Guide to Supply Chain Management

by David Jacoby

  5 Parts of this section are adapted from Boston Strategies International’s report to NYCHA (“Evaluation of the Cost-Effectiveness of NYCHA’S Supply Chain Operation Department’s Central Warehousing Practices”, November 2006).

  6 This section has been adapted from the author’s article “Perfecting Your Supply Chain”, Parcel Magazine, February 2008.

  7 Maccoby, Michael, “Learning to Partner and Partnering to Learn”, Research Technology Management, 40(3), May–June 1997, pp. 55–7.

  11 Information technology

  1 Mansfield, Edwin, Economics: Principles, Problems, Decisions, W.W. Norton, 1980.

  2 Porter, Michael, The Competitive Advantage of Nations, The Free Press, 1990.

  3 “Importacao transforma setor de autopecas”, O Estado de Sao Paulo, August 20th 1991, p. 20; “So Vai para a Frente Quem Enfrenta Desafios”, Exame, July 11th 1990; “Hora e a Vez do Comprador”, Exame Melhores e Maiores, August 1990; “O Pais Chegou Aos 20 Milhoes”, Brazil em Exame, 1990.

  4 “A New Era of Ports and Terminal Management”, C.M. Lee, chairman and CEO, Bangkok Ports and Shipping conference, September 2007.

  12 Measuring success

  1 The source for the historical benchmark is Greene, James H., Production and Inventory Control Handbook, McGraw-Hill, 1970. Note that inventory turnover is also expressed as the inverse ratio (inventory to sales ratio). A high inventory turnover is a low inventory to sales ratio.

  2 Lean accounting is based on the concept that standard costing encourages overproduction. Since manufacturing operations are measured on profitability as measured by standard costs, they look profitable when they overproduce because they get revenue credit for production, even if the product is never sold to a customer. This issue is resolved by improvements in costing, specifically the replacement of direct labour with activity-based costs (ABC), including overhead allocations.

  3 SCOR metrics are detailed in Hugos, op. cit. The SCOR level 1 metric areas are: plan (demand forecasts, product pricing and inventory management; source (procurement, credit and collection); make (product design, production scheduling and facility management); and deliver (order management, delivery scheduling and return processing).

  4 EVA is a registered trademark by its developer, Stern Stewart & Co. Some have proposed the use of market capitalisation, but this includes so many other variables that the link to the supply chain is lost. For example, a 2003 study co-sponsored by Accenture, INSEAD and Stanford showed that supply chain leaders have a market cap up to 26% higher than other firms. However, based on this correlation it is hard to know whether the SCM practices led to the higher market capitalisation or vice versa.

  5 Christopher, Martin, Logistics and Supply Chain Management: Creating Value-Adding Networks, Financial Times/Prentice Hall, 2005.

  6 Black belt is a rank in Six Sigma programmes, similar to the ranks awarded in karate.

  7 Economist Intelligence Unit, The New Face of Purchasing, 2005.

  8 Based on a presentation by Alan Milliken at the 2003 APICS International Conference and Exposition in Las Vegas entitled “How to Implement Supply Chain Performance Measurement”.

  9 “L’Oreal: High Performance Delivered”, Accenture. Available online at: https://www.supplychainservices.accenture.com/web/public/client_successes/loreal.htm (accessed January 22nd 2009).

  13 Challenges for the future

  1 “How Will Western Manufacturers Survive? The Art of High-Cost Country Sourcing”, Boston Strategies International, 2008.

  2 “Benchmarking Your Supply Chain Savings”, Boston Strategies International, 2007 webcast.

  3 Interview with the author, July 2007.

  4 “Saudi Private Sector Companies Strive for Excellence”, online newsletter of the Saudi Arabian Embassy. See: http://saudiembassy.net/Publications/MagWinter96/private.html (accessed January 12th 2009).

  5 http://finance.people.com.cn/GB/8254179.html (accessed January 12th 2009).

  6 Paraphrased from “The Transportation Challenge”, National Chamber Foundation, 2008, with permission from the National Chamber Foundation and the US Chamber of Commerce.

  7 World Bank, “Private Participation in Infrastructure (PPI)”, Database.

  8 System Dynamics Society, The National Model, a videotaped conversation between Jay Forrester and MIT doctoral students, 1999.

  9 Ibid.

  Appendix 1 A brief history of supply chain thought

  1 Greene, op. cit., pp. 30–45.

  2 For example, Edward Frazelle in Supply Chain Strategy: The Logistics of Supply Chain Management, McGraw-Hill, 2001. CSCMP expanded the definition of logistics to: “that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverses flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements.” And specified its “boundaries and relationships” as follows: “Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfillment, logistics network design, inventory management, supply/demand planning, and management of third party logistics services providers. To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. It is involved in all levels of planning and execution – strategic, operational and tactical. Logistics management is an integrating function, which coordinates and optimizes all logistics activities, as well as integrates logistics activities with other functions including marketing, sales manufacturing, finance, and information technology.” Available online at: www.cscmp.org/aboutcscmp/definitions.asp (accessed January 4th 2009).

