SUPPLY CHAIN MANAGEMENT

Introduction
Most manufacturing concerns spend more than 60% of the money for materials. A small savings in
materials can reduce the production cost to a large extend. and thus add to the profits. Materials
management (supply chain management)is used to describe the management of material, suppliers,
production facilities and distribution services.

Objectives of Supply Chain Management

The primary objective of supply chain management is to reduce risks and uncertainties in to
supply chain, thereby positively affecting inventory levels, operation and product cycle time,
processes and ultimately end users service levels.
1. to minimize material cost
2. to procure and provide materials of desired quality when required, at the lowest
possible overall cost of the concern.
3. to reduce investment tied in inventories for use in other productive purposes and to
develop high inventory turnover ratios.
4. to purchase, receive, transport(ie handle)and store materials efficiently and to reduce
the related costs.
5. to trace new sources of supply and to develop cordial relations with them in order to
ensure continuous material supply at reasonable rates.
6. to cut down costs through simplification, standardization, value analysis, import
substitution, etc
7. Minimize delays in procuring materials.
8. to conduct studies in areas such as quality, consumption and cost of materials so as to
minimize cost of production.
9. to train personnel in the field of materials management in order to increase operational
efficiency.

FUNCTIONS
1. Materials planning
2. procurement of purchasing of materials.
3. receiving and warehousing
4. storage and store administration
5. inventory control
6. standardization, simplification and value analysis
7. external transportation (ie traffic, shipping etc) and materials handling
8. disposal of scrap, surplus and obsolete materials

MEASURING SUPPLY CHAIN PERFORMANCE

Inventory means money to the enterprise. Because the inventory at each stage ties up
money, it is important that the operation at each stage are synchronized to minimize the size
of these buffer in inventories. The efficiency of supply chain management can be measured
based on the size of the inventory investment in the supply chain. The inventory
investment is measured relative to the cost of goods that are provided throughout the supply
 chain

Two common measures to evaluate supply chain are

• inventory turnover
• and weeks of supply.
These essentially measure the same thing and mathematically are the inverse of one
another.
Inventory turnover is calculated as follows
= cost of goods sold
average aggregate inventory value
The cost of goods is the annual cost of a company to produce the goods or services. It is
sometimes referred to as the cost of revenue. This does not include the selling and
administrative expenses of the company. The average aggregate inventory value is the total
value of all items held in inventory for the firm valued at cost. It includes the raw material,
work in process, finished goods and distribution inventory considered owned by the
company.
Weeks supply
=average aggregate inventory value x52 weeks
cost of goods sold

A firm considers inventory an investment because it ties up funds that could be used for
other purposes, and firm may have to borrow money to finance the inventory investment.
The objective is to have the proper amount of inventory and to have it in the correct
locations in the supply chain.

Example
Net revenue for 2007 18243m
Cost of revenue 2007 14137m
Cost of production2007 6423m
Production materials on hand J2007 234m
Work in process J 2007 39

Inventory turnover 14137/234+39 = 51.78

Weeks of supply 234+39/14137 x 52 = 1 week

Supply Chain Performance Drivers

There are four supply Chain drivers which affect the performance of the supply chain. They are
1. Inventory
Inventory refers to all raw materials, work-in-process and finished goods within the supply
chain. Inventory is an important supply chain driver because changing inventory policies can
dramatically alter the supply chain efficiency and responsiveness. Inventory is spread throughout
the supply chain from raw materials to work in process to finished goods that suppliers,
manufactures, distributors and retailers hold.
2. Transportation
Transportation refers to moving inventory from point to point in the supply chain.
Transportation takes the form of many combination of modes and routes, each with its own
performance characteristics. Transportation choices have a large impact on supply chain
responsiveness and efficiency.

Transportation moves the product between different stages in a supply chain. It has a large
impact on both responsiveness and efficiency. Faster and quick transportation by different modes,
allows the supply chain to be more responsive but reduces the efficiency. Transportation used by
the company uses also affects the inventory and facility locations in supply chain.
The components of transportation decisions in supply chain include;
1. Mode of transportation.
2. Route and network selection.
3. In-house or outsource.
4. Trade off between the cost (efficiency) and the speed of transportation
(Responsiveness).

