Proceedings of the 10th WSEAS International Conference on AUTOMATION & INFORMATION

Current issues and challenges of supply chain management

ALES GROZNIK, PETER TRKMAN
Faculty of Economics
University of Ljubljana
Kardeljeva ploscad 17, 1000 Ljubljana
SLOVENIA
ales.groznik@ef.uni-lj.si; peter.trkman@ef.uni-lj.si

Abstract: Efficient supply chain management is crucial for survival and success in a turbulent world. Current economic
crisis increases its importance even further. The paper reviews latest findings in the most relevant areas, namely the
importance of a proper supply chain strategy that is a pre-condition for business process renovation and mitigation of
supply chain connected risks. Performance measurement is also a pre-condition for proper management. Supply chain
frameworks and standards that provide guidelines in facing those challenges are reviewed. Finally, the benefits of
supply chain informatization are shown.

Key-Words: Supply chain management, business renovation, IT, supply chain risks, supply chain frameworks

1 Introduction is a matter of survival as purchased goods and services

It has often been claimed that in the modern world the
competition is no longer between single companies but
between supply chains [1], [2]. Anecdotic evidence also
supports this claim (e.g. the problems in automotive
industry due to supplier failures or the infamous Nokia-
Eriksson-Phillips example [3]). However, most of the
papers are focused on mathematical methods for supply
chain optimization instead of an overview of business-
related challenges connected to supply chains
The challenge for firms today is namely not just to take
up a supply chain management (SCM) initiative but to
implement it successfully. An informatics perspective is
vital since information flow is an integral part of SCM
and material flow is closely dependent on information
flow. But SCM initiative can be a failure unless one is
aware of the issues that may arise during its planning or
implementation [4].
However, SCM is, at best, still emergent in terms of both
theory and practice [5], therefore both further research
and classification of previous research efforts is needed.
This paper mainly contributes to the second purpose;
namely it presents several important issues in SCM.
2 Current issues in SCM
2.1 Strategic insights
Earlier purchasing was wedded to routine in many
companies. For the last two decades though, no company
can allow purchasing to lag behind other departments in
adjusting to worldwide changes [6]. The recognition of
the SCM as a key and vital area, both in the private and
public sectors, has focused attention on its effectiveness.
In a number of organizations, cost-effective supply chain
account for up to 80 per cent of sales revenue [7], while
in the public sector there is an ever-increasing demand
for savings in the procurement process [8].
However, there is (in line with the contingency theory)
no single best way of organizing/leading the supply
chain that is effective in all situations and there is no
universal set of choices that is optimal for all SCs
(adapted from [9], [10]). In order to optimize the SC the
following five configuration components are critical:
operations strategy, outsourcing strategy, channel
strategy, customer service strategy and asset network
[11]. The four main approaches towards production are
make to stock, make to order (see e.g. [12] for a
comprehensive review of make to order SC challenges),
configure to order and engineer to order [11] – they
considerably affect the correct strategy.
According to Aberdeen Research the top challenges
facing the modern supply chains are the lack of
communication across departments, lack of
communication with external partners and lack of
alignment between business goals and information
technology [13]. Our paper will deal with each of those
challenges.
2.2 Business renovation in SCM
After successful strategy preparation, companies have to
identify areas of possible improvement in quality of
product or service, lead times or operational costs. This
step takes an integral view of all organisations involved
into the supply chain in order to renovate their
operations towards supply chain excellence. Business
Renovation (BR) or business process renovation and
informatisation efforts integrate the radically strategic
method of Business Process Re-engineering (BPR) and

