The Supply Chain Management Concept CHAPTER 5 The Supply Chain Management Concept

Learning Objectives To learn about supply chains and how the network of inter-organizational relationships is managed To understand differences between prevalent supply chain process frameworks To consider potential enablers of supply chain management implementation

Learning Objectives To consider potential barriers to supply chain management implementation To understand optional approaches for supply chain integration

The Supply Chain Management Concept Key Terms Agile supply chain Bullwhip effect Contract logistics Fast supply chain Fourth-party logistics (lead logistics provider) Global Supply Chain Forum (GSCF) model Leagility Lean supply chain Perfect order

The Supply Chain Management Concept Key Terms Relational exchanges SCOR model Supply chain Supply chain analytics Supply chain collaboration Supply chain management Supply chain partnership Third-party logistics (logistics outsourcing) Transactional exchanges

Evolution of Supply Chain Management Relatively new concept – rarely mentioned prior to 1990 Recognition grew when value could be found in coordinating various business functions SCM philosophy: Coordinate not only within organizations, but across organizations

Evolution of Supply Chain Management A supply chain can be liberally viewed as a combination of processes, functions, activities, relationships, and pathways along which products, services, information, and financial transactions move in and between enterprises from original producer to ultimate end-user or consumer.1 1John Gattorna, “Supply Chains Are the Business,” Supply Chain Management Review 10, no. 6 (2006): 42–49.

Evolution of Supply Chain Management

Evolution of Supply Chain Management Supply Chains Some are more complex than others Typically more difficult to coordinate complex supply chains Complex supply chains may include 3PL providers Customers are an integral component regardless of complexity level

Logistics Versus Supply Chain Management Logistics activities are part of managing one’s supply chain Includes sourcing, procuring, and manufacturing Need to work with multiple parties, including suppliers, 3PL providers, and end customers

Logistics Versus Supply Chain Management SCM has a leading role for connecting business functions and business processes internally and across companies SCM is inclusive of logistics management activities Logistics managers can contribute to the success and benefit from involvement in SCM

SCM Process Frameworks Two prominent models Supply Chain Operations Reference (SCOR) Model Global Supply Chain Forum (GSCF) Model A primary distinction between the models is the degree of cross-functional involvement prescribed by each: GSCF involves all business functions SCOR model is focused on the logistics, operations, and procurement functions

Six Processes in the Supply Chain Operations Reference (SCOR) Model

Eight Processes in the Global Supply Chain Forum (GSCF) Model

Logistics and GSCF Model Logistics considerations such as on-time pickup and delivery could arise within the order fulfillment process as well as being monitored by the customer service management process

Logistics and GSCF Model Logistics function can contribute to customer relationship management and supplier relationship management processes in terms of outbound or inbound material flow being part of a product and service agreement with a key customer or supplier

Enablers of SCM Implementation Customer power Relationship structure Leveraging technology Supply chain facilitators

Customer Power Information is power Customer has gained tremendous power over buying decisions Internet allows the consumer to become highly knowledgeable about: An individual organization and its Competing organizations and their products

Customer Power and SCM Implications Customer needs and wants can change relatively quickly therefore supply chains are increasingly required to be fast and agile Fast supply chain emphasizes a speed and time component Agile supply chain focuses on an organization’s ability to respond to changes in demand with respect to volume and variety

Customer Power and SCM Implications Traditional supply chains Factory-driven, push oriented Focused on internal cost metrics (measures) such as labor costs and freight costs Customer-centric supply chains Pull-oriented Concerned with metrics that take a more holistic perspective

Customer Power and SCM Implications Perfect order Simultaneous achievement of relevant customer metrics such as on-time delivery, damage free and correct order quantity Examines the total impact of an incorrect order in a single metric via a multiplier effect Metric has been shown to help diagnose problems within a supply chain and improve satisfaction Look at orders from the customer’s perspective

