Business Logistics & SCM

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Supply Chain Management / Logistics ??? May 20, 2008

Filed under: Business Logistics,Logistics,Supply Chain Management — SUKUMARAN @ 9:03 pm

What is Supply Chain Management?

Since the term “supply chain” contains the word “supply”, many people naturally assume that supply chain must have something to do with suppliers (i.e. purchasing or procurement). While it is true that supply chain management does encompass the purchasing and procurement functions, supply chain management actually extends well beyond those areas. Supply chain management is the practice of manufacturing and distributing physical goods as efficiently as possible.

Supply chain management encompasses the entire process of manufacturing and distributing physical goods, from supplier’s supplier to customer’s customer. Business functions that are within the realm of supply chain management include: forecasting and planning, procurement and purchasing, manufacturing and assembly, warehousing and distribution, shipping and transportation, returns and refurbishment, inventory management and order management. Or, stated more simply, supply chain management includes the functions: plan, buy, make, store, move, sell and return.

For example, let’s look at [a very simplified version of] the processes that created the computer monitor upon which you are probably reading this text. The monitor was most likely assembled using components supplied by many companies in several different countries. The circuit boards and computer chips that control the monitor’s functions may have been manufactured in Singapore or Malaysia. The CRT may have been manufactured in Mexico. The plastic casing may have been injection-molded in China. And the final assembly of those components may have taken place in Texas. What if the Texas plant is ready to assemble 1,000 monitors, but the plastic casings didn’t arrive from China in time? And what if a computer company (e.g. Compaq) is waiting for those monitors so they can package them together with 1,000 computers? And what if a major customer of Compaq’s, such as Best Buy, has already run ads to promote those computer packages because Best Buy was counting on having them delivered tomorrow? In this scenario, the whole system just broke down, and is going to cause a lot of embarrassment, not to mention a lot of money, to Compaq and Best Buy, and is going to leave a lot of end consumers very disappointed, just because a little injection molding company in China didn’t deliver some components in time.

“Couldn’t the monitor assembler in Texas just buy a lot of plastic casings ahead of time and store them in a warehouse until they’re needed?” Yes, but inventory costs money; a lot of money. And what if that Texas assembler also bought all of the other components well ahead of time and stored them in warehouses until they’re needed? Now we need to add the cost of extra warehousing space to the equation, which actually is paltry in comparison to the cost of all that inventory just sitting in warehouses collecting dust and becoming obsolete. And what if each of the component manufacturers also adopted the same philosophy and stored raw materials in warehouses close to their facilities in Singapore, Mexico, etc.? With that methodology of inventory management, the cost of manufacturing that monitor could easily double, which means that the price the end consumer has to pay at Best Buy would double.

But, with good supply chain management, the Texas assembler can be assured of having the right components available in the right place at the right time without the need for storing massive quantities of expensive “safety stock” inventory. Supply chain management is all about making that process, from sourcing those components to delivering the finished goods to the customer, more efficient (i.e. lower cost) and reliable.

What is Logistics?

Logistics is the portion of supply chain management that encompasses distribution, transportation and inventory management. To put it in context with the simplified description given above regarding the supply chain management functions of plan, buy, make, store, move, sell and return, logistics is the “store” and “move” functions.

It is not unusual for transportation costs alone to be more than 10% of revenue. For many companies, transportation is the single largest cost element on their financial statements. Transportation costs are often double the expense of warehousing and inventory carrying costs (which means that warehousing and inventory costs can be 5% of revenue, which is no small matter). And every dollar saved in transportation costs goes straight to the bottom line. So, why don’t corporations focus more attention on streamlining logistics to reduce costs?


TOP 10 Mistakes in SCM May 25, 2007

Filed under: Supply Chain Management — SUKUMARAN @ 3:47 pm

1. Believing that supply chain management is about managing a chain.

2. Trying to achieve major changes while doing business as usual.

3.  Having unshakeable faith in the value of vertical integration.

4.  Failing to synchronize demand chains and supply chains.

5. Talking about transformation in terms of the enabling technology.

6.  Pursuing “real time” visibility at all costs.

7. Practicing supply chain “monotheism.”

8. Misreading employees’ skills and aptitudes.

9.  Confusing globalization with global brands and cross-border trade.

10. Thinking that supply chain transformation is a simple task.



An Introduction to Supply Chain Management May 24, 2007

Filed under: Supply Chain Management — SUKUMARAN @ 1:46 am

Author: Ram Ganeshan
Terry P. Harrison
Department of Management Science and Information Systems
303 Beam Business Building
Penn State University
University Park, PA 16802 U.S.A.

