Introduction to Supply Chain and Logistics Management Made Easy: Methods and Applications for Planning, Operations, Integration, Control and Improvement, and Network Design
In the early 1980s, U.S. companies dramatically increased the outsourcing of manufacturing, raw materials, components, and services to foreign countries. Around that time, the term supply chain was coined to recognize the increased importance of a variety of business disciplines that were now much more challenging to manage as a result of the new global economy. Prior to that, functions such as purchasing, transportation, warehousing, and so on were isolated and at fairly low levels in organizations.
Since that time, we’ve seen the creation of the Internet and various business technologies such as enterprise resource planning (ERP) systems, advanced planning systems (APS), and radio frequency ID (RFID), to name a few, which have helped to speed up the flow of information and product lifecycles as well as increasing the need for better communication, collaboration and visibility.
Today, logistics alone accounts for more than 9.5% of U.S. gross domestic product (GDP). Over $1.3 trillion is spent on transportation, inventory, and related logistics activities. The concept of the supply chain has now risen in importance to the extent that commercials on TV extol the virtues of logistics (for example, UPS “I Love Logistics” commercials) to the point where it is now part of the common lexicon and very mainstream. As a result, most universities now offer supply chain and logistics courses, if not majors, and most organizations have a vice president of supply chain and logistics management (or similar title).
However, beyond supply chain and logistics employees, not many in business or the public fully understand the role and importance that the supply chain plays in gaining and maintaining a competitive advantage in today’s world.
We are at the point today where most people are familiar with the terms supply chain and logistics but don’t really know that much about them. In this book, we not only define the supply chain but also offer insight into its various components, tools, and technology to help improve your understanding so that you can use it as a competitive tool in your business.
Because supply chain and logistics costs can range from 50% to 70% of a company’s sales (with trillions spent on it worldwide), organizations of all sizes both perform and are interested in this function. Therefore, understanding and implementing an efficient supply chain strategy can prove critical to both an employee’s and a company’s success.
Supply Chain Defined
The first thing we need to do is get some definitions out of the way. The terms supply chain and supply chain management (SCM) should be separately defined because they are sometimes (mistakenly) used interchangeably.
The supply chain itself is a system of organizations, people, activities, information, and resources involved in the planning, moving, or storage of a product or service from supplier to customer (actually more like a “web” than a “chain”). Supply chain activities transform natural resources, raw materials, and components into a finished product that is delivered to the end customer. For example, I once heard a major paper goods manufacturer describe their supply chain for toilet paper as ranging from “stump to rump.”
In contrast, supply chain management, as defined by the Council of Supply Chain Management Professionals (CSCMP), “encompasses the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management. It also includes the crucial components of coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers.”
In essence, supply chain management integrates supply and demand management within and across companies and typically “includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance and information technology” (Council of Supply Chain Management Professionals [CSCMP], 2014).
Some people take a narrower view of supply chain, and in many cases, they think of it as focused more on the supply end (that is, purchasing), and so ignore the logistics side (as defined as the part of the supply chain that plans, implements, and controls the efficient movement and storage of goods, services, and information from the point of use or consumption to meet customer requirements). In other cases, many just assume that logistics is included but don’t state it. Still others, while including both areas above, ignore the planning aspects of supply chain. Personally, I tend to refer to the field as supply chain and logistics management to make clear what is included.
As you will see in this book, it is important to understand the similarities and differences between more functional areas like logistics, which includes transportation and distribution, versus the broader concept of SCM, which is cross-functional and cross-organizational. This can have a major impact on decision making, structure, and staffing in an organization, so it needs to be understood and examined carefully.
Depending on one’s view, some of the functions listed here may be included within the supply chain and logistics organization:
- Procurement: The acquisition of goods or services from an outside external source
- Demand forecasting: Estimating the quantity of a product or service that customers will purchase
- Customer service and order management: Tasks associated with fulfilling an order for goods or services placed by a customer
- Inventory: Planning and management
- Transportation: For hire and private
- Warehousing: Public and private
- Materials handling and packaging: Movement, protection, storage, and control of materials and products using manual, semi-automated, and automated equipment
- Facility network: Location decision in an organization’s supply chain network
Supply chain management is also intertwined with operations management, which consists of activities that create value by transforming inputs (that is, raw materials) into outputs (that is, goods and services). Both activities support the manufacturing process.
Another way to view the supply chain is through the SCOR model, which was developed by the Supply Chain Council (SCC) (2014) to teach, understand, and manage supply chains. It is a model to both define and measure the performance of an organization’s supply chain.
Figure 1.1 SCOR model
The SCOR model is organized around the five major management processes (see Figure 1.1 ):
- Plan: Alignment of resources to demand
- Make: Conversion or value-added activities within a supply chain operation
- Source: Buying or acquiring materials or services
- Deliver: All customer interaction, from receiving order to final delivery and installation
- Return: All processes that reverse material or service flows from the customer backward through the supply chain
This provides a broad definition for the supply chain, which highlights its importance to the organization and how it helps create metrics to measure performance.
To this aim, the SCOR model is also a hierarchical framework that combines business activities, metrics, and practices that can be looked at from a high or very detailed level.
The levels, from broadest to narrowest, are defined as follows:
- Level 1: Scope: Defines business lines, business strategy and complete supply chains.
- Level 2: Configuration: Defines specific planning models such as “make to order” (MTO) or “make to stock” (MTS), which are basically process strategies.
- Level 3: Activity: Specifies tasks within the supply chain, describing what people actually do.
- Level 4: Workflow: Includes best practices, job details, or workflow of an activity.
- Level 5: Transaction: Specific detail transactions to perform a job step.
All SCOR metrics have five key strategic performance attributes. A performance attribute is a group of metrics used to express a strategy. An attribute itself cannot be measured; it is used to set strategic direction.
The five strategic attributes are as follows:
- Reliability: The ability to deliver, on time, complete, in the right condition, packaging, and documentation to the right customer
- Responsiveness: The speed at which products and services are provided
- Agility: The ability to change (the supply chain) to support changing (market) conditions
- Cost: The cost associated with operating the supply chain
- Assets: The effectiveness in managing assets in support of demand satisfaction
The SCOR model contains more than 150 key indicators, such as inventory days of supply and forecast accuracy, that measure the performance of supply chain operations and are grouped within the previously listed strategic attribute categories.
Once the performance of supply chain operations has been measured and performance gaps identified, they are benchmarked against industry best practices to target improvement, as discussed in more detail later in this book.