MODULE 0 | INTRODUCTION TO SUPPLY CHAIN MANAGEMENT| LECTURE 1
Chapter 1: Introduction to Supply Chain Management
Learning goals:
Describe a supply chain and define supply chain management.
Describe the objectives and elements of supply chain management.
Describe local, regional, and global supply chain management activities among services and
manufacturing companies.
Explain the main historical milestones in the development of supply chain management.
Ellram, L. M. et all. (2014). Supply chain management: It's all about the journey, not the
destination. Journal of Supply Chain Management, 50(1), 8-20.
Learning goals:
Explain why SCM has a cross-functional nature.
Explain why SCM is also known as demand chain management or seamless demand pipelines.
Explain the difference between supply chains and supply networks.
Compare and contrast the five main perspective on SCM using the following criteria: characteristics
and practical (or theoretical) implications.
Give your opinion (with clear arguments developed based on the article) on what are the implications
of viewing supply chain from different perspectives (e.g. process versus governance perspective)?
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Introduction:
To understand the concept of supply chain management, one must begin with a discussion of a supply chain. A
generic one is represented below:
The firm in the middle is referred to as the focal firm. The direct suppliers and customers of the focal firm are
first-tier suppliers and customers. The first-tier suppliers’ suppliers are thus the focal firm’s second-tier
suppliers, and the first-tier customers’ customers are the focal firm’s second-tier customers.
Supply chain; a set of three or more entities (organizations or individuals) directly involved in the upstream and
downstream flows of products, services, finances, and/or information to a customer.
Connected by transportation and storage activities, and integrated through information, planning, and
integration activities. Many large firms are moving away from in-house vertically integrated structures to
Supply Chain Management (SCM): the management, across and within a network of upstream and downstream
organizations, of both relationships and flows of material, information and resources. Purpose: Create value,
enhance efficiency, and satisfy customers.
Efficiency and effectiveness throughout the total supply chain system is required. Organizations should take a
system level approach and a total cost orientation; Reducing costs at a single company, could create an
increase in costs at the next level. Than, you simply transferred costs from one to another level. You should
keep the total cost in mind.
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,Definition;
1. Institute for Supply Management
“The design and management of seamless, value-added processes across organizational boundaries to meet
the real needs of the end customer”
Set of activities; design and management
Object of those activities; value added processes to meet the real needs of the end customer
2. Logistics and Supply Chain Management Society
“The coordinated set of techniques to plan and execute all steps in the global network used to acquire raw
materials from vendors, transform them into finished goods, and deliver both goods and services to customers”
Set of activities; coordinated set of techniques to plan and execute
Object of those activities; acquire raw materials and transform them into finished goods, and deliver
3. Object of those activities
“The planning and management of all activities involved in sourcing and procurement, conversion, and all
logistics management activities … also includes coordination with channel partners, which can be suppliers,
intermediaries, third party service providers, and customers”
Set of activities; planning and management of all activities
Sourcing and procurement, conversion, and all logistic management activities… coordination with
channel partners.
Coordination with channel partners: Distinction between physical and support flows.
SCM is also known as demand chain management or seamless demand pipelines;
When parties do not like the way that they see others use/interpret the term ‘supply chain management’. They
created their own names to describe what they see as supply chain management. Probably, these names do
not really add value. Most of these names are meant to be more descriptive than supply chain;
Supply networks to emphasize that these chains are not just chains, but made up of a number of
networks.
Demand chain management to emphasize the importance of the customer as central to the entire SC.
Seamless demand pipelines to emphasize the criticality of end users at all points in the chain.
Cross-disciplinary nature of SCM
The nature is cross-functional as all aspects of an organization (finance, marketing, sales, manufacturing, R&D)
are in some way involved or influencing the demand/supply for a specific product.
Multiple levels of activities of SCM
Strategic level; long-term, major choices of actions and influence whole or a major part of business
enterprise. Contribute directly to the achievement of common goals of the enterprise.
