Supply Chain Management
Supply Chain Management
A supply chain is composed of all the organizations which are involved in the design, production, and delivery of a product to market. Supply chain management (SCM) is the coordination of production, inventory, location, and transportation among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served. The goal of SCM is to increase sales of goods and services to the final, end use customer while at the same time reduce both inventory and operating expenses.
SCM integrates several activities of the organization ranging from manufacturing operations, purchasing, transportation, and physical distribution into a unified programmed action. Successful SCM coordinates and integrates all of these activities into a seamless process. It embraces and links all of the partners in the chain. In addition to the departments within the organization, these partners include suppliers, customers, transporters, third-party organizations, and information systems providers.
For succeeding in the competitive markets which make up today’s economy, organizations are to learn to align their supply chains with the demands of the markets they serve. Supply chain performance is now a distinct competitive advantage for those organizations who excel in this area. The success of several organizations is directly related to its evolving capabilities to continually improve its supply chain.
Within the organization, the supply chain refers to a wide range of functional areas. These include SCM related activities such as inbound and outbound transportation, warehousing, and inventory control. Sourcing, procurement, and supply management also fall under the supply-chain umbrella. Forecasting, production planning and scheduling, order processing, and customer service all are part of the process as well. Importantly, it also embodies the information systems which are necessary for the monitoring of all of these activities. Simply stated, ‘the supply chain encompasses all of those activities associated with moving goods from the raw-materials stage through to the end user’. SCM is one of the most essential aspects of conducting business by the organization.
The term ‘supply chain management’ arose in the late 1980s and came into widespread use in the 1990s. Prior to that time, organizations used terms such as ‘logistics’ and ‘operations management’. The logistics management is defined as that part of the supply chain process which plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements.
Supply Chain Research Group at the University of Tennessee defines SCM as ‘the systemic, strategic coordination of the traditional business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole’.
Bernard J. LaLonde at Ohio State University defines 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’. ‘From sourcing to consumption’ part of the definition suggests, though, achieving the real potential of SCM needs integration of not only the units within the organization, but also of the external partners. The latter include the suppliers, distributors, transporters, customers, and even the ultimate consumers.
While logistics focuses on the inbound and outbound flow of products, services, and related information from a focal organizational perspective, SCM is a management process which deals with inbound and outbound flows, from the perspective of the focal organization, its suppliers, and its customers. This means that a fundamental aspect of the SCM is the consideration of not just the cost and profit goals of one organization (the focal organization), but of all the organizations involved in managing the supply chain. This led the Supply Chain Research Group at the University of Tennessee to define a supply chain as a set of three or more organizations directly linked by one or more of the upstream and downstream flows of products, services, finances, and information from a source to a customer.
Concept of SCM is based on two core principles. The first is that a product which reaches a customer represents the cumulative effort of multiple organizations. These organizations are referred to collectively as the supply chain. The second principle is that organizations are not to restrict their attention to what is happening within their four walls but also manage the entire chain of activities which ultimately deliver the products to the customer. Organizations adopt SCM processes and several technologies to assist in these processes.
The decisions with respect to SCM are broadly of two types namely (i) strategic, and (ii) operational. Strategic decisions are made typically over a longer time horizon. These decisions are closely linked to the organizational 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-to-day basis. The effort in these types of decisions is to effectively and efficiently manage the product flow in the strategically planned supply chain.
There are three levels of activities which SCM focus on to achieve the smooth running of the supply chain. These activity levels are (i) strategic level in which senior management is involved in the supply chain process who makes principle decisions which concern the entire organization, (ii) tactical level of activity in which the focus is on achieving lowest costs for running the supply chain, and (iii) operational level in which activity decisions are made on a day-to-day basis and these decisions affect how the product shifts along the supply chain.
The supply chain of the organization is an integral part of its approach to the markets it serves. The supply chain needs to respond to market requirements and do so in a way which supports the organizational working strategy. The working strategy which the organization employs starts with the needs of the customers which the organization serves or going to serve. Depending on the needs of its customers, the supply chain of the organization is to deliver the appropriate mix of responsiveness and efficiency. The organization whose supply chain allows it to more efficiently meet the needs of its customers, gains market share at the expense of other organizations in that market and also is more profitable.
