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Burt−Dobler−Starling:
World Class Supply
Management, Seventh
Edition
VIII. World Class Supply
Chain Management
© The McGraw−Hill
Companies, 2003
27. Toward World Class
Supply Chain Management
C H A P T E R
27
Toward World Class
Supply Chain
Management
1
The key to World Class Supply Chain Management is World Class Supply
ManagementSM.
KEY CONCEPTS
■
■
■
The Key to Supply Chain Management 621
World Class Supply Chain Management (WCSCM) 621
The WCSCM Triangle 622
Evolution to WCSCM 622
Supply Networks 624
World Class Demand Management (WCDM) 624
Demand Management Described 625
WCDM and WCSCM 627
The Bullwhip Effect 627
Evolution to WCDM 629
Forecasting Demand 630
Planning with Time Fences 631
Implications for Supply Management 632
1
Thanks to James D. Reeds for his assistance in developing this chapter.
619
Burt−Dobler−Starling:
World Class Supply
Management, Seventh
Edition
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VIII. World Class Supply
Chain Management
PART 8
27. Toward World Class
Supply Chain Management
© The McGraw−Hill
Companies, 2003
World Class Supply Chain Management
World Class Logistics Management (WCLM) 633
Logistics Defined 634
Integration of Logistics Planning 634
Evolution to WCLM 635
Implications for Supply Management 636
Case
Circus Tents for MCC Logistics
Steve Lilly, VP of Supply Chain Management for Monster Communications Corporation (MCC), watched as another large “circus style” tent was raised outside of one of the
warehouses he managed. The tent was needed to handle the inventory that had accumulated over the last month due to late deliveries from Texas Digital Systems (TDS). TDS
had been a reliable supplier in the past, but recent increases in orders from MCC had
clearly exceeded TDS’ capability and capacity.2
TDS supplied one specially designed rapid communications device (RCD) component that was kitted with 13 other parts at MCC’s regional warehouses. Suppliers providing the other 13 components were delivering their parts on time, resulting in parts being stockpiled in the warehouses. Since demand was roughly 90,000 kits per month and
TDS was about a month behind on its deliveries, MCC was storing an excess of
1,170,000 parts. This volume exceeded MCC’s total warehouse space across the United
States by over 770,000 parts. Tents were required to store the excesses at every regional
warehouse across the United States, except Dallas, where the warehouse had large
amounts of excess capacity.
At the last meeting with Steve’s team of regional logistics managers, a discussion
took place on TDS’ responsibility for the inventory problems. Steve and his team also
wanted to avoid similar future problems. The discussion quickly became heated when it
was suggested that TDS send appropriate managers to address both issues.
Bob Hoskins, Logistics manager of the California region, started the barrage.
“Yeah, let’s invite them! We can crucify their management right on the wall over there!”
Bob pointed to the largest empty wall in the room.
Janet Baker, manager of Operations in Michigan, chimed in, “I agree. TDS has caused
me to exceed my budget. It is making us look bad. I say we find a new supplier—pronto!”
Steve replied, “I don’t think replacing TDS is an option. We committed to them for
the long term in our last contract negotiation. Let’s call Procurement and resolve whether
cancelling the contract is even an option.” Steve called Rhonda Stevens, MCC’s chief
procurement officer, on the speaker phone to answer a couple of the group’s questions.
Steve asked the first question: “Rhonda, can we find another supplier to replace TDS?”
Rhonda replied, “Not an option Steve. It would take at least six months to bid a new
contract and get the new supplier tooled and trained to produce the products.”
2
This case is based on a real-world scenario witnessed by one of the authors at one of the world’s largest
telecommunications company.
Burt−Dobler−Starling:
World Class Supply
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VIII. World Class Supply
Chain Management
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Supply Chain Management
Toward World Class Supply Chain Management
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Companies, 2003
621
Bob chimed in, “Rhonda, how the heck did we get into a contract with a supplier
that could not meet our demand?”
Rhonda replied, “Bob, TDS offered the lowest price and always delivered on time
in the past, so we awarded the contract to them.”
Getting a bit angry, Bob replied, “Tell me something I don’t know Rhonda! Let me
rephrase the question. What type of investigation of TDS did your Procurement group
do to ensure that they could meet our demand? Did any of your people even visit their
production facilities?”
After some hesitation Rhonda replied, “Well, no we didn’t visit their facilities. We
have far too many suppliers to investigate each one thoroughly. Besides, no one ever consulted Procurement about any potential issues. And—the only time we ever hear from
Logistics is when a problem arises with a supplier.”
The above story is essentially true, including the highly negative comments from the
logistics managers. They were angry. How do companies get themselves into these expensive supply chain management problems? How can such problems be avoided in the
future? The answers are probably more obvious than you might think.
The Key to Supply Chain Management
As the title of this book states, supply management is the key to supply chain management (SCM). While many functional areas lay claim to the emerging field of SCM,
supply management has the strongest claim. The argument is simple. Since supply
professionals are responsible for developing and managing the interrelationships between supply chain members, supply management is the critical function responsible
for managing the supply chain.
