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Chapter 1
I N T R O D U C T I O N T O S U P P L Y C H A I N M A N A G E M E N T
Given how quickly and continuously everything is changing these days, it is essential to understand analytically the functioning of supply chains and to be able to know what strategies will produce the best results. This requires greater attention to creating supply chain solutions that are effective and efficient.1
Growth is our mantra as an organization. We know that if you’re not growing, you’re dying. So we have to make sure that in the supply chain organization, we’re positioning ourself for that growth.2
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 Summary
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Supply Chain Management in Action
Where Does the Coal Go?
At the same time most every year my dad would be asking,“But where does the coal go?”We’d be on our family vacations on Lake Erie, and as a lover of ships, he’d closely observe the com- ings and goings of the big freighters that moved iron ore, coal, coke and other materials east and west across the Great Lakes. He’d explain to me why certain ships rode heavy (low in the water and very slow) or light (high in the water and very fast), and what materials were in the ones coming from the west, where they came from and what part they played in making steel— and in turn, what was carried in the bowels of these giant ships, some of them 1,000 feet long.
One of those cargoes was coal, and the coal-bearing freighters would always pull in and unload at the harbor three miles east of us. But the one piece of this shipping and transfer and delivery and supply puzzle that my dad couldn’t quite figure out was what happened to the coal after it was unloaded at the harbor in Conneaut, Ohio.
Oh, he knew what its ultimate fate would be and the role it would play in making steel or other products, but he couldn’t figure out the physical steps involved with the movement of that coal inside the harbor, and that really bugged him.
He and I would try to find secluded roads leading into the back of this enormous industrial har- bor so we could see where the coal went, but we’d always be caught short by fences bearing grim warnings. We tried hiking in from the far shore, hacking our way through thick woods, but always the fence would stop us.
So I took my fellow seeker on a surprise outing. We parked at the little airport in Erie, Pennsylvania, where I’d chartered a private plane. For the next couple of hours, the pilot flew us all over Lake Erie, swooping down over the decks of some of the freighters as they made their way across the lake and circling a few times over the Conneaut harbor.
I’ll never forget the sight or sound of my dad triumphantly laughing and slapping his knee as he looked out the window at the massive expanse of the harbor that we’d never been able to see from the ground as he said,“Now I see where the coal goes!”We had to go a half mile up in the air to get the perspective we needed, but we got it.
He saw the railroad shunt that moved the coal from the ships to huge machines that transferred it to a massive web of railroad cars that linked up with rail lines heading south and thence all over the country. I suspect at some level he always knew this is what went on, but he had to see it; he had to really know; he had to be able to tangibly put into place that last piece of the puzzle that ran across thousands of miles of water and rail lines and touched hundreds of industries.
I’ve been thinking about this a lot recently because companies of all sorts seem to be striving for the same kind of end-to-end view of their businesses, from their farthest-flung suppliers through their partners to their customers and even out to their customers’customers. The need to know, to really know and to have end-to-end vision, is becoming increasingly vital in this business world that moves and changes so rapidly.
Thanks for indulging me in this mostly personal tale of end-to-end vision. I’d like to close by adding that several weeks after our plane ride, my dad died quite unexpectedly. But before he left us, he got to see where the coal went.
Source:Evans, B.,“Remembering My Dad,”InformationWeek, July 26, 2010: 6–7. Used with permission. Bob Evans is senior VP and director ofInformationWeek’sGlobal CIO unit.
Introduction
Operating successfully today requires organizations to become much more involved with their suppliers and customers. 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 avertically 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 (discussed further in Chapter 6) and 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. New markets are opening up as governments change and as consumers around the world learn of new products from television, the Internet, radio and contact with tourists. Customers are demanding more socially responsible and environmentally-friendly activities from organizations. Considering all of these changes to the environment, it is indeed an exciting time for companies seeking to develop new products, find new customers and compete more successfully. New jobs and opportunities are opening up in the areas of purchasing, operations, logistics and supply chain management as firms build better competitive infrastructures.
As you read this textbook, you will be introduced to the concepts of supply chain management and how to use these concepts to become better managers in today’s global economy. We use examples throughout the text to illustrate the topics discussed;
and we provide online cases for each section of the textbook to enable you to test your problem-solving, decision-making and writing skills in supply chain management. We hope that by the end of the text you will have gained an appreciation of the value of supply chain management and will be able to apply what you have learned, both in your profession and in future courses in supply chain management.
