Supply Chain Management

By

Ramya U K

Mohammad Shadab

Jayeeta Bhattacharya

Shweta Vijaykumar

Prashant Sharma

Akshat Srivastav

Mehul Jain

Harsimran Kaur

1

Contents Introduction to Supply Chain Management ................................................................................................. 3

Need of Supply Chain Management ............................................................................................................. 5

Evolution ....................................................................................................................................................... 6

SCOR Model .................................................................................................................................................. 8

SCOR spans: .............................................................................................................................................. 8

Scope of SCOR ........................................................................................................................................... 9

Porter’s Value Chain.................................................................................................................................... 11

Industry Strategies ...................................................................................................................................... 13

Total quality management .......................................................................................................................... 15

Six Sigma ..................................................................................................................................................... 15

DMAIC ..................................................................................................................................................... 16

DMADV or DFSS ...................................................................................................................................... 16

Just in time (JIT) .......................................................................................................................................... 17

Lean Management ...................................................................................................................................... 17

Key Challenges of Applied Innovation ........................................................................................................ 18

Key Benefits ................................................................................................................................................ 19

Inventory ..................................................................................................................................................... 20

Types of inventory .................................................................................................................................. 20

Introduction to Inventory Management in SAP ...................................................................................... 20

Organizational Structure ......................................................................................................................... 20

Goods Movements .................................................................................................................................. 21

Transportation ............................................................................................................................................ 22

Modes of Transportation ........................................................................................................................ 22

Transportation Management .................................................................................................................. 24

Facilities ...................................................................................................................................................... 25

Key Facilities decisions: ........................................................................................................................... 25

Factors influencing Facilities decisions: .................................................................................................. 25

A framework for facilities /Network Design ........................................................................................... 26

Role of Information Technology in SCM ..................................................................................................... 27

Procurement ............................................................................................................................................... 29

2

Procurement process in SAP MM (Materials Management) .................................................................. 30

3

Introduction to Supply Chain Management

A supply chain is the composite of business processes, people and organization, technology,

and physical infrastructure which transform raw materials into intermediate & finished

goods/services which are offered & distributed to the consumer.

In any manufacturing company, material flow can be basically classified into three phases.

Flow of raw material from suppliers into the manufacturing facility.

Flow of material within the manufacturing facility as they are processed.

Flow of finished goods from the manufacturing facility to the end customers.

SCM is the integration of all the activities in the supply chain to achieve a sustainable

competitive advantage. Supply Chain can be broadly classified of comprising of three networks

– Supplier, Firm and Distribution.

Basically a supply chain is:

A set of approaches used to efficiently integrate Suppliers, Manufacturers,

Contract Manufacturers, OEMs

Distribution centers Warehouses, Transporters

Customers

So that the product/service is produced and distributed

In the right quantities and condition to the right locations

And at the right time

System-wide costs are minimized and Service level requirements are satisfied.

Customers, Producers and Suppliers can be interconnected in the Supply chain as follows:

4

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

operations of the supply chain with the purpose to satisfy customer requirements as efficiently

as possible. It begins and ends with the customer. SCM spans all movement and storage of raw

materials, work-in-process inventory, and finished goods from point-of-origin to point-of-

consumption.

Hence organizations must be involved in the management of management of suppliers who

provide direct and indirect material inputs, must increase the manufacturing competitiveness

and must effectively manage the network of distribution systems responsible for delivery of the

product to end customers.

Logistics, also called as Physical distribution, focuses on the physical movement and storage of

goods and materials. Logistics is that part of the supply chain process that plans, implements,

and controls the efficient, effective forward and reverse flow and storage of goods, services,

and related information between the point of origin and the point of consumption. Typical

issues in logistics are evaluation of various transportation options, packaging options, inventory

management for different channels, develop and manage networks of warehouses when

needed, and manage the physical flow of materials into and out of the organization. Therefore,

logistics is a subset in the broader scope of SCM.

The term “Supply Chain Management” was coined by consultant Keith

Oliver, of strategy consulting firm Booz Allen Hamilton in 1982.

