Supply Chain Management

views updated May 29 2018

Supply Chain Management

Supply chain management (SCM) is a broadened management focus that considers the combined impact of all the companies involved in the production of goods and services, from suppliers to manufacturers to wholesalers to retailers to final consumers and beyond to disposal and recycling. This approach to managing production and logistics networks assumes all companies involved in the process of delivering goods to consumers are part of a network, pipeline, or supply chain. It encompasses everything required to satisfy customers and includes determining which products they will buy, how to produce them, and how to deliver them. The supply chain philosophy ensures that customers receive the right products at the right time at an acceptable price and at the desired location. Companies that practice supply chain management report significant cost and cycle time reductions. For example, Wal-Mart Stores Inc. announced increases in inventory turns, decreases in out-of-stock occurrences, and a replenishment cycle that has moved from weeks to days to hours.

Increasing competition, complexity, and geographical scope in the business world have led to this broadened scope and continuing improvements in the capabilities of the personal computer have made the optimization of supply chain performance possible. Further, technological developments in the communications field, such as e-mail and the Internet, have revolutionized data exchange, facilitating the necessary flow of information between the companies in the supply chain. Cutting-edge communication technologies make it possible to manage the complexity of networked production in a way unthinkable only two decades ago.

A fundamental premise of supply chain management is to view the network of facilities, processes, and people that procure raw materials, transform them into products, and ultimately distribute them to the customer as an integrated chain, rather than a group of separate, but somewhat interrelated, tasks. The importance of this integration cannot be overstated because the links of the chain are the key to achieving the goal. Every company has a supply chain, but not every company manages their supply chain for strategic advantage.

While easy to understand in theory, the chain management becomes more complex the larger the company and its range of products, and the more international the locations of its suppliers, customers, and distribution facilities. Supply chain management is also complex because companies may be part of several pipelines at the same time. A manufacturer of synthetic rubber, for example, can at the same time be part of the supply chains for tires, mechanical goods, industrial products, shoe materials and footwear, aircraft parts, and rubberized textiles.


With supply chain management, information, systems, processes, efforts, and ideas are integrated across all functions of the entire supply chain. Supply chains become more complex as goods flow from more than one supplier to more than one manufacturing and distribution site. The possibility of outside sources for functions like assembly and packaging are also options in the chain.

The basic tasks of a company do not change, regardless of whether or not it practices supply chain management. Suppliers are still required to supply material, manufacturing still manufactures, distribution still distributes, and customers still purchase. All of the traditional functions of a company still take place. The ultimate difference in a company that manages its supply chain is their focus shifts from what goes on inside each of the links, to include the connections between the links.

A company practicing effective supply chain management also recognizes that the chain has connections that extend beyond the traditional boundaries of the organization. Managing the connections is where the integration of the supply chain begins. Any improvement in or disruption to the supply chain linkages affects the entire chain. The cumulative supply chain effect of uncertainty can be seen in this example. Suppose a manufacturer of integrated circuit boards receives a shipment of poor quality silicon. Because the manufacturer is dependent on its supplier for timely shipments, the poor quality lot results in a shipment delay to one of its customers. The computer manufacturer is forced to shut down its line because component circuit boards are not available. As a result, computer shipments to retailers are late. Finally, the customer goes to the retailer to purchase a new computer but is unable to find the desired brand. Frustrated, the customer decides to buy the product of a competitor. Consider too, the timing involved in this process. Because

of production and transportation lead times, the actual receipt of the poor quality silicon probably occurred several months before the customer made a computer purchase.

A wide variety of events occurs in the supply chain that is largely unpredictable. Suppliers can make early or late deliveries. Customers can increase, decrease, or even cancel orders. New customers can place large orders. Machines or trucks can break down. Employees can get sick, go on strike, and quit. Supplier shipments or manufactured products can have quality problems. In the past, companies prepared for uncertainty and improved their levels of customer satisfaction by allowing inventory levels to rise. This is no longer an acceptable solution. High inventories translate to increased carrying costs and risks of obsolescence that can limit a company's flexibility.

Throughout the supply chain, inventory is traditionally created and held at many locations. Any time a portion of that inventory can be reduced or eliminated, the company decreases costs and increases profitability. Shortening the length of time it takes to move a product from one link of the chain to the next also shortens the cycle time of the entire chain and thereby increases competitiveness and customer satisfaction.


