12.

Supply chain management

12.1. What is supply chain management?
What is Supply Chain Management (SCM)?
Supply chain management (SCM) is the active management of supply chain activities to
maximize customer value and achieve a sustainable competitive advantage. It
represents a conscious effort by the supply chain firms to develop and run supply
chains in the most effective & efficient ways possible. Supply chain activities cover
everything from product development, sourcing, production, and logistics, as well as the
information systems needed to coordinate these activities.
The concept of Supply Chain Management (SCM) is based on two core ideas:
1. The first is that practically every product that reaches an end user represents the
cumulative effort of multiple organizations. These organizations are referred to
collectively as the supply chain.
2. The second idea is that while supply chains have existed for a long time, most
organizations have only paid attention to what was happening within their “four
walls.” Few businesses understood, much less managed, the entire chain of
activities that ultimately delivered products to the final customer. The result was
disjointed and often ineffective supply chains.
The organizations that make up the supply chain are “linked” together through physical
flows and information flows.
Physical Flows
Physical flows involve the transformation, movement, and storage of goods and
materials. They are the most visible piece of the supply chain. But just as important are
information flows.
Information Flows
Information flows allow the various supply chain partners to coordinate their long-term
plans, and to control the day-to-day flow of goods and materials up and down the supply
chain.
Why Do You Need To Know About Supply Chain Management (SCM)?
Supply chain management is as much a philosophical approach as it is a body of tools
and techniques, and typically requires a great deal of interaction and trust between
companies to work. For right now, however, let’s talk about three major developments
that have brought SCM to the forefront of management’s attention.
 The information revolution
  Increased competition and globalization in today’s markets
 Relationship management
The Information Revolution
In the early 1960s when computers were first developed, a mainframe computer filled
an entire room. With the development of the integrated circuit, the cost and speed of
computer power increased exponentially. Today, a laptop computer exceeds the
storage and computing capacity of mainframe computers made only 15 years ago. With
the emergence of the personal computer, optical fiber networks, and the Internet, the
cost and availability of information resources allows easy linkages and eliminates
information-related time delays in any supply chain network. Wal-Mart’s ability to send
daily sales information to its suppliers is just one example.
Organizations are moving towards a concept known as electronic commerce, where
information transactions are automatically completed via Electronic Data Interchange
(EDI), Electronic Funds Transfer (EFT), Point of Sale (POS) devices, and a variety of
other approaches. The late 1990s and early 2000s saw the emergence of on-line
“trading communities” that put thousands of buyers and sellers in touch with one
another . Ariba is just one example of a business-to-business (B2B) exchange.) The old
“paper”-type transactions are becoming increasingly obsolete. At the same time, the
proliferation of new telecommunications and computer technology has made
instantaneous communications a reality. Such information systems — like Wal-Mart’s
satellite network — can link together suppliers, manufacturers, distributors, retail outlets,
and ultimately, customers, regardless of location.
Increased Competition and Globalization
The second major trend is increased competition and globalization of businesses. The
rate of change in markets, products, and technology is increasing, leading to situations
where managers must make decisions on shorter notice, with less information, and with
higher penalty costs. New competitors are entering into markets that have traditionally
been dominated by “domestic” firms. At the same time, customers are demanding
quicker delivery, state-of-the-art technology, and products and services better-suited to
their individual needs. In some industries, product life cycles are shrinking from years to
a matter of two or three months. One management guru even compared current global
markets to the fashion industry, in which products go in and out of style with the season.
Despite the imposing challenges of today’s competitive environment, some
organizations are thriving. These firms have embraced the changes facing today’s
markets, and have put a renewed emphasis on improving their operations and, in
particular, supply chain performance. For instance, Johnson Controls can now receive
an order for seats from a Ford assembly plant, make the seats, and deliver the order —
all within four hours. This requires incredibly flexible operations within Johnson’s own
manufacturing systems, as well as dependable information links with its supply chain
partners.
To survive, many firms today find that they must increase market share on a global
basis and be on the “ground floor” of rapid global economic expansion. Simultaneously,
these firms must vigorously defend their domestic market share from a host of “world
class” international competitors. To meet this challenge, managers are seeking to find
ways to rapidly expand their global presence. They must position inventories so
products are available when customers (regardless of location) want them, in the right
quantity, and for the right price. This level of performance is a constant challenge to
organizations, and can only occur when all parties in a supply chain are “on the same
wavelength”.