5

Need of Supply Chain Management

Global optimization is difficult because supply chains need to be designed for, and operated in,

uncertain environments, thus creating enormous risks to the organization. A variety of factors,

like the ones mentioned below contribute to it.

1. Matching supply and demand is a major challenge. This difficulty stems from the fact

that months before demand is realized, manufacturers have to commit themselves to

specific production levels. These advance commitments imply huge financial and supply

risks.

2. Inventory and back-order levels fluctuate considerably across the supply chain, even

when customer demand for specific products does not vary greatly.

3. Forecasting doesn’t solve the problem. Indeed, the first principle of forecasting is that

“forecasts are always wrong.” Thus, it is impossible to predict the precise demand for a

specific item, even with the most advanced forecasting techniques.

4. Demand is not the only source of uncertainty. System variations over time are also an

important consideration. Even when demand is known precisely (e.g., because of

contractual agreements), the planning process needs to account for demand and cost

parameters varying over time due to the impact of seasonal fluctuations, trends,

advertising and promotions, competitors’ pricing strategies, and so forth. Delivery lead

times, manufacturing yields, transportation times, and component availability also can

have significant supply chain impact. These time-varying demand and cost parameters

make it difficult to determine the most effective supply chain strategy, the one that

minimizes system-wide costs and conforms to customer requirements.

5. Recent trends such as lean manufacturing, outsourcing, and offshoring that focus on

cost reduction increase risks significantly. Similarly, outsourcing and offshoring imply

that the supply chains are more geographically diverse and, as a result, natural and

man-made disasters can have a tremendous impact too.

6. The supply chain is a dynamic system that evolves over time. Indeed, not only do

customer demand and supplier capabilities change over time, but supply chain

relationships also evolve over time.

6

Evolution

In the 1980s, companies discovered new manufacturing technologies and strategies that

allowed them to reduce costs and better compete in different markets. Strategies such as just-

in-time manufacturing, kanban, lean manufacturing, total quality management, and others

became very popular, and vast amounts of resources were invested in implementing these

strategies. In the last few years, however, it has become clear that many companies have

reduced manufacturing costs as much as is practically possible. Many of these companies are

discovering that effective supply chain management is the next step they need to take in order

to increase profit and market share.

The huge pressure during the 90s to reduce costs and increase profits pushed many industrial

manufacturers towards outsourcing. Forms considered outsourcing everything from the

procurement function to production and manufacturing. Indeed, in the mid-90s there was a

significant increase in purchasing volume as a percentage of the typical firm’s total sales.

Finally, in the late 90s, the Internet and the related e-business models led to expectations that

many supply chain problems would be solved merely by using new technologies and business

models. E-business strategies were supposed to reduce cost, increase service level, and

increase flexibility and, of course, increase profits, albeit sometime in the future. In reality,

these expectations frequently were not met, as many e-businesses failed. In many cases, the

downfall of some of the highest-profile Internet businesses can be attributed to their logistics

strategies. In many cases, the Internet introduced new channels and helped to enable the

direct-to-consumer business model. These new channels required many companies to learn

new skills, and added complexity to existing supply chains.

The landscape has changed in recent years. Industry recognized that trends, including

outsourcing, offshoring, lean manufacturing, and just-in-time, that focus on reducing

manufacturing and supply chain costs significantly increase the level of risk in the supply chain.

As a result, over the past several years, progressive firms have started to focus on strategies

that find the right balance between cost reduction and risk management. A number of

approaches have been applied by industry to manage risk in their supply chains:

• Building redundancy into the supply chain so that if one portion fails, for example, a fire at a

warehouse or a closed port, the supply chain can still satisfy demand.

• Using information to better sense and respond to disruptive events.

• Incorporating flexibility into supply contracts to better match supply and demand.

• Improving supply chain processes by including risk assessment measures.

