A supply chain is a global network of organizations and activities involved in:

SUPPLY CHAIN MANAGEMENT SYSTEMS

Today�s competitive business environment calls for companies to pay much more attention to how they manage their supply chains. Customers are insisting on greater value, faster order fulfillment, and more responsive service when they make purchases. Shorter product life cycles, global sourcing, and greater product variety have increased supply chain costs and complexity. The value chains of so many businesses are linked together that competitive advantage may be based on entire supply chains rather than individual firms. Supply chain management (SCM) today is not limited to order fulfillment but is tied to such strategic issues as the ability to create and deliver new products or to create and implement new business models (Kopczak and Johnson, 2003).

The Supply Chain

Supply chain management refers to the close linkage and coordination of activities involved in buying, making, and moving a product. It integrates business processes to speed information, product, and fund flows up and down a supply chain to reduce time, redundant effort, and inventory costs.

           The supply chain is a network of organizations and business processes for procuring raw materials, transforming these materials into intermediate and finished products, and distributing the finished products to customers. It links suppliers, manufacturing plants, distribution centers, retail outlets, and customers to supply goods and services from source through consumption. Materials, information, and payments flow through the supply chain in both directions. Goods start out as raw materials and move through logistics and production systems until they reach customers. Returned items flow in the reverse direction from the buyer back to the seller.

           Figure 11-3 provides a simplified illustration of a supply chain, showing the flow of information and material among suppliers, manufacturers, distributors, retailers, and customers. The upstream portion of the supply chain includes the organization�s suppliers and their suppliers and the processes for managing relationships with them. The downstream portion consists of the organizations and processes for distributing and delivering products to the final customers. The manufacturer also manages internal supply chain processes for transforming the materials, components, and services furnished by suppliers into finished goods and for managing materials and inventory.

FIGURE 11-3 A supply chain
This figure illustrates the major entities in the supply chain and the flow of information upstream and downstream to coordinate the activities involved in buying, making, and moving a product. The wide arrows show the flow of materials between supply chain members, and the dotted line and arrows show the flow of information. Suppliers transform raw materials into intermediate products or components, and then manufacturers turn them into finished products. The products are shipped to distribution centers and from there to retailers and customers.

           The supply chain illustrated in Figure 11-3 has been simplified. Most supply chains, especially those for large manufacturers such as automakers, are multitiered, with many thousands of primary (Tier 1), secondary (Tier 2), and tertiary (Tier 3) suppliers. DaimlerChrysler, for instance, has more than 20,000 suppliers of parts, packaging, and technology. Its primary suppliers are its principal suppliers, which furnish chassis, engines, and other major automotive components. These suppliers have their own suppliers (secondary suppliers), who in turn may have their own set of suppliers (tertiary suppliers.)

SUPPLY CHAIN PROCESSES

Many processes and subprocesses are involved in managing the supply chain to expedite this flow of information and materials. The Supply Chain Council (SCC) developed a Supply Chain Operations Reference Model (SCOR) as a cross-industry process reference model for supply chain management. (SCC members are organizations interested in applying and advancing state-of-the-art supply chain management systems and practices.) SCOR defines a common set of supply chain processes to help companies better understand supply chain management issues and set goals for supply chain improvement. SCOR identifies five major supply chain processes: plan, source, make, deliver, and return (see Figure 11-4).

FIGURE 11-4 Key supply chain management processes
The five supply chain management processes consist of many subprocesses performed by members of the supply chain.

Plan: Consists of processes that balance aggregate demand and supply to develop a course of action to meet sourcing, production, and delivery requirements

Source: Consists of processes that procure goods and services needed to create a specific product or service

Make: Consists of processes that transform a product into a finished state to meet planned or actual demand

Deliver: Consists of processes that provide finished goods and services to meet actual or planned demand, including order management, transportation management, and distribution management

Return: Consists of processes associated with returning products or receiving returned products, including postdelivery customer support

           To manage the supply chain, a company tries to eliminate redundant steps, delays, and the amount of resources tied up along the way as it manages relationships with other supply chain members. Information systems make supply chain management more efficient by providing information to help companies coordinate, schedule, and control procurement, production, inventory management, and delivery of products and services.

Inefficiencies in the supply chain, such as parts shortages, underutilized plant capacity, excessive finished goods inventory, or runaway transportation costs, are caused by inaccurate or untimely information. For example, manufacturers may keep too many parts in inventory because they do not know exactly when they will receive their next shipment from their suppliers. Suppliers may order too few raw materials because they do not have precise information on demand. These supply chain inefficiencies can waste as much as 25 percent of a company�s operating costs.

