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Competing Through Supply ChClin MClnClgement
Competing Through Supply Chain Management Creating Mar~et -Winning Strategies Through Supply Chain Partnerships
David frederick Ross Hanagpr of fducation for thp Intpradivp Group, Inc., Chicago, Illinois
... " SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Library of Congress Cataloging-in-Publication
Ross, David Frederick, 1948-Competing through supply chain management: creating market - winning strageties through supply chain partnerships I David Frederick Ross.
p. cm. Includes bibliographical references and index. ISBN 978-1-4419-4727-7 ISBN 978-1-4757-4816-1 (eBook) DOI 10.1007/978-1-4757-4816-1 I.Business logistics-Cost effectiveness. 3.Business networks
2.Delivery of goods-Management.
I. Title. II. Series. HD38.5.R675 1997 658.7'2--dc 21
Cover Design: Andrea Meyer, Emdash Inc.
97-2953 CIP
Copyright © 1998 by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers in 1998 Softcover reprint of the hardcover 1 st edition 1998
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo-copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC.
Printed on acid-free paper.
In memory of little Ryan Joseph Ross the bravest of the brave who lives in my heart
I took pains to determine the flight of crook-taloned birds, marking which were of the right by nature, and which of the left, and what were their ways of living, each after his kind, and the enmities and affections that were between them, and how they consorted together.
AESCHYLUS, Prometheus Vinctus, 488-492
Table of Contents
PREFACE ix
Chapter 1. MEETING THE CHALLENGE OF SUPPLY CHAIN MANAGEMENT 1 Understanding Supply Chain Management 2 Elements of Supply Chain Management 10 The Emergence of Supply Chain Management 16 Supply Chain Management and Logistics 23 Research Opportunities 29 Summary and Transition 33 Notes 34
Chapter 2. THE CHALLENGE OF TODAY'S BUSINESS ENVIRONMENT 36 Changing Business Perspectives 37 Customer Dynamics 40 Product and Service Dynamics 45 Information and Communication Technology Dynamics 51 Channel Dynamics 58 Logistics Dynamics 62 Summary and Transition 68 Notes 70
Chapter 3. EVOLUTION OF SUPPLY CHAIN MANAGEMENT 72 The Logistics Function-An Overview 73 First Management Phase-Logistics Decentralization 77 Second Management Phase-Total Cost Management 83 Third Management Phase-Integrated Functions 89 Fourth Management Phase-Supply Chain Management 96 Summary and Transition 105 Notes 107
Chapter 4. DEVELOPING SCM STRATEGIES 109 Changing Views of Business Strategy 110 The Business Planning Process 121
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Logistics Strategy 137 Summary and Transition 146 Notes 148
Chapter 5. SUPPLY CHANNEL MANAGEMENT 149 Defining the Supply Channel 150 Understanding Supply Channel Functions 166 Understanding Supply Channel Strategies 173 Global Supply Channels 181 Summary and Transition 188 Notes 191
Chapter 6. SUPPLY CHAIN INVENTORY MANAGEMENT 193 Elements of Modem Supply Chain Inventory Management 194 Principles of Supply Chain Inventory Management 203 Managing Supply Channel Inventories 217 Channel Inventory Ordering Systems 225 Supplier Management 239 Summary and Transition 243 Notes 246
Chapter 7. SUPPLY CHAIN QUALITY AND PERFORMANCE MEASUREMENT 247 Defining Supply Chain Quality 248 Understanding SCQM Processes 256 Creating Customer Service Value 265 Implementing SCQM 279 Summary and Transition 284 Notes 286
Chapter 8. THE WORK FORCE AND INFORMATION TECHNOLOGY 289 Today's Work-Force Challenge 291 New Enterprise Organizational Forms 302 SCM and Today's Information and Communication Technologies 314 Summary and Transition 324 Notes 328
Chapter 9. IMPLEMENTING SUPPLY CHAIN MANAGEMENT 330 SCM Revisited 331 Implementing SCM 335 Critical Questions for Management 350 Summary 354 Notes 355
INDEX 357
Preface
This book is a work of business strategy. Since around 1990, companies across a wide variety of industries have become
increasingly interested in exploring the opportunities for competitive advantage that can be gained by leveraging the core competencies and innovative capabilities to be found among networks of business partners. Although companies have always acknowledged the importance of the relationships that existed between themselves and their customers and suppliers, it has only been recently that creating and nurturing channel alliances has been recognized as a critical source of strategic advantage. Once a backwater of business management, creating "chains" of customers and suppliers has arisen as perhaps today's most important competitive strategy.
