SUPPLY CHAIN MANAGEMENT

Q&A

1. Define supply chain management. What are the differences/similarities between logistics
and supply chain management?

Supply Chain Management (SCM) is a term that has grown significantly in use and popularity
since the late 1980s, although considerable confusion exists about what it actually means. Many
people use the term as a substitute or synonym for logistics. However, the definition of supply
chain management used in this book is much broader than logistics.

Supply chain management is the integration of business processes from end user through original
suppliers that provides products, services, and information that add value for customers and other
stakeholders.

A number of important differences exist between this definition of supply chain management and
the Council of Logistics Management’s definition of logistics. Foremost, supply chain
management is the management of all key business processes across members of the supply
chain. While SCM represents a relatively new way of approaching business and different views
exist regarding the processes involved, for a manufacturing organization the key processes would
include: customer relationship management, customer service management, demand
management, order fulfillment, manufacturing flow management, procurement, and product
development and commercialization. At some companies such as Xerox, the returns process is
also included. Key areas required for successful implementation of SCM are executive support,
leadership, commitment to change, and empowerment. These areas are described in detail along
with the key processes in Chapter 2 of the text.

Thus, SCM is a systems approach that is highly interactive and complex, and requires
simultaneous consideration of many trade-offs. As shown in Figure 2-1, SCM spans
organizational boundaries, considering trade-offs both within, and among, organizations
regarding where inventory should be held and where activities should be performed.

While logistics as defined by the Council of Logistics Management involves the management of
"the efficient, effective flow and storage of goods, services, and related information from the
point-of-origin to the point-of-consumption in order to meet customers’ requirements," supply
chain management involves the management of all of the key interactions among firms in the
supply chain. It is our belief that if the key processes are not coordinated across the supply chain
that it will not be possible to achieve the desired results from logistics innovations. For example,
the full benefits, in terms of customer inventory reductions, will not be achieved from a rapid
delivery system designed to provide deliveries in 24-48 hours, if the sales organization continues
to offer special prices on truckload orders direct from factories.
2. What is the role of outsourcing in supply chain management?

Management in many manufacturing and retailing firms have decided that transportation and
warehousing operations are not core competencies for their firms and therefore should be
outsourced. For example, Nabisco and Goodyear Tire and Rubber have third parties operating
their distribution centers. Retailers, such as Kroger are using third parties to operate some or all
of their warehousing facilities.

In the telecom industry, Lucent Technologies, Nortel Networks and Cisco outsource some of
their manufacturing operations to companies like Selectron. Outsourcing is appropriate when
doing so makes the entire supply chain more efficient and effective.

3. Give an example of (a) a firm that uses postponement and (b) a firm that uses speculation in
the supply chain.

Examples of firms that use postponement include:

• Manufacturers of paint by mixing color at the retail store.

• Sunoco by blending gasoline at the filling station pump.

• Manufacturers of dishwashers by including three front panels with each side painted a different
color. This results in 7 SKU’s being reduced to 1 SKU (since white is the basic color).

Examples of firms that use speculation include:

• Manufacturers of Christmas toys, by producing in advance of the season.

• Manufacturers of snow tires by shipping the tires to dealers in the fall and invoicing them in
January.

• Manufacturers of air conditioning units by providing incentives for retailers to stock up prior to
the season.

• Manufacturers of convenience goods.

• U.S. automobile manufacturers whose dealers normally hold inventories equal to 90-120 days
of sales.
4. Describe the four types of business process links and give an example of a situation when
each would be appropriate.

The four types of business process links are: (1) managed business process links; (2) monitored
business process links; (3) not-managed business process links; and, (4) nonmember business
process links.

1. Managed Process Links are links that are important for managers of the focal company to be
actively involved in managing. Typically, relationships will be managed in some fashion
(partnership or contractual) with all Tier 1 suppliers and customers. Management of suppliers
beyond Tier 1 would be reserved for those firms within strategic implications. For example, all
Tier 1 suppliers in the industry purchase a critical material from the same Tier 2 supplier. In this
case, managed process links should include the Tier 2 supplier.

