CHAPTER 2 – SUPPLY CHAIN MANAGEMENT

QUESTIONS AND PROBLEMS


1. Define supply chain management. What are the differences/similarities between logistics and supply chain management?

Supply Chain Management (SCM) is a term that has grown significantly in use and popularity since the late 1980s, although considerable confusion exists about what it actually means. Many people use the term as a substitute or synonym for logistics. However, the definition of supply chain management used in this book is much broader than logistics.

Supply chain management is the integration of business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders.

A number of important differences exist between this definition of supply chain management and the Council of Logistics Management’s definition of logistics. Foremost, supply chain management is the management of all key business processes across members of the supply chain. While SCM represents a relatively new way of approaching business and different views exist regarding the processes involved, for a manufacturing organization the key processes would include: customer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, procurement, and product development and commercialization. At some companies such as Xerox, the returns process is also included. Key areas required for successful implementation of SCM are executive support, leadership, commitment to change, and empowerment. These areas are described in detail along with the key processes in Chapter 2 of the text.

Thus, SCM is a systems approach that is highly interactive and complex, and requires simultaneous consideration of many trade-offs. As shown in Figure 2-1, SCM spans organizational boundaries, considering trade-offs both within, and among, organizations regarding where inventory should be held and where activities should be performed.

While logistics as defined by the Council of Logistics Management involves the management of "the efficient, effective flow and storage of goods, services, and related information from the point-of-origin to the point-of-consumption in order to meet customers’ requirements," supply chain management involves the management of all of the key interactions among firms in the supply chain. It is our belief that if the key processes are not coordinated across the supply chain that it will not be possible to achieve the desired results from logistics innovations. For example, the full benefits, in terms of customer inventory reductions, will not be achieved from a rapid delivery system designed to provide deliveries in 24-48 hours, if the sales organization continues to offer special prices on truckload orders direct from factories.

2. What is the role of outsourcing in supply chain management?

Management in many manufacturing and retailing firms have decided that transportation and warehousing operations are not core competencies for their firms and therefore should be outsourced. For example, Nabisco and Goodyear Tire and Rubber have third parties operating their distribution centers. Retailers, such as Kroger are using third parties to operate some or all of their warehousing facilities.

In the telecom industry, Lucent Technologies, Nortel Networks and Cisco outsource some of their manufacturing operations to companies like Selectron. Outsourcing is appropriate when doing so makes the entire supply chain more efficient and effective.

3. Give an example of (a) a firm that uses postponement and (b) a firm that uses speculation in the supply chain.

Examples of firms that use postponement include:

• Manufacturers of paint by mixing color at the retail store.

• Sunoco by blending gasoline at the filling station pump.

• Manufacturers of dishwashers by including three front panels with each side painted a different color. This results in 7 SKU’s being reduced to 1 SKU (since white is the basic color).

Examples of firms that use speculation include:

• Manufacturers of Christmas toys, by producing in advance of the season.

• Manufacturers of snow tires by shipping the tires to dealers in the fall and invoicing them in January.

• Manufacturers of air conditioning units by providing incentives for retailers to stock up prior to the season.

• Manufacturers of convenience goods.

• U.S. automobile manufacturers whose dealers normally hold inventories equal to 90-120 days of sales.

4. Describe the four types of business process links and give an example of a situation when each would be appropriate.

The four types of business process links are: (1) managed business process links; (2) monitored business process links; (3) not-managed business process links; and, (4) nonmember business process links.

1. Managed Process Links are links that are important for managers of the focal company to be actively involved in managing. Typically, relationships will be managed in some fashion (partnership or contractual) with all Tier 1 suppliers and customers. Management of suppliers beyond Tier 1 would be reserved for those firms within strategic implications. For example, all Tier 1 suppliers in the industry purchase a critical material from the same Tier 2 supplier. In this case, managed process links should include the Tier 2 supplier.

2. Monitored Business Process Links are links with Tier 2 or beyond customers or suppliers that are important but not critical. In this case the managers of the focal company will establish procedures for how the Tier 1 suppliers/customers will manage the links and monitor or audit how the link is being integrated and managed. In cases where there are many suppliers at the Tier 2 level, quality and costs might be measured.

