Supply Chain Management – an Introduction

The principle of ‘Survival of the fittest’ remains valid in the present global economy characterized by the presence of ever changing business environment. Every modern company needs to struggle for the existence & growth under such a competitive environment. One surest way to achieve this is to offer best quality of product at reasonable rate, which suits well to the requirements of target customer. To impart a feeling of delight in the minds of consumers and provide quality product at reasonable price manufacturer has to bring shift in his emphasis from mere cost ascertainment to cost reduction to reduce cost of production. Thus, cost reduction is the main managerial mantra as once quoted by well-known strategist Michael.E.Porter in his landmark book “Competitive Strategy”. There are number of strategic cost management techniques available like Supply Chain Management (SCM) , Business Process Re-engineering (Value Re-engineering), Total Productive Maintenance to reduce cost. Of these Supply Chain Management is prominent tool to reduce cost. In this backdrop the present paper aims to highlight the conceptual framework of SCM, Modus Operandi and its relevance for corporate world in the new millennium.

Supply Chain Management has become a very powerful technique as it increases the responsiveness to the changing business conditions and enhances the competitiveness of the organization. In today’s intense competition, and increasingly global economy, to survive and grow, organization must enhance their market responsiveness and become cost competitive. The supply Chain framework is a method of breaking down the linked set of value creating activities from basic raw material/component supplier to the supply of the end product to customer/consumer.

A supply chain is a business process that links manufacturers, retailers, customers and suppliers in the form of a chain to, develop and deliver products as a single virtual organization of pooled skills and resources. Supply chain management is process of synchronizing the flow of physical goods and associated information from the production line of low level component suppliers to the end consumer, resulting in the provision of early notice of demand fluctuations and synchronization of business processes among all the co-operating organizations in this supply chain.

Definition:

Definitions from well-respected references have varied during the past decade. For example, Supply Chain Yearbook 2000 described SCM as, “A chain of processes that facilitates business activities between trading partners, from the purchase of raw goods and materials for manufacturing to delivery of a finished product to an end user.” APICS-The Performance Advantage, offered this definition in January 1999: “The global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution and cash.”

This is a little change from the 1997 definition, Logistics Management offered, describing SCM as, “The delivery of enhanced customer and economic value through synchronized management of the flow of physical goods and associated information from sourcing to consumption.” The definition evolution continues as European Logistics Association, in 1995 suggested SCM was, “The organization, planning, control and execution of the goods flow from development and purchasing through production and distribution to the final customer in order to satisfy the requirements of the market at minimum cost and minimum capital use.”

One of the first to pinpoint an accurate description of SCM, International Journal of Logistics Management, in 1990, called it, “An integrative philosophy to manage the total flow of a distribution channel from the supplier to the ultimate user.”

Several themes appear consistent among most definitions of SCM:

o The scope extends from sources of supply to final customers

o In addition to products and services, information and financial flows are included

o The objective is to satisfy customer demand at the lowest possible cost

o A global and integrative approach is needed to manage the process

Cost Reduction & SCM

There are number of cost reduction techniques available for management to reduce cost which ranges from Man Power Reduction , Strict supervision , compromise with quality , Overtime work etc . But cost reduction at the cost of quality is mere waste strategy. SCM aims at cost reduction without affecting quality. SCM strategy is to reduce cost by eliminating all non value added activities in the flow of goods from Raw material supplier to End consumer. The Objective of SCM is to increase the competitive advantage of the channel as a whole. The means to accomplish this objective is through creating customer value superior to the competitot’s value offering and ,thus, to enhance customer satisfaction , either through improving efficiency (lower cost) or effectiveness (added values at the same cost).

Decisions in supply chain management:1

Decisions for supply chain management can be classified into two broad categories – strategic and operational. As the term implies, strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy and guide supply chain policies from a design perspective. On the other hand, operational decisions are short term, and focus on activities over a day-today basis. The effort in these types of decisions is to effectively and efficiently manage the product flow in the ” strategically” planned supply chain.

Four major decision areas on supply chain management are:

(1) Location

(2) Production

(3) Inventory

(4) Transportation (distribution)

And there are both strategic and operational elements in each of these decision areas.

Location decisions: The geographic placement of production facilities, stocking points, and sourcing points is the natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows through to the final customer. Although location decisions are primarily strategic, they also have implications on an operational level.

Production decisions: The strategic decisions include what product to produce, and which plant to produce them in, allocation of suppliers to plants, plants to Distribution Channel’s(DC), and DC’s to customers markets. These decisions have a big impact on the revenues, costs and customers service level of the firm. These decisions include the construction of the master production schedules, scheduling production on machines, and equipment maintenance. Other considerations include workload balancing, and quality control measures at a production facility.

