Supply chain management—a term that first appeared in the late 1980s—refers to the management of a distribution channel across organizations. All the members of the channel, from suppliers to end users, coordinate their business activities and processes to minimize their total costs and maximize their effectiveness in the market. The goal is to achieve the coordination and continuity of a vertically integrated channel without centralized ownership of the entities comprising the channel. The firms in the channel form a long-term partnership or strategic alliance in order to improve service to the end consumer, reduce channel costs, and create a competitive advantage.
Supply chain management can be contrasted with a traditional distribution channel in which firms deal with one another on a short-term, arm's-length basis, with each one trying to maximize their own gain from each transaction. Without supply chain management, the relationship between firms in the channel lasts only from transaction to transaction. Most organizations in the traditional channel do not really see themselves as part of a vertically integrated channel. They only see themselves as independent businesses that buy from suppliers at the lowest possible price and sell to customers at the highest possible price. Diseconomies caused by redundancies, particularly of inventory, are common in such a channel. By looking across the entire channel, supply chain management tries to eliminate these redundancies.
There are a number of key characteristics of supply chain management. One of the most important is that the firms involved see themselves as part of the channel and understand that their future depends to a large extent on the success of the whole channel. The relationships are viewed as long term, and the corporate cultures, philosophies, and missions are similar. There is joint planning of products, locations, and quantities of inventory to be kept in the system. There is also a great deal of information sharing between firms in order to coordinate the efficient flow of goods through the channel. Modern computing and communication technology, such as electronic data interchange, is used to rapidly provide information within the channel as needed. Cost advantages are exploited wherever possible. For example, the production of a product requiring a great deal of human labor would be produced by the member with the lowest labor costs.
Performance of a company's supply chain management can be analyzed in terms of cost control, customer service, and asset productivity. A study of leading supply chain management companies, conducted by William C. Copacino in association with the Massachusetts Institute of Technology, suggests there are several areas in which the leaders excel. These include functional excellence in such areas as procurement, manufacturing, transportation and distribution, and customer service, with a highly developed level of skills and integrated management. Leaders are also skilled at managing complexity, especially the management of surge and uncertainty in such areas as new product introductions, product-line complexity, and seasonal variations. Leading supply chain managers also employ the best information technology for applications, data management, decisionsupport tools, and communications. They are able to leverage the distinctive capabilities of supply chain providers as well as to create an extended supply chain with visibility and collaboration across the channel.
The rapid growth of electronic commerce is expected to have an effect on supply chain management. Benefits include process efficiency, with greatly reduced costs made possible by utilizing the power of the Internet to enhance efficiency and effectiveness of various supply chain processes from order entry to supplier management. Electronic commerce will also result in channel restructuring, the elimination of some intermediaries, and a drastic reduction of channel inventories, handling costs, and transition costs. Companies will be able to better integrate electronically with their suppliers and customers to lower transaction costs, manufacturing costs, and supply costs, among other benefits.
[ George C. Jackson ,
updated by David P. Bianco ]
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