SCM provides needed visibility along the chain to improve performance. Without visibility up and down the supply chain, an effect known as the bullwhip can result. In reviewing the demand patterns at various points in their supply chain, Procter & Gamble (P&G) noticed that while the consumers, or in this case the babies, consumed diapers at a steady rate, the demand order variability in the supply chain was amplified as it moved up the supply chain. Without being able to see the sales of its product at the distribution channel stage, they had to rely on sales orders from resellers to make product forecasts, plan capacity, control inventory, and schedule production. This lack of visibility resulted in excessive inventory, inaccurate forecasts, excessive or constrained capacity, and reduced customer service levels. Each link in the supply chain stockpiled inventory to counteract the effects of demand uncertainty and variability. Various studies have shown that these inventory stockpiles can equal as much as 100 days' supply and by considering the effect on raw materials, the total chain could contain more than a year's supply of inventory.

Companies like P&G, Dell Computer, Hewlett-Packard, Campbell Soup, M&M/Mars, Nestlé, Quaker Oats, and many others have been able to control the bullwhip effect. Some of the methods used include innovative information flow for forecasting demand, revised price structures, or developing strategies to allow smaller batch sizes, while still maximizing transportation efficiency. By understanding the effects of supply chain integration, visibility, and information, these companies were able to develop strategies that enabled them to overcome many problems.


In addition to helping to create an efficient, integrated company, supply chain management also plays a large part in reducing costs. A study by the A.T. Kearney management consulting company estimates that supply chain costs can represent more than eighty percent of the cost structure in a typical manufacturing company. These numbers indicate that even slight improvement in the process eventually can translate into millions of dollars on the bottom line. These costs include lost sales due to poor customer service or out-of-stock retail products. For every dollar of inventory in a system, there are one to two dollars of hidden supply chain costs: working capital costs, asset costs, delivery costs, write downs and so on. Leaner inventories free up a large amount of capital.

Depending on the industry, companies leading in supply chain performance achieve savings equal to three to seven percent of revenues compared with their median performing peers. One Efficient Consumer Response Study, sponsored by the Food Marketing Institute, estimated that forty two days could be removed from the typical grocery supply chain, freeing up $30 billion in current costs, and reducing inventories by 41 percent.


Customer Focus. All sources agree the fundamental focus of supply chain management begins by understanding the customer, their values, and requirements. This includes internal customers of the organization and the final customer as well. Companies must seek to know exactly what the customer expects from the product or service and must then focus their efforts on meeting these expectations. The process of suppliers must be aligned with the buying process of the customer. Even performance measurements must be customer driven, because the behavior of the final customer ultimately controls the behavior of the entire supply chain.

Information Flow. Another requirement is increased information flow. Companies must invest in the technology that will provide access to greater amounts of timely information. Information makes it possible to move to more instantaneous merchandise replenishment and allow all parties in the chain to respond quickly to all changes. Information facilitates the decisions of the supply chain such as evaluation and exploration of alternatives. Information flow is key to the visibility of the product as it

flows through the supply chain and is needed at every stage of he customer order. Improving the intelligence of where products are in the chain also improves inventory management and customer service capabilities. Issues of trust and security are fundamental to information integration. Many organizations are successfully dealing with these issues through the development of partnering relationships.

Employee and Management Support. As partners in the supply chain must also be highly flexible, supply chain strategies often require changes in processes and traditional roles. All members of the supply chain must be open to new methods and ideas. The flexibility and change required is often difficult for organizations and their employees. It is however, the ability to embrace necessary changes that will position a company to take advantage of the benefits of supply chain management. Because the supply chain is a dynamic entity, businesses are advised to organize for change. They must anticipate resistance and be prepared to deal with it. Training in the concepts of supply chain management will aid in this effort. Also, as with any organization change, the new ideas must be supported and embraced by all levels of management.

Measurement. Often companies undertake ways to improve themselves without also thinking about how to measure whether or not they have been successful. Performance measurement must consider the entire supply chain and be related to the effect on the ultimate goal of customer satisfaction. Therefore the final concept of supply chain management is ensuring measurement techniques are adequately considered during the implementation of supply chain management techniques.


Methods being used to achieve the goals of supply chain management can be divided into two categories. Some methods seek to achieve the goals through improving the processes within the links of the chain. There are also methods that seek to achieve the goals by changing the roles or functions of the chain.

The methods used to improve the process include modeling various alternatives, effective measurement, improved forecasting, designing for the supply chain, cross-docking inventories, direct store delivery, and electronic data interchange (EDI) technology. Direct store delivery methods bypass the distribution center. Products using direct store delivery include bakeries, cosmetics, snack foods, and other items where product freshness or quick replenishment is required. Cross-docking is a process that keeps products from coming to rest as inventory in a distribution center. Products arrive at the center and are immediately off loaded, moved, and immediately reloaded on waiting delivery trucks.

