12 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

13 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

1
Supply chain management:
the basics
1.1 Supply chain management's necessity
1.2 Supply chain management's essence
1.3 Supply chain management prerequisites
1.4 Profit through collaboration

Learning objectives
What is the meaning of the supply chain for the individual firm?
● Why is supply chain management necessary?
● What is the essence of supply chain management?
● What are the supply chain management prerequisites?
● How can the collaboration between organisations end up benefiting the entire chain?

supply chain 18,21

value chain 19
demand chain 19
supply chain management 21
‘pie growing’ 25
‘pie sharing’ 25
value creation 32
cost reduction 34
14 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

Collaboration as cash cow

How do you create a streamlined supply chain for the supplier, the organisation and the final
customer? The importance of end-to-end visibility is confirmed by all parties, but at the same time
many businesses only focus on inbound, internal or outbound for when it comes to visibility. This was
also emphasised during a round table at dairy company FrieslandCampina in Beilen. The supply chain
professionals present indicated that it is difficult to know what client's desires and supplier's
possibilities are and to have internal oversight. And when a company does have a global end-to-end
visibility then this is often not sufficiently in-depth.

'Of all 12,104 member dairy companies we know the owner, they are about 80 percent of our total
number of suppliers. But the supplier behind the supplier of for instance packaging, the other 20
percent, is already more difficult', the Director Plan and Deliver Ingredient at FrieslandCampina
states.

When the lines with your supplier are short it becomes easy to find out your supplier capacity. Next
to that it is important to finding out the expected demand from your clients so you create a plan
based on that. 'With Sales & Operations Planning we create one version of the truth and we use this
to plan 18 months ahead', says the Supply Chain Network Planning Manager at FrieslandCampina.

The supply chain professionals present in Beilen played the dairy dilemma game. Here they
experienced the importance of collaboration and the necessity for good planning in the dairy supply
chain. At the heart was dairy business Milk Inc., which the players had to save from bankruptcy. The
continuous flow of milk from the dairy farmer to the company and the changing demand of the final
consumers revealed bottlenecks in Milk Inc's diary chain. Focusing on their own revenue the various
parties worked under intense time pressure in order to meet the client's demands.

At the closing of parent company Milk Inc.'s financial year this turned out not to be the best possible
strategy; the farmer was underpaid, customers went without supplies and the surplus of milk went
bad. For the year after a 12-month plan was made based on a demand forecast in which all those
involved had to collaborate. By looking across the boundaries of the own firm, the end-to-end
visibility of Milk Inc.'s supply chain increased which lead to improved efficiency, margins and brand
image.
Source: M. Vos, www.supplychainmagazine.nl, 16 May 2019 (edited)
15 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

This book is about supply chains and about managing supply chains. Why is it important to focus on
supply chains and their management? What exactly are supply chains and why are the terms value
chains or demand chains sometimes used? We start this book by discussing these questions in
paragraph 1.1. In paragraph 1.2 we show that there are various definitions of the term supply chain
management, but that it is possible to derive the essence of the concept from these definitions. In
paragraph 1.3 we discuss supply chain management's prerequisites. And finally, in paragraph 1.4 we
discuss the question where and how revenue can be achieved and/or costs may be reduced through
improved collaboration.

1.1 Supply chain management's necessity

Why is supply chain management necessary?
Entire production chains, also known as supply chains enjoy increased attention. 'From soil to mouth'
is one of the many expressions to indicate that the perspective has shifted from individual firms to
chains of various organisations. Together these organisations ensure that products and/or services
end up in the consumers’ or final users’ hands. Because the increased realisation that businesses in
the production chain need each other in order to meet the continuously changing consumer
demands.

Consumers have become more demanding. They want to choose from an increasingly wider and
continuously innovative range of products because their preferences change faster than they used
to. Consumers are also becoming more individualistic and outspoken about their demands and
desires. More than anything they want products and/or services which have been completely
tailored to their individual needs. Consumers have also become more temperamental in their
purchase of products, they want an immediate availability of the demanded products, or at least in
the very short term. When purchasing through the internet they also want a wider selection of
shipping options. Consumers need to be well informed about the status and origin of their products,
they want accurate track & trace information.

How can organisations best meet all these changes in consumers? Various functional areas have tried
for years to meet customers' demands and desires as much as possible. Especially marketing has
built a reputation in this field. The customer-service approach within logistics also shows this
customer-centric attitude. Still, this turns out to be insufficient to successfully operate in the market.
For general and functional managers, it is becoming increasingly important to collaborate with other
organisation in order to serve their customers faster, cheaper and more reliably than their
competitors.
16 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

‘Managers have come to realise that they cannot do it alone; rather, they must work on a cooperative
basis with the best organisations in their supply chains in order to succeed’, Handfield and Nichols
posed back in 1999. And in 2005 Christopher wrote: ‘The leading-edge companies have realised that
the real competition is not company against company but rather supply chain against supply chain.’
‘If you are late because your distributor is late, your customers will go to a competitor whose
distributor isn’t late. That is more than a company-to-company competition. We’re going to see more
supply-chain-to-supply-chain competition’, Hugos added in 2006.