What has caused this awareness of the "interconnectiveness" of enterprises? What does Supply Chain Management (SCM) mean and how is it to be implemented? What impact will the increasing dependence on channel partnerships have on the fabric of today's business environment? What are the possible opportunities as well as the liabilities of channel alliances? Are the benefits of channel partnerships focused primarily on operations issues, or do they hold out the opportunity for the realization of fresh sources of market-winning product and service value?
The supply chain focus of today's enterprise has arisen in response to several critical business requirements. First, today's best companies have come to realize that the effective management of the supply channel constitutes the final frontier in the search for new sources of cost reduction and process improvement. Over the past decade, the application of computerized information tools, the utilization of management techniques such as Just-In-Time (JIT), Total Quality Management (TQM), and Business Process Reengineering (BRP), and the implementation of employee empowerment and cross-functional management philosophies have activated highly agile, lean product design and manufacturing functions capable
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of superlative quality and service. Sustaining the collective momentum of these management paradigms has required companies to turn outward to their channels of supply and distribution in search of untapped opportunities for cost and cycle time reduction and process agility.
Second, interest in SCM has been stimulated by the realization that closely integrated channels of suppliers and customers can provide today's enterprise with unique sources of competitive competencies. Previous management models focused on employing quality and improvement methods that sought to increase marketplace value by leveraging the capabilities to be found in internal business processes. In contrast, SCM shifts attention to the previously unseen opportunities that appear when companies seek to converge the innovative competencies and unique resources of their external chains of customers and suppliers in the pursuit of radically new sources of competitive advantage.
Third, few companies today still maintain a dependence on vertical integration to provide them with competitive advantage. Over the past few years companies have continued to divest themselves of non-profitable businesses and functions for which they had weak core competencies, preferring to use channel partners who specialize in these business areas. In such an environment, managing supply chain partners has become the key to market leadership.
Fourth, the growth of international competition has open new markets previously inaccessible even just a few years ago. Equipped with today's newest information and communication technologies and able to leverage the tremendous capabilities occurring in global logistics management, customers are no longer limited to national sources of products and services. The ability to assemble closely networked supply chains provides even the smallest company with the capability to maximize customer satisfaction and accessibility at the lowest possible cost.
Fifth, enterprise reengineering and operations streamlining have forced companies to look seriously at their supply chain partners. The growing dependence on the supply chain has been accentuated by the following changes to traditional business practices:
• The growth of information sharing between vendors and customers
• The rise of process-focused teams replacing traditional departmental functions
• The shift in the marketplace from the mass-production of standardized products to flexible operations providing customized products
• Increased reliance on purchased materials and outside processing with a simultaneous reduction in the number of suppliers
• Greater emphasis on organizational and process agility
• Rise of employee empowerment management techniques that require the implementation of rules-based, real-time decision support systems [1].
Preface / xi
Far from being a peripheral issue, effectively managing the supply chain has become critical to competitive survival. As Ralph Drayer, Vice president for Product Supply/Customer Service at Procter & Gambel, recently put it, "Winning in the marketplace of the 90s 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 the retailer/manufacturer business systems and who work together to exploit opportunities to deliver superior customer value [2]." Effectively managing supply chains means that companies must create market-wining partnerships with other companies that promote the competitive advantage of the whole channel system. They must also know how to utilize technology to coordinate internal activities with those of their trading partners. Networking information and synchronizing the capacities and resources to be found in each channel node permit the exploration of new regions of competitive space and unassailable marketplace leadership.
Such a fundamental refocusing of business strategy has been brought about by five major business dynamics driving the marketplace today. Each dynamic provides a different perspective centered around a common theme: How can companies realize fundamentally new avenues of marketplace advantage by closely integrating the core competencies and capabilities for innovative thinking to be found among their supply chain business partners?
The first and most potent dynamic driving the movement to SCM is the veritable revolution occurring in the growth of the power of the "voice of the customer." In the past, companies sought to create and deliver standardized, mass-market products to customers who had relatively very little purchase choice. Today's customer, on the other hand, requires tailored combinations of highquality products and services that will provide them with unique value and solutions assisting them to realize their own competitive strategies. Responding to this marketplace challenge constitutes the second of today' s business dynamics and it can be described as the activity of constructing agile product design, manufacturing, and delivery processes that continually provide superior product and service quality, yet can be quickly and cost-effectively configured to meet individual customer needs. Succeeding in this dynamic means that firms must not only continually search for new ideas and processes that win the customer's order but that they must also possess the competencies and resources to realize market-wining innovations enabling them to create whole new markets beyond the boarders of their existing customers.
