Explaining the importance of supply chain management
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Part of: Supply Chain Management
In the strong global competition, high labor costs, shorter product life cycles, and environmental regulations to keep customer satisfied and to have more sustainable business performance companies should try to have the right product or service at the right place at the right time, and this cannot be done without an understanding of Supply Chain Management in its entirety.
The argument arises as to how much of this message has been reached the practitioners (Chuda, 2000). Hence, in the following research I will analyze the adoption of Supply Chain Management practices in Malaysia. Furthermore, in this challenging era, firms may have to fight for the lower cost with the best quality and efficiency, especially for those Multinational Companies to find and retain more customer, also the factors that used to evaluate suppliers’ performance and factors affecting the customers’ satisfaction will also be discussed. Furthermore, the relationship between suppliers, customers and the firms’ performance will also being determined.
This research findings will help supply chain managers to measure how effectively their supply chain resources are being used to satisfy customers and to identify areas where closely-linked decision making units in that chain can make improvements.
Supply chain management consists of developing a strategy to organize, control, and motivate the resources involved in the flow of services and materials within the supply chain. A supply chain strategy is an essential aspect of supply chain management, seeks to design a firm’s supply chain to meet the competitive priorities of the firm’s operations strategy. In other words, Supply chain is an integration of all value-creating elements from raw material extraction to the end of consumption by end user. Supply chain and value chain are sometimes used interchangeably.
Supply Chain Management concept has been widely accepted and practice in the daily operations by the major companies since the early 1990s. During the 1980s and 1990s, most of the giant companies, which are consider as multinational companies have started to implement supply chain concept in their daily operation such as Wal-Mart, Toys R Us and so on.
According to Rhonda (1999), more and more companies especially multinational company (MNC) has started the integration of Supply Chain Management in their job environment. However, some of them were not getting the expected results. Most of them are focus on wrong factors and not clearly understand the meaning of supply chain.
Supply Chain Management seeks to synchronize a firm’s processes and those of its suppliers to match the flow of materials, services, and information with customer demand (Lee J. Krajewski & Larry P.Ritzman, 2001). Thus there are two main players in the supply chain activities, which are suppliers and customers. Furthermore, in this challenging era, firms may have to fight for the lower cost with the best quality and efficiency, and also higher customer satisfaction especially for those Multinational Companies.
Chuda (2001) stated that Supply Chain Management (SCM) activities are motivated by the ideals of customer service, compression of lead-time, and inventory reduction. SCM is facilitated greatly by the latest in communication technologies, such as electronic data interchange (EDI) and the internet.
A basic purpose of supply chain management is to control inventory by managing the flow of material (Lee J.Krajewski, 2001).
From the statements above it can be concluded that the elements of the Supply Chain consist of:
Customer: The customer starts the chain of events when they decide to purchase a product .The customer contacts the sales department of the company, which enters the sales order for a specific quantity to be delivered on a specific date.
Planning: The planning department will create a production plan to produce the products to fulfill the customer’s orders. To manufacture the products the company will then have to purchase the raw materials needed.
Purchasing: The purchasing department receives a list of raw materials and services required by the production department to complete the customer’s orders. The purchasing department sends purchase orders to selected suppliers to deliver the necessary raw materials to the manufacturing site on the required date.
Inventory: The raw materials are received from the suppliers, checked for quality and accuracy and moved into the warehouse. The supplier will then send an invoice to the company for the items they delivered.
Production: Based on a production plan, the raw materials are moved from the inventory to the production area. The finished products ordered by the customer are manufactured using the raw materials purchased from suppliers. After the items have been completed and tested, they are stored back in the warehouse prior to delivery to the customer.
Transportation: When the finished product arrives in the warehouse, the shipping department determines the most efficient method to ship the products so that they are delivered on or before the date specified by the customer.
Lee J. Krajewski & Lam- P Ritzman. (2001) summarized the main members of SCM into four which contributes to the successfulness of the Supply Chain Management. They are suppliers, manufacturer, distribution center and customer. It shows that the interconnected set of linkages between suppliers of materials and services that spans the transformation of raw material into products or services and deliver to a firm’s customers is known Supply Chain.
Thus the important part for this process is the provision of the information needed for planning and organizing supply chain. The information sharing between members of supply chain will generate the important impact to the outcome.
Levels of activities in SCM:
Strategic: They will be looking to high level strategic decisions concerning the whole organization, such as the size and location of manufacturing sites, partnerships with suppliers, products to be manufactured and sales markets.
Tactical: Tactical decisions focus on adopting measures that will produce cost benefits such as using industry best practices, developing a purchasing strategy with favored suppliers, working with logistics companies to develop cost effect transportation and developing warehouse strategies to reduce the cost of storing inventory.