It is impossible, especially when there is an increased inventory risk due to shorter product life cycles,
to offer a wide, varied and variable range when there is no proper collaboration between
manufacturers and retailers. Poor coordination between manufacturers and their suppliers also
prevents a continuous flow of new, innovative products. And it is also impossible to guarantee
immediate or swift availability of products when the parties involved in the supply chain show
insufficient collaboration. Correct information about the status and origin of products cannot be
provided when this information is not shared in the supply chain. Therefore, in order to successfully
operate in the market and to ensure consumer satisfaction, collaboration within the production
chain is required.

And there are more grounds for collaboration. The drive towards sustainability also necessitates
collaboration. Slashing CO2 and other emissions are only possible when businesses work together.
Also, scarcity of certain raw materials cannot be solved by single organisations but requires a joint
vision and approach. The responsibility for people’s and animal's health, safety and well-being
requires attention of the entire production chain. To illustrate this figure 1.1 shows Heineken's
sustainability goals to focus on the entire production chain. On the left of the image you see
Heineken's sustainability goals. At the top the sub-tracks of Heineken's supply chain are displayed.
The colours show which sustainability goals are relevant to which sub-track.
17 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

Practice-based example 1.1

Sickening chicken meat

'Sickening chicken mean due to butchers' and farmers' negligence', Algemeen Dagblad writes in March 2018. A
report 'food watchdog' NVWA is referenced, which mentions that the well-being of chicken is a concern.
During inspections of so-called animal breeding businesses, the NVWA too often sees insufficient food, water
or space for the animals. At businesses raising chicks for meat overcrowding and a shortage of dry litter in the
stables are common issues. This causes animals to increasingly suffer from painful ulcers on the legs. The
animals also have increased risk of serious injury during catching and transportation. Once at the abattoir the
improper sedation of the animals is the greatest risk for poultry's well-being. For when it comes to food safety
the presence of campylobacter and salmonella is a clear risk in multiple links of the chain. And regulations for
the use of antibiotics are often violated.
The NVWA expressively calls for all parties in the chain to do their part in managing the risks. The Consumer
Association calls for the poultry sector to deal with the malpractices in the chain once and for all: 'The most
18 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

important thing is for the sector to get to work itself. The supermarkets also need to take more ownership,
because they put the meat on their shelves.'
Source: A. van Dongen, www.ad.nl, 29 March 2018 (edited)

Supply chain
This shows that a focus on supply chains is necessary. But what exactly is a supply chain? And why
are the terms value chain or demand chain sometimes used?

Let us start with two definitions of the term supply chain:

’A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer’s request.
The supply chain not only includes the manufacturer and supplier, but also transporters, warehouses,
retailers, and customers themselves.’ (Chopra and Meindl, 2003)

’A supply chain is the network of organisations that are involved, through upstream and downstream
linkages, in the different processes and activities that produce value in the form of products and
services in the hands of the ultimate consumer.’ (Christopher, 1998)

Both definitions clearly show that a supply chain consists of multiple parties, who together ensure
that the client's needs are met. But how many parties are required before we can talk of a supply
chain? Many authors indicate that in order to be able to speak of a supply chain there should be at
least two interfaces, so three independent organisations.

In this discussion Mentzer et al (2001) distinguish between:

● The short supply chain, consisting of a business, a supplier and a customer
● the extensive supply chain, which also includes the suppliers' suppliers and the customer's
customers.
● the ultimate supply chain, which consists of all organisations involved in the 'upstream and/or
downstream flows of products, services, finances and/or information from the ultimate supplier
to the ultimate customer’. Figure 1.2 shows a stylised image of the ultimate supply chain.
19 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

The elements in figure 1.2 are a) the original producer, b) a supplier, c) a manufacturer, d) a client
and e) the final user. The arrow towards the final user shows the flow of goods and the
accompanying flow of information. The arrow in the other direction shows the flow of return goods,
the flow of information and the flow of money. Between the original producer and supplier there
may be multiple suppliers (read: manufacturers of semi-finished goods). It is also possible that there
are multiple links between the client and the final user (read: distributors).

Value chain
Back to the supply chain definitions. What we see is that Christopher in his definition emphasises the
added value to the final customer which is added by each subsequent party. Each party buys third-
party products and/or services, adds value and then sells its products and/or services to a next link in
the production chain, until the product or service is consumed by the eventual client or used by the
industrial client. For this reason, instead of using the term 'supply chain' sometimes the term 'value
chain' is used, where subsequent parties add value to the product and/or service and this value is
eventually rewarded by the client through a remuneration of the costs plus a profit margin.

Demand chain
Sometimes the term demand chain is preferred over the term supply chain. This because a supply
chain is all about the satisfaction of the eventual consumer's needs, so about demand instead of
supply. De Treville, Shapiro en Hameri (2004) describe this as follows:

‘a demand chain is a supply chain that emphasizes market mediation to a greater degree than its role
of ensuring efficient physical supply of the product.’

