Principles of Supply Chain

Management
 Principles of Supply Chain Management

Supply Chain management has received a lot of attention and the terminology has been
used (sometimes misused) by companies to describe the set of manufacturing and
logistics processes that result in delivering a product to their customers. What is a
supply chain? Some broader definitions are preferable if you want to maximize the
opportunity to improve performance of your company:
The supply chain encompasses all activities associated with the flow and
transformation of goods from the raw materials stage, through to the end user as
well as the associated information flows. Supply chain management is the
integration of these activities through improved supply chain relationships, to
achieve a competitive advantage.1

A supply chain extends from your customer's customer to your supplier's supplier
and includes: developing, planning, sourcing, making and delivering.2

Principle 1: Supply chains extend beyond your immediate customer and supplier.

If your company produces many products, which have different customers, suppliers and
delivery methods, how do you deal with the complexity of your supply chain? One
approach used in the DAMA Project3 was to pick a specific product, like a men's nylon
parka and trace all the process steps for the product from raw materials to its purchase by
a consumer. The graphic below depicts the findings of a team made up of the retailer, an
apparel manufacturer, 2 textile mills, and 2 fiber suppliers involved in the production.

1-3
In this supply chain, the total time from the nylon fiber to the consumer buying the jacket
was 45 weeks. There was 9 weeks of process time and the actual assembly (cutting and
sewing) of the parka took only 55 minutes. Why did it take so long for the raw materials
to reach the consumer in a product? The primary reasons are due to the uncertainty in the
retail forecast. There was a lot of "just in case inventory" in the supply pipeline. From the
fiber supplier to the retailer, none of the players wanted to disappoint their immediate
customer. In addition, there were 15 inspections, 10 transportation steps and the goods
spent 24 days in trucks. The supply chain in total was not synchronized and only a few
business processes between companies were integrated. In addition, it is not unusual for
companies in the supply chain to be changed because of better service or pricing from a
competitor.

Principle 2: Supply chains are not constant.

Knowing that integration is difficult to accomplish, why would the companies want to
spend the resources to synchronize their business processes? The study below shows
why. There are big rewards for the successful partnerships!

Typical Quantified Benefits from Integrating

the Supply Chain
Delivery Performance 16% – 28% Improvement
Inventory Reduction 25% – 60% Improvement
Fulfillment Cycle Time 30% – 50% Improvement
Forecast Accuracy 25% – 80% Improvement
Overall Productivity 10% – 16% Improvement
Lower Supply-Chain 25% – 50% Improvement
Costs 20% – 30% Improvement
Fill Rates 10% – 20% Improvement

One of the easiest improvements to make is to share demand data. Most retailers today
offer to share the point of sale data and forecasts with their suppliers. How much of it is
used is questionable and it is probably not passed up the supply chain to the
manufacturer’s suppliers. The graphic below shows why parallel visibility to data is
better than sequentially. Everyone is seeing the same view of demand at the same time.
This improves forecasting and planning for all the partners, which will increase
responsiveness and decrease just in case inventory. Making demand data available is the
first step, and doing something with it is the next and most important step.

Supply Chain Data: Parallel is Better

Sales
Company A Company B Company C
Data

Sales
Company A Company C
Data Company B

Ref: IDSystems Sept. 2000

Principle 3: Parallel data sharing is better than serial.

There is a somewhat obvious relationship between forecasting and lead-time that is

frequently overlooked in supply chain planning. If a company could produce near
perfect forecasts, the lead-time to acquire the forecasted product would be
unimportant. The lead-time could be very long, although the dilemma is in reality;
the further out the selling period, the less accurate that forecast is likely to be. The
other half of the principle is if a company’s lead-time to acquire product were very
short, the forecast accuracy would not be as important because the company could
respond to whatever the current demand was in a very short time.

Principle 4: Forecasting and lead-time are symbiotic.

The globalization of the US softgoods industry has caused many companies to examine
the total cost of procurement. In general, the further the product is made from the US
market, the lower the manufacturing cost and the higher the logistics cost. A source
on the other side of the world may have the cheapest manufacturing cost, but it will
cost more to deliver. Keeping the correct balance will pay off at the company’s
bottom line.

Principle 5: Manufacturing and logistics cost have inverse relationship.

The Voluntary Interindustry Commerce Standards group has developed a set of business
processes called Collaborative Planning, Forecasting and Replenishment (CPFR®)
which starts with the premise that there should be one agreed upon view of demand.
CPFR® pilots between retailers and their suppliers have shown that sharing views of
demand data and collaborating on the differences result in increased sales, higher in-
stock positions and lower inventory. This is accomplished because forecasting and
planning processes increase in accuracy, which makes the supply chain more
responsive to the consumer.

The Bigger Picture

Forecasts
Suggested Orders “Jointly Deriving Information”
Product Designs

Customers Store Retail DC Mfg. DC Mfg. Plant Suppliers

Technology
End-to-end, real-time, global, messaging and information flow
between all “interested” partners

Business Model
Collaborative Relationship
© 2000 VICS

®
CPFR is a set of business processes that are established and empowered by a formal
agreement to cooperate on strategy, tactics and execution by resolution of exceptions.
This agreement is the first of a nine-step process defined by the VICS CPFR® committee.
1. Front end agreement
2. Joint business plan
3. Create sales forecast
4. Identify exceptions
5. Resolve exceptions
6. Create order forecast
 7. Identify exceptions
8. Resolve exceptions
9. Generate order
Although there are specified processes, they have been kept general enough so that
implementations can be tailored to support the partners agreed on business goals.

The CPFR Process

Once

1. Front-End Agreement Collaborative Planning

Qtr.

