Supply Chain Management includes, planning, design, control and implementation of all business processes related to procurement, manufacturing, distribution and sales order fulfilment functions of a business.
Thus Supply Chain Management includes managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer.
“Supply chain management is the integration of businesses from end user through original suppliers that provides products, services, and information that add value for customers.”
Learn about:- 1. Introduction to Supply Chain Management 2. Definitions of Supply Chain Management 3. Meaning 4. Scope 5. Importance 6. Features 7. Principles 8. Objectives 9. Basic Components 10. Examples 11. Thrust Areas 12. Strategies 13. Techniques
Supply Chain Management: Introduction, Definition, Meaning, Importance, Objectives, Features, Strategies, Techniques and More…
- Introduction to Supply Chain Management
- Definition of Supply Chain Management
- Meaning of Supply Chain Management
- Scope of Supply Chain Management
- Importance of Supply Chain Management
- Features of of Supply Chain Management
- Principles of Supply Chain Management
- Objectives of Supply Chain Management
- Basic Components of Supply Chain Management
- Examples of Supply Chain Management
- Thrust Areas of Supply Chain Management
- Strategies of Supply Chain Management
- Techniques of Supply Chain Management
Introduction to Supply Chain Management
Creating a customer is a major task of marketing. But delivering the goods to the customer so created is the most critical task. If the product is not available when and where the consumer wants it, it is sure to fail in the market. And it is this function, that of making available the product at the place that the consumer wants it, at the time that he wants, which is carried out by the physical distribution mix, or the place mix. Modern day marketing also calls this function as Supply Chain Management.
If you go to a Supermarket and pick up a few items of the shelf like shoes, clothes, accessories, jewellery, bags or electronic products and look at the labels, you will notice that they have been manufactured in China, Japan or Bangladesh. If manufactured in India, they have been manufactured in Gujarat, Punjab or any state of India. The ordinary tea leaves you use to make your tea every day comes from Darjeeling. Computers have been shipped out of South American Factories and wooden furniture in the various retail outlets and malls is from Malaysia and China.
Global markets are expanding beyond borders and this is what is re-defining the way demand and supplies are managed. Global companies are driven to source products from markets across continents, in order to keep the cost of manufacturing down. Every company in order to be competitive is forced to keep looking out to set up production centers at places where the cost of raw material and labour is cheap.
In the competitive global environment, no company has the luxury of sourcing supplies through the internal or local market only. You have to explore to find the best and cheapest sources. Thus sourcing of raw materials and vendors to supply the right quality of material, the right quantity of goods, components and raw materials, at the right price requires a dynamic procurement strategy spanning across various areas, states and countries.
It is the norm today that companies expand beyond the borders not just of the city and state but also the country to source raw materials, components and parts for their production process. The finished goods so manufactured are then disbursed through a network of channels to the various parts of the world wherever the final customer is situated.
In simple language, managing all of the above activities in a synchronised fashion and to manage demand and supply on a global scale is Supply Chain Management.
Supply Chain Management Definition
A supply chain consists of all the activities and entities that are involved in extracting, processing, manufacturing, distributing and selling the products to the ultimate customers. However, the concept of SCM is much broader than that of the marketing channels as SCM goes back to a distant starting point / root and includes the raw material suppliers.
For example, Raw material suppliers → Logistics Services Providers → Manufacturer → Logistics Services Providers → Intermediaries/ Retailers → Consumers
Different people have defined SCM in different fashions:
“Supply chain management is the integration of businesses from end user through original suppliers that provides products, services, and information that add value for customers.”
“A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers.”
Supply chain management is the combination of art and science that goes into improving the way your company finds the raw components it needs to make a product or service, manufactures that product or service and delivers it to customers.
SCM represents the processes and technical systems that enable multiple organizations to collaboratively design, build and deliver products (though not necessarily services).
Integrated supply chain management is a process-orientated, integrated approach to procuring, producing, and delivering products and services to customers. SCM has a broad scope that includes sub-suppliers, suppliers, internal operations, trade customers, retail customers, and end users. It covers the management of material, information, and funds flows. It is a cradle-to-grave approach.
SCM has grown over the past two decades from fragmented and un-automated processes to complex, integrated, and highly automated systems.