The issue of how to harness the power of SCM is creating debate in upper management boardrooms and academic classrooms across the world. Firms need to come to
terms with how they are going to improve their competitiveness in the future through
SCM. Competition is not just firm versus firm, but chain versus chain (or network versus network.) Identification of who is in charge of SCM is the first step to moving it toward world class.
World Class Supply Chain
Management (WCSCM)
What is world class supply chain management (WCSCM)?3 In order to answer this question managers must first define SCM. A review of publications over the last several years
identifies the following definitions of SCM:
■
3
An integrating philosophy to manage the total flow of a distribution channel from supplier to the ultimate customer.4
WCSCM is defined separately from WCSM throughout this book. WCSM is a prerequisite to achieving
WCSCM.
4
Martha C. Cooper, Lisa M. Ellram, Characteristics of Supply Chain Management and the Implications for
Purchasing and Logistics Strategy, The International Journal of Logistics Management, 4(2), 1993, p. 13.
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World Class Supply
Management, Seventh
Edition
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Chain Management
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Supply Chain Management
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Companies, 2003
World Class Supply Chain Management
Supply chain management is a systems approach to managing the entire flow of information, materials, and services from raw materials suppliers through factories and
warehouses to the end customer.5
Supply chain management is the systematic, strategic coordination of the traditional
business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual
companies and the supply chain as a whole.6
The supply chain encompasses all activities associated with the upstream and downstream flow and transformation of goods and information from the raw materials stage
(extraction), through to the end user. Supply chain management is the integration of
these activities through improved supply chain relationships, to obtain a sustainable
competitive advantage.7
Supply chain management is the collaborative effort of multiple channel members to
design, implement, and manage seamless value-added processes to meet the real
needs of the end customer. The development and integration of people and technological resources as well as the coordinated management of materials, information,
and financial flows underlie successful supply chain integration.8
As shown by the variation in definitions above, the definition of SCM depends on
one’s perspective. Reviewing these definitions, we see that disciplines of supply and logistics management are implied several times. All definitions directly or indirectly call
for SCM to go beyond traditional functional silos to include cross-functional disciplines
and external entities, including customers and suppliers.
The WCSCM Triangle
We believe that WCSCM consists of three critical components: World Class Supply
ManagementSM (WCSM), world class logistics management (WCLM), and world class
demand management (WCDM). WCSM is the focus of this book. The road to WCSM
was presented in chapter 1 using the step diagram portrayed in Figure 1.1. WCLM and
WCDM are presented later in this chapter. Figure 27.1 presents the WCSCM triangle.
Evolution to WCSCM
Presently, at least three stages of SCM exist: (1) SCM is the management of the internal
supply chain; (2) SCM is supplier focused; and (3) SCM is the management of a network of enterprises, which includes the customer as well as suppliers. Most firms invest
their resources sequentially. Generally, firms evolve from the first stage through to the
last over the course of several years of effort to improve SCM. WCSCM encompasses
all three stages operating in parallel.
5
Michiel R. Leenders, Harold E. Fearon, Anna E. Flynn, P. Fraser Johnson, Purchasing and Supply
Management, Twelfth Edition, McGraw-Hill, INc., New York, New York, 2002, p. 10.
6
John T. Mentzer, Supply Chain Management, Sage Publications, Inc., Thousand Oaks, California, 2001, p. 2.
7
Robert B. Handfield, Ernest L. Nichols, Jr., Introduction to Supply Chain Management, Prentice Hall,
Upper Saddle River, New Jersey, 1999, p. 2.
8
Ibid.
Burt−Dobler−Starling:
World Class Supply
Management, Seventh
Edition
VIII. World Class Supply
Chain Management
Toward World Class Supply Chain Management
en
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Supply Chain Management
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C H A P T E R 27
© The McGraw−Hill
Companies, 2003
27. Toward World Class
Supply Chain Management
World Class Supply ManagmentSM
Figure 27.1 | The World Class Supply Chain Management Triangle
Internal Supply Chain Focus In this stage, the first priority of a business enterprise is
to integrate and optimize its own operations before any attempt to extend supply chain
rationalization “beyond our four walls” into the external supply chain.9 As such, SCM may
be defined as the integration of previously separate operations within a business enterprise.
Historically, initial attempts at internal functional integration followed the materials management concept. Materials management sought to integrate such activities as
purchasing, inventory management, material control, stores, warehousing, material handling, inspection, receiving, and shipping. Further internal integration was achieved by
linking information systems between sales order entry, production planning and control,
and distribution. The focus on MRP/MRP II planning and control systems and aligning
customer demand and supplier response led to further functional integration.10 In the
1990s, Enterprise Resource Planning (ERP) Systems were developed to complete internal information system integration and automate many activities.
