Supply Chain Strategies

Abstract

Over the past decade, companies have adopted supply chain management as a critical element of their corporate strategies. A supply chain is composed of all the firms involved in the design, production, and delivery of a product to market. Supply chain management is the coordination of production, location, transportation, information and inventory among the participants in a supply chain. Supply chain strategy involving decisions how to structure the supply chain over next several years. It decides what the chains configuration will be, how resources will be allocated, and what processes each stage will perform. Strategic decisions made by companies include the location and capacities of production and warehouse facilities, the products to be manufactured or stored at various locations, the modes of transportation to be made available along different shipping legs, and the type of information system to be utilized. The operations and supply chain areas are important providers of value in any organization. This paper has presented a top-down model of the strategic planning process, with particular attention to the concepts of value, competitive advantage and core competency. [PUBLICATION ABSTRACT]

Headnote

Abstract

Over the past decade, companies have adopted supply chain management as a critical element of their corporate strategies. A supply chain is composed of all the firms involved in the design, production, and delivery of a product to market. Supply chain management is the coordination of production, location, transportation, information and inventory among the participants in a supply chain.

Supply chain strategy involving decisions how to structure the supply chain over next several years. It decides what the chains configuration will be, how resources will be allocated, and what processes each stage will perform. Strategic decisions made by companies include the location and capacities of production and warehouse facilities, the products to be manufactured or stored at various locations, the modes of transportation to be made available along different shipping legs, and the type of information system to be utilized.

The operations and supply chain areas are important providers of value in any organization. This paper has presented a top-down model of the strategic planning process, with particular attention to the concepts of value, competitive advantage and core competency.

Keywords: core competencies, customer value, operations, strategies, supply chain

JEL Classification: M11

Introduction

The traditional view of supply chain management is that it is mainly a process for obtaining and moving goods and services. According to this view, supply chains are tactical and transactional in nature, and are a cost centre rather than a revenue driver. Not surprisingly, many firms focus on individual operational metrics such as dock-to-stock time and manufacturing lead time to assess their chains. Indeed, most organizations do not track or have a method of recording total supply chain performance. Best value supply chains are grounded in a different set of assumptions and practices. Their focus is on strategic supply chain management, or the use of supply chains as a means to create competitive advantages and enhance firm performance [Hult et al., 2004].

Today, the practice of supply chain management is becoming extremely important to reduce costs and improve quality and customer service, with the end objective of improving competitiveness. Many firms are just now becoming aware of the advantages of supply chain integration. Supply chain management is an outgrowth and expansion of lean and Six Sigma activities and has grown in popularity and use since the 1980s. The foundations of supply chain management can be found in the areas of purchasing, production, logistics and process integration or collaboration between trading partners. Finally, as markets, political forces, technology and economic conditions change around the world, the practice of supply chain management must also change and grow.

In the struggle for marketplace advantage, organizations, consultants, practitioners and academics have attempted to organize and integrate supply chain management (SCM) concepts and practices into their business processes. As a result, many discovered that this subject is neither well defined nor easily implemented, but encompasses an enormous breadth of topics requiring radical new thinking. Moreover, SCM involves challenges such as developing trust and collaboration among supply chain partners, identifying best practices that can facilitate supply chain process alignment and integration, and successfully implementing the latest collaborative information systems and Internet technologies that drive efficiencies, performance, and quality throughout the supply chain [Robinson & Malhotra, 2005].

Companies are undergoing a revolution in terms of implementing new operations strategies and technologies in response to the challenges and demands of the twenty-first century. Businesses in the twenty-first century have to overcome the challenges of satisfying the demand of customers for products of a high quality, but low price. To this end, firms need to be responsive to customers' unique and rapidly changing needs. Companies are now seriously exploring the potential of the concept of supply chain management to improve their revenue growth [Gunasekaran et al., 2008].

