1 Module 1 Supply Chain Fundamentals

Course Overview and Module 1: Supply Chain Management Fundamentals Table of Contents COURSE OVERVIEW ............. ............................... ..... ...................................................... ....... ....... i MODULE 1: SUPPLY CHAIN MANAGEMENT FUNDAMENTALS Introduction ......................................... ... .. .................. ............... ........................................................... 1-l Section A: Overview of Supply Chain Management ..................... .. .................................... 1-3 Identifying Supply Chains ................................................................................... ... ............................. 1-3 Key Supply Chain Management Processes ......... .............................................................................. 1-10 Evolution of Supply Chain Management .......................................................................................... 1-17 Creating Value through Supply Chain Management.. ....................................................................... 1-29 The Impact of Globalization on Supply Chain Management. ........................................................... 1-45

Section B: Supply Chain Management Strategy .. ............................................................... 1-51 Corporate Strategy ............................................................................................................................. 1-52 Aligning Supply Chain Strategy with Corporate Strategy .............................. .. ................................ 1-75 Competitive Priorities and Future Direction ..................................................................................... 1-86 Using Enterprise Resources Planning (ERP) to Align Operations with Strategy .............................. 1-90 Supply Chain Risk Management Strategies ....... .. ........................................... ......... ......................... 1-92

Section C: Managing the Supply Chain ......................................................... ....................... 1-103 Using Corporate and Supply Chain Strategies to Set Priorities and Make Decisions ..................... 1-104 Elements of Supply Chain Management ......................................................................................... 1-110 Supply Chain Performance Metrics ................................................................................................. 1-114 Managing the Supply Chain for Financial Performance .............................. ................................... 1-128 Managing and Leading People in the Supply Chain ...................................... ................................. 1-133 Synchronization and Key Success Factors ..................................................... ............. .................... 1-136 Security and Compliance Issues .................................................................... .. ..... .. ......................... 1-138

Section D: Improving the Supply Chain ............................................ ................................... 1-146 Continuous Improvement ........................................ .. ................................ .. .. ....... ... ........................ 1-146 Visibility and Analysis ....................................... ............................................................................. 1-152

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Goals and Benchmarking .............................................................................................................. .. . 1-160 Continuous Improvement Methods ......... .. ...................................................................................... 1-162 Implementation and Change Management ...................................................................................... 1-185

Exam Preparation Questions ................ ................................................................ .................. .. 1-192 Bibliography ..................................................................................................................................... l-196 Cumulative Course Index ................... .................,......................... ............................................. 1-200

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APICS Certified Supply Chain Professional™ (CSCP) Learning System This product is based on the APICS CSCP Exam Content Manual (ECM) developed by APICS. Although the text is based on the body of knowledge tested by the APICS CSCP exam, program developers do not have access to the exam questions. Therefore, reading the text does not guarantee a passing score. The references in this manual have been selected solely on the basis of their educational value to the APICS CSCP certification program and on the content of the material. APICS does not endorse any services or other materials that may be offered or recommended by the authors or publishers of books and publications listed in this module. Every effort has been made to ensure that all information is current and correct. However, laws and regulations are constantly changing. Therefore, this product is distributed with the understanding that the publisher and authors are not offering legal or professional services. Acknowledgments We would like to thank the following dedicated subject matter experts who shared their time, experience, and insights during the initial development and subsequent updates of the CSCP Learning System: Greg P. Allgair Curtis Brewer, CFPIM, CIRM, CSCP Jashobrata Bose, CSCP AI Bukey, CFPIM, CIRM, CSCP Luc Chalmet, Ph.D, CFPIM, CSCP Prashant Chaudhary, CSCP Prasanta K. Dash, CSCP, PMP Sudripto De, CSCP Alan Downs, CPIM, CSCP Janice M. Gullo, CPIM, CSCP Amit Kumar Gupta, BE, CSCP Joni Holeman, CFPIM, CIRM, CSCP Eric P. Jack, Ph.D., CFPIM, CSCP Rajesh Kumar Jagadeeswaran, CPIM, CSCP Dave Jankowski, CFPIM, CSCP Julie Jenson, CPIM, CSCP Honey Johnson, CFPIM, CIRM, C.P.M., CSCP

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Rajesh Kamat, CSCP Prakash Kanagalekar, CPIM, CSCP Jack Kerr, CPIM, CSCP, C.P.M. Jose Lara Mike Loughman, CSCP Giuseppe Lovecchio, CFPIM, CSCP Richard Merritt, CFPIM, CSCP, C.P.M. Thiagu Mathan, CSCP Alan L. Milliken, CFPIM, CIRM, CSCP Peter W. Murray, CIRM Mike Okrent, Ph.D., CIRM, CSCP Kasthuri Rengan Ponnambalam, CSCP Gautam Chand Pradhan, CPIM, CSCP David Rivers, CFPIM, CIRM, CSCP Maryanne Ross, CFPIM, CIRM, CSCP

Kimber Rueff, CPIM, CIRM, CSCP, C.P.M. Ignacio Sanchez-Chiappe Carolyn Sly, CPIM, CSCP, C.P.M. Pam Somers, CPIM, CIRM, CSCP Chad Stricklin Shashank Tilak, CPIM, CSCP Huan-Jau (Arthur) Tseng, CFPIM, CSCP Dave Turbide, CFPIM, CIRM Sudeep Valmiki, CSCP Rosemary Van Treeck, CPIM, CIRM, CSCP Robert Vokurka, Ph.D., CFPIM, CIRM, CSCP, C.P.M. Eddie J. Whitfield, CPIM, CIRM, CSCP Vivek Wikhe, CSCP Blair Williams, Jonah, CFPIM, CSCP

The APICS CSCP Learning System is printed on 30% post-consumer waste recycled paper.

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Course Overview Welcome to the APICS Certified Supply Chain Professional™ (CSCP) Learning System. Whether you are interested in professional development or are pursuing the APICS CSCP credential, you will find the program to be a complete, easy-to-use learning and reference tool.

+ Getting Started Course materials

This course allows you to work at your own pace to increase your understanding of supply chain and operations management and the APICS CSCP body of knowledge. It includes four printed textbooks (called modules), which correspond to the knowledge domains tested on the APICS CSCP exam. The course also includes online practice tests and learning reinforcement activities. Please check that you have received the four modules and your access code (provided to you via e-mail) for the online course components. If anything is missing or if you have not received your access code, please contact APICS CSCP Learning System Customer Support at 888-266-9079 or 651-905-2664.

