Introduction to Supply Chain Management
Definition
Council of Supply Chain Management Professionals' (CSCMP) Definition of Supply Chain Management
Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.
Supply Chain Management – Boundaries and Relationships
CSCMP states that supply chain management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance, and information technology.
Process/Activities/functions
Supply chain management is an extension of the earliest concept of works management and it encompasses the managent of suppliers, the movement of raw materials into an organization, warehousing the raw material and components, internal processing of materials into finished goods, warehousing of finished goods and then the movement of finished goods out of the organization toward the end-consumer.
Supply chain management concept is an alternative to the market based transaction model between buyers and sellers in industrial and business goods. US thinkers and practioners promoted this model. Michael Porter came out with a framework in which suppliers and customers are treated as competitors in the strategic analysis of a company. Japanese manufacturing strategists came out with an alternate model of linkages between suppliers and customers that depended on relationships, frequent information sharing and trust that supply happens on a just in time basis. Japanese demonstrated to the rest of the world that such a model works effectively and efficiently. The result, the concept of supply chain emerged. Supply chain is an organizational mechanism that fulfils the demand of a market.
Demand and product requirements of market for a probable product are assessed by the marketing department and the requirements are given as inputs to product design department. The product design department comes out with a product design which is subject to evaluation and acceptance by marketing managers and supply chain managers. Marketing department once again makes an assessment of market demand for the specific product of the company and provides the informaton to the supply chain. As the supply chain starts the supply and continues the supply, the marketing initiates the post production marketing or concurrent production marketing which is more popularly known as sales. Thus pre-design marketing and design and post-design marketing (marketing strategy) are functions outside the supply chain. Sales can be seen as part of the supply chain process.
The purpose of supply chain management as a function is to improve trust and collaboration among supply chain partners (suppliers, manufacturing facilities and customers (especially industrial and business customers)), thus improving inventory visibility and improving inventory velocity.
The emergence of supply chain concept or philosophy has not erased any of the existing specialized areas of works management. The components functions can be identified as:
Supplier management ( could be a new idea of supply chain concept)
Physical supply management
Purchase management
Inventory control
Stores or physical warehousing
Manufacturing management
Manufacturing planning and control
Finished goods warehousing
Physical distribution management
Sales management
In many organizations finished goods warehousing and physical distribution management were termed as logistics management. In certain organizations where supply is critical, physical supply is also termed as logistics.
CSCMP’s Definition of Logistics Management
Logistics management is that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverses flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers' requirements.
Logistics Management – Boundaries and Relationships
Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfillment, logistics network design, inventory management, supply/demand planning, and management of third party logistics services providers. To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. It is involved in all levels of planning and execution--strategic, operational and tactical. Logistics management is an integrating function, which coordinates and optimizes all logistics activities, as well as integrates logistics activities with other functions including marketing, sales manufacturing, finance, and information technology.
Models of Supply Chain
SCOR is a supply chain management model promoted by the Supply Chain Management Council. This framework focuses on five areas of the supply chain: plan, source, make, deliver, and return.
Plan
Demand and supply planning and management are included in this first step. Elements include balancing resources with requirements and determining communication along the entire chain. The plan also includes determining business rules to improve and measure supply chain efficiency. These business rules span inventory, transportation, assets, and regulatory compliance, among others. The plan also aligns the supply chain plan with the financial plan of the company .
Source
This step describes sourcing infrastructure and material acquisition. It describes how to manage inventory, the supplier network, supplier agreements, and supplier performance. It discusses how to handle supplier payments and when to receive, verify, and transfer product .
Make
Manufacturing and production are the emphasis of this step. Is the manufacturing process make-to-order, make-to-stock, or engineer-to-order? The make step includes, production activities, packaging, staging product, and releasing. It also includes managing the production network, equipment and facilities, and transportation.
Deliver
Delivery includes order management, warehousing, and transportation. It also includes receiving orders from customers and invoicing them once product has been received. This step involves management of finished inventories, assets, transportation, product life cycles, and importing and exporting requirements .
