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Tuck School of

Business at Dartmouth

Working Paper No. 02-09

November 11, 2001

Supply Chain Management: Integration and


Globalization in the Age of eBusiness

DAVID F. PYKE
Tuck School of Business at Dartmouth
M. ERIC JOHNSON
Tuck School of Business at Dartmouth

This paper can be downloaded from the


Social Science Research Network Electronic Paper Collection:
http://ssrn.com/abstract_id=307462

Supply Chain Management:


Integration and Globalization in the Age of eBusiness

M. Eric Johnson
David F. Pyke

Forthcoming in Manufacturing Engineering Handbook

The Tuck School of Business


Dartmouth College
Hanover, NH 03755
603 (646) 2136

November 11, 2001

1. Introduction

Supply chain management (SCM) refers to the management of materials, information, and funds
across the entire supply chain, from suppliers through manufacturing and distribution, to the final
consumer. It also includes after-sales service and reverse flows such as handling customer
returns and recycling of packaging and discarded products (See Figure 1). In contrast to
multiechelon inventory management, which coordinates inventories at multiple locations of a
single firm, or traditional logistics management, SCM involves coordination of information,
materials, and financial flows among multiple firms.

Figure 1 about here

Supply chain management has generated substantial interest in recent years for a number of
reasons. Managers in many industries now realize that actions taken by one member of the chain
can influence the profitability of all others in the chain. Competition has moved beyond firm-tofirm rivalry to supply chain against supply chain. Also, as firms successfully squeeze
inefficiency from their own operations, the next opportunity for improvement is through better
coordination with suppliers and customers. During the 1970s and 1980s global competition
forced many manufacturing companies to improve the quality of their products and reduce their
manufacturing costs. With 20 years of progress, many of these manufacturers found that the
biggest challenges they faced in the new millennium were outside of their immediate control and
solutions required better coordination with their upstream and downstream partners. While they
have reduced their own costs, they found that costs of poor coordination could be very high. For
example, both Proctor & Gamble and Campbell Soup sell products whose consumer demand is

fairly stable the consumption of Pampers or Chicken Noodle Soup doesnt swing wildly from
week to week. Yet both these firms faced extremely variable demand at their factories. After
some investigation, they found that the wide swings in demand were caused by the ordering
practices of retailers, wholesalers, and distributors. For example, seeing a small increase in
consumer demand, a few store stocking managers decided to place larger than usual orders at the
retailers distribution center. The distribution center managers, not knowing the actual store
demand, yet seeing the increase in orders, placed even larger orders with the wholesaler to
ensure product availability. The snowballing effect was off and by the time it hit the factory, the
demand was greatly exaggerated. (See Figure 2.)

This phenomenon termed the bullwhip effect has many causes [1]. Sometimes it is caused by
supply chain members forecasting in isolation, as in the example above. Order batching may
also set the snowball rolling since changes in demand are hidden. Some of these practices may
be exacerbated by the marketing efforts of the company. For example, in the grocery industry,
price promotions cause grocery chains to place very large orders termed forward buying.
These spikes in demand ripple through the supply chain causing shortages upstream while filling
up downstream warehouses. Regardless of the cause, the end result is a greatly distorted demand
signal for upstream members of the supply chain. These large demand swings erode order
fulfillment and drive up costs. Fortunately, as discussed below, the bullwhip can be tamed
through an integrative approach that employs timely information shared by supply chain partners
and strong relationships that enable coordination [2].

Figure 2 about here

Such inter-firm integration, long the dream of management theorists, finally began gaining
momentum in the late 1990s. Some would argue that managers have always been interested in
integration, but the lack of information technology made it impossible to implement a more
systems-oriented approach. Industrial dynamics researchers dating back to the 1950s ([3],
[4]) have maintained that supply chains should be viewed as an integrated system. With the
recent explosion of inexpensive information technology, it seems predictable that businesses
would become more supply chain focused. However, while information technology is clearly an
enabler of integration, it alone cannot explain the radical organizational changes in both
individual firms and whole industries. A sea change in management theory was needed as well.