Tactical level; Relate to the implementation of strategic decisions. They are directed towards
developing divisional plans, structuring workflows, establishing distribution channels etc.
Operational level; Day-to-day, short-term operations of the enterprise.
Logistic service providers; classification
The fourth-party logistics providers (4PL) is an integrator that accumulates resources, capabilities, and
technologies to run complete supply chain solutions. The main difference between Third-party logistics
providers (3PL) and 4PL is that 3PL targets a single function, whereas the 4PL manages the entire process.
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,Different perspectives on Supply Chain Management;
Depending on how you see SCM, you determine what matters are important.
1. Process perspective
Supply chain consisting of processes and activities which are linked.
Supply chain integration (internal and external).
“How can supply chain activities be linked and integrated, generally for improved performance?”
2. Discipline perspective
SCM as a stand-alone discipline or cross-disciplinary.
Theoretical implications; the use of consistent terminology, standardized constructs, increased level of
rigor and replicability.
“Is supply chain management truly a separate domain or area of study in its own right?“
3. Governance perspective
Supply chain relationships, collaboration, make-or-buy decisions, buyer-supplier relationships.
Ownership structures and relationships to achieve best supply chain results.
Focuses on how the supply chain is managed, who controls it and how direction is set.
“What are the boundaries between firms, what is the best type of ownership, and type of
relationships which members of the SC should have with each other to achieve the best results?”
4. Philosophy perspective
Intra- and inter-organizational networks aimed at satisfying customer needs.
Integration of SCM issues with broader organizational decisions.
Related to firms’ orientation, viewing the way that the firm integrates supply chain implications
throughout the decisions that the organization makes.
“Whether and how does the organization consider supply chain impacts when it makes decisions?”
5. Functional perspective
SCM as a separate function or a series of functions within the company.
Selecting appropriate structures for supply chain activities.
“Whether is SCM a functional area in its own right?”
Motivations for SCM
Cost savings and better coordination of resources are reasons to employ SCM. I.e. for better customer service,
lower inventory costs, improved quality, reduced cycle time, better production methods, and other benefits.
Understanding the evolution of supply chains
Old paradigm: Firms gained synergy as a vertically integrated firm encompassing the ownership and
coordination of several supply chain activities. Organizational cultures emphasized short-term,
company focused performance.
New paradigm: Firm in a supply chain focuses activities in its area of specialization and enters into
voluntary and trust-based relationships with supplier and customer firms.
All participants in the SC benefit.
Boundaries are dynamic and extend from “the firm’s suppliers’ suppliers to its customers’
customers (i.e. second tier suppliers and customers)
SC now deal with reverse logistics (=logistics of items that move one step back into the supply
chain) to handle returned products, warranty repairs and recycling.
The origins and evolution of Supply Chain Management in the U.S.
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,The origins and evolution of Supply Chain Management in the U.S.
1950s and 1960s; Manufacturers focused on mass production techniques as their principal cost
reduction and productivity improvement strategies. E.g. Henry Ford mass production system.
1960s and 1970s; Introduction of new computer technologies lead to development of material
requirements planning (MRP) software applications and manufacturing resource planning (MRPII) to
coordinate inventory management and improve internal communication.
Main driver; development in technology
Parallel development; Invention of the container by Malcom McLean in 1956
1980s and 1990s; intense global competition led managers to offer low-cost, higher-quality products
along with higher levels of customer service. This led to the utilization of Supply Chain Management
(SCM), Just-In-Time (JIT), Total Quality Management (TQM), Business Process Reengineering (BPR),
and Enterprise Resource planning (ERP). E.g. Toyota system, less inventory improvement step by step.
2000s; Companies focus on relationships, sustainability and social responsibilities. Companies will
focus on improving supply chain capabilities with initiatives such as
o Supplier relationship management (SRM)
o Third-party service providers (3PLs)
o Integrated logistic solutions
o Environmental and social impacts of supply chains.