Operational: Affect how the products move along the supply chain. Operational decisions involve making schedule changes to production, purchasing agreements with suppliers, taking orders from customers and moving products in the warehouse.
Supply Chain Concept through past literature:
Supply chain does not replace supplier partnerships, or a description of the logistics function. Supply chain is the network of entities through which material flows. Those entities may include suppliers, earners, manufacturing sites, distribution centers, retailers, and customers (Lummus and Alber, 1997). Whereby, the Supply Chain council (1997) used the definition: “The supply chain – a term increasingly used by logistics presentations – encompasses every effort involved in producing and delivering final products, from the suppliers’ supplier to the customers’ customer.
Four basic processes – plan, source, make, deliver – broadly define these efforts, which include managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer.”
Quinn (1997) defines the supply chain as “all of those activities associated with moving goods from the raw-materials stage through to the end user. This includes sourcing and procurement, production scheduling, order processing, inventory management, transportation, warehousing, and customer service. Importantly, it also embodies the information systems so necessary to monitor all of those activities.”
As defined by Ellram and Cooper (1993), supply chain management is “an integrating philosophy to manage the total flow of a distribution channel from supplier to ultimate customer”. Monczka and Morgan (1997) state that “integrated supply chain management is about going from the external customer and then managing ail the processes that are needed to provide the customer with value in a horizontal way”.
They believe that supply chains, not firms, compete and that those who will be the strongest competitors are those that “can provide management and leadership to the fully integrated supply chain including external customer as well as prime suppliers, their suppliers, and their suppliers’ suppliers”.
From these definitions, a summary definition of the supply chain can be stated as: all the activities involved in delivering a product from raw material through to the customer including sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, delivery to the customer, and the information systems necessary to monitor all of these activities.
A key point in supply chain management is that the entire process must be viewed as one system. Any inefficiency incurred across the supply chain (suppliers, manufacturing plants, warehouses, customers, etc.) must be assessed to determine the true capabilities of the process.
Importance of SCM:
Companies are streamlining all operations and minimizing the time-to-customer for their products. For these reasons, expertly managing the supply chain has become critical for most companies.
As Ralph Drayer, vice president of product supply/customer service at Procter and Gamble mentioned “Winning in the marketplace of the 1990s is going to require a far different kind of relationship – one that recognizes that the ultimate winners will be those who understand the interdependence of retailer/manufacturer business systems and who work together to exploit opportunities to deliver superior consumer value” (Drayer, 1994).
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Regarding this issue and according to Bovet and Sheffi (1998) statements there are some reasons which lead to adopting SCM, such as increasingly demanding customers, globalization, accelerated competition, technological advances in the communication of information, decreased governmental regulation worldwide, and intensified environmental concerns, so these factors will fosters a new workplace where many old ideas and assumptions are no longer relevant.
There is not one specific way to help the manufacturers to apply SCM in their companies, each manufacturer must customize its supply chain to fit its particular circumstances. Similar to previous mentioned works, Bechtel and Jayaram, 1997; Anderson and Lee, 1999; Manheim, 1999 found several core SCM concepts which must be embraced throughout the organization: creating value through collaboration, selecting and effectively utilizing the appropriate information technology, enhancing individual effectiveness, and generating flexibility.
Richardson et al. (1997), Quinn (1997) and Westbrook (1999), believes that to reach to those concepts there should be some functional units such as purchasing, logistics, marketing, and manufacturing as well as suppliers and transportation providers to cooperate in eliminating the duplication of tasks and competencies. Besides, there are quite numbers of literature on Supply Chain Management, which concern about the SCM practices and the improvement of the performance brought by those SCM practice. Fox (1991) has urged manufacturers to treat the entire supply chain as an enterprise and integrate the flows across the supply chain in order to reduce cost and to improve customer service.
Some academicians like Balsmeier and Voisin (1996) support integrating the supply chain through strategic partnership, inter-organizational business process reengineering, information sharing, improved communication, clarification of needs and expectations, elimination of problems and concerns, consistent performance, and creation of competitive advantages. Hence, is expected that the company will become more competitive in the business world.
On the other hand there are some point of views which touched on the same topics of SCM and state the ways to reduce cycle lead time through supply chain initiatives focusing on process improvements across supply chain, like Besides, Beesley (1997) and Lurquin (1996).
Tan et al. (1998) sought a relationship between firms’ SCM practice and their performance and found out that there are positive correlations between the respondent firms. Kwan (1999) investigated on the adoption of the usage of information technology in SCM in Singapore electronics and chemical industries, and found out that they posts the logistics as one of the core competencies and will only produce to demand rather than to forecast.