There is a basic pattern to the practice of SCM. Each supply chain has its own unique set of market demands and operating challenges and yet the issues remain essentially the same in every case. Organizations in any supply chain are required to make decisions individually and collectively regarding their actions in five areas namely (i) production, (ii) inventory, (iii) location, (iv) transportation, and (v) information.
Production – An organization is to produce the products in quantities at what time the market needs. This activity includes the creation of master production schedules which take into account plant capacity, work-load balancing, quality control, and equipment maintenance.
Inventory – The needed quantity of inventory is to be stocked at each stage in a supply chain. The inventory to be held is in the form of raw materials, semi-finished, or finished goods. The primary purpose of inventory is to act as a buffer against uncertainty in the supply chain. However, holding inventory can be expensive, so the organization is to keep the optimal inventory levels and reorder points.
Location – The locations of the facilities for production and inventory storage are important. The locations are to be the most cost efficient for production and for storage of inventory. Decisions are needed to use the location for the existing facilities or there is a need to build new facilities. Once these decisions are made, they determine the possible paths available for product to flow through for delivery to the final consumer.
Transportation – Transport is concerned with the inventory which is to be moved from one supply chain location to another. Air freight and truck delivery are normally fast and reliable but they are expensive. Shipping by sea or rail is much less expensive but normally involves longer transit times and more uncertainty. This uncertainty is to be overcome for by stocking higher levels of inventory. The choice of the mode of transportation is decided based on the need.
Information – Information consists of the data which need to be collected and the information which need to be shared. Timely and accurate information holds the promise for better coordination and better decision making. With good information, people can make effective decisions about what to produce and how much, about where to locate inventory and how best to transport it. The sum of these decisions defines the capabilities and effectiveness of the supply chain of the organization. The things which the organization can do and the ways by which it can compete in its markets, are all very much dependent on the effectiveness of its supply chain. If the organizational strategy is to serve a mass market and compete on the basis of price, it has better to have a supply chain which is optimized for low cost. If the organizational strategy is to serve a market segment and compete on the basis of customer service and convenience, it has better to have a supply chain optimized for responsiveness. The image of the organization and its capabilities is shaped by its supply chain and by the markets it serves.
In its simplest form, a supply chain is composed of an organization and its suppliers and customers. This is the basic group of participants which creates a simple supply chain. Extended supply chains contain three additional types of participants. First, there is the supplier’s supplier at the beginning of an extended supply chain. Then there is the customer’s customer at the end of an extended supply chain. Third, there is a whole category of organizations who are service providers to other organizations in the supply chain. These are the organizations who supply services in logistics, finance, marketing research, product design, and information technology. In any given supply chain, there is some combination of organizations which perform different functions. Fig 1 shows two types of the supply chain structure.
Fig 1 Supply chain structure
The different definitions of SCM lead to that the SCM is the strategic management of all the traditional business functions which are involved in any flows, upstream or downstream, across any aspect of the supply chain system. Hence, SCM encompasses all the traditional business functions, their coordination within individual organizations, and their coordination across organizations in the supply chain.
First, supply chains today consist of all suppliers and customers, and they exist in a global environment. In the present-day environment, people know that no organization which does not sell in a global market, and source globally can compete with an organization which does. Second, all the traditional organizational functions are to be coordinated within individual organizations before they can be coordinated across organizations in the supply chain. Third, the intra-organizational concepts of trust, commitment, risk, and dependence are to be managed with the inter-organizational concepts of functional shifting, third-party providers, relationship management, and supply chain structures, to efficiently and effectively manage the six flows of any supply chain. Finally, efficiently means with minimal commitment of financial resources, and effectiveness means providing customer satisfaction and value, which (combined with efficiency) leads to profitability and hence leads to competitive advantage. Fig 2 shows a model for supply chain management.
