Answer:
There are two major forces that drive the supply chain management. First, is that there is the new communications technology available now that allows managers to actively manage a supply chain. Second, customers are demanding lower prices and better products and services. To meet their customers’ demands, firms are optimizing the entire supply chain. Supply chain management allows all the firms in a supply chain to look beyond their own objectives to the objective of maximizing the final customer’s satisfaction. The payoff for supply chain members that can do this is increased profits for their shareholders.
The largest barrier to successfully managing a supply chain is perhaps the human element. Failure to correctly manage the issues of trust and communication will abort any attempt to manage the supply chain. When there is a lack of trust and communication, the supply chain’s members will soon succumb to greed or suspicion that other members of the supply chain are profiting at their expense. When the communication is not adequate, the supply chain will not improve its response enough to increase profits for its members.
Without an increase in profits, the efforts to manage the supply chain will be reduced, because there will be no reward for actively managing it.
Supply chain management requires an unprecedented level of cooperation between the members of the supply chain. It requires an open sharing of information so that all members know they are receiving their full share of the profits. Since many of the firms in a supply chain do not have a history of cooperation, achieving the trust necessary for supply chain management is a time- intensive task.
Another way that the firms in the supply chain can save money is by ensuring that their marketing strategies correspond to the supply chain’s capabilities – i.e., from their position in the supply chain they can actually provide what the customer wants. They are also able to gain money by improving the supply chain’s capabilities to match the market demand with a decreased level of inventory. Firms are able to do this because they have additional information to forecast needs and as the lead time is reduced, their need to forecast is reduced. This reduced need to forecast reduces the need to carry inventory stocks for the just-in-case scenario.
1. Implementing Supply Chain Management
A firm in the supply chain must initiate the attempt to form partnerships and actively manage the supply chain. Often a firm that has a large amount of market power in the chain will become the leader of the supply chain. This firm needs to justify the effort to manage the supply chain by explaining the benefits that will accrue to each member in the supply chain and to itself. To do this, the supply chain leader must show the partners where the improvements in the supply chain will arise and how these will lead to a gain for everyone. To establish trust among the members of the supply chain, the lead firm must also suggest how communication can be opened up and how every member will be ensured that it is receiving its fair share of profits.
Example: Wal-Mart is a good example to showcase this. For years it has gathered extensive data on customer buying patterns. Wal-Mart has used this data internally to manage its own layouts and inventory. Now it is beginning to share all of this data with its most trusted suppliers. This will allow the supplier who knows how to take advantage of this data an opportunity to improve service to Wal-Mart while decreasing its own costs.
Managing a supply chain is more complex and difficult than managing an individual firm. But, the principles of management used to integrate a firm’s own internal functions also apply to managing the entire supply chain.
Example: A well-understood phenomenon in the management of a firm is that there is always a bottleneck that constrains sales.
This bottleneck may be internal to the firm (a process that cannot produce enough to meet demand) or it may be external to the firm (market demand that is less than the capacity of the firm). This principle applies to the entire supply chain. While the supply chain is driven by customer demand, it is constrained by its own internal resources.
One difference is that these resources may not be owned by the same firm. It is possible for the output of an entire supply chain to be limited because one firm does not have capacity to meet surging demand. It is also possible for every firm in the supply chain to be operating at a low utilization because there is not enough demand in the market for the products from the supply chain. There are bottlenecks inside the supply chain just as there are bottlenecks inside firms. To properly manage the supply chain, its members must be aware of the location of their bottlenecks internally and also of the bottlenecks in the supply chain.
2 Basic Understanding of the SCOR Model
The Supply Chain Operations Reference model (SCOR) has been developed by the Supply Chain Council as the cross-industry standard for supply-chain management. The SCOR model is based on a benchmarking process and used to measure the performance of an existing supply chain and its related processes. It covers customer interactions from order entry through paid invoice, product transactions and market interactions from understanding demand to fulfilling individual orders.
The SCOR model, whose conceptual framework and linkages are shown in Figure 1, is a process reference model that expands to analyze processes involving cross-functional activities. It looks at five distinct management processes that constitute the basic elements of a value chain:
- Plan: Processes that balance aggregate demand and supply to develop a course of action which best meets sourcing, production and delivery requirements;
- Source: Processes that procure goods and services to meet planned or actual demand;
- Make: Processes that transform product to a finished state to meet planned or actual demand;
- Deliver: Processes that provide finished goods and services to meet planned or actual demand, typically including order management, transportation management, and distribution management and,
- Return: Processes associated with returning or receiving returned products for any reason. These processes extend into post-delivery customer support
The model uses a four-level pyramid; Process-Type Level; Configuration Level; Process Element Level; and Implementation Level – that defines the steps a company needs to take to measure and improve supply chain performance.
The process involves comparing practices and procedures to those of the ‘best’ to identify ways in which an organization (or organizations) can make improvements. This is accomplished through benchmarking. Benchmarking is an effective means of determining the supply chain’s performance relative to those of other organizations.
Metrics can include a wide variety of performance measures: delivery (in full, on time, in specification), order fulfillment, fill rate (for make-to-stock), lead time or supply-chain response time, production flexibility, total cost, realized margin, warranty costs, returns processing costs and more. A company is not likely to meet best practice norms in all metrics, but the metrics it should focus on should reflect its customer needs and market realities.
The model draws attention to process gaps rather than pointing to specific departments’ performance. This is meant to help the company communicate without ambiguity and help measure, manage and refine processes. It also helps the organization quantify operational performance and set improvement targets based on best practices in similar companies. However, this needs to be related to functional performance measures. Organizations have to devise means to relate departmental performance metrics to the SCOR model.
The challenge in SCM is to integrate the functional performance measures into overall measures that will reflect the performance of the entire supply chain. The performance measures must show not only how well you are providing for your customers (service metrics) but also how you are handling your business (speed, asset/inventory, and financial metrics). Measurement is also an ideal way to communicate requirements to other members of the supply chain and to promote continuous improvement and change.
Many organizations are willing to receive information from other supply chain members but are reluctant to share their information with other members. The issue of the organization’s willingness to share information with other supply chain members is something that needs management attention and a solution to make the SCM initiative successful. Working together, organizations can better satisfy the customer’s requirements for quality, cost, product and service.
