The Four Fundamentals of Supply Chain Management.pdf

8/14/2019 The Four Fundamentals of Supply Chain Management.pdf

1/5

Dublin Institute of Technology ARROW@DIT

Practitioner Journals National Institute for Transport and Logistics

2002-02-01

Te Four Fundamentals of Supply ChainManagementEdward Sweeney Dublin Institute of Technology , [email protected]

Follow this and additional works at:h p://arrow.dit.ie/nitloth

Part of theBusiness Administration, Management, and Operations Commons

is Article is brought to you for free and open access by the NationalInstitute for Transport and Logistics at ARROW@DIT. It has beenaccepted for inclusion in Practitioner Journals by an authorizedadministrator of ARROW@DIT. For more information, please contact [email protected], [email protected].

is work is licensed under a Creative Commons A ribution-Noncommercial-Share Alike 3.0 License

Recommended CitationSweeney, E.: e Four Fundamentals of Supply Chain Management.Logistics Solutions, the Journal of the National Institute forTransport and Logistics, Vol. 5, No. 1, February 2002.
http://arrow.dit.ie/?utm_source=arrow.dit.ie%2Fnitloth%2F27&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://arrow.dit.ie/nitloth?utm_source=arrow.dit.ie%2Fnitloth%2F27&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://arrow.dit.ie/nitl?utm_source=arrow.dit.ie%2Fnitloth%2F27&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://arrow.dit.ie/nitloth?utm_source=arrow.dit.ie%2Fnitloth%2F27&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://network.bepress.com/hgg/discipline/623?utm_source=arrow.dit.ie%2Fnitloth%2F27&utm_medium=PDF&utm_campaign=PDFCoverPagesmailto:[email protected],%[email protected]://creativecommons.org/licenses/by-nc-sa/3.0/http://creativecommons.org/licenses/by-nc-sa/3.0/http://localhost/var/www/apps/conversion/tmp/scratch_3/?utm_source=arrow.dit.ie/nitloth/27&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://creativecommons.org/licenses/by-nc-sa/3.0/http://creativecommons.org/licenses/by-nc-sa/3.0/http://creativecommons.org/licenses/by-nc-sa/3.0/http://creativecommons.org/licenses/by-nc-sa/3.0/mailto:[email protected],%[email protected]://network.bepress.com/hgg/discipline/623?utm_source=arrow.dit.ie%2Fnitloth%2F27&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://arrow.dit.ie/nitloth?utm_source=arrow.dit.ie%2Fnitloth%2F27&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://arrow.dit.ie/nitl?utm_source=arrow.dit.ie%2Fnitloth%2F27&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://arrow.dit.ie/nitloth?utm_source=arrow.dit.ie%2Fnitloth%2F27&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://arrow.dit.ie/?utm_source=arrow.dit.ie%2Fnitloth%2F27&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://localhost/var/www/apps/conversion/tmp/scratch_3/?utm_source=arrow.dit.ie/nitloth/27&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://localhost/var/www/apps/conversion/tmp/scratch_3/?utm_source=arrow.dit.ie/nitloth/27&utm_medium=PDF&utm_campaign=PDFCoverPages


2/5

L O G I S T I C S S O L U T I O N S

I S S U E

1 2 0 0 2 / 1 4

the fourfundamentals of

supply chain management

INTRODUCTIONSince its inception in 1998,NITL has been

attempting to evolve a definition of supplychain management (SCM).This process has

been driven by a number of factors.Firstly,there is no universally accepted definitionof SCM.Secondly, many of the "definitions"that do exist are no more than trivialrestatements of the overall objectives of SCM (e.g."SCM is concerned with ensuringthat the right products, are in the rightplace at the right time and cost,in the rightquantity and quality"). Thirdly, there is anongoing debate about the relationshipbetween logistics and SCM. In an earlierarticle on SCM training and education inLogistics Solutions (Issue 2,2001), I madereference to NITLs Four Fundamentals of

SCM. In response to many enquiries aboutthis, this article explains thesefundamentals in some more detail. It isessentially an attempt to elucidate theessence of SCM in a way which goesbeyond the trite one-liners but retains acompactness and clarity which is anessential ingredient of any worthwhiledefinition.

WHAT IS SUPPLY CHAINMANAGEMENT?

A product or service is delivered to theultimate customer through a complexinteraction of several companies on theway, i.e. through a supply chain. Themanufacturers ability to give customerswhat they want, when they want it, at theprice and quality that they want, is not justdetermined by the manufacturers skill orexpertise in running his/her ownoperation. No degree of improvement inthe company itself can make up forsuppliers not delivering, deliveringwrongly or late. High inventory levels are

often the result of an effort to bufferagainst such uncertainties. Inefficientproduction methods add additionaluncertainties and unnecessary costs.Thedistribution of goods into foreign

markets adds significantly to the cost of most consumer goods or components.Inefficiencies anywhere in the chain willreduce the chances of the manufacturersuccessfully competing against othersuppliers. It is now recognised, therefore,that supply chains compete with othersupply chains.

