Agenda. Supply Chain Management (SCM) = The management of a supply chain. Basics of Supply Chain Management

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1 Basics of Supply Chain Management Erik Sandberg, Assistant Professor Division of Logistics Management Institutionen för ekonomisk och industriell utveckling Agenda 1. What is SCM? 2. SCM vs. Logistics 3. SCM in practice Supply Chain Management (SCM) = The management of a supply chain Information and Payments (Order, forecasts, etc) Supplier s supplier Supplier Focal company Customer Customer s customer Physical flow of goods Raw material Final consumer 1

2 Definitions of SCM A search at Google.com for supply chain management definition gives about 2730 hits SCM spans over several disciplines Purchasing and supply literature Logistics and transportation literature Marketing literature Organisational behaviour, industrial organisation, transaction cost economics and contract view literature Contingency theory Institutional sociology System engineering literature Network literature Best practices literature Strategic management literature Economic development literature Croom et al. (2000) Academic definitions of SCM (I) The management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole. Martin Christopher, 1998 Supply chain management is defined here as managing the entire chain of raw material supply, manufacture, assembly and distribution to the end customer Jones,

3 Academic definitions of SCM (II) supply chain management is an integrative approach to using information to manage inventory throughout the channel, from source of supply to end-user. Ellram, 1991 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, supply chain management integrates supply and demand management within and across companies. Council of Supply Chain Management Professionals, CSCMP How senor Ortega, founder of Inditex, express it: Touch the factories and customers with two hands. Do everything possible to let one hand help the other. And whatever you do, don t take your eyes off the product until it sold (Ferdows, et.al. 2004) Institutionen för ekonomisk och industriell utveckling SCM: We are all in the same boat I m sure glad the hole isn t in our end... 3

4 No chain is stronger than its weakest link An observation IKEA, H&M, Zara (Inditex) WalMart, Lidl, Aldi Dell Computer, Nokia Mats Abrahamsson SCM is not a new idea Physical distribution planning must be channelwide in perspective Bowersox, Smykay, LaLonde, 1968 the time element in manufacturing stretches from the moment the raw material is separated from the earth to the moment the finished product is delivered to the ultimate consumer Ford,

5 Traditional supply chain vs. SCM (I) (Based on Cooper & Ellram, 1993, p. 16) Element Traditional Supply chain management Cost approach Time Horizon Minimize the own costs Short term, Supplier with the lowest price wins the order Channel-wide cost efficiencies, i.e total cost approach Long strategic thinking - possibility to make investments - improvements on production, - continuous rationalisation, - knowledge about each other and the products, - stepwise expansion Information sharing Orders, afraid of giving away company secrets Whatever needed: - Point of sales data - Production planning - Forecasts - Strategic information, plans Traditional chain vs supply chain (II) Element Traditional Supply chain management Coordination and integration Single contact for the transaction between channel pairs Multiple contacts between levels in firms and levels of channel Collaboration Not needed A necessary prerequisite Channel Leadership Not needed Needed for coordination focus Joint Planning Breadth of Supplier Base Amount of Sharing of Risks and Rewards Transaction-based, operational Large to increase competition and spread risk Each member takes their own risks and rewards On-going, operational as well as strategic Small to increase coordination Risks and rewards shared over the long term (winwin) Traditional chain vs supply chain (III) Element Traditional Supply chain management Inventory management Compability of Corporate Philosophies Independent efforts Not relevant Joint reduction in channel inventories, The supply chain is seen as one single entity Compatible, supply chains are competing with other supply chains 5

6 Benefits of SCM Improved customer service Reduced lead times Different types of cost reductions Reduced inventories Reduced risks in the supply chain Reach the market faster Increased competitiveness for a whole chain and many more SCM literature from different perspectives Sandberg, 2005 SCM is an umbrella term SCM is NOT one standardised business concept, ready to be implemented by consultants We have seen many business concepts through the years (TQM, TBM, BPR ) However, SCM incorporates many of the issues addressed in the concepts: - Produce to customer order (TQM) - Process orientation (TQM and BPR) - Focus on processes (BPR) - Lead time based design of structures (TBM) - IT and POS-information (BPR) Mats Abrahamsson,

7 SCM and IT SCM is NOT only about advanced IT systems. Organisational problems/challenges can not be solved by IT But it can be an important TOOL for competitive advantage: Many of our advantages are due to the fact that we have not considered what an IT-system can do for us and adapted us, but what we want to do and make the IT-system adapt to how we work (Marketing manager, Dustin Group AB) SCM and IT IS/IT enables: - Make the supply chain transparent - Collect Point of Sales information and move it backwards - Execute the the supply chain activities - Optimise the supply chain processes -> A new information system must result in more than just a new system: Philosophy AND management practices SCM as a philosophy: Supply Chain Orientation A set of beliefs for how to manage relationships in the supply chain, or a specific mindset. SCM as management practices Actions undertaken to realise the SCO, i.e. the philosophy. E.g. sharing information, joint planning, collaboration etc Operationalised in a number of business management concepts: - ECR, Efficient Consumer Response - VMI, Vendor Managed Inventory - CPFR, Collaborative Planning, Forecasting and Replenishment Mentzer et al. (2001) 7

