What is Supply Chain Management

Description

Complete the module reading: What is Supply Chain Management? and discuss supply chain management practices. Develop a short paper that describes the following:

The evolution of supply chain management 

Supply chain management impact on inventory and organizational performance 

How performance is measured in supply chains 

The significance of supply chain management to senior management

Guidelines for Submission: The short paper should follow these formatting guidelines: 2-3 double spacing, 12-point Times New Roman font, one-inch margins, and at least three citations in APA format.

For the exclusive use of J. Smith, 2019.
BEP088
January 1, 2012
CHAPTER ONE
What Is Supply Chain Management?
From Global Supply Chain Management
By Matt Drake (Business Expert Press)
© 2012 by Business Expert Press. All rights reserved.
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affiliate of Harvard Business School.
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
CHAPTER 1
What Is Supply Chain
Management?
As I sit and listen to the seemingly interminable honks of the cars and
auto-rickshaws outside of my hotel room in Kottayam, India, I cannot help but reflect on how small the world has become in the past few
decades. You cannot go anywhere in India without seeing signs of the
Western world in the form of cars, electronics, billboard advertisements,
and the like. Even in the small town of Thekkady, nestled high in the
Western Ghats mountain range, I could purchase Lay’s potato chips or
Aquafina water if I desired.
A major mechanism behind this shrinking of the world is the development of global supply chain networks designed to manufacture and move
products to every corner of the world. With the proliferation of international air travel and the improvement of logistics infrastructure around the
world, it is now possible to catch a fish in the Mediterranean Sea or in the
waters off the coast of Prince Edward Island and feast on that same fish in
a Tokyo sushi bar several days later.1 A product manufactured deep in the
interior of China could be delivered direct to a customer in the American
heartland within the week. This is the state of world-class supply chain
management in the twenty-first century.
Of course, few products are able to navigate the complex web of
international trade regulations and domestic distribution operations so
quickly and seamlessly. Much of the logistics infrastructure around the
world is underdeveloped. The two-lane road that my hotel sits on in
Kottayam has to handle traffic in the form of cars, pedestrians, bicycles,
auto-rickshaws, motorcycles, buses, trucks, and even elephants! The road
system in India is very poor; in most places, two-lane roads are the largest that you will see. A road can go from pavement to dirt in an instant,
causing havoc for cars, let alone trucks carrying goods. I cannot even
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
2
GLOBAL SUPPLY CHAIN MANAGEMENT
imagine taking a 53-foot trailer that is at home on the U.S. Interstate
Highway System on these roads with traffic weaving in and out. If the
goods actually arrived at their destination safely, chances are there would
be no adequate dock to unload the freight. India is not alone with its
infrastructure issues; many other countries have roads and ports that are
not conducive to hauling large quantities of freight on a consistent basis.
Thus even if we can say that the world is smaller, this does not mean
that it is completely homogeneous. There are plenty of differences in
culture, economic and political policies, regulations, and physical and
climatic characteristics that complicate efforts to manage a global supply chain. When a company operates (i.e., with respect to procurement,
manufacturing, and distribution) entirely within the boundaries of one
country, its supply chain managers only have to worry about the domestic regulations and culture they live with everyday. Very few companies
outside of those that tout themselves as selling or producing “locally
sourced” products can say with any certainty that they have a truly
domestic supply chain.2 Most companies today are explicitly tied to the
global marketplace and, as a consequence, have a global supply chain.
The complexities related to managing global supply chains can cause
firms great difficulties and can even make decisions that look sound on
paper (such as offshoring work to another country or entering a foreign
market) turn out to be unprofitable. They can also, however, provide an
opportunity for organizations to establish a strong competitive advantage by learning how to manage the issues that trip up other firms. This
book is designed to highlight the importance of managing global supply
chains effectively, as well as to provide insight and recommendations for
handling the most important obstacles to making your supply chain successful in the global marketplace.
Supply Chain Management Defined
Before we delve too far into the challenges of global supply chain management, it is important in this first chapter that we take some time to
examine supply chain management itself, for this is a term that has been
used in many different contexts in the business vernacular and can cause
confusion as a result.
Supply chain management as a field is approximately 25 years old,
but the traditional business functions that compose it (i.e., procurement,
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
WHAT IS SUPPLY CHAIN MANAGEMENT?