Practice-based example 1.2

Theme parts are becoming Demand Driven

Sometimes you hear about new ideas which just make sense. There is for instance a new app which enables
you to pay for a theme park visit based on the amount of time spent there. Your presence in the quiet
(morning)hours would for instance then be cheaper than in the afternoon. As a visitor you are then no longer
stuck with one price of entry, but you pay based on the time spent in the park.

This new app offers the visitors many advantages. You no longer feel forced to spent the entire day with the
family in the theme park. And if you choose to stay for a longer time you never have to pay more than the price
of a day ticket. The new app also enables customers to pay after their visit, which reduces the lines at the cash
registers.
20 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

The theme park also benefits. The dynamic pricing enables the park to better adjust demand to the (fixed)
capacity, which allows for a higher occupancy rate of the rides in the park and also reduces the lines for visitors
at those rides. Therefore, this is a good example of an application of Demand Driven Supply Chain
Management.
Source: D. Pronk, www.supplychainmagazine.nl, 30 October 2018 (edited)

Visser and Van Goor (2019) associate the term supply chain with a strong push-controlled chain
combined with a product vision and the term demand chain with a pull-controlled chain combined
with a marketing vision. In a supply chain the production is proactive, the expected demand is
anticipated without this demand already manifesting itself. In a demand chain business wait for the
demand first and then decide the extent of the production based on that. See figures 1.3 and 1.4.

It should be noted that Visser and Van Goor (2019) do state that both the images of a strong push-
controlled chain and that of a fully pull-controlled chain are an oversimplification of these processes.
A combination of a supply chain and a demand chain is the best representation of the real world.

Chain reversal is a term often used together with the term demand chain. In a chain reversal the
supply chain activities are primarily determined by the customer's demand, and not by the supply.
Figure 1.5 shows the essence of chain reversal: distribution is no longer seen as an extension of
production, but rather as a catalyst. In chain reversal the consumer directs the chain and this means
21 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

that the consumers' demand and as an extension of that retail's replenishment orders control the
upstream activities at wholesalers and manufacturers.

Intermediate question 1.1

In this paragraph you read that businesses need to increase their collaboration. Does this also mean that
businesses, which do not collaborate with other businesses, will not survive? Why/why not?

1.2 Supply chain management's essence

What is supply chain management's essence?
In the previous paragraph you read that supply chain management is about collaboration. Not just
about collaboration within organisations but also, or especially, about organisations working
together. Therefore, supply chain management reaches across the borders of single businesses:
multiple organisations are involved. And in supply chain management it is not just about managing
upstream relationships but also about managing downstream relationships.

In supply chain management organisations voluntarily work together. And this collaboration does not
need to be limited to logistics. There are also other possible fields for collaboration. One example is
joint product development.

Finally: the collaboration is focussed on the creation of value and the reduction of costs. And in
supply chain management it is about the performance of the entire chain and not about the
performance of the individual links. This does not mean that the supply chain partners give up on
their own goals. Because collaboration creates results and this means that there is more to go
around. Here we talk about 'growing the pie' instead of 'sharing the pie'.

In the previous we mentioned supply chain management's most important characteristics:

22 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

1 Across companies
2 aimed at upstream and downstream relationships
3 voluntary
4 more than just logistics
5 aimed at the creation of value and the reduction of costs
6 aimed at the performance of the entire chain
7 'pie growing' instead of 'pie sharing'.

See figure 1.6.

Now we will discuss supply chain management's characteristics in greater detail.

1 Across companies
Supply chain management goes one step further than business administration, where an attempt is
made to integrate various functional focus areas within one organisation. Supply chain management
looks at the integration of functional focus areas within and between various organisations in a
chain. See figure 1.7, where we take a generic supplier-customer relationship but where we do note
that there is only a supply chain once there are three independent organisations.

Source: Visser & Van Goor (2019)

23 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

The supply chain management's cross-company character can be seen in the definitions of
Christopher (2005), Stock and Boyer (2009) and the Centre for Supply Chain Management of
Nyenrode University (from now on abbreviated as Nyenrode).

Christopher (2005) used the following definition for supply chain management:
’Supply chain management is 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.’

Stock and Boyer (2009), translated by SCELP) define supply chain management as follows:
'Supply chain management concerns the management of a network of entities, both within the organisation
and between organisations, which facilitates the shift forward and the return flow of products and services,
money and information from the original producer to the final consumer for the purpose of creating customer
value and improving the entire network's efficiency.'

Nyenrode created the following definition of supply chain management:

’Demand and Supply Chain Management is the management of a network that links customers and suppliers as
one ‘single entity’ where the objectives are to create value and reduce waste through the voluntary integration
and coordination of the objectives of three or more – and ideally, all the – independent parties in the network.’