Supply Chain Management Meaning
SCM has come to focus on the need to look comprehensively at the flow of value delivery to a customer. Value is delivered through the defined business activity of the organisation in the form of goods and services. Apart from the value flow, there are two associated flows in a supply chain – information flow and cash flow.
Value flow is the most obvious and visible part of the supply chain, moving largely from the vendor to the customer. Physically the flow manifests as goods flows and services flows. Goods flows constitute the materials, work-in-process, finished goods, spares etc. Occasionally, there could be small reverse flows of materials due to returns or recycling.
Information flow is a significant part of the supply chain in that it is the enabler and driver of the concept of a supply chain. It consists of flows, both from vendor to the customer and vice versa.
The major components of the backward flow are inputs for forecasts, marketing plans, despatch plans, production plans and procurement quantities and timing, orders from customers and dealers, quantity feedback, warranties that are invoked etc. In the forward direction, there are components like capacity estimates for plants, stocks available, despatch advices, stock transfer notes, warranties etc.
Cash flow is commercially significant part of the supply chain, which is largely in a direction opposite to that of the major value flow. The major part of this flow is the money paid for goods as credit periods/advances for payments from customers to vendors. Any credit/advance is with respect to the transfer of title and service delivery in the supply chain.
The various actors in the supply chain finance the cash flow and determine how a given value flows. In a broad sense, the value flow is usually matched by a flow of information and these same channels invariably become useful for other aspects of supply chain management.
Similarly, value flow needs to be matched by an appropriate cash flow structure. For better SCM practice, it is necessary to view the two flows hierarchically. As a first step, value flow needs to be optimised and then cash flow viewed as how best to finance it. The power balances between the vendor, converter and the customer, the relative cost of finance and the other fiscal benefits between these actors will determine the optimal cash flow structure.
Scope of Supply Chain Management
Supply Chain Management includes, planning, design, control and implementation of all business processes related to procurement, manufacturing, distribution and sales order fulfillment functions of a business. Thus Supply Chain Management includes managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer.
Due to its wide scope, supply chain management must address complex interdependences, in effect creating an “extended enterprise” that reaches far beyond the factory doors.
All these activities involve multiple networks of vendors and service providers. These networks of suppliers and service providers have to be integrated and coordinated by the supply chain management experts in such a way that the raw material moves smoothly from various procurement points to the centers of production and the finished goods move smoothly from the centers of production to the various points of sale/ delivery to consumer, across the globe.
Logistics is the back bone on which the supply chains are driven. Logistics refers to the management of flow of goods and supplies involving information, data and documentation between two entities or points. Logistics plays an important role in the post procurement function of delivery of raw material and supplies from the supplier to the factory or production center and the dispatch of finished goods from the factory to the point of delivery to the customer.
When goods move from supplier to factory to point of sale they flow through a network of transportation by road, rail, ship or air. They may be stored in warehouses before being moved to forward locations. This entire activity involves various suppliers, agents and agencies including freight forwarders, packers, customs department, distributors and Logistics service providers etc.
Logistics therefore is an integral component of Supply Chain Management.
In many cases Supply chain is often referred to as Logistics and vice-versa. Though logistics and supply chain are intricately linked, both do not mean the same. Logistics is a sub component and extension of supply chain.
Importance of Supply Chain Management
It is said that, today, the supply chain management system is the back-bone of a business organisation. This statement itself shows how important a component of business, is the supply chain and its management. Whenever a product is introduced and advertised in the market, a demand for the product is created. It is at this point that the consumer enquires about the product in various available retail/wholesale outlets.
At this point it is very essential that the entire market in the country and all the sales counters have the product, where the customer is able to buy and take delivery. If for any reason the product is not available at the right place and the right time, it can result in a drop in the customer’s interest and customer demand. This can have a disastrous effect on the success of the product.
Thus a proper Transportation network design and management is of great importance, as a support to the sales and marketing strategy. In fact it can be said that without proper transportation network design and management, there is no way that the sales and marketing strategy can succeed. Thus it is an effective supply chain management that will ensure an effective Market Coverage and the availability of the right product at the right places across various locations in the country.
Another reason why supply chain management is important is because inventory control and inventory visibility are the two critical elements in any business operation. Inventory control and visibility have a direct impact on the cost of production and hence a direct impact on the profitability of the organisation. The lesser the capital locked up in inventory the more will be the profitability and vice versa.
