CONCEPT OF SUPPLY CHAIN MANAGEMENT

Supply chain management (SCM) is the process of planning, implementing and

controlling the operations of the supply chain as efficiently as possible. Supply Chain
Management spans all movement and storage of raw materials, work-in-process inventory,
and finished goods from point-of-origin to point-of-consumption. The concept of ‘supply
chain’ is well established in the literature and is generally referred to as the alignment of
firms that bring products or services to market (Lambert, Stock and Ellram, 1998).The
supply chain includes manufacturer, suppliers, transporters, warehouses, wholesalers,
retailers, other intermediaries and even customers themselves. Any product traded on the
consumer goods market, in its evolution from raw material to finished products, undergoes
a series of successive transactions on the business to business market. Chopra and Meindl
(2007) believes that ‘a supply chain consists of all parties involved, directly or indirectly, in
fulfilling a customer request. Within each organization, such as a manufacturer, the supply
chain includes all functions involved in receiving and filling a customer request. These
functions include, but are not limited to, new product development, marketing, operations,
distribution, finance, and customer service’.

SCM is the integrated planning, co-ordination and control of all business processes1
and activities in the supply chain to deliver superior consumer value at less cost to the
supply chain as a whole whilst satisfying requirements of other stakeholders in the supply
chain. The definition one American professional association put forward is that 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.
More recently, the loosely coupled, self-organizing network of businesses that cooperates
to provide product and service offerings has been called the Extended Enterprise.

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 Figure 1 : Supply Chain Management

In other words Supply Chain Management means integration and management of

Supply Chain organization and activities through coordinated and collaborative strategic
alliances, efficient business processes and high levels of information sharing to create a
value chain that would provide member organizations a sustainable competitive advantage
and in turn provide value for money to the customer. Instead of brand versus brand or store
versus store, it is now supply chain versus supply chain. In this emerging highly
competitive and dynamic environment, the ultimate success of the Business entity will
depend on management’s ability to integrate the company’s complicated network of
business relationships. The graphic will explain the process of Integration in the Supply
Chain network.

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BASIC ELEMENTS OF SUPPLY CHAIN MANAGEMENT

Chopra and Meindl (2016) states that Supply Chain Management (SCM)
encompasses ‘the planning and management of all activities involved in sourcing and
procurement, conversion and logistics’. In other words, SCM includes the purchasing,
operations, distribution and integration processes that ensure the efficient production and
delivery of goods and services to end-customers as explained below:-

a) Purchasing
The purchasing function, which typically only sources and buys the materials
required for the production or manufacturing of products, manages the activities and
operations related to the supply of inputs (goods, materials and services) under
SCM. In SCM, the purchasing function identifies, qualifies and manages a
company’s suppliers.

b) Operations
The operations function in a supply chain includes demand planning, forecasting,
production, and, in some types of businesses, inventory management.

c) Demand Planning
Demand planning improves the effectiveness and efficiencies of production and
inventory management and provides a forecast of the materials, components and
services needed in future time frames for the purchasing function. Demand planning
is typically an iterative process that combines sales and production forecasts that
provide informed guidance on future sales, revenues, inventory levels and perhaps
even profitability of the company.

d) Forecasting
Within the operations functions of SCM, forecasting is an integral part of demand
planning. Forecasting product demand is the driver for nearly all activities in most

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 businesses, especially operations. A sound and realistic forecast can provide the
foundation for accurate demand planning.

e) Production
Of course, demand planning produces a plan for what the manufacturing or
operations activities of a company is to produce or perform. This plan drives the
labor, materials, processing, and shipping requirements of the company. Often, the
production planning based on demand planning is developed through resource
planning software, such as materials requirements planning (MRP), capacity
requirements planning (CRP or SCM).

f) Distribution
This portion of SCM involves the planning, logistics and delivery of products from
a warehouse or production facility to wholesalers, retailers or end-customers
directly. The distribution function within the SCM model is often expanded to
include packaging, inventory and warehousing, as well as in-bound shipments of
goods and supplies in some cases.

g) Integration
Supply Chain Integration (SCI) is the application of technology to facilitate the
close coordination of the SCM functions, which allows all parties in the supply
chain to see the details of their actions and interactions. SCI also provides for the
analysis historical transactions as a part of demand, inventory and logistics
planning. The key component of SCI is information and how it is collected, stored
and used.

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BENEFITS OF SUPPLY CHAIN ACTIVITIES

The central idea of SCM is to apply a total system approach to managing the flow
of information, materials, and services from raw materials suppliers, through factories and
warehouses, to the end customers, in order to create a higher value compared to competitors
supply chain. SCM has been a major component of competitive strategy to enhance
organizational productivity and profitability Invalid source specified.

