Supply Chain Management (SCM) 101: Introduction to SCM - Evolution of SCM, Physical Distribution Logistics SCM Digital Supply Chain

What This Is

The evolution of supply chain management (SCM) has transformed from physical distribution to logistics to SCM and now to digital supply chain. This shift matters because it has significantly impacted how companies manage their supply chains, from traditional warehouse management to real-time visibility and collaboration. For example, Amazon's use of digital supply chain management has enabled it to offer same-day delivery and real-time inventory tracking, giving it a competitive edge in the e-commerce market.

Key Frameworks & Formulas

• Physical Distribution: The traditional approach to managing supply chains, focusing on storing and moving products from one location to another.
• Logistics: The management of the flow of goods, services, and related information from the point of origin to the point of consumption.
• Supply Chain Operations Reference (SCOR): A framework for evaluating and improving supply chain performance, covering planning, sourcing, making, delivering, and returning.
• Fisher's Model: A framework for classifying supply chains into efficient (cost-focused) and responsive (service-focused) categories.
• Economic Order Quantity (EOQ): The optimal order quantity that minimizes total inventory costs, calculated as EOQ = ?(2DS/H), where D is demand, S is setup cost, and H is holding cost.
• Safety Stock: The additional inventory held to mitigate stockouts, calculated as Safety Stock = 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 the supplier to the customer, including production, transportation, and inventory holding times.
• Service Level: The percentage of demand that is met from stock on hand, calculated as Service Level = (1 - (Number of Stockouts / Total Demand)) × 100.
• Digital Supply Chain: The use of digital technologies to manage supply chains, including real-time visibility, collaboration, and automation.

Step-by-Step Application

1. Calculate the Economic Order Quantity (EOQ) for a product with a demand of 100 units per week, a setup cost of $100, and a holding cost of $5 per unit. EOQ = ?(2 × 100 × $100 / $5) = 44.72 units
2. Determine the Safety Stock required for a product with a standard deviation of 10 units, a lead time of 5 days, and a Z-score of 2. Safety Stock = 2 × 10 × ?5 = 22.36 units
3. Implement a warehouse layout change to improve order picking efficiency, using the following steps: a. Analyze current warehouse layout and identify bottlenecks. b. Design a new layout that minimizes travel distance and maximizes storage capacity. c. Implement the new layout and train staff on new procedures. d. Monitor and adjust the layout as needed to ensure optimal performance.

Common Mistakes

• Mistake: Failing to consider the impact of lead time on inventory levels.
• Correction: Calculate the Safety Stock required to mitigate stockouts, taking into account the lead time and standard deviation.
• Mistake: Using the wrong formula for Economic Order Quantity (EOQ).
• Correction: Use the correct formula, EOQ = ?(2DS/H), to calculate the optimal order quantity.
• Mistake: Failing to consider the service level when calculating inventory levels.
• Correction: Calculate the required inventory levels based on the desired service level, taking into account the demand and lead time.

Exam / Certification Tips

• Be able to distinguish between push and pull strategies in supply chain management.
• Understand the differences between efficient and responsive supply chains.
• Be familiar with Incoterms and their implications for risk and responsibility in international trade.
• Practice calculating inventory levels and safety stock using the correct formulas.

Quick Practice Problem

A company has a demand of 500 units per month for a product with a standard deviation of 20 units and a lead time of 10 days. What is the Safety Stock required to meet a service level of 95%?

Answer: Safety Stock = 2 × 20 × ?10 = 44.72 units

Explanation: The Safety Stock is calculated using the Z-score, standard deviation, and lead time, taking into account the desired service level.

Last-Minute Cram Sheet

• Physical Distribution: Traditional approach to managing supply chains, focusing on storing and moving products.
• Logistics: Management of the flow of goods, services, and related information.
• SCOR: Framework for evaluating and improving supply chain performance.
• Fisher's Model: Framework for classifying supply chains into efficient and responsive categories.
• EOQ: Optimal order quantity that minimizes total inventory costs, calculated as EOQ = ?(2DS/H).
• Safety Stock: Additional inventory held to mitigate stockouts, calculated as Safety Stock = Z ×-× ?L.
• Lead Time: Time it takes for a product to move from the supplier to the customer.
• Service Level: Percentage of demand that is met from stock on hand.
• Digital Supply Chain: Use of digital technologies to manage supply chains.
• 'Postponement' delays final configuration, not production – it's a push-pull boundary strategy.
• Incoterms FCA (Free Carrier) puts risk on the buyer at origin, while FOB (Free on Board) puts risk on the seller at origin.