8 Part 2: SCM vs Logistics Logistics Supply Chains Demand Chains Supply Networks Integrated Supply Chain Management Demand Chain Leadership International Supply Chain Management Value Chain Management Don t be confused by definitions (See van Weele, chapter 11) Customer Marketing Manufacturing and logistics Purchasing 1st Tier supplier 2nd Tier supplier Physical Distribution Materials Management Logistics Management Business Logistics Demand Chain Management Supply Chain Management Value Chain Management Logistics vs. SCM: SCM as Re-labeling Logistics SCM Logistics Manager Supply Chain Manager Larson och Halldorsson

9 Logistics vs. SCM: SCM as a sub-unit of logistics Logistics SCM Logistics hires supply chain analysts to focus on cross-functional, inter-organizational issues. Larson och Halldorsson, 2004 Logistics vs. SCM: SCM as everything SCM Marketing Logistics Production xxx SCM = purchasing + logistics + operations + marketing +... Larson och Halldorsson, 2004 Logistics vs. SCM: SCM partly overlapping logistics SCM Logistics Larson och Halldorsson,

10 Part 3: SCM practices 1. Improving working processes 2. Information sharing 3. Improving the supply chain orientation These three tasks are crucial for a company s SCM performance!! 1. Improving working processes What is a (working) process? a specific ordering of work activities across time and place, with a beginning, an end, and clearly identified inputs and outputs, a structure for action. (Cooper et al., 1997, p. 5) Important: Working with processes puts focus on end customers! Processes stretch across functions 10

11 Important learning SCM means working with processes AND functions: -What I mean is that independent of what end of the system you are, you should experience that we are working with the entirety and that one helps each other, that one understands each other s challenges That is a balance. To understand the entirety and at the same time create good results. That is similar to the matrix thinking that has been an organisational issue for many decades now. (Company Director, BAMA) Process orientation breaking functional silos: Level 0ne: Traditional supply chain Single activities Inventories and poor communication between departments in the company Each department has their own IS/IT system Different strategies in different departments Short time planning Stevens (1989) Process orientation breaking functional silos: Level two: Functional integration Procurement Production Distribution Departments/activities within the same function is integrated Inventory and administrative barriers between different functions Real demand not visible for the Production Tends to be a focus on cost reduction (customer is not in focus) Stevens (1989) 11

12 Process orientation breaking functional silos: Level three: Internal integration Supplier Procurement Production Distribution Customer Everybody in the company have access to all information Tends to be a focus on doing things right (Rather than doing right things) Reactive rather than proactive customer interaction Stevens (1989) Process orientation breaking functional silos: Level four: External integration - SCM Supplier Internal Chain Customer Integration of several organisations Customer orientation instead of product orientation In-depth analysis of customer requirements and the needs (products, culture, market, organisation) Collaboration with suppliers and customers (product development, quality, transports) Stevens (1989) Creating process orientation in the organisation - The case of Dustin Process oriented organisation through smart responsibility division among departments Dustin Pricing Suppliers Purchasing Marketing Product managers Customers Sandberg (2007) 12

13 2. Information sharing Information can reduce logistics costs: - Information can (to some extent) replace expensive inventories - Information is a prerequisite to many business concepts (Vendor Managed Inventory, Efficient Consumer Response, etc) - Information is needed for proper transportation and route planning Examples of information types shared: - Inventory levels - Sales data - Order status for tracking/tracing - Sales forecast - Production/delivery schedule - Performance metrics - Other strategic information Information sharing - The case of DELL INFO Information Hub INFO INFO Suppliers Prod. Dell s factory for Europe (Ireland) Prod. Customers Make money from sharing information Full transparency in the supply chain gains all supply chain members How to use the shared information is focused Information sharing - The case of Dustin Company Order customers at Distributors IT Systems Linked Dustin s IT System Order Private consumers at Distributors central warehouses transport Dustin s CW transport -> Short customer leadtimes -> Inventory turn over 40 times/year 13

14 3. Supply chain orientation A set of beliefs, a philosophy, that is based on: Trust towards partner/partners Commitment Interdependence Organisational compatibility Vision and key processes Leader Top management support Takes time and is difficult to build! Mentzer et al. (2001) The need for SCM increases in today s business climate -> More outsourcing -> More intermediaries -> the supply chain becomes longer from end customers -> Good quality products are not enough anymore -> Fast market entrance and sales exposure in store important -> Need for improved logistics performance Real competition is not company against company but rather supply chain against supply chain (Martin Christopher, 1998, p. 16) 14

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