In this chapter, the term supply chain managementis defined, including a discussion of its importance, history and developments to date. The chapter ends with a look at some of the current trends in supply chain management.
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Supply Chain Management Defined
To understand supply chain management, one must begin with a discussion of asupply chain; a generic one is shown in Figure 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. These firms, acting on purchase orders and specifica- tions they have received from component manufacturers, turn the raw materials into mate- rials that are usable by these customers (materials like sheet steel, aluminum, copper, lumber and inspected foodstuffs). 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). The final product manufacturers (companies like Boeing, General Motors, Coca-Cola) assemble finished products and sell them to whole- salers or distributors, who then resell these products to retailers as their product orders are received. Retailers in turn sell these products to us, the end-product consumers.
Consumers buy products based on a combination of cost, quality, availability, main- tainability and reputation factors, and then hope the purchased products satisfy their requirements and expectations. The companies, along with their supply chains, that can provide all of these desired things will ultimately be successful. 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. Thesereverse logistics activities are also included in the supply chain, and are discussed further in Chapter 9.
Figure 1.1 A Generic Supply Chain
Transportation &
storage activities
Wholesalers, distributors
First-tier customers
Retailers
Second-tier customers
End-product consumers Product & service flow
Information/planning/activity integration Recycling & returns
Intermediate component mfgs.
First-tier suppliers
Raw material Suppliers/mfgs.
Second-tier suppliers
End-product manufacturer (focal firm)
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 custo- mers. Some supply chains, such as an automobile supply chain, might have many tiers, while others such as a law office, might have very few tiers. While the focal firm is pre- sented here and in other chapter discussions as an end-product assembly firm, it can be any of the firms involved in the supply chain, depending on the frame of reference of the manager viewing the diagram.
Thus, the series of companies eventually making products and services available to consumers—including all of the functions enabling the production, delivery and recy- cling of materials, components, end products and services—is called a supply chain.
Companies with multiple products likely have multiple supply chains. All products and services reach their customers via some type of supply chain—some much larger, longer and more complex than others. Some may involve foreign suppliers or markets. 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. Steve Darendinger, vice president of advanced sourcing and sup- ply chain strategy for Cisco Systems of California, says the key to developing effective supply chain management programs is keeping the customer in mind. “The things that we do within our supply chain are driven around customer success,”he says. “We pro- vide opportunities and solutions for customers.”3 When individual firms in a supply chain make business decisions while ignoring the interests of the end customer and other chain members, these suboptimal decisions transfer risks, costs and additional waiting time along the supply chain, ultimately leading to higher end-product prices, lower supply chain service levels and eventually lower end-customer demand.
A number of other companies are also indirectly involved in most supply chains, and they play a very important role in the eventual delivery of end products to customers.
These are the many service providers, such as trucking and airfreight shipping compa- nies, information system providers, public warehousing firms, freight forwarders, agents and consultants. These service providers are extremely useful to the primary firms in most supply chains, since they can help to get products where they need to be in a timely fashion, allow buyers and sellers to communicate effectively, allow firms to serve outlying markets, enable firms to save money on domestic and global shipments, and in general allow firms to adequately serve their customers at the lowest possible cost.
So now that a general description of a supply chain has been provided, what issupply 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.”4
•The Institute for Supply Management (ISM) describes supply chain manage- ment as:“The design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer.”5
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•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 ven- dors, transform them into finished goods, and deliver both goods and services to customers.”6
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 oper- ating efficiencies, quality and customer service among the collaborating organizations.
Thus, for supply chain management to be successful, firms must work together by shar- ing 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 pur- chasing, production and distribution plans.
In theory, supply chains work as a cohesive, singularly competitive unit, accomplish- ing what many large, vertically integrated firms have tried and failed to accomplish. The difference is that independent firms in a supply chain are relatively free to enter and leave supply chain relationships if these relationships are no longer proving beneficial;
it is this free market alliance-building that allows supply chains to operate more effec- tively than vertically integrated conglomerates.
