Types and potential benefits of supply chain management
supply chain management Benefits
Historically built on Procurement, Operations and Logistics foundations; Supply Chain Management Benefits exceeds these traditional concepts. Supply Chain Managementis involved with integrating three key flows, between the different stages, across the boundaries of the companies:
Flow of information, Product/materials, Funds.
Members of the supply chain act as partners who are “linked” together through both physical and information flows. It is this that makes an effective supply chain. The flows that involve the transformation, movement, storage of goods and materials and money are called ‘physical flows’. These flows are easily visible.
The physical flows are reinforced by information flows. Information flows are used by the various supply chain partners to coordinate their long-term plans, as well as efficiently control the day-to-day flow of goods and material to the supply chain.
In essence, the supply chain enables the flow of products, services, and information go both up and down the chain. Successful integration or coordination of these three flows produces improved efficiency and effectiveness for business organizations.
‘Supply Chain Management’ can be defined as the active management of supply chain activities to maximize customer value and achieve a sustainable competitive advantage. It represents a conscious effort by the supply chain firms to develop and run supply chains in the most effective and efficient ways possible.
There can be various types of supply chains. There is a basic supply chain, and an extended supply chain. The definition of a basic supply chain is: a set of three or more companies directly linked by one or more of the upstream or downstream flows of products, services, finances and information from a source to a customer.
An extended supply chain includes suppliers of the immediate supplier and customers of the immediate customer, all linked by one or more of the upstream and downstream flows of products, services, finances, and information.
For the product to reach a typical customer who goes to the shop to buy beer, these linkages and the steps necessary to bring the product to him are not probably apparent. Take cans, for example, National Aluminum (NALCO) extracts the aluminum ore and converts it into aluminum metal. The aluminum metal is shipped to Supertech Industries at Bangalore, who convert the aluminum into cans. Supertech Industries supplies cans to Kalyani Breweries. As Supertech Industries supplies directly to Kalyani Breweries, it is a first-tier supplier in the supply chain. Using the same logic, NALCO is a second-tier supplier. It is the supplier of a supplier.
The beer is produced from other raw materials, such as barley, hops, yeast, and water. Aluminum cans from Supertech Industries used to contain the product and combined with cartons, to produce the packaged beverage. Kalyani Breweries then sells the packaged beverage to UBSN Ltd., the distributor, who in turn sells the finished good to retailers like DSIDC. Transport carriers, who move the inputs and outputs from one place to the next along the supply chain, provide the logistic support.
Supertech Industries is therefore a customer to Nalco and a supplier to Kalyani Breweries. We can visualize an extended relationship where Kalyani Breweries returns empty pallets or containers to its first-tier suppliers. This would result in a flow of physical goods back up the supply chain. If this happens, Kalyani Breweries becomes a supplier to Supertech Industries. This is in addition to its being the customer. An organization can be part of numerous supply chains. This follows from the definition given earlier.
For any supply chain, there is only one source of revenue: the customer. At DSIDC, a customer purchasing beer is the only one providing positive cash flow for the supply chain. All other cash flows are simply fund exchanges that occur within the supply chain given that different stages have different owners. When DSIDC pays its supplier, it is taking a portion of the funds the customer provides and passing that money onto the supplier. It is all these flows – information, products, or funds – that generate the costs within the supply chain.
The appropriate design of the supply chain will depend on both the customer’s needs and the role of the stages involved. This relationship, we have described above, reflects a single strand in the supply chain. In a typical supply chain, there are many more participants than the ones shown above – Kalyani Breweries has hundreds of suppliers who provide barley, hops, yeast, cartons etc. It also has a large extended network of retailers throughout the country whose number is even higher.
Regardless of the number and different types of suppliers a firm uses to satisfy its requirements, the overall structure and its essential interfaces and control processes have to be identified, irrespective of how vast and complex the system is.
Any operation or facility in one supply chain arrangement may also be a part of different supply chains. For example, as was mentioned earlier, Dabur is a part of the supply chain for consumer care products, consumer health products, food products, and home products.