EDI technology is the electronic exchange of information between the computer systems of two or more companies. It is used to process transactions like order entry, order confirmation, order changes, invoicing, and pre-shipment notices. The EDI movement was started by big retailers like Wal-Mart, Kmart, and Target. To do business with some of these large customers, EDI processing is a requirement. EDI delivers results by facilitating the constant and rapid exchange of information between companies. Customer order, invoice, and other information that would previously require hours of data entry can be done in minutes. Point of sale data can be transmitted in a matter of minutes or hours instead of weeks.

Methods that use changing roles include postponement strategies, vendor managed inventory, and supplier integration. Postponement strategies delay the differentiation of products in order to gain flexibility to respond to changing customer needs. Product inventory is held in a generic form so that as specific demand becomes known, the product can be finished and shipped in a timely manner. Vendor managed inventory and continuous replenishment programs are ways in which organizations are reaching beyond their boundaries and integrating their efforts with suppliers and customers. Point of sale data is transferred from customer to supplier in real time so that automatic replenishments can occur. Companies can even surrender the responsibility for managing inventory to some of their suppliers. Supplier integration moves beyond partnering with suppliers and focuses on aligning with all critical suppliers the supply chain.


The supply chain operations reference (SCOR) model is a process reference model, developed in 1996 by the Supply-Chain Council, as a cross-industry diagnostic, benchmarking, and process improvement tool for supply chain management. SCOR provides a complete set of supply chain performance metrics, industry best practices, and enabling systems' functionality that allows firms to thoroughly analyze all aspects of their current supply chain. A number of notable firms, such as IBM, Intel, 3M, and Siemens have used the model successfully.

The model separates supply chain operations into five distinct processes: plan, source, make, deliver, and return. Within these are three levels of process detail. Level I deals with process types, Level II is the configuration level and deals with process categories, and Level III is the process element level. The SCOR model endorses twelve performance metrics. The Levels II and III metrics are

keys to the Level I metrics that fall within the five process categories. Empirical research by Archie Lockamy III and Kevin McCormack found while some of the practices found in the model did not have an expected degree of impact, many of the practices did result in significant supply chain performance improvements.


Supply chain management, enabled by improvements in technology and a broader view of the organization, has addressed the issues of complexity and competition by exploiting and enhancing the chain to provide strategic, financial, and competitive advantage. Like other management philosophies, such as total quality management (TQM) or business process reengineering, supply chain management is an evolving process. Emerging technologies and successful supply chain management techniques used by companies today are the foundation of future improvements in techniques and technologies. Throughout the 2000s, management experts have been working on improving current models, such as the SCOR model, and on making links between SCM and other proven management techniques, such as Six Sigma, lean manufacturing, and just-in-time (JIT) systems. With continued attention on further developing supply chain management techniques, this approach will continue to provide great payoffs in cost and efficiency to organizations.

Another development that has occurred alongside rapid technological innovation is increasing environmental concerns. As responsible environmental practices have increased in importance, supply chain strategies have done the same. There are both logistical and political reasons for this. Firms finding that release of waste into the biophysical environment is becoming more difficult (or even impossible) to prevent are saddled with a new responsibility, waste control. This may have far-reaching implications for supply chain management. When source reduction is impossible or incomplete, the firm must deal with returned products as well as disassembly, recycling, reuse, repair work, or remanufacturing, all of which mean more movement of material. The supply chain is then extended beyond the final consumer to become a reverse supply chain (note that an earlier SCOR model contained only four processes; the return process was later added).

In the late-2000s, firms are also facing increasing pressure to adopt green practices in response to concerns over global warming and other impending pollution crises. Developments in supply chain management are keeping pace with these concerns. Recent works, such as Greening the Supply Chain (2006) and Green Electronics Design and Manufacturing (2008), indicate the importance of adopting innovative ideas capable of making a corporation's supply chain more socially and environmentally responsible.

SEE ALSO Distribution and Distribution Requirements Planning; Electronic Data Interchange and Electronic Funds Transfer; Reverse Supply Chain Logistics


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Supply Chain Management

views updated May 29 2018


The field of supply chain management is undergoing dramatic changes due to the advancement of technology, the proliferation of the Internet, and consumer behavior and preferences. In the digital age, supply chains are electronically interconnected and optimized, allowing for such efficiency and value-added benefits as just-in-time inventory and mass customization. Even though technology and the Internet are viewed as helpful tools in increasing the efficiency of the supply chain, there are still some major challenges in the optimal implementation of these tools.