Return
Companies must be prepared to handle the return of containers, packaging, or defective product. The return involves the management of business rules, return inventory, assets, transportation, and regulatory requirements.
http://scm.ncsu.edu/public/facts/facs041027.html (Accessed on 25-11-2008)
Another model is the SCM Model proposed by the Global Supply Chain Forum (GSCF). Supply chain activities can be grouped into strategic, tactical, and operational levels of activities.
Supply Chain Management - Evolution
During the past decades, globalization, outsourcing and information technology have enabled many organizations, such as Dell and Hewlett Packard, to successfully operate solid collaborative supply networks in which each specialized business partner focuses on only a few key strategic activities (Scott, 1993). This inter-organizational supply network can be acknowledged as a new form of organization as with the complicated interactions among the players, the network structure fits neither "market" nor "hierarchy" categories (Powell, 1990).
Traditionally, companies in a supply network concentrate on the inputs and outputs of the processes, with little concern for the internal management working of other individual players. But supply chain management advocates attention to internal management working of suplly chain partners.
In the 21st century, there have been changes in business environment that have contributed to the development of supply chain networks. First, as an outcome of globalization and the proliferation of multi-national companies, joint ventures, strategic alliances and business partnerships, supply chains were found to be significant success factors, following the earlier concepts of "Just-In-Time", "Lean Management" and "Agile Manufacturing" practices. Second, technological changes, particularly the dramatic fall in information communication costs, which are a significant component of transaction costs, have led to changes in coordination among the members of the supply chain network (Coase, 1998).
Many researchers have recognized various kinds of supply network structures that emerged in various countries as a new organization form, using terms such as "Keiretsu", "Extended Enterprise", "Virtual Corporation", "Global Production Network", and "Next Generation Manufacturing System” In general, such a structure can be defined as "a group of semi-independent organizations, each with their capabilities, which collaborate in ever-changing constellations to serve one or more markets in order to achieve some business goal specific to that collaboration" (Akkermans, 2001).
Stages in the Development of Supply Chain Management
Lavassani et al. identified six major movements in the evolution of supply chain management development: Creation, Integration, and Globalization (Lavassani et al., 2008), Specialization Phases One and Two, and SCM 2.0.
1. Creation Era
The term supply chain management came into existence in the early 1980s. But the concept of supply chain was visible in the creation of the assembly line. The characteristics of the creation era of supply chain management include the need for large scale changes, reengineering, downsizing driven by cost reduction programs
2. Integration Era
This era of supply chain management studies made use of Electronic Data Interchange (EDI) systems developed in the 1960s and Enterprise Resource Planning (ERP) systems developed in the 1990s . This era has continued to develop into the 21st century with the expansion of internet-based collaborative systems. This era of SC evolution is characterized by both increasing value-added and cost reduction through integration.
3. Globalization Era
The third movement of supply chain management development, globalization era, can be characterized by the emergence global systems of suppliers and the expansion of supply chain over national boundaries and into other continents. Although the use of global sources in the supply chain of organizations can be traced back to several decades ago (e.g. the oil industry), it was not until the late 1980s that a considerable number of organizations started to integrate global sources into their core business. This era is characterized by the globalization of supply chain management in organizations with the goal of increasing competitive advantage, creating more value-addition as well as reduced costs through global sourcing.
4. Specialization Era -- Phase One -- Outsourced Manufacturing and Distribution
In the 1990s industries began to focus on “core competencies” popularised by Prahlad and adopted a specialization model. Companies abandoned vertical integration, sold off non-core operations, and outsourced those functions to other companies. This changed management requirements by expanding the supply chain and increased management across specialized supply chain partnerships.
This transition also refocused the fundamental perspectives of each respective organization. Original equipment manufacturers (OEMs) became brand owners that needed deep visibility into their supply base. They had to control the entire supply chain from above. Contract manufacturers had to manage bills of material with different part numbering schemes from multiple OEMs and support customer requests for work -in-process visibility and vendor-managed inventory (VMI).
The specialization model creates manufacturing and distribution networks composed of multiple, individual supply chains specific to products, suppliers, and customers who work together to design, manufacture, distribute, market, sell, and service a product. The set of partners may change according to a given market, region, or channel, resulting in a proliferation of trading partner environments, each with its own unique characteristics and demands.