A majority of firms attempting to engage in SCM are still preoccupied with the internal integration of functional activities and material and information flows. For many
firms, the real potential of SCM can be realized only once external integration of material, service, and information flows are attained.11
Supplier Focus The supplier-focused stage of SCM emphasizes the importance of
fostering long-term, collaborative relationships with key suppliers. Collaboration with
9
Karen L. Alber and William T. Walker, “Supply Chain Management: A Practitioner’s Approach,” in
Practitioner Notes (Falls Church, VA: APICS Education and Research Foundation, October 1997), p. 68.
10
Martin Christopher, Logistics and Supply Chain Management: Strategies for Reducing Cost and
Improving Service (London: Financial Times–Pitman Publishing, 1998), pp. 18–19.
11
Christine Harland, “Supply Chain Management,” in Blackwell Encyclopedic Dictionary of Operations
Management, Nigel Slack, ed. (Oxford, England: Blackwell Publishers, 1997), pp. 213–215.
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World Class Supply
Management, Seventh
Edition
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Chain Management
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Supply Chain Management
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World Class Supply Chain Management
suppliers has been the focus of much of the supply management and contract management literature in recent years.12 The thrust of this thinking is based on a belief in the
elimination of adversarial relations between buyer and seller and forming long-term relationships with fewer suppliers in order to gain the benefits of economy of scale, reliability, and quality. Clearly, this book supports the supplier-focused view.
Network Management Focus The network management focus stage of SCM recognizes the complex nature of business relationships. The drivers of this perspective emphasize outsourcing of nonstrategic functions and processes. The high level of outsourcing often results in greater physical separation of operations and functional areas.
In such an environment, information technology becomes critical in order to maintain
communications.
Supply Networks
A network view helps one to accurately visualize the true relationships between supply
chain entities. The network view aids in developing an appreciation of the range of significantly different products, processes, markets, geographical markets, and time that are
concurrently present in any supply chain.13 The network perspective properly focuses
upon a reality wherein multiple supply chains exist within the same network.
A graphical representation of a three-dimensional network is given in Figure 27.2.
A three-dimensional network presentation of a supply chain represents the complex nature of the relationships and flows of information, services, and materials.
World Class Demand Management (WCDM)
A major driver of the recession of 2001–2002 was the proliferation of errors in forecasts
which were not identified, analyzed, and acted upon until billions of dollars worth of inventories had accumulated in some supply chains. The primary reason for the inaction
on the part of supply chains that were caught with excessive inventory levels was the absence of demand management. Demand management’s imperative of forecast error reconciliation with the actual order rate of an enterprise is one of the most overlooked potentials in the successful management of inventory levels, customer satisfaction, staffing
strategies, and facilities expansion or contraction.
A constant truth about forecasting is that the further into the future one attempts to
forecast future conditions, the greater the error. Consider the following example from a
class discussion presenting the problem of extending forecasts into the future.
Error and Length of Forecast Example You are a student in a 12-week university
class in supply chain management that meets every Monday evening from 6:00 to 9:30
PM. It is the first meeting of the class, and the topic under discussion is “forecast accuracy.” Your instructor asks you for a forecast with an associated probability of where you
believe you will be one week into the future at exactly 6:30 PM.
12
Richard Pinkerton, “The Evolution of Purchasing to Supply Chain Management,” Business Briefing:
European Purchasing and Logistics Strategies (London: World Markets Research Centre, July 1999),
pp. 16–28.
13
Harland, “Supply Chain Management.”
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625
Supplier
Network
Product 4
Supplier
Network
Services 1
Customer
A
Supplier
Network
Product 1
Supplier
Network
Product 2
Supplier
Network
Services 2
Supplier
Network
Product 2
Customer
B
Supplier
Network
Product 3
Figure 27.2 | Depiction of a Partial Supply Network
Source: James D. Reeds, “Drive Purchase Orders Out of the Supply Chain,” Presentation at the South
African Production and Inventory Control Society, 20th International Conference and Exhibition, Cape
Town, South Africa, July 7, 1998.
You respond quickly, “I have a 98 percent degree of confidence that I will be in class
for the second session of this class. The 2 percent error would consider the possibility of
catching cold, or car trouble.”
“Very good,” responds the professor. “Now . . . could you please provide a forecast
of your whereabouts on Monday evening at 6:30 PM five years hence?”
You take a deep breath, and answer, “Well—I don’t know just where I’ll be five
years from now. I suppose that I will have graduated from the university with an undergraduate degree in Supply Management. I hope that I will work for a progressive firm in
a position that is rewarding and employs my skills and learning. Maybe I will be in graduate school pursuing a master’s degree in SCM at Michigan State University. So, I guess
that my final answer is I will be sitting in a graduate class in East Lansing.”
The professor asks, “Okay, but how certain are you about your answer?”
You answer, “Not very certain at all. I would give my answer a 1–2 percent chance.
Too many things could happen over the next five years!”
“Exactly,” replies the professor. “Now you can better understand the difficulties organizations face when attempting to forecast future demand for their products and services!”