Note that the previous definition states that supply chain management is about the collaboration of
at least three parties. This matches our definition (in the previous paragraph) of the term supply
chain: there are at least two interfaces, therefore there are at least three independent organisations.
When there are three organisations (a business, a supplier and a customer) we talk about a brief
supply chain (Mentzer et al, 2001). From Nyenrode's definition we can conclude that supply chain
management can be about a brief supply chain but ideally concerns all parties in the supply chain
(the ultimate supply chain in Metzer et al's terms, 2001).

2 Aimed at upstream and downstream relationships

Christopher's definition indicates that supply chain management concerns both upstream and
downstream relationships. Upstream relationships are the relationships with suppliers, the suppliers'
suppliers etc. Downstream relationships are the relationships with the customers', the customers'
customers etc. From a procurement view we often see that the focus is on upstream relationships.
And when a marketing view is used, the focus is more on the downstream relationships. Supply chain
management combines both views.
24 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

Here Van Goor (2019) emphasises the necessity for coordination between logistics and commerce.
He indicates that only once logistics connects with commerce they can successfully implement their
meticulously calculated improvement opportunities in the chains in which they are active.

3 Voluntary
Nyenrode's definition emphasises that supply chain management is about voluntary integration and
coordination of goals of the organisations involved. This voluntarism is linked to the involved parties'
independence. This means we do not use the term supply chain management where there are
mergers or takeovers of businesses which are on either side in the production chain. In that case we
talk about forward or backward integration.

4 More than just logistics

One thing which is noticeable in many supply chain management definition (others than the
definitions we discussed previously) is that supply chain management is seen as equal to logistics,
across companies or not. Fortunately, Cooper, Lambert and Pagh opposed this notion back in 1997.
Based on a literature review combined with consultancy experience they drew the conclusion that
there is a need for coordination of activities and processes within and between organisations, which
goes beyond just logistical coordination. Hugos (2006) also indicated that supply chain management
is not that same as logistics:
‘Traditional logistics focuses its attention on activities such as procurement, distribution, maintenance, and
inventory management. Supply chain management acknowledges all of traditional logistics and also includes
activities such as marketing, new product development, finance, and customer service.’

So, this means that supply chain management is about the coordination of activities within and
between organisations, where various functional areas are involved, not just logistics but also for
instance marketing, product development, finance and customer service.

5 Aimed at the creation of value and the reduction of costs

Why are organisations getting into relationships with other parties? Why is there coordination,
collaboration, management and integration? ‘To deliver superior customer value at less cost’,
Christopher states. 'To create both customer value as well as improving efficiency', Stock and Boyer
pose. ‘To create value and reduce waste’, Nyenrode says. So, supply chain management is about
value creation and cost reduction. To effectively care for the customer, ensuring the customer gets
what is needed while doing this efficiently, not using more means than necessary.
25 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

6 Aimed at the performance of the entire chain

‘To the supply chain as a whole’ is part of Christopher's supply chain management definition. ‘As one
single entity’ Nyenrode says. In supply chain management it is about the performance of the entire
chain and not about the performance of its individual links. In other words: parties do not just strive
to meet their own targets. If they would do this and insufficiently take the other parties' goal into
consideration, then the willingness of those parties to collaborate would be quickly reduced.

7 'Pie growing' instead of 'pie sharing'

Based on the previous characteristic the 'aimed at the performance of the entire chain' you could
pose that the partners in a chain would have to make their individual goals secondary to the chain's
goal to prevent suboptimal performance. In practice those parties will always think from their own
perspective, no matter how motivated they are in their willingness to improve the performance of
the entire chain. This does not need to be a problem, because, due to collaboration, there can be
gains for the entire chain and gains for all parties involved. ‘The focus of supply chain management is
on co-operation and trust and the recognition that, properly managed, the whole can be greater than
the sum of its parts’, according to Christopher (2005).
Back in 2000 Van der Veen and Robben wrote the following about this:
'Pie sharing' is symbolic for the supplier's, manufacturer's and retails' situation where they compete at each
other’s expense to get the largest piece of the pie. An example from practice is the retailer who decides to
reduce its reserves by ordering the manufacturer to supply on a daily basis. This vision is about 'power play': be
as powerful as possible and use this power to impose your will on the other parties in the chain. 'Pie growing' is
seen as symbolic for an attitude of collaboration: parties work towards optimisation, not as much of their own
operations, but of the chain as a whole through voluntary coordination of goals and activities. This increases the
size of the pie which needs to be shared, this way all parties get a larger piece than in the original situation.
26 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

Practice-based example 1.3

Strategic partnership between Tony’s Chocolonely, Albert Heijn and Barry

Callebaut

The Dutch brand Tony's Chocolonely, which has the goal of 100% slave free chocolate, retailer Albert Heijn and
chocolate producer Barry Callebaut have entered into a strategic partnership in order to end child labour and
modern slavery in the chocolate industry. Albert Heijn is the first company which signs up for Tony's Open
Chain, Tony's Chocolonely open source platform which offers access to all expertise required to eliminate social
issues in the own chain of supply. The world-famous chocolate producer Barry Callebaut enables this
collaboration with its expertise in chocolate production. 'This is a giant leap for the chocolate industry and an
important step to make sustainable chocolate the industry standard by 2025', Barry Callebaut's CEO states.