Fig 2 Model for supply chain management
SCM outputs – The degree to which value is created for customers, and the customer’s perception of the value received relative to that offered by the competition, are reflected in the customer’s satisfaction with the supplies. Customers who are satisfied with value created in areas important to them are expected to behave in ways which are beneficial to the organizational or the supply chain’s success. Purchase behaviour, customer loyalty, and positive communications about products and services result from customer satisfaction and, at the same time, contribute to the success of the organization or the supply chain. For the achievement of these objectives, supply chain personnel are to work collaboratively with customers and suppliers to identify and deliver value considered important by the critical downstream customers.
Considering the overall objectives of the SCM of creating value for the customers, and competitive advantage and improved profitability for the organization, the dimensions of value which can be important to the customers, and the mechanisms whereby competitive advantage and improved profitability can be achieved for supply chain members, it can be stated that (i) the objective of SCM is to increase the competitive advantage of the supply chain as a whole, rather than to increase the advantage for any single organization, (ii) the means to accomplish competitive advantage is through creating value for downstream customers higher than that offered by competitors, (iii) customer value is created through collaboration and cooperation for improving efficiency (lower cost) or market effectiveness (added benefits) in ways which are most valuable to the key customers, (iv) value is not inherent in products or services, but rather is perceived or experienced by the customer, (v) in order to compete through creating customer value, the organization is to understand and deliver the value perceived as important by its customers, (vi) since the value perceived as important differ across customer segments, the organization is required to identify the customer segments important for the organizational long-term success and match the capability of the organization for delivering the value important to those key customers, (vii) value can be created at several points along the supply chain by making the customer’s organization at that point in the chain more effective in serving its markets, or more efficient and cost-effective in its operations, (viii) delivering customer value in dimensions important to customers better than the competitors leads to customer satisfaction and competitive advantage, and (ix) by satisfying customers and achieving competitive advantage, organizations in a supply chain influence customers to make choices and behave in ways which improve the financial performance of the supply chain and the organizations within it.
The global SCM environment – It is irrelevant which approach to globalization is pursued, organizations are faced with the challenges of understanding and managing the complexities and risks inherent in the global environment. Global supply chain personnel are needed to develop capabilities which allow them to understand the complexities in the global environment, anticipate important changes, and adapt to those changes as needed. Systems and processes are to be designed to address important environmental variables, and organizational skills and capabilities are to be developed to deal with different languages, cultures, and business environments. Considering the globalization of the world economy, the diversity and environmental factors influence the organizational global strategies and approach, drivers which influence organizations have become increasingly global, and these need different approaches to globalization which can be adopted by the organizations.
The influencing drivers to approaches to globalization include (i) different approaches to globalization need different degrees of supply chain integration, and different SCM strategies and structure, (ii) whatever approach to globalization and global SCM is adopted, organizations face the challenges of understanding and managing the higher complexity and risks inherent in the global environment, (iii) global SCM strategies are to be developed in support of the strategic thrust of the organization’s globalization initiatives, and are to consider opportunities for global efficiency, management of risks, learning to enable innovation and adaptation, and the need to balance global efficiency and local responsiveness, (iv) global supply chain processes are to provide operating flexibility to respond to changes in the macro-economic environment or government policies which adversely affect SCM performance, (v) design and management of SCM activities are to consider the influence of differences in culture, industry structure, statutory requirements, and infrastructure in different countries on customers, suppliers, competitors, and supply chain partners, (vi) the management of financial systems in a global supply chain is to address differences in financial accounting systems, comparability of data, management of terms of sale and ownership transfer to minimize risk and optimize profits, optimization of transfer pricing to minimize taxes, the minimization of foreign exchange risks, and the use of counter-trade, (vii) a much broader set of skills is needed of supply chain personnel to successfully manage on a global basis, including operating knowledge of the global environment, understanding how to manage inherent risks, and the ability to deal with differences in language and culture, (viii) compatibility of information technologies and standardization of systems and data are critical to the organization’s ability to integrate supply chain operations on a global basis, and (ix) decision support tools which incorporate global variables and allow ‘what if’ scenario analysis are important to enable the organizational management to more effectively manage the complexities and uncertainties of the global environment.
