Chapter 1: Overview and Development of
Supply Chain Management
Learning Objectives
After reading this chapter, you should be able to do the following:
• Discuss the major change drivers in our economy and in the global
marketplace.
• Understand the rationale for the development of supply chain
management in leading organizations.
• Appreciate the importance and role of supply chain management
among private and public organizations.
Learning Objectives (cont.)
Understand the contributions of a supply chain approach to organizational
efficiency (doing things right) and effectiveness (doing the right things)
Analyze the benefits that can accrue from implementing effective supply
chain practices.
Understand the major challenges and issues facing organizations
developing and implementing supply chain strategies.
Five major external forces seem to drive the rate of change and
shape our economic and political landscape:
Globalization: world as a small village as a result of the
development of communication tools and IT.
Technology: digitalization
organizational consolidation: merging of companies into large
ones to maximize competitiveness
the empowered consumer: consumers have greater access to
information (pool of knowledge) which increases their power
when making a decision.
government policy and regulation: tariffs, customs, taxes,
transforming transportation and communication sectors (instead
of monopolies, open doors for competition where there is high
quality and low prices
Globalization
- Concept of the “global marketplace” or global economy
- More intense economic and geopolitical environment
More volatility of supply and demand (due to greater
competition, open market, lack of monoplies)
Shorter product life cycles
Blurring of traditional organizational boundaries through
increasingly global operations and increasing use of outsourcing
Increasing importance of the “BRIC” economies – Brazil, Russia,
India and China (because they have a high amount of labor, with
very cheap labor costs)
Technology
- Easy and quick acquisition of information through technological
advances, especially the Internet
- Information can be “pulled” by the user (feedback from users and
reviews for changes)
Better connection of individuals and smaller organizations with the
world’s “knowledge pools” for more opportunities for supply chain
collaboration
“Flat” world with more participation of newly industrialized countries in
the global economy (firms structure shifting from hierarchal to flat, from
giving orders to execute to everybody being involved in the decision
making) (decisions from top to bottom bottom to top as first line
managers are more prioritized due to their direct access to consumers)
Multidirectional flow of commerce (communication used to be one way
interaction with multiple entities when it comes to commerce)
Organizational consolidation
- Shift of power in supply chains from manufacturers to retailers
since the 1980s and 1990s (due to their direct access to
consumers, they collect info about consumers and communicate
it to manufacturers accordingly)
- 15-20% of customers accounting for 70-80% of consumer
product companies’ sales
Customized services offered to large retailers by consumer
product companies, including mixed pallets, advance shipment
notices, etc. (shift from standardization to customization
Provision of value-added services to retailers, such as vendor-
managed inventory (VMI)
More collaboration and sharing of information in the supply chain
The empowered consumer
- Direct impact of the consumer on supply chains, due to
increased demands for and expanded variety of products and
services, e.g. fruit from overseas, stores open 24/7, etc.
Consumers better informed due to improved information
accessibility, via Internet and other sources
Increasing buying power and higher income levels causing more
demand for customized products/services
Increasing demand for quicker response times
Less loyalty to brands, focus on cost and service (due to
alternatives)
Government policy and regulation
- Economic deregulation in the 1980s and 1990s
concerning transportation, communications and
financial services
More competitive transportation environment with
lower prices and better services, more customization
More competition in the financial sector, more
responsiveness to customer demands, faster cash
flow
More competitive communications environment,
faster and better flow of information, allowing for
inventory visibility, quick response replenishment,
improved transportation scheduling, etc.
Physical supply Physical distribution
materials management outbound logistics
inbound logistics
Development of the Supply Chain Concept
Started in the 1960s with the development of the physical distribution
concept
Initial focus on physical distribution or outbound logistics was logical
because of the flows of finished goods
During the 1980s, the logistics or integrated logistics management
concept developed in a growing number of organizations, and included
for the first time both the inbound and outbound flows of goods, capital
and information
The underlying logic of the systems or total cost concept was also the
rationale for logistics management
Supply chain management can be viewed as a pipeline or conduit for
the efficient and effective flow of products/materials, services,
information, and financials, and is based on the extended enterprise
perspective and cooperation across the various supply chain segments
Supply chain flows
Products and services
Information
Financials
The flow of products
Product flow relevant to supply customers with
the timely, damage-free delivery of their orders
Traditionally unidirectional, now a two-way flow,
due to reverse logistics, concerning product
returns, waste recycling, unacceptable products
(for reasons of inferior quality, safety, etc.)
