3
Supply Chain Management: A Source of Competitive Advantage
After reading the chapter, the students should be able to understand:
- Role of logistics in the supply chain
- Supply chain components and linkages
- Supply chain mapping and e-business solutions
- Leveraging logistics for competitiveness
For the benefits of the logistics concept to be realized, there is a need to extend the logic of logistics upstream to suppliers and downstream to customers in the supply chain. Effective logistics management is capable of reducing costs and enhancing differentiation through superior customer service, leading to an effective and efficient inventory movement across a supply chain. The ultimate test of a successful supply chain is seen in drawing more customers and ensuring profits for all the partners in the chain.
“An organization’s ability to learn and translate that learning into action rapidly is the ultimate competitive advantage.”
—Jack Welch
3.1 WHAT IS SUPPLY CHAIN MANAGEMENT?
Due to emerging competition in the dynamic markets of globalized economies of countries across the world, business organizations the world over have realized that the business process of satisfying the demand of the customer is of critical importance to them. They realized that a functional approach to business process would no more help in developing competitiveness. Due to this recognition there was a paradigm shift in their outlook and thinking. It was clear to these organizations that competition today has shifted from products to supply chains, that is, the supply chain of one company is competing with that of another to deliver superior customer value. Hence, to effectively and efficiently manage the supply chain has become critically important not only for the growth but the survival of any business.
Supply chain management (SCM) is basically an information-based process that integrates the various activities from raw material supply to manufacturing and finally to the supply of finished products and services to the end customer. It is an approach to control the physical flow of products and services from suppliers to end-users by coordination of the activities of suppliers, manufacturers and end customers. It aligns the capabilities of suppliers, manufacturers, channel partners, service providers and customers to develop a sustainable competitive advantage. SCM takes into consideration cross-functional integration and looks beyond the functional excellence of an organization. It contributes to the world-class performance of a business enterprise and adds value to its product and service offerings in order that it may outperform its rivals.
Prof Lambert defines ‘supply chain management’ as the integration of business processes from end-user through original suppliers that provides products, services and information that add value for customers. Prof Lisa Elram and Martha C. Cooper mention that SCM is a strategic concept that involves understanding and managing the sequence of activities from suppliers to customers that add value to the product and supply chain pipeline. According to Ravi Kalakota and Andrew B. Whinston, SCM, because of its complex nature, is considered equal parts of art (presentation, sales technique and service) and science (forecasting, data analysis, sourcing, margins and distribution).
SCM is a new way of thinking that takes a total view of the business process starting from the source of supply to the point of consumption or usage. Hence, SCM is the integrated management of all the linkages and value-added activities from the supplier’s supplier to the customer’s customer. This integrated process results in enhanced customer value at the least cost. A well-designed supply chain supports the strategic objectives of reduced costs, shorter performance cycle, world-class product and service quality, flexibility, reliability and product availability.
In fact, many Indian business firms today have taken supply chain initiatives more seriously than ever to develop a competitive advantage in a globalized, privatized and liberalized (GPL) environment. Some of the prominent names are Modi Xerox, Telco, Maruti Udyog, Sunderam Fasteners and Godrej.
SUPPLY CHAIN INITIATIVES
Modi Xerox Limited is leveraging on its supply chain strategy to improve customer satisfaction by reducing cycle time, enhancing productivity and keeping on-time delivery so as to lead the market.
Telco is managing inventories through a vendor-based supply chain and moving towards the justintime (JIT) system to cut inventory-carrying costs. Telco have inducted Dynamic Logistics, a Third Party Logistics (3PL) service supplier, in their supply chain for spare parts management of commercial vehicles and passenger cars. The benefits are a 50 per cent reduction in logistics costs and on-time delivery to customers—a win-win situation.
In Godrej-GE, 60 per cent of the product cost is covered by raw material that is entirely outsourced to control costs, delivery schedules and product quality so as to run an efficient and lean supply chain.
To extend the JIT system for a lean supply chain, Maruti has located 70 per cent of its vendors within a 100-km radius of their Gurgaon factory.
Sunderam Fastner, a Chennai-based high tensile fastener and radiator cap manufacturer, in line with its supply chain strategy of vendor base reduction, appointed Southampton (UK) as their consolidation agent for all supplies of steel coils and components to be shipped from Europe to their manufacturing plant in Chennai.
