Guide to Supply Chain Management

by David Jacoby

  The shift towards services is changing business models as companies offer pay-for-performance deals. Oilwell drill-bit providers are offering to be paid according to length drilled. Aircraft engine manufacturers are offering power by the hour instead of selling engines for a fixed price. Software providers are now offering software as a service (saas), whereby customers rent the time they use the software rather than purchase the software outright.

  Chief supply chain officers: link supply chain initiatives to corporate strategy

  Senior executives should set the stage for their companies to move to the next stage on the RASCI (rationalisation, synchronisation, customisation, innovation) framework. They should pay particular attention to the following techniques, which are rising in importance:

  Strategic sourcing (currently capable of increasing EVA by up to 8%), which will become more important as global sourcing and international trade become more embedded in everyday commerce.

  Customer knowledge management and customisation, which will become even more vital as more companies move up the supply chain strategy life-cycle from synchronisation to customisation.

  Perfect order fulfilment, which will become more important because most companies do not come close to perfect today.

  Clear anchor players, which will become more important because more supply chains will need public–private partnerships to resolve infrastructural problems, and will require strong leadership to achieve benefits.

  Every day low price (EDLP), which will become more common as retailing along the Wal-Mart model spreads to Asia, in recognition that it is one of the best ways to reduce the bullwhip effect.

  Collaborative and simplified interfaces, which will exert a major influence on supply chain efficiency as data protocols are increasingly standardised and adopted worldwide.

  Concurrent design and engineering, frequent new product development, and early prototyping and supplier involvement, which will figure more largely as product life-cycles continue to shorten and global competition intensifies, and as more companies move from customisation to innovation.

  Other techniques that are not as widespread today will become more important, such as design for the supply chain, as awareness and penetration of SCM work their way back through the chain into design and engineering, and as high energy costs have a greater impact.

  Corporate decision-makers will need help from solution providers, governments and academics to provide IT, physical and intellectual resources to implement these SCM tools and techniques.

  Solution providers: develop new tools for managing data

  The widespread implementation of ERP systems and applications to gather and optimise supply chain operations has led to a proliferation of data. To the extent that the data are shared among supply chain partners, data wealth of new capabilities will emerge, including association of product, supplier and customer data with tactile conditions (movement, light, and so on) and far more precise event history at the pallet, case and item level. This will provide the basis for post-sale tracking and value-added services. The abundance of data even has the potential to generate innovation organically, by providing information to trading partners who can apply their creativity and perspectives to it. It also has the ability to stimulate collaborative selling across trading partner boundaries, and to convert supply chains into supply networks where shared information flows encourage all the parties in a supply chain to collaborate for mutual gain. Over time, this could result in a common language for addressing supply chain issues and more standardisation of components and information, which will itself yield economic benefits.

  The potential is not lost on MIT’S research laboratories. Ultimately, the vast amount of information and the benefits of sharing it could result in a different organisation method and even a different way of organising our thinking process. Stephen Miles, a research engineer at MIT’S Auto-ID Labs, explains:

  We’re moving towards a world where operations are network-centric. There used to be vertical silos, [but in the future we’ll] have horizontal businesses that can integrate with each other.

  The ability to manage data and information will be a key determinant of shareholder value in the future, as hard assets will decrease in importance (see Figure 13.1). Accordingly, the tools to manage this information flow will become vital competitive advantages in SCM. Companies that apply these tools effectively will have a competitive advantage by delivering better service (matching organisation of resources to demand, segmenting and prioritising orders, and customising product and service delivery); by launching products more frequently and faster; and by increasing margins through rapid response, postponement and dynamic pricing. They will apply the same information to reduce costs through lean manufacturing and lean distribution, inventory management, supplier partnering, cross-docking and fleet rationalisation, quality management and e-procurement.

  Figure 13.1 Information assets and shareholder value

  Source: Boston Strategies International

  Governments: ensure adequate physical infrastructure

  The march towards more efficient supply chains presupposes an infrastructure that can support inventory movement as fast as companies can make it move. Unfortunately, bottlenecks and unreliable connections are causing shippers to hold more inventory than in the past, jeopardising years of efforts to create lean supply chains. A recent study by the US Chamber of Commerce uncovered deficiencies in all modes:6

  Gridlock on major metropolitan roads during peak travel hours is adding costs to the operations of trucking firms in terms of time and the operational expenses (e.g. fuel consumption, vehicle wear and tear, driver costs) of sitting in traffic. Rail freight is operating at capacity, leading to congestion on major corridors and gridlock in and near major rail hubs and ports. Increased private capital investment may not be able to meet future needs without public investment. Ports are constrained by channel depth, which limits the size of ships that can call. The largest of the modern megacontainerships and tankers can be accommodated at only a limited number of US ports, for example. Severe congestion in major airports ripples through the air traffic system, causing delays nationwide. These capacity problems are caused by both airside and landside traffic bottlenecks. Investment in new airports is lagging.