The third marketplace dynamic centers around the tremendous breakthroughs occurring in information and communications technologies. Today, as the value of accurate information grows and the speed of communications accelerates, information has increasingly begun to be seen as the fundamental source of wealth. This means that companies aspiring to market leadership must view technology not only as a critical management tool that shortens cycle times and increases the productivity of business functions through automation but also as
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a key enabler providing the enterprise with the opportunity to activate highly competitive organizational cultures and channel structures in the search for new sources of marketplace leadership. Information technology has made possible the interactive networking of congruent functions across the supply channel and the linkage of once separate companies into single, competitive supply chain systems.
The competitive advantages provided by information technologies has been further enhanced by the dramatic changes occurring in the fourth dynamic, the marketing and distribution channel environment. This dynamic has several dimensions. The first can be characterized by the globalization of the world economy, the rapid introduction of new products and services on an international scale, and increased demands for quick-response delivery. The second dimension can be found in the explosion of strategic alliances and partnerships on a global scale. The close interlinkage of companies along a supply channel system has enabled the formation of interenterprise "virtual" organizations capable of leveraging the skills, physical resources, and innovative knowledge of a matrix of productive capacities originating from different locations in the supply network. The ability of companies to exploit the peer-to-peer networking of marketers, designers, manufacturers, and distributors provided by today's information technologies will facilitate the creation of new forms of competitive-enriching collaboration and enhance the growth of supply chain alliances.
Finally, the fifth business dynamic, supply channel logistics integration, provides the last source for the growth of SCM. In the past, logistics was perceived primarily as an operations activity focused around product delivery and cost management. In contrast, today's best companies utilize logistics as a strategic, cross-functional, interenterpise management activity whose mission is to both plan and coordinate all inventory and delivery activities as well as to realize new opportunities for competitive advantage. As companies increasingly seek to more closely integrate logistics operations across the supply channel, dependence on the SCM strategic philosophy will deepen as they explore concurrently new ways to satisfy customers, develop new products, explore new competitive regions, implement new technology tools, and broaden and enrich their channel relationships.
It is the thesis of this book that the concept of SCM constitutes today's most potent and influential business strategy because it provides an effective way for companies to manage the marketplace dynamics detailed above. Prior competitive strategies focused on leveraging and reengineering the product and market values, productive processes, and core competencies to be found within the boundaries of the enterprise. While such strategic initiatives were critical in refocusing competitive objectives away from the narrow business paradigms of the past, they have become insufficient as competitive strategies in today's era of global collaboration, intensified competition, ever-shortening product life cycles, and
Preface I xiii
increased dependence on supply chain partners. SCM is built around a set of simple competitive values:
• Companies work best when they not only cooperate but when they enter into full partnership with their supply channel allies
• Companies can withstand the onslaught of global competition and flourish only when they combine their destines with channel collaborators
• Companies can not hope to gather on their own without channel partners the necessary resources and core competencies permitting them to design, manufacture, market, and distribute those products and services that preempt the competition
• Companies will succeed in direct portion to their ability to network through information and communications technologies the tremendous repositories of skills and innovative capacities found collectively within their people resources
• Companies can not hope to realize the power of process improvement initiatives unless they seek to extend them beyond the boundaries of their own organizations into the supply chain system as a whole
• Companies can not hope to realize strategic visions that generate whole new regions of competitive space without converging the collective resources and innovative capabilities found among their supply chain allies
Each chapter in the book attempts to explore and elaborate on the different facets of these SCM strategic values. The first chapter focuses on defining SCM and detailing its essential elements. The basis of the discussion that unfolds is that the SCM philosophy provides today's global enterprise with the strategic capabilities to succeed despite the dramatic and fundamental changes occurring to today' s marketplace. The chapter concludes with an exploration of the relationship of logistics management and SCM in today's business environment.
Chapter 2 is wholly devoted to a detailed discussion of the five marketplace dynamics driving the development of SCM. Each dynamic-customer service, product and process design, information and communications technologies, channel management, and integrated logistics management-is explored in depth. The objective is to illustrate how collectively these dynamics are requiring companies to be dramatically more creative, flexible, and focused on productive competencies than they have ever been in the past.
