What Exactly Is Supply Chain Management?
You are experiencing the Digital Business Transformation right now. It’s happening all around you, in ways you may and may not see. And the digitalization of business is driving new ways to think about your business’s strategies, including supply chain management.
Information technology (IT) innovations are driving increased business connectivity. That is what is behind the initiation and evolution of networks of relationships between businesses called Supply Chains. It is appropriate to think of these relationship networks as being like a trade network.
In many industries, the Supply Chain is becoming the strategic differentiator between competitors. This is most easily seen in retail trade as JCPenney, Walmart, Target, and Sears are more than businesses competing for the same dollars. It is their supply chain that plays a foundational role in its strategic framework—the very foundation of their ability to differentiate and compete. And while you see it in retail trade, I assure you it is happening in the window manufacturing industry, the furniture industry, and many others.
This is important because if you aren’t thinking of your supply chain as a strategic weapon, you are falling behind.
What is Supply Chain Management?
Conceptually, supply chain management (SCM) is the embodiment of the strategic choice to collaborate and create interdependencies between value-adding partners. Logistics, the work of moving and positioning inventory within the supply chain, plays a pivotal role. While the two terms are often used interchangeably, Logistics is a subset of SCM.
A Supply Chain Model is a multi-party collaboration within a framework of resource flows and constraints that integrates efforts. It aligns an enterprise with customers, support distributors, and supplier networks to gain a competitive advantage. And it’s effectiveness is measured based on five critical flows: information, product, service, financial, and knowledge.
This shift in thinking, from the silo bound focus on function-specific best practices and lowest achievable cost by each function, to holistic system thinking, focused on process achievement in the form of lowest total process cost is the crux of the supply chain revolution. And remember it’s enabled by the “big data” in today’s information technology world.
Three Core Concepts of Supply Chain Management
Enterprises participating in a supply chain share strategic goals and have well defined specific roles. Three core concepts of Supply Chain Management that enable this achievement are collaboration, enterprise extension, and integrated service providers.
Beginning in 1984, a series of regulatory changes started a shift in thinking which has grown into an environment that is more nuanced in differentiating collusion from collaboration. Within this new framework, industry competitors frequently share information thought unthinkable only a generation ago. Combining this collaboration and information sharing with process specialization ushered in multi-firm integrated processes designed to reduce risk, increase efficiency, and reduce overall process cost.
The difference between an extended enterprise and outsourcing is really just context and depth. The evolution was from a regulated (pre-1984) trucking and warehouse environment (distinct and separate service providers) to the advent of Third Party Logistics (3PL) companies as integrated service providers who bundle and customize different combinations of services based on the supply chain needs.
IT Advances and Supply Chain Management
Another of the advances found in information technology that seeded supply chain thinking was the ever-increasing computing power available. This allowed businesses to leap from the traditional anticipatory business model to a time-based responsive model.
Illustrated below are the line diagrams of the Anticipatory and Response-Based models. The responsive model consists of fewer steps, less risk, and less capital intensive than the anticipatory model.
As computing power continues to decrease in cost, most companies have migrated to a time-based responsive model and have built their systems around either customized manufacturing (form postponement) or focus on logistics (geographic postponement).
Base financial measures of a supply chain are about measuring the value of time and reduced capital investment. Migration from a traditional business model to a supply chain enabled responsive model is supported by measuring Cash-to-Cash Conversion improvement, Dwell Time Minimization, and increasing Cash Spin.
Cash to Cash Conversion is the time needed to convert raw material or inventory purchases into sales revenue. Dwell time is the ratio of time an asset (think inventory as an example) sits idle to the time required to satisfy its designated supply chain mission. Cash Spin is a measure of the reduction of overall assets committed to the supply chain performance that can be redeployed elsewhere in the business.
The Evolution of Supply Chain Theory
As the world has flattened and more businesses become global, supply chain theory has evolved to incorporate new partners with new core competencies. Dealing with vast distances requires longer lead times. Accommodating laws and regulations of many countries involves more complex documentation. Diverse operating environments and work practices, as well as cultural differences in product/service demand, require unique approaches.
All of these represent a new and specialized mix of competencies that are the hallmark of a reputable supply chain logistics partner.