From March 2019 the Delicata chocolate sold by Albert Heijn will only be produced using fully traceable cacao,
which has been procured at higher prices than before at Tony's Chocolonely partner corporations in Ghana and
the Ivory Coast. This price increase is necessary to enable cacao farmers to earn a survivable wage and to
enable transparency in the supply chain, in which the beans' origin and circumstances surrounding production
are clear.
Source: www.barry-callebaut.com, 29 November 2018 (edited)
27 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

We end this paragraph with a quote from Van der Veen's inaugural speech (2013), in which he draws
an analogy between supply chain management and teamwork within a football team: 'In order to
win, a football team needs good players in every position. One by one these are specialist who each
excel in a certain element of the football game. The strikers have to be able to score and the goal
keeper should be able to prevent goals. But that is not enough. Eleven top players still do not make a
top team. The players have to sense each other, they need to know how the others play, they have
to be willing to share the glory, they need a common purpose and they need to make agreements
and stick to them. In short, a football team's players need excellent individual qualities and they need
to be able to play together. The starting point for supply chain management is that there are various
independent enterprises within the chain which all work hard based on their individual qualities and
specialisms. But they also need to be controlled as a single entity. Using that as a guiding principle
supply chain management focuses on the creation of superior synergy.'

Intermediate question 1.2

Due to forward and backward integration some sectors see large cross chain-link companies. What does that
mean for the importance of supply chain management in these sectors? Explain your answer.

1.3 Supply chain management prerequisites

What are the supply chain management prerequisites?

Superior synergy: what does it take? Why do businesses find it difficult, even though they recognise
the necessity of team play, to properly shape their collaboration. Which conditions need to be met to
achieve this superior synergy in order to put this concept of supply chain management into practice?

In this paragraph we look at the prerequisites for supply chain management. We do not claim to
provide an exhaustive list of prerequisites, but we discuss a number of conditions which are often
mentioned in literature:
1 there needs to be internal integration
2 there needs to be mutual trust between partners in the chain
3 there needs to be a customer-centric approach
4 ICT-capabilities need to be sufficiently utilised
5 there need to be agreements about performance measurements.
28 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

See figure 1.9

Now we will discuss the prerequisites for supply chain management in greater detail.

1 Internal integration
The first prerequisite 'there needs to be internal integration' regarding the coordination between the
functional focus areas, and the involved departments, within the business. Many authors state the
businesses first need to coordinate between their own processes, or be internally integrated, before
they are ready for superior coordination with external parties. So: first business administration, then
supply chain management.

2 Trust
The second condition 'there needs to be mutual trust between partners in the chain' comes from the
previously discussed supply chain management characteristic that collaboration between supply
chain partners takes place on a voluntary basis. This voluntary collaboration requires trust. Handfield
c.s. (1999) emphasize that 'the management of interpersonal relationships between the different
people in the organisations is often the most difficult part of the SCM-initiative.’ Especially building a
mutually relationship based on trust plays a crucial part in SCM success: ‘The trust-building process is
an element that must continually be managed at all times. Trust grows with use and disappears when
not used.’
29 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

Practice-based example 1.4

'Chain collaboration often breaks down at the front door'

Most businesses really know that it would aid them if they would engage in far-reaching collaboration with
customers and suppliers, BLMC Supply Chain Optimisation's director says, who together with Nyenrode carried
out extensive research on how businesses collaborate. But practice turns out to be stubborn. The BLMC
director writes that this is partially due to the booming economy. 'Because of this, organisations do not
experience the necessity to change. This makes it appealing to use all time and capital for daily operations
instead of trying to look at the entire supply chain from a strategic point of view.'

What does it take to get to external collaboration within the chain? Mostly vision and guts. And next to that
trust. Because it is more and more common that the chain needs to rapidly adapt to a fast-changing market.
The ability to learn, respond and innovate are essential in this process, and this is only possible when the chain
is based on trust. There also needs to be a common interest, according to the BLMC director, and there should
be something in it for everyone.

Are there any good examples? The director: 'They are scarce but they are there. Think for instance of the JSF –
the F35 Joint Strike Fighter, where a director actively tries to coordinate all collaborating businesses. And there
is an interest, an independent party, and there is enough margin for everyone and behold: the miracle
happens. So, it is possible.'

Source: P. Boerman, www.zipeconomy.nl, 1 May 2018 (edited)

3 A customer-centric approach
Previously in this chapter we read that chain partners, next to their own goals and those of their
chain partners, also need to keep an eye on the general goal. This means that they continuously need
to ask themselves what the final consumer's desires and needs are. There needs to be a customer-
centric attitude. Ideally businesses share their knowledge about short and long-term needs and
preferences of current and potential customers with their chain partners. They do not opt for a 'one
size fits all' approach but instead pay attention to the differentiation in customer needs.

