Supply Chain Chapter 3
Supply Chain Chapter 3
Supply Chain Chapter 3
• Definition: Sourcing is the broader process • Definition: The supply chain encompasses the
of identifying, evaluating, and selecting end-to-end process of creating and delivering
suppliers to obtain goods or services. products, involving the entire network from
• Scope: It involves activities such as supplier raw material suppliers to end customers.
identification, evaluation, negotiation, and • Scope: It includes procurement, logistics,
selection. production, distribution, and customer service.
• Example: Conducting a comprehensive • Example: Managing the entire lifecycle of a
assessment of potential suppliers based on product, from sourcing raw materials to
factors like quality, cost, reliability, and manufacturing, distribution, and ultimately
sustainability delivering the finished product to customers.
The key components of procurement
1. PEOPLE
2. PROCESSES
Processes refer to the series of interconnected steps and activities that define how
procurement is carried out within an organization.
Procurement processes include requisitioning, vendor selection, negotiation, purchase
order creation, receiving goods or services, and payment processing.
Efficiency and Effectiveness: Well-defined and optimized processes contribute to the
efficiency and effectiveness of procurement operations. Streamlining processes helps
reduce errors, delays, and costs.
The key components of procurement
3. PAPERWORK
Sourcing strategy deals with planning, designing and building a reliable and
competitive supplier base, determining the strategy for procurement,
defining pricing strategies and supply chain requirements.
The strategy involves confirming to the objectives of stakeholders in
operations, finance, marketing and distribution.
Some supply chain managers favor “everyday low pricing” strategies to
reduce demand distortion, improve customer service, and lower costs.
Others apply “high-low pricing” strategies to clear slow moving items and
build retail traffic, thereby increasing revenues.
• Sourcing is the entire set of business processes required to purchase goods and services.
• Sourcing processes include:
üsupplier scoring and assessment
üsupplier selection and contract negotiation
üdesign collaboration
üProcurement
üsourcing planning and analysis
• The most significant decision is either to outsource or perform in-house.
• In business, the term word sourcing refers to a number of procurement practices, aimed at finding,
evaluating and engaging suppliers of goods and services. The methodology involved in procuring
the necessary materials, supplies, and services necessary to sustain a supply chain system.
• A thorough understanding of a company’s business strategy, the resources required to deliver that
strategy, the market forces and the unique risks within the company associated with implementing
specific approaches is essential for success.
• To ensure the achievement of desired results and continued alignment with business objectives, a
periodic review of the sourcing strategy is needed.
Sourcing strategies
The sourcing strategies used in supply chain management includes:
Ø Single sourcing: Single sourcing is a method whereby a purchased part is supplied by only one supplier.
A Just-in-time (JIT) manufacturer will frequently have only one supplier for a purchased part so that
close relationships can be established with a less number of suppliers. These close relationships and
mutual interdependence promote high quality, reliability, less time and cooperative action.
Ø Multisourcing: Multi-sourcing is a method whereby procurement of a good or service is from more
than one independent supplier. It is used sometimes in a company to induce healthy competition
between the suppliers in order to achieve higher quality and lower price.
Ø Outsourcing: Outsourcing is the process of having suppliers that provide goods and services previously
provided internally. Outsourcing involves the replacement of internal capacity and production by that
of the supplier. This third party can increase the supply chain surplus relative to performing the activity
in house. Outsourcing makes sense only if it increases the supply chain surplus without increasing the
risks.
Ø Insourcing: Insourcing is the process where the goods or services are developed internally.
Typical Services included:
• Transporta6on – air, road, rail,
3PL ship
• Warehousing
A growing number of companies are turning to • Pick and Pack, Labelling
third party logis6cs organiza6ons to handle the • Light manufacturing /assembly
customer fulfilment in the supply chain. • Vendor managed inventory (VMI)
Companies that are accustomed to true • Inventory management
partnering with customers and suppliers have • Customs clearance
less trouble moving to the third party logis6cs • Managing reverse logis6cs –
and achieving the poten6al cost savings. returns
• Recycling of packaging
The key steps are to conduct a complete search
for the right third party logis6cs vendor,
thoroughly review cost proposals and contracts
to ensure there is financial benefit, and work
with the third party logis6cs.
Reasons why companies often Outsource Logistics
A supply chain strategy is a plan for how a business will manage and
op7mize its supply chain to meet its strategic goals
§ different characteris3cs
§ e.g. demand vola3lity/ value / volume /
weight / shelf-life / cri3cality, etc.
§ different service requirements
§ e.g. lead-3me / delivery frequency / order
quan33es, etc.