3
forecasting, production, transportation, warehousing, customer service,
order management) have been around since business began. The Council of Supply Chain Management Professionals (CSCMP) defines supply
chain management as
encompass[ing] the planning and management of all activities
involved in sourcing and procurement, conversion, and all logistics
management activities. Importantly it also includes coordination
and collaboration with channel partners, which can be suppliers,
intermediaries, third-party service providers, and customers. In
essence, Supply Chain Management integrates supply and demand
management within and across companies.3
The most important part of this definition is its emphasis on the interorganizational element of supply chain management. This is what sets supply
chain management apart from its traditional business functions and its
predecessors of materials management, physical distribution, and business
logistics. True supply chain management focuses on interactions and collaboration with suppliers and customers to ensure that the end customer’s
requirements are satisfied adequately. All activities in the supply chain
should be undertaken with the customer’s requirements in mind; all supply
chains ultimately exist to ensure that the customers are satisfied.
Both academic and practitioner discussions of supply chain management inevitably include some specialized terminology to describe a firm’s
position in the supply chain relative to its partners. In the “chain” part of
the supply chain metaphor, suppliers are referred to as upstream entities,
and customers are called downstream entities. The firm’s immediate suppliers are tier 1 suppliers, their suppliers are tier 2 suppliers, and so on.
The same vernacular is used to describe the different echelons of customers all the way down to the end customer. In this way it has often been
said that supply chain management seeks to coordinate operations from
the “supplier’s supplier to the customer’s customer.”
The Supply Chain Council, an international nonprofit dedicated to
helping organizations improve their supply chain performance, has developed its widely applied Supply Chain Operations Reference (SCOR®)
process reference model to align a firm’s supply chain performance metrics
with its overall strategic goals.4 It is helpful to consider the SCOR® model’s highest level processes when describing supply chain management:
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
4
GLOBAL SUPPLY CHAIN MANAGEMENT
Example 1.1. Co-Creating Value With Customers
As firms adopt a supply chain perspective and consider their interactions with suppliers and customers, they can often differentiate
themselves in the market by engaging customers in the value creation
process. This is a concept known as co-creation. In many traditional
supply chains, the customers themselves play little role in creating
value; they only consume the value that the manufacturers create.
Many firms, from gas stations and grocery stores to Ikea, have designed
ways for customers to create their own value through gas pumps, selfcheckout machines, and furniture that is assembled at home.
A more significant way to have customers create value is to involve
them in the manufacturer’s product design process. In the industrial
context customers’ representatives from procurement and engineering
can work with the manufacturer to collaborate on a design that meets
their needs. Many consumer product manufacturers such as Lego and
Nike have established online design studios where customers can customize their own offerings to meet their needs. Many college textbook
publishers offer customized textbooks where faculty members can select
chapters from several textbooks along with additional readings to design
their own textbook that fits their courses better than the general textbook offerings can. Even retailers such as Amazon and Walmart invite
their customers to rate and comment on the products they purchase
online to provide additional guidance for future customers.
Source: Prahalad and Ramaswamy (2004).
1. Plan. All supply chains must undertake a significant amount of planning because so many of their operations are performed in different
locations and most of the time in different companies’ facilities.
It takes a great deal of planning to synchronize these actions, and
this synchronization is important because the activities are crossfunctional and interrelated.
2. Source. After the initial plans have been established, the firm starts
to acquire resources from its suppliers, often in the form of parts
or partially manufactured subassemblies, but this can also include
resources such as machinery, technology, capacity, and other services.
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
WHAT IS SUPPLY CHAIN MANAGEMENT?
5
3. Make. Once the resources have been acquired, the firm performs its
primary transformation activity to turn resource inputs into outputs
that can ultimately satisfy downstream demands from other members of the supply chain or the end customer.
4. Deliver. After the resources are transformed from inputs to outputs,
they must be moved physically to the next phase of distribution. If the
output item is a part, it must be delivered to another manufacturer
who will use it as an input. If the output item is a finished item that
can be sold to the end customer, the item is delivered to the next layer
of distribution (e.g., central warehouse or retail store). The delivery of
services requires that the firm manage its customer requirements and
ensure that the customer is satisfied with the service received.
5. Return. The original SCOR® model stopped at the deliver process,
but the Supply Chain Council appended the model in the early
2000s to acknowledge that products often flow in the reverse direction from the traditional flow for a variety of reasons (e.g., defects,
shipment errors, buyback arrangements, customer service policies,
or end-of-life disposal). These return flows can be very costly for
companies that have not developed appropriate processes to handle them, and they can turn into a revenue source and competitive
advantage for companies that proactively plan for them.