5. Specialization Era -- Phase Two -- Supply Chain Management as a Service
Specialization within the supply chain began in the 1980s with the inception of transportation brokerages, warehouse management, and non asset based carriers and has matured beyond transportation and logistics into aspects of supply planning, collaboration, execution and performance management.
At any given moment, market forces could demand changes within suppliers, logistics providers, locations, customers and any number of these specialized participants within supply chain networks. This variability has significant effect on the supply chain infrastructure, from the foundation layers of establishing and managing the electronic communication between the trading partners to the more-complex requirements, including the configuration of the processes and work flows that are essential to the management of the network itself.
Supply chain specialization enables companies to improve their overall competencies in the same way that outsourced manufacturing and distribution has done; it allows them to focus on their core competencies and assemble networks of best in class domain specific partners to contribute to the overall value chain itself – thus increasing overall performance and efficiency. The ability to quickly obtain and deploy this domain specific supply chain expertise without developing and maintaining an entirely unique and complex competency in house is the leading reason why supply chain specialization is gaining popularity.
Outsourced technology hosting for supply chain solutions debuted in the late 1990s and has taken root in transportation and collaboration categories most dominantly. This has progressed from the Application Service Provider (ASP) model from approximately 1998 through 2003 to the On-Demand model from approximately 2003-2006 to the Software as a Service (SaaS) model we are currently focused on today.
6. Supply Chain Management 2.0 (SCM 2.0)
Building off of globalization and specialization, SCM 2.0 has been coined to describe both the changes within the supply chain itself as well as the evolution of the processes, methods and tools that manage it in this new "era".
SCM 2.0 follows Web 2.0 notion into supply chain operations. It is the pathway to SCM results – the combination of the processes, methodologies, tools and delivery options to guide companies to their results quickly as the complexity and speed of the supply chain increase due to the effects of global competition, rapid price commoditization, surging oil prices, short product life cycles, expanded specialization, near/far and off shoring, and talent scarcity.
SCM 2.0 leverages proven solutions designed to rapidly deliver results with the agility to quickly manage future change for continuous flexibility, value and success. This is delivered through competency networks composed of best of breed supply chain domain expertise to understand which elements, both operationally and organizationally, are the critical few that deliver the results as well as the intimate understanding of how to manage these elements to achieve desired results, finally the solutions are delivered in a variety of options as no-touch via business process outsourcing, mid-touch via managed services and software as a service (SaaS), or high touch in the traditional software deployment model.
Supply Chain Process View
Shared information between supply chain partners can only be fully leveraged through process integration.
Supply chain business process integration involves collaborative work between buyers and suppliers, joint product development, common systems and shared information. According to Lambert and Cooper (2000) operating an integrated supply chain requires continuous information flow. In many companies, managements have reached the conclusion that optimizing the product flows cannot be accomplished without implementing a process approach to the business.
The key supply chain processes stated by Lambert (2004) are:
- Customer relationship management
- Customer service management
- Demand management
- Order fulfillment
- Manufacturing flow management
- Supplier relationship management
- Product development and commercialization
- Returns management
A slightly modified list could be:
- Customer service management
- Procurement
- Product development and commercialization
- Manufacturing flow management/support
- Physical distribution
- Outsourcing/partnerships
- Performance measurement
a) Customer service management process
Customer Relationship Management concerns the relationship between the organization and its customers. Customer service provides the source of customer information. It also provides the customer with real-time information on promising dates and product availability through interfaces with the company's production and distribution operations. Successful organizations use following steps to build customer relationships:
- determine mutually satisfying goals between organization and customers
- establish and maintain customer rapport
- produce positive feelings in the organization and the customers
b) Procurement process
Strategic plans are developed with suppliers to support the manufacturing flow management process and development of new products. In firms where operations extend globally, sourcing should be managed on a global basis. The desired outcome is a win-win relationship, where both parties benefit, and reduction times in the design cycle and product development are achieved. Also, the purchasing function develops rapid communication systems, such as electronic data interchange (EDI) and Internet linkages to transfer possible requirements more rapidly. Activities related to obtaining products and materials from outside suppliers requires performing resource planning, supply sourcing, negotiation, order placement, inbound transportation, storage, handling and quality assurance, many of which include the responsibility to coordinate with suppliers in scheduling, supply continuity, hedging, and research into new sources or programmes.