1. Differentiate - ‘One size never fits all’: Segment /prioritise the product
/customer base and design the best supply chain for each;
2. De-couple the supply chain: between Lean (push) and Agile (pull) processes;
place strategic inventory at the decoupling point;
3. Postpone: delay adding value wherever possible (form and place postponement);
4. Reduce the Lead-time Gap: work to reduce the gap and become less reliant on
finished product forecasts;
5. Use real-time demand data: make real-time demand available upstream at the
information de-coupling point, and use it to make supply & production decisions;
Designing a Responsive Supply Chain
Five Key concepts:
3. Postpone:
Postponement involves delaying the customiza4on or final
configura4on of a product un4l closer to the customer order. This helps
reduce the risk associated with forecas4ng and allows for a more
responsive and agile supply chain.
Lean Agile
“having no surplus flesh or bulk” § “quick in movement : nimble”
Waste elimination § Quick response -velocity
Robust processes § Flexible processes
Minimisation of inventory and WIP § Customised service
Cost transparency in the supply chain § End-to-end Visibility
Multi skilled workers § Postponement of final configuration
Reduced change-over times § Synchronised with true demand
Continuous improvement § Value creation
Physically Efficient § Market Responsive
Consider demand volume and variability
High
“Agility” is needed in
less predictable
environments where
Demand Variability AGILE
the demand for variety
Product Variety/
is high.
The Supply Chain Order De-coupling Point refers to the specific stage
in the supply chain where products shift from being standardized and
mass-produced to becoming customer-specific or customized. It is the
point in the production process where the product's generic features
are established, and any further differentiation or customization is
postponed until closer to the customer.
The aspects of Supply chain order de-coupling point
• Standardized vs. Customized Products:
• Standardized Phase: Up to the de-coupling point, products are typically produced in a
standardized manner with minimal variations. This phase involves creating generic or
standard configurations.
• Customized Phase: Beyond the de-coupling point, customization occurs to meet specific
customer demands. Products are adapted or configured based on individual
requirements.
• Flexibility and Responsiveness:
• The de-coupling point allows supply chains to balance efficiency and responsiveness.
• Before this point, processes focus on efficiency, cost-effectiveness, and high-volume
production.
• After the de-coupling point, the emphasis shifts to responsiveness, customization, and
meeting specific customer needs.
The aspects of Supply chain order de-coupling point
• Strategic Placement:
• The exact location of the de-coupling point varies based on the industry, product characteristics,
and customer expectations.
• For example, in the automotive industry, the de-coupling point might be closer to the end of the
assembly process, allowing for customization of features like color and accessories.
• Postponement Strategies:
• Postponement involves delaying the final configuration or customization of a product until there is
more clarity about customer demand.
• This strategy helps reduce the risk of producing excess inventory of customized products that may
not align with actual market demand.
• Balancing Efficiency and Responsiveness:
• The concept of the de-coupling point reflects the challenge of balancing conflicting goals within a
supply chain: the efficiency of mass production versus the responsiveness to individual customer
preferences.
Supply chain drivers
Supply chain drivers determine the supply chain performance. For each driver, managers must make tradeoffs
between efficiency (cost) and responsiveness. The drivers of supply chain include:
1. Inventory: It consists of all raw materials; work in process, and finished goods within a supply chain.
Inventory is maintained in the supply chain because of mismatches between supply and demand. Increasing
inventory gives higher responsiveness but results in higher inventory carrying cost.
2. Transporta@on: It involves moving inventory from one point in the supply chain to another point. A number
of decisions have to be taken in designing a supply chain regarding transporta@on. The six basic modes of
transporta@on are:
• Air
• truck (road)
• Rail
• Ship
• Pipeline
• electronic transporta@on (the newest mode for music, documents etc)
3. Facili@es: A facility is a place where inventory is stored, manufactured or assembled. Hence, facili@es can be
categorized into produc@on facili@es and storage facili@es. The facili@es related decisions involve loca@on,
capacity, manufacturing methodology or technology and warehousing methodology.
4. Informa@on: It consists of data and results of analysis regarding inventory, transporta@on, facili@es,
customer orders, customers, and funds. Good informa@on drives good decisions.
Supply chain drivers
Supply Chain Operations Reference (SCOR) Model
The supply chain operations reference model (SCOR) is a management tool used to
address, improve, and communicate supply chain management decisions within a
company and with suppliers and customers of a company. The model describes the
business processes required to satisfy a customer’s demands. It also helps to explain
the processes along the entire supply chain and provides a basis for how to improve
those processes.
The SCOR model was developed by the supply chain council with the assistance of 70
of the world’s leading manufacturing companies. It has been described as the “most
promising model for supply chain strategic decision making.” The model integrates
business concepts of process re-engineering, benchmarking, and measurement into its
framework. This framework focuses on five areas of the supply chain: plan, source,
make, deliver, and return. These areas repeat again and again along the supply chain.
The supply chain council says this process spans from “the supplier’s supplier to the
customer’s customer.”
Supply Chain Operations Reference (SCOR) Model