  3 Porter, Michael, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, 1980.

  4 Lambert and Stock, op. cit.

  5 Cohen and Roussel, op. cit.

  6 Hammer, Michael and Champy, James, Reengineering the Corporation: A Manifesto for Business Revolution, HarperCollins, 1993.

  7 Poirier, Charles C. and Tokarz, Steven J., Avoiding the Pitfalls of Total Quality, ASQ Quality Press, 1996.

  8 Ross, David, Competing Through Supply Chain Management: Creating Market-Winning Strategies through Supply Chain Partnerships, Chapman and Hall, 1998.

  9 Poirier, Charles, Using Models to Improve the Supply Chain, St Lucie Press, 2004.

  10 “The Sinking of Bethlehem Steel: A hundred years ago one of the 500’s legendary names was born. Its decline and ultimate death took nearly half that long”, A Fortune autopsy. CNN Money. com, April 5th 2004. Available online at: http://money.cnn.com/magazines/fortune/fortune_archive/2004/04/05/366339/index.htm (accessed August 8th 2008).

  Appendix 2 Strategic sourcing techniques based on supplier competition

  1 “Tesco’s international sourcing – the machine behind the machine,” Daily Telegraph. Available online at: www.telegraph.co.uk/finance/newsbysector/retailandconsumer/4788156/Tescos-International-Sourcing---the-machine-behind-the-machine.html (accessed February 24th 2009).

  2 Christopher, op. cit, pp. 226–8.

  3 Hannon, David, “GSK closes the Loop Using E-sourcing Tools”, Purchasing, June 3rd 2004.

  4 Most of the literature on the impact of auctions on buyer–supplier relationships is qualitative and subjective. For an empirical study, see Pearcy, Dawn, Giunipero, Larry and Wilson, Andrew, “A Model of Relational Governance in Reverse Auctions”, Journal of Supply Chain Management, Winter 2007, pp. 4–15.

  Appendix 1

  A brief history of supply chain thought

  Early attempts to solve the demand-supply balancing problem focused primarily on reducing or eliminating the supply-demand imbalances that could be optimised with mathematical algorithms such as the optimal economic order quantity (EOQ). Early efforts were rooted in movements such as operations research (OR), total quality management (TQM), business process re-engineering
(BPR), lean manufacturing and e-commerce.

  The underlying bodies of knowledge

  Operations research (OR), which became a standard discipline in business schools in the 1930s, laid the groundwork for SCM by offering algorithms that optimised transportation operations. The most famous OR problem is the travelling salesman, which is used to demonstrate a least-cost routing algorithm for a vehicle or person needing to make many deliveries. Linear programmes (LP) were so useful in solving problems based on an objective statement and multiple constraints that they became widely used across the OR field. Other useful OR tools were simulations (which relied on probabilistic scenarios), optimisations and stratifications (such as ABC inventory classifications, described in Chapter 7). However, as late as 1970, only 8–9% of logistics practitioners used LP for production or inventory management, and only 8–10% used simulation or probability theory.1

  SCM developed rapidly after 1990, taking its influence from logistics management, value chain management, benchmarking, process re-engineering and best practices.

  Logistics management

  Historically, most people viewed logistics as a department that managed transportation and warehousing. As awareness and measurement of inventory increased, the boundaries of logistics expanded to cover inventory planning, forecasting and replenishment methods. When it became evident that poor service quality resulted in customer complaints, customer service was included. Some included supply in their view of logistics,2 which usually encompassed transactional purchasing activities such as purchase order processing, buying and payment, and supplier inventory co-ordination.

  The classic logistics model is shown graphically in Figure 1. Logistical thought and logistics organisations make an essential contribution to effective SCM by creating competitive advantage through pull-based demand-driven flow.

  Figure 1 The value chain model: channels of distribution for consumer goods

  Note: A manufacturer’s branch is owned by the manufacturer.

  Source: Lambert, Douglas and Stock, James, Strategic Logistics Management, Irwin, 1993

  Retailers such as Monoprix in France reconfigured their logistics networks to improve service levels while reducing inventory by setting up differentiated supply chains. Some warehouses handled only fast-moving goods, while others handled slow movers or heavy products like liquids. They also experimented with cross-docking and direct-to-store delivery that bypassed distribution centres. In the United States, retailers reduced the number of warehouses in their networks in order to benefit from risk pooling by centralising inventory, and numerous consumer products companies conducted best-in-class logistics benchmarks, aiming to improve their service levels and lower costs.

  The classic view of logistics included the following areas:

  transportation;

  network design;

  shipment and carrier management;

  fleet management;

  warehousing;

  put-away;

  picking;

  packing;

  inventory planning and control;

  forecasting;

  reorder processing;

  customer service;

  order entry and processing;

  invoicing and collections.

  Value chain management

  Value chain thinking can be viewed as the first precursor of integrated supply chain theory. Michael Porter, a professor at Harvard University, popularised the value chain as a basic management concept in Competitive Strategy.3 “Value chain” was a relatively simple way of defining a supply chain. Value chain concepts, which became popular in academia in the late 1980s, started being widely applied in corporations in the 1990s. Retailers and consumer packaged goods (CPG) companies in particular started analysing how they could cut costs, layers and cycle time from the heavily intermediated distribution chain. In 1993 Douglas Lambert, a professor at Ohio State University, and James Stock4 used flow charts and relational maps to show how the processes fit together in sequence as well as in a vertical hierarchy. At this point, more of the flow diagrams began to include procurement, but few touched marketing, engineering or production. Most still indicated that the departments pushed material through the supply chain rather than pulled it.

