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Supply chain management (SCM) is a broadened management focus that
considers the combined impact of all the companies involved in the production of
goods and services, from suppliers to manufacturers to wholesalers to retailers to
final consumers and beyond to disposal and recycling. This approach to
managing production and logistics networks assumes all companies involved in
the process of delivering goods to consumers are part of a network, pipeline, or
supply chain. It encompasses everything required to satisfy customers and
includes determining which products they will buy, how to produce them, and
how to deliver them. The supply chain philosophy ensures that customers receive
the right products at the right time at an acceptable price and at the desired
location.
Increasing competition, complexity, and geographical scope in the business world
have led to this broadened scope and continuing improvements in the capabilities
of the personal computer have made the optimization of supply chain
performance possible. Electronic mail and the Internet have revolutionized
communication and data exchange, facilitating the necessary flow of information
between the companies in the supply chain.
Companies that practice supply chain management report significant cost and
cycle time reductions. For example, Wal-Mart Stores Inc. announced increases in
inventory turns, decreases in out-of-stock occurrences, and a replenishment cycle
that has moved from weeks to days to hours.
A fundamental premise of supply chain management is to view the network of
facilities, processes, and people that procure raw materials, transform them into
products, and ultimately distribute them to the customer as an integrated chain,
rather than a group of separate, but somewhat interrelated, tasks. The
importance of this integration cannot be overstated because the links of the chain
are the key to achieving the goal. Every company has a supply chain, but not
every company manages their supply chain for strategic advantage.
While easy to understand in theory, the chain management becomes more
complex the larger the company and its range of products, and the more
international the locations of its suppliers, customers, and distribution facilities.
Supply chain management is also complex because companies may be part of
several pipelines at the same time. A manufacturer of synthetic rubber, for
example, can at the same time be part of the supply chains for tires, mechanical
goods, industrial products, shoe materials and footwear, aircraft parts, and
rubberized textiles.
LINKS WITHIN THE SUPPLY CHAIN
With supply chain management, information, systems, processes, efforts, and
ideas are integrated across all functions of the entire supply chain. Supply chains
become more complex as goods flow from more than one supplier to more than
one manufacturing and distribution site. The possibility of outside sources for
functions like assembly and packaging are also options in the chain.
The basic tasks of a company do not change, regardless of whether or not it
practices supply chain management. Suppliers are still required to supply
material, manufacturing still manufactures, distribution still distributes, and
customers still purchase. All of the traditional functions of a company still take
place. The ultimate difference in a company that manages its supply chain is their
focus shifts from what goes on inside each of the links, to include the connections
between the links.
A company practicing effective supply chain management also recognizes that the
chain has connections that extend beyond the traditional boundaries of the
organization. Managing the connections is where the integration of the supply
chain begins. Any improvement in or disruption to the supply chain linkages
affects the entire chain. The cumulative supply chain effect of uncertainty can be
seen in this example. Suppose a manufacturer of integrated circuit boards
receives a shipment of poor quality silicon. Because the manufacturer is
dependent on its supplier for timely shipments, the poor quality lot results in a
shipment delay to one of its customers. The computer manufacturer is forced to
shut down its line because component circuit boards are not available. As a
result, computer shipments to retailers are late. Finally, the customer goes to the
retailer to purchase a new computer but is unable to find the desired brand.
Frustrated, the customer decides to buy the product of a competitor. Consider
too, the timing involved in this process. Because of production and transportation
lead times, the actual receipt of the poor quality silicon probably occurred several
months before the customer made a computer purchase.
A wide variety of events occurs in the supply chain that is largely unpredictable.
Suppliers can make early or late deliveries. Customers can increase, decrease, or
even cancel orders. New customers can place large orders. Machines or trucks
can break down. Employees can get sick, go on strike, and quit. Supplier
shipments or manufactured products can have quality problems. In the past,
companies prepared for uncertainty and improved their levels of customer
satisfaction by allowing inventory levels to rise. This is no longer an acceptable
solution. High inventories translate to increased carrying costs and risks of
obsolescence that can limit a company's flexibility.
Throughout the supply chain, inventory is traditionally created and held at many
locations. Any time a portion of that inventory can be reduced or eliminated, the
company decreases costs and increases profitability. Shortening the length of
time it takes to move a product from one link of the chain to the next also
shortens the cycle time of the entire chain and thereby increases competitiveness
and customer satisfaction.
IMPORTANCE OF CHAIN VISIBILITY
SCM provides needed visibility along the chain to improve performance. Without
visibility up and down the supply chain an effect known as the "bullwhip" can
result. In reviewing the demand patterns at various points in their supply chain,
Procter & Gamble (P&G) noticed that while the consumers, or in this case the
babies, consumed diapers at a steady rate, the demand order variability in the
supply chain was amplified as it moved up the supply chain. Without being able
to see the sales of its product at the distribution channel stage, they had to rely on
sales orders from resellers to make product forecasts, plan capacity, control
inventory, and schedule production. This lack of visibility resulted in excessive
inventory, inaccurate forecasts, excessive or constrained capacity, and reduced
customer service levels. Each link in the supply chain stockpiled inventory to
counteract the effects of demand uncertainty and variability. Various studies have
shown that these inventory stockpiles can equal as much as 100 days' supply and
by considering the effect on raw materials, the total chain could contain more
than a year's supply of inventory.