Now a days, business enterprises faces an increasing pressure of customers’

requirement in product customization, quality improvement and demand responsiveness
and also the enterprise want to reduce production costs, shorter lead time, and lower
inventory to ensure and enhance profitability. Managers recognize that getting products to
customers faster than the competition will improve company’s competitive position. To
remain competitive, companies must seek new solutions to important Supply Chain
Management issues such as modal analysis, supply chain management, load planning, route
planning and distribution network design. Companies must face corporate challenges that
impact Supply Chain Management such as reengineering globalization and outsourcing.

A study by the A.T. Kearney Management Consulting Company estimates that

Supply Chain costs can represent more than eighty percent of the cost structure in a typical
manufacturing company. These numbers indicate that even slight improvement in the
process eventually can translate into millions of dollars on the bottom line. These costs
include lost sales due to poor customer service or out of stock retail products. For every
dollar of inventory in a system, there are one to two dollars of hidden supply chain costs:
working capital costs, asset costs, delivery costs, write downs and so on.

SCM can helps management to managing supply risk and reducing costs while
maintaining revenue focus (Habib, 2015). Each of these areas of excellence individually
and collectively help to manage the supply risk inherent in today’s global supply chains.
Supply Management drives toward perfect parts availability, thus ensuring maximum
facility throughput. The resulting benefits can be measured in reduced direct material

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spend, increased compliance, reduced inbound supply chain and logistics costs, improved
user productivity, decreased inventory, increased revenue potential, and shorter cash-to-
cash cycles.

Rather than that, Sweeney (2017) said that the SCM can improved customer
retention and increase customer loyalty that improve customer satisfaction via
improvements like streamlining and reducing errors in the invoicing process, eliminating
backorders, reducing errors, improving quality, reducing time to receipt.

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DIFFERENT OF SUPPLY CHAIN PLANNING AND SUPPLY CHAIN EXECUTION

The principal objectives of supply-chain management are normally focused on

optimizing the sequence of operations in combination with the resources that are required
to perform the operations so that the expectations of the customer are satisfied at least cost
to the organization. There are many factors that can make it difficult to achieve an optimum
supply-chain management outcome (Waters 2007). The logistical functions involved
comprise a series of related activities, including acquisition, receiving, warehousing,
inventory management, order processing, transportation, distribution, and so on.

Supply chain planning (SCP) is the forward-looking process of coordinating assets

to optimize the delivery of goods, services and information from supplier to customer,
balancing supply and demand. An SCP suite sits on top of a transactional system to provide
planning, what-if scenario analysis capabilities and real-time demand commitments,
considering constraints.

Supply chain execution (SCE) is focused on execution-oriented applications,

including warehouse management systems (WMSs), transportation management systems
(TMSs), global trade management (GTM) systems, and other execution applications, such
as real-time decision support systems (for example, dynamic routing and dynamic sourcing
systems) and supply chain visibility systems within the enterprise, as well as throughout the
extended supply chain. Sometimes, order management systems are also included in SCE,
but, generally, Gartner does not include order management in its definition of SCE.

What sets planning and execution apart is really the horizon and timing between the
times a decision is made and when it is realized. In general, we plan for responsiveness and
execute for reliability. The more accurate model of the world we have, the better plans we
can make resulting in being more responsive to changes that are not predicted.
Unfortunately, most current S&OP planning systems rely too much on human judgment
and a very basic model of the supply chain, just like spreadsheets. Lack of accuracy in
modeling causes inappropriate reservation of capacity and material resulting in constant

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firefighting when it comes to execution. Some say, S&OP gives visibility. With an
inaccurate model of the supply chain, this kind of ‘visibility’ is very foggy! To this end,
model completeness is crucial for accurate planning. The second and more important factor
is the ability to perform predictive planning not just response planning. Predictive planning
is capable of predicting potential risks in the supply chain and avoids shortages or
redundant inventory. It also ensures that adequate mix of products is made available based
on various factors such as weather, region, type of customer, volume of products etc.

Although demand planning is intended to help with future needs of the customers,
however, it only identifies the potential needs and requirements but it does not have any
knowledge of supply risks and how to avoid the potential problems on the supply side. This
is the job of predictive supply planning with model accuracy and appropriate prescriptive
algorithms. How accurate is your model of your supply chain? Are you still using bucketed
capacities, static lead times and pre-defined bottleneck resources? If so, consider moving to
predictive planning that deploy S&OE to represent accurate models and close to 100% plan
accuracy and seamless execution of plans. This is what digitalization is all about. Learn
more about plan accuracy and digitalization and how S&OE can give you accurate and
reliable plans

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CONCEPT OF DEMAND PLANNING IN SUPPLY CHAIN

Demand planning represents a set of methodologies and information technologies

for the use of demand forecasts in the process of planning. The aim is to accelerate the flow
of raw materials, materials and services beginning with the suppliers through transforming
to products in the company and to their distribution to their final consumers. Demand is one
piece of the important information that can be shared and used in supply chain management
(SCM). Demand sharing and demand forecasting are extremely helpful for supply chain
managers since it provides a great source of information for planning and decision making.
Demand forecasting is the basis for a lot of managerial decisions in the supply chain such
as demand planning, order fulfillment, production planning and inventory control. It is
usually difficult to carry out forecasting with a desired level of precision because of the
volatility and varying uncertainties involved.

