Structure of the Supply Chain

Saturated markets, high energy costs, restrictions in energy and raw mate-rial expenses, labor costs, high interest rates, decelerating trend of produc-tivity and, most importantly, inflation are the keywords describing today’s economic conditions. Under these conditions, firms find it increasingly difficult to keep their profitability and have a good return on investment.

For this reason, managers have had to seek alternative methods to increase profitability and decrease costs. One of the systems that is attempted to be improved continuously is the supply chain system.

The concept of supply chain management has undoubtedly been af-fected greatly by the Total Quality approach, which deeply undermined the structures and methods used by firms when performing their basic functions. With the effect of new tendencies and expectations, firms have had to operate in a more efficient and customer-oriented way. Today, firms have become irreplaceable for customers as long as they meet customer needs regularly and even do more than that. This is possible only through good analysis and estimation of customer expectations.

Today’s definition of quality is satisfying customer needs. As mentioned before, firms have to introduce novelties beyond meeting customer needs to be able to keep their position and not to fall behind their rivals under conditions of increasing competition, because today’s quality level will no longer be adequate when it is soon exceeded by a rival firm. While a qual-ity level of 95% may be adequate in some cases, even a level of 99% may not be adequate in other cases. Developed firms constantly establish rela-tionships with customers to understand in what direction customer needs develop and to estimate what their needs may be in the future. They have to do this to keep their current customers and gain new customers by sur-passing their rivals with the products they newly develop.

In meeting all these needs, the supply chain in a business aims at ac-quiring the right materials and right services with the right technology in the right quantity, with the right product at the right time, at a low cost, and delivering them to the right customer.

As mentioned above, a supply chain is an integrated process that con-verts raw materials into products and then sells them to customers. Sup-ply chain involves two basic areas, production planning and logistics; the logistic processes are divided into inbound logistics, the logistics of the products coming into the plant, and outbound logistics, the logistics of the

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finished product that is manufactured in the plant. Looking at it in terms of material flow, the process is run as inbound logistics – production lo-gistics – and outbound lolo-gistics as shown in Figure 8.4.

Production planning also involves material management. It consists of the manufacturing and in-production stocking sub-processes. More spe-cifically, production planning covers the design and management of the whole production process, acquisition, and scheduling of raw materials, design and scheduling of production process, and design and control of the material handling system. As part of the logistic processes, inventory control involves the design and management of the stocking procedures for raw material and in-process inventories.

The logistic processes are not limited to storage and inventory control, but determine also how products will be transported from storage to re-tailers. These products can either be forwarded to retailers directly or be carried to a distribution site. This process covers the management of con-veyance of inventories and distribution of the end-product. Briefly speak-ing, in a typical supply chain, raw materials are procured, produced, and delivered to the end-consumer. To reduce costs and improve service qual-ity, effective supply chain strategies and interaction of the supply chain at various levels should be taken into consideration.

In a basic supply chain, raw materials are procured, goods are produced in the plant, they are sent to storage places for temporary stocking, and

Figure 8.4. Inbound & Outbound Logistics

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m a n ag i n g t h e s u pply c h a i n

then they are delivered to customers. To reduce the overall supply chain costs and improve customer service quality, effective supply chain strate-gies are introduced at various levels of the supply chain.

As shown in the supply chain example in Figure 8.5, upstream activi-ties involve a flow of the materials consisting of raw materials and com-ponents that are needed to produce the goods from the suppliers and their sub-suppliers to the plant where the production will take place.

These are brought together to produce the goods at the next level. In the downstream activities, goods are sent to distribution sites and from there to retailers or customers.

The internal functions of SCM include the processes in converse re-lation to the inputs that have been provided by the supply network. In other words, it relates to production of parts, scheduling, and the pro-cess of taking orders. Upstream procurement aims at correctly estimat-ing and plannestimat-ing the expiration times between the organizations in the whole supply chain. In this way, SCM plays a role in selecting suppliers, setting out supplier performance requirements, monitoring execution of contracts, and maintaining the relationships with suppliers. The down-stream supply chain covers all distribution channels required for the goods to reach end-users, and the processes and functions of packaging, storage, and handling of materials (Monczka and Morgan, 1997).

The marketing, distribution, planning, production, and purchasing ganizations in a supply chain traditionally work independently. Each

or-Figure 8.5. Upstream Activities & Downstream Activities

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ganization has its own goals and such goals usually collide with each other.

For example, the goal of marketing for a good customer service level and maximum sales income collides with the goals of production and distri-bution. Many production operations are designed to maximize output and decrease costs to affect inventory levels and distribution capabilities.

It is clear that a very good mechanism is needed for various functions to work in integration. The supply chain is a strategy to achieve such inte-gration (Ganeshan and Harrison, 1995).

The coordination among the players of supply chain is one of the key factors that affect chain management. Cooper et al. (1997) compare sup-ply chain management to a well balanced and well trained relay race team.

If each player knows how to position at the start, this type of a team be-comes more competitive. While the relationship between the players who directly pass on the baton is the most powerful one, the entire team has to make effort in coordination to win the race.