INTRODUCTION OF
SUPPLY CHAIN MANAGEMENT (SCM)
A supply chain is a network of facilities and distribution options that
performs the functions of procurement of materials, transformation of these
materials into intermediate and finished products, and the distribution of these
finished products to customers. Supply chains exist in both service and
manufacturing organizations, although the complexity of the chain may vary
greatly from industry to industry and firm to firm.
Supply chain management is typically viewed to lie between fully
vertically integrated firms, where the entire material flow is owned by a single
firm and those where each channel member operates independently. Therefore
coordination between the various players in the chain is key in its effective
management. Cooper and llram !"##$% compare supply chain management
to a well&balanced and well&practiced relay team. Such a team is more
competitive when each player knows how to be positioned for the hand&off.
The relationships are the strongest between players who directly pass the
baton 'stick(, but the entire team needs to make a coordinated effort to win the
race.
)elow is an example of a very simple supply chain for a single product,
where raw material is procured from vendors, transformed into finished goods
in a single step, and then transported to distribution centers, and ultimately,
customers. *ealistic supply chains have multiple end products with shared
components, facilities and capacities. The flow of materials is not always
along an arborescent network, various modes of transportation may be
considered, and the bill of materials for the end items may be both deep and
large.
"
To simplify the concept, supply chain management can be defined as a
loop+ it starts with the customer and ends with the customer. All materials,
finished products, information, and even all transactions flow through the
loop. ,owever, supply chain management can be a very difficult task because
in the reality, the supply chain is a complex and dynamic network of facilities
and organizations with different, conflicting ob-ectives.
Supply chains exist in both service and manufacturing organizations,
although the complexity of the chain may vary greatly from industry to
industry and firm to firm.
.nlike commercial manufacturing supplies, services such as clinical
supplies planning are very dynamic and can often have last minute changes.
Availability of patient kit when patient arrives at investigator site is very
important for clinical trial success. This results in overproduction of drug
products to take care of last minute change in demand. */0 manufacturing is
very expensive and overproduction of patient kits adds significant cost to the
total cost of clinical trials. An integrated supply chain can reduce the
overproduction of drug products by efficient demand management, planning,
and inventory management.
Traditionally, marketing, distribution, planning, manufacturing, and the
purchasing organizations along the supply chain operated independently.
These organizations have their own ob-ectives and these are often conflicting.
1arketing2s ob-ective of high customer service and maximum sales dollars
conflict with manufacturing and distribution goals. 1any manufacturing
operations are designed to maximize throughput and lower costs with little
consideration for the impact on inventory levels and distribution capabilities.
3urchasing contracts are often negotiated with very little information beyond
historical buying patterns. The result of these factors is that there is not a
single, integrated plan for the organization&&&there were as many plans as
businesses. Clearly, there is a need for a mechanism through which these
different functions can be integrated together. Supply chain management is a
strategy through which such integration can be achieved.
4
IMPLICATIONS OF SCM ON LOGISTIC MANAGEMENT
The challenge of integrating and coordinating the flow of materials
from multitude of suppliers, including offshore, and similarly managing the
distribution of the finished product by way of multiple intermediaries.
Achieving cost reduction or profit improvement at the expense of their
supply chain partners does not make companies more competitive.
Transferring cost upstream or downstream leads to 5logistics myopia6
as all costs ultimately will make way to the final market place to be reflected
in the price paid by the end user.
Therefore, the leading edge companies seek to make the supply chain as
a hole more competitive through the value it adds and the cost it reduces
overall.
Thus today the real competition is not the companies against the
companies but rather supply chain against supply chain.
DEFINITIONS
Supply Chain 1anagement 'SC1( is the process of planning, implementing,
and controlling the operations of the supply chain with the purpose to satisfy
customer re7uirements as efficiently as possible. Supply chain management
spans all movement and storage of raw materials, work&in&process inventory,
and finished goods from point&of&origin to point&of&consumption.