Companies like P&G, Dell Computer, Hewlett-Packard, Campbell Soup,
M&M/Mars, Nestlé, Quaker Oats, and many others have been able to control the
bullwhip effect. Some of the methods used include innovative information flow
for forecasting demand, revised price structures, or developing strategies to allow
smaller batch sizes, while still maximizing transportation efficiency. By
understanding the effects of supply chain integration, visibility and information,
these companies were able to develop strategies that enabled them to overcome
many problems.
SCM BENEFITS
In addition to helping to create an efficient, integrated company, supply chain
management also plays a large part in reducing costs. A study by the A.T.
Kearney management consulting company estimates that supply chain costs can
represent more that eighty percent of the cost structure in a typical
manufacturing company. These numbers indicate that even slight improvement
in the process eventually can translate into millions of dollars on the bottom line.
These costs include lost sales due to poor customer service or out of stock retail
products. For every dollar of inventory in a system, there are one to two dollars of
hidden supply chain costs: working capital costs, asset costs, delivery costs, write
downs and so on. Leaner inventories free up a large amount of capital.
Depending on the industry, companies leading in supply chain performance
achieve savings equal to three to seven percent of revenues compared with their
median performing peers. One Efficient Consumer Response Study, sponsored by
the Food Marketing Institute, estimated that forty two days could be removed
from the typical grocery supply chain, freeing up $30 billion in current costs, and
reducing inventories by forty-one percent.
REQUIREMENTS OF SCM
CUSTOMER FOCUS.
All sources agree the fundamental focus of supply chain management begins by
understanding the customer, their values, and requirements. This includes
internal customers of the organization and the final customer as well. Companies
must seek to know exactly what the customer expects from the product or service
and must then focus their efforts on meeting these expectations. The process of
suppliers must be aligned with the buying process of the customer. Even
performance measurements must be customer driven, because the behavior of
the final customer ultimately controls the behavior of the entire supply chain.
INFORMATION FLOW.
Another requirement is increased information flow. Companies must invest in
the technology that will provide access to greater amounts of timely information.
Information makes it possible to move to more instantaneous merchandise
replenishment and allow all parties in the chain to respond quickly to all changes.
Information facilitates the decisions of the supply chain such as evaluation and
exploration of alternatives. Information flow is key to the visibility of the product
as it flows through the supply chain and is needed at every stage of he customer
order. Improving the intelligence of where products are in the chain also
improves inventory management and customer service capabilities. Issues of
trust and security are fundamental to information integration. Many
organizations are successfully dealing with these issues through the development
of partnering relationships.
EMPLOYEE AND MANAGEMENT SUPPORT.
As partners in the supply chain must also be highly flexible, supply chain
strategies often require changes in processes and traditional roles. All members
of the supply chain must be open to new methods and ideas. The flexibility and
change required is often difficult for organizations and their employees. It is
however, the ability to embrace necessary changes that will position a company to
take advantage of the benefits of supply chain management. Because the supply
chain is a dynamic entity, businesses are advised to organize for change. They
must anticipate resistance and be prepared to deal with it. Training in the
concepts of supply chain management will aid in this effort. Also, as with any
organization change, the new ideas must be supported and embraced by all
levels of management.
MEASUREMENT.
Often companies undertake ways to improve themselves without also thinking
about how to measure whether or not they have been successful. Performance
measurement must consider the entire supply chain and be related to the effect
on the ultimate goal of customer satisfaction. Therefore the final concept of
supply chain management is ensuring measurement techniques are adequately
considered during the implementation of supply chain management techniques.
ACHIEVING THE GOALS OF SUPPLY
CHAIN MANAGEMENT
Methods being used to achieve the goals of supply chain management can be
divided into two categories. Some methods seek to achieve the goals through
improving the processes within the links of the chain. There are also methods
that seek to achieve the goals by changing the roles or functions of the chain.
The methods used to improve the process include modeling various alternatives,
effective measurement, improved forecasting, designing for the supply chain,
cross-docking inventories, direct store delivery, and electronic data interchange
(EDI) technology. Direct store delivery methods bypass the distribution center.
Products using direct store delivery include bakeries, cosmetics, snack foods, and
other items where product freshness or quick replenishment is required. Crossdocking is a process that keeps products from coming to rest as inventory in a
distribution center. Products arrive at the center and are immediately off loaded,
moved, and immediately reloaded on waiting delivery trucks.
EDI technology is the electronic exchange of information between the computer
systems of two or more companies. It is used to process transactions like order
entry, order confirmation, order changes, invoicing, and pre-shipment notices.
The EDI movement was started by big retailers like Wal-Mart, Kmart, and
Target. To do business with some of these large customers, EDI processing is a
requirement. EDI delivers results by facilitating the constant and rapid exchange
of information between companies. Customer order, invoice, and other
information that would previously require hours of data entry can be done in
minutes. Point of sale data can be transmitted in a matter of minutes or hours
instead of weeks.