Demand Management Described
Demand management seeks to estimate, control, smooth, coordinate, balance and influence the demand and supply for a firm’s products and services in an effort to reduce
total costs for the firm and its supply chain. Demand management recognizes that
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World Class Supply Chain Management
KEY
Production Line Related Information Flows
Off-line Related Information Flows
BUYING FIRM
SUPPLYING
FIRM
Research and
Technology
Research and
Technology
Strategic
Product
Decisions
Strategic
Capacity
Planning
Future
Customer
Demand
Future
Customer
Demand
Strategic
Capacity
Planning
Aggregate
Plan for
Production
Demand
Forecasting
Demand
Forecasting
Aggregate
Plan
Master
Schedule
Master
Production
Schedule
Operations
Schedules
(12-24 months)
(1-12 months)
DEMAND
MANAGEMENT
Daily
Schedules
DEMAND
MANAGEMENT
Operations
Schedules
(1-4 weeks)
Daily
Schedules
Figure 27.3 | Demand Management Information Flows
forecasts are developed at several points throughout an organization. Demand management does not develop forecasts. Rather, it accepts forecasts from other functions and
updates them based on actual, real-time demand. Demand management also works with
the supply side to adjust the inflow of materials and products. Control in demand management is accomplished through the execution of effective production plans, calculation of inventory levels, setting of capacity levels, and developing customer service
strategies. Demand management also is responsible for smoothing production after master production schedules have already been released to internal production and external
suppliers. Smoothing requires that demand managers recognize that demand management is a process (versus a bounded business function) that requires the utmost in coordination and communication between the responsible parties. Demand can change daily,
weekly and monthly. Demand managers must have contingency plans developed with
supply chain members to allow modification of short-term schedules when necessary.
Demand management also balances the total costs of not meeting demand against the
total costs of adding additional resources required to meet demand.
Figure 27.3 shows the primary information flows required for demand management.
No single figure can completely capture the full complexity of demand management activities and information flows between a single buying firm and a single supplying firm.
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The complexity increases exponentially as the “real world” situation of multiple suppliers
and buyers is modeled.
Figure 27.3 assumes that all firms have dedicated demand managers who are actively involved in demand decisions throughout the life cycle of the product and/or service. Demand managers are involved with product and service design teams in the early
stages of design. Early involvement in design is a critical opportunity for demand management to convey the “voice of the supplier” on capacity issues and provide proactive
contributions on strategic product mix decisions. Subsequent to design, demand managers must work closely with internal marketing and production managers to ensure that
production planning at the strategic capacity and aggregate planning levels is communicated to and reconciled with suppliers. Demand management can provide valuable information on supplier capability and capacity at both of these planning stages.
As Figure 27.3 represents, the point of control for demand information between
supplier and buyer is the linkage between the demand managers for the two organizations. Flow of demand information comes from many sources in supply chains, and such
processes dilute accountability and foster distrust of forecasts. If professionals from engineering, marketing, production, supply, and other functional areas are all simultaneously communicating demand to the supplier, there will be confusion. The demand manager resolves these problems.
At the demand planning level, demand management seeks to reconcile the many
problems inherent in the master schedule, which is based on the forecast and actual orders. The basic objective of demand management is to analyze the consumption of the
sales forecast by the actual sales order rate on a continuous basis. Effective demand management takes tactical and operational corrective actions as required to bring forecast demand in line with actual demand from the marketplace. Tactical-level corrective actions
require adjustment to the master schedule. Operational corrective actions to the weekly
and daily schedules should be avoided if possible, but may be required. Time fences, discussed later, may be established to prevent operational changes in the schedule. Obviously, any changes to the tactical and operational schedules require rapid communication with suppliers.
WCDM and WCSCM
Demand management requires the inclusion of many internal functional areas and external supply chain members. World class demand management (WCDM) in a WCSCM
context requires open lines of communication both internally and externally. Internally,
functional areas must share information to enable improved accuracy of estimates of future demands. The demands generated through open internal communication must then
be shared with external entities. A step diagram model for WCDM, similar to the one for
WCSM, is presented in Figure 27.4.
