32 Logistics and S C M (TYBMS Sem – V)

Introduction to Supply Chain

Chapter 2 Management

SYNOPSIS

2.1 Meaning of Supply Chain Management

2.2 Objectives of Supply Chain Management
2.3 Functions of Supply Chain Management
2.4 Participants of Supply Chain Management
2.5 Role of Logistics in Supply Chain Management
2.6 Comparison between Logistics and Supply Chain Management
2.7 Channel Management & Channel Integration
2.8 Bullwhip Effect
2.9 Extended Enterprise
2.10 Evolution of Supply Chain Management or Stages of Supply
Chain Management or Phases of Supply Chain Management.
 Review Questions

2.1 MEANING OF SUPPLY CHAIN MANAGEMENT

I. Introduction
Supply Chain is a network of organisations that are having linkages
both upstream and downstream, in different activities and processes that
produce and deliver goods and services to the ultimate customer.
Supply Chain consists of all the stages that are required to satisfy the
customer’s request. It starts with the supplier and passes through the
manufacturer, wholesaler, retailer and finally reaches the customer.

II. Definition
According to Council of Supply Chain Management Professionals,
supply chain management may also be defined as “the integrated
management of all linkages and value added activities from the supplier’s
supplier to the customer’s customer in such a way that enhanced customer
value is achieved at lower costs.

III. Three Flows

In supply chain management, there are mainly three flows:
 Product Flow: It involves movement of goods from supplier to a
customer, through the manufacturer, distributor and retailer.
Introduction to Supply Chain Management 33

 Information Flow: It involves transmitting orders and updating the

status of delivery. The information flow is vital for the success of supply
chain management.
 Financial Flow: It consists of credit terms, payment schedules,
payment of money for materials, products, etc.
In the supply chain the products flows towards the end customer,
information flows both the ways and the financial flow is towards the
suppliers i.e. customer pays to retailer for product, retailer to wholesaler,
and so on.

IV. Example:
A shirt manufacturer is a part of supply chain that extends upstream
through the weavers of fabrics to the spinners and the manufacturers of
fibre, and the downstream through distributors and retailers to the final
consumers.
Manufacturers of Yarns/Fibres
Upst ream

Weavers of Fabrics Suppliers

Shirt Manufacturers

Retailers
Downstream
Customers
Customers

V. Corporate Examples

Some of the Best Examples of Supply Chain Management:

1. The Coca-Cola Company

Main makers, marketers and distributors of drink concentrates and non-

alcoholic syrups. The main office is located in Atlanta, GA but their
products are distributed to virtually every country in the world. Their
preparation, distribution and transportation logistics are in line with a
segmentation strategy for their customers when it comes to the size and
presentation of their products. Aside from having an extremely
successful supply chain, Coca-Cola participates in
sponsorships, partnerships, and alliances; thus creating a great
management and marketing of their products.
34 Logistics and S C M (TYBMS Sem – V)

2. Colgate
The main toothpaste brand made by Colgate-Palmolive, dedicated to
producing, distributing and selling oral hygiene and home cleaning
products since the last part of the 19th century. Colgate keeps present
all aspects of product diversity, effectiveness, optimization and customer
support and it uses an effective distribution channel that encompasses
all aspects of care and maintenance. Their products are sold in
many venues such as pharmacies, supermarkets, convenience
stores and small wholesalers, thus creating an excellent
impact within their distribution channels and management.
3. 7-Eleven
7-Eleven is an international chain of convenience stores, based out of
Dallas, Texas. The currently have around 58.308 in 16 different
countries, most of them franchises. They are mainly focused on selling
basic food items, medicine and toiletries and magazines, but this all
depends on their host country. Their main stores are located throughout
the United States and Asia. They supply a huge variety of customer
needs 24 hours a day in most locations. Their reach, capacity
and management have made 7-Eleven one of the biggest and
most productive companies in the world.
4. Zara
Zara is one of the main clothing and accessory retailers internationally
based in Spain. They are mainly focused on new, trendy and
cutting edge fashion for men and women alike. Currently it
operates in 88 different markets worldwide, their main
distributors are in Madrid and Zaragoza. Zara is known for its
energy saving efforts and techniques, as well as their minimization and
efficient waste management. This commitment with the environment is
paramount within their operations across all plants and departments
and has helped create a collective conservation consciousness among
members of the staff. In their fabrics, they used environmentally friendly
fabrics like organic cotton amongst others. Their textile production
comes from Spain, the Far East, India and Morocco. Biodiesel fuel is
used to transport their products, according to their environmental
policies. They have a great concern for animal treatment and under no
circumstances, use animal products that come from animals that were
not treated ethically or sacrificed for the sole purpose of
commercializing their leather, skin, horns, feathers, etc. While other
retailers use third-party production, Zara produces about 60% of the
fabrics they use and use cutting-edge technology to cut and measure
the handling of fabric so this is done in a precise and efficient manner,
thus reducing waste overall.
Introduction to Supply Chain Management 35