The flow of information
Information flow traditionally unidirectional, from
customers to back to the wholesalers to the
manufacturers, etc.
Information concerning mainly demand and
sales data
Time compression achieved within the supply
chain through faster information flows
Information flow nowadays two-directional,
through innovations such as order status
information, advance shipment notices, etc.
The flow of financials
Financial flows traditionally one-directional, with
customers paying for the goods and services
provided
Technology enabled faster cash flows
Negative working capital used in certain cases,
when companies collect money from customers
first before paying their actual suppliers,
common in highly-customized production
Effects of Efficient Consumer Response Practices
Reduction of inventory times, i.e. the time items are
stored without being available to the customer
Cost reduction
Reduced consumer prices, landed prices, achieved
through reduced storage costs
Comparison of total supply chain management costs
between best-in-class (BIC) and median companies
Best-in-class companies’ spending on the supply chain
significantly lower than median companies’ spending
Proper supply chain management causes cost
reductions
Major Supply Chain Issues
Supply Chain Networks
Network facilities (supple chain partners must have
consistent goals) and supporting transportation important
factors (scheduling time, quality, cost etc), requiring
flexibility to respond and change with the dynamics of the
marketplace
Increased complexity for organizations is a problem (standardization
is easier), requires rationalization, reduction of stock keeping unit
(SKUs) for better inventory management and order fulfillment,
elimination of high-cost operations
Inventory Deployments
inventory duplication a problem in supply chains, causing the
bullwhip effect (accelerate the stocks flow), reduction of
inventory levels necessary, possible through coordination and
integration
Collection and storage of vast accurate amounts of data, but
effective sharing of information along the supply chain required to
reduce uncertainty and inventory levels
Major Supply Chain Issues
Supply Chain Networks
Cost/Value
Efficiency (cost) and effectiveness (value) achieved through the
prevention of suboptimization
Organizational Relationships
Horizontal process orientation across traditional functions within
organizations, such as marketing, sales, operations/
manufacturing, accounting/ finance and cooperation with
external organizations, such as vendors, customers,
transportation companies, etc. for tradeoffs and optimization
Performance Measurement
Lower-level metrics, e.g. orders filled and shipped per day
necessary to be connected with high-level metrics, e.g. net
profit, assets, cash flow, consideration of the overall
organization required instead of only subunits such as
production, warehousing, etc.
Major Supply Chain Issues
Supply Chain Networks
Technology
Challenge is to evaluate and successfully implement the
technology, implementation requires analysis and adjustment of
processes first, and proper training of the people involved
Transportation Management
Right product, right time, right quantity, right quality, right cost,
right destination 7Rs – all requiring proper management of
transportation
Transportation closely related to strategies used, such as just-
in-time inventory, lean logistics and manufacturing, etc.
Transportation heavily impacted by rising fuel costs, shortages
of drivers and equipment – no longer a readily available service
in certain areas
Supply Chain Security – increasing risk of disruptions in global
supply chains, requirement for organizations to be prepared for
potential threats PROJECT
Chapter 1 Summary
Cash flow has become one of the most important measures of
financial viability in today’s global markets. Supply chains are an
important determinant of improved cash flow since they impact
order cycle time to customers.
Supply chains are an important determinant of capital consumption
since they impact working capital, inventory levels, and other assets
such as warehouses.
Efficient and effective supply chains can free up valuable resources
and improve customer fulfillment systems so as to increase return
on investment or assets and improve shareholder value.
The rate of change in our economy has accelerated the necessity of
continuing changes in organizations or even transformation to
remain competitive.
Chapter 1 Summary (cont.)
The rate of change has been driven by a set of external forces
including but not limited to globalization, technology, organizational
consolidation and shifts in power in supply chains, an empowered
consumer, and government policy and regulations.
The conceptual basis of the supply chain is not new. In fact,
organizations have evolved from physical distribution management
to logistics management to supply chain management.
Supply chains need to focus on the customers at the end of the
supply chain and be flexible and responsive.
Technology is important to facilitate change, but it must follow a
process and educate people to address problems and issues
appropriately.
Chapter 1 Summary (cont.)
Transportation management and security have become increasingly
important in the twenty-first century because of changes that have
occurred.
Supply chains are boundary spanning and require managing three
flows—products, information, and financials (cash).
Supply chain management is a journey, not a goal, and there are no
“silver bullets” since all supply chains are unique.
Information is power, and collaborative relationships internally and
externally are a necessary ingredient for success.
The performance of supply chains must be measured in terms of
overall corporate goals for success.