7

Of course, many of these approaches rely heavily on technology. Indeed, the implementation of

ERP systems, motivated in many companies by year 2000 concerns, as well as new technology

such as tools for supplier performance assessments, have created opportunities to improve

supply chain resiliency and responsiveness. Similarly, advanced inventory planning systems are

now used to better position inventory in the supply chain, and to help firms better understand

the impact of product design alternatives on supply chain costs and risks, thus facilitating the

integration of the development chain and the supply chain.

8

SCOR Model

The Supply Chain Operations Reference-model (SCOR) is a process reference model that has

been developed and endorsed by the Supply Chain Council as the cross-industry standard

diagnostic tool for supply chain management. SCOR enables users to address, improve and

communicate supply chain management practices within and between all interested parties.

While much of the underlying content of the model has been used by practitioners for many

years, the SCOR model provides a unique framework that links business process, metrics, best

practices and technology features into a unified structure to support communication among

supply chain partners and to improve the effectiveness of supply chain management and

related supply chain improvement activities.

SCOR is a management tool. It is a process reference model for supply chain management,

spanning from the supplier's supplier to the customer's customer. The SCOR-model has been

developed to describe the business activities associated with all phases of satisfying a

customer's demand. By describing supply chains using process building blocks, the Model can

be used to describe supply chains that are very simple or very complex using a common set of

definitions. As a result, disparate industries can be linked to describe the depth and breadth of

virtually any supply chain.

SCOR spans:

All customer interactions, from order entry through paid invoice

All product (physical material and service) transactions, from the supplier’s supplier to the customer’s customer, including equipment, supplies, spare parts, bulk product, software, etc.

All market interactions, from the understanding of aggregate demand to the fulfillment of each order.

9

Scope of SCOR

SCOR is based on five distinct management processes:

1. Plan: Demand/Supply planning and management

a. Balance resources with requirements and establish/communicate plans for the

whole supply chain, including Return, and the execution processes of Source,

Make, and Deliver.

b. Management of business rules, supply chain performance, data collection,

inventory, capital assets, transportation, planning configuration, regulatory

requirements and compliance, and supply chain risk.

c. Align the supply chain unit plan with the financial plan.

2. Source: Sourcing stocked, make-to-order, and engineer-to-order product

a. Schedule deliveries; receive, verify, and transfer product; and authorize supplier

payments.

b. Identify and select supply sources when not predetermined, as for engineer-to-

order product.

c. Manage business rules, assess supplier performance, and maintain data.

d. Manage inventory, capital assets, incoming product, supplier network,

import/export requirements, supplier agreements, and supply chain source risk.

3. Make: Make-to-stock, make-to-order, and engineer-to-order production execution

a. 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.

b. Finalize engineering for engineer-to-order product.

c. Manage rules, performance, data, in-process products (WIP), equipment and

facilities, transportation, production network, regulatory compliance for

production, and supply chain make risk.

4. Deliver: Order, Warehouse, Transportation, and Installation Management for Stocked,

Make-to-Order, and Engineer-to-Order Product

a. All order management steps from processing customer inquiries and quotes to

routing shipments and selecting carriers.

b. Warehouse management from receiving and picking product to load and ship

product.

c. Receive and verify product at customer site and install, if necessary.

d. Invoicing customer.

e. Manage Deliver business rules, performance, information, finished product

inventories, capital assets, transportation, product life cycle, import/export

requirements, and supply chain deliver risk.

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5. Return: Return of Raw Materials and Receipt of Returns of Finished Goods

a. 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.

b. 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.

c. All Return Excess Product steps from source – identify product condition,

disposition product, request product return authorization, schedule product

shipment, and return excess product – and deliver – authorize product return,

schedule return receipt, receive product, and transfer excess product.

d. Manage Return business rules, performance, data collection, return inventory,

capital assets, transportation, network configuration, regulatory requirements

and compliance, and supply chain return risk.

11

Porter’s Value Chain

The term ‘Value Chain’ was used by Michael Porter in his book "Competitive Advantage:

Creating and Sustaining superior Performance" (1985). The value chain analysis describes the

activities the organization performs and links them to the organizations competitive position.