3.2 SUPPLY CHAIN LINKAGES
Integrating the supply chain to improve logistics efficiency is the key challenge. Competition today is not between individual companies but between supply chains. Hence, for a supply chain to be successful, it should integrate the three individual business processes of procurement, manufacturing and distribution by consolidating the sub-linkages in each of the above functional areas (see Figure 3.1).
Fig. 3.1 Supply chain linkages
Procurement
This is one of the major cost drivers in the supply chain. The procurement cost is influenced by the following factors:
- The way procurement decisions are made
- Procedures adopted in the procurement process
- Relationship with the suppliers
- Firm’s credibility
- Market intelligence
Procurement cost can be controlled through long-term relationships with suppliers, by considering the supplier as an extension of your manufacturing facility. The philosophy of co-partnership is based on the sharing of both resources and benefits on a long-term basis. A major step in this process is reduction of the supplier base and induction of a few reliable suppliers in your supply chain who are ready to work for you and can align with the policy framework and requirements of the firm’s supply chain. The partnership, based on the philosophy of knowledge, experience and benefit-sharing, will result in cost reduction and improvement in operating efficiencies at both ends. The major advantages will be reduction in paperwork, a streamlined procurement process, resolution of problems jointly, reliability in supply, a reduction in supply chain inventory covering both supplier and buyer and a quick response to market fluctuations to reduce the risk element. In Europe, Rank Xerox has reduced its supplier base from 5000 to 300. The company has appointed a few distributors who collect the materials from various suppliers and dispatch them to the manufacturer. As a result, the manufacturer needs to tap only a few sources of supply.
Material requirement planning is a critical element in the procurement process. For an integrated supply chain, material planning will have a cascading effect on the entire supply chain. Hence, in a co-partnership arrangement the material planning process will cover inventory requirements for the entire supply chain, including both the firm and its suppliers. The benefits enjoyed by the supplier will also be shared by the buyer. In the United States, auto giants such as Ford, General Motors and Chrysler engage in online procurement planning with their ancillary suppliers. Due to real-time information sharing, a supply chain operating on the JIT system is flexible enough to take care of any fluctuations in market demand, thus resulting in a lean inventory across the entire chain. In the Indian context Telco, Mahindras and Maruti Ugyog are linking their procurement planning to the supplier’s production schedule and the purchase order schedule of their customers.
Material flow across the supply chain is determined in close coordination with suppliers. The actual shipment is scheduled in accordance with the firm’s production programs. The logistics operation is planned to take care of any eventualities, so as to deliver the material on time and with both reliability and consistency in performance.
Hence, for an integrated supply chain, accuracy in material requirement planning and reliability of scheduled shipping are possible only with the close coordination emerging out of a partnership relation with suppliers.
Processing
For developing a lean supply chain the emphasis today is not on curtailing the processing/manufacturing cost through economies of scale, but on reducing the huge inventory-carrying cost resulting from mass production ahead of demand. In the past, the emphasis was on building mega-capacity factories to produce standard products in millions to reduce manufacturing cost and flood the market with low-priced products. The stress was on focused factories to manufacture standard products for global consumption. This approach resulted in a build-up of a large reservoir of finished goods inventory that remained unsold and almost dead because of its inability to respond to the changing needs of customers. Nowadays firms, instead of banking on cost reduction through economies of scale, plan strategies to reduce the total supply chain cost through manufacturing flexibility in order to rapidly respond to the changing market demands of product volumes and varieties. This is achieved through a new manufacturing technique of mass customization based on rationalization of component design to meet the specific needs of individual customers. It takes into consideration the modular concept in product building. Manufacturing flexibility does not necessarily mean the use of automation or robotics in the process plant, but rather a zero lead time to meet customer requirements with zero inventories.
Distribution
Traditionally, the role of distribution in the business process is warehousing transportation. However, in the supply chain model the major task of distribution relates to the management of demand, that is to make available the right product at the right place and at the right time and at the least cost. Demand management covers all the activities involving anticipating customer requirements of products and fulfils that requirement against defined customer service norms. Requirement fulfilment is done through a proper distribution network.
The first and foremost task in demand management is to forecast customer requirement accurately. This is possible only if the firm is able to satisfy customers per the service level acceptable to them. Logistics plays a vital role in understanding demand through improved information flow by way of quick response to customer requirements. A quick response will help speed up inventory replenishment, reduce the inventory level across the supply chain, as well as reduce inventory-carrying cost. The latest technologies in information processing and communication are playing a vital role in the logistics process, which is primarily an information-based activity.
