Chapter 1

INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

Learning Objectives
• After completing this chapter, you should be able to:
 Describe a supply chain and define supply chain management.
 Describe the objectives and elements of supply chain management.
 Describe local, regional and global supply chain management
activities.
Describe a brief history and current trends in supply chain
management.
 Understand the bullwhip effect and how it impacts the supply chain.
Chapter Outline
• Introduction
• Supply Chain Management Defined
• The Importance of Supply Chain Management
• The Origins of Supply Chain Management in the U.S.
• The Foundations of Supply Chain Management
• Current Trends in Supply Chain Management
Introduction
• As global markets expand and competition increases, making
products and services that customers want means that businesses
must pay closer attention to:
• where materials come from,
• how their suppliers’ products and services are designed,
• produced and transported,
• how their own products and services are produced and distributed to
customers, and
• what their direct customers and the end-product consumers really
want.
• Over the past twenty-plus years, many large firms or conglomerates
have found that effectively managing all of the business units of a
vertically integrated firm—a firm whose business boundaries include
former suppliers and/or customers—is quite difficult.
• Consequently, firms are selling off many business units and otherwise
paring down their organization to focus more on core capabilities,
while trying to create alliances or strategic partnerships with
suppliers, transportation and warehousing companies, distributors
and other customers who are good at what they do.
• This collaborative approach to making and distributing products and
services to customers is becoming the most effective and efficient
way for firms to stay successful—and is central to the practice of
supply chain management (SCM).
• Several factors require today’s firms to work together more effectively
than ever before:
Communication and information exchange through computer
networks using enterprise resource planning (ERP) systems.
The Internet have made global teamwork not only possible but
necessary for firms to compete in most markets.
Communication technology continues to change rapidly, making global
partnerships and teamwork much easier than ever before.
Competition is expanding rapidly in all industries and in all markets around
the world, bringing new materials, products, people and resources
together, making it more difficult for the local, individually owned, “mom-
and-pop” shops to keep customers,
The recent global economic recession has made customers more cost-
conscious while simultaneously seeking higher levels of quality and service,
which is requiring organizations to find even better ways to compete.
Customers are demanding more socially responsible and environmentally-
friendly activities from organizations.
Supply Chain Management Defined
To understand supply chain management, one must begin with a
discussion of a supply chain; a generic one is shown in Figure 1.1.
1- The supply chain shown in the figure starts with firms extracting raw
materials from the ground—such as iron ore, oil, wood and food
items—and then selling these to raw material suppliers such as lumber
companies, steel mills and raw food distributors.
2- These firms, acting on purchase orders and specifications they have
received from component manufacturers, turn the raw materials into
materials that are usable by these customers (materials like sheet steel,
aluminum, copper, lumber and inspected foodstuffs).
3-The component manufacturers, responding to orders and
specifications from their customers (the final product manufacturers)
make and sell intermediate components (electrical wire, fabrics,
plumbing items, nuts and bolts, molded plastic components, processed
foods).
4-The final product manufacturers (companies like Boeing, General
Motors, Coca-Cola) assemble finished products and sell them to
wholesalers or distributors, who then resell these products to retailers
as their product orders are received.
5-Retailers in turn sell these products to us, the end-product
consumers.
• Consumers buy products based on a combination of cost, quality,
availability, maintainability and reputation factors, and then hope the
purchased products satisfy their requirements and expectations.
• Along the supply chain, intermediate and end customers may need to
return products, obtain warranty repairs or may just throw products
away or recycle them. These reverse logistics activities are also
included in the supply chain.
• Referring again to Figure 1.1, the firm in the middle of the figure is
referred to as the focal firm, and the direct suppliers and customers
of the focal firm are first-tier suppliers and customers. The first-tier
suppliers’ suppliers are thus the focal firm’s second-tier suppliers,
and the first-tier customers’ customers are the focal firm’s second-
tier customers.
• Thus, the series of companies eventually making products and
services available to consumers—including all of the functions
enabling the production, delivery and recycling of materials,
components, end products and services—is called a supply chain.
• Companies with multiple products likely have multiple supply chains.
• With this idea of a supply chain in mind, then, it is easy to come to
the realization that there really is only one true source of income for
all supply chain organizations—the supply chain’s end customers.