  The infrastructure gap will force more public–private collaboration. This will take three forms: private investment, public policy and shared public and private infrastructure investment. Public and public–private partnerships in large investments will fill the gap. Although physical infrastructure investments have historically come from the public sector – most bridges and tunnels were built with purely public financing – recent investments are relying increasingly on co-operative investment between the private and the public sectors. The volume of investment supported by the Multilateral Investment Guarantee Agency (MIGA), which guarantees private-sector investment to facilitate growth in developing countries, has more than tripled since 2003.7 Intelligent transportation networks, which use information technology to determine optimal routing and operation of vehicles, have attracted research grants but need to be stepped up in order to have an impact on supply chains.

  What can be done? Private shippers can only do so much to restructure their networks and improve their processes. BNSF has lengthened its trains departing from US West Coast ports and simplified their make-up by reducing the number of destinations on each to preferably just one, in order to improve the capacity, velocity and consistency of its service. Public policy will tend towards more congestion pricing, for example greater use of night and weekend deliveries. The PierPASS programme at the port of Los Angeles is alleviating congestion by shifting demand to nights and weekends. Just as companies have recognised that transportation is only one link in SCM, so should governments, which may want to consider renaming their departments of transportation as departments of supply chain.

  As part of the movement towards the supply chain, government agencies responsib
le for transportation investment decisions should incorporate collective benefits and supply chain effects in their decision-making. This will involve identifying and reviewing high-cost and high-profile investments that are especially likely to generate supply chain benefits, and working with private-sector companies to agree on economically sound bases for quantifying and sharing their costs and benefits.

  Academics: link SCM concepts to system dynamics to dampen business cycles

  While business leaders are developing the tools and technology to manage supply chains through space (in particular, inventory collaboration, waste elimination and data exchange), researchers and economists need to be working on managing supply chains through time by eliminating the bullwhip effect in capital investment, capacity investment and pricing.

  Economies oscillate over the short and the longer term according to the business cycle, which hits peaks and troughs every 3–10 years and is driven in part by production and inventory cycles, but also by factors such as levels of demand and available finance and social and political events. Production-inventory lags, which vary directly with supply chain management practices, are a major cause and aggravator of business cycles. Economists have proposed various theories to explain business cycles, including the lag between changes in demand and changes in production due to inventory buffers, multipliers and accelerators (people spend the money some time after they earn it, and withhold from spending for some time after the good times return), monetary and fiscal policies, and external shocks like wars. Jay Forrester’s simulations using the National Model show that the business cycle can be flattened and the length between peaks reduced considerably by reducing or eliminating these lags.9

  Academics, consultants and policymakers can help minimise cycles by highlighting early indications of gaps between supply and demand, thereby allowing decision-makers to make informed investment decisions and avoid overinvesting, overacquiring and overpaying at the peak. Accurate and timely information on industry-specific trends in lead times, productivity, capacity utilisation and similar metrics can help signal potential inflection points. Therefore, these relationships should be measured, modelled and forecasted and the results disseminated to private- and public-sector policymakers.

  The benefits of improving supply chains are directly linked to macro-economic performance and national competitive advantage. This connection is likely to ensure a long-lasting focus on improving the state of supply chain management.

  Notes and references

  Introduction

  1 Kransdorf, Arnold, “High Stock Levels – not the Answer to Volatile Demand”, Financial Times, June 4th 1982, p. 16.

  2 CSCMPS’ definition of SCM is: “Supply chain management encompasses 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 Characteristic of the evolution, the American Production and Inventory Control Society, a manufacturing-focused operations management group, rebranded itself – first, as the Educational Society for Resource Management, and later as the Association for Operations Management – after 47 years because production was increasingly becoming viewed as only one function of an extended supply chain.

  4 Handfield, Robert and Nichols, Ernest, Supply Chain Redesign: Transforming Supply Chains into Integrated Value Systems, Financial Times/Prentice Hall, define supply chain management as: “Supply chain management is the integration and management of supply chain organizations through cooperative organizational relationships, effective business processes, and high levels of information sharing to create high-performing value systems that provide member organizations a sustainable competitive advantage.” (2002)

  5 Christopher, Martin, in Logistics and Supply Chain Management, Irwin, defines supply chain management as follows: “Logistics is essentially a planning orientation and framework that seeks to create a single plan for the flow of product and information through a business. Supply chain management builds upon this framework and seeks to achieve linkage and co-ordination between the processes of other entities in the pipeline, i.e., suppliers and customers, and the organization itself,! … The management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole.” (2005)

  6 For instance, Mandyam Srinivasan, a professor at the University of Tennessee, as quoted in David Blanchard, Supply Chain Management Best Practices, John Wiley & Sons, 2007, lists 14 guiding principles for lean supply chains.