Enrolling in the course

Before you use the Web components of the course, you must enroll: 1.

Go to www.LearnCSCP.com, and, from the menu sidebar, select Enroll.

2.

Enter your access code EXACTLY AS SHOWN; it is case-sensitive.

3.

Accept the default setting "I am a new user." Click Enroll. Enter your first name and last name. Create a user name and password between four and eight characters long. Then click OK.

After enrollment, the access code is no longer needed. You will use your user name and password to log in, so write this information in the space below. APICS Certified Supply Chain Professional Learning System User name:

I

Password:

Note that your access code is valid for one year after your first enrollment.

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Course Overview

Accessing the program

Once you are enrolled, you can access and leave the program as often as you wish. To access the program: 1.

Go to www.LearnCSCP.com.

2. Enter your user name and password. 3. Click Log In to enter the course. Read the online overview, and then go to the course menu, from which you select course components. Exiting the program

You may exit the program from most screens by clicking Log Out. This option allows you to leave the program and return at a later time to where you left off. All current scores and your current place in the tests are saved. You may start any activity over at any time. Ifyou start over in a test, your current score is erased. Upon completion of that test, your new score is saved and displayed on your report.

Online help

The Help option on the Enroll screen is available to answer common questions related to enrollment and log-in. If you require additional assistance, please contact APICS CSCP Learning System Customer Support at 888-266-9079 or 651-905-2664, Monday through Friday, 8 a.m. to 5 p.m., central time. For specific details regarding the certification exam, please visit www.APICS.org/cscp.

Learn more

The APICS CSCP Learning System combines printed material and online software plus an instructor-led option to enhance your learning effectiveness. Go to www.APICS.org/cscp to learn more about the advantages of APICS membership, the power of certification, and the various learning options.

+ Completing the Course Increase your knowledge base wit/1 this enjoyable and complete program as you prepare for the APICS CSCP examination and develop your professional expertise.

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The APICS CSCP Learning System is based on the APICS CSCP Exam

Content Manual (ECM). Using a blend of printed text and online practice testing and learning reinforcement activities, the course provides an enjoyable and complete preparation method for the APICS CSCP certification exam. You may complete the course in any order. The following describes the recommended, step-by-step method.

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Step 1: Complete the pre-test. You begin the program and plan your own course of study by completing the online pre-test. This 50-question test checks your basic understanding of supply chain concepts. As you answer each pre-test question, you will know immediately if your answer is correct or incorrect and you are given a reference to the module from The pre-test allows you to evaluate your understanding of supply chain concepts and focus your study.

which the question was drawn. If you leave the test, you can reenter it and will have the option to either continue or restart the test. You may also print any page by using your browser's print function. The test is timed to enable you to determine whether you are answering questions at the pace needed to complete the APICS CSCP certification examination within the time allotted. If you are interested in timing your test, allow yourself an uninterrupted block of time. When you have completed the pre-test, you see a chart that shows your moduleby-module score. You may use this chart to develop a study plan to help focus your efforts on the modules you need to examine most thoroughly. Use the print function on your browser if you want to print a copy of your pre-test results.

The entire program includes more than 750 pages of text reinforced by online practice testing and learning reinforcement activities.

Step 2: Study the print modules. Based upon your individual study profile, study each of the four modules at your own pace. The modules include the following topics, which correspond to those that constitute the APICS CSCP Exam Content Manual. The APICS CSCP certification exam questions are distributed among the four modules.

At the end of each module section is a progress check. Progress check questions provide an opportunity for you to stop and think about what you have just studied. They include a page reference with the correct answer to guide further review.

Module 1: Supply Chain Management Fundamentals (30%) •

Overview of Supply Chain Management

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Supply Chain Management Strategy

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Managing the Supply Chain

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Improving the Supply Chain

Module 2: Building Competitive Operations, Planning, and Logistics (20%) •

Demand Planning

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Product Design Considerations

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Operations Planning and Control

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Logistics

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Course Overview

Module 3: Managing Customer and Supplier Relationships (30%) Each module includes a bibliography referencing the books used in the development of that module.

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Relationship Management in SCM

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Customer Relationship Management (CRM)

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Supplier Relationship Management (SRM)

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Integrated Customer/Supplier Relationship Management

Module 4: Using Information Technology to Enable Supply Chain Management (20%)

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Role oflnformation Technology in the Supply Chain

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ERP in Supply Chain Management

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Innovative Technologies and Their Uses

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Using IT to Enhance Supply Chain Performance

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e-Business

Step 3: Complete the module-specific test. Module-specific tests check your understanding of each module.

Module-specific tests contain 20 questions. You may take as many tests as you like, as often as you like. After you answer each question, you will know immediately if your answer is correct or incorrect along with the reasoning for the correct answer. If you leave the test, you can reenter it and will have the option to either continue or restart the test. You may also print any screen by using your browser's print function. The test is timed to enable you to determine whether you are answering questions at the pace needed to complete the APICS CSCP examination within the time allotted.

Step 4: Complete the module-specific eFiashcards. These eFiashcards provide an opportunity to review terms and definitions by module.

After you have studied each module and taken the module-specific test, complete the eFlashcards for that module. The eFlashcards are drawn from the glossary and represent the terms identified as key or supplemental by the APICS Exam Content Manual. The eFlashcards present a definition of a term, and you supply the term. You may visit the Information Center to download a printable version of the module-specific eFlashcards.

Step 5: Complete the eFiashcards across modules. eFiashcards can also be chosen and printed to review terms and definitions across modules.

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After you have studied all of the modules, taken the module-specific tests, and reviewed the module-specific eFlashcards, complete the eFlashcards across modules. You may visit the Information Center to download a printable version of these eFlashcards.