Chapter 3 seeks to explore the origins and development of the SCM concept. After a brief discussion on the development of logistics management and its basic functions and objectives, the remainder of the chapter examines the stages marking the rise of SCM. Four stages are identified: decentralized logistics
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management, centralized logistics management, logistics integration, and the emergence of SCM.
Chapter 4 is concerned with how companies can utilize the strategic and operations components of SCM to fashion market-winning business strategies. The discussion focuses on exploring the nature of today's marketplace and how business strategies centered around the SCM philosophy provide for the creation of effective channel partnerships and the development of new forms of productJ service combinations and new competitive space. The chapter concludes with a seven-step methodology for SCM strategic development to guide planners in strategy formulation.
Chapter 5 focuses on detailing the physical supply channel strategies and functions necessary for the effective implementation of SCM. After defining supply channel management, its historical development, and principle business mission, the chapter discusses supply channel functions in detail. Two areas are explored: basic channel functions, such as inventory movement and functional performance, and channel marketing functions, such as title, transaction, and information flows. The chapter concludes with an overview of the challenges involved in developing effective global strategies.
Chapter 6 is concerned with a detailed examination of the elements necessary for the effective management of supply chain inventories. Discussion begins with an overview of the flow and functions of supply pipeline inventories and how channel buffer stocks can provide a key source of strategic advantage and service value. Next, the chapter turns to an analysis of the principles of supply chain inventory management. Among the topics discussed are computerized tools for inventory management, planning and ordering methods, continuous inventory replenishment techniques, and supplier management.
Chapter 7 seeks to explore the application of quality and improvement management concepts, termed Supply Chain Quality Management (SCQM), to the management of today's global supply channel system. After a short review of the development of quality management for the past 15 years, attention shifts to an analysis of SCQM processes and how channel quality can be utilized to create superior customer service value. The chapter concludes by detailing the requirements necessary for the effective implementation of a channelwide program for continuous SCQM process improvement.
Exploring how changes to the work force and information technologies are impacting SCM is the subject of chapter 8. The analysis begins with an overview of the changes to work force values and objectives in the "Age of Supply Chain Management." Key topics discussed are meeting the challenge of SCM leadership, creating the learning organization, developing new forms of organization, and team-based management styles. After this analysis, the chapter then shifts to a discussion of how information and communications technologies are fundamentally reshaping the tactical and strategic functions of both the work force and the supply channel network.
Preface / xv
Chapter 9 concludes the book with a discussion of the management and organizational elements necessary to effectively implement SCM. The goal is to detail the principles that must be followed in any application of SCM. After revisiting the principles of the SCM philosophy and the steps required for effective implementation, the chapter concludes with a series of questions managers can use when determining how SCM can help their businesses achieve competitive success and what direction their implementations should take.
Acknowledgments
Acknowledgments are always one of the most difficult tasks in writing a book. There are so many influences direct and indirect on an author's ideas that it is virtually impossible to render the kind of thanks that is so necessary. The author is greatly indebted to the many students, professionals, and companies he has worked with over the years who have contributed their ideas and experiences. They have provided the laboratory where the author could test the hypotheses and determine the fundamental principles upon which this book is based.
The author would especially like to thank Mr. Eugene Magad, editor of Chapman & Hall's Materials Management/Logistics Series, for his scholarly assistance and encouragement. I would also like to thank my friends in the editorial office at Chapman & Hall. Ms. Margaret Cummins, Acquisitions Editor, was especially helpful in her enthusiasm for the project. Ms. Mary Ann Cottone, Senior Managing Editor, at Chapman & Hall rendered her expertise in processing the manuscript through to completion. The author would also like to express his gratitude to Ms. Nancy Sherman and the entire staff at the Oakton Community College Library. Finally, I would like to express my thanks to my personal friends and relatives, and most especially my loving wife Colleen and my son Jonathan, whose strength and devotion somehow enabled me to continue during the dark period after the passing of our little son Ryan.
Notes
1. Rhonda R. Lummus and Karen L. Alber, Supply Chain Management: Balancing the Supply Chain with Customer Demand. Falls Church, VA: APICS, 1997, pp. 3-5.
2. Ralph Drayer, "The Emergence of Supply Chain Management in the North America." Excerpt from a speech to suppliers of Procter & Gambel Co., October 1994.
Competing Through Supply Chain Management