On the information side, the issues of forecasting demand remains of the highest priority because it is viewed as the beginning of the cycle. If forecasting is wrong, so are the remaining phases in the supply chain. Two additional challenges are systems and people. We are faced with a "Babylon Tower" of systems that makes collaboration very challenging. At the same time, human nature always favors familiarity, and it takes time and effort to create new comfort zones.

Just-in-time (JIT) inventory systems are a good idea that have proven themselves in many industries. Nevertheless, the transformation to just-in-time inventory is neither simple nor easy. It requires a coordinated effort on the part of people, systems, and strong partnerships.

Ironically, the greatest beneficiaries of the mass-customization process are the delivery and shipping companies. Increase in shipping along the supply chain spectrum, as well as between the manufacturer and the consumer, implies higher shipping costs. Some of this incremental cost will be paid by the consumer, and some will be offset by the increase in process efficiency.


No matter what the product is or the stage an entity fulfills in the supply chain, the most challenging task is forecasting demand. Demand is the beginning of the cycle, and everything done afterwards relies on this information.

Forecasting demand includes elements such as historical information, market trends, and changes in materials that make up the product. Moreover, you need to find out the lead time. The shorter you can make your lead time, the more accurate the forecast can be because the project need not be too far into the future.


Technology and the Internet have provided the supply chain with the key to operate in a real-time environment. However, we are not there yet, mainly because there are two major challenges to overcome—a Babylon Tower of systems and human behavior.


Currently, there are different systems all over, and each entity in the supply chain needs different information for their purpose. The fact that each entity along the supply chain spectrum uses different systems and needs different information makes the notion of collaboration almost impossible.

Another system-related issue is the accuracy of the data. Keeping the data up to date is a challenge. There are problems with continuity of data, meaning that the same material is sometimes described differently by different entities in the supply chain.


Regardless of the efficiency and functionality of a given system, it is human behavior that needs to be dealt with if a supply chain is to become more efficient. One issue is trust, and willingness on the part of the trading partners to share information. The biggest challenge is a cultural one. The technology exists, but the behavioral change required from the customer and the supplier is often quite large.

Fear also plays a role in this area. Brand companies have the ability to share very detailed information with their suppliers and partners along the supply chain. However, they are afraid that competitors might get access to this information and take advantage of it. The notion that everyone is going to share information with everyone else is somewhat naive.


Ensuring that you have the right components in hand at the right time, with minimal excess inventory, can produce high efficiency results, but it takes careful planning and to master the complexity of implementing such an environment. It is possible to have an efficient inventory system for direct components, which will become part of the finished product, and at the same time have an inefficient inventory system for the indirect parts, such as tools and machinery.


The Internet, e-commerce, mass-customization, and other elements of the new economy have created a need for increased shipping and delivery. This increase effects all the entities involved in the supply, as well as the end user.

The underlying reasons for the increase in shipping and delivery are evident. More customers can now order an item directly from the manufacturer or distributor, and in many cases one single item is shipped to a single customer as opposed to bulk shipping to a store. Moreover, if this item is customized, it is very likely that it has created increase in shipping along the supply chain.

The ability to mass-customize is one thing, and the willingness of consumers to buy such products is another. Generally speaking, consumers do not see value in the customization of commodity-like products. On the other hand, consumers have accepted mass-customization of higher ticket items. Over time, though, we should expect the bar to be lower for items that consumers will desire to be customized.


The Internet, which provides greater speed and connectivity, will create varying degrees of relationships amongst businesses. Suppliers and manufacturers will interact on two or three levels. The highest level, strategic partnership, will be reserved for suppliers that provide an instrumental contribution to the manufacturer, and the relationship will be maintained on a personal level. The lowest level will be with commodity suppliers, and will be based with on the "deal" rather than on the relationship.

Entities involved in the supply chain process should expect to find themselves in two or three types of relationships with each other. Suppliers that provide the highest value-added components to their manufacturers can expect a strategic alliance based on personal relationships. Those that produce commodity-like components are more likely to be "best deal" type of providers, which will be easily replaced with competitors.