Supply chain management isconcerned with the total management of the supply chain.As such, it is an essentialactivity in any companys everyday life.Very often the company is let down notby their own actions,but by the actions of other parties involved. Many companiesdo not even realise the importance of supply chain management to their futuresurvival. It applies to small or largecompanies, whether they are inmanufacturing, process or serviceindustries. Improving ones own businessis no guarantee of success in todayscompetitive markets. The individualsuccess of a company depends not aloneon their in-house skills and expertise.Without the right companies up anddown the supply chain to work with acompany will never achieve truecompetitive advantage.

At the end of the day supply chainmanagement is the management of allthe activities in any of the companiesinvolved in a supply chain to achieve twothings: to provide the highest possiblelevel of customer service at optimumtotal supply chain cost and investment.

Recent advances in supply chain IT andelectronic commerce have providedbusinesses of all types and sizes with thepotential to improve competitiveadvantage. The potential benefits

associated with the embracing of thesenew technologies include potentialaccess to new markets on a global basis,more effective integration of upstreamand downstream supply chain partnersand better streamlining of internal and

MANY COMPANIES DO

NOT EVEN REALISE THEIMPORTANCE OFSUPPLY CHAIN

MANAGEMENT TO THEIRFUTURE SURVIVAL. IT

APPLIES TO SMALL ORLARGE COMPANIES

EDWARD SWEENEY provides a primer on the fundamentals of supply chain management

scm

Figure 1

RetailerP R O

F I T

Wholesaler

Assembler

Component Manufacturer

Raw Material Supplier

The Source of realmoney

Final Customer Every Link Matters


3/5


I S S U E

1 2 0 0 2 / 1 5

scm


4/5


I S S U E 1 2 0 0 2 / 1 6

scm

external business processes. In short, thetechnological potential exists tosimultaneously improve customer servicelevels and to reduce supply chain costs.

However, if this potential is to berealised in practice there is a need to re-evaluate current supply chainconfigurations. A mismatch currentlyexists between the technologicalcapability and the supply chain orlogistical reality. This mismatch hassharpened the focus on the need for

robust approaches to supply chain re-engineering.

MATERIAL,INFORMATION ANDMONEY FLOWS

A representation of a simple supplychain is shown in Figure 1. Material flowsthrough the chain from the raw materialsupplier through the componentmanufacturer, assembler, wholesaler andretailer and eventually reaches the final

customer. Value is added in some way ateach point in the chain. The finalcustomer can be regarded as the sourceof real money. The money paid by thisfinal customer flows back down throughthe chain.The key point is that every link in the chain matters. As pointed outpreviously, a weakness anywhere in thechain results in the chain as a wholefailing to achieve its competitivepotential.In other words, the chain is onlyas strong as its weakest link.

For the chain to be as competitive aspossible, the material, information andmoney flows need to be managed acrossthe companies in the chain. This hasimplications for the way in whichcompanies deal with their customers andsuppliers.Traditionally, relationships withsuppliers were often adversarial.Customers played one supplier off against another often with a view toachieving unit price reductions. Thisapproach inevitably led to problems inrelation to achieving high levels of servicewith the final customer and in relation tothe real costs incurred by companiesthroughout the chain. Supply chainmanagement is not a "zero sum" gamebased on adversarial relationships.Ratherit requires companies to work in a spirit of partnership based on shared objectivesand interests.I t requires the development

of "win-win" relationships to replace the

"zero sum" game which often resulted ineveryone losing in the long term.

THE VALUE CHAINAnother way of thinking about the

supply chain is based on the concept of value. As pointed out previously, value isadded at each point along the chain.Value is something which a customer isprepared to pay for. A value-addingactivity is, therefore, an activity along thechain which adds value to the product orservice and which the final customer is

willing to pay for.Conversely, a non value-adding activity (or NVA) is an activitywhich adds costs but does not necessarilyadd value from a customers perspective. The elimination of NVAs along the chain isan important part of supply chainmanagement.

THE FOURFUNDAMENTALS OFSUPPLY CHAINMANAGEMENT

All of the foregoing can be summarisedby the four absolutes or fundamentals of supply chain management (see Figure 2). These fundamentals refer to theobjectives, the philosophy, the "threeflows" and customer/supplierrelationships. These are now explainedfurther.

FUNDAMENTAL 1Firstly, the objectives of SCM are to

achieve high levels of customer service intargeted markets/segments and tooptimise total supply chain investmentand cost. This service/cost approach haslong been regarded as central to supplychain management. This approachrequires companies to have a clearunderstanding of both issues. Customer

service requirements, dictated by the

market place, sets the spec for the supplychain. Achieving this level of service at theoptimal cost focuses attention on theelimination of NVAs throughout the supplychain.

FUNDAMENTAL 2Secondly, every product or service is

delivered to the final consumer (the onlysource of "real" money in the chain)through a series of often complexmovements between companies whichcomprise the complete chain. Aninefficiency anywhere in the chain will

result in the chain as a whole failing toachieve its true competitive potential. Inother words,supply chains are increasinglycompeting with other supply chains ratherthan, in the more traditional axiom,companies simply competing with othercompanies. The phrase "supply chain" isused to indicate that the chain is only asstrong as its weakest link. The representation in Figure 1 (above) is

of a "macro" supply chain shows materialsflowing from the raw material supplierthrough the various stages in the chain tothe final customer. Money then flows back down the chain.The point is that every link matters and that value is added, and profitgenerated,at each link along the way.