Relationship Management
The information revolution has given companies a wide range of technologies for better
managing their operations and supply chains. Furthermore, increasing customer
demands and global competition have given firms the incentive to improve these areas.
But this is not enough. Any efforts to improve operations and supply chain performance
are likely to be inconsequential without the cooperation of other firms. As a result, more
companies are putting an emphasis on relationship management.
Of all the activities operations and supply chain managers perform, relationship
management is perhaps the most difficult, and is therefore the most susceptible to
break down. A poor relationship within any link of the supply chain can have disastrous
consequences for all other supply chain members. For example, an unreliable supplier
can virtually cripple a plant, leading to inflated lead times and resulting in problems
across the chain, all the way to the final customer.
To avoid such problems, firms must manage the relationships with their upstream
suppliers as well as their downstream customers. In many American industries, strong
supply chain relationships like those found Japan might not develop readily. Firms are
often geographically distant, and there are not as many small, family-owned suppliers
as in Japan. In the case of high-tech firms, many components may be sole-sourced
from overseas suppliers who are proprietary owners of the required technology. In such
environments, it becomes more important to choose a few, select suppliers, thereby
paving the way for informal interaction and information sharing.
What Do You Need to Know about Supply Chain Management (SCM)?
The first thing one needs to understand is that SCM doesn’t replace what we’ve learned
about management over the last 50 years; it builds upon it. The analogy that a chain is
only as strong as its weakest link holds here as well. Organizations must first be able to
provide quality products or services in a timely, cost-effective manner if they want to
tackle broader supply chain issues. Therefore, programs such as Total Quality
Management, Just-in-Time manufacturing, concurrent product development, and the
like are just as relevant today as they were in the past. In fact, it’s interesting to note
that many of the firms that have emerged as SCM leaders had already established their
reputations in other areas beforehand.
The second thing to understand about SCM is that it often requires significant changes
in the firm’s organizational structure. SCM issues cut across functional areas and even
business entities. Therefore, the responsibility and authority for implementing SCM must
be placed at the highest levels of an organization. Firms that attempt to imbed SCM
within a functional unit (such as purchasing, operations, or logistics) usually have limited
success.
Third, SCM requires firms to put in place information systems and metrics that focus on
performance across the entire supply chain. This is because individual units that seek to
maximize their performance without regard to the broader impact on the supply chain
can cause problems. For example, a manufacturing unit’s decision to minimize its
inventory levels may reduce delivery performance to the end user. Likewise, a
distributor’s decision to chase highly seasonal demand may “bullwhip” its upstream
partners, causing significant cost overruns. Putting in place the information systems and
metrics needed to make intelligent decisions in the face of such trade-offs presents a
significant challenge to supply chain partners.
Finally, SCM adds another layer of complexity to a firm’s strategy development efforts.
Years ago, firms could succeed by being particularly good in one functional area, such
as marketing, finance, or operations. Then firms recognized that they had to have
sufficient capabilities across multiple functional areas in order to survive. Nowadays,
much competition occurs between multi-firm supply chains, not just between individual
firms. In addition to their debates about functional- and business-level strategies, then,
managers must now address how they will partner with other firms in order to compete.
How Do You Do Supply Chain Management (SCM)?
A firm’s SCM efforts start with the development and execution of a long-term supply
chain strategy. Among other things, this strategy should:
 Identify what supply chains the firm wants to compete in.
 Help managers understand how the firm will provide value to the supply chain.
 Guide the selection of supply chain partners, including suppliers, subcontractors,
transportation providers, and distributors.
As firms struggle to understand what supply chains they compete in, it is often valuable
to map the physical flows and information flows that make up these supply chains. From
these maps, firms can begin to understand how they add value, and what information is
needed to make the supply chain work in the most effective and efficient way possible.
Of course, the firm’s supply chain strategy does not exist in a vacuum. It must be
consistent with both the overall business strategy and efforts within such areas as
purchasing, logistics, manufacturing and marketing.

12.2. How should supply chains compete?

How Does Your Supply Chain Compete?
Global supply chains have their own cycles and intervals. Order lead times,
manufacturing cycle times, and transit times directly impact costs, inventory levels and
customer service. Often more important than the actual cycle times and transit times is
understanding how the rhythm of different operations impact each other. Lean
manufacturing principles have a name for this: take time, referring to the maximum time
allowed to produce product in order to meet demand. To drive efficiencies in the supply
chain, a lean manufacturing company focuses on the flow of product based on customer
need and then works backwards through the supply chain to establish the heartbeat of
the extended enterprise. The different nodes and links of the supply chain are designed
to add value while servicing and complementing both the downstream and upstream
flows.