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Step 6: Complete the post-test. When you reach this point, you've studied all the components of the program and are ready to measure your learning gain. The 50-question post-test draws Post-test questions will be new. If you don 't pass the posttest, the program helps redirect your study efforts, and then you can take the test again. Or use the post-test as a refresher to help you stay current.

from a different bank than you saw in the pre-test, so all the questions are new. After you answer each question, you will know immediately whether your answer is correct or incorrect and will see the reasoning for the correct answer to help clarifY your understanding. The timing feature allows you to determine if you are on track to complete the certification exam in the time allotted. If you leave the test, you can reenter it and will have the option to either continue or restart the test. After you finish the post-test, you may view your report, which compares your pre-test and post-test scores and your scores on questions related to each of the four modules. You may take the post-test as many times as you wish until you are satisfied with your results. Each time you retake the post-test, your last score is erased and your new score is saved. Your most recent score is available to you on the report.

Step 7: Review your report. Review your report to measure your progress through the course at any time.

At any time, you may view an online report of your progress by clicking the Report link. The report shows the dates you have completed tests as well as your most recent pre-test, module-specific test, and post-test scores. You can use this report to determine where you may have areas of strength or weakness to direct further studying of the course.

Step 8: Complete the Program Evaluation. Help us improve our product offerings and request your Letter of Recognition.

Upon completion of the course, we would appreciate your feedback. Select Program Evaluation and Certificate of Achievement from the menu and complete the online form. Upon successful completion of the course (a post-test score of at least 80 percent), you can request a Certificate of Achievement (recognizing completion of the learning system) from the Program Evaluation form.

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Course Overview

The following is a graphic representation of the APICS CSCP Learning System.

APICS CSCP Learning System

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Module 1

Module2

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Module4

ModuleSpecific Test

ModuleSpecific Test

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ModuleSpecific eF!ashcards

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Module 1: Supply Chain Management Fundamentals

Introduction There have been supply chains as long as there have been suppliers and customers, but the evolving discipline of managing those chains for competitive advantage belongs to recent decades. Even the term "supply chain" came into common usage only toward the end of the 20th century. As with many other phenomena occurring in that period of time, supply chains and their management reflect the revolution in electronic communication and the shrinking of the world into one global community-what author Tom Friedman calls the flattening of the globe. There were supply chains when primitive hunters brought back skins for transformation into garments for use or trade. Marco Polo went east in search of trade routes to bring raw materials from "the Orient" to Europe. But the scope, scale, and speed of supply chain processes have all gathered revolutionary momentum-and businesses around the world hasten to catch up or, in the case ofleaders like Toyota, Wal-Mart, and Zara, to stay ahead. Their opportunities result from the flattening of the global playing field and advances in technology; their discoveries contribute to globalization and revolutionary technology. Supply chain management may be a young discipline, but like those other young disciplines, rocket science and brain surgery, it isn't a simple one. It also resembles other youngsters in its rapid rate of development. Staying abreast of the theoretical and practical aspects of supply chain management-even keeping up with the vocabulary-requires constant attention. This first module in the APICS CSCP Learning System, Supply Chain Management Fundamentals, provides basic information that forms a foundation both for the following modules in the course and for the continuous learning you will do later to stay current with new developments.

2010 APICS All rights reserved.

•

Section A introduces essential concepts and vocabulary, including definitions and illustrations of the terms "supply chain" and "supply chain management." It also traces the continuing evolution of supply chain management, identifies business processes that are specific to supply chains, and describes ways in which supply chain management can create value for customers and investors.

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Section B explores supply chain strategies, including their alignment with corporate strategy, how to change strategy when conditions require change, and how to manage risk.

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lvfodu /e I: Supply Chc1in J\tlcmogement F11ndamen tals

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Section C explains the principles of supply chain management, from the setting of supply chain objectives through decision making, management of human resources, risk management, metrics, and financial performance.

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Section D explores the methods of assessing, measuring, and improving supply chain performance.

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Section A: Overview of Supply Chain Management

This section is designed to

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Define and illustrate the supply chain as a concept

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Define supply chain management as a concept and provide examples

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Describe the evolution of supply chain management globally and within companies

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Identify and describe key supply chain processes

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Identify specific ways in which supply chain management creates value for customers and investors (customer value and financial value) Define globalization and illustrate its impact on supply chain management.

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+Identifying Supply Chains Basic supply chain

According to the APICS Dictionary, 12th edition, a supply chain is a "global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash." A supply chain, in this view, comprises a network of both entities and processes (the engineered flow). A supply chain doesn't have to be global, but the massive chains that interest us in this course-the ones that run through corporations such as Wal-Mart, Mitsubishi, Dell, and the clothing chain Zaraare decidedly global in scope. Exhibit 1-1 illustrates a very basic supply chain (one that isn't necessarily global) with three entities-a producer with one supplier and one customer. Exhibit 1-1: The Basic Supply Chain

Supplier

Producer ............ Primary product flow

Customer ............ Primary product flow

Primary cash flow

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These "entities" that perform the processes can be business or governmental organizations or (at least in theory) individuals. They can also be departments or functional areas or individuals within a larger organization; there are internal as well as external supply chains. For the most part the model applies to corporations. Most work on supply chains, both theoretical and applied, involves a manufacturing firm in the middle (although service firms also have supply chains) with a supplier of materials or components on the "upstream" side and a customer on the "downstream" side. Technically, a supply chain needs only those three entities to exist, but that isn't realistic for the types of global supply chains of interest in this course.

Basic supply chain: three entities

The simplified chain in Exhibit 1-1 might be made up of these organizations: •

A supplier, defined in the APICS Dictionary, 12th edition, as a "provider of goods or services [or a] seller with whom the buyer does business, as opposed to a vendor, which is a generic term referring to all sellers in the marketplace." The supplier provides materials, energy, services, or components for use in producing a product or service. These could include items as diverse as sugar cane, fruit, industrial metals, roofing nails, electric wiring, fabric, computer chips, aircraft turbines, natural gas, electrical power, or transportation services.

•

A producer that receives services, materials, supplies, energy, and components to use in creating finished products, such as dress shirts, packaged dinners, airplanes, electric power, legal counsel, or guided tours. (Note that supply chains for services may be more abstract than those for manufacturing.)

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A retailer that receives shipments of finished products to deliver to its customers, who wear the shirts, eat the packaged dinners, fly the planes, or tum on the lights.

Basic supply chain: four flows

Four basic flows connect these entities together: •

The flow of physical materials and services from suppliers through the intermediate entities that transform them into consumable items for distribution to the final customer

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The flow of cash from the customer back "upstream" toward the raw material supplier

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The flow of information back and forth along the chain (also back and forth within the entities and between the chain and external entities, such as governments, markets, and competitors)

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The reverse flow of products returned for repairs, recycling, or disposal (This is called the reverse supply chain, and it is handled by reverse logistics, which involves different arrangements than the forward logistics that carried materials and products in the other direction.)