5. Amazon
Amazon is a US electronic commerce and cloud computing company.
Their headquarters are based in Seattle, Washington and they are the
largest internet-based retailer in the United States. Amazon was one of
the first companies that started selling book online. Currently their
range of products doesn’t stop there; they also sell music, videogames,
shoes, clothing, luggage and many other accessories. Amazon offers
about everything you can think of and their variety in offers and
products along with their customer driven shopping and
recommendations is a hit with customers. One of the reasons why
Amazon can have such a wide spectrum of products is the fact that they
are not limited by physical spaces, since they don’t have actual stores.
Their supply chain goes from the lowest levels of inventory,
through the logistics of the order itself all the way up to an
outstanding distribution chain of their products in an
international scale. Amazon can currently ship close to 10 million
different products. This diversity gives it an edge against competitors
and makes it a perfect example of what efficient supply chain
management can accomplish.
Conclusion
Supply Chain is a group of members including Suppliers of Raw
Materials, Manufacturers, Distributors, Wholesalers , Retailers and
Customers. Thus, success of a supply chain depends upon effective
coordination and cooperation among members.

2.2 OBJECTIVES OF SUPPLY CHAIN MANAGEMENT

1. To Maximise the Overall Profitability- The most important objective of

supply chain management is to maximise the overall supply chain
profitability. The supply chain profitability is the difference between the
amount paid by customer to purchase the product and the cost incurred by
organisation to produce and supply the product to the customer at right
time. Higher the Supply chain profitability, more successful is the supply
chain.
2. Enhancing Customer Service: One of the major objectives of supply
chain management is to provide superior customer service. It aims at
avoiding any kind of service failure and provides efficient services to
customers thereby leading to customer satisfaction.
3. Reduce Inventory Cost: One of the objectives of supply chain
management is to reduce inventory cost. Due to efficient supply chain
management, there is greater co-ordination and co-operation among the
members which helps to reduce inventory thereby reducing Inventory costs.
36 Logistics and S C M (TYBMS Sem – V)

4. Reduce warehousing Cost: Due to reduction in level of inventory, there

will be a reduction in warehousing cost as there will be less held up of
inventory.
5. Reduce Transportation Cost: Another objectives of supply chain
management is to reduce transportation cost through proper planning and
network and by using transportation principles like Economies of scale and
Economies of Distance.
6. Reduce Lead Time: Efficient Supply Chain Management Should reduces
the time required to convert orders into cash through proper
Communication, Co-Ordination, etc.
7. Minimising Variance: Supply chain Management through
Standardization of activities and processes helps to reduce variance between
actual results and perceived results.
8. Ensuring On-time delivery to customers: All the Members of Supply
Chain should work effectively and efficiently and thereby ensure On-time
delivery to customers.
9. Reducing working Capital: Effective Supply Chain Management will
help to reduce various costs such as inventory cost, warehousing costs, and
transportation costs thereby reducing working capital.