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Supply Chain Management

views updated Jun 27 2018


Supply chain management is the practice of using the Web and other information technologies to coordinate and keep track of supplies as they move through a business's supply networks. The simultaneous goals of supply chain management are to quickly meet customer demandby, for instance, fulfilling their orders in a timely fashion and offering them accurate projectionsand to minimize costs by reducing inventories and making supply chains optimally efficient. In an age of increased outsourcing and larger webs of business relationships in the global economy, supply chains have become particularly complex, making them increasingly difficult for individual firms to control. The proliferation of electronic business relationships, in the forms of extranets and online business-to-business exchanges, made supply chain management both tempting and technically feasible. Supply chain management was thus a quickly emerging, if still problematic, element of business-to-business e-commerce in the late 1990s and early 2000s.

Electronic management of business supply chains coordinates all business partners in the supply chain over electronic networks and gives all parties an up-to-the-minute overview of all available inventories. Technically, supply chain management "Web-enables" existing enterprise resource planning (ERP) systems, which include everything from product catalogs to order files to inventory databases. Companies take their back-end databases and other systems and integrate them into a Web portal shared across the entire supply chain network. In this way, companies can feed all essential information across the entire supply chain. Most such systems closely detail all components as they move through the systemincluding the quantity and precise time of parts shipped through the supply chain. In this way, suppliers can log onto secure Web sites and determine exactly how many components to send to the factory, and the companies are aware of exactly what they need to complete projected orders in the most efficient fashion.

Supply chain management systems can take many forms. The most basic route is to simply coordinate existing databases over supply networks using extranets. More sophisticated systems, however, are the specialty of a new breed of service providers that specialize in software and systems management geared specifically toward supply chain management. These companies, such as the Santa Barbara, California-based SupplySolution Inc., one of the most prominent names in the field, simply contract with companies to receive their inventory data and organize it for optimal management across networks.

The layers of potentially useful information are many. By implementing comprehensive databases of components and integrating them into the supply chain management system, companies have the opportunity to cut costs at almost every corner. For instance, by detailing all the components that go into a completed product, firms can monitor each individual component to determine its optimal production and shipping level, determine which components are moving below peak efficiency, and coordinate their entire supply lines to bring them into equilibrium at the greatest level of efficiency. From there, the savings can spread through their operations, as, for instance, firms that have successfully cut down inventories can cease renting warehouse space to store excess components.

Supply chain management, in addition, provides all companies connected in a supply partnership with the greatest level of transparency. That is, all orders and requests are readily accessible to all connected parties, which not only facilitates the transaction process by providing all companies with information, but also increases accountability, as all companies are made aware of each movement through the supply chain and can spot shortcomings. In this way, business partnerships are forced to become more honest, and there is less room for laziness or skimming off the top.

There was a defensive logic to building supply chain management systems as well. By the mid-2000s, e-commerce was expected to reach some $6.8 trillion, and there was concern that existing supply chains would be unable to accommodate such volume. In order to fully take advantage of e-business opportunities, businesses will feel pressured to upgrade their internal and external systems architecture to keep their supply chains in pace with e-commerce as a whole. And evidence into the early 2000s lent credence to the view that existing supply chains were a drag on e-commerce. While companies were competent at taking orders online, order fulfillment left a great deal to be desired. The convenience of e-commerce adds pressure for more sophisticated supply chains as well. Since sales procured over the Internet are more difficult to project, companies are harder pressed to order adequate supplies far in advance.

One of the barriers to supply chain management is that, for the system to live up to its potential, all connected parties need to operate on a common platform. The investment into new systems is substantial enough, and becomes more complex when all players need to coordinate those investments and convert their existing systems to compatibility with the new platform.

A number of dangers lurk in adopting supply chain management. For instance, companies may be reluctant to align themselves too closely to any particular firm if it means closing off their options to shop for supplies elsewhere. Since setting up an efficient and worthwhile supply chain management system calls for a major investment, companies need to be sure that those firms with whom they establish such a relationship are solid and will prove compatible partners over the long term. Relatedly, companies may be uneasy about tying their own strategies too closely to those of other companies since such an arrangement could impede the firms' autonomy and limit their ability to shift direction should the need arise. Businesses also need to be wary of over-extending the supply chain management relationship with those firms that also act as competitors in other fields or that may one day become competitors. Sharing intimate company details could give such a competitor an unfair advantage.


Greengard, Samuel. "New Connections." Industry Week, August 13, 2001.

Lundegaard, Karen. "Bumpy Ride." Wall Street Journal, May 21, 2001.

Mahoney, Chris. "Global Supply Chains." Executive Excellence, August, 2001.

SEE ALSO: Business-to-Business (B2B) E-commerce; Channel Transparency; Enterprise Resource Planning (ERPs); Fulfillment Problems; Intranets and Extranets; Order Fulfillment; Shipping and Shipment Tracking

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