As shown in Fig 1, there are 10 aspects which play important role in SCM. These drivers are (i) marketing, (ii) sales, (iii) research and development (R&D), (iv) forecasting, (v) production, (vi) purchasing, (vii) logistics, (viii) information systems, (ix) finance, and (x) customer service. The roles played by these aspects are described below.
Role of marketing in SCM – The role of marketing is suggested by a cause-and-effect relationship through the marketing concept, a market orientation, and relationship marketing. The role of marketing in the implementation of SCM is necessary for the success of the SCM.
The drivers for the role of marketing includes (i) the objective of marketing is creating exchanges, and the output of it is customer satisfaction, (ii) the marketing concept consists of three pillars (a) customer focus, (b) coordinated marketing, and (c) profitability, (iii) the marketing concept is an operational philosophy, guiding the organization towards customer satisfaction for a profit, (iv) the market orientation is the implementation of this philosophy, forcing the organization to generate, disseminate, and respond to market information, (v) the marketing concept not only provides the philosophical foundation of a market orientation, but also plays an important role in the management of the organization, inter-functional relationships, and the implementation of SCM, (vi) the market orientation also affects the management of the organization, inter-organization relationships, and a supply chain, since it leads the organizational focus on market information generation, dissemination, and responsiveness to satisfy customers, coordinate its marketing efforts, redefine the responsibilities of each function, restructure its organizational system, and achieve superior organizational performance, (viii) the market orientation provides an environment which encourages the organization in its efforts to develop, maintain, and improve close relationships with other organizations, organizational learning from other organizations, and building commitment, trust, and cooperative norms in the relationships with other organizations, (ix) the market orientation is performed both inside and outside the organization to recognize and respond to customers’ needs, and get experiences, products, skills, technologies, and knowledge from outside the organization which are not available to other competitors, (x) the market orientation promotes the implementation of SCM, (xi) relationship marketing aims at establishing, maintaining, and improving either dyadic relationships or multiple relationships in a supply chain to create better customer value, (xii) relationship marketing helps achieve such objectives of SCM as efficiency (i.e., cost reduction) and effectiveness (i.e., customer service) through increased cooperation in close long-term interfirm relationships among the supply chain partners, and (xiii) with the help of the marketing concept, a market orientation, and relationship marketing, SCM achieves competitive advantage for the supply chain and its partners by reducing costs and investments, and improving customer service.
Role of sales in SCM – Since the role of the contemporary sales personnel is changing dramatically, hence in several situations, the old models of selling are simply outdated, ineffective, and counter-productive to SCM goals and objectives. For supporting the sales personnel in their new SCM roles, sales personnel need to be trained, supported, and encouraged to have supply chain activities and logistics expertise. For the achievement of this goal, sales personnel are also to adopt a new orientation and adopt new management techniques for improving the supply chain performance. Specifically, sales personnel are to become change agents in the sales organization and lead the sales force in a new direction. Traditional training programmes, performance objectives, and compensation packages need to be adapted and better aligned with SCM.
The drivers for the role of for the role of sales in SCM are (i) while the majority of the sales organizations focus on pre-purchase activities, supply chain partners focus on managing relationships and conducting post-purchase activities to improve the supply chain performance, (ii) the sales personnel are well positioned to implement, facilitate, and coordinate several SCM activities, (iii) the supply chain sales personnel are to be involved with any supply chain activity which goes beyond the organizational boundary, (iv) the sales personnel are to be an integral part of implementing cooperative behaviours (i.e., joint planning, evaluating, and forecasting), mutually sharing information, and nurturing supply chain relationships, (v) to be effective at their new role, the supply chain sales personnel are to gain new expertise in logistics and SCM (sales personnel logistics expertise is defined as a customer’s perception of sales personnel knowledge, experience, or skills relevant to logistics issues. Sales personnel logistics expertise concerns the seller’s and supply chain partners’ logistics operations, systems, and processes at both tactical and strategic levels. Hence, sales personnel logistics includes both internal and external logistics expertise as well as, tactical and strategic logistics expertise. (vi) while the logistics person can be the primary person ln designing logistics solutions, the sales personnel are likely to be the primary persons representing the supply chain partner’s needs, and (vii) for effective teamwork and innovative solutions, sales and logistics personnel need to be able to communicate effectively and work together on the SCM issues.