A new stage in the evolution of SCM: Digital Supply Chains?
Data analytics (e.g. as a method to improve forecasting methods to better
predict demand, or to analyze defects or disruptions.)
Cloud technologies (e.g. as a method to improve efficiency. Do not forget the
associated risks)
Autonomous objects (The technological developments that are expected to
bring computers into the physical environment as autonomous entities
without human direction, freely moving and interacting with humans and
other objects)
Blockchain (= digital database containing information. E.g. records of financial
transactions that can be simultaneously used and shared within a large
decentralized, publicly accessible network)
Automation (e.g. a method to reduce costs and create efficiency)
Drones and robotics (e.g. a method to improve e.g. the logistic functions within SCM)
The Bullwhip effect
Fluctuations in the downstream end of the supply chain can become a big one at the start. “bullwhip” effect
occurs when someone along the value chain expects a higher demand and starts ordering more products and
so the next does the same. It is an amplification of order variability as one goes upstream along the supply
chain. Through information sharing and tight coordination you can regain control of supply chain efficiency.
Crucial is sharing demand information and synchronized planning.
Example:
Cause: Albert Hein expects high demand because of promotions, wanting to achieve full truck loads
and order exaggerated amounts. Their supplier will do the same.
Effect: Their suppliers will order even more, because they want to have enough in stock. As an effect,
they all have huge waste of their products e.g. waste of food, money, and also high inventory costs.
Solution: Information sharing and coordinated replenishment programs enhanced the efficiency of the
supply chain. Inventory dropped, and stockout rates went down.
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,The Foundations of Supply Chain Management (Not mentioned during lectures. Only as a learning goal!)
Element Important issues Book chapters
Supply base rationalization, supplier alliances, SRM, global 2-4
Supply
sourcing, ethics and sustainability (Lecture 8 t/m 10)
Demand management, CPFR, MRP, ERP, inventory visibility, lean 5-8
Operations
systems, Six Sigma quality systems (Lecture 5 t/m 7)
Logistics management, customer relationship management,
9 - 12
Logistics network design, RFID, global supply chains, sustainability,
(Lecture 2 t/m 4)
service response logistics
Risk and security management, performance measurement, 13 - 14
Integration
green supply chains (Lecture 11 and 12)
1. Supply elements:
Supplier management: Encouraging or helping the firm’s suppliers to perform in some desired fashion.
Improve performance through supplier evaluation (determining supplier capabilities) AND Supplier
certification (third party or internal certification to assurer product quality and service requirements)
Strategic partnerships: Successful and trusting relationships with top-performing suppliers in terms of
long-term, higher-volume sales.
Ethics and sustainability: Recognizing suppliers’ impact on reputation and carbon footprint and
purchasing from suppliers that are governed by environmental sustainability and social and ethical
practices.
2. Operation elements:
Demand management: strategies and systems with the objective of matching demand to available
capacity. Controlling or managing inventory is one of the most important aspects of operations and is
certainly value enhancing for the firm.
MRP software system: These systems can be linked throughout the organization and its supply chain
partners using Enterprise resource planning (ERP) systems, which provide real-time sales data,
inventory and production information to all business units and supply chain participants.
Lean production systems: Inventory management system which takes time to implement but usually
results in faster delivery times, lower inventory levels and better quality.
Six Sigma quality: Ensure continued quality compliance among suppliers and with internal production
facilities. Especially important when considering the design of the supply chain
3. Logistics elements:
Transportation management: Trade-off decisions between cost and timing of delivery and customer
service. (Via trucks, rail, water, air? Will be discussed from page 12).
Customer relationship management: strategies regarding how to meet delivery due dates, how to
successfully resolve customer complaints, how to communicate with customers and how to determine
the logistics services required.
Network design: Designing and building a distribution network is one method of ensuring successful
product delivery. Typical trade-off between the cost of the distribution and customers service (just like
transportation management).