Two fundamental catalysts have conspired over the past decade to initiate the required change in
management theory. The first is the power shift from manufacturers to retailers. Wal-Mart, for
instance, has forced many manufacturers to improve their inventory management, and even to
manage inventories of their products in Wal-Mart stores and distribution centers. Following
Wal-Marts lead, most major retailers are asking suppliers to tighten up their inventory
management and improve their order fulfillment capabilities. Second, the Internet and associated
eBusiness initiatives are forcing managers to rethink their supply chain strategies. 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 flow
of information and funds, via the Internet and electronic funds transfer. Now, the challenge is to
efficiently manage the flow of products.

2. Key Components of Supply Chain Management

Supply chain management is really a whole set of topics covering multiple disciplines and
employing many management and engineering tools. Within the last few years, several
textbooks on supply chain have arrived on the market providing both managerial overviews and
detailed technical treatments. For examples of managerial introductions to supply chain see [5],
[6] and [7], and for logistics texts see [8] and [9]. For more technical, model-based treatments
see [10] and [11]. [12] is an extensive collection of research papers while [13] is a collection
papers on teaching supply chain management. Also, there are several casebooks that give
emphasis to global management issues including [14], [15], and [16]. Introductory articles
include [17], [18], [2], and [19].

Research in supply chain management has identified twelve distinct management areas that are
associated with the subject. Each area represents a supply chain issue facing the firm. For each
area, we provide a brief description of the basic content and refer the reader to a few articles that
apply. We also mention likely quantitative tools that may aid analysis and decision support. See
[20] for a more detailed description of these twelve areas with references to academic research,
management and popular press stories, and related teaching cases. For a more detailed review of
recent research in supply chain management see [21].

The twelve categories we define are

location

transportation and logistics

outsourcing and logistics alliances

sourcing and supplier management

marketing and channel restructuring

inventory and forecasting

service and after sales support

reverse logistics and green issues

product design and new product introduction

information and electronic mediated environments

metrics and incentives

global issues.

Location pertains to the vast set of issues facing a firm in a facility location decision. Of the
twelve categories, decisions in this area have perhaps the longest time horizon. Decisions at this
level set the physical structure of the supply chain and thus create constraints for more tactical
decisions, such as transportation, logistics and inventory planning. Engineering tools such as
mathematical models of facility location and geographic information systems (GIS) are very
useful in sorting through the many important quantitative and qualitative differences between
location choices including country differences, taxes and duties, transportation costs associated
with certain locations, and government incentives ([22]). Exchange rate issues fall in this

category, as do economies and diseconomies of scale and scope, labor availability and skill, and
quality of life issues for employees. Mathematical optimization using binary integer
programming models play a role here, as do simple spreadsheet models and qualitative analyses.
There are many advanced texts specially dedicated to the modeling aspects of location ([23]) and
most books on logistics also cover the subject. [11] presents a substantial treatment of GIS while
[16] dedicates a chapter to issues of taxes, duties, exchange rates, and other global location
issues. [24] examines several software products that provide optimization tools for solving
industrial location problems.

Transportation and logistics includes all issues related to the physical flow of goods through the
supply chain, including transportation, warehousing, and material handling. Decisions in this
category assume that location decisions have been made; the firm has decided where to operate
factories, distribution centers and retail outlets. However, the two categories interact when
managers determine which mode of transportation to use, and which factory, say, will supply a
given distribution center. This category addresses many of important choices related to
transportation management including vehicle routing, dynamic fleet management with global
positioning systems, and merge-in-transit. Also included are topics in warehousing and
distribution such as cross docking, vendor hubs ([25]) and materials handling technologies for
sorting, storing, and retrieving products.

Both deterministic models (such as linear programming and the traveling salesman problem) and
stochastic optimization models (stochastic routing and transportation models with queueing) are
used here, as are spreadsheet models and qualitative analysis. Recent management literature has

examined the changes within the logistics functions of many firms as the result of functional
integration ([26]) and the role of logistics in gaining competitive advantage ([27]). With growing
numbers of firms involved with the global management of materials, outsourcing of logistics
services has become very popular. However, because of the importance of logistics outsourcing,
we devote a separate category specifically to it.