For example, when a particular material or product is in short supply accompanied by rising prices, a firm may find it beneficial to align itself with one of these suppliers to ensure continued supply of the scarce item. This alignment may become beneficial to both parties—new markets for the supplier leading to new, future product opportunities;
and long-term continuity of supply and stable prices for the buyer. Later, when new competitors start producing the scarce product or when demand declines, the supplier may no longer be valued by the buying firm; instead, the firm may see more value in negotiating with other potential suppliers for its purchase requirements and may then decide to dissolve the original buyer–supplier alignment. As can be seen from this exam- ple, supply chains are often very dynamic or fluid, which can also cause problems in effectively managing them.
While supply chain management may allow organizations to realize the advantages of vertical integration, certain conditions must be present for successful supply chain man- agement to occur. Perhaps the single most important prerequisite is a change in the cor- porate cultures of all participating firms in the supply chain to make them conducive to supply chain management. More traditional organizational cultures that emphasize short-term, company-focused performance in many ways conflict with the objectives of supply chain management. Supply chain management focuses on positioning organiza- tions in such a way that all participants in the supply chain benefit. Thus, effective sup- ply chain management relies on high levels of trust, cooperation, collaboration and honest, accurate communications.
Purchasing, operations, logistics and transportation managers not only must be equipped with the necessary expertise in these critical supply chain functions but also must appreciate and understand how these functions interact and affect the entire supply chain. Rebecca Morgan, president of Fulcrum Consulting Works, an Ohio-based supply chain management consulting firm, says too many companies go into agreements they call partnerships and then try to control the relationship from end to end. “A lot of the automotive companies did this in the beginning,”she says. “They issued a unilat- eral ultimatum: you will do this for me if you want to do business with me, no matter
what it means for you.”7 This type of supply chain management approach can lead to distrust, poor performance, finding ways to “beat the system” and ultimately loss of customers.
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.”Today, most firms’supply chain management efforts do not extend beyond those boundaries. In fact, in many cases, firms find it very difficult to extend coordina- tion efforts beyond a few of their most important direct suppliers and customers (in one survey, a number of firm representatives stated that most of their supply chain efforts were with the firm’s internalsuppliers and customers only!).8 However, with time and successful initial results, many firms are extending the boundaries of their supply chains to include theirsecond-tier suppliers and customers, logistics service companies, as well as non-domestic suppliers and customers. Some of the firms considered to be the best at managing their supply chains have very recognizable names: Procter & Gamble, Cisco Systems, Wal-Mart, Apple Computers, PepsiCo and Toyota Motor.
The Importance of Supply Chain Management
While all firms are part of a chain of organizations bringing products and services to customers (and most firms operate within a number of supply chains), certainly not all supply chains are managed in any truly coordinated fashion. Firms continue to operate independently in many industries (particularly small firms). It is often easy for managers to be focused solely on their immediate customers, their daily operations, their sales and their profits. After all, with customers complaining, employees to train, late supplier deliveries, creditors to pay and equipment to repair, who has time for relationship build- ing and other supply chain management efforts? Particularly within this most recent eco- nomic downturn, firms may be struggling to just keep their doors open.
Many firms, though, have worked through their economic problems and are encoun- tering some value-enhancing benefits from their supply chain management efforts. 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.
According to theU.S. Census Bureau’s Annual Survey of Manufactures,the total cost of all materials purchased in 2008 exceeded $3.2 trillion among U.S. manufacturers, up from $2.2 trillion in 2000. Additionally, fuel purchases among manufacturers in the U.S.
totaled $63 billion, up 10 percent from just the previous year due to rising fuel prices.9 Thus it can easily be seen that purchasing, inventory and transportation cost savings can be quite sizable for firms utilizing effective supply chain management strategies. In fact, in a 2009 Global Survey of Supply Chain Progress conducted by Michigan State University, almost two-thirds of the respondents reported the existence of an “official” supply chain management group within the firm with jurisdiction over activities like logistics, sourcing and performance measurement. Additionally, about 70 percent of the respondents reported that their supply chain initiatives had either reduced costs or improved revenues.10 In some cases firms hire a company knowledgeable in supply chain management activities to help the firm develop its own capabilities, and to get the benefits much faster. The Global Perspective feature describes global security system
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