Competing through Supply Chains: The Rise of Integrated Supply Chain Management

By: Charles R. Miller, Consultant

Introduction

The concepts of supply chain management (SCM) are not totally new to the literature of management; credible research studies and articles on the topic can be found from over 25 years ago. However, during the past 5-10 years, there has been an increased focus on SCM as a competitive weapon due to the significant effects that supply chain activities have on all elements of an organizations financial performance, including operating costs, revenue growth, and asset management.

This recognition of the importance of SCM has given rise to an abundance of recent research on SCM practices flowing from business schools, industry consortia, SCM software providers, and consultancies. One of the key issues which continues to be explored and developed is how SCM integrates with other operational performance initiatives, such as lean manufacturing, total quality management, and new product development.



Supply Chain Management

So, what exactly is supply chain management? There are as many individual definitions as there are authors on the subject; however, a good place to start might be with the definition offered by MIT researchers:

"... a process-oriented, integrated approach to procuring, producing, and delivering end-products and services to customers. It includes subsuppliers, suppliers, internal operations, trade customers, retail customers, and end-users. It covers the management of materials, information, and funds flows." [1]

The key words here are integrated and customer -- any meaningful approach to SCM must begin with the customers requirements and must include analysis and planning for all activities that touch the product or add value by the time it is delivered to the end-user. Such an approach means that true supply chain management and optimization must transcend the individual factory or operation and involve all of the participants in the chain.

The concept just described is commonly called the total value chain or the extended enterprise. A simplified diagram of the total value chain concept is shown in Figure 1.

Figure 1. The Total Value Chain (Click to Zoom)
Supply chain management, then, involves the effective planning and execution of activities and processes across the entire value chain. This effort requires new levels of involvement by materials suppliers, service providers (e.g., freight/transportation services), and even distribution customers and resellers, in order to be successful. The opportunities for competitive advantage are significant. A current industry/ academic consortium doing research on SCM best practices, the Supply Chain Council, has estimated that most companies and organizations can realize the following performance benefits from improved SCM [2]:

• Increase forecast accuracy by 25-80%
• Reduce inventory levels by 25-60%
• Reduce fulfillment cycle time by 30-50%
• Lower supply chain costs by 25-50%
• Upgrade fill rates by 25-30%
• Improve delivery performance by 16-28%

Given the potential for these kinds of performance improvements, it is clear that the competitive landscape of the future will no longer be limited to competition among individual companies but will involve supply chains competing against other supply chains.



Optimizing Supply Chains

Optimal management of supply chains generally involves three distinct elements of activity supply chain analysis, supply chain planning, and supply chain execution.

Supply chain analysis is critical to success but tends to be a traditionally weak element in many organizations. This analysis should start with the end-customer requirements and work back through each element of the chain, assessing the value-added activities and required resources at each stage of material transformation (or service activity). This process should be done for both the current condition and for the desired state.

Costs should be evaluated on a basis of total cost of ownership of the materials or services being provided. This evaluation typically means building a total-cost model that includes not only price paid for the materials at each stage but all other meaningful elements of cost involved in acquiring, transforming, and delivering the materials to the next stage in the chain. These can include such costs as inventory carrying costs, quality costs, freight, warehousing, insurance, late delivery costs, warranties, and other factors.

Supply chain planning activities look at the alternatives for redeployment of resources to better optimize the value chain and thereby reduce overall costs. This optimization will often include development of strategies and plans for insourcing/outsourcing, strategic procurement of materials, inventory management plans (e.g., supplier-managed inventory), supplier management and partnering, e-procurement strategies, and third-party logistics providers.

A critical element of supply chain planning is the information systems required to integrate all the partners in the chain. In this regard, first-generation, dedicated EDI systems are beginning to give way to lower-cost, web-based tools and portals for forecasting, demand balancing, inventory replenishment, order entry and tracking, and account management. Supply chain execution means putting the agreed upon plans into action and establishing the requisite management review and tracking systems for ensuring that cost goals and operational requirements for the chain are being met.



Supplier Relationship Management

Competing in supply chains requires some non-traditional thinking in terms of the relationships between an organization and its suppliers. In the extended enterprise model, suppliers and distribution customers become the arms and legs of the product or service provider.

As we move outside the traditional four walls of our own operation it becomes clear that we need the same (or better) levels of planning and communications with key suppliers as we have enjoyed inside the organization, in order to meet or exceed end-customer expectations for cost, lead times, quality, and demand flexibility.

The traditional arms-length, win-lose approach that many companies take with their suppliers will simply not deliver the required results. A more integrated, win-win relationship may be called for. The net effect is that companies will need to take a more sophisticated, and segmented approach to suppliers.