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Section A: Overview of Supply Chain Management

Supply chain example

Consider, as a very simplified instance of this stripped-down supply chain model, a young girl and her sister who set up a lemonade stand to sell lemonade made by their mother to passersby on the comer. In the United States, this is a familiar sight on warm summer days. In many ways, the lemonade stand resembles small family businesses that exist in cities all across the world-a vegetable stand in a farmer's market, a sidewalk grill cooking crepes or shish kebab, a cart filled with souvenirs for passing tourists. It is a simpler example, however, in that the lemonade stand requires no licensing and isn't technically commercial. It's more a family hobby or a business lesson for the children involved. The lemonade stand represents one end of a supply chain. The supplier is the comer store that sells basic ingredients to the mother. The mother is the "producer" who turns the ingredients into lemonade. The stand, operated by the girls, is the retailer that sells lemonade to the customers, consisting of the thirsty, or perhaps merely sympathetic, passersby who pay for a glass of lemonade. (In this case the retailer is most likely not a paying customer of the producer, but at least in theory the mother might be taking a cut of the profits.) Notice that even in this simplest of supply chains, the basic model needs amplification. For instance, there are more suppliers than one. While sugar and lemons may be procured from the same comer store, water comes from the kitchen faucet, and the supplier of water may actually be a government entity rather than another business. Electricity is supplied to light the kitchen "manufacturing center." Adjacent to the work site is a warehouse of sorts with refrigeration for storing the fruit plus shelves and drawers to hold various supplies, such as glasses and utensils. There is also wood to build the stand and poster paper and markers for making signs to advertise the stand. Somewhere in the chain, though they remain invisible in our model, are suppliers' suppliers, who bring materials, components, or services to the comer grocery and the utilities.

Manufacturing supply chain model

Exhibit 1-2 on the next page at least hints at the organizational complexity that appears in corporate supply chains by adding a second tier of suppliers and more distribution centers and customers. Notice that there are suppliers of services as well as materials. Discussions of supply chains typically put manufacturing at the center and suppliers of components to the iinmediate left. It may be that component suppliers are the most crucial consideration when designing and managing a supply chain for manufactured products, but utilities and other services are not inconsequential contributors to the cost of operations.

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Module I: Supply Chain Management Fundamentals

Exhibit 1-2: Manufacturing Supply Chain Model

Information flow

Distributor

Cu stomer Distributor Cu stomer Primary ........ -product flow

Primary

-+--- payment flow

In the case of our lemonade stand, services most obviously include utilities, transportation, warehousing, carpentry, and cleanup, among others. Utilities, which are suppliers to all manufacturers, are crucial considerations when locating plants and warehouses. If water and electricity (or natural gas, or both) are not available at a proposed site, they cannot be readily made available. The exhibit also shows that Tier 1 suppliers have their own suppliers in Tier 2. The grocery store that supplies the lemons and sugar for the lemonade has its material and service suppliers-and they have their suppliers, and so forth. The sugar is not a raw material but a product with its own supply chain that begins in a cane field (probably in a different country) and is processed in a plant, shipped to a wholesaler, and distributed to the comer store. No matter how far you travel toward the left, you will never run out of new tiers of suppliers. Even a raw material extractor, such as a coal mine, has its own suppliers of extraction machinery and services. In fact, the coal mine may ship coal to a generating plant that supplies power to the manufacturer that produces a machine that is shipped to a distributor that sells mining equipment to the same mine that began the process; supply chains can double back on themselves. (Note: The APICS Dictionary, 12th edition, defines a distributor as "a business that does not manufacture its own products but purchases and resells these products.")

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2010 APICS All rights reserved.

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Section A: Overview of Supply Chain Management

Services also have supply chains

Although the traditional supply chain model was developed in manufacturing, the service industry, too, has supply chains. According to the APICS Dictionary, 12th edition, a firm in the service industry is "in its narrowest sense, an organization that provides an intangible product (e.g., medical or legal advice)." More generally, the Dictionary defines service industries as "all organizations except farming, mining, and manufacturing [including] retail trade; wholesale trade; transportation and utilities; finance, insurance, and real estate; construction; professional, personal, and social services; and local, state, and federal governments." Service-oriented supply chains also require sophisticated management. Exhibit 13 illustrates, in simple form, the supply chain of an electric utility. It receives products, services, and supplies of its own and dispenses its services into three distribution channels: home customers, commercial customers, and other utilities. Exhibit 1-3: Electric Utility Supply Chain Fuel supplies

j Electric backup power

J

Electric transformers Home customers Facility maintenance

""--1Commercial customers I

I Programming services I Jan.itoria l services

.. The flows in our lemonade stand example aren't quite as simple as might be supposed, either. The "products" that move through the chain could include materials, supplies, and the components used in the production of the lemonade. Information flows may be fairly rudimentary: orders submitted by end users of the product, by the distributor to the manufacturer, and by the manufacturer to the supplier. There will be recipes and shopping lists, discussions of potential demand, perhaps records oflast year's results. The flows of cash may be based upon information contained in cash register or credit card receipts at the comer store, mailed (or e-mailed) utility bills, and, of course, the mortgage payments made on the manufacturing center/warehouse/residence. Quite possibly the utility bills are paid electronically-a significant improvement in the velocity of that part