Inventory decisions: These refer to means by which inventories are managed. Inventories exist at every stage of the supply chain as either raw material, semi-finished or finished goods. They can also be in process between Locations. Their primary purpose to buffer against any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. It is strategic in the sense that top management sets goals.

Transport decisions: The mode choice aspect of these decisions are the more strategic ones. These are closely linked to the inventory decisions, since the best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. Customer service levels, and geographic location play vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment are key in effective management of the firm’s transport strategy.

Why Supply Chain.

The importance and need of SCM will increase in the future. Customers will demand faster, timelier delivery of orders. Manufacturing will expect greater knowledge of order requirements to better plan its operations and procurement processes. Similar expectations apply to external entities. This need for increased coordination among customers, suppliers and service providers dictates greater visibility and collaboration throughout the supply chain.

Dynamic business environment characterized with Time-based competition, Synchronization with other corporate functions, Service customized to specific markets and customers, Increased consolidation of suppliers and service providers, Further privatization and deregulation, Continued emphasis on outsourcing, Development of performance measures encompassing supply chain partners, Increased collaboration between supply chain partners, and Electronic commerce to enable communications throughout the supply chain will increase the need of of supply chain.

Evolution of Supply Chain Management:

Span of Responsibility

Earlier: The components of SCM traditionally were viewed as “functional silos” and typically included outbound transport-tation (i.e., customer delivery); field warehousing and finished goods inventory management.

Present: Today’s SCM executive generally has a much broader range of responsibilities. that the majority of these executives have respon-sibility for transportation, ware-housing, inventory management , customer service , purchasing / sourcing, demand planning, production planning/scheduling and international logistics.

2.Organizational Position:

Earlier: SCM traditionally was viewed as a cost center, adding little or no tangible value to bottom line results. Individuals responsible for SCM were typically at the manager level, reporting to directors or vice presidents responsible for operations, marketing or other functional areas.

Present: SCM executives are now well positioned. Executives in charge of marketing / sales, manufacturing and other departments are now generally peers rather than reporting officials. In recent survey it is observed that In U.S. companies, 52 percent of SCM executives report to an Executive Vice President or COO/CEO. In Asia, this percentage was slightly lower (48 percent); in Europe this percentage was only 31 percent.

3. Education and Training

Earlier: Historically, relatively few universities offered SCM education. In these institutions, the academicians who taught SCM coursework were usually housed within a larger department, e.g., Operations or Marketing. Some schools offered continuing education and seminars in SCM, but these forums generally focused on a specific aspect of SCM, such as carrier negotiations, inventory management techniques, warehousing and material handling systems and international trade

Present: Today, there are numerous, well-recognized universities–in the U.S. and abroad–offering degrees at all levels in the field of SCM. A recent CLM listing identified nearly 50 institutions with SCM-related curricula. Continuing education seminars and workshops with SCM themes abound.

4. Contributions to Corporate Performance

Earlier: Historically viewed as a cost center, SCM contributions at the corporate level were judged to be minimal. Since reporting systems focused on managing operational-level activities, any strategic value associated with SCM was difficult to quantify.

Present: Leading-edge manufacturers report SCM costs between 4 percent and 5 percent of sales, compared to the industry average of 7 percent to 10 percent Successful SCM can improve delivery performance by 25%, reduce inventory levels by as much as one-half and enhance overall productivity by at least 15 percent.

To conclude, In this dynamic market place, the equations are kept changing very fast with the leaders of yesterday being displaced by the fast-paced and agile new entrants. Intense competition, demanding customers, shrinking product life cycles, rapid advances in technology- all these factors are fast changing the competitive dynamics in global environment. This volatile business environment is making it harder than ever for marketers compete effectively. The traditional approaches are too slow to keep pace with the evolving global complexity. These developments are putting pressure on business community to look at the each and every components of business like procurement, logistics, marketing etc. Effective linking of functions of these processes puts companies in strategic position. Every link in SCM can add up to a competitive advantage. Time was when companies looked at their supply chains as a means of focusing on their own core competencies, of leveraging those of vendors, of lowering their costs, and of becoming more responsive to customers. Those goals won’t be swept away by the supply chain in the new millennium. But they will be superseded by a singly super-objective: competing on the basis of how well companies’ manage their supply-chain.

References:

1 An Introduction to Supply Chain Management by Ram Ganeshan and Terry P Harrison accessed at http://lcm.csa.iisc.ernet.in/scm/supply_chain_intro.html