Value chain analysis describes the activities within and around an organization, and relates

them to an analysis of the competitive strength of the organization. Therefore, it evaluates

which value each particular activity adds to the organizations products or services. This idea

was built upon the insight that an organization is more than a random compilation of

machinery, equipment, people and money. Only if these things are arranged into systems and

systematic activates it will become possible to produce something for which customers are

willing to pay a price. Porter argues that the ability to perform particular activities and to

manage the linkages between these activities is a source of competitive advantage.

Porter distinguishes between primary activities and support activities. Primary activities are

directly concerned with the creation or delivery of a product or service. They can be grouped

into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and

service. Each of these primary activities is linked to support activities which help to improve

their effectiveness or efficiency. There are four main areas of support activities: procurement,

technology development (including R&D), human resource management, and infrastructure

(systems for planning, finance, quality, information management etc.).

The basic model of Porter’s Value Chain is as follows:

Fig. 2 Porter’s Value Chain

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The term margin implies that organizations realize a profit margin that depends on their ability

to manage the linkages between all activities in the value chain. In other words, the

organization is able to deliver a product / service for which the customer is willing to pay more

than the sum of the costs of all activities in the value chain.

The linkages between activities are crucial for corporate success. The linkages are flows of

information, goods and services, as well as systems and processes for adjusting activities. Their

importance is best illustrated with some simple examples: Only if the Marketing & Sales

function delivers sales forecasts for the next period to all other departments in time and in

reliable accuracy, procurement will be able to order the necessary material for the correct date.

And only if procurement does a good job and forwards order information to inbound logistics,

only than operations will be able to schedule production in a way that guarantees the delivery

of products in a timely and effective manner – as pre-determined by marketing. So linkages are

about seamless cooperation and information flow between the value chain activities.

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Industry Strategies

From the supplier’s perspective, delivery lead time is the time from receipt of an order to the

delivery of the product. From the customer’s perspective it may also include time for order

preparation and transmittal. Customers want delivery lead time to be as short as possible, and

manufacturing must design a strategy to achieve this. There are four basic strategies: engineer-

to-order, make-to-order, assemble-toorder, and make-to-stock. Customer involvement in the

product design, delivery lead time, and inventory state are influenced by each strategy.

Engineer-to-order : It means that the customer’s specifications require unique engineering

design or significant customization. Usually the customer is highly involved in the product

design. Inventory will not normally be purchased until needed by manufacturing. Delivery lead

time is long because it includes not only purchase lead time but design lead time as well.Benefit

of this strategy is it enables response to specific customer requirements.

Make to order : It means that the manufacturer does not start to make the product until a

customer’s order is received. The final product is usually made from standard items but may

include custom-designed components as well. Delivery lead time is reduced because there is

little design time required and inventory is held as raw material.Benefit of this strategy is it

enables customization with low inventory levels and high service levels.

14

Assemble to order : It means that the product is made from standard components that the

manufacturer can inventory and assemble according to a customer order. Delivery lead time is

reduced further because there is no design time needed and inventory is held ready for

assembly. Customer involvement in the design of the product is limited to selecting the

component part options needed. Benefit of this startegy is it enables wide range of product

offerings with simplified planning.

Make to stock : It means that the supplier manufactures the goods and sells from finished

goods inventory. Delivery lead time is shortest. The customer has little direct involvement in

the product design.Benefit of this strategy is it enables in meeting customers demand quickly.

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Total quality management

TQM is an integrated organizational effort designed to improve quality at every level. Total Quality Management (TQM) is a comprehensive and structured approach to organizational management that seeks to improve the quality of products and services through ongoing refinements in response to continuous feedback. TQM requirements may be defined separately for a particular organization or may be in adherence to established standards, such as the International Organization for Standardization's ISO 9000 series. TQM can be applied to any type of organization; it originated in the manufacturing sector and has since been adapted for use in almost every type of organization imaginable, including schools, highway maintenance, hotel management, and churches. As a current focus of e-business, TQM is based on quality management from the customer's point of view.