Email: Ganeshan (, Harrison (

A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm.

Below is an example of a very simple supply chain for a single product, where raw material is procured from vendors, transformed into finished goods in a single step, and then transported to distribution centers, and ultimately, customers. Realistic supply chains have multiple end products with shared components, facilities and capacities. The flow of materials is not always along an arborescent network, various modes of transportation may be considered, and the bill of materials for the end items may be both deep and large.

Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. Marketing’s objective of high customer service and maximum sales dollars conflict with manufacturing and distribution goals. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan for the organization—there were as many plans as businesses. Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such an integration can be achieved.

Supply chain management is typically viewed to lie between fully vertically integrated firms, where the entire material flow is owned by a single firm, and those where each channel member operates independently. Therefore coordination between the various players in the chain is key in its effective management. Cooper and Ellram [1993] compare supply chain management to a well-balanced and well-practiced relay team. Such a team is more competitive when each player knows how to be positioned for the hand-off. The relationships are the strongest between players who directly pass the baton, but the entire team needs to make a coordinated effort to win the race.

Supply Chain Decisions

We classify the decisions for supply chain management into two broad categories — strategic and operational. As the term implies, strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy (they sometimes {\it are} the corporate strategy), and guide supply chain policies from a design perspective. On the other hand, operational decisions are short term, and focus on activities over a day-to-day basis. The effort in these type of decisions is to effectively and efficiently manage the product flow in the “strategically” planned supply chain.

There are four major decision areas in supply chain management: 1) location, 2) production, 3) inventory, and 4) transportation (distribution), and there are both strategic and operational elements in each of these decision areas.

Location Decisions

The geographic placement of production facilities, stocking points, and sourcing points is the natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows through to the final customer. These decisions are of great significance to a firm since they represent the basic strategy for accessing customer markets, and will have a considerable impact on revenue, cost, and level of service. These decisions should be determined by an optimization routine that considers production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs, production limitations, etc. (See Arntzen, Brown, Harrison and Trafton [1995] for a thorough discussion of these aspects.) Although location decisions are primarily strategic, they also have implications on an operational level.

Production Decisions

The strategic decisions include what products to produce, and which plants to produce them in, allocation of suppliers to plants, plants to DC’s, and DC’s to customer markets. As before, these decisions have a big impact on the revenues, costs and customer service levels of the firm. These decisions assume the existence of the facilities, but determine the exact path(s) through which a product flows to and from these facilities. Another critical issue is the capacity of the manufacturing facilities–and this largely depends the degree of vertical integration within the firm. Operational decisions focus on detailed production scheduling. These decisions include the construction of the master production schedules, scheduling production on machines, and equipment maintenance. Other considerations include workload balancing, and quality control measures at a production facility.

Inventory Decisions

These refer to means by which inventories are managed. Inventories exist at every stage of the supply chain as either raw materials, semi-finished or finished goods. They can also be in-process between locations. Their primary purpose to buffer against any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. It is strategic in the sense that top management sets goals. However, most researchers have approached the management of inventory from an operational perspective. These include deployment strategies (push versus pull), control policies — the determination of the optimal levels of order quantities and reorder points, and setting safety stock levels, at each stocking location. These levels are critical, since they are primary determinants of customer service levels.

Transportation Decisions

The mode choice aspect of these decisions are the more strategic ones. These are closely linked to the inventory decisions, since the best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. While air shipments may be fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper, but they necessitate holding relatively large amounts of inventory to buffer against the inherent uncertainty associated with them. Therefore customer service levels, and geographic location play vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment are key in effective management of the firm’s transport strategy.

Supply Chain Modeling Approaches

Clearly, each of the above two levels of decisions require a different perspective. The strategic decisions are, for the most part, global or “all encompassing” in that they try to integrate various aspects of the supply chain. Consequently, the models that describe these decisions are huge, and require a considerable amount of data. Often due to the enormity of data requirements, and the broad scope of decisions, these models provide approximate solutions to the decisions they describe. The operational decisions, meanwhile, address the day to day operation of the supply chain. Therefore the models that describe them are often very specific in nature. Due to their narrow perspective, these models often consider great detail and provide very good, if not optimal, solutions to the operational decisions.