The primary objective of any supply chain is to maximize the overall value generated. For most commercial supply chains, value will be strongly correlated with supply chain profitability. Profitability is the total profit to be shared across all supply chain stages. The higher the supply chain profitability, the more successful the supply chain. Next objective is management of the supply chain. Supply chain management involves the management of flows between and among stages in a supply chain to maximize total supply chain profitability.

Managing a supply chain is more complex and difficult than managing an individual firm. But, the principle of management is used to integrate a firm own internal function (value management) also apply to managing the entire supply chain. Those firms the successfully integrated their purchasing, operation and distribution functions did improve their performance in the past. The power of supply chain management is its potential to include the customer as a partner in supplying the goods or services provided by a supply chain.

In this paper, we examine the connection between strategy and SCM. This article reviews the literature base and development of supply chain management and operations strategies. In addition, this article attempts to describe supply chain management clearly, since the term has been used very liberally in the literature. This article also discusses various operations strategies and the conditions conducive to supply chain management.

1. The Evolution of Supply Chain

To understand supply chain management, one must begin with a discussion of a supply chain; a generic one is shown in Figure 1. [Wisner et al., 2012]. The supply chain shown in the figure starts with firms extracting raw materials from the ground -such as iron ore, oil, wood and food items - and then selling these to raw material suppliers such as lumber companies, steel mills and raw food distributors. These firms, acting on purchase orders and specifications they have received from component manufacturers, turn the raw materials into materials that are usable by these customers. The component manufacturers, responding to orders and specifications from their customers (the final product manufacturers) make and sell intermediate components. The final product manufacturers assemble finished products and sell them to wholesalers or distributors, who then resell these products to retailers as their product orders are received. Retailers in turn sell these products to us, the end-product consumers.

Consumers buy products based on a combination of cost, quality, availability, maintainability and reputation factors, and then hope the purchased products satisfy their requirements and expectations. The companies, along with their supply chains, that can provide all of these desired things will ultimately be successful. Along the supply chain, intermediate and end customers may need to return products, obtain warranty repairs or may just throw products away or recycle them. These reverse logistics activities are also included in the supply chain.

Referring again to Figure 1. the firm in the middle of the figure is referred to as the focal firm, and the direct suppliers and customers of the focal firm are first-tier suppliers and customers. The first-tier suppliers' suppliers are thus the focal firm's second-tier suppliers, and the first-tier customers' customers are the focal firm's second-tier customers.

A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. The supply chain includes not only the manufacturer and suppliers, but also transporters, warehouses, retailers, and even customers themselves. Within each organization, such as a manufacturer, the supply chain includes all functions involved in receiving and filling a customer request. These functions include, but are not limited to, new product development, marketing, operations, distribution, finance, and customer service. [Chopra & Meindl, 2007].

The SCM concept could be said to consist of five distinct management stages portrayed in Table 1. [Ross, 2003].The first can be described as the era of internal logistics departmentalism. In the second stage, logistics began the migration from organizational decentralization to centralization of core functions driven by new attitudes associated with cost optimization and customer service. Stage three witnessed the dramatic expansion of logistics beyond a narrow concern with internal warehousing and transportation to embrace new concepts calling for the linkage of internal operations with analogous functions performed by channel trading partners. As the concept of channel relationships grew, the old logistics concept gave way, in stage-four, to full supply chain management. Today, with the application of Internet technology to the SCM concept, we can describe SCM as entering into stage five, e-SCM.

SCM is closely connected with and in many ways is the product of the significant changes that have occurred in logistics management. Over the past 30 years logistics has progressed from a purely operational function to a key strategic component [Simchi-Levy et al., 2000]:

* The operational level refers to day-to-day decisions such as scheduling, lead time quotations, routing, and truck loading.

* The tactical level includes decisions that are typically updated anywhere between once every quarter and once every year. These include purchasing and production decisions, inventory policies, and transportation strategies, including the frequency with which customers are visited.