The Bullwhip Effect
Failure to accurately estimate demand and share information among supply chain entities can result in bloated inventory levels due to a cumulative effect of poor information
cascading up through a supply chain. Poor demand data forces the supplying firm to either carry additional inventory or increase lead times to account for the uncertainty. Either way, inventory levels in the supply chain are increased. If lead times are increased,
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World Class
Proactive
• Involved in aggregate
planning and master
production scheduling
• Involved in internal
capacity management
• Cross-functional team
orientation
• Coordinates master
scheduling with Sales,
Marketing and
Procurement
• Involved in new product
introduction and
Engineering/Production
Prototyping
• Involved with
Marketing and Sales to
reconcile forecast error
• Emphasis is on balance
between schedule
attainment, customer
satisfaction, inventory
risk and investment
• Data are centralized and
available through a data
accumulation and
delivery system
Mechanical
• Transactional focus
• Involved in developing
the master production
schedule
• Originates material
requisitions
• “Nervous” planning
(bullwhip effect)
• Inventory management
occurs at product/family
level and component
level
• Relationships with
suppliers are still mostly
adversarial
• Reports to Materials
Management
• Data are derived from
combination of
informal manual
systems and disparate
legacy information
systems
• Data are still historical
Clerical
• Process paperwork
• Confirms actions of
others
• Emphasis is on
expediency
• Reactive focus
• Sales forecast is
unchallenged
• Goal is schedule
attainment in current
period
• Inventory management
occurs at component
level only
• Relationships with
suppliers are adversarial
• Reporting is at a very
low level
• Data are historical
1
2
3
4
6
7
8
• Involved in aggregate
planning, master
production scheduling
and strategic product
decisions
• Fully integrates supply
and planning strategies
• Facilitates reconciliation
of demand conflict
(forecast vs. actual
demand)
• Plans and coordinates
internal and external
(supplier) material and
capacity requirements
• Involved in new product
development’s earliest
stages to address
capacity issues
• Works in collaborative
cross functional terms
(typically organized
around product families
as well as commodities)
• Teams may involve
both customers and
suppliers
• Manages requirements
of the “Extended
Enterprise”
• Reports to Supply Chain
Management
• Employs state of the art
information systems to
communicate
requirements throughout
the supply chain
9
10
Figure 27.4 | Four-Stage Model of World Class Demand Management Characteristics
then the buyer (based on conventional reorder point calculations) will increase order
quantities. The supplier will interpret the increase in the order quantity as increased customer demand. The supplier will then need to take action to increase capacity to meet
the fictional trend. To add greater irony to the problem, just as the supplier has added additional capacity to meet the increase in demand, demand falls off because the buying
firm has excessive stock available. The supplier will then need to reduce its capacity
through firing employees selling assets, or some other approach. The problem of fictional or “phantom” demand has been termed the bullwhip effect in SCM. The following example presents another way that the bullwhip effect can occur.
Bullwhip Effect Example14 An extreme example of this is the behavior of an individual employed as sales representative of a large tobacco firm located in Richmond,
14
The problems identified with the “Bullwhip effect” and false demand were first identified as “The Phoney
Backlog” by the late Oliver Wight in the late 1970s. See Oliver W. Wight, MRP II: Unlocking America’s
Productivity Potential (Williston, VT: Oliver Wight Publications, 1981), pp. 33–38.
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Virginia. Every evening he would telephone 10 tobacco retailers out of several hundred
to obtain reports on the day’s sales of his firm’s cigarettes. Each of the retailers believed
that the frequency of these queries was an indication of likely increased demand for cigarette products, and, in turn, they increased their actual orders with the tobacco firm. The
sales representative noted the increase in retail orders, and thus modified his own sales
forecast input to the factory.
The manufacturing manager at the cigarette factory observed the upsurge in retail
demand in the form of actual orders, as well as his sales representative’s modification
(upward) of the forecast. He planned the addition of a third shift of operation for the next
month, informed supply management to order more materials, and asked human resources to hire additional workers for the next month. To meet the immediate upturn in
demand, he authorized the use of overtime and expedited raw tobacco deliveries to fill
the increased orders from the retailers. The cigarette firm had increased its capacity and
its orders with its tobacco producers. The firm’s tobacco growers concluded that the increase in orders from the factory reflected an increased market demand for cigarettes.
Accordingly, they made plans to expand planting acreage for the next season and to purchase additional harvesting equipment and hire additional workers.
However, toward the middle of the following month, tobacco retailers noticed that
their stocks of cigarettes were not moving from the shelves as they had expected. In fact,
sales were declining as the result of ongoing antismoking campaigns and the increase in
the cost of tobacco products due to increases in tobacco product taxes. Swamped with
unsold inventories of cigarettes, the retailers called the sales representative and cancelled
virtually all outstanding orders. They maintained that they now had many weeks of inventory on the shelves, and that they must work off the inventory before placing additional orders. The tobacco firm’s sales manager reacted quickly by slashing the sales
forecast. The manufacturing manager reacted to the change in the sales forecast and the
cancellation of retail orders by eliminating the third and second shifts, and furloughing
all of the newly hired workers, as well as eliminating all overtime. Supply management
cancelled its orders for raw tobacco with the growers, who in turn cancelled their orders
for new harvesters, labor, etc. Everyone involved in this scenario wondered, “What went
wrong?”
Evolution to WCDM
Historically, many organizations have employed manual and/or visual systems of order
replenishment. Such approaches generally fall under the category of Reorder Point replenishment techniques (ROP). Later, calculations on the effects of setup, holding, and
carrying costs in addition to purchased and manufactured lot size quantities were considered and resulted in replenishment calculations known as Statistical Reorder Point
techniques. With the introduction of the computer into the manufacturing and distribution environment, Material Requirements and Distribution Requirements Planning
(MRP and DRP) were able to schedule orders for products against lead times and bills
of materials. The resultant effect was a drastic decrease in inventory at all levels (finished
goods, work-in-process, components, and raw materials) held in the production system.