To facilitate a concise review of the literature, and at the same time attempting to accommodate the above polarity in modeling, we divide the modeling approaches into three areas — Network Design, “Rough Cut” methods, and simulation based methods. The network design methods, for the most part, provide normative models for the more strategic decisions. These models typically cover the four major decision areas described earlier, and focus more on the design aspect of the supply chain; the establishment of the network and the associated flows on them. “Rough cut” methods, on the other hand, give guiding policies for the operational decisions. These models typically assume a “single site” (i.e., ignore the network) and add supply chain characteristics to it, such as explicitly considering the site’s relation to the others in the network. Simulation methods is a method by which a comprehensive supply chain model can be analyzed, considering both strategic and operational elements. However, as with all simulation models, one can only evaluate the effectiveness of a pre-specified policy rather than develop new ones. It is the traditional question of “What If?” versus “What’s Best?”.

Network Design Methods

As the very name suggests, these methods determine the location of production, stocking, and sourcing facilities, and paths the product(s) take through them. Such methods tend to be large scale, and used generally at the inception of the supply chain. The earliest work in this area, although the term “supply chain” was not in vogue, was by Geoffrion and Graves [1974]. They introduce a multicommodity logistics network design model for optimizing annualized finished product flows from plants to the DC’s to the final customers. Geoffrion and Powers [1993] later give a review of the evolution of distribution strategies over the past twenty years, describing how the descendants of the above model can accommodate more echelons and cross commodity detail.

Breitman and Lucas [1987] attempt to provide a framework for a comprehensive model of a production-distribution system, “PLANETS”, that is used to decide what products to produce, where and how to produce it, which markets to pursue and what resources to use. Parts of this ambitious project were successfully implemented at General Motors.

Cohen and Lee [1985] develop a conceptual framework for manufacturing strategy analysis, where they describe a series of stochastic sub- models, that considers annualized product flows from raw material vendors via intermediate plants and distribution echelons to the final customers. They use heuristic methods to link and optimize these sub- models. They later give an integrated and readable exposition of their models and methods in Cohen and Lee [1988].

Cohen and Lee [1989] present a normative model for resource deployment in a global manufacturing and distribution network. Global after-tax profit (profit-local taxes) is maximized through the design of facility network and control of material flows within the network. The cost structure consists of variable and fixed costs for material procurement, production, distribution and transportation. They validate the model by applying it to analyze the global manufacturing strategies of a personal computer manufacturer.

Finally, Arntzen, Brown, Harrison, and Trafton [1995] provide the most comprehensive deterministic model for supply chain management. The objective function minimizes a combination of cost and time elements. Examples of cost elements include purchasing, manufacturing, pipeline inventory, transportation costs between various sites, duties, and taxes. Time elements include manufacturing lead times and transit times. Unique to this model was the explicit consideration of duty and their recovery as the product flowed through different countries. Implementation of this model at the Digital Equipment Corporation has produced spectacular results — savings in the order of $100 million dollars.

Clearly, these network-design based methods add value to the firm in that they lay down the manufacturing and distribution strategies far into the future. It is imperative that firms at one time or another make such integrated decisions, encompassing production, location, inventory, and transportation, and such models are therefore indispensable. Although the above review shows considerable potential for these models as strategic determinants in the future, they are not without their shortcomings. Their very nature forces these problems to be of a very large scale. They are often difficult to solve to optimality. Furthermore, most of the models in this category are largely deterministic and static in nature. Additionally, those that consider stochastic elements are very restrictive in nature. In sum, there does not seem to yet be a comprehensive model that is representative of the true nature of material flows in the supply chain.

Rough Cut Methods

These models form the bulk of the supply chain literature, and typically deal with the more operational or tactical decisions. Most of the integrative research (from a supply chain context) in the literature seem to take on an inventory management perspective. In fact, the term “Supply Chain” first appears in the literature as an inventory management approach. The thrust of the rough cut models is the development of inventory control policies, considering several levels or echelons together. These models have come to be known as “multi-level” or “multi-echelon” inventory control models. For a review the reader is directed to Vollman et al. [1992].

Multi-echelon inventory theory has been very successfully used in industry. Cohen et al. [1990] describe “OPTIMIZER”, one of the most complex models to date — to manage IBM’s spare parts inventory. They develop efficient algorithms and sophisticated data structures to achieve large scale systems integration.