* The strategic level deals with decisions that have a long-lasting effect on the firm. This includes decisions regarding product design, what to make internally and what to outsource, supplier selection, and strategic partnering as well as decisions on the number, location, and capacity of warehouses and manufacturing plants and the flow of material through the logistics network.

As logistics has evolved through time, the basic features of SCM can also be identified. Logistics has always been about managing the synchronization of the needs of individual companies for product and service acquisition with the resources available from suppliers, on the one side, and distribution functions to meet the demands of the customer, on the other. The SCM concept, enhanced by the power of Internet technology, is the maturation of these basic value-added functions.

As a critical component within best value supply chains, logistics should be managed as an integrated effort to achieve the value associated with the four competitive priorities: speed, quality, cost, and flexibility. Typical supply chains use logistics as an extended transportation mechanism, while best value chains integrate logistics as a strategic mechanism at the level of corporate strategy. Specifically, best value chains go beyond traditional logistics requirements by stressing a holistic logistical value proposition, emphasizing the value of positioning inventory, and developing a flexible chain structure [Bowersox et al., 2007].

2. Operations and Supply Chain Strategies

Strategies are the mechanisms by which businesses coordinate their decisions regarding their structural and infrastructural elements [Bozarth & Handfield, 2008]. Strategies can be thought of as long-term game plans that are focused on achieving a specific set of business objectives at a specific time in the future. They provide direction on what people in the organization must do now to ensure that the firm reaches these objectives. What is considered long term can differ from one industry to the next, but generally the phrase covers several years or more.

As Figure 2. suggests, most organizations have more than one level of strategy, from upper-level business strategies to more detailed, functional-level strategies. (When organizations have multiple distinct businesses, they often distinguish between an overall corporate strategy and individual business unit strategies.) The mission statement explains why an organization exists. It describes what is important to the organization, called its core values, and identifies the organization's domain.

Much has been written on what a business strategy should accomplish. To keep things simple, we will focus only on those parts of a business strategy that are directly relevant to the development of successful operations and supply chain strategies. In this vein, the business strategy must [Bozarth & Handfield, 2008]:

* Clearly identify the firm's targeted customers and broadly indicate what the operations and supply chain functions need to do to provide value to these customers;

* Set time frames and performance objectives that managers can use to track the firm's progress toward fulfilling its business strategy; and

* Identify the role of supply chain partners;

* Identify and support the development of core competencies in the operations and supply chain areas.

The concept of core competencies deserves special attention because of the implications for operations and supply chain strategies. Core competencies are organizational strengths or abilities, developed over a long period of time, that customers find valuable and competitors find difficult or even impossible to copy.

Functional strategies translate a business strategy into specific actions for the functional areas, such as marketing, human resources, and finance. An operations and supply chain strategy might address the manufacturing or service processes needed to make a specific product, how suppliers will be evaluated and selected, and how the products will be distributed.

The model in Figure 2. shows how the mission statement, business strategy, and functional strategies are related to one another. Managers should be able to pick any specific strategic action at the functional level and trace it back to the business strategy and, ultimately, to the firm's mission statement. When the different levels of the strategic planning process fit together well, an organization is said to have good strategic alignment.

Operations strategy is the development of a long-term plan for using the major resources of the firm for a high degree of compatibility between these resources and the firm's long term corporate strategy. Operations strategy addresses very broad questions about how these major resources should be configured to achieve the desired corporate objectives.

The company have to choose between several strategies regarding manufacturing process [Cohen & Roussel, 2005]:

* Make to stock is the best strategy for standardized products that sell in high volume. Larger production batches keep manufacturing costs down, and having these products in inventory means that customer demand can be met quickly.

* Make to order is the preferred strategy for customized products or products with infrequent demand. Companies following this strategy produce a shippable product only with a customer order in hand. This keeps inventory levels low while allowing for a wide range of product options.

* Configure to order is a hybrid strategy in which a product is partially completed to a generic level and then finished when an order is received. This is the preferred strategy when there are many variations of the end product and you want to achieve low finishedgoods inventory and shorter customer lead times than make to order can deliver.