It refers to management methods used to enhance quality and productivity in business

organizations. TQM is a comprehensive management approach that works horizontally across

an organization, involving all departments and employees and extending backward and forward

to include both suppliers and clients/customers

Six Sigma

Six Sigma is a set of tools and strategies for process improvement originally developed by

Motorola in 1985. Six Sigma became well known after Jack Welch made it a central focus of his

business strategy at General Electric in 1995, and today it is used in different sectors of

industry.

Six Sigma seeks to improve the quality of process outputs by identifying and removing the

causes of defects (errors) and minimizing variability in manufacturing and business processes. It

uses a set of quality management methods, including statistical methods, and creates a special

infrastructure of people within the organization

The term Six Sigma originated from terminology associated with manufacturing, specifically

terms associated with statistical modeling of manufacturing processes. The maturity of a

manufacturing process can be described by a sigma rating indicating its yield or the percentage

of defect-free products it creates. A six sigma process is one in which 99.99966% of the

products manufactured are statistically expected to be free of defects (3.4 defects per million).

Motorola set a goal of "six sigma" for all of its manufacturing operations, and this goal became

a byword for the management and engineering practices used to achieve it.

Six Sigma projects follow two project methodologies inspired by Deming's Plan-Do-Check-Act Cycle.

16

DMAIC is used for projects aimed at improving an existing business process

DMADV is used for projects aimed at creating new product or process designs

DMAIC

The DMAIC project methodology has five phases:

Define the problem, the voice of the customer, and the project goals, specifically. Measure key aspects of the current process and collect relevant data. Analyze the data to investigate and verify cause-and-effect relationships. Determine

what the relationships are, and attempt to ensure that all factors have been considered. Seek out root cause of the defect under investigation.

Improve or optimize the current process based upon data analysis using techniques such as design of experiments, poka yoke or mistake proofing, and standard work to create a new, future state process. Set up pilot runs to establish process capability.

Control the future state process to ensure that any deviations from target are corrected before they result in defects. Implement control systems such as statistical process control, production boards, visual workplaces, and continuously monitor the process.

DMADV or DFSS

The DMADV project methodology, known as DFSS ("Design For Six Sigma"), features five phases:

Define design goals that are consistent with customer demands and the enterprise strategy.

Measure and identify CTQs (characteristics that are Critical To Quality), product capabilities, production process capability, and risks.

Analyze to develop and design alternatives Design an improved alternative, best suited per analysis in the previous step Verify the design, set up pilot runs, implement the production process and hand it over

to the process owner(s).

17

Just in time (JIT)

Just in time (JIT) is a production strategy that strives to improve a business return on investment by reducing in-process inventory and associated carrying costs. To meet JIT objectives, the process relies on signals or Kanban (between different points in the process, which tell production when to make the next part. Kanban are usually 'tickets' but can be simple visual signals, such as the presence or absence of a part on a shelf. Implemented correctly, JIT focuses on continuous improvement and can improve a manufacturing organization's return on investment, quality, and efficiency. To achieve continuous improvement key areas of focus could be flow, employee involvement and quality.

JIT inventory systems expose hidden cost of keeping inventory, and are therefore not a simple

solution for a company to adopt. The company must follow an array of new methods to

manage the consequences of the change. The ideas in this way of working come from many

different disciplines including statistics, industrial engineering, production management, and

behavioral science

Inventory is seen as incurring costs, or waste, instead of adding and storing value, contrary to traditional accounting. This does not mean to say JIT is implemented without an awareness that removing inventory exposes pre-existing manufacturing issues. This way of working encourages businesses to eliminate inventory that does not compensate for manufacturing process issues, and to constantly improve those processes to require less inventory. Secondly, allowing any stock habituates management to stock keeping. Management may be tempted to keep stock to hide production problems. These problems include backups at work centers, machine reliability, process variability, lack of flexibility of employees and equipment, and inadequate capacity. In short, the Just-in-Time inventory system focus is having “the right material, at the right time, at the right place, and in the exact amount”, without the safety net of inventory.