Role of R&D in SCM – The organization by broadening the knowledge base through the R&D process better enables the organization to design and develop effective and efficient new-product development systems. This suggests that developing a supply chain orientation for R&D personnel leads to opportunities for lower costs, improved customer value, and competitive advantages for the long term.
The drivers for the role of R&D within the organization, and with suppliers, customers, and the supply chain include (i) supply chain activities have a major impact on the capabilities and profitability of the supply chain and its member organizations in new product development, (ii) innovative and effective new-product development is important in the turbulent, highly uncertain market environment of the future, (iii) by collaborating with immediate customers and suppliers, R&D can considerably improve the new-product development process, (iv) by collaborating with customers’ customers and suppliers’ suppliers along the supply chain, R&D improves the new-product development process, (v) organizations which are multi-national in scope can benefit through globalization of the R&D process and collaborating with global supply chain partners, (vi) the concept of postponement, delaying final product configuration as close to the end consumer as possible, benefits greatly from collaborating R&D with supply chain partners, (vii) speed to market or reducing the cycle time to develop new products can be improved considerably through supply chain R&D involvement, and (viii) flexible new-product development enables the organizations to incorporate rapidly changing customer requirements and evolving technologies through supply chain R&D involvement.
Role of forecasting in SCM – In order to contribute to improved supply chain performance, supply chain personnel are required to go beyond traditional measures of forecast accuracy to understand the overall supply chain demand-planning process and influence the behaviours of individual persons and organizations involved in the development and application of sales forecasts.
In SCM, increasingly important contribution to supply chain performance is offered through effective sales forecasting management. The drivers for this are (i) supply chain sales forecasting management can considerably influence operating performance within each member, and across members, of a supply chain (ii) For affecting supply chain operations in a positive manner, organizations working together in a supply chain are required to improve forecasting management performance (an internally directed measure) as well as supply chain forecasting management performance (a cross-organizational measure), (iii) the four dimensions of sales forecasting namely management functional integration, approach, systems, and performance measurement, can be extended to incorporate a supply chain orientation, and (iv) initiatives such as ‘collaborative planning, forecasting, and replenishment’ (CPFR) reflect the four forecasting management dimensions and provide an approach to forecasting which addresses factors that influence forecasting management performance and supply chain forecasting management performance.
Role of production in SCM – Understanding the different types of production systems in a better way enables the managers to design and develop the production system which is most suitable for the specific supply chain market environment.
Considering the role of production within the organization, with suppliers, customers, and the supply chain, the drivers are (i) functional products in stable markets need a supply chain production system which focuses on reducing volume cost and increasing production efficiency, highly innovative products in uncertain, constantly changing environments need a supply chain production system which focuses on strategic flexibility and speed to market, (iii) dispersed production is a supply chain production system of great value in a globally competitive market which focuses on cost efficiency, and (iv) build to order production and postponement are useful supply chain production systems in markets with quickly obsolete existing products, rapidly changing customer requirements, and shrinking product life cycles.
Role of purchasing in SCM – People have primarily focused on supplier partnerships, or building stronger relationships between the buyer and seller organizations till date. In order to achieve the potential of SCM, people are required to adopt a broader, system wide approach to understand and achieve the contribution which purchasing can make in a SCM context. Given the evolution of the role of purchasing and the purchasing role in support of the organizational SCM strategies and objectives, as well as the objectives and role of purchasing in a SCM context versus historical approaches, it is seen that purchasing in a SCM context makes a big impact on the organizational performance.
