Essentials of Supply Chain Management

Michael H. Hugos

• Publisher: Wiley
• Year: 2010
• ISBN:
  9780470893715
• Edition: 2
• Topic: Commerce
• Subtopic: Prise de décision

Fully revised and expanded, the Second Edition contains valuable tips, techniques, illustrative real-world examples, exhibits, and best practices. This handy and concise paperback will help you stay up to date on the newest thinking, strategies, developments, and technologies in supply chain management. "Michael Hugos presents the core concepts and techniques of supply chain management in a clear, concise, and easily readable style for those desiring an introduction to the subject or for those wanting to refine their understanding and application of supply chain issues. The case studies and executive insights are very useful in illustrating how to effectively employ supply chains to enable companies to accomplish their business goals."
-Perry J. Gaid, Vice President of Purchasing, OneSource Facility Services, Inc. "My company is involved in both manufacturing and distribution. Mr. Hugos's book provides a valuable framework of concepts and techniques that people at all levels of the company can use to organize and improve our supply chain management capabilities and tie them to our business strategy."
-Grant Watkinson, Ph.D., President, Coastwide Laboratories, Inc. Praise for the First Edition "An excellent introduction into supply chain management... a book you should own and loan out to others frequently."
-Supply Management "In clear and concise prose, this lean book outlines the most crucial tenets and concepts of supply chain management."
-Supply Chain Management Review The Wiley Essentials Series-because the business world is always changing...and so should you.

CHAPTER 1

Key Concepts of Supply Chain Management

After reading this chapter you will be able to

• Appreciate what a supply chain is and what it does

• Understand where your company fits in the supply chains it participates in and the role it plays in those supply chains

• Discuss ways to align your supply chain with your business strategy

• Start an intelligent conversation about the supply chain management issues in your company

This book is organized to give you a solid grounding in the “nuts and bolts” of supply chain management. The book explains the essential concepts and practices and then shows examples of how to put them to use. When you finish you will have a solid foundation in supply chain management to work from.

The first three chapters give you a working understanding of the key principles and business operations that drive any supply chain. The next three chapters present the techniques, technologies, and metrics to use to improve your internal operations and coordinate more effectively with your customers and suppliers in the supply chains your company is a part of.

The last three chapters show you how to find supply chain opportunities and respond effectively to best capitalize on these opportunities. Case studies are used to illustrate supply chain challenges and to present solutions for those challenges. These case studies and their solutions bring together the material presented in the rest of the book and show how it applies to real world business situations.

Supply chains encompass the companies and the business activities needed to design, make, deliver, and use a product or service. Businesses depend on their supply chains to provide them with what they need to survive and thrive. Every business fits into one or more supply chains and has a role to play in each of them.

The pace of change and the uncertainty about how markets will evolve has made it increasingly important for companies to be aware of the supply chains they participate in and to understand the roles that they play Those companies that learn how to build and participate in strong supply chains will have a substantial competitive advantage in their markets.

Nothing Entirely New ... Just a Significant Evolution

The practice of supply chain management is guided by some basic underlying concepts that have not changed much over the centuries. Several hundred years ago, Napoleon made the remark, “An army marches on its stomach.” Napoleon was a master strategist and a skillful general and this remark shows that he clearly understood the importance of what we would now call an efficient supply chain. Unless the soldiers are fed, the army cannot move.

Along these same lines, there is another saying that goes, “Amateurs talk strategy and professionals talk logistics.” People can discuss all sorts of grand strategies and dashing maneuvers but none of that will be possible without first figuring out how to meet the day-to-day demands of providing an army with fuel, spare parts, food, shelter, and ammunition. It is the seemingly mundane activities of the quartermaster and the supply sergeants that often determine an army’s success. This has many analogies in business.

The term “supply chain management” arose in the late 1980s and came into widespread use in the 1990s. Prior to that time, businesses used terms such as “logistics” and “operations management” instead. Here are some definitions of a supply chain:

• “A supply chain is the alignment of firms that bring products or services to market.”—from Lambert, Stock, and Ellram (Lambert, Douglas M., James R. Stock, and Lisa M. Ellram, 1998, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, Chapter 14).

• “A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer request. The supply chain not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves ...” —from Chopra and Meindl (Chopra, Sunil, and Peter Meindl, 2003, Supply Chain, Second Edition, Upper Saddle River, NJ: Prentice-Hall, Inc., Chapter 1).

• “A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers.”—from Ganeshan and Harrison (Ganeshan, Ram, and Terry P. Harrison, 1995, “An Introduction to Supply Chain Management,” Department of Management Sciences and Information Systems, 303 Beam Business Building, Penn State University, University Park, PA).

If this is what a supply chain is then we can define supply chain management as the things we do to influence the behavior of the supply chain and get the results we want. Some definitions of supply chain management are:

• “The systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.”—from Mentzer, DeWitt, Keebler, Min, Nix, Smith, and Zacharia (Mentzer, John T., William DeWitt, James S. Keebler, Soonhong Min, Nancy W. Nix, Carlo D. Smith, and Zach G. Zacharia, 2001, “Defining Supply Chain Management,” Journal of Business Logistics,Vol. 22, No. 2, p. 18).

• “Supply chain management is the coordination of production, inventory, location, and transportation among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served.”—my own words.

There is a difference between the concept of supply chain management and the traditional concept of logistics. Logistics typically refers to activities that occur within the boundaries of a single organization and supply chains refer to networks of companies that work together and coordinate their actions to deliver a product to market. Also, traditional logistics focuses its attention on activities such as procurement, distribution, maintenance, and inventory management. Supply chain management acknowledges all of traditional logistics and also includes activities such as marketing, new product development, finance, and customer service.