Further integrative refinements (known familiarly as Manufacturing Resources
Planning and Distribution Resources Planning—MRP II and DRP II) of computer-based
information systems provided capabilities to manage production capacity as well as the
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demand for materials. These planning and information systems enabled business enterprises to effectively gauge the financial impact of various inventory–customer service–capacity decisions, and to run “what-if” simulations of various material and capacity scenarios, without the risk of inventory, labor, equipment, or facilities commitment.
Later the many influences of planning techniques, such as Just-in-Time (JIT) manufacturing and its requirements for lean operations, total quality, continuous process improvement, and the elimination of waste in all forms further defined the need for many
functional disciplines to communicate and collaborate in ways never before envisioned.
Most recently, many businesses have purchased and installed enterprise information
systems. The potential of such enterprise systems lies in the seamless integration of the
many databases typically found in any firm. Thus equipped, the prototypical planning
and control information systems applied to production and distribution have become
known as the step beyond MRPII—Enterprise Resource Planning, or ERP.
While the advent of highly integrated enterprise planning systems and the application of e-Commerce, e-Procurement, and B2B capabilities have manifested themselves
in recent years, by themselves they do not address the fundamental questions posed by
effective demand management. For instance, thorny issues often arise when trade-off issues are considered. When the following questions arise as a firm examines the levels of
customer service in terms of inventory on hand, there is often no clear solution.
■
■
■
■
■
What is enough inventory?
What is too much inventory?
What are the cost implications?
What are the effects on customer service levels?
What short- and long-range capacity management decisions must be made to address
demand (i.e., overtime for line workers or outsource to contract manufacturers)?
With traditional manual replenishment techniques, and later disaggregated legacy
information systems, the answers to these vital questions were most often not available.
There were simply not enough resources on hand (both men and machines) to answer
such questions easily or quickly. With the advent of enterprise information systems and
the emergence of the transparent and electronic seamless transfer of planning information between businesses, the true potential of sharing planning information throughout
the supply chain may finally be realized.
Forecasting Demand
The most important output of demand management for a particular product or service is
the forecast. What is a forecast? In terms of SCM, a forecast is an estimate of future demand. In other words, it is a calculated guess or estimate about the future demand for a
firm’s products and services under conditions of uncertainty. Forecasts fall into two categories: quantitative and qualitative.
Quantitative methods require mathematical analysis of historical data. Common
mathematical approaches based on historical data are regression analysis, moving averages, and exponential smoothing. An often-favored forecasting method by managers that
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have little knowledge of forecasting techniques is the naïve method, where the last period’s historical values become the forecast for the next period. However, historical data
may not be complete or available.
Qualitative forecasts are created subjectively, using estimates from sources, such as
market surveys, in-depth interviews, and experts. When historical data are available,
qualitative forecasting is usually used to verify or adjust quantitative forecasting methods. In some cases, when historical data are not available, qualitative forecasting is the
only alternative.
Why are forecasts necessary in SCM? The primary reason is that lead times exist
for production, distribution, and services. If lead times were zero, then demand could be
met as it arises. Since lead times do exist, supply chains must operate based on forecasts.
Most managers in the world today do not trust forecasts because they are fraught
with error. Commonly heard comments from supply managers in industry are:
■
■
■
■
■
■
■
“Forecasts are always inaccurate—why try to improve them?”
“Forecasts are always wrong—they cannot be made right!”
“Forecasts constantly change!”
“Someone must be to blame for an inaccurate forecast!”
“If only we had a good computerized forecasting software module.”
“You cannot believe the numbers!”
“Using statistical forecasting tools takes too much time.”
Planning with Time Fences
Many companies reduce uncertainty in demand by establishing time fences. A time
fence reflects management decisions regarding production and supplier commitments
about changes allowed to the scheduling of materials and capacity elements. Figure 27.5
presents three typical approaches to time fences: frozen, slushy, and fluid.
Typically, the demand time fence is for a short period, such as the current production month. The demand time fence establishes planning rules which, if broken, may
prove very disruptive and/or costly to a firm. The most common rule is that production
schedules that are within the demand time fence cannot be changed, even if the demand
forecast is changed. Thus, schedules in the demand time fence are often said to be
“frozen,” that is, made very difficult or even impossible to change without top management approval.
Within the “slushy” time fence, many commitments for a firm’s material, capacity,
capital equipment, and related financial resources can be made on an advisory basis.
This intermediate period is usually two to six months into the future. Some actions cannot be delayed until the frozen, immediate period. For example, long lead-time materials may need to be ordered.
“Fluid” time fences acknowledge that greater uncertainty exists as forecasts are extended farther out in the planning horizon. Commitments for materials, capacity, capital
equipment, and related financial resources are highly subject to change. The chief advantage of planning during the “fluid” time fence period for materials, capacity, capital
equipment, and finances is to provide as much forward visibility as possible. In SCM,
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Current
Production
Period
Intermediate
Planning
Period
Long-Range
Planning
Period
FROZEN
SLUSHY
FLUID
Demand Time Fence
Planning Time Fence
TIME
Figure 27.5 | The Concept of Time Fencing in Demand Management
Source: Thomas E. Vollmann, William L. Berry, and D. Clay Whybark, Manufacturing Planning and
Control Systems, 4th ed. (New York: McGraw-Hill, 1997), p. 246.
such forward visibility about the changing nature of demand is of critical importance for
suppliers so that they may effectively manage their own resources. Buying firms that
communicate planned orders on a continuous basis with their supply chain members will
achieve a distinct advantage over those firms that do not share their plans.