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 Proceedings of the 10th WSEAS International Conference on AUTOMATION & INFORMATION
more progressive methods of Continuous Process
Improvement (CPI) with appropriate IT infrastructure
strategies. BPR is a thorough re-engineering strategy that
critically examines current business policies, practices
and procedures, rethinks them and then redesigns the
mission-critical products, processes and services [14].
BPR seeks improvements by elevating efficiency and
effectiveness of the business process that exist within
and across organizations. On the opposite, CPI refers to
minor and specific changes that one makes in an existing
business process [15]. CPI relies on building a
fundamental understanding of customers’ requirements,
process capability, and the root cause of any gaps
between them by developing culture of continuous
improvement in the areas of reliability, process cycle
times, costs in terms of less total resource consumption,
quality, and productivity. Six Sigma and Total Quality
Management (TQM) are examples of approaches to CPI.
BR argues for a balanced approach between radical
changes and continuous improvements. According to
Jacobson [16], we view business renovation as an
umbrella concept for strategic IS planning, and both
BPR and CPI since thorough and effective renovation
should combine both, radical shifts (BPR) with those
that permanently increase business efficiency and
effectiveness (CPI).
Since direct changes can have a detrimental result,
companies develop business models [17]. A business
model is an abstraction of a business that shows how
business components are related to each other and how
they operate. Its ultimate purpose is to provide a clear
picture of the company’s current state and to determine
its vision for the future. There are several reasons
producing business models [18]:
• A business model helps us understand the
business: one of the primary goals of business modelling
is to increase understanding of the business and to
facilitate communication about the business.
• A business model is a basis for creating suitable
information systems: descriptions of the business are
very useful in identifying the information systems
necessary to support the business. Business models also
act as a basis for engineering requirements when a
particular information system is being designed.
• A business model is a basis for improving the
current business structure and operation: as it shows a
clear picture of the business current state, a business
model can be used to identify the changes necessary to
improve the business.
• A business model provides a polygon for
experiments: a business model can be used to
experiment with new business concepts and to study the
implications of changes for the business structure or
operation.
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• A business model acts as a basis for identifying
outsourcing opportunities: using a business model the
core parts of a business system can be identified. Other
parts considered less important can be delegated to
external suppliers.
The main purpose of developing and analysing business
models is to find revenue and value generators inside a
reversible value chain, or a business model's value
network .
2.3 Supply chain risks
The risk of disruptions caused by both factors within SC
and outside environmental forces is a topic of increased
importance. Supply chain risk management is therefore a
field of escalating importance and is aimed at developing
approaches to the identification, assessment, analysis
and treatment of areas of vulnerability and risk in SCs
[19]. Various trends that enhance exposure to risks, such
as the increased use of outsourcing, globalisation,
reduction of the supplier base; reduced buffers, increased
demand for on-time deliveries or shorter product life
cycles [20] are increasing the importance of SCRM. The
recently developed model ([21], shown in Figure 1)
sheds more light on the prediction of suppliers’
connected risks. It is based on the premise that different
suppliers (and their second and third tier suppliers)
operate in different markets and environments; therefore
their turbulence and the forces influencing a supplier
also differ. While a certain supplier strategy (e.g.
ordering large batches to decrease procurement costs or
single-source suppliers with long contractual
commitments) may be acceptable in a non-turbulent
environment, it may be detrimental in a more turbulent
one (e.g. in the presence of quick technological advances
such as microprocessors or large commodity price
swings). Considering all of this, the same supplier
attributes, strategy and structure may pose considerably
different risks of disruption. Therefore, a comprehensive
approach to SCRM has to include supplier-associated
turbulence as well as various sources of uncertainty due
to supplier attributes such as strategy, structure and
performance.
In order to distinguish between the different kinds of
risks, the sources of uncertainty were separated into two
different constructs [21]:
- endogenous uncertainty: the source of uncertainty/risk
is inside the SC and can lead to changing relationships
between focal firm and suppliers, the most notable kinds
are market and technology turbulence. Market
turbulence is likely to arise from the heterogeneity and
rapid changes in the composition of customers in the
market and their preferences [22]. It means continuous
changes in customers’ preferences/demands, in
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price/cost structures, and in the composition of
competitors [23]. Technological turbulence refers to the
degree to which technology changes over time within an
industry and the effects of those changes on the industry
[24]. Technological turbulence arises from changes in
the underlying technologies of products or services and
their rates of obsolescence [22]. Technical dynamics
includes how fast the related technology is changing, as
well as breakthroughs in the manufacturing process, and
mass production techniques [25];
- exogenous uncertainty: the source of uncertainty/risk is
from outside the SC. These risks are further divided into
the two most notable kinds; namely discrete events (e.g.
terrorist attacks, contagious diseases, workers’ strikes)
and continuous risks (e.g. inflation rate, consumer price
index changes).
which one to implement and to what extent. The
adoption of frameworks and standards causes
standardization of business operations that is in
contradiction with agile supply chain strategies and lean
business models. From the business model point of view
the most relevant is the Supply-Chain Operations
Reference (SCOR) model that was developed by the
Supply-Chain Council (SCC) to assist organisations in
increasing the effectiveness of their supply chains, and to
provide a process-based approach to SCM [28]. The
SCOR model (Figure 2) provides a common process
oriented language for communicating among supply-
chain partners in the following decision areas: PLAN,
SOURCE, MAKE, DELIVER and RETURN.
Figure 2: SCOR framework