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Module 1: Supply Chain Management Fundamentals

of the supply chain and a time saver for the accounting department (the mother, when she pays the bills). Cash travels in several separate flows from the manufacturer to suppliers of products and services and, of course, to the mortgage company. There are also logistics concerns: transportation from one entity to the other-perhaps drawing upon the private fleet of two cars-as well as the warehousing decisions, which are more likely thought of as kitchen design in this case. And, finally, the reverse supply chain-you'll read more about that later in this module and in Module 2-exists to return any unacceptable lemons (or any overstock), to recycle the peels into a composter, to reuse glasses and other supplies after sterile cleansing, and to dispose responsibly of any packaging. Our lemonade business avoids many complexities that confront a profit-making enterprise. There are no competitors, for one thing, although competition is not out of the question. Other children in the neighborhood might set up a business to distribute store-bought lemonade, thus cutting out the manufacturer in the kitchen and putting the supplier in charge of product design. Another stand might be set up with "make-to-order" (the product is made after receipt of the order) lemonade squeezed and sweetened to each customer's taste. There are also no taxes, no regulations (at least none that the family takes into account), and no labor contracts. All those complications might loom down the road, however. Many global businesses began in someone's home office, garage, or basement with the glimmering of an idea for, let us say, a computer operating system or a new idea for consumer-to-consumer e-commerce. Perhaps Mom comes up with a new twist on the old recipe for lemonade; a customer is impressed and asks the girls to cater a party; someone at the party owns a neighborhood store or restaurant ... and before long the family has purchased a processing facility to supply fruit-based drinks to franchised "Thirst-Ade" stands in three time zones and has direct links to farms around the world for fresh fruit in all seasons. It's surprising how many challenges and opportunities confronting the largest corporations and supply networks are anticipated-and can be seen most easily-in a very simple model. Notice one last aspect of this lemonade stand supply chain. Unlike many traditional supply chains involving corporations, this one quite likely included a good deal of collaborative planning (a process where supply chain partners jointly plan key supply chain activities) in regard to demand forecasts (predicting customer demand) and replenishment (replacing material in the supply chain), at least involving the manufacturer and distributors. Finance may also have contributed to the plans. Some of the problems that supply chain management strives to overcome are implicit in a simple model-because the problems have arisen as a direct result of the massive scale of modem supply chains.

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Section A: Overview of Supply Chain Management

Summing up

There are many variations on the basic supply chain models presented so far. Here are some basic points to keep in mind as the discussion continues and grows more complex. •

A supply chain involves, directly or indirectly, everyone and everything required to extract materials, transform them into a product, and sell the product to a user.

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Supply chains include various entities, such as raw material extractors, service and component suppliers, a material product manufacturer or a producer of services, distributors, and end customers.

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Supply chains can be viewed in terms of processes, such as the gathering and processing of marketing data, distribution and payment of invoices, processing and shipping of materials, scheduling, fulfillment of orders, and so forth. Such functions cut across entities.

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Supply chains include various flows as well as various entities. Materials and services flow from suppliers toward customers; payment flows from customers toward suppliers; information flows both ways. Supply chains also run in reverse, starting with the customer who sends back such items as components for replacement or repair, returned goods for remanufacture, and obsolete goods for recycling or disposal. The reverse chain, like the forward chain, also comprises information flows and cash or credits.

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There are stakeholders outside the basic supply chain model that can significantly affect its functioning for good or ill. These include, most significantly, governments that may build infrastructure, enforce regulations, levy (or forgive) taxes, and in various ways create a climate in which businesses either thrive or stagnate. Other stakeholders include the public at large and providers of knowledge, such as universities and trade associations. (Information flows into a supply chain from such sources as well as flowing back and forward among entities in the chain.) Finally, competitors also affect the functioning of a supply chain in more ways than one. Competition can not only threaten a chain; it can energize it as well. And sometimes competing businesses directly foster each other's growth by participation in trade associations and joint ventures. Whenever a competitor creates an improved product or business process, the entire marketplace is enriched by the new ideas.

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+Key Supply Chain Management Processes Supply chain processes

The definition of supply chain seems fairly solid when you consider the chain as linked organizations-supplier, producer, and customer connected by product, information, and payment flows. But the supply chain is more accurately viewed as a set of linked processes that take place in the extraction of materials for transformation into products (or perhaps services) for distribution to customers. Those processes are carried out by the various functional areas within the organizations that constitute the supply chain. When considered as a set of processes rather than a succession of companies, the supply chain becomes just a little more difficult to identify-let alone manage. In this discussion of key processes, we'll outline one of the more widely known process-oriented models: the Supply-Chain Operations Reference model. This model was developed and is maintained by the Supply-Chain Council (SCC), a nonprofit membership organization open to all interested corporations, nonprofit organizations, government and military agencies, consultants, and academicians. We'll also apply a version ofthe process model to service supply chains, which have received much less attention than manufacturing chains. But before we look at the model, we'll analyze several definitions of supply chain management.

Beware of conflicting definitions

Not all authors agree on the definition of supply chain, and that can be a source of confusion. In addition, you may see references to the supply chain that include only the suppliers. In this view, supply chain management is restricted to supply management. The rest of the chain (possibly excepting production) is called the distribution chain and is subject to distribution management. For this course, definitions of supply chain management (SCM) and related references integrate the three functions-supply, distribution, and production-linked in a relationship.

Value chain primary activities and the supply chain

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Another source of confusion about definitions comes from the sometimes interchangeable use of"value chain" and "supply chain." Although many would assume that a supply chain is, in fact, a value chain-at least it is if well managed-others draw a distinction between the two. A value chain is a string of collaborating players who work together to satisfy market demands for specific products or services. According to the APICS Dictionary, 12th edition, the value chain is made up of"the functions within a company that add value to the goods or services that the organization sells to customers and for which it receives payment." Value chains integrate a variety of supply chain activities throughout the product/service life cycle, from determination of customer needs through product/service development,

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production/operations, and distribution. The intent of a value chain is to increase the value of a product or service as it passes through stages of development and distribution before reaching the end user. A value chain seeks to achieve the highest levels of customer satisfaction and value while effectively exploiting the competencies of all parties in the supply chain. Not all value chain activities are technically part of the supply chain, and those engaged in them may not understand their role in supporting the supply chain. For example, managers from outside the supply chain often don't understand the requirements of supply chain management, can't distinguish value chain from supply chain, and consequently don't provide the SCM support required from their areas. Among these areas are engineering, marketing, finance, accounting, information technology, human resources, and legal. Each of these areas has specific responsibilities in relation to effective management of the supply chain. Later in this course we'll look specifically at the role of marketing (Module 2) and information technology (Module 4), and we'll see more about people management in Sections Band C of this module. It's possible to disagree about which support responsibilities belong to value chain management and not to supply chain management; the important point is that they have to be carried out in such a way as to support the supply chain. Another closely related term is "value stream." A value stream encompasses all the primary actions required to bring a product or service from concept to placing it in the hands of the end user. As defined in the APICS Dictionary, 12th edition, a value stream is: The processes of creating, producing, and delivering a good or service to the market. For a good, the value stream encompasses the raw material supplier, the manufacture and assembly of the good, and the distribution network. For a service, the value stream consists of suppliers, support personnel and technology, the service "producer," and the distribution channel. The value stream may be controlled by a single business or a network of several businesses. It's worth noting that in this definition, as in many discussions of supply chains, value chains, and value streams, it is difficult to maintain a clear separation between processes- such as manufacture and assembly on the one hand-and entities, such as raw material supplier and distribution network on the other. While "stream" implies flow and, therefore, processes, "chain" implies physical entities. Since both entities and processes are crucial in supply chain management, it seems best to assume that the term "supply chain" includes both.