The drivers for the role of purchasing in SCM include (i) purchasing plays a critical, boundary-spanning role in the supply chain management activities of the organization, (ii) for achieving the potential benefits of SCM, the role of purchasing is to be viewed in a system wide context, and is to be focused beyond managing the buyer-seller relationship, (iii) people are to understand the potential benefits to be achieved through SCM relationships, based on environmental conditions and specific resource or performance requirements, (iv) it is important for people to understand the potential benefits, as well as the costs, of developing such relationships so that appropriate decisions can be made, (v) for successfully achieving the SCM objectives, purchasing requirements are to be understood within the context of the overall strategy of the organization, supply chain partners are to be selected to meet the strategic requirements, and the relationships is to be managed appropriately over the long term, (vi) cost and quality improvements are to be understood and implemented from a system wide perspective for achieving optimum results, (vii) for achieving the objectives of improved quality and reliability, reduced inventories, and lower total system cost associated with an operational approach to SCM, an emphasis on the integration of purchasing and logistics is needed, (viii) for achieving the objectives of speed, flexibility, and competitive advantage associated with a strategic approach to SCM, collaboration with strategic supply chain partners focused on redesigning products and business processes to deliver value to customers is needed, (ix) in a strategic context, the role of purchasing is to understand the capability of suppliers and identify ways to match that capability to the needs of strategic customers, (x) purchasing can improve the effectiveness of product and process design by ensuring reliability and quality of supply of materials, components and services, managing supplier involvement in the process, and providing insights about the competitive supply environment, (xi) organizational structure and communications processes are to be designed to support the needs and objectives of the purchasing organization in support of the organizational SCM activities, and (xii) information technology (IT) is critical to manage the increasing complexity of the purchasing function, facilitate the integration of processes across organizations in a supply chain context, and provide decision support tools to enable system wide optimization.
Role of logistics in SCM – Capitalizing on the logistics opportunities needs the ability to build alliances within and between organizations, a commitment for the planning and integrating information flows, and ability to measure performance for guiding the improved design of the logistics system and supply chain processes. The supply chain ability of the personnel to leverage logistics competencies is an important aspect in SCM.
Considering the role of logistics in the supply chain, including the major functions comprising logistics, emerging logistics strategies, and logistics competencies which drive competitive advantage for the organization, the drivers are (i) logistics activities have a major impact on the capabilities and profitability of the supply chain and its member organizations, (ii) logistics functions are key operating components of the organization which need design and management consistent with organizational strategy and changing competitive environments, (iii) logistics strategies need to be implemented since they support organizational strategies and since they are based on the needs of the market-place and the distinct capabilities of the organizations, and (iv) the organizational managements which can understand and shape logistics competencies can dramatically improve organizational competitiveness.
Role of information systems in SCM – People have little choice but to embark on the path to develop supply chain improving and integrating information systems. This is since the competitiveness of organizations improves in terms of lower costs, improved customer value, and maintaining long-term competitive advantages in the rapidly changing, customer driven, Internet-enabled, e-commerce market environment.
Considering the role of information systems within the organization and the role of information systems with suppliers, customers, and the supply chain have high importance, the drivers for information systems include (i) since the market environment continues to emphasize more variety and quicker response to a dynamic customer driven market place, better and more effective information systems need to be developed, (ii) one of the best ways to serve a demanding market-place is to develop effective intra-organization information systems, (iii) intra-organizational information systems such as enterprise resource planning (ERP) systems are an important precursor to improve the flow of information between the organizations, (iv) people need to determine if the benefits of effective and efficient information flow mitigate the risks associated with developing partnerships with either suppliers or customers, (v) by developing relationships with members of their supply chains, organizations can develop more efficient and effective information systems which facilitate better supply chain integration utilizing the enabling capabilities of the Internet, and (vi) the Internet allows true supply chain management through the transparent, real-time connection of all supply chain links.
Role of finance in SCM – The capitalizing on the financial opportunities needs the ability to plan for and measure supply chain performance and for effectively communicating the performance implications in financial terms. The ability of the supply chain personnel to articulate the financial implications of exchanges between organizations is very important for SCM.