Although current research in multi-echelon based supply chain inventory problems shows considerable promise in reducing inventories with increased customer service, the studies have several notable limitations. First, these studies largely ignore the production side of the supply chain. Their starting point in most cases is a finished goods stockpile, and policies are given to manage these effectively. Since production is a natural part of the supply chain, there seems to be a need with models that include the production component in them. Second, even on the distribution side, almost all published research assumes an arborescence structure, i. e. each site receives re-supply from only one higher level site but can distribute to several lower levels. Third, researchers have largely focused on the inventory system only. In logistics-system theory, transportation and inventory are primary components of the order fulfillment process in terms of cost and service levels. Therefore, companies must consider important interrelationships among transportation, inventory and customer service in determining their policies. Fourth, most of the models under the “inventory theoretic” paradigm are very restrictive in nature, i.e., mostly they restrict themselves to certain well known forms of demand or lead time or both, often quite contrary to what is observed.

The preceding sections are a selective overview of the key concepts in the supply chain literature. Following is a list of recommended reading for a quick introduction to the area.

1. Arntzen, B. C., G. G. Brown, T. P. Harrison, and L. Trafton. Global Supply Chain Management at Digital Equipment Corporation. Interfaces, Jan.-Feb., 1995.
2. Ballou, R. H. 1992. Business Logistics Management, Prentice Hall, Englewood Cliffs, NJ, Third Edition.
3. Breitman, R. L., and J. M. Lucas. 1987. PLANETS: A Modeling System for Business Planning. Interfaces, 17, Jan.-Feb., 94-106.
4. Cohen, M. A. and H. L. Lee. 1985. Manufacturing Strategy Concepts and Methods, in Kleindorfer, P. R. Ed., The Management of Productivity and Technology in Manufacturing, 153- 188.
5. Cohen, M. A. and H. L. Lee. 1988. Strategic Analysis of Integrated Production-Distribution Systems: Models and Methods. Operations Research, 36, 2, 216-228.
6. Cohen, M. A. and H. L. Lee. 1989. Resource Deployment Analysis of Global Manufacturing and Distribution Networks. Journal of Manufacturing and Operations Management, 81-104.
7. Cooper, M. C., and L. M. Ellram. 1993. Characteristics of Supply Chain Management and the Implications for Purchasing and Logistics Strategy. The International Journal of Logistics Management, 4, 2, 13-24.
8. Deuermeyer, B. and L. B. Schwarz. 1981. A Model for the Analysis of System Service Level in Warehouse/ Retailer Distribution Systems: The Identical Retailer Case, in: L. B. Schwarz (ed.), Studies in Management Sciences, Vol. 16–Multi-Level Production / Inventory Control Systems, North-Holland, Amsterdam, 163-193.
9. Geoffrion, A., and G. Graves. 1974. Multicommodity Distribution System Design by Benders Decomposition. Management Science, 29, 5, 822-844.
10. Geoffrion, A., and R. Powers. 1993. 20 Years of strategic Distribution System Design: An Evolutionary Perspective, Interfaces. (forthcoming)
11. Houlihan, J. B. 1985. International Supply Chain Management. International Journal of Physical Distribution and Materials Management, 15, 1, 22-38.
12. Lee, H. L., and C. Billington. 1992. Supply Chain Management: Pitfalls and Opportunities. Sloan Management Review, 33, Spring, 65-73.
13. Lee, H. L., and C. Billington. 1993. Material Management in Decentralized Supply Chains. Operations Research, 41, 5, 835-847.
14. Masters, J. M. 1993. Determination of Near-Optimal Stock Levels for Multi-Echelon Distribution Inventories. Journal of Business Logistics, 14, 2, 165-195.
15. Schwarz, L. B. 1981. Introduction in: L. B. Schwarz (ed.), Studies in Management Sciences, Vol. 16–Multi-Level Production / Inventory Control Systems, North-Holland, Amsterdam, 163-193.
16. Stenross, F. M., and G. J. Sweet. 1991. Implementing an Integrated Supply Chain in Annual Conference Proceedings, Oak Brook, Ill: Council of Logistics Management, Vol. 2, 341-351.
17. Vollman, T. E., W. L. Berry, and D. C. Whybark. 1992. Manufacturing Planning and Control Systems, Irwin, Homewood, IL. Refers to: Production planning, inventory management, distribution and transportation, mathematical programming
Referenced by: Contributors: Ram Ganeshan (, Terry Harrison (



