Supply Chain or Ms

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Supply Chain Management

M. Eric JohnsonDavid F. PykeThe Tuck School of BusinessDartmouth CollegeHanover, NH 03755603 (646) 2136July 27, 1999

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Introduction

Supply chain management (SCM) is the term used to describe the management of the flow of materials, information, and funds across the entire supply chain, from suppliers to component producersto final assemblers to distribution (warehouses and retailers), and ultimately to the consumer.

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In fact, itoften includes after-sales service and returns or recycling. Figure 1 is a schematic of a supply chain. Incontrast to multiechelon inventory management, which coordinates inventories at multiple locations,SCM typically involves coordination of information and materials among multiple firms.Supply chain management has generated much interest in recent years for a number of reasons.Many managers now realize that actions taken by one member of the chain can influence theprofitability of all others in the chain.

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Firms are increasingly thinking in terms of competing as part of a supply chain against other supply chains, rather than as a single firm against other individual firms.Also, as firms successfully streamline their own operations, the next opportunity for improvement isthrough better coordination with their suppliers and customers. The costs of poor coordination can beextremely high. In the Italian pasta industry, consumer demand is quite steady throughout the year.However, because of trade promotions, volume discounts, long lead times, full-truckload discounts, andend-of-quarter sales incentives the orders seen at the manufacturers are highly variable (Hammond(1994)). In fact, the variability increases in moving up the supply chain from consumer to grocery storeto distribution center to central warehouse to factory, a phenomenon that is often called the

bullwhipeffect

(see Figure 2 as an example). The bullwhip effect has been experienced by many students playingthe “Beer Distribution Game.” (Sterman (1989); Sterman (1992); Chen & Samroengraja (2000); Jacobs(2000)) The costs of this variability are high -- inefficient use of production and warehouse resources,

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Much of the material in this article is based on Chapter 12 of Silver, Pyke, & Peterson (1998) and Johnson & Pyke(2000a).

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high transportation costs, and high inventory costs, to name a few. Acer America, Inc. sacrificed $20million in profits by paying $10 million for air freight to keep up with surging demand, and then paying$10 million more later when that inventory became obsolete.

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It seems that integration, long the dream of management gurus, has finally been sinkinginto the minds of western managers. Some would argue that managers have long been interestedin integration, but the lack of information technology made it impossible to implement a more“systems-oriented” approach. Clearly industrial dynamics researchers dating back to the 1950’s(Forrester (1958); Forrester (1961)) have maintained that supply chains should be viewed as anintegrated system. With the recent explosion of inexpensive information technology, it seemsonly natural that business would become more supply chain focused. However, whiletechnology is clearly an enabler of integration, it alone can not explain the radical organizationalchanges in both individual firms and whole industries. Changes in both technology andmanagement theory set the stage for integrated supply chain management. One reason for thechange in management theory is the power shift from manufacturers to retailers. Wal-Mart, forinstance, has forced many manufacturers to improve their management of inventories, and evento manage inventories of their products at Wal-Mart.While integration, information technology and retail power may be key catalysts in thesurge of interest surrounding supply chains, eBusiness is fueling even stronger excitement.eBusiness facilitates the virtual supply chain, and as companies manage these virtual networks,the importance of integration is magnified. Firms like Amazon.com are superb at managing the

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Certain industries use other terms in place of SCM. For example, many grocery industry executives are pursuingefficient consumer response (ECR), the equivalent of just-in-time distribution or “continuous replenishment.” Weconsider initiatives such as ECR to be aspects of supply chain management.

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See Business Week (September 30, 1996), pg. 72. See also Towill & DelVecchio (1994); Berry, Naim, & Towill(1995); and Buzzell & Ortmeyer (1995).

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