* Engineer to order, which shares many of the characteristics of make to order, is used in industries where complex products and services are created to unique customer specifications.

Changing the operations strategy can be a key source of performance advantage. Several clients in consumer packaged goods, for instance, found that moving from make to stock to configure to order improved service levels while reducing inventory. In the past, these companies manufactured and shipped products directly to the end market. Small pack size, combined with the need for local language variants, meant that products were dedicated to a given market very early in the production process. Strategic supply chain management is more than just innovation for the sake of being innovative. It's creating a unique supply chain configuration that drives forward the strategic objectives.

Conclusion

Supply chains are a central element of today's global economy. Existing management practices consist primarily of static interactions between established partners. Global competition, shorter product life cycles and the emergence of Internet-mediated business solutions create an incentive for exploring more dynamic supply chain practices.

Supply chain management has been considered as the most popular operations strategy for improving organizational competitiveness in the twenty-first century. At a generic level there is no single supply chain strategy that is applicable to all product types.

Rather we have found that supply chains should be engineered to match customer requirements and should take into account the following aspects:

First, supply chain strategies cannot be determined in isolation. They are directly affected by another chain that most organizations have, the development chain that includes the set of activities associated with new product introduction. At the same time, supply chain strategies also should be aligned with the specific goals of the organization, such as maximizing market share or increasing profit.

Second, it is challenging to design and operate a supply chain so that total system wide costs are minimized, and system wide service levels are maintained. Indeed, it is frequently difficult to operate a single facility so that costs are minimized and service level is maintained. The difficulty increases exponentially when an entire system is being considered. The process of finding the best system wide strategy is known as global optimization.

Third, uncertainty and risk are inherent in every supply chain; customer demand can never be forecast exactly, travel times will never be certain, and machines and vehicles will break down. Similarly, recent industry trends, including outsourcing, offshoring, and lean manufacturing that focus on reducing supply chain costs, significantly increase the level of risk in the supply chain. Thus, supply chains need to be designed and managed to eliminate as much uncertainty and risk as possible as well as deal effectively with the uncertainty and risk that remain.

References

References

Bowersox, D. J., Closs, D. J., Cooper, M. B. (2007) Supply chain logistics management, New York: McGraw-Hill/Irwin.

Bozarth, C., Handfield, R. (2008) Introduction to Operations and Supply Chain Management, New Jersey: Pearson Prentice Hall

Chopra, S., Meindl, P. (2007) Supply chain management: strategy, planning, and operation, Upper Saddle River, N.J.: Pearson Prentice Hall

Cohen, S., Roussel, J. (2005) Strategic Supply Chain Management: The Five Disciplines For Top Performance, New York: McGraw-Hill,

Gunasekaran, A., Lai, K.-H., Edwin Cheng, T.C. (2008) Responsive supply chain: A competitive strategy in a networked economy, Omega, The International Journal of Management Science, Volume 36, Issue 4, August 2008, pp. 549-564

Hult, G. T., Ketchen, D. J., Slater, S. F. (2004) Information processing, knowledge development, and strategic supply chain performance, Academy of Management Journal, 47(2), 241-253.

Robinson, C. J., Malhotra, M. K. (2005) Defining the concept of supply chain quality management and its relevance to academic and industrial practice, International Journal of Production Economics 96 (3) (2005), pp. 315-337.

Ross, D. F. (2003) Introduction to e-supply chain management: engaging technology to build market-winning business partnerships, Boca Raton, Fla.: St. Lucie Press

Simchi-Levy, D., Kaminski, Ph., Simchi-Levy, E. (2000) Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies, Boston, MA: Irwin/McGraw Hill.

Wisner, J. D., Keong Leong, G., Tan, K-C. (2012) Principles of Supply Chain Management: A Balanced Approach, Third Edition, Mason, OH: Thomson South-Western