Supply Chain Concept
Helen Strong
Supply Chain Concept: Purpose
There are several reasons why an organization will consider setting up a formal supply chain. First, they may wish to enhance the consumers’ experience and perceived value of the brand or product through delivery of a product that reliably meets their expectations. Another reason could be that the organization wants to achieve operating efficiencies that will reduce operating costs. Alternatively, the aim could be to ensure supply of raw materials or components that are difficult to source.
Whatever the reason, the sharing of information and cooperation between supply chain partners should reduce their risks. It should also contribute to quality control of production of the final product.
Supply Chain Concept: Structure and Description
The supply chain concept is a formal system of cooperation between a network of organizations, each participating in transformation; value add-ons; and onward movement of raw goods, work in progress, end products, or all these. The system is more than technology. Supply chain is facilitated by technology.
The concept is based on shared strategy development and management through exchange of information. It uses integrated IT software with appropriate controls and decision metrics. This cooperation (throughout the chain) can result in:
- Improved planning (quantities, quality, timing of delivery)
- Optimization of the movement of goods and services
- Negotiated prices between participants
- Reduced risk
- Maximum consumer value
- Enhanced efficiency
- Reduced costs
- Improved operating margin
In the good old days at the start of the industrial revolution (late eighteenth century in England), manufacturing facilities rose up to the point where manufacturing, processing, or both were already taking place; that is, close to the original sources of skilled labor and raw material abundance.
Even when steam power emerged, manufacturing facilities did not move as they were already in close proximity to coal fields. Transport of goods took place initially through canals. As David King (2005) points out, it took the development of railway networks to free up choice of locations for manufacture of goods.
In spite of the world blossoming into a global village, these three factors (skilled labor, raw materials, and transport to market) remain at the heart of most logistical systems. Given the international trade infrastructure and modern technology, the difference today is that manufacturers can elect to choose suppliers and markets almost anywhere in the world. The business objectives remain to maximize quality, minimize production issues, and move goods to their market in the most efficient and cost-effective way.
Some of the risk factors and uncertainty contributing to the complexity of supply chain decisions are:
- The pace of change and innovations in the market
- Knowing what the consumer (at all levels) wants
- Having the right quality products and services to satisfy those needs at a price the consumer is willing to pay
- Being able to deliver the right quantity of goods to the place(s) where the market wants to consume them
- Having goods available when the consumers want to use them
- Sometimes extreme levels of competition, both within the direct and indirect sense of substitutes
Supply chain operates on a right place, right time, and right condition concept. If all of those are in place, then an order is fulfilled. If not, the order is not fulfilled and that is what gets measured.
To warrant the investment of time and effort, participants setting up a supply chain will be counting on a certain degree of permanency in the relationship. Hence there should be commonality with regard to production standards, business philosophies, and the cultural fit between the organizations. In the ideal world, trust is built on reliability, and similar approaches to doing business. (Unfortunately, one needs to be aware that there are many examples where the major partner controls the relationship, extracting as much benefit as they can from the smaller participants.)
It is essential that supply chain teams within the participating organizations include people from all functions and departments; that is, from marketing, market research, research and development, finance, production, purchasing, logistics, and finance.
The dual arrows in the model given in Figure 32.1 represent an interchange of information and transfer of ownership of goods and materials taking place along the chain.
Agreements and contracts need to be set up with regard to:
- Sharing market and operational information
- Service levels
- Goods storage: where, how, what quantities, and availabilities
- Integrating IT systems, including monitoring flow of materials and inventories.
- Delivery logistics
- Common administration systems (purchasing and billing)
- Pricing and terms of sale
Figure 32.1 Supply chain participants
Supply Chain Concept: Strategic Implications
An efficient supply chain with all participants aligned to providing consumer value will increase competitive advantage.
It requires careful selection of supply chain partners as the exchange of strategic information (such as new products, marketing strategies, and costing details) increases the risk of exposure. An efficient supply chain should reduce operational problems and reduce risks associated with forecasting and production.
Company profits should benefit from the increased level of customer service and improved operations.