Implicit in the SCOR® model’s description of a firm’s supply chain
processes are the linkages of these processes with those of the firm’s supply
chain partners. For example, a manufacturer’s sourcing process is invariably dependent on its suppliers’ delivery processes. The SCOR® model
explicitly shows how companies in the same supply chain are linked and
gives managers a map of them so that none of the linkages are overlooked,
which could lead to a breakdown in the entire chain.
The Evolution of Supply Chain Management
This section describes some important factors and milestones in the
development of the supply chain management field over the past century. This is not meant to be an exhaustive history, however, because that
would fill an entire book on its own.
The field of supply chain management has its origins in the giant
manufacturing firms of the late nineteenth century. It was common for
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Dec 2018 to May 2019.
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6
GLOBAL SUPPLY CHAIN MANAGEMENT
large firms in that era to own many or all of the stages of production from
raw materials to finished goods and even part of the distribution channel
as well. Ford Motor Company is the classic example of such an approach,
which is called vertical integration. In the 1920s Ford owned its main
manufacturing facility in River Rouge, Michigan, but it also owned rubber plantations, glassworks, railroads, forests and timber operations, coal
and iron ore mines, and ocean carriers.5
The main benefit to complete vertical integration is the degree of control that a firm has over its supply chain operations. The more stages of
a supply chain that a firm owns, the easier it is for the firm to coordinate
the operations to minimize waste in the form of excess inventory buffers. The downside, though, is that the firm must be able to perform
all of these functions well and synchronize them so that they occur in a
timely manner. As the twentieth century progressed, most vertically integrated firms divested themselves of their ancillary functions and processes
to focus on their core competencies, the functions that positively distinguish a firm from its competitors.
In the 1960s the major business functions related to supply chain
management, such as procurement, forecasting, production, transportation, and warehousing, all operated independently in what have become
known as functional silos.6 Employees in each of these departments made
decisions with only their department’s interests in mind and without
concern for how their decisions affected other departments’ ability to satisfy the end customer’s demand.7
In the 1970s many firms began to recognize that these business functions are inherently linked and dependent upon each other and started
to manage them together, as a group. All of a firm’s inbound activities to
the point of production were grouped under the header “materials management,” while the outbound activities after production of a good were
called “physical distribution.” It should not be difficult to see where the
trend went from this point.
In the 1980s firms established the link between the inbound materials
management processes and the outbound physical distribution processes
under the heading “integrated business logistics.” Firms that truly integrated their logistics processes managed all the processes involved with
sourcing, making, and delivering products together, but it was not until
the late 1980s and early 1990s that the focus shifted outside of the
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
WHAT IS SUPPLY CHAIN MANAGEMENT?
7
company’s internal operations and functions and to the firm’s interactions with suppliers and customers. Supply chain management as we
know it today began when firms recognized that, regardless of where they
stood in the supply chain hierarchy, they should be focused on satisfying
the end users of their products and services, and their ability to fulfill customers’ demands was necessarily dependent on the performance of their
suppliers (and their suppliers’ suppliers).
It is no coincidence that this timeline of business process coordination
and channel collaboration mirrors the development of business enterprise
and communications information technology. Supply chain management
is inherently dependent on technology to facilitate the sharing of information between partners and coordination of actions between parties that are
likely located many miles from each other. The gains from such coordination and joint planning would be severely limited without the ability to
share information and communicate quickly and easily. Any supply chain
that does not perform tasks entirely inside one physical building (which is
all supply chains) must have some minimum level of proximity in relation
to geographic, organizational, cultural, or electronic characteristics to be
effective; this proximity is often easiest to accomplish through the deployment of information and communications systems.8
The development of the supply chain management field was influenced by the discovery by Procter & Gamble (P&G) of the phenomenon
known as the bullwhip effect.9 Managers at P&G could not understand
the data that they had investigated with respect to their Pampers brand
of diapers. If any product should have relatively constant demand at the
retail store level over the course of a year, it should be diapers. There
are no predictable seasonal fluctuations as there are for, say, snow blowers, and the market demand does not grow or decline very quickly over
time (unless P&G were able to successfully capture market share from its
competitors). As a result, it should be no surprise that the managers were
puzzled to see a graph of the orders they received from their wholesalers and large retailers exhibited a great deal of variability. Some weeks
the orders from a customer would be very high, and the next week they
would drop off precipitously. There had to be a reason that they were
experiencing such a counterintuitive result.