Considering that there are financial implications of supply chain decisions, trends in supply chain costs, a financial model for evaluating investments, and concerns for financial and SCM is needed. The drivers for the role of finance in SCM are (i) supply chain activities affect profit and loss statements, balance sheets, and the costs of capital, and (ii) considerable opportunities exist for the competent supply chain manager to reduce expenses, generate better returns on invested capital, and improve cash flows, (iii) by controlling supply chain expenses, profit margins are improved, (iv) by continuing to shorten cycle times, cash flows are improved, (v) superior supply chain performance can also produce the leverage and competitive advantage to increase revenues and the supply chain’s share of market, (vi) traditional accounting techniques do not provide accurate and timely information which informs the financial aspects of supply chain trade-off decisions, (vii) activity-based costing is not widely employed, (viii) the potential benefits of improved SCM are foiled by the absence of activity-based financial data and the inability to link performance measurement with cost, (ix) improved collaboration between finance and other business and supply chain functions is necessary to facilitate the process to develop ‘activity based costing’, and this collaboration is to help to overcome the seemingly widespread inability of supply chain personnel to articulate the costs and benefits of supply chain activities.
Role of customer service in SCM – Customer service is frequently being mentioned as a key objective of SCM. When service offerings create value for the customers, they lead to behaviours which improve supply chain performance. For the achievement of this objective, it is important for supply chain personnels to manage customer service strategically and develop supply chain capabilities to deliver services viewed as important by critical down-stream customers.
Considering that the elements of customer service management are important for SCM, it is needed to monitor the performance outcomes associated with customer service activities and their contribution to supply chain objectives, and customer responses to the outcomes of the organizational customer service activities. The drivers for customer services are (i) for the achievement of supply chain objectives, customer service activities are to be strategic in nature and are to be designed based on an understanding of the service levels important to critical customers, (ii) important customer segments are to be identified and the needs of those segments understood for both immediate and down-stream customers, (iii) the impact of service levels on customers are to be understood and internal capabilities are to be designed to deliver service levels which optimize the overall performance of the supply chain, (iv) the quality of the customer interface is likely to influence the level of trust and openness of information exchange between organizations, which can contribute to a better understanding of the customer’s needs and improved performance of SCM activities, (v) it is important to measure customer service outcomes as perceived by the customer and understand which performance outcomes are most valued by customers at various levels of the supply chain, (vi) customer service needs and performance, as well as the influence of customer service levels on customer behaviour, are to be understood and monitored for both immediate and down-stream customers in the supply chain, (vii) customer service is not the ultimate objective of SCM but rather an outcome of SCM which can create value for customers through improved efficiency or effectiveness, and (viii) creating value for customers superior to that created by competition is expected to result in higher customer satisfaction and competitive advantage and influence customers to behave in ways which improve the performance of the supply chain as a whole.
Aligning of the supply chain with organizational strategy
The supply chain of the organization is an integral part of its approach to the markets it serves. The supply chain needs to respond to market needs and do so in a way which supports the organizational strategy. The strategy which the organization uses starts with the needs of the customers which the organization serves or going to serve. Depending on the needs of its customers, the supply chain of the organization is required to deliver the appropriate mix of responsiveness and efficiency. The organization whose supply chain allows it to more efficiently meet the needs of its customers, gains market share at the expense of competing organization in that market and also gets higher profits.
There are normally three steps which are used for aligning the supply chain with the organizational strategy. The first step is to understand the markets which the organization serves. The second step is to define the strengths or core competencies of the organization and the role the organization can play in serving its markets. The last step is to develop the needed supply chain capabilities to support the roles the organization has chosen. Fig 3 shows these three steps along with the organizational strategies.
Fig 3 Steps to align supply chain and organizational strategies
The organization is required to understand the markets it serves. This can be done by getting the customer’s details and also knowing about the kind of the customers to which the organizational customer sells the organizational products. The organization is to be aware of the kind of the supply chain which the organization is a part of. The supply chain of the organization is required to emphasize responsiveness or efficiency.
The attributes which help to clarify the requirements for the customers the organization serve are (i) the quantity of the product needed in each lot, i.e., whether the customers want small quantities of products or they purchase large quantities, (ii) the response time which the customers are willing to tolerate, i.e., whether the customers buy on short notice and expect quick service or is a longer lead time acceptable, (iii) the variety of products needed by the customers, i.e., whether the customers are looking for a narrow and well-defined bundle of products or whether they are looking for a wide selection of different kinds of products, (iv) the service level needed by the customers, i.e., whether the customers expect all products to be available for immediate delivery or whether they accept partial deliveries of products and longer lead times, (v) the price of the product, i.e., how much the customers are willing to pay (some customers are willing to pay more for convenience or high levels of service and other customers look to buy based on the lowest price they can get), and (vi) the desired rate of innovation in the product, i.e., how fast are new products introduced and how long before existing products become obsolete.
