This chapter is from the book
This chapter is from the book
This chapter is from the book
Purpose and Goals
The definitions of supply chain management indicate that it is a complex undertaking that extends beyond the scope and capabilities of a single organization. Significant effort is needed to build and maintain a supply chain network. This involves a tremendous action list that requires expertise, time, and money—establishing strategies, building relationships and roles, aligning processes, developing people, implementing technology, and investing in capacity.
Given these requirements and challenges, it is logical to wonder whether the pursuit of supply chain management capabilities is worthwhile. The succinct answer is yes because organizations need strong supply chain capabilities to profitably compete in the marketplace. Their key goals for supply chain management should be to achieve efficient fulfillment of demand, drive outstanding customer value, enhance organizational responsiveness, build network resiliency, and facilitate financial success.
Goal 1: Achieve Efficient Fulfillment
On the most basic level, the purpose of supply chain management is to make inventory readily available in customer facing positions to fulfill demand. The fresh produce business adage “you can’t sell from an empty wagon” highlights this fundamental purpose of supply chain management.
Organizations must pursue the goal of matching supply with demand in a timely fashion through the most efficient use of cross-chain resources. Supply chain partners must work together to maximize resource productivity, develop standardized processes, eliminate duplicate efforts, and minimize inventory levels. Such steps will help the organization reduce waste, drive out costs, and achieve efficiencies in the supply chain.
Reduction of supply chain expenses is a popular goal, particularly during times of economic uncertainty when companies desire to conserve capital. Efficiency initiatives can focus on any aspect of supply chain operations, though transportation and inventory are frequent cost control targets. Together, they account for 81 percent or $1.08 trillion of U.S. business logistics system costs (Council of Supply Chain Management Professionals, 2013).
Ocean Spray, an agricultural cooperative that produces fruit juices and foods, was able to cut freight costs after opening a regional distribution center in Florida. The facility reduced distances to customer locations and was well positioned to leverage empty railroad boxcars traveling from New Jersey to Florida. The shift from truck to rail, along with the reduced outbound mileage, helped Ocean Spray cut freight costs by 40 percent and carbon dioxide emissions by 20 percent (Bradley, 2013).
Kimberly-Clark, a manufacturer of personal care products, has been on a 6-year journey to create a demand-driven supply chain. The company has realigned its distribution center network and streamlined the number of facilities to take inventory and costs out of the system.
To further streamline safety stock inventories and reduce associated costs, the company is using demand planning software with retailer point-of-sale data to understand demand and develop more accurate forecasts. Over an 18-month period, Kimberly-Clark reduced its finished goods inventory by 19 percent (Cooke, 2013).
Goal 2: Drive Customer Value
Cost efficient fulfillment and inexpensive products are important, but supply chain managers must also focus on value creation for their customers. Customers are the lifeblood of the organization and create the need for a supply chain. Hence, a fundamental objective in supply chain management must be to consistently meet or exceed customer requirements.
The goal of driving customer value begins with a market-driven customer service strategy that is based on clearly understood customer requirements. Supply chain strategies, design, and capabilities should emanate from these requirements (Sweeney, 2011). The result will be higher-quality service, reduced variability, and fewer exceptions to address.
Highly consistent, just-in-time delivery is critical to the restaurants and food service companies supplied by McCain Foods, the world’s largest manufacturer of French fries. Rather than focus on low–cost rail transportation, McCain works closely with a long–haul truckload carrier to provide exceptional on-time delivery performance for these time–sensitive supply chains. They preload trailers, secure additional capacity, and expedite deliveries as needed to ensure that French fries are always on the menu (Partridge, 2010).
It is important to note that Goal 1 and Goal 2 are not mutually exclusive. To succeed, organizations must establish supply chains that balance efficiency with effectiveness to optimize overall performance. The annual Supply Chain Top 25 rankings by Gartner, Inc. (2013a) identify companies that accomplish both goals by integrating demand, supply, and product into a network that that orchestrates a profitable response to ever-changing customer demands. Table 1-1 highlights the 2013 supply chain leaders based on industry opinions, 3-year weighted return on assets, inventory turns, and 3-year weighted revenue growth.
