Supply Chain Operations Reference Model

In our last article we have introduced the term supply chain, its elements, and types of lows. Also we have addressed the importance of having a supply chain model in any business. In this article, we are going to discuss a brief overview of supply chain operations reference (acronym SCOR Model).

Supply chain operations reference model can be described as a management tool defines the mandatory business processes, and how to improve them, to satisfy a customer’s demands. SCOR model was first established in 1996 by some world leading organizations and was recognized by the Supply Chain Council. SCOR model was introduced as the standard strategy, process improvement, and performance management investigative instruments for supply chain management to be adopted across the industry.

Supply chain operations reference model’s structure focuses on five areas of the supply chain: plan, source, make, deliver, and return. Along the supply chain, these areas are continuously repeating for all supply chain entities starting from the supplier’s supplier to the customer’s customer. Explaining SCOR model’s structure areas in details,

·         Plan: including supply and demand planning and balancing between organization’s limited resources and customers’ requirements. Also, selecting standards to measure the supply chain efficiency and provide ways to improve. Furthermore, aligning supply chain plan with the organization’s financial plan to achieve maximum profit.  

·         Source: including the acquisition of raw materials, goods, and services needed to meet planned and actual customer’s demand. Besides, it includes the full process of procurement, vendor management, and material management.

·         Make: including the production process of transforming raw materials into finished product to meet planned and actual customer’s demand. Moreover, it includes determination of production environment, i.e. make to stock, make to order, or engineered to order, process types, equipment and facilities

·         Deliver: including the full cycle of providing the finished products to customer as per planned demand. Additionally, this includes order management, warehousing, distribution, and transportation management.

·         Return: including the returns from customer for any reason, i.e. defective products, and returned containers and packages. Furthermore including the business rules management and regulatory requirements.

The SCOR model has recognized to assist companies to detect its supply chain problems. It is a multi-level analysis that goes into many levels of details. It explains how many times the five areas of supply chain operations reference model are continuously repeating between entities of supply chain. Every area gains its importance from being critical in the process of delivering the resources from level to level.

Supply Chain

In recent years the term supply chain has been widely used. It became an essential knowledge for any new hire regardless of his main qualification. In this article, we are going to introduce in short the definition of the supply chain, its components, and a real life example.

In 80's of the last century, supply chain was introduced in financial times’ interview with Oscar Gomes. Since then several definitions of supply chain have been ascended. Supply chain can be described as a network of people, processes, resources, and technologies in a business that work collectively to produce products and services for an end user. It is a worldwide network used to carry final products and services from raw materials to final consumers through a planned flow of information, physical distribution, and cash.

Simplest form of  supply chain consists of three main parties, i.e. supplier, manufacturer, and customer. When supply chain becomes more complex, it can consist of many suppliers, many manufacturers and many customers. Even one element can be considered as a multi performer, i.e. customer can be either an end consumer or the manufacturer who make a process on a semi finished item purchased from other supplier. Each entity adds value to the chain, hence, supply chain can be considered a value chain for any business.

There is four main flows in the supply chain,

·         Primary product flow: the downstream flow of products from supplier to customer.

·         Cash flow: the upstream flow of funds from end consumer to supplier.

·         Information flow: the upstream and downstream flow of data between entities of supply chain, i.e. sales orders, purchase orders, and invoices.

·         Reverse product flow: the upstream flow of defect products that are not accepted by end customer due to several reasons, i.e. poor quality, product not matching with specifications, or recycling.

Supply chain management is the science of planning, organizing, leading, and controlling all functions related to the supply chain such as customer services, sourcing, production, warehousing, transportation, and after sales support. All those functions are participating in the flow of goods and services from its origin till reaching the final consumer. Being unsuccessful in one function will cause other functions to fail to perform its tasks.

Every industry has its own supply chain model which every company needs to consider for surviving the competition. Not any business can survive the market without considering the importance of its own supply chain. Businesses should apprehend its supply chain model before launching new product to avoid problems that might affect their market share and their own products, i.e. lead time, safety stock and forecast accuracy. Supply chain operations reference model is a management tool defines the mandatory business processes and how to improve them to satisfy a customer’s demands. We are going to discuss it in more details in another article.

Supply and Demand

Supply and demand are interrelated terms in both economic and business speech. There is no supply without demand. The demand of a specific product or service becomes an idea for a new business to start and a new way to satisfy customers. In this article, we are going to have a simple justification for supply chain and business folks about both demand and supply from two common standpoints, i.e. economic perspective and business perspective.

The Supply is a wide used term that has its own definition according to its position in the speech. If we are going to discuss the term supply in an economic speech, it can be defined as “the capability of providing product and services to the market to meet its needs”. This capability can be presented as Supply Curve.

Supply curve is an illustration of a positive relationship between price and quantity of a supplied product or service. When the quantity supplied of a specific product increases, the price will increase. The price increase is not absolute as it is affected by other factors such as the price of the substitutes, production technology or labor costs.

While in business speech, we can identify it as “A continuous flow of raw materials, final products, and services into the market according to its demand”. When demand is seasonal, the products flow is seasonal, i.e. summer season for ice cream products or Christmas season for buying gifts and gadgets.

The Demand is described as “the desire to obtain a specific product or service based on a tenacious need and to pay for its agreed market price”.  No one is going to pay for a product without necessity and proper price. This relationship between the quantities needed and the desired price can be presented as Demand Curve.

Demand curve is a diagram for a negative relationship between price and quantity of a demanded product or service. When the quantity demanded of a specific product increases, the price will decrease.

Every supply chain or business folks need to understand how to match supply with demand in any market. Since demand and supply are solid terms, the next graphic displays both demand and supply curves to identify the fair market price and the feasible quantity of products to be produced and sold to achieve the equilibrium state of the market.

The Equilibrium Point is when the quantity supplied by businesses is equal to the quantity demanded (Q*) by customers at the fair market price (P*). Above this point the quantity demanded is lower than the quantity supplied so there will be a product surplus that will affect the business through obsolete inventory. On the other side, when quantity supplied is lower than the quantity demanded, there will be a product shortage. To avoid that, the equilibrium point is managed through the price mechanism by the market through shifting the demand or supply curves and define new reasonable market price.