2.3 FUNCTIONS OF SUPPLY CHAIN MANAGEMENT

When you need to buy something, you just head to the nearest store or
supermarket. You pick up the product, pay for it and return home. Have
you ever wondered how products reach the store shelves? There is an entire
process called supply chain management behind it.
Supply chain management maintains the balance between the demand
and supply and involves activities right from procurement of materials and
converting them into finished goods to ensuring delivery at the right time to
reach the end-consumer. Hence, supply chain management is the lifeline of
an organization. It needs to be really efficient to keep the operations running
like a well-oiled machine. A streamlined supply chain management chain
can enhance customer relationship, lower down operational costs.
The supply chain management primarily comprises five functions
mentioned below:
1. Purchasing
This is the first function of supply chain management. It pertains to
procuring raw materials and other resources that are required to
manufacture the goods. It requires coordination with suppliers to deliver
the materials without any delays.
2. Operations
The operation team engages in demand planning and forecasting.
Before giving raw material purchase order, the organization has to
anticipate the possible market demand and number of units it needs to
produce. Accordingly, it further sets the ball rolling for inventory
management, production and shipping. If the demand is over
anticipated, then it could result in excess inventory cost. If the demand
Introduction to Supply Chain Management 37

is under anticipated, the organization wouldn’t be able to meet

customer demand, thereby leading to revenue loss. So, operations
function plays a critical role in supply chain management.
3. Logistics
This function of supply chain management requires immense
coordination. The manufacturing of products has commenced. It needs
space for storage until it is shipped for delivery. This calls for making
local warehouse arrangements. Let’s say; the products are to be
delivered outside the city, state or country limits. This brings
transportation in the loop. There will also be a need for outstation
warehouses. Logistics ensures that products reach the end-point
delivery without any glitches.
4. Resource Management
Any production consumes raw materials, technology, time and labour.
However, all the processes need to be efficient and effective. This phase
is taken care of by the resource management function team. It decides
the allocation of resources in the right activity at the right time to
optimize the production at reduced costs.
5. Information Workflow
Information sharing and distribution is what really keeps all other
functions of supply chain management on track. If the information
workflow and communication are poor, it could break apart the entire
chain and lead to mismanagement.

2.4 PARTICIPANTS OF SUPPLY CHAIN MAMAGEMENT

Supply Chain generally includes:

1. Suppliers: These are the organizations that provide goods and services
(Raw Materials) to purchasing organization (usually a manufacturer).
Suppliers provide raw materials to manufacturers who need these to run
their operations or incorporate into the goods that they manufacture.
2. Manufacturers: These are the organizations that are engaged in the
production of goods and services. Manufacturers sell their goods to others
like distributors / wholesalers / retailers in the supply chain for resale.
3. Distributors: Distributors are typically middlemen that purchase goods
from manufacturers with the intention of reselling them to others in the
supply chain.
4. Customers: Customers are the end receivers or users of the product or
service. They are an essential part of the supply chain as they are the
ultimate consumers of the products and services.
38 Logistics and S C M (TYBMS Sem – V)

2.5 ROLE OF LOGISTICS IN SUPPLY CHAIN MANAGEMENT

1. Logistics is basically concerned with making the goods available from

point of origin to point of consumption. In order to achieve this, various
components of logistics such as transportation, warehousing, materials
handling, inventory management and information management are put
into operation in order to make the goods available at right time, right
place and right quantity.
2. There is always a gap between point of demand and point of supply.
Logistics is viewed as a competency that links an enterprise with its
customers (point of demand) and Suppliers (Points of Supply).
Information from the customers flow in the form of sales activity
forecasts and orders. Information is then translated into manufacturing
and purchasing plans. Raw materials are procured and converted into
finished goods. Thus, Logistics is viewed as a process that bridges the
gap between point of demand and point of supply.
3. On the distribution side, supply chain is needed in order to make the
products available at right time and at right place. In order to achieve
this, there will be a need to establish proper distribution network,
proper co-ordination among various channel members, faster, reliable
and consistent freight movement, movement consolidation, etc.
4. Reduction in operating cost and delivery of superior customer service in
the supply chain will be possible only by performing various logistical
operations like transportation, warehousing, material handling,
packaging, inventory management, etc.
5. The success of supply chain management will largely depend on the
success of logistics management. Hence, integration of the supply chain
management is not possible without efficient and effective logistics
management.
6. Hence, for the success of both logistics and supply chain management,
following activities needs to be performed in a planned manner:
 Minimum inventory level.
 Reduced transportation costs by using principles like economies of
scale, economies of distance, movement consolidation, full load
capacity utilisation.
 Reduced lead time and order processing time.
 High inventory turnover.
 Close coordination and cooperation among members of supply
chain.
7. To conclude, we can say that Logistics Management is the key for
success of Supply Chain Management. Moreover, Logistics and SCM
Introduction to Supply Chain Management 39