           If a manufacturer had perfect information about exactly how many units of product customers wanted, when they wanted them, and when they could be produced, it would be possible to implement a highly efficient just-in-time strategy. Components would arrive exactly at the moment they were needed and finished goods would be shipped as they left the assembly line.

           In a supply chain, however, uncertainties arise because many events cannot be foreseen �uncertain product demand, late shipments from suppliers, defective parts or raw material, or production process breakdowns. To satisfy customers, manufacturers often deal with such uncertainties and unforeseen events by keeping more material or products in inventory than what they think they may actually need. The safety stock acts as a buffer for the lack of flexibility in the supply chain. Although excess inventory is expensive, low fill rates are also costly because business may be lost from canceled orders.

           One recurring problem in supply chain management is the bullwhip effect, in which information about the demand for a product gets distorted as it passes from one entity to the next across the supply chain (Lee, Padmanabhan, and Wang, 1997). A slight rise in demand for an item might cause different members in the supply chain�distributors, manufacturers, suppliers, secondary suppliers (suppliers� suppliers), and tertiary suppliers (suppliers� suppliers� suppliers)�to stockpile inventory so each has enough �just in case.� These changes ripple throughout the supply chain, magnifying what started out as a small change from planned orders, creating excess inventory, production, warehousing, and shipping costs (see Figure 11-5).

FIGURE 11-5 The bullwhip effect
Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves further back in the supply chain. Minor fluctuations in retail sales for a product can create excess inventory for distributors, manufacturers, and suppliers.

           The bullwhip can be tamed by reducing uncertainties about demand and supply when all members of the supply chain have accurate and up-to-date information. If all members of the supply chain could share dynamic information about inventory levels, schedules, forecasts, and shipments, they would have a more precise idea of how to adjust their sourcing, manufacturing, and distribution plans. Supply chain management systems provide the kind of information that can help members of the supply chain make better purchasing and scheduling decisions.

Internet Connection

The Internet Connection for this chapter will take you to a series of Web sites where you can complete an exercise to evaluate supply chain management software.

The central objective of supply chain management systems is information visibility�open and rapid communication and information sharing between members of the supply chain. Correct movement of accurate information makes it possible to time orders, shipments, and production properly to minimize stocking levels and expedite deliveries to customers. Supply chain management systems automate the flow of information between a company and its supply chain partners so they can make better decisions to optimize their performance.

           In essence, supply chain software can be classified as either software to help businesses plan their supply chains (supply chain planning) or software to help them execute the supply chain steps (supply chain execution). Supply chain planning systems enable the firm to generate demand forecasts for a product and to develop sourcing and manufacturing plans for that product. Such systems help companies make better operating decisions, such as determining how much of a specific product to manufacture in a given time period; establishing inventory levels for raw materials, intermediate products, and finished goods; determining where to store finished goods; and identifying the transportation mode to use for product delivery.

           For example, if a large customer places a larger order than usual or changes that order on short notice, it can have a widespread impact throughout the supply chain. Additional raw materials or a different mix of raw materials may need to be ordered from suppliers. Manufacturing may have to change job scheduling. A transportation carrier may have to reschedule deliveries. Supply chain planning software makes the necessary adjustments to production and distribution plans. Information about changes is shared among the relevant supply chain members so that their work can be coordinated. One of the most important�and complex�supply chain planning functions is demand planning, which determines how much product a business needs to make to satisfy all of its customers� demands.

           Supply chain execution systems manage the flow of products through distribution centers and warehouses to ensure that products are delivered to the right locations in the most efficient manner. They track the physical status of goods, the management of materials, warehouse and transportation operations, and financial information involving all parties. Table 11-2 provides more details on supply chain planning and execution systems.

TABLE 11-2 Supply Chain Planning and Execution Systems

Companies need to be able to measure the performance of their supply chain management efforts using objective performance information. A number of metrics can be used to evaluate the performance of supply chain processes, and supply chain management systems can provide the data for them. A metric is a standard measurement of performance. Important metrics for measuring supply chain performance include the fill rate (the ability to fill orders by the due date), the average time from order to delivery, the number of days of supply in inventory, forecast accuracy, and the cycle time for sourcing and making a product. (Cycle time is the total elapsed time to complete a business process.)

           Companies may not necessarily excel in all these areas, but management should choose the operations that are most critical for the success of the firm and focus on metrics that measure their performance. Although large software vendors have tools for automating many of the most important supply chain processes, no software package or set of tools does everything. The specific supply chain management objectives for each company should determine which supply chain management package or set of software tools to use.