3. Not-Managed Process Links are links for which the focal company is not actively involved, nor are they critical enough to use resources to monitor. Typically, a number of suppliers could provide the product/service in question at a similar price. Cardboard shipping cartons or overnight package service may be examples.

4. Nonmember Process Links are links in other supply chains to which the focal company’s customers or suppliers belong that influence the focal company’s supply chain. For example, Goodyear sells tires to General Motors and also to its competitors. The ability of General Motors’ management to have a particular type of relationship with Goodyear will depend to some extent on Goodyear’s relationships with GM’s competitors and how important relative to these other firms GM is to Goodyear.

5. Identify the eight supply chain processes and explain why they are cross-functional.

Successful supply chain management requires a change from managing individual functions to integrating activities into key supply chain processes. Traditionally, both upstream and downstream portions of the supply chain have interacted as disconnected entities that receive sporadic flows of information over time.

The purchasing department placed orders, as requirements became necessary. Marketing, responding to customer demand, attempted to satisfy this demand by interfacing with various distributors and retailers. The firm gave orders periodically to suppliers and they gave orders to their suppliers without any clear picture of demand at the point-of-sale or use. Satisfying the customer often translated into demands for expedited operations throughout the supply chain as channel members reacted to unexpected changes in demand.

Operating an integrated supply chain requires continuous information flows, which in turn help to create the best product flows. The customer remains the primary focus of each supply chain process. However, improved linkages with suppliers are necessary because controlling uncertainty in customer demand, managing manufacturing capacity, and supplier performance are critical to effective supply chain management (SCM). Achieving a good customer-focused system means that information must be processed with accuracy and timeliness, because quick response systems require frequent changes in response to fluctuations in customer demand.

Optimizing the product flows cannot be accomplished without implementation of the eight business processes shown in Figure 2-1. The key processes are:

• Customer relationship management.

• Customer service management.

• Demand management.

• Order fulfillment.

• Manufacturing flow management.

• Procurement.

• Product development and commercialization

• Returns.

The primary advantage of processes over functions is that the processes all focus on the customer (see Figure 2-10) while it is quite possible to perform very well within a function and actually work at cross-purposes to serving the interests of the customer or the shareholder. Manufacturing, for example, might very efficiently produce a particular product in large quantities for inventory when the company is experiencing stock-outs on other products. When judged on a cost per-unit to produce, manufacturing looks great, but customer service is dismal.

The processes are cross-functional because each process team is made up of individuals from the various functional silos (see Figure 2-10).

6. What difficulties might be expected when management attempts to implement a business process approach with members of the firm’s supply chain?

As illustrated in Figure 2-6, a major difficulty in implementing the eight business processes with other members of the supply chain is that many of these firms will not be organized around business processes but will be using the traditional functional silo approach. Even when organizations have adopted a process approach, the number of processes may be different, as may the names of these processes. This lack of consistency makes integration across firms very difficult. For this reason, we believe that it is important to come to agreement on a standard set of processes that can be implemented throughout the supply chain. The processes presented in Chapter 2 are those recommended by The Global Supply Chain Forum and we believe that they represent the necessary standard set of processes. It is difficult to imagine for example, that any firm selling in a business-to-business environment would not have a customer relationship management process. That is, have a small group of customers that represent a disproportionately large share of its sales and profits for whom a team from each of the buyer and seller organizations is appropriate for managing the relationship (see page 68 of text).

7. Explain how product characteristics influence supply chain design.

Nine product characteristics should be analyzed when designing a supply chain: (1) the product’s value, (2) the technicality of the product, (3) the degree of market acceptance, (4) the degree of substitutability, (5) the product’s bulk, (6) the product’s perishability, (7) the degree of market concentration, (8) seasonality, and (9) the width and depth of the product line.