should go hand in hand in order to achieve the mission of providing

superior customer service at the lowest possible cost.

Supply Chain
Management Logistics
  Sourcing  Inbound and outbound
 Procurement  Inventory Management
 Collaboration  Transportation
 Integration  Warehouse
 Packaging
 Order processing

2.6 COMPARISON BETWEEN LOGISTICS AND SUPPLY CHAIN

MANAGEMENT

LOGISTICS SCM
It is concerned with getting goods & SCM encompasses all the activities
services where they are required and associated with movement of goods from
when they are desired raw materials stage to end user.
Logistics is a narrower concept. SCM is a broader concept.

Logistics is concerned with inbound, SCM co-ordinates and co-operates

manufacturing and outbound process. among value chain members.

Logistical activities are conducted within SCM functions outside organization

the organization.
It originated from Military logistics. SCM originated from Business Logistics.
Logistics is mainly concerned with SCM recognizes that internal integration
optimizing the cash flows within the by itself is not sufficient. So emphasize on
organization i.e. emphasize on Internal Internal Integration as well as on external
Integration integration.
The objective of logistics is to minimize The objective of SCM is to maximize
cost. profitability.
There are 2 flows in logistics: Product There are three flows in SCM: Product
flow (i.e. Flow of goods and Services) flow, Information Flow and Financial
and Information flow. Flow.
The focus of logistics management The focus of SCM depend upon the
depend upon the management of management of relationship in order to
resources within the organization achieve a more profitable outcome for all
parties in the chain.
40 Logistics and S C M (TYBMS Sem – V)

2.7 CHANNEL MANAGEMENT & CHANNEL INTEGRATION

Channel Management
 A supply chain is a network of organisations that are having linkages
both upstream and downstream, in different activities and processes
that produce and deliver goods and services to the ultimate customers.
 It starts with the supplier and passes through Manufacturer, wholesaler,
retailer and finally reaches the customer. Thus, a supply chain involves
large number of intermediaries.
 Channel Management is all about Managing relationships with all these
intermediaries (channel members ) in such a way that it improves that
overall efficiency of entire channel.
 Effective Channel Management will help in delivering superior customer
service at the lowest possible cost.
 Thus, we can say that effective Channel Management is vital so as to
help the Material / Product reach the right place, in the right quantity
and at the right time.
 All channel Member should aim at developing and Maintaining long
term relationship with each other in order to Strengthen the channel-
Effective Flow of information and proper communication among all
Members is vital to achieve it.

Wholesalers Retailer Customers

Supplier of Manufactures
Raw Material

Channel Members
The above diagram illustrates an overall supply chain (including various
channel members focusing) on integrated management of all logistics
operations starting from procurement of Raw Material from Suppliers upto
delivery of finished goods to the customers.

Channel Integration
 Another way to achieve effective channel management is by integrating
all channel members.
 Channel integration is wherein one channel members integrate its
business with other channel member within the supply chain by
entering into any contract, partnership or strategic alliances etc.
 Thus, Channel integration unifies all channel members within the
supply chain into one.
Introduction to Supply Chain Management 41

Benefits of Channel Integration

 Increase efficiency due to better co-ordination and co-operation.
 Improved Profitability.
 Reduction in Overall Costs
 Best use of available resources.
 Reduction in Quantity Gap and Time Gap between Production and
Consumption.

