Supply Chain Management

Supply chain management, by definition, encompasses all activities associated with the flow and transformation of goods and services from the raw materials stage through the end-user (customer), as well as the associated information flows. This is important for any organization that wants to compete in today's business environment (Russell, R. S., & Taylor III, B. W, 2003). A truly effective supply chain is seamless and invisible to the customer; in managing this effectively there are several supply chain factors that must be considered. Factors that affect the supply chain are: complexity, production demands, time, partners, environment, logistics, materials/services and cost of quality (Aquilano, Chase, & Jacobs, 2004, pp. 367-368).

Complexity refers to the daily management of variations in the production process. These include product demands, time frames, logistical changes and unforeseeable changes in the chain. The environment can be seasonal changes, regulations, and market standard alterations. Partners are an intrical part of the process that can impact materials/services and delivery. Alignment between partners in the supply chain must be managed to achieve optimum performance (Russell, R. S., & Taylor III, B. W, 2003).

One program Manager will discuss in the paper is a Harvard study that found an incentive program that helps manage this link in the supply chain (V.G.; Raman, Ananth Narayanan, Nov 2004). The last discussed factor is the cost of quality theory. This is a practice used by management to meet operational objectives using a quasi cost-benefit analysis (Aquilano, N. J., Chase, R. B., & Jacobs, F. R., 2004). This is where executives evaluate the potential loss of quality and malfunction to the overall operational benefit throughout the supply chain (V.G.; Raman, Ananth Narayanan, Nov 2004).

A supply chain works well if its companies' incentives are aligned--that is, if the risks, costs, and rewards of doing business are distributed fairly across the network (V.G.; Raman, Ananth Narayanan, Nov 2004). If incentives are not in line, the companies' actions won't optimize the chain's performance. Indeed, misaligned incentives are often the cause of excess inventory, stock-outs, incorrect forecasts, inadequate sales efforts, and even poor customer service (V.G.; Raman, Ananth Narayanan, Nov 2004).

When incentives aren't aligned in supply chains, it's not just operational efficiency that's at stake. In recent years, many companies have assumed that supply costs are more or less fixed and have fought with suppliers for a bigger share of the pie. For instance, U.S. automobile manufacturers have antagonized their vendors by demanding automatic price reductions every year (V.G.; Raman, Ananth Narayanan, Nov 2004). Harvard research, however, shows that a company can increase the size of the pie itself by aligning partners' incentives (V.G.; Raman, Ananth Narayanan, Nov 2004). Thus, the fates of all supply chain members are interlinked: If the companies work together to efficiently deliver goods and services to consumers, they will all win(V.G.; Raman, Ananth Narayanan, Nov 2004). If they don't, they may all lose to another supply chain. The challenge is to get all the firms in the supply network to play the game so that everybody wins. The most widely utilized way to achieve this is by aligning incentives (V.G.; Raman, Ananth Narayanan, Nov 2004).

There are three reasons why incentive-related issues arise in supply chains. First, when companies cannot observe other firms' actions, they find it hard to persuade those firms to do their best for the supply network (V.G.; Raman, Ananth Narayanan, Nov 2004).

A simple illustration: Whirlpool relies on retailers like Sears to sell its washing machines because retailers' salespeople greatly influence consumer decisions (V.G.; Raman, Ananth Narayanan, Nov 2004). If Whirlpool doesn't offer lucrative margins on its products, Sears will plug products that do or will encourage shoppers to buy its private-label brand, Kenmore (V.G.; Raman, Ananth Narayanan, Nov 2004). However, Whirlpool can't observe or track the effort that Sears expends in pushing its products (V.G.; Raman, Ananth Narayanan, Nov 2004). Since Sears actions are hidden from Whirlpool, the manufacturer finds it tough to create incentives that induce the retailer to do what's best for both companies. Such hidden actions, as we call them, exist all along the supply chain (V.G.; Raman, Ananth Narayanan, Nov 2004).

Inferences from several Harvard University research studies suggest that companies need to align incentives in three stages (V.G.; Raman, Ananth Narayanan, Nov 2004). At the outset, executives need to acknowledge that there's misalignment. Then they must trace the problem to hidden actions, hidden information, or badly designed incentives (V.G.; Raman, Ananth Narayanan, Nov 2004). The study also suggest that by utilizing one of three approaches that we describe earlier in Manager's paper, companies can align or redesign incentives to obtain the behavior they desire from their partners.

The next factor in operations (Supply-chain) management is what (Quinn, J. 1999, December) states as the "cost of quality" concept. This was first developed by Joseph Juran in the mid 1950s. Newbridge NPI (New Product Introduction) engineer Vince Thompson has adopted Juran's algorithms to create the cost of quality ratio system for manufacturing operations at Newbridge. The Newbridge system combines these calculations with the value of the units shipped on a specific manufacturing line to establish a clear cost of quality or CQ ratio (Quinn, J. 1999, December).

The cost of quality ratio was a significant breakthrough for the manufacturing process (Quinn, J.1999, December 3). It allowed companies to allocate our resources in the right places and achieve an overall reduction in the cost of quality (Quinn, J. 1999, December). The Thompson's cost