Principles of Supply Chain Management

This chapter is from the book

Essentials of Supply Chain Management, The: New Business Concepts and Applications

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This chapter is from the book

This chapter is from the book 

Essentials of Supply Chain Management, The: New Business Concepts and Applications

Learn More Buy

Evolution of the Supply Chain Concept

Over the years, most firms have focused their attention on the effectiveness and efficiency of separate business functions such as purchasing, production, marketing, financing, and logistics. The lack of connectivity among these functions, however, can lead to sub-optimal organizational goals and create inefficiency by duplicating organizational efforts and resources. To capture the synergy of interfunctional and interorganizational integration and coordination across the supply chain and to subsequently make better strategic decisions, a growing number of firms have begun to realize the strategic importance of planning, controlling, and designing a supply chain as a whole. In today’s global marketplace, individual firms no longer compete as independent entities with unique brand names, but rather as integral parts of supply chain links. As such, the ultimate success of a firm will depend on its managerial ability to integrate and coordinate the intricate network of business relationships among supply chain partners (Drucker, 1998; Lambert and Cooper, 2000). A supply chain is referred to as an integrated system that synchronizes a series of interrelated business processes in order to: (1) create demand for products; (2) acquire raw materials and parts; (3) transform these raw materials and parts into finished products; (4) add value to these products; (5) distribute and promote these products to either retailers or customers; (6) facilitate information exchange among various business entities (e.g., suppliers, manufacturers, distributors, third-party logistics providers, and retailers). Its main objective is to enhance the operational efficiency, profitability, and competitive position of a firm and its supply chain partners. More concisely, supply chain management is defined as “the integration of key business processes from end-users through original suppliers that provide products, services, and information and add value for customers and other stakeholders” (Cooper et al., 1997b, p. 2). A supply chain is characterized by a forward flow of goods and a backward flow of information, as illustrated by Figure 1.1 (Min and Zhou, 2002, p. 232).

Figure 1.1. The supply chain process

Typically, a supply chain is composed of two main business processes:

• Material management (inbound logistics)
• Physical distribution (outbound logistics)

Material management is concerned with the acquisition and storage of raw materials, parts, and supplies. To elaborate, material management supports the complete cycle of material flow—from the purchase and internal control of production materials, to the planning and control of work-in-process, to the warehousing, shipping, and distribution of finished products (Johnson and Malucci, 1999). On the other hand, physical distribution encompasses all outbound logistics activities related to providing customer service. These activities include order receipt and processing, inventory deployment, storage and handling, outbound transportation, consolidation, pricing, promotional support, returned product handling, and life-cycle support (Bowersox and Closs, 1996).

Combining the activities of material management and physical distribution, a supply chain does not merely represent a linear chain of one-on-one business relationships, but a web of multiple business networks and relationships. Along a supply chain, there may be multiple stakeholders, composed of various suppliers, manufacturers, distributors, third-party logistics providers, retailers, and customers. For example, a supply chain for typical automobile seats linking suppliers, manufacturers, third-party logistics providers, and customers is graphically illustrated in Figure 1.2. As shown in this figure, the supply chain begins with customers such as Ford, General Motors, and Fiat-Chrysler, who need to use automobile seats as critical parts of their manufactured cars. At the next upstream stage of the supply chain, the car manufacturer often purchases automobile seats from the original equipment manufacturer (OEM). This OEM needs to acquire the parts and components of the automobile seats, including brackets, foam, fabric, and fasteners from tier-one suppliers fabricating those parts and components. Because these parts and components are made of metals, screws, bolts, plastics, and textiles, the tier-one suppliers should acquire some simple parts and raw materials from tier-two suppliers, who should obtains such parts and materials from tier-three suppliers such steel and yarn producers. These tier-three suppliers, in turn, obtain their sources of materials from ore mining and cotton plants at the furthest upstream of the supply chain. In case logistics activities involving the movement, handling, storage, and packaging of these materials, parts, components, and finished goods are outsourced from third-party logistics providers, the complexity of the supply chain network will be increased due to the possibility of both forward and reverse flow of products. As illustrated by this example, the typical supply chain cannot be explained by a linear linkage among the supply chain members.