Lean Management Lean is all about customer focus. "Lean", is a production practice that considers the expenditure

of resources for any goal other than the creation of value for the end customer to be wasteful,

and thus a target for elimination. Working from the perspective of the customer who consumes

a product or service, "value" is defined as any action or process that a customer would be

willing to pay for. Value is defined by the customer and we develop and maintain processes to

provide this value. Processes are run by people. Only support and proper leadership and

guidance you can drive your people to continuously improve the processes that add value to

the customer. The management system that helps you to achieve this is a Lean Management

system. Lean Management system uses various tools to connect the purpose (Providing value

to customer) to the process and people. Some of the lean management tools which are

commonly used are Leader standard work, visual control boards, and daily accountability.

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Key Challenges of Applied Innovation

• Dealing with uncertain environments – matching supply and demand

o Raw materials shortages, internal and supplier parts shortages and productivity

inefficiencies

o Larger than anticipated inventories on the shelves of hospitals

o Unanticipated disasters

• Shorter product life cycles of high-technology products

o Less opportunity to accumulate historical data on customer demand

o Wide choice of competing products makes it difficult to predict demand

• Need for technology / Integration and Managing Tech complexity

o If you don’t do it, your competitor will

o Major buyers such as Wal-Mart demand a level of “supply chain maturity” of its

suppliers

• Forecasts are never right

o Very unlikely that actual demand will exactly equal forecast demand

o The longer the forecast horizon, the worse the forecast. A forecast for a year

from now will never be as accurate as a forecast for 3 months from now

• Inventory- Striking the fine balance

• Supply Chain Complexity

• Changing Customer preferences

• Change Management

• Changing environmental factors (legal, social, etc.)

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Key Benefits

Typical direct benefits realized by SCM-

• Release Imprisoned Capacity for Revenue Growth

• Reduce Supply Chain Operating Costs

• Reduce Supply Chain Inventory (pull instead of push)

Long Term benefits realized include

• Ability to Manage Complexity

• Ability to Manage Relationship

• Ability to Manage Change

Value

Enhancement

Cash

Liberation

Cost

Reduction

Manage

Complexity

Manage

Change

Manage

Relationship

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Inventory

Types of inventory

Raw material

Work in process

Finished goods

The cost of work in process and finished goods includes the cost of raw materials, direct labour,

and an allocated portion of manufacturing overhead.

Introduction to Inventory Management in SAP

Inventory management is the process of efficiently monitoring the flow of products into and

out of an existing inventory in the warehouse. This process involves controlling the receipt of

products in order to prevent the inventory from becoming too high where items are stored at

an unnecessary cost , or too low where it can cause a stock-out and production could be halted

due to lack of raw materials. In SAP, the inventory management functionality revolves around

the movement of materials in and out of the storage facility and the physical count of those

items at regular intervals.

Material is procured from external or internal sources on the basis of the requirements

determined by Material Requirements Planning. The delivery is entered in Inventory

Management as a goods receipt. The material is stored (and managed under Inventory

Management) until it is delivered to customers (Sales & Distribution), or is used for internal

purposes (for example, for production).

During all transactions, Inventory Management accesses both master data (such as material

master data) and transaction data (such as purchasing documents) shared by all Logistics

components.

Organizational Structure

In the SAP system each storage facility is part of an organizational structure created in the

system. For inventory management there are two organizational levels which are required to

be created; the plant, and the storage location.

Plant - This is a physical location in the organization where some processes take place.

Sometimes these processes involve stored material, sometimes maintenance or sometimes

21

production. For inventory management, a plant will be created to represent a location that

receives stores, and issues materials.

Storage Location - This describes an designated area within a plant. A storage location can

be a site where inventory is held. The physical location can be a physical room, a row of

shelves, a racking system, a refrigerated cabinet, a trailer or a space in the plant that is

identified by painted lines on the shop floor. The inventory can be materials that are used in

the production process, finished goods or maintenance items. The storage location is the

lowest inventory level in the inventory management function.

