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"Supply
Chain Management: the active
management of supply chain activities to maximize customer
value and achieve a sustainable competitive advantage."
Cecil
Bozarth, Introduction to Operations and Supply Chain
Management
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| What
is Supply Chain Management? |
The
concept of Supply Chain Management is based on two
core ideas. The first is that practically every
product that reaches an end user represents the
cumulative effort of multiple organizations. These
organizations are referred to collectively as the
supply chain.
The second idea is that while supply chains have
existed for a long time, most organizations have
only paid attention to what was happening within
their “four walls.” Few businesses understood,
much less managed, the entire chain of activities
that ultimately delivered products to the final
customer. The result was disjointed and often ineffictive
supply chains.
Supply chain management, then, is the active
management of supply chain activities to maximize
customer value and achieve a sustainable competitive
advantage. It represents a conscious effort
by the supply chain firms to develop and run supply
chains in the most effective & efficient ways
possible. Supply chain activities cover everything
from product development, sourcing, production,
and logistics, as well as the information systems
needed to coordinate these activities.
The organizations that make up the supply chain
are “linked” together through physical
flows and information flows. Physical flows
involve the transformation, movement, and storage
of goods and materials. They are the most visible
piece of the supply chain. But just as important
are information flows. Information flows
allow the various supply chain partners to coordinate
their long-term plans, and to control the day-to-day
flow of goods and material up and down the supply
chain.
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| What
do you need to know about SCM? |
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The
first thing one needs to understand is that SCM
doesn’t replace what we’ve learned about
management over the last 50 years; it builds
upon it. The analogy that a chain is only as strong
as its weakest link holds here as well. Organizations
must first be able to provide quality products
or services in a timely, cost-effective manner
if they want to tackle broader supply chain issues.
Therefore, programs such as Total Quality Management,
Just-in-Time manufacturing, concurrent product
development, and the like are just as relevant
today as they were in the past. In fact, it’s
interesting to note that many of the firms that
have emerged as SCM leaders had already established
their reputations in other areas beforehand.
The second thing to understand about SCM is that
it often requires significant changes in the firm’s
organizational structure. SCM issues cut across
functional areas and even business entities. Therefore,
the responsibility and authority for implementing
SCM must be placed at the highest levels of an
organization. Firms that attempt to imbed SCM
within a functional unit (such as purchasing,
operations, or logistics) usually have limited
success.
Third, SCM requires firms to put in place information
systems and metrics that focus on performance
across the entire supply chain. This is
because individual units that seek to maximize
their performance without regard to the broader
impact on the supply chain can cause problems.
For example, a manufacturing unit’s decision
to minimize its inventory levels may reduce delivery
performance to the end user. Likewise, a distributor’s
decision to chase highly seasonal demand may “bullwhip”
its upstream partners, causing significant cost
overruns. Putting in place the information systems
and metrics needed to make intelligent decisions
in the face of such trade-offs presents a significant
challenge to supply chain partners.
Finally, SCM adds another layer of complexity
to a firm’s strategy development efforts.
Years ago, firms could succeed by being particularly
good in one functional area, such as marketing,
finance, or operations. Then firms recognized
that they had to have sufficient capabilities
across multiple functional areas in order to survive.
Nowadays, much competition occurs between multi-firm
supply chains, not just between individual firms.
In addition to their debates about functional-
and business-level strategies, then, managers
must now address how they will partner with other
firms in order to compete.
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| Why
do you need to know about SCM? |
Supply
chain management is as much a philosophical approach
as it is a body of tools and techniques, and typically
requires a great deal of interaction and trust between
companies to work. For right now, however, let's
talk about three major developments that have brought
SCM to the forefront of management’s attention:
• The information revolution
• Increased competition and globalization in
today's markets
• Relationship management
The Information Revolution
In the early 1960s when computers were first developed,
a mainframe computer filled an entire room. With
the development of the integrated circuit, the cost
and speed of computer power increased exponentially.
Today, a laptop computer exceeds the storage and
computing capacity of mainframe computers made only
15 years ago. With the emergence of the personal
computer, optical fiber networks, and the Internet,
the cost and availability of information resources
allows easy linkages and eliminates information-related
time delays in any supply chain network. Wal-Mart's
ability to send daily sales information to its suppliers
is just one example.
