Business logistics and supply chain importance, objectives and drivers.

Strategy planning, selecting proper channel, performance measurement.

Outsourcing- Make vs buy approach sourcing strategy

BUSINESS LOGISTICS AND SUPPLY CHAIN

WHAT IS A SUPPLY CHAIN?

A supply chain consists of all parties involved, directly or indirectly, in

fulfilling a customer request.
- Sunil Chopra

The supply chain includes not only the manufacturer and suppliers, but also
transporters, warehouses, retailers, and even customers themselves. Consider a
customer walking into a Wal-Mart store to purchase detergent. The supply chain
begins with the customer and his or her need for detergent. The next stage of
this supply chain is the Wal-Mart retail store that the customer visits. Wal-Mart
stocks its shelves using inventory that may have been supplied from a finished-
goods warehouse or a distributor using trucks supplied by a third partx. The
distributor in turn is stocked by the manufacturer (say, Proctor & Gamble [P&G]
in this case). The P&G manufacturing plant receives raw material from a variety
of suppliers, who may themselves have been supplied by lower-tier suppliers.
For example, packaging material may come from Tenneco packaging, while
Tenneco receives raw materials to manufacture the packaging from other
suppliers. This supply chain is illustrated in Figure 1-1, with the arrows
corresponding to the direction of physical product flow.

A supply chain is dynamic and involves the constant flow of information,

product, and funds between different stages. In our example, Wal-Mart provides
the product, as well as pricing and availability information, to the customer. The
customer transfers funds to Wal-Mart. Wal-Mart conveys point-of-sales data as
well as replenishment orders to the warehouse or distributor, who transfers the
replenishment order via trucks back to the store. Wal-Mart transfers funds to the
distributor after the replenishment. The distributor also provides pricing
information and sends delivery schedules to Wal-Mart. Wal-Mart may send back
packaging material to be recycled. Similar information, material, and fund flows
take place across the entire supply chain.
In another example, when a customer makes a purchase online from Dell
Computer, the supply chain includes, among others, the customer, Dell's Web
site, the Dell assembly plant, and all of Dell's suppliers and their suppliers. The
Web site provides the customer with information regarding pricing, product
variety, and product availability. Having made a product choice, the customer
enters the order information and pays for the product. The customer may later
return to the Web site to check the status of the order. Stages farther up the
supply chain use customer order information to fill the request. That process
involves an additional flow of information, product, and funds between various
stages of the supply chain.

These examples illustrate that the customer is an integral part of the supply
chain. In fact, the primary purpose of any supply chain is to satisfy customer
needs and, in the process, generate profit for itself. The term supply chain
conjures up images of product or supply moving from suppliers to manufacturers
to distributors to retailers to customers along a chain. This is certainly part of
the supply chain, but it is also important to visualize information, funds, and
product flows along both directions of this chain. The term supply chain may also
imply that only one player is involved at each stage. In reality, a manufacturer
may receive material from several suppliers and then supply several distributors.
Thus, most supply chains are actually networks. It may be more accurate to use
the term supply network or supply web to describe the structure of most supply
chains, as shown in Figure 1-2.

A typical supply chain may involve a variety of stages. These supply chain stages
include:
i. Customers
ii. Retailers
iii. Wholesalers/distributors
iv. Manufacturers
v. Component/raw material suppliers
Each stage in a supply chain is connected through the flow of products,
information, and funds. These flows often occur in both directions and may be
managed by one of the stages or an intermediary. Each stage in Figure 1-2 need
not be present in a supply chain. Dell does not have a retailer, wholesaler, or
distributor in its supply chain. In the case of other retail stores, the supply chain
may also contain a wholesaler or distributor between the store and the
manufacturer.

Logistics, in contrast to supply chain management, is the work required to move

and position inventory throughout a supply chain. logistics is a subset of and
occurs within the broader framework of a supply chain. Logistics is the process
that creates value by timing and positioning inventory; it is the combination of a
firm's order management, inventory, transportation, warehousing, materials
handling, and packaging as integrated throughout a facility network. Integrated
logistics serves to link and synchronize the overall supply chain as a continuous
process and is essential for effective supply chain connectivity.

OBJECTIVE OF A SUPPLY CHAIN

Maximize the overall value

The objective of every supply chain should be to maximize the overall value
generated. The value a supply chain generates is the difference between what
the final product is worth to the customer and the costs the supply chain incurs
in filling the customer's request. For example, a customer purchasing a wireless
router from Best Buy pays $60, which represents the revenue the supply chain
receives. Best Buy and other stages of the supply chain incur costs to convey
information, produce components, store them, transport them, transfer funds,
and so on. The difference between the $60 that the customer paid and the sum
of all costs incurred by the supply chain to produce and distribute the router
represents the supply chain profitability or surplus. The higher the supply chain
profitability, the more successful is the supply chain. Supply chain success
should be measured in terms of supply chain profitability and not in terms of the
profits at an individual stage.