c) Product development and commercialization
Here, customers and suppliers must be united into the product development process, thus to reduce time to market. As product life cycles shorten, the appropriate products must be developed and successfully launched in ever shorter time-schedules to remain competitive. According to Lambert and Cooper (2000), managers of the product development and commercialization process must:
- coordinate with customer relationship management to identify customer-articulated needs;
- select materials and suppliers in conjunction with procurement, and
- develop production technology in manufacturing flow to manufacture and integrate into the best supply chain flow for the product/market combination.
d) Manufacturing flow management process
The manufacturing process is produced and supplies products to the distribution channels based on past forecasts. Manufacturing processes must be flexible to respond to market changes, and must accommodate mass customization. Orders are processes operating on a just-in-time (JIT) basis in minimum lot sizes. Also, changes in the manufacturing flow process lead to shorter cycle times, meaning improved responsiveness and efficiency of demand to customers. Activities related to planning, scheduling and supporting manufacturing operations, such as work-in-process storage, handling, transportation, and time phasing of components, inventory at manufacturing sites and maximum flexibility in the coordination of geographic and final assemblies postponement of physical distribution operations.
e) Physical distribution
This concerns movement of a finished product/service to customers. In physical distribution, the customer is the final destination of a marketing channel, and the availability of the product/service is a vital part of each channel participant's marketing effort. It is also through the physical distribution process that the time and space of customer service become an integral part of marketing, thus it links a marketing channel with its customers (e.g. links manufacturers, wholesalers, retailers).
f) Outsourcing/partnerships
This is not just outsourcing the procurement of materials and components, but also outsourcing of services that traditionally have been provided in-house. The logic of this trend is that the company will increasingly focus on those activities in the value chain where it has a distinctive advantage and everything else it will outsource. This movement has been particularly evident in logistics where the provision of transport, warehousing and inventory control is increasingly subcontracted to specialists or logistics partners. Also, to manage and control this network of partners and suppliers requires a blend of both central and local involvement. Hence, strategic decisions need to be taken centrally with the monitoring and control of supplier performance and day-to-day liaison with logistics partners being best managed at a local level.
g) Performance measurement
Experts found a strong relationship from the largest arcs of supplier and customer integration to market share and profitability. By taking advantage of supplier capabilities and emphasizing a long-term supply chain perspective in customer relationships can be both correlated with firm performance. As logistics competency becomes a more critical factor in creating and maintaining competitive advantage, logistics measurement becomes increasingly important because the difference between profitable and unprofitable operations becomes more narrow. A.T. Kearney Consultants (1985) noted that firms engaging in comprehensive performance measurement realized improvements in overall productivity. According to experts internal measures are generally collected and analyzed by the firm including
- Cost
- Customer Service
- Productivity measures
- Asset measurement, and
- Quality.
External performance measurement is examined through customer perception measures and "best practice" benchmarking, and includes 1) customer perception measurement, and 2) best practice benchmarking. Components of Supply Chain Management are 1. Standardization 2. Postponement 3. Customization
Theories of Supply Chain Management
Authors such as Halldorsson, et al. (2003), Ketchen and Hult (2006) and Lavassani, et al. (2008) had tried to provide theoretical foundations for different areas related to supply chain with employing organizational theories. These theories includes:
- Resource-based view (RBV)
- Transaction Cost Analysis (TCA)
- Knowledge-based view (KBV)
- Strategic Choice Theory (SCT)
- Agency theory (AT)
- Institutional theory (InT)
- Systems Theory (ST)
- Network Perspective (NP)
Components of Supply Chain Management
Lambert and Cooper (2000) identified the following components which are:
- Planning and control
- Work structure
- Organization structure
- Product flow facility structure
- Information flow facility structure
- Management methods
- Power and leadership structure
- Risk and reward structure
- Culture and attitude
Bowersox and Closs states that the emphasis on cooperation in the supply chain enhances the synergism leading to the highest level of joint achievement (Bowersox and Closs, 1996). A primary level channel participant is a business that is willing to participate in the inventory ownership responsibility or assume other aspects of financial risk, thus including primary level components (Bowersox and Closs, 1996). A secondary level participant (specialized), is a business that participates in channel relationships by performing essential services for primary participants, thus including secondary level components, which are in support of primary participants. Third level channel participants and components that will support the primary level channel participants, and which are the fundamental branches of the secondary level components, may also be included.