After investigating order data from every level of the distribution channel for the diapers, the researchers identified a pattern that they found
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
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GLOBAL SUPPLY CHAIN MANAGEMENT
also held true for other products. As orders moved further upstream in
the supply chain (toward the manufacturer), the variability of the orders
increased. End-user demand at the retail-store level was indeed relatively
flat, but the orders that the stores placed to the retailer’s distribution center were more variable. The pattern of increasing variability continued
until the orders reached P&G, the manufacturer.
In the work that followed, the researchers were able to identify the
following four major causes of the bullwhip effect:
1. Demand forecast updating. This is the major cause of the bullwhip
effect, and it stems from a lack of information sharing in the supply chain. If upstream entities (such as P&G) are not able to see the
end customers’ demand at the retail level, they have no choice but
to base their demand forecast on the orders that they see from their
immediate customers (i.e., wholesalers and large retailers). These
orders already have more variability than the actual demand does,
and the forecasting process adds another layer of error because forecasts are never 100% accurate over time. Every time an entity has
to forecast based on channel partner orders instead of on actual end
customer demand, variability increases. This effect can be mitigated
by engaging the retailer to share the end customer demand for the
product, which is captured by their point-of-sale scanning systems,
so that the upstream parties can use this information to plan their
production instead of relying on forecasts of a wholesaler’s orders.
While demand forecast updating is the main cause of the bullwhip
effect, the latter cannot be entirely eliminated just by sharing pointof-sale demand information because of the subsequent causes of the
bullwhip effect.
2. Order batching. When order setup costs are large, companies have an
incentive to order larger quantities than they actually need so that
they can avoid paying the setup cost so often. These larger orders
introduce variability into the ordering pattern experienced by the
supplier because a customer may order many units 1 week and then
none for the next 3 or 4 weeks, even if their actual requirements
for the product are constant each week. This is a more variable pattern than it would be if the firm ordered exactly what it needed
each week. Suppliers often react to this variable ordering pattern by
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
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WHAT IS SUPPLY CHAIN MANAGEMENT?
9
holding a large amount of inventory because they find it difficult
to predict when the large order will be placed. Customers can help
the supplier improve performance by providing visibility to their
real-time inventory levels. By monitoring the inventory levels, the
supplier can easily see when a large order is likely to be placed.
3. Price fluctuations. Firms will often offer short-term or quantity discounts on their products as a way to entice customers to purchase
more. They may not realize it, but these discounts can actually introduce variability into the demand that they see from their customers.
If customers decide to purchase more than they actually need and
store it for subsequent periods, the supplier experiences the same
result as in the order-batching case. Consistent pricing policies
devoid of discounts incentivize the customers to purchase only what
they need instead of stocking up to take advantage of a discount.
This is the crux of Walmart’s famous “Everyday Low Prices” policy.
Walmart smartly used this policy as a marketing strategy as well, but
it was mainly designed to mitigate the variability in demand that it
experienced from its customers.
4. Shortage gaming. If customers know a supplier is going to be short on
capacity for a given period, which is what the Japanese automakers
experienced in the summer of 2011 as a result of the earthquake and
tsunami that rocked Japan earlier that year, it is extremely important
for the supplier to allocate the scarce supply smartly. If the supplier
uses a policy such as a common percentage to fulfill customer orders
(where each customer will receive X% of their actual units ordered),
then customers have the incentive to inflate their orders artificially
in the hope that they ultimately receive their desired amount. If
the supplier looks at the actual orders received later on to forecast
demand in the future, this could lead to an erroneous estimate
because the large orders were due only to the allocation mechanism
and not to an increase in demand. In this case, an allocation mechanism based on past orders would be more appropriate to eliminate
this gaming strategy.10
A common thread throughout the causes of the bullwhip effect is the
misalignment of decentralized decision makers within the supply chain.
Like it or not, employees often make decisions to take advantage of the
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Dec 2018 to May 2019.