2. J oint Business Plan

Seller
3. Create Sales Forecast
Wk, Mo

Collaborative Forecasting
4. Identify exceptions
5. Resolve exceptions

6. Create Order Forecast Collaborative

Wk, Mo

7. Identify exceptions Replenishment

8. Resolve exceptions
Buyer
9. Generate Order
© 2000 VICS

®
To date, the CPFR pilot companies have seen significant benefits. The buyers have seen
a higher service level to their customers, higher in-stock performance and lower
inventory. The sellers have seen an increase in sales, lower inventory and faster cycle
time.

Principle 6: Defined exceptions to the supply chain agreement save expediting.

 Typical CPFR® Benefits
Retailer Benefits Improvement
Better Store Shelf Stock Rates 2% to 8%
Lower Inventory Levels 10% to 40%
Higher Sales 5% to 20%
Lower Logistics Cost 3% to 4%

Manufacturer Benefits Improvement

Lower Inventory Levels 10% to 40%
Faster Replenishment Cycles 12% to 30%
Higher Sales 2% to 10%
Better Customer Service 5% to 10%
AMR Research Inc. April 2001

The CPFR® initiative has engendered deeper thinking to include collaborative

transportation management and going beyond a 2-tier partnership to n-tier.

Principle 7: Collaboration improves forecasting.

Another industry initiative, the Demand Activated Manufacturing Architecture (DAMA)

Project, began in 1994 with a holistic view of the softgoods supply chain (fiber, textile,
sewn products, retail, and consumer). The DAMA researchers proposed that if
Cooperative Business Management could be agreed upon among the companies in the
softgoods supply chain, a higher degree of synchronization would occur. With more
synchronization, the time from raw materials to consumer in a supply chain such as, the
Men's Nylon Supplex Parka, could be reduced by 50%. This would place the decision
making of what to manufacture closer to the consumer's decision of what to buy and all
participants would benefit. To enable this collaborative supply chain, the researchers
developed the DAMA Information Architecture.

Principle 8: Supply chain synchronization yields consistent results.

 DAMA Information Architecture
Activity

Information

n
ive

Bu
Dr

sin
ess
y Application
log

Dr
hno

ive
Te c

n
Data

Infrastructure

As the Project worked on prototypes and pilots to implement this Architecture, it became
evident that the infrastructure was going to be the Internet with its rapidly evolving
commercial technologies. The data would be specific to the participants and applications
would be developed by commercial software companies. The business processes would
need to be defined in some detail using standard business process models. The
advantages of business process modeling are:

• Take a very large problem and break it down into manageable chunks
– An industry
– N-tiers of suppliers
– Multiple companies
• Develop a standard model of the business
• Develop a semantic representation of the Industry
• Adapt a modeling standard like IDEF0 (Information Definition Modeling)

The result is an as-is business process of the softgoods supply chain. The model,
published on a CD, depicts the business processes of fiber, textile, sewn products, retail
and logistics companies.5 The processes were defined in collaboration with the American
Apparel and Footwear Association, the American Textile Manufacturers Institute and the
VICS Logistics Committee. The figure below shows the first level of the model, which is
decomposed, into hundreds of supporting activities.
 Inter-enterprise Supply Chain Model

Having described the supply chain in its as-is state, the next step was to propose an
improved to-be model. A portion of this model, shown below, has incorporated the
CPFR process.6

TO-BE Model for Collaboration

In the To-Be Model for Collaboration, business planning agreements are developed and a
supply chain utility6 is established so that products can be defined, forecast and plan
commitments are known, production schedules and delivery times are visible and
exceptions can be identified. An illustration of the supply chain utility shows that all
players can input and access information relevant to their role in the supply chain.

The Supply Chain Utility

The initial population of the utility would require each trading partner to provide
information in the following areas:
• Manufacturing (lead times, process times, and transport times),
• Capacity allocation to the partnership,
• Manufacturing capability (product lines, bill of materials for products, product
specifications and boundary constraints), and
• Exception criteria
The information supplied to the Supply Chain Utility must be absolutely secure in the
agreed on terms of the partnership. The partners need to agree on the type and frequency
of updates to the data repository and a common vocabulary or ontology.

Collaborative supply chains will not be successfully implemented overnight. It will

require changes in business practices and implementation of systems to support the
collaborative environment. Small-scale pilots will be necessary to ensure the
synchronization and integration of technology with new processes before large-scale
implementations are attempted.

Information technologies and techniques have evolved and developed to the point where
most of the designs, raw materials, yarn, fabric, findings, and finished product can be
kept in digital form. If the supply chain can be synchronized to convert the materials
from digital form to analog form at the time when demand is known, the whole supply
chain process becomes more responsive and less costly. Digital inventory can be stored,
changed, moved around the world, and presented faster and at much less cost than the
analog forms.

Principle 9: Digitize everything.

The merging of collaborative processes and e-commerce has created the concept of c-
commerce.

“C-Commerce will become a standard way of conducting business, and companies that
do not pursue it may find their very existence threatened.”
“C-Commerce yields a more synchronized supply chain, which yields better customer
service, higher quality, lower inventory, and faster delivery”. Gartner Group,
May 2000

“The new supply chain game is becoming a competition between effective supply
networks rather than individual corporations, and the gap between the
leaders and followers is growing rapidly.” Charles Poirier,

References

1. Robert B. Hanfield, Introduction to Supply Chain Management, Prentice Hall

2. The Supply Chain Council, www.supply-chain.org
3. DAMA Project (Demand Activated Manufacturing Architecture),www.dama.tc2.com
4. CPFR for Dummies, Bobbie Aldridge, Andrew White, VICS, www.cpfr.org
5. Textile Industry Supply Chain Business Model, DAMA Project
6. DAMA Model for Collaboration, DAMA Project, www.dama.tc2.com