Figure 1.2. The supply chain network for automobile seats

In a nutshell, the concept of supply chain management has evolved around a customer-focused corporate vision, which drives changes throughout a firm’s internal and external linkages and then captures the synergy of interfunctional, interorganizational integration and coordination. Herein, integration does not entail merger/acquisition or equity of the ownership of other organizations. The successful integration of the entire supply chain process can bring about a number of bottom-line benefits (Schlegel, 1999):

• Improved customer service and value added—Customer service can be improved through increased inventory availability, better on-time delivery performances, higher order fill rates, and lower post-sales costs.
• Enhanced fixed capital—Fixed capacity is maximized through a strategic partnership and joint planning that can increase overall capacity and throughput.
• Utilized asset—Asset utilization can be maximized by increasing inventory turns and closely aligning supply with demand.
• Increased sales and profitability—The ability to assess outcomes due to price changes, promotional events, and new product development can be enhanced through increased visibility resultant from information sharing among supply chain partners.

Financial benefits can be accrued from successful supply chain integration. For instance, thanks to streamlined supply chain integration, Dell’s personal computer (PC) market share in the U.S. grew from 2.7% in 1995 to 24.1% in 2014 (Gartner, 2014). Similarly, Walmart, which happens to be another supply chain leader, enjoyed the rapid growth of its market share from 6.8% in 1992 to 17.1% in 2004 before declining to 11.4% in 2013 (Foster, 2006; Statistica, 2014). Despite these benefits of supply chain integration, firms engaged in this effort must be aware of the various challenges because of the unprecedented number and diversity of products and services available to customers in the era of mass customization. This variety will make it more difficult for a firm to predict customer needs and requirements. Therefore, the consequence of making forecasting errors will be more serious than ever before. Unfortunately, in a stretched supply chain with complex layers of suppliers and distributors, the severity of forecasting errors could be far beyond the level of compromise. Hardest hit by such forecasting errors are often upstream suppliers with little resources whose visibility of true demand is blindsided by distorted information passed by their immediate customers (e.g., manufacturers) and other downstream customers (e.g., distributors and retailers). This phenomenon was often explained by the so-called “bullwhip” effect.

The bullwhip effect is generally referred to as an inverse ripple effect of forecasting errors throughout the supply chain that leads to amplified supply and demand misalignment, where orders (perceived demand) to the upstream supply chain member tend to exaggerate the true patterns of end-customer demand because each chain member’s view of true demand can be blocked by its immediate downstream supply chain member (Min, 2000; Lee et al., 1997a). The common symptoms of the bullwhip effect include delayed new product development, constant shortages and backorders, frequent order cancellations and returns, excessive pipeline inventory, erratic production scheduling, expedited shipments, and chronic overcapacity problems (Min, 2000; Lee et al., 1997b). The failure to mitigate or eliminate the bullwhip effect can disrupt the firm’s revenue driver and adversely affect the firm’s bottom line. According to Hendricks and Singhal (2005), supply chain disruptions led to:

• Significant reduction in stock returns relative to their benchmarks (e.g., 33% to 40% reduction over a three-year period)
• Increased share price volatility (e.g., 13.5% increase in share price volatility one year after supply chain disruptions)
• Decline in profitability (e.g., 107% drop in annual operating income, 7% decline in annual sales growth, and 11% annual total cost increase)
• Debilitating firm performances (e.g., at least two consecutive years of lower performances after supply chain disruptions)

Similarly, another worldwide survey of 602 financial executives conducted by FM Global and Harris Interactive indicates that supply chain disruptions are the biggest threat to a firm’s revenue drivers (Yang and Gonzalez, 2006). Considering the enormous impact of supply chain disruptions on a firm’s financial status, today’s firms are increasingly pressured to manage their supply chain right. Thus, supply chain management has become the forefront of the firms’ competitive strategy. The discipline of supply chain management, however, is still undergoing an evolutionary process. Table 1.1 summarizes the changes in the philosophy, focus, and performance metrics of supply chain management, from the earlier stages to the current era (see Martin and Towill, 2000).

Table 1.1. The Evolution of Supply Chain Management Disciplines