According to the Council of Supply Chain Management Professionals
(CSCMP),
a professional association that developed a definition in 4889, Supply Chain
1anagement 5encompasses the planning and management of all activities
involved in sourcing and procurement, conversion, and all logistics
management activities6. :mportantly, it also includes coordination and
collaboration with channel partners, which can be suppliers, intermediaries,
third&party service providers, and customers. :n essence, Supply Chain
1anagement integrates supply and demand management within and across
companies.
$
According to Cohen & Lee (19)
Supply Chain 1anagement is 5The network of organizations that are having
linkages, both upstream and downstream, in different processes and activities
that produces and delivers the value in form of products and services in the
hands of ultimate consumer.6 Thus a shirt manufacturer is a part of supply
chain that extends up stream through the weaves of fabrics to the spinners and
the manufacturers of fibers, and down stream through distributions and
retailers to the final consumer. Though each of these organizations are
dependent on each other yet traditionally do not closely cooperate with each
other. An integrated supply chain management streamlines processes and
increases profitability by delivering the right product to the right place, at the
right time, and at the lowest possible cost.
According to !aneshan & "arrison (#$$1)
Supply Chain 1anagement is a 5systems approach to managing the entire
flow of information, materials, and services from raw materials suppliers
through factories and warehouses to the end customer.6
Supply chain event management 'abbreviated as SC1( is a consideration of
all possible occurring events and factors that can cause a disruption in a
supply chain. ;ith SC1 possible scenarios can be created and solutions can
be planned.
Some e%perts distinguish supply chain management and logistics
management, &hile others consider the terms to 'e interchangea'le( )rom
the point of *ie& of an enterprise, the scope of supply chain management is
usually 'ounded on the supply side 'y your supplier+s suppliers and on the
customer side 'y your customer+s customers(
Supply chain management is also a category of soft&are products(
9
DIFFERENCE BETWEEN LOGISTICS MANAGEMENT
AND SCM
Logistics Management Supply Chain Management
. &logisticsK
?. Continuous tracking of customer orders through the :nternetK
@. :nternet&based shared services manufacturingK etc.
SUPPLY CHAIN MANAGEMENT PROBLEMS
Supply chain management must address the following problems+
1() 1istri'ution Bet&or/ Configuration,
Humber and location of suppliers, production facilities, distribution
centers, warehouses and customers.
4.( 1istri'ution Strategy ,
Centralized versus decentralized, direct shipment, cross docking, pull or
push strategies, third party logistics.
.() 5nformation,
:ntegrate systems and processes through the supply chain to share
valuable information, including demand signals, forecasts, inventory and
transportation.
4#
9.( 5n*entory Management,
Nuantity and location of inventory including raw materials, work&in&
process and finished goods.
SUPPLY CHAIN MANAGEMENT CURRENT KEY TOPIC:
TRADEOFF CURVES
Ene of the fundamental tradeoffs in supply chain management is that
between inventory levels and customer service. Cor any given supply chain,
increasing the level of service 'productLspare part availability( typically means
higher levels of inventory. 1ost companies have discovered their Pbest placeP
on the curve, depending on what their customers re7uire and what their
competition offers. ,owever, supply chain strategies can shift the entire curve,
lowering your inventory levels without adversely affecting your customers 'or
the reverse, improving customer service levels with no increase in inventory(.
,ow might this workR Through effective supply chain management you may
be able to reduce lead times. This would shift the curve to the right, speeding
up customer response times without raising inventories. Supply Chain 1odule
SC1"8? reviews a strategy called postponement, or risk pooling, that can
lower the curve, allowing you to maintain 'or enhance( service levels with less
finished&goods inventory.