2.8 BULLWHIP EFFECT

Meaning of Bullwhip Effect

A supply chain has various stakeholders i.e. suppliers, manufacturers,
wholesalers, retailers, distributors, etc. There must be a proper co-ordination
among all the members of the supply chain. This is mainly because action of
one member has an impact on actions of other member in the supply chain.
The bullwhip effect is a well known symptom of co-ordination problems
in a supply chains. The bullwhip effect can be explained as an incident
where orders sent to the manufacturer and supplier create larger variance
(difference) then the actual sales to end customers. These irregular orders in
the lower part of supply chain create larger variations in the upper part of
supply chain. This variance can interrupt the smoothness of the supply chain
process as each member in the supply chain will over or underestimate the
product demand resulting in extreme fluctuations.

Example of Bullwhip Effect

Let us take an example, an actual demand from a customer is 10 units,

the retailer may order 20 units from manufacturer. In turn manufacturer may
order 30 units of raw materials from the supplier. This variance in demand
orders is known as Bullwhip Effect.
Causes of Bullwhip Effect
1. Lack of communication between each member in the supply chain.
2. Lack of co-ordination between various supply chain members.
3. Demand forecast inaccuracies.
4. Free Return Policies.
5. Delay in flow of information and material among chain members.
42 Logistics and S C M (TYBMS Sem – V)

Results/Impacts of Bullwhip Effect

1. It increases manufacturing cost due to building up of excess
production capacity or holding excess inventory.
2. It increases inventory cost due to carrying higher level of inventory.
3. The high level of inventory also increases the warehousing space
requirement and thereby warehousing cost.
4. It increases replenishment lead time due to excess production
requirements.
5. It has a negative effect on performance at every stage and thus hurts
the relationship between different stages of supply chain.
Remedies/Solutions of Bullwhip Effect
1. Know your customers: Some companies deal directly with their end
customers. This will enable the companies to know the actual requirements
of the customers and they can supply goods as per the requirements.
2. Proper forecast: One of the causes of Bullwhip effect was inaccurate
demand forecasting. Thus, in order to avoid bullwhip effect, the company
should undertake proper demand forecasting. The changing requirements of
the customer should be kept in mind and accordingly supply of the goods
should be arranged.
3. Better flow of Information: The Bullwhip effect would not occur if orders
exactly meet the demand of each period. This can happen only when there
is proper flow of information in the supply chain.
4. Free Return Policies: Free Return Policies are another major cause for
bullwhip effect. To avoid Bullwhip effect, such policies simply must be
prohibited or limited.
5. Reducing the Lead time of the Supply: Lead time is the time gap
between placement of an order and delivery of an order. Lead time can be
reduced by measuring and eliminating the errors made during the
lead time process. Lead time can also be reduced by using modern
techniques like Electronic Data Interchange (EDI), Just in time (JIT) etc.

2.9 EXTENDED ENTERPRISE

 Extended Enterprise is a self-organizing network of firms that combines their

economic output to provide product and service offerings to the market.
 Firms in extended enterprise may operate independently or co-operatively.
 The success of a firm does not merely depend on its performance but it
depends on performance of network of firms.
 Extended enterprise work together to make one main product of the parent
company.
 It consists of outsourcing various activities like warehousing, technology,
public relations, packaging, transportation, etc.
Introduction to Supply Chain Management 43

 It is a concept wherein a company can gain competitive advantage when

suppliers become partners.
 The extended enterprise is same as supply chain, in which all parties
connect through a contract and work as Single Corporation.

The Extended Enterprise associated with McDonald’s. Eg.

McDonald’s Corporation not only involves itself solely but also Franchisees,
Joint Venture Partners, food suppliers, food purchasing co-operatives etc.
This enables the McDonald’s Corporation to conduct their business in more
efficient manner by outsourcing its activities.

2.10 EVOLUTION OF SUPPLY CHAIN MANAGEMENT

OR STAGES OF SUPPLY CHAIN MANAGEMENT
OR PHASES OF SUPPLY CHAIN MANAGEMENT

Source: Stages of Supply Chain Development (Stevens, 1989).