Implications for Supply Management
Since a primary role of demand management is in coordinating demand between the
buying and supplying firm, demand management clearly fits within either supply management or supply chain management. Demand management requires open, honest,
trusting, and collaborative relationships between customers and suppliers throughout the
supply chain. This point underscores the critical importance of trust and relationship
management in effective SCM.
The greatest potential—and challenge—for effective demand management exists in
SCM. Under the imperative of SCM, the “view of the future” for the firm, as reflected
in both reconciled forecast and actual demand, must be communicated to all supply
chain members continuously. Who better to convey that view than a demand manager
within supply chain management? Changes in demand patterns suggest that the formal
planning evolutions once largely confined to processes and functions within a firm must
be shared with all supply chain members.
For many supply managers, demand management requires a shift from a focus on component- and commodity-level planning to a focus on strategic product- and subassemblylevel planning. If supply managers do not become involved in strategic planning, they may
not be relevant in the management of the supply chain. This is especially true, for example,
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when an entire means of production of a particular product is outsourced to a subcontract
manufacturer.
World Class Logistics Management (WCLM)
World class logistics management (WCLM) forms the third side of the WCSCM triangle. Logistics professionals play an important role in the success of supply chain management in the management of transportation, storage, and warehousing activities. Unfortunately, many companies define logistics as synonymous with the term SCM, thus
ignoring the contributions and roles of supply management and demand management. A
model for WCLM is presented in Figure 27.6.
World Class
Proactive
• Cross-functional team
orientation
• Aligns distribution
resource plan with
master planning process
• Involved with
Marketing and Sales to
reconcile forecast errors
• Inbound and outbound
logistics are integrated
• Reports at a high
enough level that it can
influence upper
management strategy,
but in a “hit and miss”
manner
• Improved customer
satisfaction through
proactive storage and
distibution
• Balance schedule
attainment, customer
satisfaction, inventory
risk, and investment
• Real time data are now
available and used, but
not across entire chain
Mechanical
• Historical demand and
stockouts drive
replenishment
• Functional
discrimination between
warehousing/stores,
transportation, material
handling and field
service still operate
relatively independently
in a decentralized
manner
• Historical demand and
stockouts drive
replenishment decisions
• High transaction levels
exist with associated
costs
• Logistics contributes
little to firm’s bottom
line
• Report to logistics/
warehouse/transportation
manager
Clerical
• Process paperwork
• Confirms actions of
others
• Emphasis is on
expediency
• Reactive, focus is on
current current planning
and replenishment
period
• Inbound and outbound
transportation are
organizationally
separate
• Lack of collaboration
between supply chain
members
• Reporting is at a very
low level with virtually
no organizational power
• Data are historical
1
2
3
4
6
7
• Manage logistics
requirements of the
“extended enteprise”
• Actively involved in
developing corporate
strategy
• Enables customization
at the product level to
better meet diverse
customer needs
• Increased value added
activities and process
employed in-transit of
products and materials
as well as at the point of
sale
• Logistics specifications
are integrated with
product specifications
• Real-time traceability of
materials and product
exists throughout the
supply chain and the
information is utilized
• Comprehensive
performance
measurement is realized
• Works in collaborative
cross functional teams
that include suppliers
and/or customers when
appropriate
• Logistics chain
competencies are
enhanced via a
consultancy role within
the supply chain as a
“logistics process
improvement advocate”
8
Figure 27.6 | Four-Stage Model of World Class Logistics Management
9
10
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Logistics Defined
Logistics management deals with the handling, movement, and storage activities within
the supply chain, beginning with suppliers and ending with the customer. One of the best
selling books in logistics states: “Logistics is the part of the supply chain process that
plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.”15 Typical logistics roles include the
management of many or all of the following activities:
■
■
■
■
■
■
■
■
■
■
■
■
■
Traffic and transportation
Warehousing and storage
Industrial packaging
Materials handling
Inventory control
Order fulfilment
Demand forecasting
Site location analysis
Returned goods handling
Parts and service support
Field service and maintenance
Value-added services
Salvage and scrap disposal
The list above is not exhaustive. In some organizations, supply management reports
to logistics. If that is the case, then logistics is also responsible for all activities in the
supply management discipline.
Storage points for goods and information, such as outside warehouses and stocking points within a firm’s distribution network, are critical in meeting customer satisfaction goals. For example, transportation costs represent about 40–50 percent of the
total cost of logistics and perhaps 4–10 percent of product selling prices.16 Thus, from
a total systems viewpoint, logistics becomes the means whereby the needs of customers are satisfied through the coordination of materials and information flows that
extend from the marketplace, through the firm and its operations, and beyond that to
suppliers.17
Integration of Logistics Planning
The imperative to integrate logistics planning with material and capacity planning throughout the supply chain is very real. Noted logistics scholar Martin Christopher has observed:
“The concept of integration within the business and between businesses is not new, but the
15
Coyle et al.