Supply Chain Concept: Implementation
This section is concerned with the preparation for installation of a formal supply chain system. It is not intended to replace proprietary models from the global consulting firms, or systems such as the SCOR methodology advocated by the Supply Chain Council (SCC), a global, nonprofit organization based in Cypress.
Participants in a supply chain need systems that will control, measure, and implement supply chain processes. The systems will cover forecasting, inventory, warehousing, logistics, and transportation.
Obvious activities in any supply chain are that entities need to source materials, process them, and then have a system for delivering them further down the supply chain. SCC reminds strategists that there is also a need for:
- Planning with regard to the degree of integration and information sharing along the chain
- Returns (which they say is one of the most problematic areas in the chain)
- And critically, enablement of managing performance, data, assets, and networks
The advantage using the same methodology along the supply chain is that it provides standardized terms and ratings, giving a common basis for communication throughout the chain. Value analysis methodology and agreement outlines are all part of their member services.
That said, there are a number of questions that a researcher needs to ask when setting up and evaluating potential components of the chain.
• End consumers (checking current product specification and trends):
○ Who are they?
○ Where are they?
○ What do they expect from the product?
○ How satisfied are they with the product?
○ What are the trends in use of the product and its substitutes?
○ How do we communicate with them?
○ Do we have a database, customer relationship management (CRM) system, or both?
• Supply chain potential participants: Common questions include:
○ Is there an organizational fit? Aligned with our values?
○ Costs, value of their products and services, or both?
○ Are they customer focused?
○ Financial stability?
○ What is their level of reliability?
○ Innovative? Research and development role in the supplier organization?
○ Reputation? Recognized in the industry?
○ Governance and ethics?
○ Terms and conditions of sale?
○ Warranties, maintenance, and backup?
○ Labor practices?
○ Who else do they supply?
○ When should functions be outsourced to a third party?
• Suppliers (raw materials, packaging, and components): Common questions include:
○ Which are available and where are they?
○ Does their quality match that required by our product?
○ Do their systems match our manufacturing process (e.g., Toyota and Kanban) or will they adapt to match?
○ Can they supply the quantities we need, when we need them?
○ Do they subcontract?
○ Risk of key personnel leaving?
○ What is the backup plan if one supplier defaults?
• Logistics operators: Common questions include:
○ Do they have the capacity coverage, and costing to meet our delivery requirements?
○ Do they have the IT capability to support our requirements (interface and business intelligence [BI])?
• IT, software organizations, or both that support the selected methodology:
Common questions include:
○ Do they understand our needs? Have they worked in supply chain before? Evidence of success?
○ Capacity to design a system that provides the information and management controls required at all levels and points in the chain?
○ Capacity to install, train, and support the system throughout the chain?
○ Will the reports and controls be appropriate, relevant, and timely?
○ Will variances be immediately obvious?
○ Security? Backup and disaster plans?
○ Integrated and interoperable?
○ Integrated with existing CRM, websites, and social media interfaces?
○ Hardware supply?
○ What development, installation, and maintenance costs are involved?
Supply Chain Concept: Conclusions
Supply chain management takes a strategic decision and strong project management to design and implement such a network. Apart from gaining a competitive position in the market, companies can expect a better return on their investment through reduced costs or added value.
Collaboration should improve management efficiency and reduce down-time within the chain. Participants will not necessarily be buying the cheapest goods, but with quality and delivery agreements in place should experience fewer rejections and lower warehousing costs. All of the above add up to a smoother production process and possibility of a greater number of turnover cycles, reduced costs, and enhanced operating margins.
Successful supply chains depend on building trust relationships, so within each participant one would expect to find specific programs focusing on management of customer and supplier relationships. These would be supported by service programs to reduce dissatisfaction and areas of conflict.
Flow of materials would be managed through efficient ordering and fulfillment programs that would contribute to uneventful manufacture of goods.
Growth would be based on a collaborative effort to find innovative ways of tracking changes in and satisfying customer demand.
At the heart of supply chain management is availability, analysis, and communication or sharing of appropriate research and metrics to enable the right decisions to be taken at all levels of the chain.
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