Monday, May 3, 2010

Supply Chain Management: Misunderstood & Misapplied

Like so many excellent concepts in business over the years, supply chain management (SCM) will probably never live up to its potential.  Too many people are unable to broaden their understanding beyond basic procurement and move toward a more systems approach required to truly optimize a company's supply chain.

What is Supply Chain Management?

The American Production & Inventory Control Society (APICS) defines supply chain management as the design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally.  This definition inherently assumes that a systems thinking approach is necessary to be successful.

The suppliers that provide materials, products, and services to a company should be managed and optimized just as if they were internal to the operation.  Since they represent the starting point for a company's operation, they potentially affect everything throughout the value stream and ultimately what is provided to the customer.

To be truly effective, SCM should focus on improving quality, cycle times, and total costs in dealings with suppliers.  In theory, the process should involve understanding and optimizing the entire value chain from the very first level suppliers (those in which the company may never deal with directly) to the end customer.  Since it can be overwhelming to fully understand and take the time to build relationships with a lengthy supply chain, a more practical application of SCM involves working with a company's first tier suppliers and customers.

The way that SCM is approached in most companies, however, is to solely focus on negotiations with first tier suppliers on price and payment terms, which have very little, if any, effect on quality and cycle times, and only barely addresses the subject of total costs.

Total Costs

The total cost of dealing with suppliers involves so much more than price and payment terms.  Far too often, though, companies - even those that claim they follow an SCM approach - focus only on these aspects of the relationship while virtually ignoring the other factors that can have a much greater effect on costs (see table below).

Improving the total costs associated with the supply chain involves:
  • building close relationships with suppliers (based on trust, mutual benefit, and clear communications);
  • continually working on the factors that reduce total cost (see above table);
  • understanding and optimizing the systems of logistics for products and services procured (inbound) as well as those provided to customers (outbound) that are consistent with the company's operational and marketing strategy;
  • working with customers to understand how the supply chain affects their operations.
Once the supply chain strategy is developed, implementation begins initially with the first tier and slowly and continually expands to cover more of the supply chain.  How much of the chain depends on many factors, including the size and complexity of the supply chain and how much of it can be effectively managed.

A Generalist Approach

The topic of SCM is far too complex to adequately cover in a relatively short blog post.  The point is, though, that effective supply chain management involves so much more than negotiating price and payment terms with key suppliers.  It requires developing close relationships with customers to understand how the supply chain contributes to their needs, and systematically implementing improvements throughout the system to reduced waste and improve performance.  Those directing an organization's SCM efforts need to be systems thinkers who are much more adept at leading improvement efforts than negotiating contracts with individual suppliers.

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