3.3 ROLE OF LOGISTICS IN THE SUPPLY CHAIN
Logistics basically connects the source of supply with the sources of demand. It bridges the gaps between market demand and the capabilities of supply sources. Logistics helps in bridging these gaps so as to make them invisible at the points of demand in the supply chain. To achieve this, all components of the logistics system such as the warehousing network, transportation network, inventory control system and supporting information system are put into operation with the objective of delivering the right product at the right place and at the right time with the least cost. The logistics system has to fulfill the two primary objectives of customer service and cost while striking a balance between them.
Logistics makes it possible to deliver a product to the customer anywhere, irrespective of its manufacturing location. It is deployed for making a daily shipment of products manufactured once a week/month or otherwise as per market needs. Logistics facilitates either a full truckload of shipment once a week or a part load daily per the requirement of customers. Thus logistics fills the gap between supply and demand. However, when these gaps tend to be larger and the risk of dilution of service level is high, an integrated system is needed to make the operation seamless for product and information flow. SCM is a process of integration to bridge the gap between supply and demand. Today, we are talking of a virtual supply chain wherein the cycle time is reduced to zero, no warehouses exist, as inventory levels plummet to near zero and freight is cut down to a minimum through networking. This is an ideal situation but attempts should be made to achieve this goal. After trading half the path toward the goal as above, it becomes progressively easier to tread the remaining path and bridge the gap. SCM helps to close this gap by enhancing and then aligning the capabilities through enablers such as technology, collaboration and human resources (HR) skills. The supply chain banks on the relationship with suppliers for performance cycle reduction, quality improvement, freight minimization and reduction in cost of material and transaction. It emphasizes flexibility in manufacturing capability for producing volumes and variety to quickly respond to the market demands, irrespective of time and place limitations. On the distribution side the supply chain is needed in order to make products available at the point of sale or consumption as and when required, so as to minimize loss of sales due to non-availability of products. This would entail the restructuring of the distribution network, designing logistics programs to tune to channel members’ requirements, speedier, reliable and consistent freight movements, load unitization, cross-docking, and freight consolidation. The supply chain tries to understand the demand signals and profiles the target customer base to adjust itself for planning and execution of customer requirement in accordance with the desired service level.
Table 3.1 Logistics vs. Supply Chain Management
| Logistics | Supply chain |
|---|---|
| Physical bond | Mental and emotional bonding (through change management workshops and training) |
| Free flow of product, information and cash | Capacity to allow this flow |
| Synonymous with flow within and between | Leads to integration in flow |
| Ensures an opportunity | Creates an opportunity |
| Ensures cost-effectiveness | Ensures competitiveness |
| Guarantees quality at the customer level | Guarantees quality at the production level |
| Satisfies a market | Creates a market |
Logistics capabilities supplement supply chain operations (Table 3.1). The efficiency and effectiveness of inventory movement across the supply chain is largely dependent on the capability of logistics management. Hence, integration of the supply chain is not possible without the capability and reliability of the logistics operation. Cost reduction and customer service enhancement in the supply chain are not possible without efficient logistics operations such as warehousing, material handling, inventory control, packaging and transportation. In fact, logistics and SCM cannot be separated from each other, since they are part of the same customer service solution. Logistics operations may continue irrespective of whether or not an enterprise follows the supply chain philosophy. Inventory movement needs to take place to bridge the gap between demand and supply. Logistics takes care of this gap. The effectiveness and efficiency of gap closing depends on the enablers—technology, collaboration and HR skills. On the other hand, the success of a supply chain is greatly dependent on logistics. However, for the success of both logistics and the supply chain, the following operations need to be taken care of, planned and managed properly:
- Close coordination with suppliers.
- Reduce inventory levels
- Speed, reliability, and consistency in inventory movement
- Faster replenishment cycle
- Shorter performance cycle
- Flexible manufacturing cycle
- Asset utilization and productivity
- Innovations for value additions in customer service offerings
In a nutshell, logistics is the key to the success of SCM. The degree of success depends on the level of integration between them using the enablers such as information and communication technology.
3.4 MAPPING THE SUPPLY CHAIN
To understand the implications of cost and value additions at the different stages of inventory movement in the supply chain, it becomes necessary to map the supply chain. Mapping will give an insight into the scope and opportunities that exist for cost reduction and productivity enhancement. The movement of inventory across the supply chain is facilitated through various logistics operations with information support. The break-up of an operation into smaller elements is crucial in order to know a value-added and non-value added activity, the time frame for performing that activity and its cost implication.
