The Logistics Chain
Supply chain or logistics Chain is the system of organisations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to the end customer. In sophisticated supply chain systems, used products may re- enter the supply chain at any point where residual value is recyclable. Supply chains link value chains.
A typical supply chain begins with ecological and biological regulation of natural resources, followed by the human extraction of raw material, and includes several production links (e.g., component construction, assembly, and merging) before moving on to several layers of storage facilities of ever-decreasing size and ever more remote geographical locations, and finally reaching the consumer.
Many of the exchanges encountered in the supply chain will, therefore, be between different companies that will seek to maximise their revenue within their sphere of interest, but may have little or no knowledge or interest in the remaining players in the supply chain. More recently, the loosely coupled, self-organizing network of businesses that cooperates to provide product and service offerings has been called the Extended Enterprise
Supply chain management (SCM) is the term used to describe the management of the flow of materials, information, and funds across the entire supply chain, from suppliers to component producers to final assemblers to distribution (warehouses and retailers), and ultimately to the consumer. In fact, it often includes after-sales service and returns or recycling. In contrast to multi-echelon inventory management, which coordinates inventories at multiple locations, SCM typically involves coordination of information and materials among multiple firms. Supply chain management has generated much interest in recent years for a number of reasons. Many managers now realise that actions taken by one member of the chain can influence the profitability of all others in the chain. Firms are increasingly thinking in terms of competing as part of a supply chain against other supply chains, rather than as a single firm against other individual firms. Also, as firms successfully streamline their own operations, the next opportunity for improvement is through better coordination with their suppliers and customers. The costs of poor coordination can be extremely high. In the Italian pasta industry, consumer demand is quite steady throughout the year. However, because of trade promotions, volume discounts, long lead times, full-truckload discounts, and end-of-quarter sales incentives, the orders seen at the manufacturers are highly variable (Hammond (1994)). In fact, the variability increases in moving up the supply chain from consumer to grocery store to distribution centre to central warehouse to factory, a phenomenon that is often called the Bullwhip effect
The bullwhip effect has been experienced by many students playing the “Beer Distribution Game.” (Sterman (1989); Sterman (1992); Chen & Samroengraja (2000); Jacobs (2000)) The costs of this variability are high — an inefficient use of production and warehouse resources, high transportation costs, and high inventory costs, to name a few. Acer America, Inc. sacrificed $20 million in profits by paying $10 million for air freight to keep up with surging demand, and then paying $ 10 million more later when that inventory became obsolete. It seems that integration, long the dream of management gurus, has finally been sinking into the minds of western managers. Some would argue that managers have long been interested in integration, but the lack of information technology made it impossible to implement a more “systems-oriented” approach. Clearly, industrial dynamics researchers dating back to the 1950’s (Forrester (1958); Forrester (1961)) have maintained that supply chains should be viewed as an integrated system. With the recent explosion of inexpensive information technology, it seems only natural that business would become more supply chain focused. However, while technology is clearly an enabler of integration, it alone can not explain the radical organisational changes in both individual firms and whole industries. Changes in both technology and management theory set the stage for integrated supply chain management. One reason for the change in management theory is the power shift from manufacturers to retailers. Wal-Mart, for instance, has forced many manufacturers to improve their management of inventories, and even to manage inventories of their products at Wal- Mart. While integration, information technology and retail power may be key catalysts in the surge of interest surrounding supply chains, e- Business is fueling even stronger excitement. e- Business facilitates the virtual supply chain, and as companies manage these virtual networks, the importance of integration is magnified. Firms like Amazon.com are superb at managing the flow of information and funds, via the Internet and electronic funds transfer. Now, the challenge is to efficiently manage the flow of products. Some would argue that the language and metaphors are wrong. “Chains” evoke images of linear, unchanging, and powerless. “Supply” feels pushy and reeks of mass production rather than mass customization. Better names, like “demand networks” or “customer driven webs” have been proposed by many a potential book author hoping to invent a new trend. Yet, for now, the name “supply chain” seems to have stuck. And under any name, the future of supply chain management appears bright.