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The Underpinnings of Supply Chain Management

If we were to ask a pool of business managers to define the term supply chain management (SCM), we would likely receive many different definitions. All too often SCM is confused with the notion of logistics, or mistakenly juxtaposed with an organization’s procurement function.4 In some companies, the supply chain is visualized and operated as a “chain” of companies that extends from the receiving dock’s door back to the sources of raw materials. They think of it as an upstream pipeline through which the internal production process’s necessary supplies flow. To such companies, SCM is simply a collection of company initiatives designed to influence these inbound material flows. Unfortunately, this definition proves to be overly limiting, for it fails to accurately describe the end-to-end, source-to-customer processes that lead to shareholder value and customer satisfaction. To remedy this issue, the Council of Supply Chain Management Professionals (CSCMP) has derived a “consensus” definition of SCM:

  • Supply Chain Management encompasses 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. In essence, SCM integrates supply and demand management within and across companies.

As can be deduced from this definition, supply chain management spans a broader domain than simply a single business’s procurement or logistics functions, or the physical path from a firm’s raw-materials providers to its inbound loading dock. In fact, limiting the organization’s view of SCM to these functions and physical spaces has become a dangerous impediment to firm value maximization. Because of the confusion, many companies have failed to give SCM the attention in the boardroom that it often deserves. Considering the importance of supply chain management to solving tomorrow’s problems, companies cannot continue to view it as a low-priority business function or simply a cost of doing business. Supply chain management offers a broader, more impactful means for navigating the major challenges and creating advantage for businesses that learn to leverage their muscle and influence.

In the lagging companies’ defense, cutting-edge SCM thinkers understand that handling the supply chain is a complex endeavor that requires both cross-functional processes as well as managing relationships within and across the organizations that make up the source-to-consumer network. In top-flight companies, supply chain management simultaneously incorporates all the organization’s business functions with the functions within partner organizations. The ability to maximize shareholder returns hinges on the focal organization’s ability to put forward a comprehensive and integrated offering to customers dependent on fully coordinated, interfunctional activity. As the supply chain leaders of best-in-class companies such as Apple, Nike, Procter & Gamble, and Walmart often publicly attest, it is likely that no other business discipline will play as critical a role in the success or failure of companies throughout the remainder of this century.

In other words, we are entering an “age of supply chain management,” where seamlessly integrated groups of organizations are uniting multiple functional efforts around a singular goal of delivering optimum value at the entire system’s lowest landed costs. This proposition begs two questions. Why do such well-established companies view SCM as being so critical for future successes? Equally important, where the rubber meets the road, how are firms and functions integrated throughout the supply chain for SCM initiatives to deliver value?

To answer these questions, we rely on two conceptual frameworks that provide the foundation for our SCM views. The University of Tennessee’s Demand-Supply Integration (DSI) framework, shown in Figure 1.1, addresses the “why.” It proposes that the best supply chain companies, both now and in the future, are those whose driving mission is to perfectly balance customer demand with product and service supply. They do so through internal planning, external planning, and integrated processes. Anything less is viewed as either ineffective, creating customer dissatisfaction, or inefficient, creating waste. Adopting a DSI philosophy implies that businesses recognize that they must address what management guru Peter Drucker called the “great operational divide.” This is the philosophical and operational chasm that often exists between the business enterprise’s demand-fulfilling and supply-provisioning functions. Each of these traditionally has operated autonomously and with limited regard for the planning, goals, and structures of the other.

Figure 1.1

Figure 1.1. Demand-supply integration framework

As shown in Figure 1.1, by uniting supply and demand planning efforts within and across organizations, relevant business function groups can share an aligned view of the necessary steps of creating shareholder value. On the supply side, DSI implies that companies must do a better job of identifying supply sources, with a focus on meeting customer requirements at an acceptable cost. On the demand side, the philosophy requires that demand must be “shaped,” wherever possible, to coincide with supply market realities and opportunities. Furthermore, identifying a subset of customers—“customers of choice”—who can best be served profitably becomes paramount.

One electronics company executive indicated the following during a DSI interview session: “We make 110% of our profits on the first 40% of our customers.” Thus, he is implying that the remaining 60% of the firm’s customer base was actually served at a loss. Taking this statistic into account, it may have been better for the company not to serve them at all. Another electronics company found that it derived 90% of its profits from just 15% of its customers, indicating a more persuasive argument for selective engagement than even the 80/20 Pareto Rule. This rule suggests that 80% of revenues come from 20% of customers or products.

What the DSI framework tells us, then, is that balancing demand with supply is the most critical philosophical direction a company can take when intertwining the goals of maximizing shareholder value and optimizing customer outcomes. This can happen only through fully integrated supply chain management that considers both sets of functional elements within and across formal organizations. It is reasonable to conclude, then, that the future of supply chain management hinges on demand and supply integration.

To address how firms integrate supply chain processes to attain maximum value, we rely on the Global Supply Chain Forum (GSCF) framework developed by researchers at The Ohio State University (see Figure 1.2). By collaborating with executives from leading global companies, the GSCF devised the architecture for managing supply chains. The GSCF framework breaks supply chain management into eight critical business processes that span an organization’s functions. A multifirm, cross-functional team manages each of the processes, with input from all business functions, including procurement, production, finance, logistics, marketing, and research and development (R&D). As such, SCM is not a function, but rather an orientation for managing the business and its relationships with external customers and suppliers. The eight business processes are as follows:5

  • Customer relationship management (CRM) provides structure for how the relationships with customers are developed and maintained.
  • Supplier relationship management (SRM) provides structure for how relationships with suppliers are developed and maintained.
  • Customer service management (CSM) is the firm’s face to the customer. It seeks to proactively address potential disruptions and service failures.
  • Demand management (DM) balances demand and supply through planning and flexible accommodation.
  • Order fulfillment (OF) includes all activities to design a supply chain network, plan for the delivery of orders, and execute logistics activities.
  • Manufacturing flow management (MFM) includes all activities necessary to obtain, implement, and manage manufacturing flexibility and move products through the plants.
    Figure 1.2

    Figure 1.2. Global Supply Chain Forum framework

  • Product development and commercialization (PD&C) facilitates developing and bringing products to market jointly with customers and suppliers.
  • Returns management (RM) facilitates the activities associated with returns, reverse logistics, gatekeeping, and avoidance such that customer complaints are reduced as problems with products and services are identified and remedied.

By integrating these processes across functional areas and organizational boundaries, firms optimize their ability to integrate supply and demand. For example, one major pet products manufacturer had been making and distributing a certain dog care product through a prominent retail chain when new circumstances forced the manufacturer to recall the product. Because the supply chain’s manufacturing flow management and returns management processes were integrated across both the retailer’s and manufacturer’s business interface, the recalled goods were replaced almost immediately by the same manufacturer’s secondary brand, which was deemed safe for animal consumption. Though the particular product was rightfully removed from store shelves, the incident resulted in nominal consumer impact and only minor losses in sales for the manufacturer and retailer. Such examples of cooperation and value creation across company lines underscore the value of a supply chain orientation, where companies effectively team up to address major opportunities and challenges.

The processes defined in the GSCF framework represent the methodology and processes that leading supply chain companies use to generate heightened value for the involved companies and the end customers they collectively serve. The driving theory of supply chain management is that working effectively as a team maximizes the profits and market capitalizations of the participating companies.6 In essence, supply chain management is a “team sport.” The macrotrends identified in this book are simply too big and complex for any single company to address on its own. The upcoming chapters illustrate how the macrotrends will differentially impact the eight key business processes, as well as the supply chain as a whole.

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