  7 For example, Blanchard, David: “top-performing companies have top-performing people working for them. That’s the competitive advantage supply chain professionals offer.” Blanchard, op. cit., p. 276.

  1 A historical perspective on trade and transport

  1 A new edition of Greene, James H., Production and Inventory Control Handbook, McGraw-Hill, first published in 1970, was published in 1997.

  2 Lieb, Robert C., Labor in the Transportation Industries, Praeger, 1974.

  3 Lambert, Douglas and Stock, James, Strategic Logistics Management, Irwin, 1993.

  4 Charlene Barshefsky, US trade representative, in a speech on US-China Trade Relations at the Economic Club of Washington, Washington, DC, March 16th 2000.

  5 Boston Strategies International analysis of Economist Intelligence Unit WorldData. WorldData combines the economic and industry forecasts of the EIU with updates throughout the day from EcoWin.

  6 Data from Shanghai International Port Group (SIPG) website, 2009.

  7 Container Security Initiative (CSI) Fact Sheet, US Department of Homeland Security, March 29th 2006.

  8 The beer game has been passed on in folklore style through repetitive replaying. Those desiring to learn more about Jay Wright Forrester’s contributions to the field of system dynamics may want to read his Industrial Dynamics (Pegasus Publishing, 1961) or consult the System Dynamics Review. Copies of the “beer game” board are available through the System Dynamics Society.

  9 These examples are described in more detail in “Freight Transportation Bottom Line Report: Freight Transportation Demand and Logistics,” prepared by Cambridge Systematics for the American Association of State Highway and Transportation Officials (AASHTO), Washington, DC, forthcoming, 2009.

  10 Hickey, Kathleen, “Retailers: Starting to Get it Right – at the Store Level”, Global Logistics and Supply Chain Strategies, April 2005, p. 56.

  11 Source: Thelwell, David and Ritson, Christopher, “The International Competitiveness of the UK Cereals Sector”, paper prepared for presentation at the 98th EAAE Seminar, “Marketing Dynamics within the Global Trading System: New Perspectives”, Chania, Crete, June 29th–July 2nd 2006.

  2 The bullwhip problem

  1 By Kurt Salmon Associates (KSA), cited in Poirier, Charles C. and Reiter, Stephen E., Supply Chain Optimization: Building the Strongest Total Business Network, Berrett-Koehler, 1996.

  2 “Tesco’s Supply Chain Management Practices”, ICMR India. Available online at: http://www.icmrindia.org/casestudies/catalogue/Operations/Tesco%20Supply%20Chain%20Management%20Practices.htm (accessed January 22nd 2009).

  3 Cecere, Lora, Newmark, Eric and Hoffman, Debra, “How Do I Know That I Have a Good Forecast?”, AMR Research Report, January 2005, p. 9.

  4 Ouyang, Yanfeng, “Taming the Bullwhip Effect: from Traffic to Supply Chains”, in Carranza Torres, Octavio A. and Moran, Felipe Villegas, The Bullwhip Effect in Supply Chains: A Review of Methods, Components and Cases, Palgrave Macmillan, 2006, p. 123.

  5 Lee, Hau, “The Bullwhip Effect: Reflections”, in Carranza Torres and Moran, op. cit., p. 2.

  6 Sterman, John, “Operational and Behavioral Causes of Supply Chain Instability,” in Carranza Tor
res and Moran, op. cit. Figures 2.1 and 2.2 are based on similar graphs presented in Sterman’s chapter, although they were constructed independently using data from the US Federal Reserve.

  7 Lee, op. cit., p. 2

  8 J.S. Thomsen and John Sterman modelled tens of thousands of iterations of the beer game and identified chaotic patterns. See Thomsen, J.S., Mosekilde, E. and Sterman, J., “Hyperchaotic Phenomena in Dynamic Decision-Making”, Journal of Systems Analysis and Modelling Simulation (SAMS), 1992, Vol. 9, pp. 137–56.

  9 This synopsis is based on a case study provided by Hau Lee and Seungjin Whang in “The Bullwhip Effect: A Review of Field Studies”, in Carranza Torres and Moran, op. cit.

  10 From a presentation by David McGowan (vice-president of World Wide Security Services for Tiffany & Co) to the International Air Transport Association (IATA), Rome, March 2008.

  11 Based on a December 2007 interview with Gary Maring, Cambridge Systematics.

  12 Based on the author’s analysis of trade and economic data from Global Insight, 2009.

  13 Based on the author’s analysis of trade and economic data from the Economist Intelligence Unit WorldData, 2009.

  14 Based on the author’s analysis of trade and economic data from the US Bureau of the Census foreign trade statistics, 2009.

  3 What supply chain management is and where it is going

  1 “The Emerging Supply Chain Management Profession”, Supply Chain Management Review, February 2006.