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APICS definition of supply chain management

And, finally, the APICS Dictionary, 12th edition, defines supply chain management as "the design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally." (Globally, in this case, can mean either worldwide or applying to the chain as a whole rather than to a particular entity within the chain.) There is really nothing in this definition incompatible with others we've explored, except for possible differences in opinion about what functions are and are not technically part of the supply chain. Moreover, the APICS definition provides guidance on the activities and objectives of supply chain management, and the course follows that guidance. Explaining all the parts of the APICS definition requires more than a sentence or a paragraph. (In fact, it takes the four modules of this course to do so in depth.) But there are a few things to note right away. Supply chain management is about creating net value; early efforts at managing chains often focused only on cost reduction-on making the chain leaner. Unfortunately, these efforts sometimes reduced the ability to create value more than they reduced costs, for a net negative effect. As we'll see, there's more to creating value through intelligent management than simply squeezing costs out of one or another activity in the chain. The definition also assumes value-creating activities that transcend the activities of particular entities in the chain-activities, for example, that are planned and coordinated between two or more entities in the chain. This of course raises the question of who will manage those activities, since a supply chain isn't an entity like a corporation with its own management structure. Supply chains are generally organized by one strong firm called a channel master or nucleus firm-often a manufacturing firm, sometimes a powerful retailer. Nevertheless, the chain has to produce value for more than one stakeholder in addition to generating value for the consumers or investors. Given the nature of groups, one would expect this to be a challenging task, especially in "worldwide" chains; think of the rivalries that arise among the 50 United States, the 25 nations in the European Union, the three nations in the North American Free Trade Agreement (Mexico, Canada, and the United States), the various sects of any world religion, or the divergent personalities in an extended family. As in all these other complicated enterprises, managing supply chains requires a balancing act among competing interests.

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SCOR® supply chain process model

The Supply-Chain Operations Reference (SCOR®) model is "a process reference model developed and endorsed by the Supply-Chain Council as the cross-industry standard diagnostic tool for supply chain management" (APICS

Dictionary, 12th edition). The SCOR model presents the Supply-Chain Council's consensus view of supply chain management and reflects the collective wisdom of years of field-based practices. The model provides a unique framework that links business processes, metrics, best practices, and technology features in a unified structure. SCOR Model 9.0 assumptions

The Supply-Chain Council (SCC) intends the SCOR model for use by its members to enhance their understanding of their supply chains and associated processes and to improve their supply chain performance. The SCC carefully defines the boundaries within which the SCOR process model applies. Specifically, it does not apply to all business processes, only to those involved in the supply chain as the chain extends two tiers in both directions from the company at the core ("Your Company" shown in Exhibit 1-4 on the next page). SCOR Version 9.0 does apply to the following activities: •

All customer interactions from order entry through paid invoice

•

All product transactions (defined as physical materials and services), including equipment, spare parts, bulk product, and software, among others

•

All market interactions from understanding aggregate demand through order fulfillment

SCOR Version 9.0 does not apply to the following processes: •

Sales and marketing (defined as demand generation)

•

Research and technology development

•

Product development

•

Some elements of post-delivery customer support (but it does include returns as a fundamental process)

(SCOR does note some of the many links that can be drawn from processes in the model to processes outside the model, such as product development. The product flows from supplier toward customer in the basic model shown in previous illustrations; that representation assumes that the product has already been designed and tested for production. Nevertheless, the design of a product may significantly influence the functioning of the chain, so supply chain representatives should play a role in the design process, as you'll see in Module 2.) Because all business activities are related throughout an organization, the SupplyChain Council is hosting efforts to build models of sales, design, and marketing using the same logic as the model featured here.

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SCOR does not address the following but assumes that they exist: •

Training

•

Quality

•

Information technology (IT)

•

Administration (other than SCM administration)

As shown at the bottom ofExhibit 1-4, the SCOR model refers to the members of the supply chain pictured in our earlier exhibits, with slight modifications. At the center is "Your Company." To the immediate right is the first tier of customers, which can be either internal or external; to the left is the first tier of suppliers, which, again, can be either internal or external. The model goes out two tiers in both directions; the second-tier suppliers and customers are asswned to be external. But the main focus of the model is on the chain's five management processes: plan, source, make, deliver, and return. These processes-which are not traditional functional areas or departments- exist within the member firms of the chain. According to the SCOR 9.0 model, all five processes are carried out by the central triad of chain members (which, after all, may be under the same ownership and upper management). The members at each end of the chain (a raw material supplier and a retail outlet, for example) perform only two processes (the supplier's supplier handles only delivery and returns, while the customer's customer manages only sourcing and returns). While the model focuses on "Your Company" and two tiers of suppliers and customers, it can be applied to supply chains containing many linked firms. Exhibit 1-4: SCOR Supply-Chain Operations Reference Model

Suppliers' Supplier

I 1

SupplierInternal or External

.---~~------~·

Your Company

CustomerInternal or External

Customer's Customer

Source: Adapted from Supply-Chain Council

SCOR Model 9.0 applicability

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There is more to the SCOR model than the five process descriptions and their relationships as illustrated in Exhibit 1-4. Later in this module we'lllook more

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closely at the way the model can be used to describe, measure, and improve the performance of supply chain processes in "Your Company." Membership in the SCC is open to all types of global organizations. Many case studies are available for download from the SCC Web site, including SCOR initiatives at Charoen Pokphand, Daikin Europe, KPMG, Siemens, the U.S. Department of Defense, and the University ofNew Zealand.

