CHAPTER 4

The Supply Chain

Management Concept
Evolution of Supply Chain Management
• Relatively new concept – rarely mentioned
prior to 1990
• Recognition grew when value could be found
in coordinating various business functions
• SCM philosophy:
– Coordinate not only within organizations, but
across organizations
Evolution of Supply Chain Management
A supply chain can be liberally viewed as a
combination of processes, functions, activities,
relationships, and pathways along which
products, services, information, and financial
transactions move in and between enterprises
from original producer to ultimate end-user or
consumer.1
1
John Gattorna, “Supply Chains Are the Business,” Supply Chain Management Review 10, no. 6 (2006): 42–49.
Evolution of Supply Chain Management
Evolution of Supply Chain Management
• Supply Chains
- Some are more complex than others
- Typically more difficult to coordinate
complex supply chains
- Complex supply chains may include 3PL
providers
- Customers are an integral component
regardless of complexity level
 Logistics Versus Supply Chain
Management
• Logistics activities are part of managing one’s
supply chain
• Includes sourcing, procuring, and
manufacturing
• Need to work with multiple parties, including
suppliers, 3PL providers, and end customers
 Logistics Versus Supply Chain
Management
• SCM has a leading role for connecting
business functions and business processes
internally and across companies
• SCM is inclusive of logistics management
activities
• Logistics managers can contribute to the
success and benefit from involvement in SCM
 Successful Supply Chains

• Adopt an enterprise-to-enterprise point of

view
• Adopt behaviors that haven’t traditionally
been associated with buyer–seller interactions
 Successful Supply Chains
• Maintain a systems approach across all
organizations in the supply chain
– Companies recognize interdependencies of the
decisions made in major functional areas and
business processes within, across, and between
firms
– Goals and objectives of individual supply chain
participants should be compatible with the goals
and objectives of other participants in the supply
chain
 SCM Process Frameworks
• Two prominent models
– Supply Chain Operations Reference (SCOR) Model
– Global Supply Chain Forum (GSCF) Model
• A primary distinction between the models is
the degree of cross-functional involvement
prescribed by each:
– GSCF involves all business functions
– SCOR model is focused on the logistics,
operations, and procurement functions
Six Processes in the Supply Chain Operations
Reference (SCOR) Model
 Logistics and SCOR Model
• Logistics has some involvement in both
sourcing and making
• Logistics can be involved in delivering and
returning
• Logistics is also a key area of consideration
within SCOR’s planning and enabling processes
 Eight Processes in the Global
Supply Chain Forum (GSCF) Model
 Logistics and GSCF Model
• Logistics considerations such as on-time
pickup and delivery could arise within the
order fulfillment process as well as being
monitored by the customer service
management process
 Logistics and GSCF Model
• Logistics function can contribute to customer
relationship management and supplier
relationship management processes in terms
of outbound or inbound material flow being
part of a product and service agreement with
a key customer or supplier
 Logistics and GSCF Model
• Logistics decisions support of a new product
might surface in:
– Manufacturing flow (inbound flows of new raw
materials)
– Demand management (forecasted transportation
requirements for a product rollout)
– Product development and commercialization
(packaging considerations) processes
 Logistics and GSCF Model
• Reverse logistics is a key consideration for the
returns management process.
 Enablers of SCM Implementation