Goods Movements

There are a number of goods movements in the SAP system, and they can be either inbound

from suppliers or the production department, outbound to customers, a transfer of stock from

another plants within the company, or an internal movements within the same plant.

Goods Receipt - This process can be either inbound from a supplier or can be from a

company's own production process. A goods receipt can be performed so that the materials

are immediately available for use, or they can be placed in a quality inspection hold so that

the quality department can perform tests on the items to ensure that they are within

specifications before releasing them to stock. Sometimes the goods can be placed in a

blocked stock state where the company does not accept financial liability for the materials

as they were not ordered, or incorrect. In that case the material is not available for use.

Goods Issue - The items in the warehouse can either be used in the production process or

sold to a customer. In either scenario the items are issued to a production order or sales

order which causes the stock level at the plant to be reduced. In some instances material can

be issued to scrap if it is deemed unusable by the quality department, past its shelf life, or

damaged.

Internal Movements - Material in the plant can be moved from one storage location to

another before it is used in production or delivered to a customer. There is a goods

movement so that the material is moved from the main storage area to a staging location

close to where the production or delivery area is located. Sometimes the material is moved

to another plant if they need the material sooner. In that instance there is a plant to plant

transfer of materials. One other internal movement is the transfer posting, where a material

is logically changed within the system. For example, a material that has been received as

material requiring quality inspection can be changed to material that is available for use, by

performing a transfer posting.

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Transportation

Transportation is Movement of Resources/Products/Services to fulfill customer need.

Transportation Management caters to optimization of transportation cost while maximizing

service.

Modes of Transportation

1. Road - Flexible in routing & time schedules, efficient for short-hauls of high value goods

2. Rail - cost-effective for shipping bulk products, piggyback

3. Air - High cost, ideal when speed is needed or to ship high-value, low-bulk items

4. Water - Low cost for shipping bulky, low-value goods, slowest form

5. Pipeline - Ship petroleum, natural gas, and chemicals from sources to markets

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24

Transportation Management

25

Facilities

Facilities is one of the important drivers of Supply chain Management.It include all

locations/nodes/resources in the supply chain to create or store inventory to fulfill the

customer need.

Key Facilities decisions:

1. Facility role

2. Facility location

3. Capacity allocation

4. Market and supply allocation

Factors influencing Facilities decisions:

1. Strategic

2. Technological

3. Macroeconomic

4. Political

5. Infrastructure

6. Competitive

7. Logistics and facility costs

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A framework for facilities /Network Design

PRODUCTION METHODS

Skill needs, response

time

PHASE II

Regional Facility

Configuration

PHASE I

Supply Chain Strategy

PHASE III

Desirable Sites

COMPETITIVE

ENVIRONMENT

PRODUCTION TECHNO

LOGIES Cost, Scale/Scope

impact, support

FACTOR COSTS Labor,

materials, site specific

GLOBAL COMPETITION

PHASE IV

Location Choices

COMPETITIVE

STRATEGY

INTERNAL CONSTRAINTS

Capital, growth strategy,

existing network,

partnerships

TARIFFS AND TAX

INCENTIVES

REGIONAL DEMAND Size,

growth, homogeneity,

local specifications

POLITICAL, EXCHANGE

RATE AND DEMAND RISK

AVAILABLE

INFRASTRUCTURE

LOGISTICS COSTS

Transport, inventory,

coordination

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Role of Information Technology in SCM

Information is the driver that serves as the “glue” to create a coordinated supply chain.