However visibility of inventory is also a factor that has to be considered. The two have to be balanced and the right or optimum inventory turnaround has to be established. Every company has a standard for inventory turnaround that is ideal or optimum for the particular business. Inventory turnaround is the number of times the inventory is sold and replaced during a particular period. This period is usually twelve months.
Today inventory or stock of finished goods is held at many distribution centers, wholesale and retail locations across the country. These may or may not be managed by the organisation itself. Some could be managed by third parties. Inventory could also be in the pipeline in transportation. Any loss of inventory anywhere in the supply chain will result in a loss. As such the effective control of inventory is an important factor of the supply chain management function.
5 Fundamental Features of Supply Chain Management – Single Entry, Inventory Perspective, Strategic Decision-Making, Systems Approach and Doing what One can do Best
In response to meet challenges, the five fundamental features of supply chain management are as follows:
Feature # 1. Single Entry:
For various planning and control functions across the supply chain, the responsibility will lie with single entity. For example, a group consisting of representatives from purchase, manufacturing, distribution and sales could be the entity for finalising the marketing plan, the despatch plan, the production plan and procurement plan. This will reduce administrative delays and improve empathy across the supply chain.
Feature # 2. Inventory Perspective:
The traditional concept of inventories is to serve as a buffer to reduce coordination requirements across activities. The current concept is that inventory is a buffer to be used as a last resort after ensuring proper information sharing and coordination. For example rather than quantify the appropriate inventory to protect oneself against uncertain process yields, working with lower inventories will highlight the top problem areas where efforts for improving process yields need to be focussed.
This results in a leaner and cleaner system, which is more responsive in the long-run. Some of the key measures that would enable this perspective of inventory in supply chain management are – (i) improving flexibility; (ii) reducing lead times; (iii) reducing uncertainties, and (iv) improving quality. These are the reasons why inventories are held.
Feature # 3. Strategic Decision-Making:
The decisions in the supply chain are viewed as having strategic implications rather than just operational. For example, rather than being concerned with just sourcing trucks from the market, one could consider long-term contracts with transporters.
Feature # 4. Systems Approach:
The supply chain from vendor to customer is looked upon as a single integrated system rather than as many subsystems interfacing with each other.
Feature # 5. Doing what One can do Best:
In the various activities of the supply chain, it is important to focus on what one can do best. This has implications on outsourcing or even insourcing and building effective partnerships. The more extensive the logistics requirements and the more uncertainty due to logistics supply, insourcing would be a right direction; otherwise the general norm in this business today is outsourcing, usually in the case of consumer goods.
4 Important Principles of Supply Chain Management – Efficiency, Reliability, Flexibility and Innovation
Supply chain management ultimately aims to provide value to customers. Suppliers who follow SCM principles are expected to provide much more value to customers compared to suppliers who have not adopted SCM in their operations. Suppliers who have adopted SCM are expected to provide better value because they espouse the broad principles of SCM.
These principles of SCM guide the individual strategies and the associated activities adopted by the suppliers. The four principles of supply chain management are- (i) efficiency (ii) reliability (iii) flexibility and (iv) innovation.
Each is explained below:
The principle of efficiency requires that any supply chain should be conscious of cost reduction in all the activities and programmes. Efficiency leads to reduction in the wastage of resources, including wastage of time. The principle of efficiency is reflected in initiatives such as just-in-time (JIT) inventory management. The principle of efficiency also drives firms to achieve better planning and coordination of activities.
Reliability is associated with consistency. To a customer, the supply chain should ensure consistency of service. Consistency should be measured mainly in terms of the consistent delivery time achievement, accuracy in order fulfilment, consistency and accuracy in payment processing time, installation support, and after-sales service.
To achieve consistency, the processes have to be perfectly synchronized to the maximum extent possible across every link in the supply chain. Reliability is very important since the globalized nature of supply chain relationships and criticality of the network linkages lead to a high level of dependency. Disruption in the availability of even some small components could bring an entire assembly line to a complete halt, leading to huge losses across the entire supply chain.
Flexibility is associated with the ability of the entire supply chain to adapt to changes in the demand or supply pattern. Sometimes flexibility is also termed as the ‘agility’ of the supply chain. Flexibility involves such capabilities such as ramping up production at the minimum of time intervals if required, responding to changing patterns of demand, customized transactional processes, as well as streamlined and rapid data flow.