3. Facilities
Facilities refer to places in the supply chain network where inventory is stored, assembled or
fabricated. The two major types of facilities are production sites and storage sites. Irrespective of
the function of the facility, decision regarding location, capacity and flexibility of facilities have a
significant impact on the supply chains performance.
4. Information
Information consists of data and analysis regarding inventory, transportation, facilities and
customers throughout the supply chain. It is the bigger driver of performance of supply chain as it
directly affects each of the other drivers. Information presents management with the opportunity to
make supply chains more efficient.

The goal of the supply chain management is to link the market, distribution channel, operations
process and supplier base such that customer's needs are better met at lower costs.

2. Outsourcing
Purchased items and services account for 60 to 70 percent of the cost of goods sold.
Outsourcing is a term used to describe when a firm purchases materials, assemblies and other
services that were previously done within the company from sources external to the company. Out
sourcing i.e. buying from outside allows the firm to focus on activities that represent its core
competencies. Thus, a company can create a competitive advantage while reducing cost.

Organizations outsource when they decide to buy something that are being manufactured in
house currently. It is a reversal of previous make decision. In order to focus on activities, which
constitute core competence, many organizations out source the non-value adding activities like
cleaning and house keeping.

Information system is one activity, which has captured major attention as a candidate for
Outsourcing. An entire function may be out sourced or some may be outsourced and others are
kept in house. Depending upon the importance of the function, its nature as to whether it is a
strategic or routine the decision regarding outsourcing will be taken.

Reasons for Outsourcing

• Cost reduction
• Focus on core competencies
• Reduction in man power
• Reduce development and production cycle
• Improve efficiency
• Minimizes inventory, material handling and non-value added costs.

Risks and Disadvantages of Outsourcing

• Higher exit barriers
• Loss of control
• Exposure to supplier risks
• Difficulty in quantification
• Possibility of bearing tied to obsolete technology
• Attention required by top management
• Supply restrictions

Strategic partnership - a close buyer-supplier relationship

A close relationship is both desirable and possible with all suppliers. The extent of the effort at
this relationship building is determined by number of considerations like
(i) Based on value of suppliers of goods and services. This will establish a potential cost and
other benefits of developing a close relationship.
(ii) Percentage of supplies coming from one supplier.

Stages of Development of Buyer-Supplier Relationship

Once the organization makes the decision to buy, and then the next logical step is identification
of sources of supply. The basic stages of development of Buyer-Supplier relationship -
1. Specification of basic contract between the two parties. Suppliers are provided with
drawings and basic specifications [Quantities to be supplied, rates and period of contract].
2. Specifications of critical parameters for incoming parts. Aggregate production plans known
to suppliers.
3. Standardization of quantity procedure at suppliers dispatch. Buyer is informed about
upstream development and testing procedures of suppliers, die-design, patterns and tooling,
supplier product constraints are taken into account.
4. Initiation of improvements by buyer after supplier audit of supplier operations.
5. Initiation of improvement by supplier with sharing of gains. This could conclude value
engineering and design improvements.
6. Common strategy planning of long-term relationship spanning many contracts.

Delphi technique - To make the judgmental forecasts more realistic by minimizing bias, this
method is used. In this method, a panel of experts are asked sequential questions in which the
response to one questionnaire is used to produce next questionnaire. The information available to
some experts are made available to the other experts. This technique is an iterative process.

The Delphi method is a qualitative forecasting method in which opinions are collected from
experts to arrive at a reliable consensus. A series of questionnaire is sent to a panel composed of
experts from selected technical fields. Each questionnaire demands a written opinion about specific
subjects and reasons for justifying the opinions. These reasons are summarized in each iteration
and returned for inspection by the whole panel. Through this series of exchanged view, the
consensus is reached. This method can be extended to several decades in to future.