4. Integration elements:
Most difficult topic, the coordination and integration of these processes among the focal firm and its key
supply chain trading partners.
Supply chain process integration: When members of the supply chain work together to make
purchasing, inventory, production, quality and logistics decisions that impact the overall profits of the
supply chain. This process requires high levels of intra-firm functional integration. Based on efforts to
change attitude & adversarial relationships.
Supply chain performance measurement: Must be utilized along supply chains to help firms keep track
of their supply chain management efforts. It is crucial for firms to know whether certain strategies are
working as expected.
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,Lee, H. L. (2002). Aligning supply chain strategies with product uncertainties. California
management review, 44(3), 105-119.
Learning goals:
Explain two main factors which impact the selection of supply chain strategies.
Explain the difference between A) functional and innovative products and B) stable and evolving
supply.
Explain the characteristics of demand uncertainty reduction strategy using the example of Barilla and
the different techniques a company can employ to reduce this type of uncertainty. Please refer to the
bullwhip effect in your explanation and use the following structure: cause-effect-solution.
Compare and contrast the four main supply chain strategies illustrated by the uncertainty framework
(efficient, responsive, risk-hedging and agile). Please use the following criteria for comparison:
objectives, processes and techniques employed, applications (examples), the role of Internet.
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Goal of Supply chain management
SCM is not strictly a cost reduction paradigm. You should find the balance between
Minimizing the costs
And maximization of the customer service levels
Therefore, SCM has conflicting objectives
Efficient SCM;
o Cost-sensitive Supply Chain
o Producing and supplying at the lowest possible cost
Responsiveness SCM;
o Time-sensitive Supply Chain
o Meet short lead times
o Handle a wide variety of products
o Meet high service level
Supply chain trade-offs: efficiency versus responsiveness:
Driver Efficiency Responsiveness
Inventory Cost of holding (Low inventory and low Availability (High inventory and high variety)
product variety)
Transportation Consolidation (Few, large shipments by Speed (Frequent shipments, fast and flexible
slower mode of transport) movements)
Facilities Consolidation/Dedicated (Few Proximity/Flexibility (Many small facilities
centralized facilities serving wide areas) closer to customers)
Sourcing Low cost sources and economies of Responsive sources (No high uncertainty
scale suppliers)
Conflicting objectives in SCM:
As you can see in red, some of the objectives are simply contradictory. Nevertheless, you should align all
different goals of each department (= Internal integration)
Purchasing Manufacturing Warehousing Customers
Stable volume Reduced transportation
Long run production Short order lead time
requirement costs
Flexible delivery time High quality Low inventory High in stock
Quick replenishment Enormous variety of
Little variation in mix High productivity
capability products
Large quantities Low production costs Low prices
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,Matching supply with demand uncertainty; Supply chain strategies
Four strategies based on their level of demand uncertainty and supply uncertainty.
Horizontal; demand uncertainty framework
Demand uncertainty is linked to the predictability of the demand on the product. Different type of products
have different characteristics as illustrated in the table below:
Functional product Innovative product
Functional products have a long product life cycle Innovative products have short life cycle with high
and therefore stable demand, so a LOW demand innovations and fashion concepts, as a result have highly
uncertainty. Tend to have less product variety. unpredictable demand, thus HIGH demand uncertainty.
Low demand uncertainties High demand uncertainties
More predictable demand Difficult to forecast
Stable demand Variable demand
Long product life Short selling season (e.g. summer)
Low inventory costs High inventory costs
Low profit margin High profit margin
Low product variety High product variety (H&M/ZARA)
Higher volume per SKU Low volumes per SKU
Low stockout costs High stockout cost
Low obsolesce (= veroudering) High obsolescence (= veroudering)
E.g. basic food, oil, gas, basic clothing. E.g. fashion apparel, high end computers,
Vertical; Supply uncertainty framework
Stable supply process Evolving supply process
An ‘evolving’ supply process is where the manufacturing
A ‘stable’ supply process is one where the
process and the underlying technology are still under
manufacturing process and the underlying
early development and are rapidly changing, as a result
technology are mature and the supply base is
the supply base might be limited in both size and
well established. So, LOW supply uncertainty.
experience. Thus, HIGH supply uncertainty.