• Customer power
• Relationship structure
• Leveraging technology
• Supply chain facilitators
 Customer Power
• Information is power
– Customer has gained tremendous power over
buying decisions
– Internet allows the consumer to become highly
knowledgeable about:
• An individual organization and its
• Competing organizations and their products
 Customer Power and SCM
Implications
• Customer needs and wants can change
relatively quickly therefore supply chains are
increasingly required to be fast and agile
– Fast supply chain emphasizes a speed and time
component
– Agile supply chain focuses on an organization’s
ability to respond to changes in demand with
respect to volume and variety
 Customer Power and SCM
Implications
• Failure to be fast and agile can result in:
– Decreased market share
– Reduced profitability
– Lower stock price
– Dissatisfied customers for supply chain members
• Need for fast and agile supply chains resulted
in some e-commerce firms to begin offering
same-day delivery services in select markets
 Customer Power and SCM
Implications
• Traditional supply chains
– Factory-driven, push oriented
– Focused on internal cost metrics (measures) such
as labor costs and freight costs
• Customer-centric supply chains
– Pull-oriented
– Concerned with metrics that take a more holistic
perspective
 Customer Power and SCM
Implications
• Perfect order
– Simultaneous achievement of relevant customer
metrics such as on-time delivery, damage free and
correct order quantity
– Examines the total impact of an incorrect order in
a single metric via a multiplier effect
– Metric has been shown to help diagnose problems
within a supply chain and improve satisfaction
– Look at orders from the customer’s perspective
 Customer Power and SCM
Implications
• Firms must focus on both effectively and
efficiently designing their supply chains
according to market needs/characteristics
– Agile supply chain may be most appropriate where
customer demand is volatile, and their
requirements for variety are high
– Lean supply chain may be a more appropriate
when customer demand is relatively stable and
the need for variety is low
 Customer Power and SCM
Implications
• Leagility
– Hybrid approach that combines aspects of both
lean and agile
– Way to focus part of one’s supply chain on a
timely response to fluctuating customer orders
and/or product variety and another part of the
supply chain on leveling out the planning
requirements to smooth production output
 Customer Power and SCM
Implications
• Lean supply chains
– Focus on reducing the so-called bullwhip effect,
which is characterized by variability in demand
orders among supply chain members
– One aspect of inventory control that could be
influenced by a lean approach is to move from a
pattern of stops and starts to a continuous flow
– Achieve a better-controlled flow of inventory with
lower levels of expensive inventory “lumps”
 Customer Power and SCM
Implications
• Can reduce the amount of inventory in the
supply chain through the use of:
– Smaller, more frequent orders
– Premium transportation
– Demand-pull versus supply-push replenishment
– Elimination or consolidation of slower-moving
product
• Reduced inventory may increase susceptibility
to natural disasters
 Relationship Structures
• Companies should consider employing a long-
term as opposed to a short-term orientation
with key supply chain members:
– Suppliers
– Customers,
– Intermediaries
– Facilitators
 Relationship Structures
• Long-term orientation tends to be predicated
on relational exchanges
– “What’s in it for us?” philosophy
• Short-term orientation tends to focus on
transactional exchanges
– “What’s in it for me?” philosophy
 Relationship Structures
• Attributes of relational exchange:
– Trust
– Commitment
– Dependence
– Joint Investment
– Shared benefits
– Information sharing
 Relationship Structures
• Supply chain collaboration refers to
cooperative relationships between members
of a supply chain—formal or informal—
between companies and their suppliers or
customers, established to enhance the overall
business performance of all parties
 Relationship Structures
• Supply chain collaboration
– Can be classified as transactional, tactical
information sharing, or strategic in nature
– Offers the best opportunity for improving supply
chain performance
• Transactional and tactical information sharing
are currently the most prevalent types of
collaboration
Relationship Structures
 Relationship Structures
• Supply chain partnership
– An example of a strategic collaboration
– Defined as a tailored business relationship
between two supply chain members
– Characteristics include:
• High interdependence among the partners
• Increased willingness to share information
• Compatible goals and mutual trust
• Buying decisions based on value as opposed to cost or
price
 Leveraging Technology
• Technological advancements in computing and
the internet affect the supply chain
• Computing power
– Supply chains can be complex entities consisting
of multiple organizations, processes, and
requirements
– Can apply mathematical models that maximize
shareholder wealth or minimize costs
 Leveraging Technology
• Internet
– Commoditizes both goods and services
– Allows a supply chain party to have virtually
instantaneous visibility to the same data as other
parties in the supply chain
• Offers the opportunity for supply chains to become
more proactive and less reactive
• Can translate into lower inventories and improved
profitability throughout the supply chain
 Leveraging Technology
• Supply chains depend on huge quantities of
real-time information
• Retail point-of-sale information can be
transmitted directly to suppliers and translated
into orders for replenishment of product
• Vendors may allow customers to query vendor
inventory records to determine what products
are in stock and where the stocks are located
Leveraging Technology
 Supply Chain Facilitators
• Third-Party Logistics (3PL), also known as logistics
outsourcing or contract logistics
– Any logistics activity not performed in-house is
representative of third-party logistics
– Common 3PL activities involve inbound and
outbound transportation, carrier negotiation and
contracting, and freight consolidation
– Well-known 3PL providers include Exel Logistics ,
Kuehne and Nagle, Schenker Logistics, and UPS
Supply Chain Solutions
 Supply Chain Facilitators
• Logistics outsourcing has the potential to
improve both the effectiveness and efficiency of
supply chains but can easily result in failure due
to:
– Unreasonable and unrealistic expectations
– lack of flexibility in the relationship
• Need to structure 3PL relationships so that
unexpected occurrences can be dealt with in a
timely and satisfactory manner
 Supply Chain Facilitators
• Fourth-party logistics (4PL) or lead logistics
provider (LLP)
– Refers to a company whose primary purpose is to
ensure that various 3PLs are working toward the
relevant supply chain goals and objectives
– Need to have the expertise to consider:
• Supply chain solutions and potential trade-offs
• Make constant objective decisions across a broad set of
• value-adding activities
– Must be viewed as neutral
Barriers to Supply Chain Management
• Regulatory and political considerations
• Lack of top management commitment
• Reluctance to share, or use, relevant data
• Incompatible information systems
• Incompatible corporate cultures
• Globalization
 Globalization of Supply Chains
• Increasing globalization
– Lower priced materials and labor
– Global perspective of companies
– Development of global competition
• Extremely difficult to execute due to
differences
– Cultural, economic, and technological
– Political, spatial, and logistical
 Supply Chain Integration
• Long-term, mutually beneficial agreements
– Partnerships
– Strategic alliances
– Third-party arrangements
– Contract logistics
• Methods used to integrate
– Vertical integration
– Formal contracts
– Informal agreements