Measuring Performance
In researching the stock of a publicly-traded company, a review of several financial
ratios and a comparison with the corporation's performance year-to-year versus its
competition provides insight into overall performance. Management efficiency is an
important category and a standard measure is the Return on Assets (ROA). Calculate
the overall cash conversion cycle of the corporation depicted in the following equation:
Days Working Capital = (Days Inventory Outstanding + Days Sales Outstanding) –
Days Payable Outstanding
Where,
Days Inventory Outstanding (DIO) = Inventory / (Revenue / 365)
Days Sales Outstanding (DSO) = (Account Receivables / Revenue) / 365
Days Payable Outstanding (DPO) = (Account Payables / Revenue) / 365
The overall cash conversion cycle (or Days Working Capital) is the number of days of
working capital required for a company to operate and serves as the financial rhythm of
the company. And while the numbers can be an interesting point of comparison against
competition, the real question is how these numbers impact the overall supply chain
where the company performs.
Changing Payment Terms Isn't Always a Winning Strategy
The most important thing for a buyer to remember is that their DSO is their supplier's
DPO – a change in one impacts the other. For example, it's a common practice for large
companies to try to extend payables to improve the cash-to-cash cycle. Some
companies will move from using Sight Letters of Credit to Open Account with 30 day
payment terms or stretch their Open Account 30 day terms out to 45 or 60 days.
Though this will improve the buyer's DPO ratio, it will also affect their suppliers who will
have to respond to a ballooning DSO.
Do the suppliers have the working capital to survive the increase? Do the suppliers now
need to borrow at higher interest rates to cover the increased working capital
requirements? Will this strategy have a negative impact on quality and service as the
suppliers look for cost efficiencies in their materials and operations? Will the suppliers
need to include their higher costs into the product cost going forward thereby increasing
the overall purchase price for the buyer? How does the increase in product cost
compare to the savings in working capital for the buying company? A buyer's change in
payment terms may cause suppliers to request letters of credit from the buyer to help
bridge the additional cost in pre-shipment financing and also to mitigate risk if they
foresee the buyer's credit rating being downgraded.
A company wants to get paid as quickly as possible; therefore, a common approach is
to drive down the number of days it takes for a company to be paid for their goods
resulting in a lower DSO ratio. Question: Why would a high-tech multi-national extend
their DSO's in emerging markets, allowing distributors more time to pay? Answer: To
increase revenue. A buyer should recognize that typical payment terms vary by
geography, industry and overall market conditions.
In Russia, for example, a 30 day term puts the distributor into the situation of having to
pay its suppliers for the products before the product can be installed at the end-
customer's location and before the distributor will be paid. Customs clearance and in-
country logistics can be such a challenge that the goods may take a full 30 days before
arriving at the customer location. As the customer pays only after installation, there is
little room for the distributor to handle more than one large deal at a time because they
need to finance the working capital to fund the transaction. Extending the terms will
serve to drive increased revenue and market share.
Recognizing the fact that one company's DSO is another company's DPO allows both
companies in the supply chain to work together to develop a sustainable model. One
company simply imposing terms on the other may yield a financial benefit in the next
quarter's results, but the overall impact may serve to only shift the cost temporarily until
the next negotiation on price or, even worse, may challenge the financial health and on-
going viability of the other company. The more strategic view is to understand the
working capital needs of both parties and to negotiate a mutually beneficial set of terms.
In addition, leveraging the power of an Integrated Payables Platform enables a range of
trading options from Letters of Credit, Private Label Letters of Credit to Open Account.
Establishing programs such as Supply Chain Finance and Order-to-Pay allows
suppliers to pull in payments when they need the cash and enables buyers to take
advantage of discounts when cash is available.
Unrealized Strength of Inventory
Days Inventory Outstanding is the final component of the cash-to-cash cycle and the
most closely tied to the physical supply chain. Any given extended supply chain is going
to require some level of inventory to fulfill customer service levels, keep manufacturing
processes running and buffer variability in the physical world. When strategizing
inventory, there are two critical million dollar questions that need to be answered:
 Where should inventory be held or stored in the extended supply chain?
 What is the critical balancing point between necessary inventory and waste that
needs elimination?