Outsourcing and logistics alliances examines the supply chain impact of outsourcing logistics
services. With the rapid growth in third party logistics providers, there is a large and expanding
group of technologies and services to be examined. These include fascinating initiatives such as
supplier hubs managed by third parties. The rush to create strategic relationships with logistics
providers suggests that issues in this category will be important for some time, and yet several
well-published failures have raised questions about the future of such relationships. (See [28],
[29].)

Broadening the outsourcing discussion beyond logistics services, the sourcing and supplier
management category addresses the issue of outsourcing components and the management of the
suppliers who provide them. Make/buy decisions ([30], [31], [32], [33], and [34]) fall into this
category. These decisions should involve top managers and strategic thinkers because they can
literally define the future of the firm. Witness the decision of IBM to outsource its PC operating
software to Microsoft and its central processing unit to Intel!

Global sourcing also falls in the sourcing and supplier management area. While the location
category addresses the location of a firms own facilities, this category pertains to the location of

the firms suppliers. Once a decision is made to outsource a given component, and a supplier is
chosen, the firm must carefully manage its relationship with the supplier ([35] and [36]). We
have observed two competing trends in recent years. On the one hand, some firms are posting
part specifications on the Internet so that dozens of suppliers can bid on jobs. GE, for instance,
has developed a trading process network that allows many more suppliers to bid than was
possible before. The automotive assemblers have developed a similar capability called Covisint;
and independent Internet firms, such as Ariba and Commerce One, are providing similar services
focused on certain product categories. On the other hand, some firms are reducing the number of
suppliers, in some cases to a sole source ([37] and [38]). Determining the number of suppliers
and the best way to structure supplier relationships is becoming an important topic in supply
chains ([39], [40], and [41]).

While the sourcing and supplier management category addresses upstream relationships,
marketing and channel restructuring focuses downstream. It includes critical decisions related
to getting the products from a firms factories all the way into the customers hands. As with
facility location, these decisions impact the supply chain structure ([42]) as well as define an
interface with marketing ([43]). While the inventory and forecasting category addresses the
quantitative side of these relationships, this category covers relationship management,
negotiations, and even the legal dimension. Most importantly, it examines the role of
distribution strategy and channel management ([44]), affecting the availability of products at the
retail level while defining the way information and materials flow through distribution.

Many industry initiatives (for example, Efficient Consumer Response (ECR) in groceries or
Quick Response in apparel) have focused on managing the channel as they strive to mitigate the
bullwhip effect. The bullwhip effect has received enormous attention in the research literature.
Many earlier studies argued that centralized warehouses are designed to buffer factories from
variability in retail orders. The inventory held in these warehouses should allow factories to
smooth production while meeting variable customer demand. However, empirical data suggests
that exactly the opposite happens. (See for example [45], and [46].) Orders seen at the higher
levels of the supply chain exhibit more variability than those at levels closer to the customer. In
other words, the bullwhip effect is real and pervasive.

Some recent innovations, such as increased communication about consumer demand, via electronic data
interchange (EDI) and the Internet, and everyday low pricing (EDLP) (to eliminate forward buying of
bulk orders), can mitigate the bullwhip effect. In fact, the number of firms ordering, and receiving
orders, via EDI and the Internet is exploding. The information available to supply chain partners, and
the speed with which it is available, has the potential to radically reduce inventories and increase
customer service. Other initiatives can also mitigate the bullwhip effect. For example, changes in
pricing and trade promotions ([47]) and channel initiatives, such as vendor-managed inventory (VMI),
coordinated planning, forecasting and replenishment (CPFR), and continuous replenishment ([48], [49],
[50]), can significantly reduce demand variance. Vendor Managed Inventory is one of the most widely
discussed partnering initiatives for improving multi-firm supply chain efficiency. Popularized in the late
1980s by Wal-Mart and Procter & Gamble, VMI became one of the key programs in the grocery
industrys pursuit of ECR and the garment industrys Quick Response. Successful VMI initiatives have

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been trumpeted by other companies in the United States, including Johnson & Johnson, and by
European firms like Barilla (the pasta manufacturer).