Value. Products with a high per-unit cost require a large inventory investment. Consequently, manufacturers with limited resources usually shift some of the burden by using intermediaries. The product’s value also influences its inventory carrying cost and the desirability of using premium transportation. Low-value, low-margin grocery products may be shipped by rail car and stored in field warehouses. High-value component parts and products such as fashion merchandise may be shipped by airfreight to minimize in-transit inventories and reduce inventory-carrying costs by holding inventory at a central location.

Technicality. Highly technical products usually require demonstration by a salesperson. In addition, pre-purchase and post-purchase services often require that repair parts be stocked. Generally, direct supply chains and selective or exclusive distribution policies are used for these kinds of products.

Market Acceptance. The degree of market acceptance determines the amount of selling effort required. If intermediaries are reluctant to support the line, the manufacturer may have to employ "missionary salespeople" or "detail people" to promote the line to Tier 2 customers.

Substitutability. When product substitution is likely, intensive distribution is required. A premium is placed on point-of-purchase displays in high-traffic areas.

Bulk. Generally, low-value, high-weight products are restricted to markets close to the point of production. These products often require special material handling skills.

Perishability. Perishable products are usually sold on a direct basis in order to move product through the supply chain more quickly and reduce the potential for inventory loss.

Market Concentration. When the market is concentrated in a geographic area, direct supply chains may be the most effective and efficient method of distribution.

Seasonality. For some products, sales volumes peak at certain times of the year (toy sales at Christmas); in other cases, raw materials, such as fresh fruits and vegetables, may only be available at specific times.

Width and Depth. A manufacturer of products with low per-unit values may use intensive distribution with direct sales if the product line is broad enough to result in a relatively large average sales volume. Usually a manufacturer of a limited line of products will use indirect supply chains to achieve adequate market coverage at a reasonable cost.

In summary, product characteristics will determine the cost of transportation, warehousing and inventory associated with distributing a specific product. They will also influence the selling costs and other marketing related costs. Consequently, product characteristics will influence the number and type of potential intermediaries as well as the ability of the manufacturer to perform marketing and logistics activities internally.

8. How can communications technology be used to improve supply chain efficiency and effectiveness?

A major cost to manufacturers, wholesalers and retailers is the cost of carrying inventory. By reducing the level of inventory investment, each firm can improve its profitability and return on assets. Unfortunately, most firms attempt to reduce their own inventories at the expense of other members of the supply chain. That is, management attempts to shift the inventory investment to another member of the supply chain..

However, management in the most progressive firms understand that it is entire supply chains that compete for consumers’ dollars. As a result, these managers attempt to implement technology that will improve information flows. Use Figure 2-1 to show how information about consumer sales or end user consumption, when made available to all members of the supply chain, can be used to better manage materials flow and production, warehousing and transportation capacity throughout the supply chain. This topic will be covered in detail in Chapter 4 and marketplaces such as Transora (which has the potential to provide such information linkages in the consumer products industry) will be covered in Chapter 12 (see pages 505-508).

By using the latest communications technology to improve the speed and quality of information flow throughout the supply chain, it is possible to reduce the level of inventory investment for each member of the supply chain.

9. What are some of the difficulties you would expect to encounter in trying to measure supply chain performance?

The primary difficulty in trying to measure supply chain performance is that the measures are typically not available. When management talks about supply chain metrics they are talking about internal costs such as transportation and inventory or customer service measures developed by them and measuring their firms’ performance to customers. This topic will be covered in more depth in Chapters 16 and 17.

10. What are the major obstacles to successfully implementing supply chain management?

To successfully implement SCM, the key firms within the supply chain must overcome their own functional silos and accept a process approach. The requirements for successful implementation of SCM include:

• Executive support, leadership, and commitment to change.

• An understanding of the degree of change necessary.

• Agreement on the SCM vision and the key processes.

• The necessary commitment of resources and empowerment to achieve the stated goals.

The absence of these four requirements for successful implementation represents an obstacle for those committed to implementing supply chain management.

In many organizations resistance to change is the most serious obstacle. There is comfort in the functional silo approach because of the familiarity with it. Further, executives who have made it to the top of a functional silo are often married to the approach that served them well. Unless the existence of the business is threatened, many will not see the need to change.