A supplier typically participates in numerous different supply chains, which may involve a wide variety of industries and customers. In the case of the mail order business, such as Amazon.com, the company maintains an inventory of product from which it fills customer orders. In the case of retail stores, the supply chain may also contain a wholesaler or distributor, the store and, the manufacturer. The final consumer is always considered a member of the supply chain.
There can be many types of supply chains. For example, a third-party logistics (3PL) provider may be a member of two supply chains where it is performing the logistics activities between companies that conventionally compete with each other. An example of an even more complex relationship could be the case of Reliance Communications. Reliance Communications might find Nokia to be a customer in one supply chain, a partner in another, a supplier in a third, and a competitor in still a fourth supply chain. This multiple supply chain phenomenon also explains the complex nature of the network created by many supply chains.
Potential Benefits of Supply Chain Management
Supply chain is an integral part of the value chain. The supply chain consists only of the primary activities or the operational part of the value chain. The supply chain, therefore, can be thought of as a subset of the value chain. The value a supply chain generates is the difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customer’s request. The objective of every supply chain is to maximize the overall value generated so that the final price of the good covers all of the costs involved plus a profit for each participant in the chain.
Information flow identifies specific locations within a supply chain that requires attention. Supply chain information also integrates different operating areas. This integration of different areas involves three major types of information flows:
(a) Coordination flows, (b) Cash flows and (c) Operational flows.
The supply chain, by managing receivables and payables very closely, is able to collect cash from its customers down the chain. Profits are heavily tied to its managers’ ability to convert purchased components into products – and then cash – in the most efficient way possible. The higher the speed of transfer of money, the better is the financial position of the firm, as the flow of money supports the movement of products and may also add to the cost.
While Materials Management looks at these three flows within the organization, Supply Chain Management extends this across all members of the chain.
The paradigm shift from Materials Management to SCM is based on the expectations of customer for increased value addition reflected in response time sensitivity, need for reliability, lower costs and information sensitivity. Firms enjoy a competitive advantage due to lower lead times and operational costs. These drivers have led organizations from a focus on Material Management to SCM.
There are two different ways to view the processes performed in a supply chain, (a) the cycle view and (b) the push-pull view. According to the cycle view, the processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain. A cycle view of the supply chain clearly defines the processes involved and the owners of each process.
According to the push-pull view, processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order or in anticipation of customer orders. Pull processes are initiated by a customer order whereas push process are initiated and performed in anticipation of customer orders.
The primary unit of analysis for supply chains is the performance cycle. Performance cycles span the overall supply chain and links participating firms. The locations that performance cycles link together are referred to as nodes. It is at the facility nodes that work related to the supply chain occurs. Performance cycles reflect the input/output requirements. The performance cycle may be under the control of a single firm or may involve multiple firms, depending upon the objectives.
In large enterprises involved in marketing a broad product line to numerous customers engaging in basic manufacturing and assembly, and procuring materials and components on a global basis, the notion of individual performance cycles linking all operations is very complex. They have to design multi-echeloned flexible structures for their performance cycles.
Integrated supply chain management assumes that one can make significant reductions in the cycle time required to move materials among supply chain members. The process cycle time spans multiple areas of the supply chain. Therefore, the potential is great. Reducing supply chain cycle time means reducing cost, increasing quality, and improving customer service. Cycle time reduction is not just about working faster; it is also about working smarter.
All too often in organizations, less than 5 percent of the total elapsed time performing a process has to do with the process itself. The rest of the time is spent scheduling, waiting, needless repetition, etc. Successful organizations are able to bring about significant cycle-time reductions. To do this, you need to have: top management who are committed to support cycle-time reduction goals; use cross-functional teams with thorough knowledge of process, information systems and technology; train in cycle-time reduction approaches; establish, monitor, and report formal cycle-time performance measures using TQM tools; and collaborate with supply chain members.
Supply Chain Management (SCM) maximizes profit by integrating three key flows across the boundaries of the companies that form the supply chain: flow of value (product/materials), information, and funds. Successful integration or coordination of these three flows produces improved efficiency and effectiveness for business organizations.