Supply Chain Management (SCM) 101: Introduction to SCM - Definition of Supply, Chain Management Global End-to-End Upstream/Downstream

What This Is

Supply Chain Management (SCM) is the end-to-end planning, coordination, and execution of processes to produce and deliver products or services from raw materials to end customers. It involves managing the flow of goods, services, and information across the entire supply chain, from suppliers to manufacturers to distributors to customers. SCM is crucial in today's globalized and competitive business environment, as it enables companies to respond quickly to changing market demands, reduce costs, and improve customer satisfaction. For example, Amazon's SCM strategy allows it to offer fast and reliable delivery of products to customers worldwide, which has contributed to its success and customer loyalty.

Key Frameworks & Formulas

• SCOR (Supply Chain Operations Reference): A framework for designing and managing supply chains, consisting of five processes: Plan, Source, Make, Deliver, and Return.
• Fisher's Model: A framework for classifying supply chains into two types: efficient (high volume, low variability) and responsive (low volume, high variability).
• EOQ (Economic Order Quantity): A formula for determining the optimal order quantity, calculated as ?(2DS/H), where D is demand, S is setup cost, H is holding cost, and Q is order quantity.
• Safety Stock: A formula for calculating the optimal safety stock level, calculated as Z ×-× ?L, where Z is the Z-score,-is the standard deviation, and L is the lead time.
• Lead Time: The time it takes for a product to move from raw materials to finished goods, typically measured in days or weeks.
• Service Level: The percentage of demand that is met from stock on hand, typically measured as a percentage (e.g., 95%).
• Inventory Turnover: The number of times inventory is sold and replaced within a given period, typically measured as a ratio (e.g., 4 times per year).
• VMI (Vendor-Managed Inventory): A supply chain strategy where the supplier manages the inventory levels of the buyer.
• Just-in-Time (JIT): A supply chain strategy that aims to produce and deliver products just in time to meet customer demand.

Step-by-Step Application

1. Calculate Safety Stock: To calculate safety stock, you need to know the Z-score, standard deviation, and lead time. For example, if the Z-score is 2, standard deviation is 10 units, and lead time is 5 days, the safety stock level would be 2 × 10 × ?5 = 22 units.
2. Implement a Warehouse Layout Change: To implement a warehouse layout change, you need to assess the current layout, identify the goals of the change, and develop a new layout that meets the goals. For example, if the goal is to reduce travel time for warehouse workers, you might reorganize the warehouse to group similar products together.
3. Determine the Optimal Order Quantity: To determine the optimal order quantity, you need to know the demand, setup cost, and holding cost. For example, if the demand is 100 units per day, setup cost is $100, and holding cost is $5 per unit per day, the optimal order quantity would be ?(2 × 100 × 100 / $5) = 447 units.
4. Calculate Inventory Turnover: To calculate inventory turnover, you need to know the beginning inventory, ending inventory, and cost of goods sold. For example, if the beginning inventory is 1000 units, ending inventory is 500 units, and cost of goods sold is $100,000, the inventory turnover would be 2 times per year.

Common Mistakes

• Mistake: Assuming that safety stock is only needed for high-demand products.
• Correction: Safety stock is needed for all products to ensure that demand is met, regardless of demand level.
• Mistake: Thinking that just-in-time (JIT) is the same as vendor-managed inventory (VMI).
• Correction: JIT is a supply chain strategy that aims to produce and deliver products just in time to meet customer demand, while VMI is a supply chain strategy where the supplier manages the inventory levels of the buyer.
• Mistake: Believing that inventory turnover is only measured in terms of units sold.
• Correction: Inventory turnover is measured in terms of units sold and replaced within a given period, typically measured as a ratio (e.g., 4 times per year).

Exam / Certification Tips

• Tip: Be able to distinguish between efficient and responsive supply chains, and explain how each type requires different strategies and tactics.
• Tip: Understand the different types of inventory management strategies, including just-in-time (JIT), vendor-managed inventory (VMI), and economic order quantity (EOQ).
• Tip: Be able to calculate safety stock and explain the factors that affect its level.
• Tip: Understand the importance of service level and inventory turnover in supply chain management.

Quick Practice Problem

Scenario: A company sells 100 units of a product per day, with a demand variability of 10%. The lead time is 5 days, and the standard deviation of demand is 5 units. What is the reorder point?

Answer: 115 units (100 units + 2 × 5 units × ?5 days)

Explanation: The reorder point is calculated by adding the average demand to the safety stock level, which is calculated as 2 × standard deviation × ?lead time.

Last-Minute Cram Sheet

• EOQ = ?(2DS/H): Economic Order Quantity formula
• Safety Stock = Z ×-× ?L: Safety stock formula
• VMI (Vendor-Managed Inventory): Supply chain strategy where the supplier manages the inventory levels of the buyer
• JIT (Just-in-Time): Supply chain strategy that aims to produce and deliver products just in time to meet customer demand
• Inventory Turnover = COGS / (Beginning Inventory + Ending Inventory) / 2: Inventory turnover formula
• Service Level = (Number of Units Met / Total Demand) × 100: Service level formula
• Lead Time = Time from raw materials to finished goods: Lead time definition
• SCOR (Supply Chain Operations Reference): Framework for designing and managing supply chains
• Fisher's Model: Framework for classifying supply chains into efficient and responsive types
• Postponement delays final configuration, not production – it's a push-pull boundary strategy: Trap answer