Information must have the following characteristics to be useful:

o Accurate

o Accessible in a timely manner

o The right kind

o Provides supply chain visibility

Information technology (IT)

o Hardware and software used throughout the supply chain to gather and analyze

information

o Captures and delivers information needed to make good decisions

Information provides the basis for supply chain management decisions:

o Inventory - (demand patterns, carrying costs, stock-out costs, ordering costs)

o Transportation - (costs, customer locations, shipment sizes)

o Facility (location, capacity, schedules of a facility; need information about trade-

offs between flexibility and efficiency, demand, exchange rates, taxes, etc.)

o Sourcing – (information on product margins, prices, quality, lead times help in

sourcing)

o Pricing and revenue management - (to set pricing policies, need information on

demand, lead times, availability)

Use of information technology (IT) is considered a prerequisite for the effective control of

today’s complex supply chains. the use of IT for SCM purposes can be divided into 1)

transaction processing, 2) supply chain planning and collaboration, and 3) order tracking and

delivery coordination.

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Software and applications of IT in SCM range from different uses and scenarios ranging from

procurement, logistics, payment, tracking, vendor management etc. Some vendors: SAP,

Oracle, JDA, Ariba, etc. Key challenges: Integration, Customization, Enhancements, Change

management. New trends include automation, RFID techniques, GPS & remote monitoring,

barcodes, QR, EDI etc.

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Procurement Procurement is the process of obtaining or buying goods and services for the purpose of either storing

for further use in production or direct consumption. The process includes preparation and processing of

a demand as well as the end receipt and approval of payment. Procurement is an integral part of the

Supply Chain of any organization.

Procurement process can be represented as:

1. Request / Indent – A purchase request or indent or Purchase requisition can be raised by either

an employee, by the production department, against a sales order or against Materials

Requirement Planning input. It may need approval before it goes further for processing.

2. Determination of Source of Supply (Vendor Selection) – If the materials are available in the

stock, then the Purchase requisition is fulfilled by the stock. If not, then the materials have to be

procured externally. This involves sending Request for Quotations (RFQ) to vendors. Sometimes,

e-tendering and auctioning is also used to solicit bids. Once quotations are received from the

potential vendors, the best one is chosen on the basis of certain parameters like Price, Payment

terms, Incoterms, Delivery date, Technical specification, etc. Negotiation may follow. Finally the

Purchase order or contract is awarded to L1 vendor. A Purchase order or Contract or Scheduling

agreement is then created and sent out to the vendors.

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3. Order processing (Purchase Order) – PO contains data like material/ service, quantity, price,

plant, currency, Delivery date and address, etc. After approval of the PO from concerned

authority depending upon the value or quantity of the material, it is sent to the concerned

vendor for processing.

4. Goods Receipt – Once the vendor gets the PO, the goods are delivered along with a delivery

note. The shipment goes through quality check and verification of quantity. Once cleared, the

delivery note is signed and sent back to the vendor and the goods are updated in the inventory.

5. Invoice verification and payment processing – The goods are received at the Ship To location

while the supplier invoice is received at the Bill To location which is usually the Finance office.

The invoice consists of P.O. ref., material, quantity, terms of payment, amount per item (cost

breakup) bank information Tax amount, rate, etc. Quantity mentioned in the invoice is checked

against Goods Receipt while the Price is checked against the PO. In case of variance, subsequent

debit and credit notes are received to adjust the Vendor account. Once done, the invoice gets

paid by the Accounts Payable team.

Procurement process in SAP MM (Materials Management) Procurement process in SAP is a functionality of MM module. Like any other module of SAP,

Organization structure needs to be pre-defined in the MM module to carry out the procurement

transactions in the system. The following is the Organization structure of MM module:

MM identifies procurement as two types. They are:

Procure to Stock (Direct Materials) – In this case, the warehouse stock level is increased by

entering goods receipt and reduced by entering goods issue. With each goods movement, the

stock and consumption accounts are updated in FI (Financial Accounting).

Procure to Consumption – In this case, no warehouse stock is created when goods receipt is

entered (and the stock value is not increased) but the consumption statistics (and the

consumption accounts in the accounting department) are updated directly.

The procurement process in MM can be represented as below:

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The procurement process in MM is exactly similar to the Industry Procurement process. However, the

Purchase requisition is mostly done on the basis of MRP (Materials Requirement Planning). RFQ,

Quotation, PO and Goods Receipt are created and sent/received electronically. The final payment

processing is done in the FI module.