Five SCOR processes

As you can see in Exhibit 1-5 on the next page, the more detailed descriptions of the five main processes refer to such matters as product engineering, warehousing, product inventories, and return of defective products. We'lllook at the SCOR model again in Section C, "Managing the Supply Chain," to show how it can be used in assessing a supply chain and measuring progress toward achieving supply chain objectives. For now, take a look at the descriptions of each of the five management processes in Exhibit 1-5. The SCOR process model is not static. For example, the fifth process, Return, was added after the first iterations of the model to recognize the growing importance of the reverse supply chain, which accommodates the flow of products back from the end user for replacement, warranty repairs, recycling, or disposal. What we say in this course applies specifically to Version 9.0 of the SCOR model. We'll come back to SCOR later when looking at supply chain management practices in more detail. The most important point to remember from this introduction to the model is the focus on processes. Once you orient your strategic planning toward improving processes rather than functional silos, everything changes. In organizations, the term "silo" is a metaphor drawn from the large storage silos prevalent throughout American agricultural communities. The use ofthe term generally implies a lack of communication and common goals and suggests that each department in an organizational chart is an individual silo that stands alone, without interacting with any of the other departmental silos. A simple example of a process focus (not functional silo) is applying SCOR in planning. You might ask a question such as "How do we improve the way we make the product?" or "How do we bring delivery more into line with customer demands?" Some answers will logically come from traditional supply chain functions. The logistics manager may very well have an answer to the question about delivery based on either traditional or innovative thinking about transportation modes and schedules. But an engineer might have an idea for changing the way the product is manufactured or assembled to provide more consumer choice for the same cost; a component supplier, if brought into the design process, might offer a suggestion about materials that better suit the features that someone in marketing has identified.

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Exhibit 1-5: SCOR Processes Defined Demand/Supply Planning and Management • Balance resources with requirements and establish/communicate plans for the whole supply chain, including Return, and the execution processes of Source, Make, and Deliver. • Management of business rules, supply chain performance, data collection, inventory, capital assets, transportation, planning configuration, and regulatory requirements and compliance. • Align the supply chain unit plan with the financial plan. Sourcing Stocked, Make-to-Order, and Engineer-to-Order Product • Schedule deliveries, receive, verify, and transfer product, and authorize supplier payments. • Identify and select supply sources when not predetermined, as for engineer-to-order product. • Manage business rules, assess supplier performance, and maintain data. • Manage inventory, capital assets, incoming product, supplier network, import/export requirements, supplier agreements, and supply chain source risk. Make-to-Stock, Make-to-Order, and Engineer-to-Order Production Execution • Schedule production activities, issue product, produce and test, package, stage product, and release product to deliver. With the addition of Green to SCOR, there are now processes specifically for waste disposal in Make. • Finalize engineering for engineer-to-order product. • Manage rules, performance, data, in-process products (WIP), equipment and facilities, transportation, production network, regulatory compliance for production, and supply chain make risk. Order, Warehouse, Transportation, and Installation Management for Stocked, Make-toOrder, and Engineer-to-Order Product All order management steps from processing inquiries and quotes to routing shipments and selecting carriers. Warehouse management from receiving and picking product to load and ship product Receive and verify product at customer site and install, if necessary. Invoicing customer. Manage Deliver business rules, performance, information, finished product inventories, capital assets, transportation, product life cycle, import/export requirements, and supply chain deliver risk. Return of Raw Materials and Receipt of Returns of Finished Goods All Return Defective Product steps from source-identify product condition, disposition product, request product return authorization, schedule product shipment, and return defective product-and deliver-authorized product return, schedule return receipt, receive product, and transfer defective product. All Return Maintenance, Repair, and Overhaul product steps from source-identify product condition, disposition product, request product return authorization, schedule product shipment, and return MRO product-and deliver- authorize product return, schedule return receipt, receive product, and transfer MRO product. All Return Excess Product steps from source-identify product condition, disposition product, request product return authorization, schedule product shipment, and return excess productand deliver-authorize product return, schedule return receipt, receive product, and transfer excess product. Manage Return business rules, performance, data collection, return inventory, capital assets, transportation, network configuration, regulatory requirements and compliance, and supply chain return risk. Source: SCOR 9.0 Ovetview Booklet, Supply-Chain Council

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A real-world example of supplier-aided design occurred, in fact, at BMW. One of the automaker's top suppliers proposed adding fiber optic-enabled light rings to the headlights, a distinctive feature that drivers in front of the BMW would recognize as a signal to move aside and let the oncoming "Ultimate Driving Machine" pass-a particularly useful feature on Germany's Autobahn with its provision for extremely fast driving. BMW and the supplier jointly developed the idea under a contract that ensures exclusive rights for the automaker. This is a particularly rich example of creative supply chain management, demonstrating partnership across company boundaries and the reliance on a supply chain unit for outside-the-box (or outside-the-silo) contributions. The supplier partnership created here transcended silos and the traditional transaction-based selection of the low bid on a project exhaustively designed by the manufacturer. Managing a process requires skill in bringing people and ideas together in new configurations, whereas managing silos tends to focus attention on increasing speed and cost efficiency in one area of the company without regard to other areas. We've looked at the five processes in the SCOR model developed by the Supply-Chain Council. This model provides useful guidance in developing cross-functional, cross-company approaches to managing supply chain processes. Next we'lllook at the evolution of supply chain management as leading companies have evolved techniques and technologies to make these processes more efficient and effective in creating value for customers and other key supply chain stakeholders. For additional information about the Supply-Chain Council and the SCOR 9.0 model, visit www.supply-chain.org or contact the council's headquarters (info@supply-chain. org).

+Evolution of Supply Chain Management Two types of supply chain management

Firms have generally pursued one of two types of supply chain management, called vertical and lateral (or horizontal) integration. Vertical integration, or vertical supply chain management, refers to the practice of bringing the supply chain inside one organization. Henry Ford often receives mention as an especially successful avatar ofthis approach. In the early days of the automotive industry, Ford pursued a strategy of owning and controlling as many links in the automobile supply chain as possible. While this structure still persists in some companies, it generally went out of fashion as corporations became vaster in scale and global supply chains became longer. It's difficult for one corporation to gamer the expertise needed to excel in all

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elements of the supply chain, so corporations in Europe and North America, especially, have turned instead to outsourcing those aspects of their business in which they judge themselves to be least effective. Ford Motor Company is no exception to this trend. Like the other two major U.S . automakers, Ford divested itself of the production of many components, as Chrysler Corporation shed its Mopar (motor parts) division and General Motors turned loose its component supplier to become Delphi Corporation. Lateral supply chain management has replaced vertical integration as the favored approach to managing the myriad activities in the supply chain. The lateral, or horizontal, approach is assumed in most supply chain illustrations, including the ones featured so far in this text. We usually assume that the customer-producer-supplier illustrations refer to three separate companies. This is, of course, not necessarily the case; the entities could be departments within one company- a supplier of tires in one department, an assembler of finished automobiles in another (the assembly line), and a wholly owned dealership at the customer end. But, in point of fact, horizontal chains are now the way of the world and, therefore, the major focus of supply chain theory and application. In this discussion of supply chain evolution, we will look first at vertical integration and then at the stages of evolution in the management of lateral supply chains.