Figure 1: Conceptual model for suppliers’ connected

risks
Market Turbulence
New products
Price sensitivity
Level of competition
Demand swings
Supplier Attributes New customers v. repeat
Technology Turbulence
Rapid changes
High tech influence
Financial Performance
Human Resource Factors
Operational Factors
Culture Endogenous
Relationship Factors uncertainty Risk of Supplier
Non Performance
or Disruption
in a SC
Exogenous
uncertainty

SC Strategy Continuous
and Structure Interest rates
CPI
GDP
SC type Commodity prices
lean, agile, hybrid Discrete
Suppliers Types Terrorism
Business Structure Disasters
Geographic Location Strikes

Source: [21]

The current approaches only offer a limited estimation of

the risk of supplier non-performance. The proposed
approach (see [21] for more details) enables the
estimation of the risks and helps the company to make a
more informed decision as to how much risk it is willing
to take and which risks will it mitigate (either with
dual/multiple sourcing or with the change of supplier).
Dual sourcing is namely an important topic – while it
may increase the costs due to activities connected with
supplier search and qualification it can considerably
decrease the costs of supplier non-performance or even
bankruptcy (see e.g. [26], [27]).
2.4 Supply chain frameworks and standards
In order to streamline businesses and bridge the supply
chain risks, different frameworks and standards (SCOR,
GS1, MMOG/LE, ISO 9001, ISO 14001, BS OHSAS
18001, BS 25999, ISO/IEC 27001, etc) have been
developed. The organizations are facing the challenge
Source: Supply Chain Council, www.supply-chain.org
Researching the link between frameworks or standards
and supply chain performance is scarce. Lockamy &
McCormack [29] have studied the link between SCOR
planning practices and supply chain performance and
shown that the supply chain planning practices related to
process integration, collaboration, teaming, process
measurement, process documentation and process
ownership have been shown to be important to supply
chain performance, but lack broad implementation by
supply chain partners. This suggests that integrated
supply chain management may be more difficult to
operationalize in practice than the popular supply chain
press or consultants would have one to believe.
This study also suggests is that some of the best
practices proposed as mechanisms for improving overall
supply chain management performance may not have the
degree of impact often presented in the literature. Some