Tactics in shifting inventory within the supply chain include vendor managed inventory
programs, late configuration, and inventory financing. Driving efficiencies in inventory
requires a very detailed analysis of the extended supply chain that considers:
 Typical demand patterns
 Inventory carrying rate assumptions
 Service level requirements
 Value of product
 Cost of Lost Sale or Manufacturing Stock Out
 Re-order and safety stock logic / business rules
 Current costs of logistics (origin, destination, international freight, duties, taxes,
fees, broker/agent, inland freight and warehousing or consolidation)
 Understanding the sources of variability
 Demand forecast accuracy
 Order lead times
 Transit times
 Number of hand-offs in supply chain
Going for Gold
Management needs to understand all of the different, and possibly, competing activities
that contribute to the cash-to-cash equation. Most often, it will be a combination of
factors that are at play and not a single silver bullet solution. As an example, to drive
efficiencies in an Accounts Receivable process in order to improve Days Sales
Outstanding, the view cannot be just internally focused. A company must consider:
 Internal revenue recognition rules, negotiated contracts and payment terms (and
policies) including how Incoterms and payment terms interact (e.g. Payment
 somehow contingent on proof-of-delivery when this official proof is notoriously
late or inaccurate, etc.)
 End Customer's view of errors and exceptions in information flow (purchase
orders, invoices, bills of ladings, quantities, prices, etc.) which fail their Accounts
Payable reconciliation process prior to payment.
 Accounts Receivables policies, processes and technologies used. For example,
the buyer may not send a second invoice if payment has not been received
within agreed terms or staff may manually re-keying information in multiple
applications.
 Physical supply chain breakdowns resulting in delays in shipments, partial
shipments, using wrong freight forwarder or level of service to ship the order, etc.
Ideally, a detailed and thorough investigation should be initiated to understand existing
customer processes starting with internal activities and working backwards through the
supply chain.
Driving efficiencies in the supply chain and the cash-to-cash cycle requires
understanding and optimizing the linkages between the different parties in the overall
process. In the Olympic Games one of the most exciting track events is the 4x100 meter
relay race. The four fastest runners from each country will each run a 100 meter leg of
the race and pass the baton off to their teammate. The hand-off must be practiced until
it's finely tuned. The runner who is to receive the baton must time their acceleration to
match the speed of the incoming runner so that the hand-off is performed in perfect
stride and at high speed in the allowed hand-off zone. The slightest bobble of the baton
or miscalculated timing of the hand-off can cost the team in a race where a hundredth of
a second could mean the difference in medaling. The key to yielding improved financial
performance? Understand the hand-offs in your supply chain, establish the best
financial rhythm for your business, and go for the gold.

12.3. How should relationships in supply chains be managed?

Managing Relationships in the Supply Chain
As we begin the new year, many companies are standing back and re-evaluating the
health of their supply chains. In this column, we continue with the eight-part series on
transforming supply chains into integrated value systems, based on a new book entitled
“Supply Chain Redesign” (Handfield and Nichols, Prentice-Hall, to appear in April 2002).
The major areas we will cover in this column over the next few months include:
 Improving supply chain relationships
 Designing products for the supply chain
 Information visibility in supply chains
  The impact of new channels: reverse auctions and exchanges
 Managing costs across the supply chain
 Adopting standards for supply chain systems
 Change management: a critical stepping stone
In this column we begin with the first of these topics, which is one of the most
fundamental yet more difficult requirements for supply chain integration: changing the
nature of traditional relationships between suppliers and customers in the supply chain.
In implementing an integrated value system, organizations are continually faced with the
challenge of managing the “people” part of the equation. Relationship management
affects all areas of the supply chain and has a dramatic impact on performance. In
many cases, the information systems and technology required for the supply chain
management effort are readily available and can be implemented within a relatively
short time period, barring major technical mishaps. Inventory and transportation
management systems are also quite well understood and can be implemented readily.
A number of supply chain initiatives fail, however, due to poor communication of
expectations and the resulting behaviors. Managers often assume that the personal
relationships within and between organizations in a supply chain will fall into place once
the technical systems are established. However, managing relationships among the
various personalities in the organizations is often the most difficult part of the SCM
initiative. Moreover, the single most important ingredient for successful supply chain
management may well be trusting relationships among partners in the supply chain,
where each party in the chain has confidence in the other members’ capabilities and
actions. Without positive interpersonal relationships, the other systems cannot function
effectively. One supply chain manager expressed this feeling succinctly:
“Supply chain management is one of the most emotional experiences I’ve ever
witnessed. There have been so many mythologies that have developed over the
years, people blaming other people for their problems, based on some incident
that may or may not have occurred sometime in the past. Once you get everyone
together into the same room, you begin to realize the number of false perceptions
that exist. People are still very reluctant to let someone else make decisions
within their area. It becomes especially tricky when you show people how “sub-
optimizing” their functional area can “optimize” the entire supply chain.”