You can describe most businesses interms of the five functions buy,make,store,move and sell - known as the "micro" orinternal supply chain (See figure 3). Traditionally these functions have been

managed in isolation, often working atcross purposes.Supply chain managementmeans thinking beyond the establishedboundaries, strengthening the linkagesbetween the functions, and finding waysfor them to pull together. A recognitionthat the whole is greater than the sum of the parts calls for more effectiveintegration between purchasing andprocurement (buy), production planningand control (make), warehouse

Figure 2

INDICATIVE DESCRIPTOR

1 Objectives Customer Service/SupplyChain Investment and Costs

Supply Chain vs. Supply Chain

(ie not Company vs. Company)- the chain is only as strong asits weakest link

2 Philosophy

3 Manage the flows Integrated management of the material,money andinformation flows throuhoutthe chain

Re-appraisal of internal andexternal customer/supplierrealtionships

4 Relationships

FUNDAMENTAL

Supply Chain Management


5/5

management (store), transportmanagement (move) and customerrelationship management (sell).

FUNDAMENTAL 3

For a supply chain to achieve itsmaximum level of effectiveness andefficiency, material flows,money flows andinformation flows throughout the entirechain must be managed in an integratedand holistic manner, driven by the overallservice and cost objectives. This view of amacro chain indicates the way in whichmaterial, money (funds) and informationflow between the companies whichparticipate in the chain. Flows in the microchain can be thought of in a similar way.

FUNDAMENTAL 4Finally, this holistic approach requires a

reappraisal of the way in which bothinternal and external customer/supplierrelationships are created and managed.SCM is not a "zero-sum" game based onadversarial relationships, rather, it needs tobe a "win-win" game based on partnershipapproaches. This point is relevant to theinteractions between the key "internal"supply chain functions of buy,make, store,

move and sell, as well as to relationshipsbetween an organisation and its externalcustomers and suppliers. One of thebiggest manifestations of the applicationof supply chain philosophy in recent yearshas involved the move away from

adversarial relationships throughout thesupply chain towards relationships whichare based on mutual trust and benefits,openness and shared goals and objectives.

WHY IS SUPPLY CHAINMANAGEMENTIMPORTANT?

Supply chain management is quicklybecoming regarded as one of the keyvalue-adding business processes incompanies. Value is added both throughenhanced levels of customer service (and,as a result, revenues) and throughoptimisation of the supply chain cost base.A recent MIT survey indicates that theimplementation of supply chainmanagement by US companies resulted insignificant reductions in inventory andother supply chain costs andimprovements in customer service (forexample, on-time deliveries, order cycletimes and stock-outs see Figure 4).

WHY IS SUPPLY CHAINMANAGEMENTIMPORTANT INIRELAND?

"World Class Best Practice" companieshave endorsed the concept of supply chain

management. Companies in Ireland willhave to do the same if they are becompetitive in world markets. This isparticularly true as a result of Irelands veryopen economy - over 80 per cent of what isproduced in Ireland is exported off theisland. Given Irelands peripheral location,companies based here must be better atsupply chain management thancompanies in more favourable locations.Supply chain management shows that

transport is only one, and not even themost important, cost in the total supplychain. Distance from raw material sourcesand markets need not be a disadvantage if companies in Ireland can be world class inthe other supply chain managementelements. These supply chainmanagement elements include, forexample:

Agile and lean manufacturing; development of supplier partnerships; just in time inventory management; effective use of 3rd and 4th party

distribution and logistics service

providers.

If companies in Ireland can be world classin these they can successfully compete inworld markets. In addition, the entiresupply chain does not have to be in onecountry, so supply chain managementallows Irish based companies compete inthe world market as part of a global supplychain. The large number of multinationalcompanies which have chosen to locate inIreland makes this even more important.Finally, developments in E-business havecreated virtual supply chains, adevelopment which Ireland is well placedto exploit.

THE ENTIRE SUPPLY CHAINDOES NOT HAVE TO BE INONE COUNTRY, SO SUPPLYCHAIN MANAGEMENTALLOWS IRISH BASEDCOMPANIES COMPETE IN THE WORLD MARKET ASPART OF A GLOBAL SUPPLY

CHAIN

Figure 3 Micro(Internal) Supply Chain

BUY MAKE STORE MOVE SELL

Figure 4

Effective supply chain management can cut costs,improve service and enhance revenues and thats just

the beginning Prof. P.Metz, MIT

Why is Supply ChainManagement Important?

MIT Survey: Implementation of supply chain management in USresulted in: 50% reduction in inventory 40% improvement in on-time deliveries 27% reduction in order cycle time Nine-fold reduction in out of stocks


I S S U E 1 2 0 0 2 / 1 7

scm

LS

Material and information flows

Financial and information flows

The Four Fundamentals of Supply Chain Management.pdf

Documents

Transcript of The Four Fundamentals of Supply Chain Management.pdf