Less breakdowns Vulnerable to breakdowns
Stable and higher yields Variable and lower yields
Less quality problems Potential quality problems
More supply sources Limited supply sources
Reliable suppliers Unreliable suppliers
Less process changes More process changes
Less capacity constraints Potential capacity constraint
Easier to changeover Difficult to changeover
Flexible Inflexible
Dependable lead time Variable lead time
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,Four supply chain strategies:
Efficient supply chains
E.g. grocery, basic apparel, food, oil and gas.
Uncertainty framework: low demand and low supply uncertainty
Objective: efficiency (cost and information coordination)
Processes and techniques employed: productivity improvement through manufacturing excellence,
automation, economies of scale, facility layout, workflow streamlining, total quality management,
effective logistics system.
Role of internet: enables the supply chain to have tight and effortless information integration, and
enabling production and distribution schedules to be optimized, once demand, inventor and capacity
information is transparent across the supply chain
Responsive Supply chains
E.g. Fashion apparel, computers, pop music
Uncertainty framework: High demand uncertainty and low supply uncertainty
Objective: Responsiveness and flexibility to the changing and diverse needs of the customers
Techniques: postponement, mass-customization, build-to-order, configure-to-order.
Role of internet: enables very accurate and timely capturing of highly personalized requirements of
customers as well as fast transfer of order information to the factory/ customization centers for final
configuration of the product
Risk-hedging supply chains
E.g. Hydro-electric power, some food products
Uncertainty framework; Low demand uncertainty, and high supply uncertainty
Objective; sharing resources in a supply chain so that the risk in a supply chain disruption can be
shared
Techniques: safety stocks, inventory pooling strategies, multiple supply bases.
Role of internet: providing information transparency among the members of the supply chain that are
sharing the inventory. Need real-time information on inventory and demand to best divide inventory
Agile supply chains
E.g. Telecom, High-end computers, semiconductors
Uncertainty framework: High demand uncertainty and high supply uncertainty
Objective: Responsiveness and flexibility to customer needs while hedging the risks of supply shortage
by pooling inventory and other capacity resources
Techniques: combination of ‘hedged’ and ‘responsive’ techniques.
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,The right supply chain strategy to match product uncertainty:
Functional product, stable supply process | EFFICIENT SUPPLY CHAIN
Low demand and supply uncertainties, the basis for competition is efficiency. There are two
dimensions to this, cost and information coordination.
Cost efficient supply chains means; providing the product at the lowest cost possible to the customer.
o It can be gained by productivity improvements which in turn are the result of basic elements of
manufacturing excellence, such as just- in-time systems, automation, economies of scale, facility
layout, and workflow streamlining (e.g. JIT, EOS, Japanese manufacturing tools e.g. Toyota).
o In addition, you can gain cost efficiency by having a highly effective logistics system. For
products with stable demand, it is often possible to ship products directly from the
manufacturing source to the customer without going through distribution centers. Eliminating
steps in the distribution channel reduces costs (emphasis is on lean and cutting costs; direct
shipment).
E.g. retail giants as Wal-Mart have direct-to-store distribution processes for their stable, high-volume
products. Shipping products with erratic demand goes directly to stores. However, this can result in
less-than-truckload shipments with small batches, so that transportation is no longer cost-efficient.
Innovative product, stable supply process | RESPONSIVE SUPPLY CHAIN
If there is an innovative product, but the demand is unpredictable. The cost of inventory for innovative
products can be significant, since the product life cycles are short. Pursue ‘responsive’ supply chain.
Rather than focusing on accurate forecasting and inventory planning, companies with a stable process
and product technology can use postponement to pursue an aggressive build-to-order strategy.