The consumers today are surrounded with plenty of information, which they can obtain from the Internet and other resources, such as catalogs and media. Hence, consumers are able to compare prices, quality and services. In turn, they may demand competitive price, high quality, flexibility and responsiveness.
Consumer expectation of lower price has given pressure to the supply chain to operate more efficiently in order to reduce cost. Besides, customer service is also a very important part of today’s supply chain. Firms may need to maintain a minimum level of services, which is reliable, on-time delivery and accurately filled the orders.
While in today environment, there are more needs to be fulfill by the firms in order to increase number of customers, which is has to be very responsive to the customers’ special request and needs. Moreover, firms also need to add service like vendor-managed inventory, collaborative planning and forecasting on behalf of customers.
Understanding consumer’s behavior and their needs have been the main focuses of Supply Chain Management. Companies may need to get more understanding of their main market segments in order to respond to the consumer needs with products or services. Nowadays, the impact of the consumer is much more direct for supply chain and logistics managers compared to the past (Coyle, 2002).
SCM can provide a sustainable competitive advantage by enabling the manufacturer to please customers by improving product offerings and service while simultaneously reducing cost (Davis, 1993). From upper management’s perspective, the ultimate aim of SCM is to attain high levels of customer satisfaction (Morgan, 1996).
This entails developing a cluster of capabilities that enables the company and its supply chain partners to customize its products and services to meet individual customer needs (Hayes and Pisano, 1994; Gilmore and Pine. 1997).
The age-old axiom of “let the buyer aware” may have to change to “let the seller beware” (Coyle, 2002). This is due to decrease in consumer loyalty and patience compare to the past. The seller may have to minimize the wait time in order to increase and keep their customers.
Purchasing personnel today do much more than “buy things”. They have become relationship managers; facilitating decision making by bringing together the pertinent parties internal and external to the organization (Cooper and Ellram, 1993).
They have the important responsibility of selecting suppliers within the framework of achieving system-wide goals as opposed to minimizing piece price (Bregman, 1995; Mason, 1996). Another critical duty is developing and maintaining long-term strategic alliances with these suppliers (Anderson and Lee, 1999; Manheim. 1999).
Research suggests that managing well supplier involvement can lead to belter supplier performance, improved manufacturing, and product and process advancements that in turn enhance customer satisfaction and firm performance (Epatko, 1994; Schilling and Hill, 1998; Vonderembse and Tracey, 1999; Shin et al., 2000).
So it can be concluded that through applying SCM in the company the inventories will be managed better, more efficient production planning, increase customer service and demand management
How SCM affect the company’s performance:
There are many successful companies which applied Supply Chain Management in their systems; here 3 of them will be discussed:
Goodyear established a tire factory in Oxo, Mexico, and some other places outside the Mexico to serve the demand of the Mexican market. However, during the Mexican economic crisis at 1994, Goodyear has lost its entire domestic market.
In order to balance the inventory level in the crisis and to prevent firing the workers, Goodyear managers decided to change their strategy from the domestic market orientation to a low cost orientation in the global market.
Though applying supply chain management and using their capabilities, Goodyear successfully shifted its excess output to the United States and European markets. Hugh Pace, the managing director of Goodyear, was able to lead the transformation of the strategic role of the Oxo plant from a local market serve to an exporter by configuring the global supply chain activities (W.E. Youngdahl,1998)
2- Dell Company:
The Dell Computer Corporation also achieves better performance after practicing Supply Chain Management in their daily operations. Dell Computer Corporation is a mass customizer of personal computers and is known as one of the best producers among all PC makers. Approximately they are able to sell more than $30 millions products a day.
The successful story of Dell is due to a single word “Speed”. A customer’s order for a customized computer can be on a delivery truck in 36 hours. A primary factor in filling customers’ order is Dell’s manufacturing operations and the performance of its suppliers. Dell’s manufacturing is flexible enough to delay the delivery of components until an order is booked. In addition, Dell’s warehousing plan calls for the bulky parts to be warehoused within 15 minutes of its plants by practicing JIT concept. Moreover, the suppliers can use a Web site to make an order from Dell. Basically, suppliers will restock the warehouse and manage their own inventories. Hence, Dell will only pay when the components are being used. This system has proven to be the greatest advantages while compete with competitors, such as Compaq. For example, in Compaq Company it takes 12 to 18 hours to get components form the warehouse. IBM and Gateway may need two days. So Dell Corporation reduced the cost and the lead-time required. This kind of supply chain management of the material and services from the suppliers to the customers enables Dell to operate more efficiently (Harvard Business Review, 1998 & Roth, Daniel, 1999).