In the pre-Internet environment, supply chain coordination was hampered by the difficulties of making information flow smoothly among disparate internal supply chain systems for purchasing, materials management, manufacturing, and distribution. It was also difficult to share information with external supply chain partners because the systems of suppliers, distributors, or logistics providers were based on incompatible technology platforms and standards. Enterprise systems could supply some integration of internal supply chain processes but they were not designed to deal with external supply chain processes.

PeopleSoft Demand Forecasting software enables users to create forecasts based on statistical analyses of demand history, causal factors such as promotional events and new product introductions, and input from other members of the organization or trading partners.

FIGURE 11-6 Intranets and extranets for supply chain management
Intranets can be used to integrate information from isolated business processes within the firm to help them manage their internal supply chains. Access to these private intranets can also be extended to authorized suppliers, distributors, logistics services, and, sometimes, to retail customers to improve coordination of external supply chain processes.

PeopleSoft Supply Planning software enables users to view ongoing material requirements and available capacity data to help quickly identify potential shortages or capacity issues and respond in a timely manner.

As more and more companies outsource manufacturing operations, obtain supplies from other countries, and sell abroad, they must operate supply chains extending across multiple countries and regions. Global supply chains typically span greater geographic distances and time differences than domestic supply chains, with participants from many different countries. The Internet provides a standard set of tools that can be used by companies all over the world to coordinate overseas sourcing, transportation, communications, financing, and compliance with customs regulations.

DEMAND-DRIVEN SUPPLY CHAINS: FROM PUSH TO PULL MANUFACTURING AND EFFICIENT CUSTOMER RESPONSE

Internet-based supply chain management applications are clearly changing the way businesses work internally and with each other. In addition to reducing costs, these supply chain management systems facilitate efficient customer response, enabling the workings of the business to be driven more by customer demand. (Efficient customer response systems were introduced in Chapter 3.)

           Earlier supply chain management systems were driven by a push-based model (also known as build-to-stock). In a push-based model, production master schedules are based on forecasts or best guesses of demand for products, and products are �pushed� to customers. With new flows of information made possible by Web-based tools, supply chain management can more easily follow a pull-based model. In a pull-based model, also known as a demand-driven model or build-to-order, actual customer orders or purchases trigger events in the supply chain. Transactions to produce and deliver only what customers have ordered move up the supply chain from retailers to distributors to manufacturers and eventually to suppliers. Only products to fulfill these orders move back down the scaupply chain to the retailer. Manufacturers would use only actual order demand information to drive their production schedules and the procurement of components or raw materials, as illustrated in Figure 11-7. Wal-Mart�s continuous replenishment system and Dell Computer�s build-to-order system, both described in Chapter 3, are examples of the pull-based model.

FIGURE 11-7 Push- versus pull-based supply chain models
The difference between pushand pull-based models is summarized by the slogan �Make what we sell, not sell what we make.�

FIGURE 11-8 The future Internet-driven supply chain
The future Internet-driven supply chain operates like a digital logistics nervous system. It provides multidirectional communication among firms, networks of firms, and e-marketplaces so that entire networks of supply chain partners can immediately adjust inventories, orders, and capacities.

Supply chain management systems enable firms to streamline both their internal and external supply chain processes and provide management with more accurate information about what to produce, store, and move. By implementing a networked and integrated supply chain management system, companies can match supply to demand, reduce inventory levels, improve delivery service, speed product time to market, and use assets more effectively. Companies that excel in supply chain management have been found to produce higher rates of growth in their market value than the average for their industries (D�Avanzo, von Lewinski, and Van Wassenhove, 2003). Effective supply chain management systems enhance organizational performance in the following areas:

1. Improved customer service and responsiveness. If a product is not available when a customer wants it, that customer will likely try to purchase it from someone else. Having the right product at the right place at the right time will increase sales.

2. Cost reduction. Supply chain management helps companies contain, and often reduce, some or all of the costs associated with moving a product through the supply chain. These costs include material acquisition, inventory carrying, transportation, and planning costs. (Inventory carrying costs may amount to 30 or 40 percent of the value of the entire inventory.) Total supply chain costs represent the majority of operating expenses for many businesses and in some industries approach 75 percent of the total operating budget (Handfield, 1999). Reducing supply chain costs can thus have a major impact on firm profitability.

3. Cash utilization. The sooner a company delivers a product, the sooner that company will get paid. Companies leading in supply chain efficiency have cash available two to three months faster than companies that do not have this capability.

What is a global network of organizations and activities?

What is a global network of organizations and activities that supply a firm with goods and services *?

What are the activities involved in supply chain operations?

What is a global network of organizations and activities that supply a firm with goods and services to support the firm's creation of customer satisfaction?