—Materials management vice president, Fortune 500 manufacturer
The experience is not unique to this company. Almost every individual interviewed by
the authors who was involved in a supply chain management initiative emphasized the
criticality of developing and maintaining good relationships with the customers and
suppliers in the chain. In deploying the integrated supply chain, developing trust on both
sides of the partnership is critical to success. In discussing the importance of
relationships in supply chain management, trust building is emphasized as an ongoing
process that must be continually managed. In short, trust takes time to develop but can
disappear very quickly, if abused.
In the early stages of supply chain development, organizations often eliminate suppliers
or customers that are clearly unsuitable, whether, because they do not have the
capabilities to serve the organization are not well aligned with the company, or are
simply not interested in developing a more collaborative relationship typically required
for successful SCM. After these firms are eliminated, organizations may concentrate on
supply chain members who are willing to contribute the time and effort required to
create a strong relationship. Firms may consider developing a special type of supply
chain relationship with this supplier in which confidential information is shared, assets
are invested in joint projects, and significant joint improvements are pursued. These
types of inter-organizational relationships are sometimes called strategic alliances. A
strategic alliance is a pro-cess wherein participants willingly modify basic business
practices to reduce duplication and waste while facilitating improved performance.
Strategic alliances allow firms to improve efficiency and effectiveness by eliminating
waste and duplication in the supply chain. However, many firms lack the guidelines to
develop, implement, and maintain supply chain alliances.
Creating and managing a strategic alliance often represents a major change in the way
companies do business. In creating new value systems, companies must re-think how
they view their customers and suppliers. They must concentrate not just on maximizing
their own profits, but also on how to maximize the success of all organizations in the
supply chain. Strategic priorities must consider other key alliance partners that
contribute value for the end customer. Tactical and operational plans should be
continuously shared and coordinated. Instead of encouraging companies to hold their
information close, trust-building processes promote the sharing of all forms of
information possible that will allow supply chain members to make better, aligned
decisions. Whereas traditional accounting, measurement, and reward systems tend to
focus on individual organizations, a unified set of supply chain performance metrics
should be utilized as well. Finally, instead of “pushing products” into the supply channel,
thereby creating excess inventories and inefficient use of resources, consultative sales
processes and “pull” systems should be utilized. When organizations in a supply chain
seek these goals, they may discover the need to re-design the entire structure of their
supply chains.
Strategic alliances can occur in any number of different markets and with different
combinations of suppliers and customers. Alliance configurations can vary significantly.
A typical supplier-customer alliance involves a single supplier and a single customer. A
good example is the relationship between Procter & Gamble and Wal-Mart, who have
worked together to establish long-term EDI linkages, shared forecasts, and pricing
agreements. Alliances also can develop between two horizontal suppliers in an industry,
such as the relationship between Dell and Microsoft. These organizations collaborate to
ensure that the technology road map for Dell’s computers (in terms of memory, speed,
etc.) will be aligned with Microsoft’s requirements for its software. Finally, a vertical
supplier-supplier alliance may involve multiple parties, such as transportation providers
who must coordinate their efforts for multi-modal shipments. For example, trucking
companies, must work with railroads and ocean freighters to ensure proper timing of
deliveries for multi-modal transshipments.
All of this sounds reasonable. However, how does one even begin to initiate a strategic
alliance? And under what conditions should they occur? To create and manage a
strategic alliance means committing a dedicated team of people to answering these
questions, and working through all of the details involved in managing the relationship.
Unfortunately, there is no “magic bullet” to ensure that alliances will always work.
However, it is reasonable to assume that, like a marriage, the more you work at it, the
more successful it is likely to be!

Links
https://scm.ncsu.edu/scm-articles/article/what-is-supply-chain-management-scm
https://scm.ncsu.edu/scm-articles/article/why-do-you-need-to-know-about-scm
https://scm.ncsu.edu/scm-articles/article/what-do-you-need-to-know-about-scm
https://scm.ncsu.edu/scm-articles/article/how-do-you-do-scm
John Brockwell 2008 How Does Your Supply Chain Compete?
https://www.supplychainmarket.com/doc/supply-chain-performance-0001
https://scm.ncsu.edu/scm-articles/article/managing-relationships-in-the-supply-chain