It is not just sufficient for the supply chain to be efficient, reliable, and flexible, but a supply chain also has to constancy innovate so as to constancy utilize the learning generated through its operations. Innovation is important, as it could generate a sustainable competitive advantage for the firm. Supply chains that do not innovate will slowly erode their comparative advantage with regard to their competitors.
5 Main Objectives of Supply Chain Management
“The goal of logistics and supply chain management is timely delivery, competitive pricing, mobility, and flexibility, together with innovative transportation services”.
The basic objective of supply chain management is to ensure minimum cost and maximum efficiency in every aspect of handling of raw material, component parts and finished goods as they move from production centre to the final consumer.
Effective supply chain bridges the following gaps that exist between the producer and the consumer:
(a) Space Gap:
This is the gap caused by the manufacturers and consumers being situated physically away from each other. Here supply chain moves the goods physically from the point of production to the point of distribution and fills the space gap. It is a supply chain management system that ensures that goods produced in one particular place are available for consumption to consumers at their right place.
(b) Time Gaps:
This is the gap that results because the manufacture of a product takes place at one point in time however it is required by the consumer at another point in time. Example – sugar is manufactured just after the harvest of sugarcane and beetroot. However sugar is demanded throughout the year. Thus the supply chain ensures that excess manufactured product is properly stored when not required and makes it available when required. It thus fulfills the time gap.
(c) Quantity Gap:
Quantity gap is the difference between the quantities produced and demanded. Certain products, in order to be profitable have to be manufactured in large quantities. However the demand is limited and spread over a period of time. For example a publisher cannot publish a small quantity of books.
For the cost of production to be feasible, a particular number of copies of a particular book need to be published. However the sale is only of a copy per consumer. Thus this quantity gap too is taken care of by an effective supply chain management system.
(d) Variety Gap:
Customers usually want a variety of products. The more the customer for a product the more variety is demanded. It is an effective supply chain management system that fills this variety gap and ensures a wide variety of goods for the customers. For example a stockiest of consumer products or a retailer will keep soaps of various brands and manufacturers, thus ensuring a wide range of soaps for the consumer to choose from.
(e) Information Gap:
It is the supply chain that bridges this gap. An information gap exists when either the supplier or the consumer does not have information about the other. That is the supplier lacks information about who or where is his consumer and the consumer lacks information about the various available options that are available to fulfil his product need. Here supply chain supplies the information and bridges this gap.
Basic Components of Supply Chain Management
1. Demand planning and forecasting
2. Demand collaboration, i.e., collaborative resolution process to determine consensus forecasts.
3. Order promising, i.e., when can one promise a product to a customer taking account lead times and constraints.
4. Strategic network optimization, i.e., what plants and distribution channels should serve, what markets for what products whether monthly — yearly.
5. Production and distribution planning, i.e., coordinate the actual production and distribution plans for a whole enterprise may be on a daily basis.
6. Production scheduling.
7. Plan of reduction of costs and management of the performance, i.e., diagnosis of the potential and the indicators, the organization, evaluation and accounting reporting, evaluation and reporting quality, etc.
SCM works on the five basic components:
1. Customer Service Standardization – Determining customer needs and wants related to logistics, recording of the response to the service and finally benchmarking the service levels.
2. Transportation – Assistance is provided in selection of mode and transport, service selection, freight consolidation, carrier routing, vehicle scheduling etc.
3. Inventory Management – Raw materials and finished goods stocking policies, short-term sales forecasting, determining product mix at stocking points, evaluating number, size, and location of stocking points, just-in-time, push, and pull strategies, information flows and order processing etc.
4. Warehousing – Assistance in space determination, stock layout and dock design, warehouse configuration, storage methods, materials handling equipment selection, etc.
5. Purchase – Supply source selection, purchase-timing etc. Co-operate with production/operations: Specify aggregate quantities, sequencing and timing production.
6. Information Maintenance – Information collection, storage, data analysis and control procedures.
Supply Chain Management Examples
Following examples explain how the SCM offers strategic advantages to all the participants including the ultimate consumers:
Citibank Singapore brings its banking activities into its major corporate clients’ offices by supplying computers that are linked to its head office.