2. Monitored Business Process Links are links with Tier 2 or beyond customers or suppliers that
are important but not critical. In this case the managers of the focal company will establish
procedures for how the Tier 1 suppliers/customers will manage the links and monitor or audit
how the link is being integrated and managed. In cases where there are many suppliers at the Tier
2 level, quality and costs might be measured.

3. Not-Managed Process Links are links for which the focal company is not actively involved,
nor are they critical enough to use resources to monitor. Typically, a number of suppliers could
provide the product/service in question at a similar price. Cardboard shipping cartons or
overnight package service may be examples.

4. Nonmember Process Links are links in other supply chains to which the focal company’s
customers or suppliers belong that influence the focal company’s supply chain. For example,
Goodyear sells tires to General Motors and also to its competitors. The ability of General
Motors’ management to have a particular type of relationship with Goodyear will depend to
some extent on Goodyear’s relationships with GM’s competitors and how important relative to
these other firms GM is to Goodyear.
5. Identify the eight supply chain processes and explain why they are cross-functional.

Successful supply chain management requires a change from managing individual functions to
integrating activities into key supply chain processes. Traditionally, both upstream and
downstream portions of the supply chain have interacted as disconnected entities that receive
sporadic flows of information over time.

The purchasing department placed orders, as requirements became necessary. Marketing,

responding to customer demand, attempted to satisfy this demand by interfacing with various
distributors and retailers. The firm gave orders periodically to suppliers and they gave orders to
their suppliers without any clear picture of demand at the point-of-sale or use. Satisfying the
customer often translated into demands for expedited operations throughout the supply chain as
channel members reacted to unexpected changes in demand.

Operating an integrated supply chain requires continuous information flows, which in turn help
to create the best product flows. The customer remains the primary focus of each supply chain
process. However, improved linkages with suppliers are necessary because controlling
uncertainty in customer demand, managing manufacturing capacity, and supplier performance
are critical to effective supply chain management (SCM). Achieving a good customer-focused
system means that information must be processed with accuracy and timeliness, because quick
response systems require frequent changes in response to fluctuations in customer demand.

Optimizing the product flows cannot be accomplished without implementation of the eight
business processes shown in Figure 2-1. The key processes are:

• Customer relationship management.

• Customer service management.
• Demand management.
• Order fulfillment.
• Manufacturing flow management.
• Procurement.
• Product development and commercialization
• Returns.

The primary advantage of processes over functions is that the processes all focus on the customer
(see Figure 2-10) while it is quite possible to perform very well within a function and actually
work at cross-purposes to serving the interests of the customer or the shareholder.
Manufacturing, for example, might very efficiently produce a particular product in large
quantities for inventory when the company is experiencing stock-outs on other products. When
judged on a cost per-unit to produce, manufacturing looks great, but customer service is dismal.

The processes are cross-functional because each process team is made up of individuals from the
various functional silos (see Figure 2-10).
6. What difficulties might be expected when management attempts to implement a business
process approach with members of the firm’s supply chain?

As illustrated in Figure 2-6, a major difficulty in implementing the eight business processes with
other members of the supply chain is that many of these firms will not be organized around
business processes but will be using the traditional functional silo approach. Even when
organizations have adopted a process approach, the number of processes may be different, as
may the names of these processes. This lack of consistency makes integration across firms very
difficult. For this reason, we believe that it is important to come to agreement on a standard set of
processes that can be implemented throughout the supply chain. The processes presented in
Chapter 2 are those recommended by The Global Supply Chain Forum and we believe that they
represent the necessary standard set of processes. It is difficult to imagine for example, that any
firm selling in a business-to-business environment would not have a customer relationship
management process. That is, have a small group of customers that represent a
disproportionately large share of its sales and profits for whom a team from each of the buyer
and seller organizations is appropriate for managing the relationship (see page 68 of text).

7. Explain how product characteristics influence supply chain design.

Nine product characteristics should be analyzed when designing a supply chain: (1) the product’s
value, (2) the technicality of the product, (3) the degree of market acceptance, (4) the degree of
substitutability, (5) the product’s bulk, (6) the product’s perishability, (7) the degree of market
concentration, (8) seasonality, and (9) the width and depth of the product line.