Integrated Supply Chains:
According to Lee & Larry (2001), successful supply chain management requires a high degree of functional and organizational integration. Traditionally, organizational have decided the responsibility for managing the flow of material and services among three different departments: purchasing, production and distribution. These three departments operate individually.
Purchasing is the management of the acquisition process, which includes deciding which suppliers to use, negotiates the prices and decides whether to buy locally. It is normally work with suppliers to ensure the flow of material is smooth in long and short-term period. Moreover, they also responsible for the level of raw material inventory and dead stock level.
Production is the management of the transformation processes to produce products and services. This department will responsible on the production master schedule, manpower allocation and production quantity and also inventory management in terms of work in process.
Distribution is the management of the flow for the materials from manufacturer to customers and from warehouses to retailers, involving the storage and transportation of the products. Distribution department will be responsible for finished goods inventory and also selection of carrier or shipping line for the company.
As shown in the figure below, firms have to undergo a series of phase in order to reach as the integrated supply chain. Phase 1, is the typical point. All members in the supply chain are considered as independent of the firms. Their relationship is formal and less information sharing between them. Every single body has their own system and only controls their own inventory. Hence, finally there is a huge amount of inventory existing in the supply chain and overall operation is ineffective.
Figure 1, Developing an Integrated Supply Chain:
Krajewski and Ritzman, Operation Management. 6’h Edition.
In Phase 2, the firms are undergoing a process named internal integration. Three departments will join together from the responsibility for purchasing, production and distribution. The flow begins with the purchase of raw material and stored for more transformation process. In this case, the firms will involve on short-term storage and will consist of work in process inventory. Finally, finish goods will be produced and shipped out to customers by transportation provider. This cycle is responds to customer demand.
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The most important phase is phase 3, supply chain integration. The internal supply chain is exceeded to external parties, such as suppliers and customers. The firm that practice this integrated supply chain must change in focus from a product or service orientation to a customer satisfaction. In supply chain integration, the firm must have better understanding of their customers in terms of their culture, markets and organization. Firms must react to customer demand hence the better understanding and relationship will smoothen the flows of material and services. Phase 3 is called also as Supply Chain Management, which seeks to integrate the internal and external supply chains.
Issues and Problems of SCM:
The cost of managing Supply Chain is on the rise and the customers are demanding higher levels of service and efficiency. By implementing an optimized configuration strategy rather than a traditional supply chain strategy, companies can deliver better service to their customers while maximizing their profits and gaining competitive advantages.
There are many reason why the SCM might face problem, for example Turban, McLean and Wetherbe (2001) mentioned that the reasons of Supply Chain Problems can be because of uncertainty in demand forecast or in delivery times & production delays, or because of poor coordination with Internal units and business partners, ineffective customer service, high inventory costs, loss of revenue & extra cost for expediting services.
Knowing the issues and trends in SC will help to find the problems and their solutions easier.
Martin Christopher (2005) mentioned some trends in supply chain mentioned:
The trend towards just in time and lean practices, (efficiency rather than effectiveness)
The trend towards reducing costs, (globalization, more complex and longer supply chains)
The trend towards economies of scale, (centralized distribution and manufacturing, lower costs but also less flexibility
The trend towards outsourcing of non-core business activities, (loss of control when it is most needed)
The trend towards consolidation of suppliers, (increased potential for wider impacts of disruptions).
In this part some of the most important issues of the SCM will be discussed:
The Bull Whip Effect:
This is one of the most persistent SCM problems. It shows erratic shifts in orders up & down the supply chain. Distributor orders fluctuate because of poor demand forecast, price fluctuation, order batching & rationing with supply chain.
Supply Chain Management Technology:
If a company expects to achieve benefits from their supply chain management process, they will require some level of investment in technology. Many large companies invest largely on expensive Enterprise Resource Planning (ERP) suites, such as SAP and Oracle. Since the wide adoption of Internet technologies, all businesses can take advantage of Web-based software and Internet communications. Instant communication between vendors and customers allows for timely updates of information, which is the key in management of the supply chain.
When Wal-Mart started to operate in South American markets, it found that their logistic aspects are sound challenging to them. This is mainly due to the bumper-to-bumper traffic impedes timely delivery and smooth replenishment for the Wal-Mart systems. Mysterious disappearance of shipments also exacerbates the situation. The situation faced by Wal-Mart, which is one of Multinational Companies, has clearly shows that when multinational companies wish the expanded to other countries, they are many logistic and supply chain challenges that they have to overcome.
