Supply Chain Management

Supply Chain Management (SCM) can be viewed as the means for supply chains to achieve their objectives. In other words SCM is a framework that includes a set of techniques and methods to management and control the flows of material, information and financials in the supply chains to deliver value to all parties starting from the most upstream supplier all the way down to the most downstream end-customer. The task of SCM is to design, plan, and execute the activities at the different stages so as to provide the desired levels of service to supply chain customers profitably.

Origin of Supply Chain Management

Over the past century companies transformed from vertically integrated enterprises to global, focused operations to minimize their cost, make the best use of their competencies and to improve quality. This shift created multiple independent organizations still needing to be virtually integrated and coordinated for satisfying the ultimate end customers demand. Each of these organizations have been exhausting numerous approaches to optimize operations within their walls but at a certain point, there is not much one can do but consider the bigger picture and optimize the extended enterprise which ultimately is viewed as a single company by the end-customer. Therefore, SCM can be viewed as the next natural step in the evolution of business management. SCM utilizes techniques and methods which fall into operations management (OM) and management science which is also known as operations research (OR). Therefore all the developments in OM/OR lay the foundation for an effective and intelligent SCM. Although one might claim as for many things that the supply chains and SCM existed since the existence of mankind, we are going to focus here to some more systematic development that happened in the areas of OR/OM since the industrial revolution in the 19th century.

Important of Supply Chain Management

SCM is important, because many inefficiencies exit (Figure 5) in todays supply chains including supply shortages in the upstream for the demanded materials whereas high inventories for un-demanded or obsolete products in the overall chain consequently, high stock-outs, low fill rates and high landed cost for the overall supply chain. It is intuitive that eliminating these inefficiencies should save companies millions of dollars, but how much? It is not easy to answer this question in a generic sense but here are some facts which can help us to guess the magnitude of savings: According to the State of Logistics Report (Wilson and Delaney, 2000), in 2000, the US companies spent $1 trillion (10 of GNP) on supply-related activities (movement, storage, and control of products across supply chains).

 Another study argues that companies that improve their supply chain can generate savings equal to 7% of their annual revenues (IEE Solutions, 1997). Similarly, $30 billion potential savings in grocery industry has been estimated (Kurt Salmon Associates, 1993). Besides these study reports, there are numerious real life examples from major corporations (such as Walmart, Dell Amazon to name a few) which should convince us that intelligent SCM is indeed vital for competitiveness. Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988 1996, by over 3.000% (see Anderson and Lee, 1999) using Direct business model and Build-to-order strategy. Compaq Computer estimated that it lost $500 million to $1 billion in sales in 1994 because its laptops and desktops were not available when and where customers were ready to buy then (Henkoff, 1994) Wal-Mart became the words largest retailer with 5% of US retail spending by applying innovative SCM techniques such as cross-docking and year around low pricing (Kuaffaman, 2000)

Key hierarchical decision phases of SCM

Design

Planning

Execution

Typically, instead of tackling the whole SCM problem at once, one would divide the decisions process into phases based on the strategic, tactical versus operational behavior of the supply chain decision. In supply chains the strategic decisions typically concern supply chain design, whereas tactical decisions can be treated under planning and operations decisions can be grouped under execution for the fulfillment of a customer request. Therefore Design. Planning and Execution can be viewed as the hierarchical decision phases of a supply chain. In the design phase one needs to decide on the product portfolio, when to transition in and out the products, make/buy decision, selections, selection of partners, contract negotiation and management, location, number and capacity of facilities, modes of transportation, supply chain organizational structure, building strategic alliances with third party logistics companies and collaboration with major suppliers and customers to come up with superior designs. These decisions tend to be more strategic and apply for longer terms typically in the order of years. The frequency of the strategic decisions would typically be annually.

The second decision phase is planning, which utilizes the boundaries and decisions set by the design phase. For example some directives communicated from the design phase for demand planning purposes could be which geographies and products to focus on and similarly for master planning which facilities to use and what capacities to consider and in which warehouses to store inventory. Planning includes demand forecasting and planning, master planning (also known as aggregate planning) that includes production, distribution, capacity, inventory and replenishment plans, spare parts planning, allocation planning dealing with the allocation of available supply and products to different customer channels as well as demand collaboration with customers to improve demand forecasts and supply collaboration with suppliers to ensure reliable supply delivery. Allocation strategies based on smart pricing and the nature of demand. The time horizon for planning decisions change typically be weekly to monthly. The final decision phase which is sometimes referred as the demand fulfillment process is typically concerned with the short term execution (typically time horizon of days to weeks) of the supply chain based on forecasted/planned production and day to day customer requests. This phase involves purchasing of raw materials and supplies scheduling of factories to make the products, deploying logistics carriers to move the product, warehousing to store and fulfilling the request through order management process and providing customer support services after sales completion. Last but not least managing returns is a major component of execution referred as reverse logistics.

Example: - Bicycle Manufacturing Company

Consider the following bicycle manufacturing company Large corporation, manufacturing and delivering bikes in all parts of USA. For operational purpose the market regions are established as West, Central, and East USA. Forecasts the demand and manufactures to meet the forecasts. Procures raw materials from different suppliers and manufactures bikes in one central facility in USA. Bikes are shipped to regional warehouses in USA. All bikes are of a fixed configuration. Typical flow for this company is as follows: Step1 Market regions forecast their regional sales. Head office collects all the sales figures and aggregates the forecasts based on consensus/historical estimates. Steps 2 Head Office then adjusts the forecast.

Step 3

Forecasts are planned for generating long-term material and capacity requirements at the manufacturing facility. Factory is instructed on what to build, when to build and how much to build based on the forecast. Factory communicates build position to the head office. Step 4 The head office allocates the available and projected supply to the sales representatives Step 5 Orders are taken through the order entry system at different levels Step 6 The sales representatives quote order for due date based on the supply allocated to them Step 7 The factory assembles bikes based on the forecast (pick, and pack) Step 8 The factory ships assembled bikes via third party logistics career (3 PL). Step 9 Allocations are stored for forecasting in the next cycle.

Challenges to effectives supply chain management

There are two major challenges 1) difficulty in attaining supply chain wide synchronization and optimization and 2) managing uncertainty inherent within supply chains.

Global optimizing
It is challenging to design and operate a supply chain so that total system wide costs are minimized and system wide services levels are maintained. This is mainly because The supply chain is a complex network with a number suppliers, manufactures, distributors, retailers and customers in different geographies. Different players in the supply chain frequently have different and conflicting objectives. Suppliers want manufactures commit to large and stable volumes with flexible delivery dates. On the other hand, flexibility to meet changing customer needs and demand. Warehouses and distribution would aim for low inventory and reduce transportation cost by reduced frequency but high volumes. Finally, customers want high variety, high quality, latest technology, quick response and delivery lead times The supply chain is a dynamic system that evolves over time. Some of things which continuously change are the power, competition and the relations with supply chain partners. Supply chain strategies will need to also take into account seasonal variations in demand, cost other market trends.