44 Logistics and S C M (TYBMS Sem – V)

Stage 1: Baseline:
In this stage, all the departments like purchasing, production, material
handling, etc work in isolation. Each of these departments focus on reducing their
individual departmental costs which results in increased inventory. Due to this,
individual departmental cost decreases but in turn inventory cost increases
thereby giving no benefit to the organisation as a whole.
Stage 2: Functional Integration:
In this stage, all the similar and related activities were integrated into a single
functional department. For example; purchasing and material control got
integrated into Materials management. Sales and distribution got integrated into
Distribution Management.
Stage 3: Internal Integration:
It involves integration of all the functions within the organisation right from
purchase of raw material till the distribution of finished goods to the customer.
Stage 4: External Integration:
It involves complete integration with all the upstream members like suppliers
of raw materials and downstream members like distributors, customers, etc in
order to establish a complete supply chain.

REVIEW QUESTIONS

Q.1. Objective type questions.

(A) Multiple Choice Questions
1. Following is a barrier to supply chain management _________.
a. Sharing your skills b. Optimum information flow
c. Visibility/transparency d. None of these
2. _________ is a loosely coupled, self-organizing network of firms that
combines their economic output to provide product and service offering
to the market.
a. Extended enterprise b. value chain
c. bull whip d. Both a and c
Ans. 1. – d, 2. – a
(B) Fill in the Blanks
1. __________ is a network of organizations that are having linkages both
upstream and downstream, in different activities and processes that
produce and deliver goods and services to the ultimate customer.
2. Supply chain management comprises of three flows product flow,
information flow and __________.
3. The three flows in supply chain are _______, ________ and ________.
4. _________ is a symptom of coordination problem in supply chain.
5. In terms of logistics, advertising firm, supplier’s ____________.
6. __________ strategies bring together supplier, manufactures, distributors and
sellers with the aim to lower cost and increase efficiencies.
7. __________ is an act of purchasing your own suppliers.
Introduction to Supply Chain Management 45

8. The _____________ means demand variability increases as one move

up the supply chain.
Ans. 1. Supply Chain, 2. Financial flow, 3. Product flow, information
flow, financial flow, 4. Bullwhip effect. 5. Extended enterprise. 6. Channel
management, 7. Channel integration 8. Bull whip effect.
(C) Answer in one sentence
1. What is Outbound Logistics?
Ans. Once the product is manufactured, it has to be made available to the
customers so that they can purchase it. Thus, outbound logistics involves all the
activities associated with physically distributing the product to the customers.
2. What is Supply Chain Management?
Ans. According to Council of Supply Chain Management Professionals,
supply chain management may also be defined as “the integrated
management of all linkages and value added activities from the supplier’s
supplier to the customer’s customer in such a way that enhanced customer
value is achieved at lower costs.
3. What is Bull Whip Effect?
Ans. A supply chain has various stakeholders’ i.e. suppliers,
manufacturers, wholesalers, retailers, distributors, etc. The bullwhip effect
can be explained as an incident where orders sent to the manufacturer and
supplier create larger variance (difference) then the actual sales to end
customers. These irregular orders in the lower part of supply chain create
larger variations in the upper part of supply chain. This variance can
interrupt the smoothness of the supply chain process as each member in the
supply chain will over or underestimate the product demand resulting in
extreme fluctuations.
4. Name the three flows involved in a supply chain.
Ans. The three flows involved in a supply chain are:
a. Product flow. b. Information Flow. c. Financial flow.
(C) Match the following
A B
1. Extended enterprise A. Three flow
2. Bullwhip effect B. McDonald’s
3. Channel management C. Changes in demand
4. Channel integration D. Long term relationship
5. Integrated logistics E. Purchasing own supplier & customers
6. Supply chain F. Internal & External Integration
management
Ans. (1- B)(2- C)(3- D)(4- E)(5- F),(6-A)
Q,2. Answer the following questions
1. Differentiate between Logistics and Supply Chain Management.
2. What are the functions of SCM?
3. What are the objectives of SCM?
4. Explain the participants involved in a supply chain.
5. Write a note on Channel Management and Channel Integration.
6. Write a note on Role of Logistics in Supply Chain Management.
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