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GLOBAL SUPPLY CHAIN MANAGEMENT
incentives that they face at the time, and these incentives are not always
aligned with the interests of the supply chain as a whole. Hau Lee identified the three important components of creating the “Triple-A Supply
Chain,” and incentive alignment was one of the three major foci that can
help firms create a world-class supply chain.11 Lee cites misaligned incentives with contract manufacturers as the main reason for Cisco’s US$2.25
billion inventory write-off in 2001. Incentive alignment efforts begin
with sharing information between supply chain partners, but they also
often include mechanisms that redistribute risks, rewards, or both among
the channel members. Some popular examples of incentive alignment
mechanisms in supply chains include buyback agreements, revenuesharing arrangements, and quantity-flexibility contracts.12
Of course, it is impossible for a company to align its incentives with
those of its overall supply chain if the firm does not have its own internal
business functions aligned. There are many stories of companies in which
production is at odds with marketing, and engineering is constantly
fighting with purchasing, even from companies that are often viewed
as leaders in supply chain management. A recent survey of operations
and sales employees in a large Europe-based multinational group with
many different brands in its product portfolio showed significant gaps
between the interests and priorities of those employees in sales and those
in operations. In fact, the only item both departments agreed upon was
the importance of working toward internal realignment.13 Another recent
study found that internal alignment is a positive predictor of the success
of efforts to integrate with suppliers or customers and that these successful external integration efforts enhance an organization’s competitive
capabilities and, subsequently, its financial performance.14
The issue of internal misalignment is not necessarily restricted to the
functional areas. A particular business function’s incentives could be misaligned with the strategic goals of the organization as a whole. Consider
the following simple example. A manufacturing plant manager’s quarterly bonus is largely based on plant utilization over the quarter. At first
glance, this may seem to be a perfectly reasonable metric because most
firms would like to have high utilization of their capital equipment. To
maximize utilization, however, it would be in the manager’s best interest
to have the plant running for as much time as possible, constantly producing goods whether there is demand for those goods or not. In its most
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
WHAT IS SUPPLY CHAIN MANAGEMENT?
11
critical realization, the manager would produce only one type of product
for the entire quarter, effectively running the plant like a paper mill or an
oil refinery, to avoid any downtime related to changeovers. It is important
to monitor metrics such as utilization, but they should not be considered myopically. They must be combined with other metrics related to
customer service and asset turnover to ensure that the plant operates in
accordance with the firm’s overall competitive strategy. The senior managers at the European firm where the survey was conducted were floored
to see that some of their strategic initiatives were viewed as having little
importance in the eyes of many of their surveyed employees.15
Example 1.2. Synchronizing the Supply
Chain at Philips Electronics
Coordinating its own internal operations is a significant challenge for
a multinational firm with many different subsidiaries such as Philips
Electronics, let alone synchronizing the supply chain with external
suppliers and customers. These large companies often look for internal
improvement opportunities before venturing out with external channel partners. Philips Semiconductors, a subsidiary, decided to tackle
the bullwhip effect in early 2000 by implementing a collaborative
planning process with a major customer, another Philips subsidiary
known as Philips Optical Services. The goal of the collaboration project was to increase sales and profit margins by enhancing customer
service and reducing inventory investments through information
sharing and coordinated supply chain planning. In addition to collaborative planning meetings, the project included the implementation
of a software planning tool designed to support quick, effective decision making so that the two subsidiaries could react to various sources
of supply chain volatility as they arose.
Philips has benefited greatly from the collaborative planning process since the implementation was completed at the end of 2001. The
firm estimates that the process has resulted in a US$5 million annual
reduction of inventory costs on an annual turnover of US$300 million. Annual profit also increased by approximately 1.5% from the
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Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
12
GLOBAL SUPPLY CHAIN MANAGEMENT
new collaboration effort. Philips realized these benefits from increased
responsiveness to changes in Philips Optical Services’ market,
enhanced delivery performance compared to quoted lead times, and
lower levels of inventory obsolescence for products, which is essential
in an industry with quickly changing technology.
Source: de Kok, Janssen, van Doremalen, van Wachem, Clerkx, and Peeters (2005).
The Importance of Supply Chain
Management to Executives
It should be clear by now that managing and coordinating all the business
functions that compose the supply chain among disparate locations and
companies, each potentially with its own incentives, is a complex task to
say the least. As a result, supply chain management must prove to generate for the company a tangible benefit to garner interest from senior-level
managers and executives.