The next step is the defining of the core competencies of the organization. This step is to define the role which the organization plays or wants to play in these supply chains. This step identifies the position of the organization in the supply chain. For example, the organization is a supplier organization, a producer organization, or a customer organization etc. The step identified what the organization do to enable the supply chains which it is part of.
The core competencies of the organization are determined by the activities through which the organization makes money. It decides the role which is best suited for the organization to play in a supply chain. However, it is to be noted that the organization can serve multiple markets and participate in multiple supply chains. In a certain supply chain, the organization can be a supplier, in other supply chain, it can be a producer, while in another supply chain, it can be a customer. Further, the organization can cater to two different markets which can have different requirements as measured by the customer attributes.
When an organization serves multiple market segments, the organization needs to look for ways to leverage its core competencies. Parts of these supply chains can be unique to the market segment they serve while other parts can be combined to achieve economies of scale. For example, if manufacturing is a core competency for an organization, it can build a range of different products in common production facilities. Then different inventory and transportation options can be used to deliver the products to customers in different market segments.
The organization is required to develop needed supply chain capabilities. Once it is known, the kind of markets which the organization serves and the role the organization does or is going to play in the supply chains of these markets, then organization can take this last step, which is to develop the supply chain capabilities needed to support the roles the organization plays. This development is guided by the decisions made about the five supply chain drivers. Each of these drivers can be developed and managed to emphasize responsiveness or efficiency depending on the organizational requirements.
Production – This driver can be made very responsive by building plants which have a lot of excess capacity and which use flexible manufacturing techniques to produce a wide range of products. To be even more responsive, the organization can do its production in several smaller plants which are close to major groups of customers so that delivery times can be made shorter. If efficiency is desirable, then the organization can build plants with very little excess capacity and has the plants optimized for producing a limited range of products. Further, efficiency can be gained by centralizing production in large central plants to get better economies of scale.
Inventory – Responsiveness here can be have by stocking high levels of inventory for a wide range of products. Additional responsiveness can be gained by stocking products at several locations so as to have the inventory close to customers and available to them immediately. Efficiency in inventory management calls for reducing inventory levels of all items and especially of items which do not sell as frequently. Also, economies of scale and cost savings can be achieved by stocking inventory in only a few central locations.
Location – A location approach which emphasizes responsiveness is one where the organization opens up counters at several locations to be physically close to its customer base. Efficiency can be achieved by operating from only a few locations and centralizing activities in common locations.
Transportation – Responsiveness can be achieved by a transportation mode which is fast and flexible. Several organizations which sell products through catalogs or over the Internet are able to provide high levels of responsiveness by using transportation to deliver their products, frequently within 24 hours. Efficiency can be emphasized by transporting products in larger batches and doing it less frequently. The use of transportation modes such as ship, rail, and pipelines can be very efficient. Transportation can be made more efficient if it is originated out of a central hub facility instead of from several branch locations.
Information – The power of this driver grows stronger every year as the technology for collecting and sharing information becomes more wide-spread, easier to use, and less expensive. Information, much like money, is a very useful commodity since it can be applied directly to improve the performance of the other four supply chain drivers. High levels of responsiveness can be achieved when organizations collect and share accurate and timely data generated by the operations of the other four drivers.
Where efficiency is more the focus, less information about fewer activities can be collected. Organizations can also elect to share less information among themselves so as not to risk having that information used against them. It is to be noted, however, that these information efficiencies are only efficiencies in the short term and they become less efficient over time since the cost of information continues to drop and the cost of the other four drivers normally continues to rise. Over the longer term, those organizations and supply chains which learn how to maximize the use of information to get optimal performance from the other drivers gain the majority of the market share and be the most profitable organizations.
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