Methods that use changing roles include postponement strategies, vendor
managed inventory, and supplier integration. Postponement strategies delay the
differentiation of products in order to gain flexibility to respond to changing
customer needs. Product inventory is held in a generic form so that as specific
demand becomes known, the product can be finished and shipped in a timely
manner. Vendor managed inventory and continuous replenishment programs are
ways in which organizations are reaching beyond their boundaries and
integrating their efforts with suppliers and customers. Point of sale data is
transferred from customer to supplier in real time so that automatic
replenishments can occur. Companies can even surrender the responsibility for
managing inventory to some of their suppliers. Supplier integration moves
beyond partnering with suppliers and focuses on aligning with all critical
suppliers the supply chain.
SCOR
The supply chain operations reference (SCOR) model is a process reference
model, developed in 1996 by the Supply-Chain Council, as a cross-industry
diagnostic, benchmarking, and process improvement tool for supply chain
management. SCOR provides a complete set of supply chain performance
metrics, industry best practices, and enabling systems' functionality that allows
firms to thorough analyze all aspects of their current supply chain. A number of
notable firms, such as IBM, Intel, 3M, and Siemens have used the model
successfully.
The model separates supply chain operations into five distinct processes: plan,
source, make, deliver, and return. Within these are three levels of process detail.
Level I deals with process types, Level II is the configuration level and deals with
process categories, and Level III is the process element level. The SCOR model
endorses twelve performance metrics. The Levels II and III metrics are keys to
the Level I metrics that fall within the five process categories. Empirical research
by Archie Lockamy III and Kevin McCormack found while some of the practices
found in the model did not have expected degree of impact, many of the practices
did result in significant supply chain performance improvements.
SCM AND THE ENVIRONMENT
As environmental practices increase in importance supply chain strategies will do
the same. Firms finding that release of waste into the biophysical environment is
becoming more difficult or even impossible are saddled with a new responsibility,
waste control. This may have far-reaching implications for supply chain
management. When source reduction is impossible or incomplete, the firm must
deal with returned products as well as disassembly, recycling, reuse, repairwork
or remanufacturing, all of which mean more movement of material. The supply
chain is then extended beyond the final consumer to become a "reverse supply
chain" (note that an earlier SCOR model contained only four processes; the
"return" process was later added).
THE FUTURE
Supply chain management is an evolving process. It is much like the philosophies
of total quality management (TQM) or business process reengineering in that
there is no stopping point. Emerging technologies and successful supply chain
management techniques used by companies today are the foundation of future
improvements in techniques and technologies. Supply chain management can
provide great payoffs in cost and efficiency to the organization.
Enabled with improving technology and a broader view of the organization,
supply chain management addresses the issues of complexity and competition by
exploiting and enhancing the chain to provide strategic, financial, and
competitive advantage.
SEE ALSO: Distribution and Distribution Requirements Planning ; Electronic
Data Interchange and Electronic Funds Transfer ; Reverse Supply Chain
Logistics
Marilyn M. Helms
Revised by R. Anthony Inman
FURTHER READING:
Gunasekaran, A. and E.W.T. Ngai. "Virtual Supply-Chain Management." Production
Planning & Control 15, no. 6 (2004): 584–595.
Handfield, Robert, Robert Sroufe, and Steven Walton. "Integrating Environmental
Management and Supply Chain Strategies." Business Strategy and the Environment 14,
no. 1 (2005): 1–18.
Huan, Samuel H., Sunil K. Sheoran, and Ge Wang. "A Review and Analysis of Supply
Chain Operations Reference (SCOR) Model." Supply Chain Management: An
International Journal 9, no. 1 (2004): 23–29.
Kannan, Vijay R., and Keah Choon Tan. "Just-In-Time, Total Quality Management, and
Supply Chain Management: Understanding Their Linkages and Impact of Business
Performance." Omega 33, no. 2 (2005): 153.
Lockamy, Archie, III, and Kevin McCormack. "Linking SCOR Planning Practices to
Supply Chain Performance: An Exploratory Study." International Journal of
Operations & Production Management 24, no. 11/12 (2004): 1192–1218.
Nagurney, Anna, and Fuminori Toyasaki. "Reverse Supply Chain Management and
Electronic Waste Recycling: A Multitiered Network Equilibrium Framework for Ecycling." Transportation Research. Part E, Logistics & Transportation Review 41E, no. 1
(2005).
New, Steve, and Roy Westbrook, eds. Understanding Supply Chains: Concepts,
Critiques & Futures. Oxford University Press, 2004.
Supply Chain Council Website. Available from http://www.supply-chain.org.
Walker, William T. Supply Chain Architecture. Boca Raton: CRC Press, 2005.
Wisner, Joel D., G. Keong Leong, and Keah-Choon Tan. Principles of Supply Chain
Management: A Balanced Approach. Mason, OH: Thomson South-Western, 2005.