The Evolution of Supply Chain Management March 27, 2007

Filed under: Supply Chain Management — SUKUMARAN @ 11:11 am

In the early days, the supply chain management was referred to the functions of logistics, transportation, purchasing and supplies. However, the evolution of the supply chain management has moved to focus on integration, visibility, cycle time reduction and streamlined channels. The new integration has a variety of activities that include:

• Integrated Purchasing Strategy
• Supplier Integration
• Supply Base Management
• Supply Chain Management

Logistics activities exist since the early 1900s. These activities were first associated with the military as a branch of war that pertains to the movement and the supply for armies. Military forces always used to make use of logistics models to ensure the availability of the required material at the right place and on right time. Logistics is being used by the military even today.

After 1950, supply chain management got a boost with the production and manufacturing sector getting highest attention. The inventory became the responsibility of the marketing, accounting and production areas. Order processing was part of accounting and sales. Supply chain management became one of the most powerful engines of business transformation. It is the one area where operational efficiency can be gained. It reduces organizations costs and enhances customer service. The evolution led to an Internet-based application for Supply Chain Management.

Article Dated: May 19, 2006



Supply Chain – A New Concept in India… March 23, 2007

Filed under: Supply Chain Management — SUKUMARAN @ 6:35 pm

Article Dated: 03 March 2007

The Concept of Supply Chain in India is a new concept if not unofficially at least officially.

What is supply chain all about and why is it so important in today’s global business activities. Supply Chain refers to the distribution channel of a product, from its sourcing, to its delivery to the end consumer (also known as the value chain). The supply chain is typically comprised of multiple companies who are increasingly coordinating activities via an extranet.

According to Wikipedia the channelization of supply chain is done through supply chain management. The Wikipedia defines “Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the Supply chain with the purpose to satisfy customer requirements as efficiently as possible. Supply chain management spans all movement and storage of raw material , work-in-process inventory, and finished goods from point-of-origin to point-of-consumption.”

The term supply chain management was first coined by consultant Keith Oliver, of strategy consulting firm Booz Allen Hamilton in 1982. The Booz Allen Hamilton puts forward , “Supply Chain Management encompasses the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies”

Author: Dr Suvrokamal Dutta. The writer is a renowned Foreign Affairs and Economic Expert.



Types of SCM Software…

Filed under: Supply Chain Management — SUKUMARAN @ 6:04 pm

There are two main types of SCM software: 1) planning applications and 2) execution applications.

Planning applications use advanced algorithms to determine the best way to fill an order.

Execution applications track the physical status of goods, the management of materials, and financial information involving all parties.

Some SCM applications are based on open data models that support the sharing of data both inside and outside the enterprise (this is called the extended enterprise, and includes key suppliers, manufacturers, and end customers of a specific company). This shared data may reside in diverse database systems, or data warehouses, at several different sites and companies.

By sharing this data “upstream” (with a company’s suppliers) and “downstream” (with a company’s clients), SCM applications have the potential to improve the time-to-market of products, reduce costs, and allow all parties in the supply chain to better manage current resources and plan for future needs.

Increasing numbers of companies are turning to Web sites and Web-based applications as part of the SCM solution. A number of major Web sites offer e-procurement marketplaces where manufacturers can trade and even make auction bids with suppliers.



What is Supply Chain Management ?

Filed under: Supply Chain Management — SUKUMARAN @ 6:02 pm

Supply chain management (SCM) is the oversight of materials, information, and finances as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer.

Supply chain management involves coordinating and integrating these flows both within and among companies.

It is said that the ultimate goal of any effective supply chain management system is to reduce inventory (with the assumption that products are available when needed).

As a solution for successful supply chain management, sophisticated software systems with Web interfaces are competing with Web-based application service providers who promise to provide part or all of the SCM service for companies who rent their service.

Supply chain management flows can be divided into three main flows:

* The product flow
* The information flow
* The finances flow

The product flow includes the movement of goods from a supplier to a customer, as well as any customer returns or service needs.

The information flow involves transmitting ordersand updating the status of delivery.

The financial flow consists of credit terms, payment schedules, and consignment and title ownership arrangements.