Certainly, there will remain some suppliers with whom a traditional buyer-seller relationship will suffice. However, for more critical commodities and services, higher-level relationships will be required. These could range from conventional preferred supplier agreements to sophisticated, multi-year partnering arrangements with value-added activities included, such as inventory management systems, technical support, and even technology co-development programs.

These special supplier relationships must be built on the basis of shared business goals and mutual trust and respect. They are more complex to put in place and they require proactive management, but they hold the potential for significant competitive advantage if they are managed properly.



Operational Integration

The extended enterprise model requires better operational integration of the value chain than traditional business models normally provide. Information flow is especially critical to the success of the supply chain in order to meet demand flexibility requirements while keeping inventory costs down. Consequently, a well-planned, integrated information system strategy is a critical element. The SCM software industry has gone aggressively after this market requirement and there are two primary types of software products attempting to achieve SCM integration.

Large enterprise resource management providers have seen this market as an opportunity to offer supply chain solutions as part of their enterprise package. The other group of software providers offers dedicated SCM packages that perform functions such as demand forecasting & balancing, inventory management, logistics planning, supply chain optimization, and other features. It is also clear that SCM and lean manufacturing concepts are closely related. In fact, it could be said that SCM is akin to lean manufacturing applied beyond the four walls of our own factory.

Fully integrated suppliers can support a variety of lean manufacturing activities, such as kanban and automatic replenishment systems, vendor-managed inventory systems, and outsourced subassembly operations. A further, logical development of these concepts is the recent rise of third-party logistics (3PL) or lead logistics providers (LLPs) who offer a fully integrated logistics outsourcing approach that can include inventory management, warehousing, freight & transportation, cross-docking, kitting & kanban, and outbound distribution services on an optimized basis.

Supply chain partners are also frequently engaged in technology co-development and new product development activities. In this context, integration of supplier reliability, maintainability, and supportability capabilities into the new product development process becomes a key enabler and should occur in the earliest phases of the product development program.

Key suppliers should be members of the cross-functional product development team in order to best leverage their organizations capabilities to reduce costs and cycle times. In most cases these key suppliers can contribute effective ideas and capabilities for reducing materials costs, design fabrication costs, logistics costs, and manufacturing cycle times.



Potential Impacts on E-Procurement

As they are with many other aspects of business, information technologies and the worldwide web in particular are having an increasing impact on the way operations are conducted. E-procurement gained a significant foothold during the dot-com buildup of the late 1990s; and although the rate of e-procurement penetration into purchasing has not maintained its early predictions, it continues to grow steadily.

The Center for Advanced Purchasing Studies reports that on average, across all U.S. industry categories, companies currently purchase about 9% of their total requirements through EDI arrangements with suppliers and about 4.5% through business-to business (B2B) e-commerce sites on the web [3]. However, these numbers are expected to grow dramatically in the next decade. E-procurement models are still evolving and there are several categories of sites currently doing business on the web. These can generally be classified under the following categories:

• Supplier-hosted web sites (essentially web-based catalogs & ordering)
• Supply-side trade exchanges
• Buyer-side trade exchanges
• Electronic auction sites

These various categories of e-procurement sites provide varying degrees of buyer control balanced against what might be called supplier friendliness. Figure 2 illustrates this spectrum.

Figure 2. B2B E-Procurement Web Site Types (Click to Zoom)
It remains to be seen which models or combination of models will ultimately prevail in the marketplace, but what is clear is that companies are under increasing pressure to realize the potential cost savings inherent in these e-procurement tools.

In a study by the Boston Consulting Group, it was estimated that, on average, manufacturing companies could expect to save 1215% of total cost on materials that were migrated from traditional procurement methods to e-procurement [4]. Such potential savings will place procurement organizations under increasing pressure to expand e-procurement. Use of these tools will undoubtedly grow as a percentage of total purchase dollars.



Conclusions

The concept of high-performance supply chains as a competitive weapon is coming and in fact has already arrived in some industries, such as the automotive industry and the personal computer industry. Without doubt, successful organizations of the future will be operating in an environment of well-integrated supply networks communicating over web-based information systems on a real-time basis. Such organizations will enjoy significant operating cost advantages, reduced cycle times, and improved production flexibility. Many of these supply chain networks can be expected to be global in nature.

The biggest obstacles to achieving optimized supply chain management solutions will likely be overcoming traditional mindsets concerning buyer/supplier relationships and cost-effectively establishing the required information systems networks between different organizations in the chain. Those companies and organizations that succeed in achieving this level of supply chain integration will be richly rewarded. Those that do not will get the crumbs.



References

1.From Peter J. Metz, Demystifying Supply Chain Management, Supply Chain Management Review, Winter,1998.

2. Supply Chain Council, 2000 ( http://www.supply-chain.org ).

3. Center for Advanced Purchasing Studies (CAPS Database), 2002.

4. Boston Consulting Group B2B Study, 2000.