Baziotopoulos (2004) suggests the following supply chain components:
- For customer service management: Includes the primary level component of customer relationship management, and secondary level components such as benchmarking and order fulfillment.
- For product development and commercialization: Includes the primary level component of Product Data Management (PDM), and secondary level components such as market share, customer satisfaction, profit margins, and returns to stakeholders.
- For physical distribution, manufacturing support and procurement: Includes the primary level component of enterprise resource planning (ERP), with secondary level components such as warehouse management, material management, manufacturing planning, personnel management, and postponement (order management).
- For performance measurement: Includes the primary level component of logistics performance measurement, which is correlated with the information flow facility structure within the organization. Secondary level components may include four types of measurement such as: variation, direction, decision and policy measurements. More specifically, in accordance with these secondary level components, total cost analysis (TCA), customer profitability analysis (CPA), and asset management could be concerned as well.
- For outsourcing: Includes the primary level component of management methods, and the strategic objectives for particular initiatives in key areas of information technology, operations, manufacturing capabilities, and logistics (secondary level components).
Institutes Promoting Supply Chain Management
Institute for Supply Management™ (ISM)
Founded in 1915, the Institute for Supply Management™ (ISM) is the largest supply management association in the world as well as one of the most respected. ISM’s mission is to lead the
supply management profession through its standards of excellence, research, promotional activities, and education. ISM’s membership base includes more than 40,000 supply management professionals with a network of domestic and international affiliated associations. ISM is a not-for-profit association that provides opportunities for the promotion of the profession and the expansion of professional skills and knowledge.
http://www.ism.ws/about/content.cfm?ItemNumber=4790&navItemNumber=4896
(accessed on 25-11-2008)
The Supply-Chain Council (SCC)
The Supply-Chain Council (SCC) is a global non-profit consortium whose methodology, diagnostic and benchmarking tools help nearly a thousand organizations make dramatic and rapid improvements in supply chain processes. SCC has established the supply chain world’s most widely accepted framework for evaluating and comparing supply chain activities and their performance. The framework—the SCOR® process reference model—lets companies quickly determine and compare the performance of supply chain and related operations within their company or against other companies. SCC continually advances its tools and educates sponsors about how companies are capitalizing on those tools. By using its tools, SCC sponsors are able to rapidly overcome the first difficult step in supply chain improvement: determining what processes to improve first and how much to improve them. Sponsors also use SCC’s reference models to guide the consolidation of internal supply chains (which results in significant cost reductions from eliminating duplicative assets); create standard processes and common information systems across business units (which generates major cost savings, cycle-time and quality improvements); and create a common scorecard by which customers can measure their performance and by which SCC sponsors can measure suppliers’ performance (which can lead to major cross-organizational process improvements).
To help members maximize the value of SCC’s reference models, the consortium provides a benchmarking database by which companies can compare their supply chain performance to others in their industries; training classes so that managers can master the use of the reference models; and conferences at which supply chain and senior business executives can learn how SCC member companies have used the consortium’s services to make dramatic improvements in supply chain and overall financial performance.
History & Members
The Supply-Chain Council was organized in 1996 by Pittiglio Rabin Todd & McGrath (PRTM) and AMR Research, and initially included 69 voluntary member companies. The Supply-Chain Council now has closer to 1,000 corporate members world-wide and has established international chapters in North America, Europe, Greater China, Japan, Australia/New Zealand, South East Asia, Brazil and Southern Africa. Development of additional chapters in India and South America are underway. The Supply-Chain Council's membership consists primarily practitioners representing a broad cross section of industries, including manufacturers, services, distributors, and retailers.
http://www.supply-chain.org/cs/root/about_us/about_us
Accessed on 25-11-2008
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