Supply Chain Management
Supply Chain Management (SCM) tests whether you can treat the chain from tier-2 suppliers to the final customer as one system and choose trade-offs that lower total cost and improve service instead of moving cost between silos. Questions lean on SCOR vocabulary, the bullwhip effect, push/pull positioning, postponement and cash-to-cash performance.
SCOR: the reference model
- Six management processes: Plan, Source, Make, Deliver, Return, Enable. Enable covers governance, risk, data and rules that support the other five.
- Five performance attributes: reliability, responsiveness, agility, cost, and asset management efficiency. Perfect order fulfillment (reliability) counts an order only if it is on time, in full, damage-free and with correct documentation.
- Metrics are tiered: Level 1 diagnostics, Levels 2–3 to locate the cause.
Bullwhip effect
Demand variance grows as you move upstream. Four classic causes: forecast updating from order data rather than end demand, order batching, price-promotion forward buying, and rationing/shortage gaming. Remedies: share POS data, vendor-managed inventory, continuous replenishment, everyday low pricing, allocate on historical sales, shorten lead times, and postpone differentiation.
Cash-to-cash cycle
CCC = DIO + DSO − DPO. Days inventory outstanding uses inventory at cost divided by COGS × 365; days sales outstanding uses receivables over revenue × 365; days payables outstanding uses payables over COGS × 365.
Worked example
A distributor reports DIO 60 days, DSO 55 days, DPO 40 days. CCC = 60 + 55 − 40 = 75 days. Annual COGS is $36.5M, so one day of inventory is 36.5M/365 = $100,000. If collection terms tighten so DSO falls to 45, the company releases 10 × $100,000 = $1.0M of cash - a working-capital win that never appears on the income statement. The trap is celebrating the DSO reduction without checking that tighter terms do not cut revenue through lost customers.
Traps that cost marks
- Dividing inventory by revenue instead of COGS in DIO; the answer looks plausible and is wrong.
- Assuming risk pooling always cuts safety stock - it does when demands are independent, not when they are positively correlated.
- Treating postponement (delayed differentiation) as the same thing as drop-shipping.
- Ignoring that Return and Enable are equal SCOR processes, not footnotes.