In a VMI partnership, the supplierusually the manufacturer but sometimes a reseller or


distributormakes the inventory replenishment decisions for the consuming organization. This
means the supplier monitors the buyers inventory levels (physically or via electronic messaging)
and makes periodic resupply decisions regarding order quantities, shipping, and timing.
Transactions customarily initiated by the buyer (like purchase orders) are initiated by the
supplier instead. Indeed, the purchase order acknowledgment from the supplier may be the first
indication that a transaction is taking place; an advance shipping notice informs the buyer of
materials in transit. Thus the manufacturer is responsible for both its own inventory and the
inventory stored at its customers distribution centers.

Because many of these initiatives involve channel partnerships and distribution agreements, this
category also contains important information on pricing, along with anti-trust and other legal issues.
These innovations require interfirm, and often intrafirm, cooperation and coordination that can be
difficult to achieve.

Inventory and forecasting includes techniques for ongoing inventory management and demand
forecasting. Industrial engineers and operations managers have long employed statistical models
for forecasting and inventory planning. Inventory costs are often the easiest to identify and
reduce when attacking supply chain problems. Stochastic inventory models can identify the
potential cost savings from, for example, sharing information with supply chain partners ([51]),
but more complex models are required to coordinate multiple locations. Of course there are

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many full texts on the subject such as [10] and [52]). Useful managerial articles focusing on
inventory and forecasting include [18] and [53].

The service and after sales support category covers the important, but often overlooked, issue of
providing service and service parts. Some leading firms, such as Saturn and Caterpillar, build
their reputations on their ability in this area, and this capability generates significant sales ([54]).
Stochastic inventory models for slow-moving items fall into this category. While industry
practice still shows much room for improvement, several well-known firms have shown how
spare parts can be managed more effectively ([55] and [56]).

Reverse logistics and green issues are emerging dimensions of supply chain management ([57]).
This area examines both reverse logistics issues of product returns ([58] and [59] and
environmental impact issues ([60]). Direct shipment from products ordered over the web have
created many new and important problems in economically handling customer returns. For
products such as home furniture, management of product returns has proven to be the most
vexing issue facing on-line retailers [61]. Growing regulatory pressures in many countries are
forcing managers to consider the most efficient and environmentally friendly way to deal with
product recovery.

The term product recovery includes the handling of all used and discarded products, components and
materials. [62] notes that product recovery management attempts to recover as much economic value as
possible, while reducing the total amount of waste. The authors also provide a framework and a set of
definitions that can help managers think about the issues in an organized way (see Figure 3). These

12

authors examine the differences among various product recovery options including repair, refurbishing,
remanufacturing, cannibalization, and recycling. [63] provides a review of quantitative models for
reverse logistics.

Figure 3 about here

The product design and new product introduction category deals with design issues for mass
customization, delayed differentiation, modularity and other issues for new product introduction.
With the increasing supply chain demands of product variety ([64]) and customization ([65]),
there is an increasing body of research available. One of the most exciting applications of
"supply chain thinking" is the increased use of postponed product differentiation ([66]).
Traditionally, products destined for world markets would be customized at the factory to suit
local market tastes. While a customized product is desirable, managing worldwide inventory is
often a nightmare. Using postponement the product is redesigned so that it can be customized
for local tastes in the distribution channel. The same generic product is produced at the factory
and held throughout the world (Figure 4). Thus if the French version selling well, but the
German version is not, German products can be quickly shipped to France and customized for
the French market. Many times products can even be customized for individual customers or
sales channels [67].

Figure 4 about here

In a fascinating interaction with the reverse logistics and green issues category, some firms are
beginning to consider design for the environment (DFE) and design for disassembly (DFD) in

13

their product development processes. Unfortunately, AT&T discovered that designing products
for reuse can result in more materials and complexity, thereby violating other environmental
goals. (See [68], who also reports on product takeback and recycling initiatives in numerous
countries.)