Organizations are moving towards a concept known
as electronic commerce, where information
transactions are automatically completed via Electronic
Data Interchange (EDI), Electronic Funds Transfer
(EFT), Point of Sale (POS) devices, and a variety
of other approaches. The late 1990s and early 2000s
saw the emergence of on-line “trading communities”
that put thousands of buyers and sellers in touch
with one another. The old “paper”-type transactions
are becoming increasingly obsolete. At the same
time, the proliferation of new telecommunications
and computer technology has made instantaneous communications
a reality. Such information systems -- like Wal-Mart's
satellite network -- can link together suppliers,
manufacturers, distributors, retail outlets, and
ultimately, customers, regardless of location.
Increased Competition and Globalization
The second major trend is increased competition
and globalization of businesses. The rate of change
in markets, products, and technology is increasing,
leading to situations where managers must make decisions
on shorter notice, with less information, and with
higher penalty costs. New competitors are entering
into markets that have traditionally been dominated
by "domestic" firms. At the same time,
customers are demanding quicker delivery, state-of-the-art
technology, and products and services better-suited
to their individual needs. In some industries, product
life cycles are shrinking from years to a matter
of two or three months. One management guru even
compared current global markets to the fashion industry,
in which products go in and out of style with the
season.
Despite the imposing challenges of today’s
competitive environment, some organizations are
thriving. These firms have embraced the changes
facing today's markets, and have put a renewed emphasis
on improving their operations and, in particular,
supply chain performance. For instance, Johnson
Controls can now receive an order for seats from
a Ford assembly plant, make the seats, and deliver
the order -- all within four hours. This requires
incredibly flexible operations within Johnson's
own manufacturing systems, as well as dependable
information links with its supply chain partners.
To survive, many firms today find that they must
increase market share on a global basis and be on
the “ground floor” of rapid global economic
expansion. Simultaneously, these firms must vigorously
defend their domestic market share from a host of
“world class” international competitors.
To meet this challenge, managers are seeking to
find ways to rapidly expand their global presence.
They must position inventories so products are available
when customers (regardless of location) want them,
in the right quantity, and for the right price.
This level of performance is a constant challenge
to organizations, and can only occur when all parties
in a supply chain are “on the same wavelength”.
Relationship Management
The information revolution has given companies a
wide range of technologies for better managing their
operations and supply chains. Furthermore, increasing
customer demands and global competition have given
firms the incentive to improve these areas. But
this is not enough. Any efforts to improve operations
and supply chain performance are likely to be inconsequential
without the cooperation of other firms. As a result,
more companies are putting an emphasis on relationship
management.
Of all the activities operations and supply chain
managers perform, relationship management is perhaps
the most difficult, and is therefore the most susceptible
to break down. A poor relationship within any link
of the supply chain can have disastrous consequences
for all other supply chain members. For example,
an unreliable supplier can virtually cripple a plant,
leading to inflated lead times and resulting in
problems across the chain, all the way to the final
customer.
To avoid such problems, firms must manage the relationships
with their upstream suppliers as well as their downstream
customers. In many American industries, strong supply
chain relationships like those found Japan might
not develop readily. Firms are often geographically
distant, and there are not as many small, family-owned
suppliers as in Japan. In the case of high-tech
firms, many components may be sole-sourced from
overseas suppliers who are proprietary owners of
the required technology. In such environments, it
becomes more important to choose a few, select suppliers,
thereby paving the way for informal interaction
and information sharing.
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| How
do you do SCM? |
A
firm’s SCM efforts start with the development
and execution of a long-term supply chain strategy.
Among other things, this strategy should:
• Identify what supply chains the firm wants
to compete in.
• Help managers understand how the firm will
provide value to the supply chain.
• Guide the selection of supply chain partners,
including suppliers, subcontractors, transportation
providers, and distributors.
As firms struggle to understand what supply chains
they compete in, it is often valuable to map the
physical flows and information flows that
make up these supply chains. From these maps, firms
can begin to understand how they add value, and
what information is needed to make the supply chain
work in the most effective and efficient way possible
Of course, the firm’s supply chain strategy
does not exist in a vacuum. It must be consistent
with both the overall business strategy and efforts
within such areas as purchasing, logistics, manufacturing
and marketing.
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