Vertical integration

Vertical integration-the ownership of many or all parts of a supply chain- is one method of supply chain management that has been around longer than the tetm "supply chain." By bringing many supply chain activities in-house and putting them under corporate management, vertical integration solves the problem of who will design, plan, execute, monitor, and control supply chain activities. A vertically integrated enterprise may grow from an entrepreneurial base by adding departments and layers of management to accommodate expansion, or it may be built through mergers and acquisitions. One often-cited example of vertical integration is the automobile company built by the first Henry Ford. In an attempt to create a self-sufficient enterprise, Ford owned iron ore mines, steel mills, and a fleet of ships as well as the manufacturing plants and showrooms that built and distributed the cars bearing his name (and, eventually, Lincolns and Mercurys as well). Exhibit 1-6 illustrates, roughly, the vertical integration of a supply chain as practiced by Henry Ford.

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Exhibit 1-6: Vertical Integration/Supply Chain Management a Ia Henry Ford

Ownership Management Marketing/Sales Finance

Vertical integration persists as one method of managing a supply chain; wireless phone companies, for example, may purchase the phones, stock them at retail outlets, sell them, provide coverage, and handle warranty service. Nevertheless, many of the multinational corporations that once were vertically integrated have chosen to eliminate non-core functions within the company and rely instead on outside supply chain partners. The complexity and expense of managing all those diverse activities drives top management to sell off assets not directly contributing to the core business. In today's global economy, many companies have divested themselves of

their in-house component suppliers. Rather than bringing all the functions inside the walls of one corporation, large manufacturers and service providers are now more likely to adopt a lateral supply chain strategy. In a lateral chain, separately owned firms focus on core competencies such as extraction or production and deal with each other through discrete transactions or by longer-term contracts. The primary benefit of vertical integration is control. A department or wholly owned subsidiary with no independent presence in the marketplace can't deal with competitors to sell its components or services at a higher price. Its operations are completely visible to the parent company (at least in theory) and can be synchronized with other company functions by directives from the top. Its schedules, workforce policies, locations,

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amounts produced-all aspects of its business-are controlled by the overarching management.

Lateral integration

Once corporate ownership abandons the idea of vertical integration and turns instead to outsourcing various activities, it loses control ofthese aspects of the supply chain and has to deal with separately owned companies as suppliers or customers. Nevertheless, that's been the dominant trend in the evolution of supply chain management during recent decades in North America and elsewhere. Some Japanese companies, on the other hand, favor an intermediate form of integration called "keiretsu." The APICS Dictionary, 12th edition, defines keiretsu as follows: A form of cooperative relationship among companies in which the companies largely remain legally and economically independent, even though they work closely in various ways such as sole sourcing and financial backing. A member generally owns a limited amount of stock in other member companies. Among the reasons for relying on a lateral supply chain, the following three stand out: •

To achieve economies of scale and scope No matter how large the corporation, its internal supply chain functions lack economies of scale when compared with the potential capacity of an independent provider of the same product or service. This assumes, of course, that the independent provider supplies all the needs of the original corporation and other customers as well. In that case, the supplier is most likely dealing directly with companies that compete with one another for the same business. The gain in scale may come at a price in confidentialitythough lack of confidentiality cuts both ways.

•

To improve business focus and expertise Vertical integration, in a globally competitive market, multiplies the complexity of managing disparate businesses spread across international borders, time zones, and oceans. The independent company that focuses entirely on its particular business can develop more expertise than an inhouse department, leading to more attractive pricing, higher quality, or both. Both the function spun off and the parent firm benefit from a cleaner focus on what they do best after they part company.

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•

Because it's possible With the advent of advanced communication technology, many of the barriers to doing business at a distance have been falling away. Nearly instantaneous communication means, for example, that information can be shared simultaneously by videoconference or in chat rooms around the globe. As the entire globe becomes a marketplace, it makes sense to deal with already established companies that know their local markets. Many apparel companies in Europe, for example, work through Dutch logistics centers to take advantage ofHolland's central location and because a number of specialized firms have sprung up there with well-developed capabilities in handling both the distribution and the return of clothing.

Despite the attractions of the lateral chain, however, the fact remains that synchronizing the activities of a network of independent firms can be enormously challenging. What each firm gains in scale, scope, and focus, it may lose in ability to see and understand the larger supply chain processes-or care about them. Exhibit 1-7 hints at the complexity of a multi tiered chain- but only hints at it. As you can see, "horizontal" doesn't quite capture the complexity of the global supply network with multiple connections around the world and information shared on networks connected all along the chain. Exhibit 1-7: Lateral (Horizontal) Supply Chain

Information flows

Primary product flows

Stages of supply chain management evolution

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Primary cash flows

In biology there used to be a saying, "Ontogeny recapitulates phylogeny"; the individual develops through the stages of species evolution. It was thought that the fetus developed gills to represent evolution through the fish stage, for instance. It's a little like that with supply chains. The advances made over the past few decades in supply chain management are generally reproduced in each supply chain's development. Some authors divide this evolution into three stages, some into four, and some five. There's no important quarrel about the

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These initiatives will generally not be coordinated with one another, however, and will therefore fall short of their potential for reducing costs, improving margins, expanding markets, or delivering better products and services to end users. Exhibit 1-9 provides an illustration of Stage 2 supply chain evolution, the semifunctional enterprise. Information flow has been improved and functional areas have been defined-but they tend to perform their functions one after the other without collaborating on the most effective ways of creating value. There are as yet no partnerships with customers and suppliers. Exhibit 1-9: Semifunctional Enterprise