• So now that a general description of a supply chain has been provided,
what is supply chain management (SCM)? A number of definitions are
available in the literature and among various professional associations. A
few of these are provided here from three organizations connected to the
practice of supply chain management:
• The Council of Supply Chain Management Professionals (CSCMP) defines
supply chain management as: “The planning and management of all
activities involved in sourcing and procurement, conversion and all logistics
management activities. Importantly, it also includes coordination and
collaboration with channel partners, which can be suppliers,
intermediaries, third-party service providers and customers.”
• The Institute for Supply Management (ISM) describes supply chain
management as: “The design and management of seamless, value-
added processes across organizational boundaries to meet the real
needs of the end customer.”
• The Singapore-based Logistics & Supply Chain Management Society
defines supply chain management as: “The coordinated set of
techniques to plan and execute all steps in the global network used to
acquire raw materials from vendors, transform them into finished
goods, and deliver both goods and services to customers.
• Consistent across these definitions is the idea of coordinating or integrating a number of goods-
and services-related activities among supply chain participants to improve operating efficiencies,
quality and customer service among the collaborating organizations.
• Thus, for supply chain management to be successful, firms must work together by sharing:
 information on things like demand forecasts,
 production plans, capacity changes,
 new marketing strategies,
 new product and service developments,
 new technologies employed,
 purchasing plans,
 delivery dates and anything else impacting the firm’s purchasing,
 production and distribution plans.
• Supply chains are often very dynamic or fluid, which can also cause
problems in effectively managing them ( shortage of supply vs
abundant supply).
• Boundaries of supply chains are also dynamic. It has often been said
that supply chain boundaries for the focal firm extend from “the
suppliers’ suppliers to the customers’ customers.”
The Importance of Supply Chain Management
• Firms with large system inventories, many suppliers, complex product
assemblies and highly valued customers with large purchasing budgets
have the most to gain from the practice of supply chain management. For
these firms, even moderate supply chain management success can mean
lower purchasing and inventory carrying costs, better product quality and
higher levels of customer service—all leading to more sales.
• The Bullwhip effect:
• independent planning and lack of supply chain information sharing and
coordination. Distorted information from one end of SC to the other end
can lead to tremendous deficiencies such as: excessive inventory
investments, poor customer service, lost revenues, misguided capacity
plans, ineffective transportation and missed production schedules.
The Origins of Supply Chain Management in
the U.S.
1- During the 1950s and 1960s, U.S. manufacturers were employing mass
production techniques to reduce costs and improve productivity, while relatively
little attention was typically paid to creating supplier partnerships, improving
process design and flexibility, or improving product quality.
2- In the 1960s and 1970s, computer technologies began to flourish and material
requirements planning (MRP) software applications and manufacturing resource
planning (MRPII) software applications were developed.
These systems allowed companies to see the importance of effective materials
management—they could now recognize and quantify the impact of high levels of
inventories on manufacturing, storage and transportation costs.
As computer capabilities grew, the sophistication of inventory tracking software
also grew, making it possible to further reduce inventory costs while improving
internal communication of the need for purchased parts and supplies.
3- The 1980s were the breakout years for supply chain management.
One of the first widely recorded uses of the term supply chain
management came about in a paper published in 1982. Intense global
competition beginning in the 1980s (and continuing today) provided an
incentive for U.S. manufacturers to offer lower-cost, higher-quality
products along with higher levels of customer service.
Manufacturers utilized just-in-time (JIT) and total quality management
(TQM) strategies to improve quality, manufacturing efficiency and
delivery times.
4-As competition in the U.S. intensified further in the 1990s,
accompanied by increasing logistics and inventory costs and the trend
toward market globalization, the challenges associated with improving
quality, manufacturing efficiency, customer service and new product
design and development also increased.
To deal with these challenges, manufacturers began purchasing from a
select number of certified, high-quality suppliers with excellent service
reputations and involved these suppliers in their new product design
and development activities as well as in cost, quality and service
improvement initiatives.
• Business process reengineering (BPR), or the radical rethinking and
redesigning of business processes to reduce waste and increase
performance, was introduced in the early 1990s and was the result of
a growing interest during this time in the need for cost reductions and
a return to an emphasis on the key competencies of the firm to
enhance long-term competitive advantage.