Christopher, Logistics and Supply Chain Management, pp. 69–99.
17
Ibid., p. 13.
16
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acceptance of its validity by managers is.”18 The integration of logistics, multilevel planning, and supply management objectives makes sense when one considers the highly
customer-centric business strategies that have emerged in recent years. Customer needs
vary, and firms can tailor logistics systems to serve them better—and more profitably.
Indeed, whether they know it or not, senior managers of every retail store and diversified
manufacturing company compete in businesses that are distinguished by their logistics, in effect “logistically distinct businesses,” organized, or potentially organized, around the delivery characteristics of logistics pipelines: the channels of transport, warehousing, handling,
and control through which manufactured goods flow.19
As the competitive context of business continues to change, logistics activities and
processes must be integrated into strategic-level thinking and planning. In addition to organizational integration, much of the focus on logistics has been on reduction of cycle
times in logistics activities. Cycle-time reduction and the elimination of waste in logistics processes have had a direct correlation to the enhancement of customer satisfaction.
Evolution to WCLM
In completing the third side of the WCSCM triangle, WCLM includes the following:
■
■
■
■
18
Increased Value-Added Activities. WCLM “tailors” products to meet customer needs.
The logistics characteristics for each type of customer are incorporated into each product’s specifications. This includes such features not traditionally considered as part of
a product’s “form, fit, and function.” For example: product testing prior to delivery,
applying special customer features and options prior to delivery, using packaging for
a unique method of storage and/or marketing, applying special marking or labeling,
employing technology to track materials throughout the supply chain, etc. The notion
of “tailored logistics” implies that the product characteristics of how a product is packaged, handled, shipped, stored, and supplied becomes every bit as much a part of a
product’s “specifications” as its material and operating attributes.
Real-Time Traceability of Materials and Product throughout the Supply Chain.
WCLM organizations employ the use of paperless information technology to track
inventory status and movement in real time.
Logistics Competencies Enhanced via Consultancy Role as “Logistics Process Improvement” Advocates. WCLM experts are “on the road” a significant part of the time
surveying supply chain members’ logistics competencies. They educate supply chain
members on “best practices” in a spirit of continuous improvement and the elimination of waste. The focus of logistics is “outward” toward the “extended enterprise.”
Collaborative Cross-Functional Teams. WCLM teams involve both customers and
suppliers. The complexities of logistics environments and the ever-changing technology and world economic and political events necessitate a team-based, collaborative approach to logistics planning and execution. Teams typically are organized
around product families as well as commodities.
Ibid., p. ix.
Joseph B. Fuller, James O’Connor, and Richard Rawlinson, “Tailored Logistics: The Next Advantage,”
Harvard Business Review, May–June 1993, p. 87.
19
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World Class Supply Chain Management
Implications for Supply Management
The fact that supply management is the key to SCM does not imply that other functional
areas are not important. On the contrary, each functional area serves an important role
in achieving WCSCM. The difference is that professionals in logistics, operations, information technology, engineering, accounting, marketing, legal, finance, and other
functional areas commonly do not have the skills and experience required to manage the
interrelationships on which successful supply chains are built. The integration of these
interrelationships is what separates excellent supply chains from lesser ones.
Lead- and cycle-time reduction initiatives, the elimination of waste, and the implementation of advanced, integrated information systems that have characterized supply
management in recent years also are well under way in the field of logistics. Unfortunately, supply management and logistics frequently do not collaborate in many companies. The time has come for collaboration to occur. Logistics and supply management
will realize their greatest gains in efficiency and effectiveness through such collaboration. Only then can both traditionally separate disciplines achieve world-class status.
Concluding Remarks
For many in the field of SCM, the future holds substantive and far-reaching changes.
These changes are largely driven by the following trends:
■
■
■
■
■
■
■
Institutionalization of the SCM perspective.
Increasing emphasis on supply chain relationships.
Increasing emphasis on the long-term view.
Use of information technology to enhance supply chain communications.
Use of information technology to foster rapid decision making.
An increasing focus which looks “outward” toward the intricacies of supplier and customer relations.
The emergence of the supply management professional as a “manager and facilitator
of relationships,” versus an information broker whose attention is defined by commodity knowledge.
Increasingly, supply management professionals spend a majority of their time outside the boundaries of their employers’ facilities. They will often “be on the road,”
adding value to their enterprise by helping suppliers achieve World Class Supply Management SM status.
A thorough grasp of the continually evolving perspectives of SCM is a necessary
component of the skill set of any proactive supply management professional. Such perspectives recognize the continuing need to integrate many competencies traditionally
resident in other functional disciplines, in particular, demand management and logistics.
Further, successful supply chain optimization depends on the coordination of crossfunctional competencies in cross-enterprise teams. The supply management professional is the logical “team leader” for such initiatives.