Fig. 3.2 Activities: Value and cost addition
The purpose of supply chain mapping is to find out the non-value-added activities that add to the cost and the order performance cycle time, which have a direct impact on customer service. For example, the conversion of raw material to a finished product is a value-added activity. But within the manufacturing process, materials have to be moved from different work stations and are kept waiting for processing for a longer time because of improper sequencing or process layout, or because the machine capacity is not compatible with the material flow. Hence the work-in-progress inventory hold-up is a non-value-added activity. Similarly, in distribution, holding of inventory in excess of the demand for a longer time is a non-value-added activity. All non-value-added activities block resources, which can otherwise be used for productive purposes. The resources may be money, manpower, machine, space or time, which are scarce and have time-and-place utility value. Non-value-added activities are, in fact, a drain on the company’s resources and reduce system performance. These activities need to be identified and not only reduced but minimized to make the supply chain lean.
SUPPLY CHAIN MAPPING
TechNova, a leading Indian imaging equipment manufacturer, having their manufacturing plant in Mumbai, used to dispatch a full truckload of spare parts twice a week to a public warehouse in Coimbatore for onward distribution (transshipment) to scattered customers further down in Southern India. The material was then held up there for 6/8 days for freight consolidation before it was picked up by a particular transporter operating on those specific routes. Due to the uncertainty of the situation, the management was facing problems in honouring their delivery commitments to customers, resulting in customer displeasure and delays in realization of payment thereafter. In addition, due to improper supervision during unloading and loading (transshipment), the transit damages were on the higher side and uncontrollable. The management identified the material hold-up and the transshipment in its present form as non-value-added logistical activities in the supply chain. They modified this activity by hiring a small space and stationing their own employee there to organize loading/unloading, sort out boxes, organize transportation, prepare documentation and effect deliveries within 24 hours of the truck reaching Coimbatore. Thus, they could reduce the total delivery time of dispatches from Mumbai to the remotest customer in the deep South from the earlier 15/16 days to just 6/7 days. In addition, they could reduce transit damages (through effective checks on transshipment) to the bare minimum and were finally complimented by their customers for the good service.
3.5 E-BUSINESS SOLUTIONS FOR SUPPLY CHAIN
These are computer programs to capture, represent, distribute and apply knowledge to solve specific problems in the logistics supply chain. An Integrated Supply Chain is a cross-functional approach. Hence, critical problems in different functional areas can be resolved using a software solution for a particular area or a comprehensive software to cover all the functional areas. Supply chain software solution may be tailor-made for a particular business process with particular objectives in mind. Standard packages are also available, but they are less likely to give you the solution you expected. Tailor-made supply chain software solution is expensive and needs a lot of care and maintenance.
The test of a good application software is the degree of integration it facilitates among the firm’s different functional areas, quickly and accurately. These softwares cover key activities in the following major functional areas of the business.
Fig. 3.3 e-Business solution software coverage
BUSINESS EXCELLENCE THROUGH E-BUSINESS SOLUTIONS
How IT tools play a major role in improving business performance can be well understood by studying the end results that various business enterprises have got, after implementing the e-business solutions from the country’s leading e-business solution provider.
e-business solution helped India’s leading auto instrument manufacturer to redesign their supply chain and implement a comprehensive supply chain initiative. A single-window e-business solution to cover customer interactions; vendor base rationalization; vendor managed inventory; evaluation and selection of 3PL supplier; and information exchange with supply chain partners reaped the following benefits:
Reduction
- Material cost by 3 per cent
- Transaction cost by 50 per cent
- Vendor base by 30 per cent Increase
- Inventory turnover from 6.3 to 12
Another case pertains to a bicycle manufacturer to whom the e-business solution provider offered a solution to redesign the supply chain for reduction in manufacturing, distribution, logistics and inventory costs to effect an overall reduction of 10 % in unit cost of the finished product. Again, a singlewindow solution was to cover strategic outsourcing, lean production, decentralized manufacturing and integration of customers and suppliers. The overall result was quite dramatic.
Drop
- WIP by 50 per cent
- Raw materials by 50 per cent
- Finished goods by 60 per cent
- Freight by 70 per cent Gain
- Inventory turnover from 12 to 30
Hence, the key to success in business lies in a robust integrated supply chain, designed on the IT backbone, to bring about a perfect balance between demand and supply through a single visible plan for all business processes in the business that can be controlled on real time basis through e-business solution.
e-Business solution basically focuses on the integration of logistics, which encompasses the entire supply chain as shown in Figure 3.3. Hence, the success of supply chain depends on how effectively and efficiently the various logistics operations are performed in synergy using e-business solutions, which need to be customized for company-specific requirements.
