Page 81 - DMGT525_MATERIALS_MANAGEMENT

Materials Management

Notes Members of the supply chain act as partners who are “linked” together through both physical
and information flows. It is this that makes an effective supply chain. The flows that involve the
transformation, movement, storage of goods and materials and money are called ‘physical
flows’. These flows are easily visible.
The physical flows are reinforced by information flows. Information flows are used by the
various supply chain partners to coordinate their long-term plans, as well as efficiently control
the day-to-day flow of goods and material to the supply chain.

In essence, the supply chain enables the flow of products, services, and information goes both up
and down the chain. Successful integration or coordination of these three flows produces improved
efficiency and effectiveness for business organizations.
‘Supply Chain Management’ can be defined as the active management of supply chain activities
to maximize customer value and achieve a sustainable competitive advantage. It represents a
conscious effort by the supply chain firms to develop and run supply chains in the most effective
and efficient ways possible.

There can be various types of supply chains. There is a basic supply chain, and an extended
supply chain. The definition of a basic supply chain is: a set of three or more companies directly
linked by one or more of the upstream or downstream flows of products, services, finances and
information from a source to a customer.
An extended supply chain includes suppliers of the immediate supplier and customers of the
immediate customer, all linked by one or more of the upstream and downstream flows of
products, services, finances, and information.

A supplier typically participates in numerous different supply chains, which may involve a
wide variety of industries and customers. In the case of the mail order business, such as
Amazon.com, the company maintains an inventory of product from which it fills customer
orders. In the case of retail stores, the supply chain may also contain a wholesaler or distributor,
the store and, the manufacturer. The final consumer is always considered a member of the
supply chain.

6.2.1 Need for Supply Chain

The need of every supply chain is to maximize the overall value generated. The value a supply
chain generates is the difference between what the final product is worth to the customer and the
effort the supply chain expends in filling the customer’s request. For most commercial supply
chains, value will be strongly correlated with supply chain profitability, the difference between
the revenue generated from the customer and the overall cost across the supply chain.

Example: A customer purchasing a computer from Dell pays $2,000 represents the revenue
the supply chain receives.
Dell and other stages of the supply chain incur costs to convey information, produce components,
store them, transport them, transfer funds, and so on. The difference between the $2,000 that the
customer paid and the sum of all costs incurred by the supply chain to produce and distribute the
computer represents the supply chain profitability. Supply chain profitability is the total profit
to be shared across all supply chain stages. The higher the supply chain profitability, the more
successful the supply chain.

!
Caution Supply chain success should be measured in terms of supply chain profitability
and not in terms of the profits at an individual stage.

76 LOVELY PROFESSIONAL UNIVERSITY