Demand planning and forecasting is one of the factors that can contribute to the
volatility of demand. Demand planning is not an easy task and many companies and
forecasters fail to do a scientific forecast. The biggest problem with demand forecasting is
the uncertainty in demand that renders demand forecasting a challenging problem. Demand
accuracy is a critical factor in determining the quality of decision making. Inaccurate
forecasts may cause unnecessary costs in procurement and transportation, manpower,
service level, and inventory. Although demand volatility can be reduced and controlled, it is
inevitable. Thus, it is crucial to have a proper strategy to control volatility.

The demand planning process in the supply chain is done to help the business
understand profit potential. Indirectly it sets the stage for capacity, financing, and
stakeholder confidence (Sheldon 2006). The implementation of the demand planning
enables to determine the closest possible forecast to the planning horizon and decide the
volume of production, stock and sources capacity distribution among particular products to
maximize the profits of the whole company.

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 The key requirement for efficient company management is sharing the mutual
forecast. However, the research carried in production companies showed individual
departments of the company in some cases draw up forecasts on their own and thus they
base their planning on different figures. This provokes conflicts among the resulting
activities of in-company plans (Gros and Grosova 2004).

The same situation happens also in case when the company prefers approved
financial plan which does not correspond with the updated forecast results. The forecasting
should always be the process which is essential and determining for other company
processes, including financial planning. The financial plan, however, often represents the
main motivation source for company managers as it reflects requirements of the company
top management and main strategic company goals.

While managing processes via the demand planning the managers should not be
assessed according to their meeting the financial plan but rather according to their ability to
predict the future development of both the demand and demand control so that the main
strategic goals are way. It is evident the demand planning does not represent only one of
many tools of managing the company processes. It is a whole philosophy of company
planning and decision making on strategic, tactic and operative levels. With regard to the
current turbulent environment escalating requirements on a prompt company response to
customers´ orders, especially the pressure put on ready operative decision making.

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FORCASTING ON DEMAND PLANNING IN SUPPLY CHAIN

Demand forecasting is the prerequisite for strategies that aim to control the
volatility of demand. It is the first step towards dealing with uncertainty and volatility in the
supply chain. Over the past few decades, many different models have been used for retail
sales forecasting. There is no unique solution that can address all types of forecasting
problems and performs better than all other forecasting models in all possible situations and
under all possible conditions. However, some models might outperform others under
particular conditions. For instance, compared the forecasts generated by an artificial neural
network (ANN), triple exponential smoothing, ARIMA, and multiple aggregation methods.
They concluded that ARIMA and triple exponential smoothing outperform the other
models when the macroeconomic conditions are stable, whereas ANN and multiple
aggregations might work better in volatile markets. In other studies and considered CoV as
the statistics in analyzing different time series models. However, they did not investigate
different models performance with respect to their CoV as an important feature of demand
series in SC context that can impact the forecasting performance. These methods
underestimate or neglect volatility as a factor that can impact the performance of the
forecasting models. We shall construct or choose an appropriate model based on the
characteristics of the demand.

The forecasting is a process in course of which possible future variants of a

phenomenon or object, maybe even variant solutions of ways leading to future situations
are formulated. The forecasting creates a basis for planning company processes (Johnson
2009). It enables managers to plan future needs and consequently make rational decisions.
Forecasting is a continuous process that requires product managers to think about markets
and understand those (Haines 2008).

Forecasting methods were developed since the 1950s for business forecasting and at
the same time for econometric purposes. The application in software modules makes it
possible to forecast for a lot of items in a few seconds (Stadtler 2008). Accurate demand
forecasts are an important input to decision models used in APS. Forecast errors are

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directly related to required safety stocks, while frequent adjustments of demand forecasts
can lead to dramatic changes in plans (Stadtler 2005). If the company wants to maximize
the effect of accessible methods for internal company processes, it must build on objective
and evaluated demand forecasts. The choice of optimum forecasting procedures and
following use of obtained forecasts may become a competitive advantage.