Table 1-1 The Gartner Supply Chain Top 25 for 2103
Rank |
Company |
Peer Opinion |
Gartner Opinion |
Return on Assets |
Inventory Turns |
Revenue Growth |
Composite Score |
1 |
Apple |
3203 |
470 |
22.3% |
82.7 |
52.5% |
9.51 |
2 |
McDonald’s |
1197 |
353 |
15.8% |
147.5 |
5.9% |
5.87 |
3 |
Amazon.com |
3115 |
475 |
1.9% |
9.3 |
33.6% |
5.86 |
4 |
Unilever |
1469 |
522 |
10.5% |
6.5 |
9.0% |
5.04 |
5 |
Intel |
756 |
515 |
15.6% |
4.2 |
11.4% |
4.97 |
6 |
P&G |
1901 |
493 |
8.6% |
5.8 |
3.6% |
4.91 |
7 |
Cisco Systems |
1167 |
517 |
8.5% |
11.2 |
7.8% |
4.67 |
8 |
Samsung Electronics |
1264 |
298 |
11.6% |
18.5 |
15.7% |
4.35 |
9 |
Coca Cola Company |
1779 |
278 |
11.7% |
5.5 |
14.0% |
4.33 |
10 |
Colgate-Palmolive |
794 |
324 |
18.9% |
5.2 |
3.6% |
4.27 |
11 |
Dell |
1409 |
342 |
6.2% |
30.7 |
-0.6% |
4.05 |
12 |
Inditex |
745 |
221 |
18.0% |
4.2 |
13.4% |
3.85 |
13 |
Wal-Mart |
1629 |
282 |
8.8% |
8.1 |
4.9% |
3.79 |
14 |
Nike |
955 |
236 |
14.1% |
4.2 |
10.6% |
3.62 |
15 |
Starbucks |
808 |
159 |
16.5% |
4.8 |
11.5% |
3.41 |
16 |
PepsiCo |
810 |
314 |
8.6% |
7.8 |
10.5% |
3.41 |
17 |
H&M |
399 |
41 |
28.2% |
3.7 |
6.7% |
3.22 |
18 |
Caterpillar |
714 |
247 |
5.8% |
2.8 |
23.4% |
2.91 |
19 |
3M |
999 |
105 |
13.3% |
4.2 |
6.9% |
2.87 |
20 |
Lenovo Group |
397 |
211 |
2.5% |
22.2 |
29.8% |
2.75 |
21 |
Nestlé |
679 |
112 |
13.3% |
5.1 |
-0.6% |
2.51 |
22 |
Ford Motor |
552 |
231 |
5.7% |
15.1 |
3.1% |
2.51 |
23 |
Cummins |
74 |
139 |
13.3% |
5.3 |
13.5% |
2.48 |
24 |
Qualcomm |
122 |
45 |
12.7% |
8.5 |
25.9% |
2.37 |
25 |
Johnson & Johnson |
730 |
144 |
9.6% |
2.9 |
3.3% |
2.35 |
Composite Score: (Peer Opinion*25%) + (Gartner Research Opinion*25%) + (ROA*25%) + (Inventory Turns*15%) + (Revenue Growth*10%) |
|||||||
Goal 3: Enhance Organizational Responsiveness
Another important rationale for supply chain management capabilities is responsiveness to change. The current business environment is one of rapid change with multiple forces shaping how businesses operate and survive. Supply chain management can help organizations adapt to the challenges of globalization, economic upheaval, expanding consumer expectations, and related issues (Coyle et al., 2013)
The unprecedented expansion of global trade increases the intensity of competition from new market entrants. For example, Panasonic, Samsung, and Sharp must battle for retail shelf space and sales with Vizio, Hisense, and other television manufacturers. Also, the cost of global trade is on the rise. As offshore labor costs increase, global sourcing does not guarantee lower overall cost of goods. In both situations, supply chain management expertise and network flexibility are needed to analyze and respond to these issues. At the same time, globalization can present expansion opportunities. Organizations with flexible supply chain networks that can adapt to the requirements of new markets will be well positioned to grow.