This tradeoff curve provides a perfect example of how silo behavior 'in
which functional areas lose sight of cross&functional optimizations( can cause
problems in supply chains. Ene of the first steps in improving a supply chain
is making sure that organizational responsibility for inventory levels and
customer service are appropriately managed. These two responsibilities
$8
should not be separated & in fact, they should report to the same desk. 0oing
so enables a company to set expectations and properly manage this tradeoff,
without costly swings from one place on the curve to another as different
functional groups PfightP for either lower inventories or higher service.
CURRENT SITUATION OF SUPPLY CHAIN
MANAGEMENT
Howadays, one of the few outcomes in the constantly changing
business world is that organizations can no longer compete solely as
individual entities. :ncreasingly, they must rely on effective supply chains, or
networks, to successfully compete in the global market and networked
economy ')aziotopoulos, 4889(. 3eter 0ruckerDs '"##B( managementDs new
paradigms, this concept of business relationships extends beyond traditional
enterprise boundaries and seeks to organize entire business processes
throughout a value chain of multiple companies.
0uring the past decades, globalization, outsourcing and information
technology have enabled many organizations such as 0ell and ,ewlett
3ackard, to successfully operate solid collaborative supply networks in which
each specialized business partner focuses on only a few key strategic activities
'Scott, "##$(. This inter&organizational supply network can be acknowledged
as a new form of organization. ,owever, with the complicated interactions
among the players, the network structure fits neither 5market6 nor 5hierarchy6
categories '3owell, "##8(. :t is not clear what kind of performance impacts
different supply network structures could have on firms, and little is known
about the coordination conditions trade&offs that may exist among the
players.Crom a systemDs point of view, a complex network structure can be
decomposed into individual component firms 'Shang and 0ilts, 4889(.
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. Therefore, the choice of internal
management control structure is known to impact local firm performance
'1intzberg, "#@#(.
:n the 4"st century, there have been few changes in business
environment that contributed to the development of supply chain networks.
Cirst, as an outcome of globalization and proliferation of multi&national
$"
companies, -oint ventures, strategic alliances and business partnerships were
found to be significant success factors, following the earlier 5Must&:n&Time6,
5
SUPPLY CHAIN MANAGEMENT (SCM)
A supply chain is a network of facilities and distribution options that
performs the functions of procurement of materials, transformation of these
materials into intermediate and finished products, and the distribution of these
finished products to customers. Supply chains exist in both service and
manufacturing organizations, although the complexity of the chain may vary
greatly from industry to industry and firm to firm.
Supply chain management is typically viewed to lie between fully
vertically integrated firms, where the entire material flow is owned by a single
firm and those where each channel member operates independently. Therefore
coordination between the various players in the chain is key in its effective
management. Cooper and llram !"##$% compare supply chain management
to a well&balanced and well&practiced relay team. Such a team is more
competitive when each player knows how to be positioned for the hand&off.
The relationships are the strongest between players who directly pass the
baton 'stick(, but the entire team needs to make a coordinated effort to win the
race.
)elow is an example of a very simple supply chain for a single product,
where raw material is procured from vendors, transformed into finished goods
in a single step, and then transported to distribution centers, and ultimately,
customers. *ealistic supply chains have multiple end products with shared
components, facilities and capacities. The flow of materials is not always
along an arborescent network, various modes of transportation may be
considered, and the bill of materials for the end items may be both deep and
large.
"
To simplify the concept, supply chain management can be defined as a
loop+ it starts with the customer and ends with the customer. All materials,
finished products, information, and even all transactions flow through the
loop. ,owever, supply chain management can be a very difficult task because
in the reality, the supply chain is a complex and dynamic network of facilities
and organizations with different, conflicting ob-ectives.
Supply chains exist in both service and manufacturing organizations,
although the complexity of the chain may vary greatly from industry to
industry and firm to firm.
.nlike commercial manufacturing supplies, services such as clinical
supplies planning are very dynamic and can often have last minute changes.