Thanks to the Electronic Data Interchange (EDI) — General Electric’ operates a computer-oriented system that upon receipt of order, checks customer’s credit and whether and where the items are in stock. The computer issues an order to ship, bills the customer, updates the inventory records, sends a production order from new stock, and relays the message back to the sales representative that the customer’s order is on its way — all in less than 15 seconds.
Levi’s, the famous brand of blue jeans includes its suppliers and distributors in USA. One of Levi’s major retailers is Sears. Every night Levi’s learns the sizes and styles of its blue jeans that sold through Sera and other major outlets. Levi’s then electronically orders more fabric for the next day delivery from its fabric supplier, who in turn relays an order for more fiber to Du Pont — the fiber supplier.
Thus, the partners in the supply chain use the most current sales information. Levi’s performance against its any of competitors, say Wrangler will depend upon the teamwork quality of Levi’s strategic network/supply chain against Wrangler’s strategic network.
When the customer in a Walgreens store buys a tube of Colgate toothpaste, this transaction triggers a series of information flows that result in product replenishment. Toothpaste purchased is scanned at the billing counter. The information on the black and white bar code goes directly to a computer at Walgreens’ regional distribution center and to Colgate-Palmolive’s computer as well.
A replenishment order is automatically generated from the bill counter terminal and data is shipped to Walgreens’ distribution center. Colgate-Palmolive product is immediately loaded onto Walgreens’ trucks. Once it enters the store, the product is immediately placed on the shelf. A source tag and Walgreens’ price label are affixed to the package by Colgate-Palmolive to save time and effort at the store.
Because of this, immediate access to information, both Walgreens and Colgate-Palmolive know exactly what, where, and when something is being sold. Additionally, Walgreens’ stores purchase information on customers to be used to plan promotions and to merchandise their stores. By sharing this information, Walgreens’ and Colgate-Palmolive have become partners in this supply chain.
Everyone benefits. Colgate – Palmolive can plan its production and distribution activities. Walgreens’ does not need to maintain a large inventory and does not have to worry about keeping its stores in stock because Colgate-Palmolive shares the distribution activities.
15 Key Thrust Areas of Supply Chain Management
There are 15 key thrust areas, which are specific decision areas:
Area # 1. Minimising Uncertainty:
Supply uncertainty due to unreliability of vendors, process, uncertainty due to internal process and demand uncertainty are some of the major obstacles to effective SCM. Supply uncertainty can be reduced through a number of initiatives such as vendor development, sharing of production planning information and joint attention to transport arrangements.
Process uncertainty is due to machine breakdowns, uncertain yields and absenteeism, which can be tackled through good maintenance practices, better technology etc. Demand uncertainty can be reduced to some extent by forecasting techniques and by better communication with customers.
Area # 2. Reducing Lead Times:
Lead times at the stages of procurement, conversion and distribution can be reduced by faster modes of transport, better planning practices and process technologies.
Area # 3. Minimising the Number of Stages:
The number of stages that goods and services flow through adds to the complexity of SCM. Unification of tasks and reducing the number of stages make the coordination of decisions easier.
Area # 4. Improving Flexibility:
Reducing changeover times in various processes and the use of flexible manufacturing and assembly techniques improves the flexibility of response. In transport, the use of smaller vehicles provides flexibility in making despatches at short notice without being constrained by batching economies. Wherever possible, batch processes should be made continuous one.
Area # 5. Improving Process Quality:
A precondition to effective SCM, in the light of reducing inventories and wastage, is to do things right the first time. This is good for improving process quality. The techniques for this include statistical process control, root cause analysis of poor quality and improvement of process capability.
Area # 6. Minimising Variety:
Variety is one of the causes for inventory in the downstream part of supply chains. One response is to standardise product and service offerings.
Area # 7. Managing Demand:
Uncertainty and anticipated variations in demand should be tackled by appropriate promotion and branding. This will ensure a better control of the supply chain.
Area # 8. Delaying Differentiation:
The value addition through product differentiation should be postponed as far as possible so that precise customer needs can be met without holding committed stocks in the entire chain. There are many ways of how this can be done, such as shipping of component level goods to major points and assembling according to customer needs.
Area # 9. Kitting of Supplies:
In assembly system, a major source of delay is the staging delay where some components for assembly have to wait since matching components are not available.