Initiatives in this category have clear implications for product cost ([69]) and inventory savings.
Inventory models are often used to identify some of the benefits of these initiatives. Also
important are issues related to managing product variety ([70]) and managing new product
introduction and product rollover ([71]).

The information and electronic mediated environments category addresses the impact of
information technology to reduce inventory ([72], and the rapidly expanding area of electronic
commerce ([73] and [74]). Often this subject takes a more systems orientation, examining the
role of systems science and information within a supply chain ([75]). Such a discussion naturally
focuses attention on integrative ERP software such as SAP and Oracle ([76]), as well as supply
chain offerings such as Manugistics, i2s Rhythm and Peoplesofts Red Pepper. The many
supply chain changes wrought by electronic commerce are particularly interesting to examine,
including both the highly publicized retail channel changes (like Amazon.com) and the more
business to business innovations that are fundamentally changing the power structure in many
supply chains [77].

Metrics and incentives refer to the measurement of both engineering and organizational
processes and the related economic motivations. Because metrics are fundamental to business

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management, there are many reading materials outside of the supply chain literature, including
accounting texts for instance. Several recent articles concentrate on the link between
performance measurement and supply chain improvement ([78], [79]).

Finally, global issues considers the issues beyond local country specific operating environments,
to encompass issues related to cross-border distribution and sourcing. For example, currency
exchange rates, duties & taxes, freight forwarding, customs issues, government regulation, and
country comparisons are all included. Of course the location category, when applied in a global
context, also addresses some of these issues ([80]). As we mentioned earlier, there are several
texts devoted to global management and many recent articles also examine challenges in specific
regions of the world (for example, Asia -- [81] or Europe -- [82]).

3. Conclusion

Supply chain management is indeed a large and growing field for both engineers and
managers. Nearly all major management consulting firms have developed large practices in the
supply chain field, and the number of books and academic research papers in the field is growing
rapidly. In fact, each of the twelve areas covered in our treatment of supply chains are important
in themselves. While these areas may appear to be somewhat disparate, they are all linked by the
integrated nature of the problems at hand. Large firms today operate in global environments,
deal with multiple suppliers and customers, are required to manage inventories in new and
innovative ways, and are faced with possible channel restructuring. Finally, the Internet

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continues to change many fundamental assumptions about business, pushing managers to


continue to evolve their supply chain practices or find themselves driven out the of the market.

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Order Fulfillment
Orders
Supply

Production

Distribution

Retail
Product

Customer
Requirements
Designs/
Blueprints

New Product & Process


Development

Recycle
Reuse
Remanufacture

Figure 1. A Schematic of a Supply Chain

26

The Bullwhip Effect


800
Order Size (Units)

700
600
500

Central Warehouse

400

Distribution Center

300

Grocery Store

200
100
0
1

6 7

9 10 11 12

Month

Figure 2. An Illustration of the Bullwhip Effect

27

Raw
Materials

Recycle

Parts
Fabrication

Cannibalize

Modules
Subassembly

Product
Assembly

Distribution

Remanufacture

Refurbish

Repair

Landfill

Figure 3. Product Recovery Options (adapted from Thierry et al. (1995)).

28

Users

Reuse

Retailer

Supplier

North
America
Distribution
Center

Fabrication and
Final Assembly
and Test
Japan

Supplier
Supplier

Supplier
Supplier
Supplier

4 Weeks

1 Week

Customization
and Test
Fabrication and
Assembly of
Generic Products
Japan

US

Customization
and Test
Europe

14 Weeks

Retailer
Retailer

Europe
Distribution
Center

14 Weeks

Retailer

4 Weeks

Retailer
Retailer

1 Week

Retailer
North
America
Distribution
Center

Retailer
Retailer
Retailer

Europe
Distribution
Center

1 Week

Retailer
Retailer

1 Week

Figure 4. Using postponement a product destined for both US and Europe markets is redesigned
so that local content can be added to a common platform within distribution (adapted from
Johnson & Anderson (2000)).

29