In the wider view of supply chain thinking, these additional activities are now seen as part of the work needed to fulfill customer requests. Supply chain management views the supply chain and the organizations in it as a single entity. It brings a systems approach to understanding and managing the different activities needed to coordinate the flow of products and services to best serve the ultimate customer. This systems approach provides the framework in which to best respond to business requirements that otherwise would seem to be in conflict with each other.

Taken individually, different supply chain requirements often have conflicting needs. For instance, the requirement of maintaining high levels of customer service calls for maintaining high levels of inventory, but then the requirement to operate efficiently calls for reducing inventory levels. It is only when these requirements are seen together as parts of a larger picture that ways can be found to effectively balance their different demands.

Effective supply chain management requires simultaneous improvements in both customer service levels and the internal operating efficiencies of the companies in the supply chain. Customer service at its most basic level means consistently high order fill rates, high on-time delivery rates, and a very low rate of products returned by customers for whatever reason. Internal efficiency for organizations in a supply chain means that these organizations get an attractive rate of return on their investments in inventory and other assets and that they find ways to lower their operating and sales expenses.

There is a basic pattern to the practice of supply chain management. Each supply chain has its own unique set of market demands and operating challenges and yet the issues remain essentially the same in every case. Companies in any supply chain must make decisions individually and collectively regarding their actions in five areas:

1. Production—What products does the market want? How much of which products should be produced and by when? This activity includes the creation of master production schedules that take into account plant capacities, workload balancing, quality control, and equipment maintenance.

2. Inventory—What inventory should be stocked at each stage in a supply chain? How much inventory should be held as raw materials, semifinished, or finished goods? The primary purpose of inventory is to act as a buffer against uncertainty in the supply chain. However, holding inventory can be expensive, so what are the optimal inventory levels and reorder points?

3. Location—Where should facilities for production and inventory storage be located? Where are the most cost efficient locations for production and for storage of inventory? Should existing facilities be used or new ones built? Once these decisions are made they determine the possible paths available for product to flow through for delivery to the final consumer.

4. Transportation—How should inventory be moved from one supply chain location to another? Air freight and truck delivery are generally fast and reliable but they are expensive. Shipping by sea or rail is much less expensive but usually involves longer transit times and more uncertainty. This uncertainty must be compensated for by stocking higher levels of inventory. When is it better to use which mode of transportation?

5. Information—How much data should be collected and how much information should be shared? Timely and accurate information holds the promise of better coordination and better decision making. With good information, people can make effective decisions about what to produce and how much, about where to locate inventory and how best to transport it.

The sum of these decisions will define the capabilities and effectiveness of a company’s supply chain. The things a company can do and the ways that it can compete in its markets are all very much dependent on the effectiveness of its supply chain. If a company’s strategy is to serve a mass market and compete on the basis of price, it had better have a supply chain that is optimized for low cost. If a company’s strategy is to serve a market segment and compete on the basis of customer service and convenience, it had better have a supply chain optimized for responsiveness. Who a company is and what it can do is shaped by its supply chain and by the markets it serves.

How the Supply Chain Works

Two influential source books that define principles and practices of supply chain management are The Goal (Goldratt, Eliyahu M., 1984, The Goal, Great Barrington, MA: The North River Press Publishing Corporation); and Supply Chain Management, Second Edition by Sunil Chopra and Peter Meindl. The Goal explores the issues and provides answers to the problem of optimizing operations in any business system whether it be manufacturing, mortgage loan processing, or supply chain management. Supply Chain Management, Second Edition is an in-depth presentation of the concepts and techniques of the profession. Much of the material presented in this chapter and in the next two chapters can be found in greater detail in these two books.

IN THE REAL WORLD

Alexander the Great based his strategies and campaigns on his army’s unique capabilities and these were made possible by effective supply chain management.

In the spirit of the saying, “Amateurs talk strategy and professionals talk logistics,” let’s look at the campaigns of Alexander the Great. For those who think that his greatness was only due to his ability to dream up bold moves and cut a dashing figure in the saddle, think again. Alexander was a master of supply chain management and he could not have succeeded otherwise. The authors from Greek and Roman times who recorded his deeds had little to say about something so apparently unglamourous as how he secured supplies for his army. Yet, from these same sources, many little details can be pieced together to show the overall supply chain picture and how Alexander managed it. A modern historian, Donald Engels, has investigated this topic in his book Alexander the Great and the Logistics of the Macedonian Army (Engles, Donald W., 1978, Alexander the Great and the Logistics of the Macedonian Army, Los Angeles, CA: University of California Press).

He begins by pointing out that given the conditions and the technology that existed in Alexander’s time, his strategy and tactics had to be very closely tied to his ability to get supplies and to run a lean, efficient organization. The only way to transport large amounts of material over long distances was by oceangoing ships or by barges on rivers and canals. Once away from rivers and sea coasts, an army had to be able to live off the land over which it traveled. Diminishing returns set in quickly when using pack animals and carts to haul supplies because the animals themselves had to eat and would soon consume all the food and water they were hauling unless they could graze along the way.

Alexander’s army was able to achieve its brilliant successes because it managed its supply chain so well. The army had a logistics structure that was fundamentally different from other armies of the time. In other armies the number of support people and camp followers was often as large as the number of actual fighting soldiers because armies traveled with huge numbers of carts and pack animals to carry their equipment and provisions, as well as the people needed to tend them. In the Macedonian army the use of carts was severely restricted. Soldiers were trained to carry their own equipment and provisions. Other contemporary armies did not require their soldiers to carry such heavy burdens but they paid for this because the resulting baggage trains reduced their speed and mobility.

The result of the Macedonian army’s l...