Economic crises such as the recent global recession have a tremendous negative impact on consumer demand and production. Weaker organizations that fail to anticipate the changes, adjust capacity, and reduce inventory levels in their supply chains will not survive. Such was the fate of Circuit City Stores, K-B Toys, and other retailers in 2009. To weather these economic downturns with minimal damage, organizations should build adaptive operating models buoyed by flexible supply chain capacity and a variable cost structure. Also, the use of standardized processes and systems will help the organization rapidly scale or shutter operations based on short-notice demand changes (Cudahy, George, Godfrey, & Rollman, 2012).
With information at their fingertips, today’s consumers are empowered to make strong demands on the supply chain. They can review product options, compare prices, and check availability in real-time using mobile devices. This leads to increased expectations for greater product variety, customized goods, off-season availability of inventory, and rapid fulfillment at a cost comparable to in-store offerings. To satisfy these consumer expectations, retailers must be able to leverage inventory as a shared resource and use distributed order management technology to fill orders from the optimal node in the supply chain. Such responsive omnichannel supply chain capabilities separate the retail winners from the losers (Baird & Kilcourse, 2011).
In addition, shrinking product life cycles, the emergence of new technologies to facilitate supply chain transformation, and increases in government regulation of supply chain processes like transportation are compelling reasons to remain nimble. A flexible and responsive supply chain will adapt to these changes with negligible disruption.
Goal 4: Build Network Resiliency
Beyond the business challenges that emerge over time, organizations may also encounter sudden and severe supply chain disruptions. These atypical events—natural disasters, cataclysmic weather, labor strikes, supplier failures, and so on—negatively affect the flow of goods and make the organization vulnerable to financial, reputational, and relational damages. One study estimates that supply chain glitches are associated with an abnormal decrease in shareholder value of more than 10 percent (Hendricks & Singhal, 2003).
Given the cost of disruptions, it is imperative for organizations to manage these supply chain risks. Common predisruption steps include risk identification, risk assessment, and risk reduction. To reduce vulnerability to disruption risks, Sheffi (2005) recommends that organizations collaborate on security and safety issues, build redundancies into their supply chains, and invest in people through cross-training.
In addition to preventative risk management steps, it is imperative to establish disruption management capabilities. Organizations must develop the capabilities to recognize disruptions, overcome them, and redesign processes to reduce future risk (Blackhurst, Craighead, Elkins, & Handfield, 2005). For known risks, it is important to design resilient supply chains that are flexible enough to bounce back quickly from major incidents (Sheffi, 2005). For risks that are unlikely to occur but are potentially catastrophic, supply chain managers must engage in contingency planning and test the plans.
Well known for its configure-to-order (CTO) computer systems, Dell Inc. has structured its supply chain to mitigate risk and recover rapidly from disruptions. The CTO process allows Dell to overcome component shortages by configuring systems in different ways and by enticing customers to specify configurations with components that are readily available. Dell also builds strong long-term relationships with primary suppliers to ensure its priority customer status in times of supply uncertainty. Finally, Dell preemptively qualifies and reviews secondary suppliers to reduce the risk of inventory shortages. Strategies like these minimized the impact of the 2011 Tohoku, Japan earthquake on Dell (de Souza, Goh, Kumar, & Chong, 2011).
Goal 5: Facilitate Financial Success
One of the most important roles of supply chain management is to contribute to the financial success of the organization. Traditional initiatives focus on cost efficiency—streamline stock levels to reduce inventory carrying cost, automate fulfillment operations to minimize labor expense, consolidate orders to cut freight spend, and so on. In contrast, leading organizations use the supply chain to enhance differentiation, increase sales, and penetrate new markets. Their goal is to drive competitive advantage and shareholder value (Anderson, Copacino, Lee, & Starr, 2003).
A dual focus on cost control and revenue generation helps C-level executives recognize the organizational value of supply chain management. As they place more strategic emphasis on supply chain management, capabilities must morph from a series of day-to-day functions to a strategic process with supply chain managers who skillfully manage cross-functional and cross-company complexity. They must understand the connections and interdependencies across the organization and conquer the challenges of managing supplier and customer interfaces (Dittmann, 2012).
Further details regarding supply chain management’s role in driving financial success are discussed in the value proposition section.