Customer Power and SCM Implications Leagility (lean + agility) Hybrid approach that combines aspects of both lean and agile Way to focus part of one’s supply chain on a timely response to fluctuating customer orders and/or product variety and another part of the supply chain on leveling out the planning requirements to smooth production output

Customer Power and SCM Implications Lean supply chains Focus on reducing the so-called bullwhip effect, which is characterized by variability in demand orders among supply chain members One aspect of inventory control that could be influenced by a lean approach is to move from a pattern of stops and starts to a continuous flow Achieve a better-controlled flow of inventory with lower levels of expensive inventory “lumps”

Customer Power and SCM Implications Can reduce the amount of inventory in the supply chain through the use of: Smaller, more frequent orders Premium transportation Demand-pull versus supply-push replenishment Elimination or consolidation of slower-moving product Reduced inventory may increase susceptibility to natural disasters

Relationship Structures Companies should consider employing a long-term as opposed to a short-term orientation with key supply chain members: Suppliers Customers, Intermediaries Facilitators

Relationship Structures Long-term orientation tends to be predicated on relational exchanges “What’s in it for us?” philosophy Short-term orientation tends to focus on transactional exchanges “What’s in it for me?” philosophy ?

Relationship Structures Attributes of relational exchange: Trust Commitment Dependence Joint Investment Shared benefits Information sharing

Relationship Structures Supply chain collaboration refers to cooperative relationships between members of a supply chain—formal or informal—between companies and their suppliers or customers, established to enhance the overall business performance of all parties

Relationship Structures Supply chain collaboration Can be classified as transactional, tactical information sharing, or strategic in nature Offers the best opportunity for improving supply chain performance Transactional and tactical information sharing are currently the most prevalent types of collaboration

Relationship Structures

Relationship Structures Supply chain partnership An example of a strategic collaboration Defined as a tailored business relationship between two supply chain members Characteristics include: High interdependence among the partners Increased willingness to share information Compatible goals and mutual trust Buying decisions based on value as opposed to cost or price

Leveraging Technology Technological advancements in computing and the internet affect the supply chain Computing power Supply chains can be complex entities consisting of multiple organizations, processes, and requirements Can apply mathematical models that maximize shareholder wealth or minimize costs

Leveraging Technology Internet Commoditizes both goods and services Allows a supply chain party to have virtually instantaneous visibility to the same data as other parties in the supply chain Offers the opportunity for supply chains to become more proactive and less reactive Can translate into lower inventories and improved profitability throughout the supply chain

Leveraging Technology Supply chains depend on huge quantities of real-time information Retail point-of-sale information can be transmitted directly to suppliers and translated into orders for replenishment of product Vendors may allow customers to query vendor inventory records to determine what products are in stock and where the stocks are located

Leveraging Technology

Supply Chain Facilitators Third-Party Logistics (3PL), also known as logistics outsourcing or contract logistics Any logistics activity not performed in-house is representative of third-party logistics Common 3PL activities involve inbound and outbound transportation, carrier negotiation and contracting, and freight consolidation Well-known 3PL providers include Kuehne and Nagle, Schenker Logistics, and UPS Supply Chain Solutions

Supply Chain Facilitators Fourth-party logistics (4PL) or lead logistics provider (LLP) Refers to a company whose primary purpose is to ensure that various 3PLs are working toward the relevant supply chain goals and objectives Need to have the expertise to consider: Supply chain solutions and potential trade-offs Make constant objective decisions across a broad set of value-adding activities Must be viewed as neutral

Barriers to Supply Chain Management Regulatory and political considerations Lack of top management commitment Reluctance to share, or use, relevant data Incompatible information systems Incompatible corporate cultures Globalization

Globalization of Supply Chains Increasing globalization Lower priced materials and labor Global perspective of companies Development of global competition Extremely difficult to execute due to differences Cultural, economic, and technological Political, spatial, and logistical

Supply Chain Integration Long-term, mutually beneficial agreements Partnerships Strategic alliances Third-party arrangements Contract logistics Methods used to integrate Vertical integration Formal contracts Informal agreements