  The plan-source-make-deliver framework

  Benchmarking became very popular in the 1990s, and consultants led initiatives worldwide to compare organisations and identify best-in-industry, best-in-class and best-in-world performance.

  The supply chain operations reference model (SCOR), developed from 1994 to 1996, is a multi-company benchmarking effort that popularised a four-step view of supply chains. The four steps – plan-source-make-deliver – and benchmark performance levels that went along with them became central to the thought of the Supply Chain Council. The plan-source-make-deliver framework was a convenient way of capturing all the activities included in SCM, but since it mirrored the traditional functions (loosely, plan = logistics, source = purchasing, make = production, deliver = transportation), many companies just used (and still use) the framework to benchmark traditional functional performance. Nonetheless, Shoshana Cohen and Joseph Roussel’s book Strategic Supply Chain Management made the purpose and elements of SCM clearer.5 Specifically, their work and the work of the Supply Chain Council clarified the linkage between supply chain management and business strategy, which is reflected in some of the frameworks put forward in this book.

  Process re-engineering and change management

  Process re-engineering, which was popularised by Michael Hammer and James Champy in Reengineering the Corporation,6 addressed supply chain opportunities by recognising that most of its activities were fragmented in different functional departments of organisations. It exposed the opportunity to redesign corporations around processes rather than functions, with fantastic improvements in cycle times, performance levels and ultimately customer service. Many of these opportunities were found in operations, where gaps existed between departments that shared a common end goal but never talked to each other since they were organised in stovepipe fashion. Some of the ripest opportunities occurred across multiple adjacent organisations in the same value chain; this was analogous to the process re-engineering opportunities that existed inside the companies themselves.

  The mid-1990s saw extensive business process re-engineering (BPR), and SCM received its share of BPR attention. In the throes of the re-engineering movement, Charles Poirier and Steven Tokarz7 acknowledged the importance of organisational change to the success of SCM by placing “co-operative synergies” at the centre of a radial depiction of a variety of aspects of SCM, as seen in Figure 2.

  Figure 2 Collaboration at the centre of it all

  Source: Poirier, Charles C. and Tokarz, Steven J., Avoiding the Pitfalls of Total Quality, ASQ Quality Press, 1996

  Best practices

  Throughout the 1990s, “best practices” thinking pervaded SCM. Robert Handfield (see note 4 on page 211) merged many of the previous concepts into one schema that showed a value-stream flow with best practices overlaid (see Figure 3). A map showing the value chain from suppliers to customers identified relevant best practices such as volume leveraging, design for manufacturing, and global sourcing.

  Figure 3 Early attempts at mapping best practices to value chain activities

  Source: Handfield, Robert and Nichols, Ernest, Supply Chain Redesign: Transforming Supply Chains into Integrated Value Systems, Prentice Hall, 2002

  Similarly, but in more depth, Lambert mapped every functional integration and leverage point involved in SCM, showing the contribution that each function could make to supply chain advantage by honing its best practices (see Figure 4 overleaf).

  Figure 4 Each function’s contribution to supply chain management

  By 2004, the concept was becoming very elaborate, but an increasing amount of descriptive detail was making it harder for practitioners to maintain a common understanding on the central purpose of SCM.

  The emergence of supply
chain strategy

  Around 2005, academics were helping to clarify what exactly it was about SCM that contributed strategic advantage to the company above and beyond what excellence in each individual function could contribute. As David Ross explained: 8

  SCM is about accelerating delivery times and reducing costs; it is also about utilising new management methods and the power of information technologies to achieve order-of-magnitude breakthroughs in products and services that target the unique requirements of the marketplace.

  The operational aspects of SCM provide today’s enterprise with the ability to stay even with the competition in the struggle for marketplace advantage. On the other hand, the strategic capability of SCM to fashion a shared vision with channel system partners, form co-evolutionary and mutually beneficial channel alliances, and manage complex relationships with suppliers and customers enables today’s innovative enterprise to lead market direction, spawn new associated businesses, and explore radically new opportunities.

  In response to this, Poirier9 presented SCM as a set of integrated value-added activities that did more than all the old functional ones. Specifically, it involved a nucleus firm; it used plan-source-make-deliver and had two more dimensions (inventory and technology); and it specified the best practices in categories that made sense to senior management because the benefits were apparent.

  Leading-edge companies worked out major SCM programmes based on these frameworks. The world’s biggest automaker conducted a large global sourcing programme in Latin America to achieve cost savings on a strategic level. Farm equipment manufacturer John Deere launched a widely recognised lean manufacturing process improvement programme. Steel and metals conglomerates such as KGHM in Poland and Bethlehem Steel in the United States privatised or rationalised their operations to achieve step improvements in shareholder value or stave off decline.10