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CHAPTER 2
Supply Chain
Management
SCM (CSCMP Definition)
• The integration of key business processes from end user
through original suppliers, that provides products,
services, and information that add value for customers
and other stakeholders.
• 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.
Supply Chain Network Structure
Tier 1
Suppliers
Tier 1
Customers
Tier 2
Customers
1
1
2
2
n
1
1
2
2
Tier 3 to
Consumers/
End-Customers
n
1
n
n
1
2
3
n
3
n
1
2
n
n
1
n
Focal Company
1
Members of the Focal Company’s Supply Chain
Figure 2-2
Consumers / End-Customers
Tier 2
Suppliers
Tier 3 to n customers
Tier 3 to n suppliers
Initial Suppliers
Tier 3 to
Initial
suppliers
The SCM Framework
Elements and Key Decisions
2. What processes should be linked
with each of these key
supply chain members?
Supply chain
business
processes
Supply chain
management
components
Supply chain
network
structure
3. What level of integration
and management should be
applied or each process link?
1. Who are the key supply
chain members with whom
to link processes?
Figure 2-3
SUPPLY CHAIN MANAGEMENT
Integrating and Managing Processes Across the Supply Chain
Information Flow
Tier 2
Supplier
Manufacturer
Tier 1
Supplier
Customer
Logistics
Marketing & Sales
Purchasing
Production
Consumer/
End-user
PRODUCT FLOW
Finance
R&D
Supply Chain Business Processes
CUSTOMER RELATIONSHIP MANAGEMENT
CUSTOMER SERVICE MANAGEMENT
DEMAND MANAGEMENT
ORDER FULFILLMENT
MANUFACTURING FLOW MANAGEMENT
PROCUREMENT
PRODUCT DEVELOPMENT AND COMMERCIALIZATION
RETURNS
Source: Douglas M. Lambert, Martha C. Cooper, Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”, The International Journal
of Logistics Management, Vol. 9, No. 2, 1998, p. 2.
Figure 2-1
Issues Affecting Channel Structure
• Make versus buy: outsourcing
• Postponement: shifting the risk
- Postponing changes in the form and identity of the product to
the last possible point in the marketing process
- Postponing inventory location to the last possible point in
time
Issues Affecting Channel Structure
• Risk
-economies of large scale production
-reduction in logistics costs
-reduction of stockouts
-reduction of uncertainty
• Local laws
• Social and behavioral variables
• Physical factors: geography, size of market,
concentration of markets
• Technological factors
Issues Affecting Channel Structure
• Type of distribution
-Intensive distribution: chewing gum…
-Selective distribution
-Exclusive distribution
• Seasonality
Issues Affecting Channel Structure
Product characteristics
•
•
•
•
•
•
Value
Technicality
Market acceptance
Substitutability
Bulk
Perishability
Customer service objectives
• Whatever requested and required by the
customer...
(e.g. availability, order cycle time...)
Logistics Supports Marketing
• According to Kotler and Armstrong;
– marketing management - determining the needs
and wants of target markets and delivering the
desired satisfactions more effectively and
efficiently than competitors
– Impact of marketing concept ----customer
orientation
– Marketing/logistics interfaces focus on physical
distribution activities...
Logistics Adds Value by Creating
Utility
• FORM UTILITY is the process of creating the good
and service, or putting it in the proper form for the
customer to use. (from raw materials to finished
goods)
• POSSESSION UTILITY is the value added to a product
or service because the customer is able to take actual
possession. (by credit arrangements, loans...)
• TIME UTILITY is the value added by having an item
when it is needed.
• PLACE UTILITY means having the item or service
available where it is needed.
Marketing-Logistics Interaction
• Time and place utility –customer service
level –customer satisfaction
• Customer service is an output of the
logistics system
System Approach/Integration
• Logistics is, in itself, a system; it is a network of
related activities with the purpose of managing
the orderly flow of goods, information and service
with the logistics channel.
• The systems approach simply states that all
functions or activities need to be understood in
terms of how they affect, and are affected by,
other elements and activities with which they
interact.
System must be viewed as a whole
Logistics and Supply Chain Management
Approach
Systems Approach
• The sum of a series of activities is greater than
its individual parts.
• Trade-off analysis-system should be viewed as
a whole.
High inventory- High customer service
High storage costs
High obsolescence risks
TOTAL COST CONCEPT
• “The total cost concept” is the key to
effectively managing logistics processes.
• The goal of the organization should be to
reduce the total cost of logistics activities,
rather than focusing on each activity in
isolation.
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MAJOR LOGISTICS COST
CATEGORIES
•
•
•
•
Customer service levels
Transportation costs
Warehousing costs
Order processing/information
systems costs
• Lot quantity costs
• Inventory carrying costs
• Inventory carrying costs: capital costs, inventory
service cost (insurance and taxes on inventory),
storage space costs, inventory risk costs.
• Lot quantity costs: procurement and production
related costs varying with changes in order size or
frequency.
Order costs, setup costs, capacity lost, material
handling cost, price differentials due to buying in
different quantities
TRADE-OFF APPROACH IN
LOGISTICS
• Central goal of trade off in logistics is to maximize long
term profitability and the effective use of assets.
• Examining trade-offs among alternatives and costs,
thereby reducing the overall total cost of activites.
• Reduced transportation costs and longer transit timesincreased inventory and inventory carrying costs
Cost Trade-offs Required
in Marketing and Logistics
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Price
Promotion
LOGISTICS
Place/
customer service
levels
Inventory
carrying costs
Transportation
costs
Lot quantity
costs
Warehousing
costs
MARKETING
Product
Order processing
and information
costs
Source: Adapted from Douglas M. Lambert, The Development of an Inventory Costing Methodology: A Study of the Costs
Associated with Holding Inventory (Chicago, IL: National Council of Physical Distribution Management, 1976), p. 7.
Competition
Today the real competition is
not company against
company but rather supply
chain against supply chain.
Christopher s. 16,38