4 Utilise Information and Communication Technology (ICT) capabilities

The fourth prerequisite for supply chain management concerns the use of information and
communication technology. In order to be able to collaborate, information needs to be current and
suitable for exchanging. Information systems are preferably open and transparent. Currently many
businesses who are willing to cooperate run into obstacles due to a mismatch of information systems
and a lack of standards. It is expected that the ICT capabilities for mutual coordination will see an
increase in their use in the future. In chapter 7 we will go more into ICT in the supply chain

5 Measuring performance
The final prerequisite for supply chain management is about performance measurement. When
parties desire collaboration they will have to enter into agreements about each other's expected
30 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

performance. The chain partners' performance will also need to be monitored, to observe deviations
in the agreed performance at one or more chain partners and to adequately intervene. Logistics
Europe and IBM (2005) research showed that superior chains use continuous measurement. What is
for instance the reliability of forecast? And the reliability of deliveries? And the cash-to-cash cycle
time? Are the supply chain costs known? Etcetera.

We can conclude that there are various prerequisites which need to be met before there can be
supply chain management. Businesses need to be internally integrated to be able to capitalise on the
opportunities for external integration. They have to want to collaborate, trust each other and feel
part of the whole and not just pursue their own goals. They need to be customer-centric. This
customer-centric approach connects chain partners: when all parties know that it is about serving the
final customer effectively and efficiently they will all move in the same direction. Obviously, the
collaboration needs to be facilitated. The growing possibilities offered by ICT need to be utilised.
Businesses which desire collaboration need to be able and prepared to enter into proper
performance agreements and need to be able and willing to measure this performance.

Practice-based example 1.5

The Plastic Pact shows that many parties are willing to move in the same
direction

Plastic manufacturers, food producers, supermarkets, catering businesses and many more parties signed the
Plastic Pact, together with the under-secretary of the Ministry of Infrastructure and Waterworks. In a memo by
the Ministry the Nature and Environment director is quoted: 'The main gain of this pact is its broad
collaboration. From packager to producer and from supermarket to recycler: the entire chain now moves in on
the problem. This collaboration is essential to get to reduced and recyclable waste flows which are actually
being reused for new packaging.

The participants in the Plastic Pact aim to reduce the use of plastic by at least 20 percent in 2025 compared to
2017. Another goal is to have, by 2025, at least 70 percent of all one-off plastic products and packaging
materials which end up in the Dutch waste bins, recycled without loss of quality. Furthermore, all new plastic
products and packaging materials need to made from 100 percent recyclable plastics. Reducing the amount of
plastic in the environment, that is what it is about.
31 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

Source: www.kunststofenrubber.nl, 21 February 2019 (edited)[#T01.1a]

Intermediate questions 1.3

Often it is said that optimising separate elements is less optimal for the whole. Why does this not necessarily
have to be the case for supply chain management?

1.4 Profit through collaboration

How can collaboration between organisations end up benefiting the entire chain?
Collaboration pays off. Previously in this chapter we stated that supply chain management aims to
create value and reduce costs. We also discussed 'pie growing' instead of 'pie sharing'. The question
is where and how that extra piece of pie can be obtained through collaboration. In this paragraph we
will explicitly consider this question.

Value, added value and profit

First we need to explain what we mean by value. From a supply chain perspective, the term value is
connected to the importance the final customer or consumer attaches to a product or service or
combination of both. He or she will express that value through the money he or she is willing to pay
in order to own said product and/or service. In the rest of this paragraph this is the definition of
value which we will use. So, we look at the additional benefits to the consumer for which he or she is
willing to pay.

Here we should mention that the term 'value' can have a wider meaning. Van Dam (1997) for
instance indicated that, next to customer benefits, value can also be expressed in ecological impact,
public acceptability and corporate liability. It was also posed that next to a financial margin there is
an ecological margin, a social margin and a risk margin. See figure 1.10.
32 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

We return to our previous definition of value and now look at what is meant by added value. A
business's added value is the value of the products and/or services sold minus the value of
products/services procured. The added value is sometimes also defined as the reward for the
production factors nature, labour, capital and entrepreneurship, which are being deployed to
increase the value of the procured product and/or services to the value of the product and/or
services being sold.

Finally, the profit is the difference in money which customers are willing to pay for products and/or
services and the costs made to supply those products and/or services. Here money is an expression
of the attached value. Among these costs are procurement of raw materials, parts and third-party
services (the value of the products and/or services procured). But the costs of land, labour and
sustainable means of production (the rewards for the aforementioned three production factors
nature, labour and capital) are also included. This means that the difference, the profit, is the reward
for the fourth production factor: entrepreneurship. See figure 1.11.

Collaboration to create value

When the value final customers attach to the supplied products and/or services increases due to
collaboration in a supply chain leads to them being willing to pay a premium price, we talk about
collaboration which leads to additional value creation. And, for the same level of deployment of the
production factors nature, labour and capital, lead to increased profits for the chain as a whole. But
how can organisations in a supply chain collaborate in such a way that additional value for the final
consumer is created?