The major reason executives should take notice of innovative supply
chain management practices is that supply chain management can provide
a long-term competitive advantage. Even though all competitive advantages are ultimately temporary in a dynamic business environment,16 an
efficient and effective supply chain is difficult for competitors to replicate
quickly because it often relies on technological integration and meaningful collaboration between channel partners. In fact, world-class supply
chains embody the proverbial “holy grail” by reducing a firm’s costs while
simultaneously improving customer service levels by increasing the velocity and reducing the variability of goods moving through the channel.
Here are several examples of the results that supply chain improvement initiatives can generate for firms of all sizes:
• Hewlett-Packard (HP) specifically considers supply chain
issues during the development of new products through
a formal process called “design for supply chain” (DfSC).
The cross-functional process enables employees throughout the organization to assess opportunities to reduce costs
and improve customer service for all of its new and existing
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Dec 2018 to May 2019.
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WHAT IS SUPPLY CHAIN MANAGEMENT?
13
products across 30 product lines. From 2001 through 2006,
HP realized more than US$100 million in cost savings as a
result of its commitment to DfSC.17
• In the early 2000s Whirlpool overcame a conflicting relationship between its supply chain and its sales force and a lackluster
Enterprise Resource Planning (ERP) system installation by
getting back to basics and focusing on the end customers’
needs. The supply chain managers also talked to Whirlpool’s
direct customers (small and large retailers) to gauge their service criteria and tried to build consensus throughout the other
departments in the company (especially sales) for the actions
that were expected to reconstruct the supply chain. In less than
2 years forecasting errors had dropped by more than 50%, and
Whirlpool was delivering close to its target of 93% availability
for all of its products. The company also realized direct financial benefits by reducing the working capital needed to finance
finished goods inventory by 10% and lowering supply chain
costs by a total of US$20 million.18
• The Febal Group, an Italian manufacturer of kitchen furniture
with annual sales of 50 million euros, has implemented an
innovative integrated production and distribution planning
process that is expected to improve customer service by more
than 20% and reduce delivery lead time to customers from 4
to 6 weeks to 2 to 4 weeks.19
• Small and medium-sized businesses can benefit from improving
their supply chains as well. Malt-O-Meal (MOM) redesigned its
supply chain to give the firm enough flexibility to take advantage
of new distribution channels and unique customer packaging
requests. MOM aligned internal functions such as demand planning and sales and inventory planning and physical distribution,
and the firm reconstituted its purchasing organization to include
strategic sourcing activities. MOM also invested in supply
chain–enabling technology and a leadership development program to build organizational knowledge among its employees.
These measures resulted in an increase in sales of 40% (fulfilled
with the same amount of warehouse space used in the past), as
well as a reduction in order cycle time by more than 2 days.20
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14
GLOBAL SUPPLY CHAIN MANAGEMENT
Example 1.3. Improving Inventory
Control at John Deere
Deere & Company, maker of the John Deere line of agricultural
equipment, realized in 2000 that its business was too dependent on
the economics of the farming industry in the United States. Consequently, its new CEO placed even greater emphasis on enhancing its
other divisions that satisfy the commercial, consumer, and construction markets to diversify its customer base. In addition, he challenged
every division to improve asset turnover through better management
of inventory in all forms. This directive from senior management provided the rest of the company’s employees with a clear challenge and
reassured them that the senior management would support the initiatives that they develop to attain this goal.
Deere engaged in several different strategies to improve its asset
turnover in subsequent years. The commercial and consumer divisions
worked with dealers—the main retail outlets for these products—to
ensure that the dealers had the right quantities of the right products
at the right locations so customers could try them out on site. The
dealers were skeptical of Deere’s inventory-reduction plans, so Deere
implemented a gradual reduction of US$250 million in inventory
each year so the dealers could trust that they could operate with the
lower level of inventory before reducing levels even lower. Deere also
redesigned its production scheduling and planning processes to monitor the actual performance relative to the plan on a weekly basis and
to make adjustments as necessary. Deere assembly lines increased the
number of items they produced, as well as the frequency of production, so these items could be manufactured in quantities that matched
the size of actual demand instead of in large batches. In contrast to
many inventory-reduction strategies, Deere added a layer to its distribution network in the form of regional distribution centers that merge
shipments from multiple factories for distribution to the dealers.
These regional distribution centers were located closer to the dealers,
thereby reducing the delivery lead time and allowing the dealers to
carry less inventory while maintaining service levels.