SUMMARY
Supply chain management is basically an information-based process that integrates the various activities from raw material supply to the manufacturing and supply of finished products and services to the end customer. It is an approach to control the physical flow of products and services from suppliers to end-users through coordination of the activities of suppliers, manufacturers and end customers. SCM aligns the capabilities of suppliers, manufacturers, channel partners, service providers and customers so as to develop a sustainable competitive advantage. It takes into consideration cross-functional integration and looks beyond the functional excellence of the organization.
There are three critical linkages in the supply chain. The first is procurement wherein co-partnership with suppliers, material requirement planning and scheduling of procurement are important sublinkages. The second is manufacturing wherein success depends on manufacturing flexibility for volumes and variety, JIT management and proper production scheduling. The third of course is distribution wherein demand management, quick response and postponement are critical. The success of a supply chain depends on how these linkages are efficiently and effectively coordinated through integrated logistics operations, which basically encompass the entire supply chain. e-Business solutions, which are basically computer software based on latest IT techniques, make the integration job easier. However, these solutions need to be customized for company-specific applications. For working out a solution, the first step is supply chain mapping, which helps in identifying value-added and non-value-added logistical activities, and these are either to be eliminated or re-engineered to enhance customer value delivery capability. Logistics capabilities supplement supply chain operations. The efficiency and effectiveness of inventory movement across the supply chain is greatly dependent on the capability of logistics management. Logistics operations may go on irrespective of whether an enterprise follows the supply chain philosophy or not. Inventory movement needs to take place to bridge the gap between demand and supply. Logistics takes care of this gap. The effectiveness and efficiency of gap closing depends on the enablers. On the other hand, the success of the supply chain is greatly dependent on logistics management.
REVIEW QUESTIONS
- Explain the term ‘supply chain management’ and the reason/s why it has received so much importance today?
- Discuss the importance of the various linkages of the supply chain in light of the prevailing business environment in which business firms operate.
- Describe the role of logistics in the success of a firm's supply chain.
- What is meant by ‘supply chain mapping’? How does it help in the success of an organization?
- Give three live examples of success through e-business solution implementation and list the benefits they received.
INTERNET EXERCISES
- Visit Business Today at http://india-today.com/btoday/20000207/cover.html and read “Logistics: Your Next Source of Competitive Advantage” by Paroma Roy Chaudhary.
- Visit Indian Institute of Materials Management at http://www.iimm.org/knowledge_bank/index.htm#a for further reading on logistics management.
BIBLIOGRAPHY
Beche, C., and J. Jayaraman. 1997. ‘Supply Chain Management: Strategic Perspective.’ International Journal of Logistics Management 8 (1): 15–34.
Cooper, M.C., D.M. Lambert and J.D. Pagh. 1997. ‘Supply Chain Management—More Than a New Name for Logistics.’ International Journal of Logistics Management 8 (1): 1–13.
Coulson-Thomes, Evan and Danks Collins. 1997. The Future of the Organization. London: Kogan Page.
Dubey, Rajiv, 1999. ‘The New Supply Chain 2000.’ Business Today (Dec 7–21).
Gourdin, Kent N. 2007. Global Logistics Management, A Competitive Advantage for New Millenium. Boston: Blackwell Publishing.
Handy, C. 1995. ‘Trust and Virtual Organization.’ Harvard Business Review (May/June), pp. 40–50.
Morris, Cohen A., Carl Cull, How L. Lee and Don Willen. 2000. ‘Saturn's Supply-Chain Innovation: High Value in After Sales Service.’ Sloan Management Review (Summer), pp. 9–101.
Mohanty, R.P and S.G. Deshmukh. 2000. Reengineering of a Supply Chain Management, a Case Study on Production Planning and Control. The Management of Operations. 2000. 11 (1): 90–104.
Richie, P 1990. ‘McDonald's: A Winner Through Logistics.’ International Journal of Physical Distribution and Logistics Management 20 (3): 21–24.
Simchi-Levi, David, Philip Kaminsky, and Edith Simchi-Levi. 2000. Designing and Managing the Supply Chain. Boston, MA: Irwin McGraw-Hill, pp. 1–13.
Vittal, N. and B.S. Sahay. 1999. Supply Chain Management for Global Competitiveness. New Delhi: Macmillan.
Wong, A. 2003. ‘Achieving Supply Chain Management Excellence.’ Journal of Total Quality Management 14.