Availability of patient kit when patient arrives at investigator site is very
important for clinical trial success. This results in overproduction of drug
products to take care of last minute change in demand. */0 manufacturing is
very expensive and overproduction of patient kits adds significant cost to the
total cost of clinical trials. An integrated supply chain can reduce the
overproduction of drug products by efficient demand management, planning,
and inventory management.
Traditionally, marketing, distribution, planning, manufacturing, and the
purchasing organizations along the supply chain operated independently.
These organizations have their own ob-ectives and these are often conflicting.
1arketing2s ob-ective of high customer service and maximum sales dollars
conflict with manufacturing and distribution goals. 1any manufacturing
operations are designed to maximize throughput and lower costs with little
consideration for the impact on inventory levels and distribution capabilities.
3urchasing contracts are often negotiated with very little information beyond
historical buying patterns. The result of these factors is that there is not a
single, integrated plan for the organization&&&there were as many plans as
businesses. Clearly, there is a need for a mechanism through which these
different functions can be integrated together. Supply chain management is a
strategy through which such integration can be achieved.
4
IMPLICATIONS OF SCM ON LOGISTIC MANAGEMENT
The challenge of integrating and coordinating the flow of materials
from multitude of suppliers, including offshore, and similarly managing the
distribution of the finished product by way of multiple intermediaries.
Achieving cost reduction or profit improvement at the expense of their
supply chain partners does not make companies more competitive.
Transferring cost upstream or downstream leads to 5logistics myopia6
as all costs ultimately will make way to the final market place to be reflected
in the price paid by the end user.
Therefore, the leading edge companies seek to make the supply chain as
a hole more competitive through the value it adds and the cost it reduces
overall.
Thus today the real competition is not the companies against the
companies but rather supply chain against supply chain.
DEFINITIONS
Supply Chain 1anagement 'SC1( is the process of planning, implementing,
and controlling the operations of the supply chain with the purpose to satisfy
customer re7uirements as efficiently as possible. Supply chain management
spans all movement and storage of raw materials, work&in&process inventory,
and finished goods from point&of&origin to point&of&consumption.
According to the Council of Supply Chain Management Professionals
(CSCMP),
a professional association that developed a definition in 4889, Supply Chain
1anagement 5encompasses the planning and management of all activities
involved in sourcing and procurement, conversion, and all logistics
management activities6. :mportantly, it also includes coordination and
collaboration with channel partners, which can be suppliers, intermediaries,
third&party service providers, and customers. :n essence, Supply Chain
1anagement integrates supply and demand management within and across
companies.
$
According to Cohen & Lee (19)
Supply Chain 1anagement is 5The network of organizations that are having
linkages, both upstream and downstream, in different processes and activities
that produces and delivers the value in form of products and services in the
hands of ultimate consumer.6 Thus a shirt manufacturer is a part of supply
chain that extends up stream through the weaves of fabrics to the spinners and
the manufacturers of fibers, and down stream through distributions and
retailers to the final consumer. Though each of these organizations are
dependent on each other yet traditionally do not closely cooperate with each
other. An integrated supply chain management streamlines processes and
increases profitability by delivering the right product to the right place, at the
right time, and at the lowest possible cost.
According to !aneshan & "arrison (#$$1)
Supply Chain 1anagement is a 5systems approach to managing the entire
flow of information, materials, and services from raw materials suppliers
through factories and warehouses to the end customer.6
Supply chain event management 'abbreviated as SC1( is a consideration of
all possible occurring events and factors that can cause a disruption in a
supply chain. ;ith SC1 possible scenarios can be created and solutions can
be planned.
Some e%perts distinguish supply chain management and logistics
management, &hile others consider the terms to 'e interchangea'le( )rom
the point of *ie& of an enterprise, the scope of supply chain management is
usually 'ounded on the supply side 'y your supplier+s suppliers and on the
customer side 'y your customer+s customers(
Supply chain management is also a category of soft&are products(
9
DIFFERENCE BETWEEN LOGISTICS MANAGEMENT
AND SCM
Logistics Management Supply Chain Management
. &logisticsK
?. Continuous tracking of customer orders through the :nternetK
@. :nternet&based shared services manufacturingK etc.