Together with other modern methods it accelerates other company processes,

reduces the costs and increases the value for the customer. The demand forecast determines
the volume of products, place and time horizon in which they will be needed. In relation
with the demand forecast it is necessary to deal not only with the quantitative aspect of the
needs (the volume demanded by customers) but also their qualitative aspect (the type of
customers´ needs). The accurate demand forecast is thus important for the production and
distribution management but also for e. g. areas of marketing (distribution of sales forces,
communication, promotion and planning of new products), finance (current need of money,
budgets and calculations), investment designs (production facilities, workshops and
warehouses), research and development (innovations) and human resources (structure and
labour force volume planning, training). It is important to accept the process of forecasting
as a part of company planning. A lot of small and middle-size businesses neglect this
activity or avoids it on purpose as it evokes feelings of vanity with most practitioners
(Sindelar, 2009).

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PUSH AND PULL SYSTEM

Push system is a manufacturing system in which production is based on a projected

production plan and where information flows from management to the market, the same
direction in which the materials flow. Pull System is a manufacturing system in which
production is based on actual daily demand (sales), and where information flows from
market to management in a direction opposite to that in traditional (push) systems.

In this strategy the material is pushed to the supply chain from the initial raw
material end to the customer end on the basis of the demand forecasts. At the end of the
supply chain, the finished goods await customers’ orders. Naturally inventory in various
forms (raw material, work-in-progress and finished goods) exists at the various points in
the supply chain, ‘just-in-case’ it may be required. Push process operate in an uncertain
environment in which customer demand is not yet known.

In this strategy a customer order pulls material into the supply chain. However, the
catch here is that the customer should be willing to wait during the time the product is
being processed in the supply chain. If the waiting time on part of the end customer is
stretched too long, this strategy starts failing. Pull Process operate in an environment in
which customer demand is known. A major advantage of this strategy is that in an ideal
scenario, there would be zero inventories all across the supply chain. Initially most of the
organizations were following Push system but in the last two decades pull system is
pushing the push system. These systems have led to the development of lean manufacturing
and Kanban System. Although all sectors cannot go for the pull system and some have to
follow push.

A push-pull-based supply chain strategy is an amalgamation of push-and pull-based

strategies. The downstream operations from the initial raw material supplier end to another
player in the chain are pursued on push-based strategy, while the remaining part of the
chain is operated on pull based strategy as shown in figure 1. For example the designing,
planning, and procurement of components are done through the push-based strategy by

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utilizing the aggregate demand forecasts for the various models and variants of the product.
However, the assembling of the product starts only when the actual customer demand
comes in at the retailer’s end of the chain.

The paint industry can be considered as the best example of push and pull boundary,
they have gained substantially by having a push-pull based system. In last few decades in
lieu of completing the whole process of mixing colors at the large plants. They have started
providing facility to retailers who can mix the color as per the demand of the customer. In
other word, the color mixing was shifted from push to pull strategy. This helped to reduce
the retailers in reducing the inventory also coping ever changing demand. The result is win-
win situation for both the customer and retailer as the customer is delighted to get all colors
available, whereas retailers are saving on the inventory costs and no possibility of shortages
which was the major issue few decades back.

A push/pull view of the supply chain categorizes processes based on whether they
are initiated in response to a customer order (pull) or in anticipation of a customer order
(push). This view is useful when to follow which strategy as can be seen in the figure 1,
push/pull boundary, this boundary separates push processes from pull process. Thus, here
organization is following combination of both push and pull strategy.

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REFERENCES
Bozarth, C. & Handfield, R.B., (2017). Introduction to Operations and Supply Chain
Management. 2nd edition. Upper Saddle River: Pearson Prentice Hall.

Burgess, K., Singh, P. & Koroglu, R., (2006). Supply Chain Management: A Structured
Literature Review and Implications for Future Research. International Journal of
Operations & Production Management, 26 (7), pp.703-729

Chopra, S. & P. Meindl, (2016), Supply Chain Management, Prentice Hall

Chopra, S. & Meindl, P., (2017). Supply chain management: strategy, planning, and
operation. 3rd edition. Upper Saddle River: Pearson Prentice Hall.

Christopher, M. & Towill, D.R. (2000). Supply chain migration from lean and functional to
agile and customised, Supply Chain Management, Vol. 4, No. 5, pp. 206-213

Habib, M., (2015). Supply chain management: theory and its future perspectives. International
Journal of Business, Management and Social Sciences, 1 (1), pp. 79-87.

Lambert, D. & Martha C. Cooper (2000) Issues in Supply Chain Management, Industrial
Marketing Management 29, 65-83

Russel, R. S. & Taylor, B.W., (2016). Operations Management along the Supply Chain. 6th
edition. Hoboken: John Wiley & Sons

Sweeney, E., (2017). Perspectives on Supply Chain Management and Logistics. Dublin:
Blackhall Publishing.

Waller. D.L., (2014). Operations management: a supply chain approach. 2nd edition. London:
Thomson Learning.

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