Deere’s inventory-reduction program has been very successful since
its initialization. The total inventory investment has fallen by more
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
WHAT IS SUPPLY CHAIN MANAGEMENT?
15
than US$1 billion in the past decade, and dealer locations carry less
than half of the 170 days’ worth of inventory that they had in 2001.
Orders now reach the dealers in 5 days or less compared to the 10
days it used to take for orders to arrive. Total assets have fallen each
quarter with respect to the level of the previous year for 29 straight
quarters, showing continuous improvement. The CEO estimates that
the inventory-reduction program has increased the company’s shareholder value added by US$120 million.
Source: Cooke (2007).
A recent survey-based study of manufacturing companies located in
23 countries dispersed throughout the world examined the connection
between a firm’s level of external integration with suppliers and customers and its order-winning strategies. Firms typically compete on the basis
of price, quality, flexibility, or responsiveness, and the criterion that causes
a customer to purchase one product over the other is the “order-winning”
criterion. The study found manufacturers that compete on the basis of
quality, flexibility, or responsiveness tend to exhibit higher degrees of external integration with supply chain partners; manufacturers that primarily
focus on price competition do not have such a high level of external integration.21 Competitiveness in many firms is inseparable from their supply
chains’ ability to come together and satisfy the needs of the end customer.
A firm’s bases of competitiveness are usually established by company
executives in the organization’s strategic plan. All of the company’s functional plans, including the supply chain plan, should be constructed to
support the overall competitive strategy. For example, a procurement plan
for a firm that strives to compete by producing high-quality goods should
focus on obtaining high-quality materials and subcomponents from suppliers, as well as collaborating with significant suppliers to ensure timely
deliveries. The supply chain plan should not emphasize sourcing the
lowest-cost materials available because this does not support the company’s plan to compete on quality. If the firm sought to be the low-price
producer of the product, however, procuring low-cost materials would be
an appropriate strategy. It is an executive’s responsibility to ensure that
the functional plans, including the supply chain plan, are aligned with
the company’s overall strategic plan. The SCOR® process reference model
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
16
GLOBAL SUPPLY CHAIN MANAGEMENT
described previously emphasizes the importance of linking operational
metrics in the supply chain with the firm’s overall competitive strategy.
Supply chain management should also draw executives’ attention because customers are becoming more demanding with respect
to lead-time requirements, product customization, and availability.22
As consumers order more and more products from the almost endless
catalog offered by e-commerce companies, these service expectations are
bound to increase in the future as well. Of course, companies can choose
to satisfy this demand by holding a large amount of finished goods inventory, but that strategy is likely to prove unprofitable in the long run once
inventory carrying costs (including opportunity cost of capital invested
in the inventory) are considered. A responsive supply chain enables a firm
to meet a variety of customer requirements with a modest level of inventory investment, securing the profitability of the operation.
Chapter Summary
This chapter has presented the underlying principles of supply chain
management, the evolution of the field from its constituent business
functions, and the importance of supply chain management for executives. Key takeaways from this chapter include the following:
• Supply chain management is an interorganizational approach
that encompasses all of the activities necessary to produce and
deliver a product to fulfill an end customer’s requirements.
There is a specific emphasis on a firm’s collaborative relationship with suppliers and customers (such as distributors and
retailers) to improve the entire system’s ability to satisfy the end
customer.
• Supply chain management is a relatively new concept in business, but the business functions that compose it have been
performed for decades. The new focus is on the integration of
these functions along with those of suppliers and customers.
• Many supply chain management efforts seek to minimize the
impact of the bullwhip effect, which refers to the increasing
variability of orders traveling upstream in a serial supply chain
toward the manufacturer. The bullwhip effect can be largely
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.
For the exclusive use of J. Smith, 2019.
WHAT IS SUPPLY CHAIN MANAGEMENT?
17
mitigated by realigning the incentives that companies in the
supply chain face so that their own incentives induce behavior
consistent with that which is best for the overall supply chain.
• Supply chain management should be an important concern for
executives because it can be a source of competitive advantage, regardless of how a firm positions itself in the market. It
also enables a firm to respond to the increasing demands of
customers for shorter delivery times, customized products, and
increased levels of availability.
This document is authorized for use only by Jessica Smith in QSO-415-Trends in Operations Management 19EW4 taught by SNHU INSTRUCTOR, Southern New Hampshire University from
Dec 2018 to May 2019.

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