• Also during this time, managers, consultants and academics began
developing an understanding of the differences between logistics and
supply chain management. Up until then, supply chain management
was simply viewed as logistics outside the firm.
• Thus, supply chain management has evolved along two parallel paths:
• (1) the purchasing and supply management emphasis from industrial
buyers and
• (2) the transportation and logistics emphasis from wholesalers and
retailers.
• The increasing popularity of these alliances with suppliers and customers
(and suppliers’ suppliers and customers’ customers) in the latter part of the
1990s and continuing today has also meant a greater reliance on the
shipping, warehousing and logistics services that provide transportation,
storage, documentation and customs clearing services to many firms within
a typical supply chain.
The Foundations of Supply Chain Management
Supply Elements
• Traditional purchasing strategies emphasized the use of many
suppliers, competitive bidding and short-term contracts. This often
created adversarial buyer–supplier relationships with a focus
primarily on the product’s purchase price instead of the capabilities of
the suppliers and how they can contribute to the long-term
competitiveness of the buying organization.
• Over the past fifteen or twenty years, there has been a gradual shift
toward a more strategic approach to purchasing, and this broader
approach is more commonly referred to as supply management.
• One of the most crucial issues within the topic of supply management
is supplier management. Simply put, this means encouraging or
helping the firm’s suppliers to perform in some desired fashion, and
there are a number of ways to do this. This involves assessing
suppliers’ current capabilities and then deciding if and how they need
to improve them.
Operations Elements
• Once materials, components and other purchased products are
delivered to the buying organization, a number of internal operations
elements become important in assembling or processing the items
into finished products, ensuring that the right amount of product is
produced and that finished products meet specific quality, cost and
customer service requirements.
• Demand management strategies and systems, with the objective of
matching demand to available capacity, either by improving
production scheduling, curtailing demand, using a back-order system
or increasing capacity.
• Controlling or managing inventory is one of the most important
aspects of operations and is certainly value enhancing for the firm.
Firms can and typically do have some sort of material requirements
planning (MRP) software system for managing their inventory.
• These systems can be linked throughout the organization and its
supply chain partners using enterprise resource planning (ERP)
systems, providing real-time sales data, inventory and production
information to all business units and to key supply chain participants.
Logistics Elements:
• When products are completed, they are delivered to customers
through a number of different modes of transportation. Delivering
products to customers at the right time, quality and volume requires
a high level of planning and cooperation between the firm, its
customers and the various logistics elements or services employed
(such as transportation, warehousing and break-bulk or repackaging
services).
• For services, products are produced and delivered to the customer
simultaneously in most cases, so services are extremely dependent
upon server capacity and successful service delivery to meet
customer requirements. Logistics is the third foundation of supply
chain management.
Integration Elements
• Thus far, three of the foundations of supply chain management have been
discussed: supply, operations and logistics activities occurring among the
firm and its various tiers of customers and suppliers. The final foundation
topic—and certainly the most difficult one—is to coordinate and integrate
these processes among the focal firm and its key supply chain trading
partners.
• Processes in a supply chain are said to be integrated when members of the
supply chain work together to make purchasing, inventory, production,
quality and logistics decisions that impact the overall profits of the supply
chain.
• If one key activity fails or is performed poorly, then the flow of goods
moving along the supply chain is disrupted, jeopardizing the effectiveness
of the entire supply chain.
• Ultimately, firms act together to maximize total supply chain profits
by determining optimal purchase quantities, product availabilities,
service levels, lead times, production quantities, use of technology
and product support at each tier within the supply chain.
•
• This integration process also requires high levels of internal functional
integration of activities within each of the participating firms, such that the
supply chain acts as one entity.
• This idea of supply chain integration can run contrary to the notion among
many potential supply chain participants of their firm’s independent profit-
maximizing objectives, making supply chain integration a very tough sell in
many supplier buyer- customer situations.
• Thus, continued efforts are required to break down obstacles, change
cultural norms, change adversarial relationships, knock down silos, reduce
conflict and bridge functional barriers within and between companies if
supply chain integration is to become a reality.
• One additional integration topic is the use of a supply chain
performance measurement system.
