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.
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.
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.
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.
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.
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.
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.
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.
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. Cross-docking 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.
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.
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).
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
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