Essentially SCM is a set of practices aimed at managing and co-ordinating the whole supply chain from raw material suppliers to the end consumer. The objective is to develop synergy along the whole supply chain rather than focusing on a particular business unit.
SCM is a progression on internal programs such as total quality management and lean production. These have often provided substantial improvements by breaking down barriers between departments and by efficiently managing the business processes. It is logical, therefore, to look at the improvement potential of cutting across companies and managing the whole supply chain. The assumption is that there are important synergies to be gained by managing the entire chain of supply and delivery.
The objective of developing synergy is obtained through reduction of costs and increasing the value provided. The most frequently cited benefit of SCM is cost reduction of inventory levels. Not so common is to find companies increasing the value provided through the chain. Some few companies are innovating by using new ways of ‘bundling’ products and services to increase the value for the end consumer.
A common way of visualizing the supply chain is to draw a streamlined pipeline that processes raw materials, transforms them into finished goods and delivers them to the end consumer. This may be an over-simplification. Relationships throughout a supply chain are in general many-to-many rather than one-to-one. A realistic picture is more complex, with a multitude of relationships between business units as in Figure 1. (I have taken the business unit, rather than the corporation, as the basis for our analysis. Business units are the building blocks of supply chains.)
Most companies have several suppliers and several customers. Often, business units compete for customers and have common suppliers. In this complex setting companies consider some relationships between customers and suppliers as more important than others in order to develop synergy. One of the first questions for a company to consider should be with which customers and suppliers it should develop new SCM practices.
There are many new ways of doing business associated with SCM. Some we consider best SCM practices are outlined below:
- Reduction and consolidation of the customer base. Some companies are selecting the customers they want to develop. The objective is not to reduce sales but is more a question of how to serve different customers. A typical pattern is to ask small customers to buy through distributors, thereby reducing the number of direct customers and attached costs such as invoicing and debt collection. (Phillips is a company that takes such a view)
- Co-ordination of price and inventory policies to reduce the amplification of demand variability-known as the ‘Fosters’ effect. For example, Procter & Gamble and Wal-Mart co-ordinate their inventory policies based on a system of every-day low price. The objective is to avoid the short-term demand increases – and the amplification of the supply chain – stemming from promotional campaigns and so on.
- Sharing of information between business units to achieve the frequent, reliable deliveries necessary for just-in-time manufacturing. Sharing of information enables significant reduction in stock levels, stock-outs are more easily avoided as are stocks of obsolete products subject to mark down.
- Linking computer systems to link processes. With electronic data interchange, point-of-sale information from checkout scanners in stores is transferred directly and electronically to manufacturers’ order entry systems. EDI enables cross-docking, by which products are shipped directly to the retail stores, bypassing warehouses. The consumer foods business is leading this practice, driven by powerful retail chain.
- Early supplier involvement in product development. Suppliers are involved early in the development stage of a new product to optimize the efficiency of the whole supply chain in making the new product. For example, when the US printer manufacturer Lexmark developed a new laser printer, its supplier of moulded plastic frames, Minco, was involved early in the process
- Design for supply chain. Logistics is a central issue for SCM. Some companies are designing products to improve logistics throughout the supply chain. A good example is Hewlett Packard’s DeskJet printer. It was designed so as to allow country-or market-specific attributes, such as power supply or user manual, to be added at distribution centers rather than at the central manufacturing facilities. The result was a restructuring of the distribution system and a substantial reduction of total stocks in the system
- Joint problem solving. By working together, customers and suppliers may often achieve faster and better solutions to specific problems. Automobile component manufacturers often have resident engineers on customer promises to solve the technical problems that may appear in the assembly process.
- In-plant representatives. These exist where a customer in-house position is created for a person representing the supplier. This individual typically resides full time in the customer’s purchasing office, operates on the customer’s computer systems, uses the customer’s purchase orders and places them with his own company, the supplier. In effect, the supplier representative is doing the customer’s planning for the materials supplied, eliminating the need for the customer to plan.