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 Proceedings of the 10th WSEAS International Conference on AUTOMATION & INFORMATION
best practices help to improve supply chain performance
only in specific decision areas.
2.6 Performance measurement in SCM
A well known-saying is that: ‘You Can’t Manage What
You Can’t Measure’. Therefore all frameworks and
research efforts emphasize the importance of
performance measurement. The starting point for
performance measurement is that the metrics should:
• be directly related to the manufacturing strategy,
• primarily use non-financial measures,
• vary between locations,
• change over time, as needs change,
• be simple and easy to use,
• provide fast feedback to operators and managers,
• be intended to foster improvement rather than just
monitor[30].
Performance measurement focuses on two connected but
still separable areas, namely the measurement of
performance of each supplier and the measurement of
supply chain as a whole. The classic metrics for supplier
performance measurement are replenishment lead time,
on-time performance, supply flexibility, delivery
frequency, quality, viability, information coordination
capability etc. [31]. According to the recent survey the
most important measures are quality of delivered goods,
on time delivery and flexibility of supply [32]. Since
balanced scorecard [33] is in general one of the most
widely used models for performance measurement its
application to supply chain area has also been proposed.
Such an example is presented in [34] who derived the
objectives for SCM from financial, customer, business
process (both internal and external) and learning and
growth perspective. As shown performance
measurement is closely connected with process
renovation outlined in the previous section (see e.g. [35]
as an example of performance metrics for each of the
supply chain processes.
Different performance measures can also be used at
various decision areas of the SCOR model; for example
supplier delivery performance and purchase order time
are suitable metric for “SOURCE” while utilization of
resources or percentage of defects are more relevant for
“MAKE” phase (see e.g. [32] for more details). The
review of customer and internal facing metrics is also
shown in figure 3.
One of the increasingly popular approaches for both
measurement of effectiveness and prediction of changes
due to renovation of supply processes is the use of
simulations. They enable the preparation of the models
of current and desired state [36] and can be used to
estimate the risks of different events [37]. In connection
with business process modeling (see chapter 2.2. of this
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paper) they can be used to compare different
configurations of business processes [38].
Figure 3: Main metrics for supply chain performance
measurement
Source: [43]
2.7 Supply chain informatization
Final issue in SCM is supply chain informatization
which is by far an easy task. Information technology is
an important enabler of effective supply chain
management. Much of the current interest in SCM is
motivated by the possibilities that are introduced by the
abundance of data and the savings inherent in
sophisticated analysis of these data (see e.g. [39] for
several successful case studies). The innovative
opportunities coming to the fore with e-business have
also increased the interest in IT. From technological
perspective SCM spans over internal as well as external
systems, which facilitates information transfer between
various organizations. In addition, SCM typically
includes many functional areas within an organization
and is affected by the way the various groups
communicate and interact.
According to Simchi-Levi [40] ultimate goals (Figure 4)
of IT are to collect, access and analyze information. In
practice that SCM systems have to:
- collect information on each product from production to
delivery or purchase point and provide complete
visibility for all parties involved,
- access any data in the system from single-point-of-
contact,
- analyze, plan activities, and make trade-offs based on
information from the entire supply chain.
In order to achieve these goals major issues (Figure 4) in
informatization are standardization, infrastructure e-
business, supply chain components and integration.
Standardization is vital for IT since it allows systems to
work together and is a key feasibility factor of SCM
implementation. Infrastructure is a basic component of
system capabilities without which some of the goals
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 Proceedings of the 10th WSEAS International Conference on AUTOMATION & INFORMATION
cannot be achieved. E-business is an emerging area of
business conduct that provides cost-effective way of
SCM. Supply chain components are various systems that
are involved directly in supply chain planning. These are
typically systems that combine short-term and long-term
decision support system elements.
Figure 4: Goals and means of SCM – an IT view
Source: [40]
The goal of SCM software s to increase flows through
collaboration. However, increasing collaboration is not
merely a matter of making a tool available. Participants
must be encouraged to use the tool share information to
make its use effective. Ruppel [41] compared adoption
of three information technologies (i.e. group decision
support systems, EDI and e-business) that can be used to
improve information flows and the factors that affect
their adoption and use. Comparison indicates that the
decision to adopt one of these technologies does not
guarantee its effective use. Those who wish to champion
the use of tools have a complex task to perform not just
to foster adoption, but also to encourage successful
implementation.
4 Conclusion
The paper has tackled a vital challenge to provide a
comprehensive review of several inter-connected
challenges in supply chain management. Only
continuous efforts in each of the mentioned areas assure
the efficient and successful. Nevertheless, optimal
decision making is not possible since the choice set is too
complex and generally unknown, for due to the large
number of possibilities and uncertainties. Therefore SCM
»optimization« involves a small number of choices at each
step of exploration [42]. We hope that our paper is a small
but significant contribution in this quest
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