SUPPLY CHAIN MANAGEMENT PROBLEMS
Supply chain management must address the following problems+
1() 1istri'ution Bet&or/ Configuration,
Humber and location of suppliers, production facilities, distribution
centers, warehouses and customers.
4.( 1istri'ution Strategy ,
Centralized versus decentralized, direct shipment, cross docking, pull or
push strategies, third party logistics.
.() 5nformation,
:ntegrate systems and processes through the supply chain to share
valuable information, including demand signals, forecasts, inventory and
transportation.
4#
9.( 5n*entory Management,
Nuantity and location of inventory including raw materials, work&in&
process and finished goods.
SUPPLY CHAIN MANAGEMENT CURRENT KEY TOPIC:
TRADEOFF CURVES
Ene of the fundamental tradeoffs in supply chain management is that
between inventory levels and customer service. Cor any given supply chain,
increasing the level of service 'productLspare part availability( typically means
higher levels of inventory. 1ost companies have discovered their Pbest placeP
on the curve, depending on what their customers re7uire and what their
competition offers. ,owever, supply chain strategies can shift the entire curve,
lowering your inventory levels without adversely affecting your customers 'or
the reverse, improving customer service levels with no increase in inventory(.
,ow might this workR Through effective supply chain management you may
be able to reduce lead times. This would shift the curve to the right, speeding
up customer response times without raising inventories. Supply Chain 1odule
SC1"8? reviews a strategy called postponement, or risk pooling, that can
lower the curve, allowing you to maintain 'or enhance( service levels with less
finished&goods inventory.
This tradeoff curve provides a perfect example of how silo behavior 'in
which functional areas lose sight of cross&functional optimizations( can cause
problems in supply chains. Ene of the first steps in improving a supply chain
is making sure that organizational responsibility for inventory levels and
customer service are appropriately managed. These two responsibilities
$8
should not be separated & in fact, they should report to the same desk. 0oing
so enables a company to set expectations and properly manage this tradeoff,
without costly swings from one place on the curve to another as different
functional groups PfightP for either lower inventories or higher service.
CURRENT SITUATION OF SUPPLY CHAIN
MANAGEMENT
Howadays, one of the few outcomes in the constantly changing
business world is that organizations can no longer compete solely as
individual entities. :ncreasingly, they must rely on effective supply chains, or
networks, to successfully compete in the global market and networked
economy ')aziotopoulos, 4889(. 3eter 0ruckerDs '"##B( managementDs new
paradigms, this concept of business relationships extends beyond traditional
enterprise boundaries and seeks to organize entire business processes
throughout a value chain of multiple companies.
0uring the past decades, globalization, outsourcing and information
technology have enabled many organizations such as 0ell and ,ewlett
3ackard, to successfully operate solid collaborative supply networks in which
each specialized business partner focuses on only a few key strategic activities
'Scott, "##$(. This inter&organizational supply network can be acknowledged
as a new form of organization. ,owever, with the complicated interactions
among the players, the network structure fits neither 5market6 nor 5hierarchy6
categories '3owell, "##8(. :t is not clear what kind of performance impacts
different supply network structures could have on firms, and little is known
about the coordination conditions trade&offs that may exist among the
players.Crom a systemDs point of view, a complex network structure can be
decomposed into individual component firms 'Shang and 0ilts, 4889(.
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. Therefore, the choice of internal
management control structure is known to impact local firm performance
'1intzberg, "#@#(.
:n the 4"st century, there have been few changes in business
environment that contributed to the development of supply chain networks.
Cirst, as an outcome of globalization and proliferation of multi&national
$"
companies, -oint ventures, strategic alliances and business partnerships were
found to be significant success factors, following the earlier 5Must&:n&Time6,
5