Just In Time (JIT):
It is a form of inventory management in which product is transported in small batches, so that very little inventory is carried because components are delivered just as they are needed. JIT-II: A style of business coordination, initiated at Bose, whereby a firm’s suppliers and carriers have a full time representative at the firm to coordinate the supply process. Schonberger’s (1982) said that early definition of the JIT concept suggests this extension was natural: “The goal of JIT is to produce and deliver goods just in time to be sold, subassemblies just in time to be assembled into finished goods, fabricated parts just in time to go into the subassemblies and purchased materials just in time to be transformed into fabricated parts”.
Green Supply Chain:
Environmental issues are always in the public eye and businesses have to develop supply chain management strategies that are good for the environment. Businesses that want to transition to a green supply chain should take the opportunity to review all their business processes to identify areas where adopting a greener outlook can actually improve their business. Companies should review each process along the supply chain to identify if a more environmentally sound approach will help cure the inefficiencies that occur. Many companies that have been through this exercise have identified processes where raw materials were wasted; resources underutilized and unnecessary energy used due to inefficient equipment. It appears that many executives are still unaware that improved environmental performance means lower waste-disposal and training costs, fewer environmental permitting fees, and, often, reduced materials costs. The Green Supply Chain approach seeks to reduce a product or service’s ecological impact to a minimum. Therefore the concept has to cover the entire life cycle of the product since each phase can influence the environment negatively. As a result we have to consider a cycle model instead of the common linear model of the classical Supply Chain.
Supply Chain risk:
This issue is about how the wrong people can ruin a supply chain. People are what makes organizations work, or in some cases, not work. Just as the ordinary, supply chain is all about getting the right product to the right place at the right time and at the right price, another stage is the talent supply chain which is all about getting the right people in the right jobs with the right skills at the right time and right price.
The biggest risk is inside the company. Risks generally result from the natural way in which org. grows. Ad hoc development of structure, process, new product and service creation often leads to gaps in competency, communication and function, (Gen Ford, 2009).
This issue is one of the most important issues for every company. Understanding consumers’ behavior and needs have been one of the main focuses on Supply Chain Management.
SCM can provide a sustainable competitive advantage by enabling the manufacturer to please customers by improving product offerings and service while simultaneously reducing cost (Davis, 1993).
Serving customers is an increasingly complex global environment extends the risk management challenge across the entire supply chain. Dealing with cost pressures of their own, many companies have increased efforts in asset management and have shifted supply chain risks upstream to their suppliers.
Global supply chain management
From the production house the product starts it journey and travels through to the supplier, distributor, retailer and ends at the hands of the consumer. This whole journey is a well managed mechanism and controlled by supply chain management. When it goes global and the journey of the product covers multiple countries, then it is called global supply chain management.
Big companies have many branches around the world. Raw materials, finished products, finance and other pertinent information travel from one hub to the next. Global supply chain management is the basis of the whole operation. The cost of production and profitability is dependent on the global supply chain as well as how well employees throughout the company are trained for such fast-paced tasks. Thus according to the above literature and findings it can be concluded that still many companies lack the capabilities critical for meeting growing demand or for managing an increasingly complex and global supply chain. Only a small percentage truly improved supply chain flexibility and processes needed both to capture an increase in demand and to better manage high volatility.
Ultimately, the main challenge for many companies is not to redefine their organization models, but to transition and manage the organizational change. To make a truly empowered supply chain organization work, companies first must determine what their target models should look like and persuade senior management to make the required changes. To make an integrated supply chain work, it is essential to train and acquire top talent with end-to-end supply chain knowledge.
Importance of MNCs:
Recently many barriers to entry into foreign markets have been reduced or removed, thereby encouraging firms to pursue to international business. Consequently, many firms have evolved into Multinational Corporation (MNCs), which are defined as firms that engage m some form of international business (Jeff Madura, 2003).
In terms of an oversea plant by Multinational Companies or Cooperation, the oversea plant may need to maintain its competitive advantage in order to maintain its operation. Under this harsh environment, in order to sustain the plant or offices in Malaysia, those companies may have to study ways to minimize the cost while producing quality products, services or professional functions. The proposed methodology for this study is that used in the research is Descriptive analysis and Pearson Correlations. MNCs will bring the flow of investment, technology, profits, and more to the host country, they tend to experience a sense of loyalty and responsibility for the citizens of the countries in which their subsidiaries reside.
Evans and Lindsay (1999) stated that measures of customer satisfaction allow a business to discover customer perceptions on how well the business is doing in meeting customer needs, compare a company’s performance relative to competitors, discover areas for improvement, both in the design and delivery of products and services, tract trends to determine if changes actually result in improveme
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