Organisations can start by sharing their knowledge about short and long term needs and preferences
of their (final) customers. Using the acquired additional knowledge organisations can then better
33 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

anticipate these customer needs and preferences. Organisations can use the shared knowledge when
establishing collections which meet the customer's needs and desires. Possibly organisations can use
the shared knowledge to launch effective marketing and promotional campaigns, which increase the
amounts which are customers are willing to pay. They can also develop new products and/or services
to satisfy customers’ needs. Perhaps organisations can even collaborate when developing said
product and/or service. Or they can collaborate with the customers to develop new products and/or
services.

Practice-based example 1.6

Smart bicycle bell should improve elderly cyclists' safety

In traffic elderly people on bicycles are a very vulnerable group. In 2017 as many as two third of all bicycle
deaths concerned people of 65 or over. The organisations SAP and Quinso and a Dutch insurance company,
together with the province of Noord-Brabant, started a pilot project to better protect elderly cyclists.
The SafeToBike app warns cyclists of dangerous sections on their route, such as junctions and roundabouts
which showed a large number of bicycle related accidents in recent years. This information is drawn from a
public database created by police and insurance companies but users can also add sections themselves.
Through gps the app is linked to a special bicycle bell which turns red and buzzes when a cyclist approaches a
dangerous section.
This pilot follows a successful experiment with another vulnerable group: cycling students. The collaborating
parties’ goal is that everyone feels safer when cycling. 'There is so much data available, you just have to use it!
With this solution we hope to contribute to a safer world, for young and old', Quinso's managing partner says.
Source: www.productnieuws.nl, 12 July 2018 (edited)

In mutual coordination organisations can also structure their processes in such a way that it becomes
easier to meet the desires of the ever more individualistic customers. This can also lead to increased
value for and increased payments by customers, because customers get the level of service they
require. Amacom for instance supplies, in coordination with web shops, washing machines and high-
end television within five hours after ordering. People pay a premium for this because people who
order a € 2,000 television online do not mind to pay a little extra for speed and service'.

There are countless examples of businesses which increased the value which the final customer
attaches to the product though collaboration. Here we provided you with one example but you will
find more scattered throughout this book.
34 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

Practice-based example 1.7

Wehkamp and BCC kick of their major strategic collaboration

Wehkamp and BCC will collaborate. This collaboration entails that Wehkamp will use BCC's full range of
electronics and domestic appliances and that BCC on the other hand will use Wehkamp's entire fulfilment
process. The best of both worlds, combined for the benefit of the consumer.
This strategic collaboration creates a win-win situation. With this collaboration both parties reinforce their
position in a competitive market. But more important still: together Wehkamp and BCC will be able to better
serve their customers. By combining Wehkamp's online strength and comprehensive service with BCC's
expertise regarding electronics and physical locations a unique proposition is created for the consumer. In the
longer term the collaboration will be expanded further.
Source: www.productnieuws.nl, 6 July 2018 (edited)

Collaboration to reduce costs

Collaborations which are not focused on creating (additional) value for the consumer still may
benefit the chain as a whole. After all, from a supply chain perspective, while keeping the value for
the final customer the same, the reward for entrepreneurship (profit) can be increased when the
rewards for labour, nature and capital are reduced. In other words: even when the final customers
are not willing to pay more for the provided products, collaboration pays off because it enables a
reduction in the costs of the production factors nature, labour and capital, which will mean that a
greater part of the added value is expressed in profit.

Now too we can ask the 'how question': how can parties in the same or in different supply chains
reduce costs by collaborating, so reduce or prevent waste without this impacting the value of the
whole?

Without pretending to be complete, we will go into reducing the following types of waste though
supply chain collaboration:
1 waste due to unnecessary transportation
2 waste due to overproduction and superfluous or excessive reserves
3 waste due to superfluous activities
4 waste due to unnecessary errors and checks

1 Waste due to unnecessary transportation

Unnecessary transportation leads to additional fuel costs (production factor nature), additional
maintenance for and depreciation of means of transportation (production factor capital) and
additional labour costs. These additional costs can be reduced when organisations improve their
coordination. Manufactures but also traders can combine their flow of goods. Together they can
35 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

agree to carry return shipments. And they can employ logistic services which can combine cargoes.
Within the same supply chain, a powerful retailer can also stop to impose its desires on its suppliers.
Instead of demanding a one-sided and very frequent delivery on a tight schedule the retailer can
collaborate with its suppliers in order to agree on deliveries which allow for efficient and sustainable
transportation.

2 Waste due to overproduction and superfluous or excessive reserves

Just as unnecessary transportation, overproduction (producing too much or too early) and the
redundant or excess reserves that come with it necessitates the additional deployment of the
production factors nature (procured raw materials may spoil or become unusable when shelved for
too long), labour (additional stock requires additional control and handling) and capital (for instance
the storage space required). The costs can be reduced or perhaps be completely avoided when
parties collaborate. When information is exchanged it will be easier to predict the client's demand,
the emergency stock may be reduced and the number of left-over or obsolete products will be
reduced as well. When processes in the chain are better coordinated, fewer decoupling supplies will
be required. There will be less waiting for raw materials, parts or information, which avoids the
waste of being unproductive due to waiting times.