1. Value. Products with a high per-unit cost require a large inventory investment. Consequently,
manufacturers with limited resources usually shift some of the burden by using intermediaries.
The product’s value also influences its inventory carrying cost and the desirability of using
premium transportation. Low-value, low-margin grocery products may be shipped by rail car and
stored in field warehouses. High-value component parts and products such as fashion
merchandise may be shipped by airfreight to minimize in-transit inventories and reduce
inventory-carrying costs by holding inventory at a central location.

2. Technicality. Highly technical products usually require demonstration by a salesperson. In

addition, pre-purchase and post-purchase services often require that repair parts be stocked.
Generally, direct supply chains and selective or exclusive distribution policies are used for these
kinds of products.

3. Market Acceptance. The degree of market acceptance determines the amount of selling effort
required. If intermediaries are reluctant to support the line, the manufacturer may have to employ
"missionary salespeople" or "detail people" to promote the line to Tier 2 customers.

4. Substitutability. When product substitution is likely, intensive distribution is required. A

premium is placed on point-of-purchase displays in high-traffic areas.
5. Bulk. Generally, low-value, high-weight products are restricted to markets close to the point of
production. These products often require special material handling skills.

6. Perishability. Perishable products are usually sold on a direct basis in order to move product
through the supply chain more quickly and reduce the potential for inventory loss.

7. Market Concentration. When the market is concentrated in a geographic area, direct supply
chains may be the most effective and efficient method of distribution.

8. Seasonality. For some products, sales volumes peak at certain times of the year (toy sales at
Christmas); in other cases, raw materials, such as fresh fruits and vegetables, may only be
available at specific times.

9. Width and Depth. A manufacturer of products with low per-unit values may use intensive
distribution with direct sales if the product line is broad enough to result in a relatively large
average sales volume. Usually a manufacturer of a limited line of products will use indirect
supply chains to achieve adequate market coverage at a reasonable cost.

In summary, product characteristics will determine the cost of transportation, warehousing and
inventory associated with distributing a specific product. They will also influence the selling
costs and other marketing related costs. Consequently, product characteristics will influence the
number and type of potential intermediaries as well as the ability of the manufacturer to perform
marketing and logistics activities internally.

8. How can communications technology be used to improve supply chain efficiency and
effectiveness?

A major cost to manufacturers, wholesalers and retailers is the cost of carrying inventory. By
reducing the level of inventory investment, each firm can improve its profitability and return on
assets. Unfortunately, most firms attempt to reduce their own inventories at the expense of other
members of the supply chain. That is, management attempts to shift the inventory investment to
another member of the supply chain..

However, management in the most progressive firms understand that it is entire supply chains
that compete for consumers’ dollars. As a result, these managers attempt to implement
technology that will improve information flows. Use Figure 2-1 to show how information about
consumer sales or end user consumption, when made available to all members of the supply
chain, can be used to better manage materials flow and production, warehousing and
transportation capacity throughout the supply chain. This topic will be covered in detail in
Chapter 4 and marketplaces such as Transora (which has the potential to provide such
information linkages in the consumer products industry) will be covered in Chapter 12 (see pages
505-508).
By using the latest communications technology to improve the speed and quality of information
flow throughout the supply chain, it is possible to reduce the level of inventory investment for
each member of the supply chain.
9. What are some of the difficulties you would expect to encounter in trying to measure supply
chain performance?

The primary difficulty in trying to measure supply chain performance is that the measures are
typically not available. When management talks about supply chain metrics they are talking
about internal costs such as transportation and inventory or customer service measures developed
by them and measuring their firms’ performance to customers. This topic will be covered in
more depth in Chapters 16 and 17.

10. What are the major obstacles to successfully implementing supply chain management?

To successfully implement SCM, the key firms within the supply chain must overcome their own
functional silos and accept a process approach. The requirements for successful implementation
of SCM include:

• Executive support, leadership, and commitment to change.

• An understanding of the degree of change necessary.

• Agreement on the SCM vision and the key processes.

• The necessary commitment of resources and empowerment to achieve the stated goals.

The absence of these four requirements for successful implementation represents an obstacle for
those committed to implementing supply chain management.

In many organizations resistance to change is the most serious obstacle. There is comfort in the
functional silo approach because of the familiarity with it. Further, executives who have made it
to the top of a functional silo are often married to the approach that served them well. Unless the
existence of the business is threatened, many will not see the need to change.