Sources of revenue and cost

For any supply chain, there is only one source of revenue: the customer. At Wal-
Mart, a customer purchasing detergent is the only one providing positive cash
flow for the supply chain. All other cash flows are simply fund exchanges that
occur within the supply chain, given that different stages have different owners.
When Wal-Mart pays its supplier, it is taking a portion of the funds the customer
provides and passing that money on to the supplier. All flows of information,
product, or funds generate costs within the supply chain. Thus, the appropriate
management of these flows is a key to supply chain success. Effective supply
chain management involves the management of supply chain assets and
product, information, and fund flows to maximize total supply chain profitability
IMPORTANCE OF BUSINESS LOGISTICS AND SUPPLY CHAIN

- Costs are significant

- Logistics customer service expectations are increasing
- Supply and Distribution lines are lengthening with greater complexity
- It is important to strategy
- It adds significant customer value
- Customers increasingly want Quick, Customized response
- Omni-channel marketing

DRIVERS OF SUPPLY CHAIN

The strategic fit in the next Chapter requires that a company's supply chain
achieve the balance between responsiveness and efficiency that best meets the
needs of the company's competitive strategy. To understand how a company can
improve supply chain performance in terms of responsiveness and efficiency, we
must examine the logistical and cross functional drivers of supply chain
performance: facilities, inventory, transportation, information, sourcing, and
pricing. These drivers interact with each other to determine the supply chain's
performance in terms of responsiveness and efficiency. As a result, the structure
of these drivers determines if and how strategic fit is achieved across the supply
chain.

Facilities

Facilities are the actual physical locations in the supply chain network where
product is stored, assembled, or fabricated. The two major types of facilities are
production sites and storage sites. Decisions regarding the role, location,
capacity and flexibility of facilities have a significant impact on the supply chain's
performance.

Inventory

Inventory includes all raw materials, work in process, and finished goods within
a supply chain. Changing inventory policies can dramatically alter the supply
chain's efficiency and responsiveness.

For example, a clothing retailer can make itself more responsive by stocking
large amounts of inventory and satisfying customer demand from stock. A large
inventory, however, increases the retailer's cost, thereby making it less efficient.
Reducing inventory makes the retailer more efficient but hurts its
responsiveness.

Transportation

Transportation involves moving inventory from point to point in the supply chain.
Transportation can take the form of many combinations of modes and routes,
each with its own performance characteristics. Transportation choices have a
large impact on supply chain responsiveness and efficiency.
For example, a mail-order catalog company can use a faster mode of
transportation such as FedEx to ship products, thus making its supply chain
more responsive, but also less efficient given the high costs associated with
using FedEx. Or the company can use slower but cheaper ground transportation
to ship the product, making the supply chain efficient but limiting its
responsiveness.

Information

Information consists of data and analysis concerning facilities, inventory,

transportation, costs, prices, and customers throughout the supply chain.
Information is potentially the biggest driver of performance in the supply chain
because it directly affects each of the other drivers. Information presents
management with the opportunity to make supply chains more responsive and
more efficient.

For example, with information on customer demand patterns, a pharmaceutical

company can produce and stock drugs in anticipation of customer demand,
which makes the supply chain very responsive because customers will find the
drugs they need when they need them. This demand information can also make
the supply chain more efficient because the pharmaceutical firm is better able to
forecast demand and produce only the required amount. Information can also
make this supply chain more efficient by providing managers with shipping
options, for instance, that allow them to choose the lowest-cost alternative while
still meeting the necessary service requirements.

Sourcing

Sourcing is the choice of who will perform a particular supply chain activity such
as production, storage, transportation, or the management of information. At
the strategic level, these decisions determine what functions a firm performs and
what functions the firm outsources. Sourcing decisions affect both the
responsiveness and efficiency of a supply chain.

For example, after Motorola outsourced much of its production to contract

manufacturers in China, it saw its efficiency improve but its responsiveness
suffer because of the long distances. To make up for the drop in responsiveness,
Motorola started flying in some of its cell phones from China even though this
choice increased transportation cost.

Pricing

Pricing determines how much a firm will charge for goods and services that it
makes available in the supply chain. Pricing affects the behavior of the buyer of
the good or service, thus affecting supply chain performance.

For example, if a transportation company varies its charges based on the lead
time provided by the customers, it is very likely that customers who value
efficiency will order early and customers who value responsiveness will be willing
to wait and order just before they need a product transported. Early orders are
less likely if prices do not vary with lead time..

STRATEGY

A company's competitive strategy defines, relative to its competitors, the set of

customer needs that it seeks to satisfy through its products and services. For
example, Wal-Mart aims to provide high availability of a variety of products of
reasonable quality at low prices. Most products sold at Wal-Mart are
commonplace (everything from home appliances to clothing) and can be
purchased elsewhere. What Wal-Mart provides is a low price and product
availability.

The foundations for success in the marketplace are numerous, but a simple
model is based around the triangular linkage of the company, its customers and
its competitors the Three Cs. Figure illustrates the three-way relationship.

The source of competitive advantage is found firstly in the ability of the

organization to differentiate itself, in the eyes of the customer, from its
competition and secondly by operating at a lower cost and hence at greater
profit.

Seeking a sustainable and defensible competitive advantage has become the

concern of every manager who is alert to the realities of the marketplace. It is
no longer acceptable to assume that good products will sell themselves, neither
is it advisable to imagine that success today will carry forward into tomorrow.
STRATEGY planning, selecting proper channel, performance measurement