The concept of postponement of innovative products is most applicable if there is a reliable and stable
supply base. Postponement might be costlier, but when product demand is unpredictable, pursuing a
responsive supply chain is more appropriate than a cost-efficient one.
The internet has enabled companies to tap into bigger supply bases to ensure a reliable supply of the
products. So, to be responsive.
E.g. Dell Computer. As long as PC manufacturers can design their products with highly modular
structures—so that the final assembly steps can be simply and reliably performed and suppliers of key
components can provide stable supplies—then Dell, can engage in build-to-order processes to be
highly responsive to customer orders. These companies often utilize the concept of a supplier hub,
often close to the final assembly site, to ensure a stable and reliable supply of components.
Functional products, with evolving supply process | RISK HEDGING SUPPLY CHAIN
When supply processes are still evolving and therefore faced with uncertainties regarding yield (=opbrengst),
process reliability, supply source, and lead-time, companies must find ways to prevent such uncertainties from
ultimately affecting demand fulfillment. Thus, they have to establish risk-hedging supply chains.
Inventory pools; Such inventory stocking points decouple the supply chain in order to shield
uncertainties of supply. When the component with the evolving supply process is of low value, than it
is clearly worthwhile to stockpile the components. Than, the order fulfillment process will not be
disrupted due to inventory shortages.
Develop multiple supply bases; Than, a backup supply source is available. The costs of managing the
multiple supply bases may be higher, but the risk of supply outages (=uitval) can be reduced.
Internet supports:
o Supply conditions can be shared quickly and accurately, so that the downstream sites can use
that information to plan accordingly
o Enables a buyer to quickly identify alternative supply sources in case of supply uncertainty.
o Via market exchanges, extend the reach of a typical buyer to suppliers from a global market. E.g.
to identify availabilities of scarce components.
Innovative product, with evolving supply process | AGILE SUPPLY CHAIN
With evolving and unstable supply process, you should use a combination of risk-hedging and responsive
strategy. Need to establish an ‘agile’ supply chain. A highly sophisticated fabrication facility is needed. For
example, an e-Hub will link multiple tiers of suppliers via the Internet, and it will coordinate supply and demand
planning across the supply chain, using intelligent planning software. The e-Hub will also enable the
identification of potential supply and demand problems early, with proper warning given to the appropriate
parties and resolution actions taken promptly via the Internet.
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, Uncertainties in SCM
Matching supply and demand is difficult (as just discussed)
Forecasting does not solve the problem
Multiple, inter-related sources of uncertainty
Lead time, transportation times, natural disasters, component availability
Sources of uncertainty in SCM
Strategies to deal with uncertainty (Lecturer said: “make sure you really get this!!”)
These are the type of strategies in which companies attempt to increase supply chain flexibility through
proactively redesigning products, processes, and the supply chain network as well as proactively negotiating
more effective relationships with trading partners. Visualized in the figure below.
Demand uncertainty reduction strategies and/or supply uncertainty reduction strategies.
Strategic alliances; An agreement between two organizations to pursue a set of agreed upon
objectives needed while remaining independent organizations.
Pull systems; Applying a pull system allows you to start new work only when there is a customer
demand for it.
Postponement; This is a deliberate action to delay final manufacturing or distribution of a product
until receipt of a customer order.
Collaborative forecasting; A concept that retailer and supplier each create a demand forecast and
enter it into the collaboration platform. If there are any differences between the two forecasts, they
are reconciled through discussion and information, which serves as the basis for quantity decisions.
Centralization; Reducing facilities or centralizing stocks to fewer facilities reduces risks as well as
improves flexibility in allocating stock to multiple destinations or sales region. centralized
procurement among firms in the same group are among strategies to overcome the problem of buyers
having minimum power and having to accept large minimum order quantities
Risk pooling; A statistical concept that suggests that demand variability is reduced if one can aggregate
demand, for example, across locations, across products or even across time.
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