• Performance measurements must be utilized along supply chains to
help firms keep track of their supply chain management efforts.
Current Trends in Supply Chain Management
• The practice of supply chain management is a fairly recent
phenomenon, and many organizations are beginning to realize both
the benefits and problems accompanying integrated supply chains.
• As we look at the most recent practices and trends in supply chain
management, a number of issues present themselves as areas that
need to be addressed including the:
1- expansion (or contraction) of the supply chain,
2- increasing supply chain responsiveness,
3- creating a sustainable supply chain and
4-reducing total supply chain costs.
Expanding (and Contracting) the Supply Chain
• The supply chain dynamic today is changing, and companies are
working with firms located all over the globe to coordinate
purchasing, manufacturing and logistics activities.
• For many years now, computer maker Hewlett-Packard (HP) has been
expanding with the help of a third-party logistics company. As Tom
Healy, worldwide supply chain strategy manager for HP, said recently,
“In a globalized environment, there isn’t a single part of the world we
are not trying to dominate.”
• While these global expansions of supply chains are occurring, firms
are also trying to expand their influence and control of the supply
chain to include second- and third-tier suppliers and customers.
• This supply chain expansion is occurring on two fronts:
• (A) increasing the breadth of the supply chain to include foreign
manufacturing, sales offices and retail sites, along with foreign
suppliers and customers; and
• (B) increasing the depth of the supply chain to include the influencing
of second- and third-tier suppliers and customers.
• Today, some firms are also finding that their foreign markets are
contracting. Logistics costs are escalating, security concerns are
growing and there is increasing awareness that it might be time to
concentrate on doing what the firm does best to protect its most
profitable and loyal customers in domestic markets.
• Much of this supply chain contraction emphasis was born with the
recent economic downturn. Some have come to refer to these
contraction activities as right-shoring.
• Right-shoring is the combination of onshore, near-shore and far-shore
operations into a single, flexible, low-cost approach to supply chain
management.
• Foreign suppliers in many cases have simply shut their doors as orders
dried up, forcing companies to seek other suppliers.
• As firms become more comfortable and experienced with their supply
chain trading partner relationships, there is a tendency to expand the
depth or span of the supply chain by creating relationships with
second- and third-tier suppliers and customers.
Increasing Supply Chain Responsiveness
• Agile manufacturing, JIT, mass customization, lean manufacturing and
quick response are all terms referring to concepts that are intended
to make the firm more flexible and responsive to customers’ changing
requirements. Particularly with the tremendous levels of competition
in almost all avenues of business, firms (and their key supply
partners) are looking today at ways to become more responsive to
customers.
• To achieve greater levels of responsiveness, supply chains must
identify their end customers, determine their needs, look at what the
competition is doing and position their supply chain’s products and
services to successfully compete; then finally, consider the impact of
these requirements on each of the supply chain participants.
• Mobile technologies, for example, have now improved to the point
that they are used in many supply chain applications where real-time
data transfers can improve responsiveness.
• With optimization through real-time mobile communications, the
instantaneous changes can be delivered to drivers. It allows greater
visibility into the manufacturing process.
The Greening of Supply Chains
• Purchasing, producing, packaging, moving, storing, repackaging,
delivering and then returning or recycling products can pose a
significant threat to the environment in terms of discarded packaging
materials, scrapped toxic materials, carbon monoxide emissions,
noise, traffic congestion and other forms of industrial pollution.
• As the practice of supply chain management matures, governments
along with firms and their supply chain partners are working harder
to reduce these environmental problems.
• Following the European Union, which enacted restrictions in July of
2006, China established the first stage of their restrictions in March of
2007. Eventually, exporters to China will be prohibited from shipping
any items containing lead, mercury, cadmium and several other
hazardous materials.
Reducing Supply Chain Costs
• Considering again the objectives of supply chain management, cost
reduction is clearly high on this list of priorities, and the economic
hardships of the past few years have likely moved cost reduction even
higher on most firms’ priority lists.
• Cost reduction can be achieved throughout the supply chain by
reducing waste as already described, by reducing purchasing and
product distribution costs and by reducing excess inventories and
non-value-adding activities among the supply chain participants.
• Read and answer the questions at the end of chapter one.