Practice-based example 1.8

A well-directed chain reduces logistical costs for the construction industry

In practice, the construction industry, which is known to be relatively conservative, has shown little interest in
logistical innovations. Nevertheless, logistical innovations are sourly needed in the construction business since
the coming period will see the start of many housing projects in poorly accessible city centres. Research shows
that currently already 30 percent of business traffic in urban construction is related to over 200,000 vans and
20,000 lorries every day. This leads to irritation and congestion, reduced air quality, noise and traffic safety
issues.
It is up to the building industry to change this. Conditions for the successful implementation of construction
logistics are, amongst other things: insight into the integral costs of the entire chain, collaborate on the tactical
and operational planning based on shared information, a sufficient scale in construction hubs to reduce costs, a
well-considered location of these hubs, insight in the operational logistical performances and an active role of
the local government when calling for tenders and awarding permits.
Source: B. Dijkhuizen, www.logistiek.nl, 31 October 2018 (edited)

3 Waste due to superfluous activities

There is also waste when unnecessary activities are carried out. Consider for instance the actions
taken because packaging sizes were not coordinated. These actions do not add value for the final
user, but do require additional use of production factors. Also think about having to re-enter
information when information systems do not match.
36 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

4 Waste due to unnecessary errors and checks

Finally, we discuss waste related to errors. Checking for errors, fixing mistakes and/or rejecting
products: all this requires additional deployment of production factors without adding customer
value compared to a situation where no errors are made. Collaboration between businesses may
prevent mistakes, for instance errors in product specifications due to a lack of coordination. Trust
between supply chain partners can also prevent unnecessary checks.
We can conclude that collaboration within and between supply chains could lead to gains for the
chain as a whole, even when the value of the final product and/or service remains the same to the
final customer, because waste is being reduced.
We end this chapter with: SCELP (Supply Chain Excellence Leadership Platform) which offers a nice
impulse to quantify the benefits of supply chain management. To this end they use five indicators:
the increase of timely delivered goods, the reduction of supplies, the reduction of machine
downtime, the increase in production efficiency and the reduction of transportation costs. See figure
1.12.

Source: www.scelp.nl (2019)

Practice-based example 1.9

Real estate maintenance businesses join forces

Koers Group, Hartman Total Maintenance, Mampaey Installation Technology and Cazdak Roofing have joined
forces. They do this to respond to the growing demand for comprehensive maintenance packages. One party
which can do everything for the client.
Koers Group's general director states the following: 'As far as we are concerned collaboration within the chain
is the future. Close collaboration with both our maintenance partners and our clients provides additional value
for all parties involved. Our mutual collaboration encourages us to innovate, while our clients benefit from
improved quality and lower costs. Because by optimising the use of the parties' individual expertise, projects
can be handled in a smarter way. With fewer risks and few expenses for failures. Not just the start-up and
completion costs are reduced but also the costs for overhead and advice.'
Source: www.bouwtotaal.nl, 20 March 2019 (edited)

Intermediate question 1.4

Selling prices remaining the same, a business can increase its added value by procuring cheaper products
and/or services. Does this result in a gain for the whole chain when you consider it from the supply chain
perspective?
37 © Noordhoff Uitgevers bv SUPPLY CHAIN MANAGEMENT

Synopsis
What is the meaning of the supply chain for an individual firm?
Each business is part of one or more supply chains. To many firms the dependencies within the
supply chain have become more prevalent and as a result, they feel the necessity to collaborate.

Why is supply chain management necessary?

Consumers have become more demanding. Consumers are also becoming more individualistic, more
erratic in their purchasing behaviour and more outspoken about their demands and desires.
Businesses need each other in order to respond to this development. Also, the drive for sustainability
and the increased focus on health, safety and people's and animal's well-being necessitate
collaboration.

What is supply chain management's essence?

Therefore, supply chain management (SCM) reaches across businesses: multiple organisations are
involved. SCM is not just about managing upstream relationships but also about managing
downstream relationships. In supply chain management organisations voluntarily work together. And
this collaboration does not need to be limited to logistics. Collaboration focusses on the creation of
value and the reduction of costs. It is about the performance of the entire chain and not about the
performance of the individual links in the supply chain. This does not mean that the supply chain
partners give up on their own goals. Because collaboration creates results and means that there is
more to go around. It is about 'pie growing' instead of 'pie sharing'.

What are the supply chain management prerequisites?

Supply chain management prerequisites often mention in literature are:
1 there needs to be internal integration
2 there needs to be mutual trust between partners in the chain
3 there needs to be a customer-centric approach
4 ICT-capabilities need to be sufficiently utilised
5 there need to be agreements about performance measurements.

How can collaboration between organisations end up benefiting the entire chain?
Collaboration between organisations results in gains for the entire chain when the value attached to
the supplied product and/or service by the final customer increases (which results in their willingness
to pay a premium) and/or when costs can be reduced by reducing or avoiding waste through
collaboration.