Vendors that supply such components are not available although they can be arranged so that all components required for an assembly are manufactured or supplied to one stage where they are kitted into sets of matching components, ready for assembly and further operations. This might involve some restructuring of vendors or internal activities and some vertical integration.
Area # 10. Focusing on a Category:
Where items that account for a large part of the value or which are critical and/or customers who are significant, receive special attention.
Area # 11. Planning for Multiple Supply Chains:
Doing better SCM would often require different supply chain for different customer segments based on response requirements. The tendency to club supply chains may be counterproductive for effectiveness.
Area # 12. Modifying Performance Measures:
The need to move from being single-actor focused to multi-actor focused in the supply chain is felt. For instance, in the context of a warehouse, instead of warehouse space utilisation as the primary measure of warehouse performance, the retrieval time would be more in tune with SCM, since this focuses on both the warehouse and the downstream actor.
Area # 13. Competing on Service:
The big opportunity in SCM for long-term competitive advantage is on the service aspects of value delivery to the customer. Product quality can only be a short-term advantage.
Area # 14. Moving from Function to Processes:
Improved supply chain practices will require integrated process orientation rather than functional organisation. Job rotation and flatter organisations will help.
Area # 15. Taking Initiatives at an Industry Level:
This is essential, especially in dealing with poor infrastructure. Industry-level, rather than firm-level initiatives in specific product categories can focus on transport or warehousing inadequacies and help develop appropriate service providers.
Strategies and Supply Chain Management – Rationalization, Synchronization, Customization and Innovation Strategy
Supply chain management is a general orientation for managing the operations of a firm. Within the larger supply chain management framework, a firm can choose to follow a variation of strategies that differ in their overall emphasis.
Four different strategies can be identified:
Of course in practice, most firms follow a supply chain strategy that involves a combination of these strategies, placing varying levels of emphasis on each.
Rationalization strategy places greater emphasis on process rationalization that eventually leads to better net margin. Such a strategy involves closely assessing the processes and working out ways of reducing wastage wherever possible. It emphasizes on operating expense management, without reducing customer service.
Examples of execution of rationalization strategy would involve reducing the number of warehouses or less than full truck load transportation. Typical elements of the rationalization strategy would involve devices such as transportation optimization, lean manufacturing, and electronic data interchange (EDI). In this sense this strategy is more traditional than other supply chain strategies such as synchronization and innovation.
Synchronization strategy involves streamlining the supply chain process so that there is a flawless, reliable execution of the supply chain process. Synchronization also places emphasis on cost reduction, not just through process rationalization but by efficiency managing the assets.
Synchronization strategy involves elements such as collaborative inventory management, perfect order fulfilment, anchor players, and optimal inventory placement. One of the most popular supply chain practices that follow from synchronization strategy is JIT inventory management. Both rationalization and synchronization strategies have the same goal—cost reduction. However, the two seek to achieve it through different means.
Customization strategy involves developing specific strategies for profitable customers and executing it with a view to establishing a long-term relationship with them. Customization strategy is associated with responsiveness and flexibility. Responsiveness is measured in terms of the ‘Velocity’ with which the supplier provides products to the customer, and flexibility is measured in terms of the ‘agility’ with which the supplier responds to the changing needs of the customer.
The elements of customization strategy involve mass customization, lifetime relationships, customer profitability management, customer knowledge management, and value analysis.
Innovation strategy is different from the principle of innovation—considered as a basic principle of SCM. The supply chain innovation strategy involves exploiting the competitive advantage generated by a strong supply chain to introduce successful new products in the market at a much higher rate than competitors.
Implementing a supply chain strategy essentially boils down to involving the supply chain partners in developing new products and integrating the supply chain processes among all partners to such an extent that it becomes possible to constancy innovate and produce new products with collaboration from tier 1 as well as tier 2 suppliers.
For a company like Apple, developing a constant stream of new products involves working closely with their partners in research and development (R&D) and other associated activities. The elements of the innovation strategy involve concurrent product development, rapid and early prototyping, early supplier involvement, and designing for the supply chain.
All firms may not choose to focus on all these strategies with the same level of emphasis at all times. According to Jacoby (2010), the degree to which a firm places emphasis on each of these four supply chain strategies depends on the generic organizational strategy followed by the firm. Though the supply chain strategies flow from the fundamental supply chain principles, they are basically correlated with the overall strategy followed by the firm.
