based on trends and launch new collections in weeks.

Lean vs. Agile Manufacturing

Role of IT in SCM

Information Technology plays a crucial role in enhancing the visibility, speed, accuracy, and efficiency of the supply chain.

🖥️ Key IT Tools in SCM

• ERP (Enterprise Resource Planning): Integrates all business functions (HR, finance, inventory)
• SCM Software: Helps manage supply chain activities
• GPS & RFID: Track shipments and inventory
• EDI (Electronic Data Interchange): Speeds up data sharing between partners
• Blockchain: Provides secure and transparent supply chain records
• Cloud Computing: Real-time data access from anywhere

🎯 Benefits of IT in SCM

• Better demand forecasting
• Real-time inventory tracking
• Faster decision-making
• Improved supplier and customer relationships
• Reduced errors and lead times

Demand Forecasting in Supply Chain

Demand forecasting is the process of estimating future customer demand for a product or service using historical data and analytical methods.

🎯 Purpose in SCM

• Optimize inventory
• Reduce stockouts or overstocking
• Improve production and delivery planning
• Enhance customer service

Simple Moving Average Method

Formula:

Example: Demand for the last 3 months: 100, 120, 110

Use When: Demand is stable and no trend or seasonality is present.

Weighted Moving Average Method

Formula:

Where:

• 𝐷 = demand of each period
• 𝑊 = assigned weight (sum of weights = 1)

🧠 Example:

• Demand for last 3 months: 100, 120, 110
• Weights: 0.5 (most recent), 0.3, 0.2

Use When: More importance is given to recent data.

Linear Regression Method

Formula:

Where:

• 𝑌 = forecasted demand
• 𝑋 = time period
• 𝑎 = intercept
• 𝑏 = slope (change in demand over time)

🧠 Example: Based on historical data, a linear trend is fitted (you may use Excel or calculator to find a and b), and forecast is made for future periods.

Use When: There is a trend in demand over time.

Exponential Smoothing Method

🔷 Formula:

Where

• α = smoothing constant (0 < α < 1)
• Forecast t+1  = forecast for next period
• Demand t  = actual demand in current period
• Forecast t = forecast for current period

Example:

Let α = 0.3,
Demand this month = 120,
Forecast this month = 110

Use When: You want to smooth short-term fluctuations in demand.

📋 Summary Table