Some of the supply chain strategies are implemented only in combination with (or as part of) certain generic strategies followed by the firm. For instance, a firm following a focus or niche strategy will be focusing more on a customization supply chain strategy, with emphasis on streamlining the supply chain-related processes to give each customer what he or she wants. Following such a strategy would lead to less emphasis on elements of rationalization, synchronization, and innovation.
5 Essential Techniques of Supply Chain Management
Any supply chain strategy can be implemented only through strong supply chain techniques. These techniques form the backbone of the supply chain strategy implementation. Supply chain techniques are the bunch of activities that the SCM process should incorporate, in order to achieve the objectives set in the SCM strategy. Supply chain techniques underlie all the elements of the supply chain strategies. Whichever supply chain strategy is emphasized, supply chain techniques require adequate attention and application.
According to Jacoby (2010), the essential supply chain techniques are as follows:
Technique # 1. Supply Chain Network Design:
Network design is probably the most critical part of the supply chain management. To achieve the optimum supply chain performance, it is necessary to establish a purposeful network design characterized by an optimum division of activities and responsibilities.
Further, the network design should be based on fairness and transparency. This implies that no element in the network should get an unfair profit for the contribution made to the processes, and every element should know what the others are doing and what the other element is receiving as remuneration. Fairness and transparency contribute to the sustainability of the network design.
Technique # 2. Capacity Planning:
Capacity planning is associated with the ability of the network to respond to changing demand patterns and market conditions. Ideally, the supply chain strategies should lead to an optimum utilization of the infrastructure and other facilities.
This would involve the most appropriate utilization of transportation facilities with very few less-than-truckload transportation and maximum capacity utilization of the warehouse space. In order to achieve the optimum level of capacity utilization, proper planning is required.
Capacity planning requires both long-term, as well as short-term orientation. For instance, capacity planning should address issues such as—If the demand increases gradually, how would the requirements for additional inventory storage be met after two years? In the short term, how would the short-term dip in demand affect storage space productivity? Supply chain managers use sophisticated modelling- based analysis to address some of these issues.
Technique # 3. Risk Management:
Supply chain management requires a seamless, delicate integration of hundreds of supply and processing points. Often, these processing points are separated by thousands of kilometers. It is only with perfect and accurate coupling, that cost and time advantage in a supply chain can be realized. However, such a coupling also leads to potential risks. Disruption in any one of these points could translate into a system-wide disruption.
Environmental factors, such as the sudden increase in cost of certain components, or disruptions to the physical flow of goods due to natural disasters could create tremendous disruption in the whole system. Similarly, fluctuating demand at any point in the system could lead to tremendous disruption in the overall supply.
Risk management is therefore very critical in SCM strategies. Risk management involves qualifying, measuring and managing risks, developing broad objectives while handling risk (e.g. the quantum of compensation), as well as hedging for risks such as building buffer stocks.
Technique # 4. Organizational Change Management:
Ultimately, SCM is also an organizational process involving organizational players including departments, teams, and informal groups. Embracing SCM involves profound changes within the organization, including the way activities are organized and personnel interact.
Further, as SCM involves a continuous adaption to market changes, the organization will also need to change constancy. All this requires an ability to change whenever required. An organization that refuses to change will find it difficult to adopt SCM. Expertise in managing change in an organization is therefore a critical factor in managing a supply chain.
Technique # 5. Performance Measurement and Monitoring:
Developing and implementing performance monitoring processes is also very crucial to the success of a SCM strategy. Erroneous performance metrics, or faulty measurement methodology could completely derail a well thought out SCM strategy. Performance metrics and measurement provides the crucial feedback that guides the SCM strategy.
The lack of proper feedback or faulty feedback leads to faulty implementation of the strategy. For instance, if the main focus is on inventory turnover and faulty methodology is implemented in calculating average inventory, the feedback going to the supply chain will be fundamentally wrong, and any action which is initiated, based on such a feedback will be ineffective or worse—counterproductive.
Supply chain management as a philosophy or a set of practices dominate the practice of logistics management. With the impending arrival of large multinational firms in the Indian retail arena, SCM will gain much more prominence than at present in India. It is much wider in scope than the logistics management of a firm. Supply chain management directly embraces activities such as procurement, research, design, manufacturing, distribution, and marketing.