Supply Chain

What is Supply Chain Management?

A company's supply chain consists of geographically dispersed facilities where raw materials, intermediate products, or finished products are acquired, transformed, stored, or sold, and transportation links connecting the facilities along which products flow. There is a distinction between plants, which are manufacturing facilities where physical product transformations take place and distribution centers, which are facilities where products are received, sorted, put away in inventory, picked from inventory, and dispatched, but not physically transformed. The company may operate these facilities, or they may be operated by vendors, customers, third-party providers or other firms with which the company has business arrangements. The company's goal is to add value to its products as they pass through its supply chain and transport them to geographically dispersed markets in the correct quantities, with the correct specifications, at the correct time, and at a competitive cost.

Supply chain management is a relatively new term. It crystallizes those concepts of integrated business planning that have been espoused for many years by logistics experts, strategists, and operations research practitioners. Today, integrated planning is possible due to advances in Information Technology (IT), but most companies still have much to learn about implementing the new analytical tools needed to achieve it. They must also learn about adapting their business processes to exploit insights provided by these tools.

There are four dimensions to integrated supply chain management. The First is functional integration of purchasing, manufacturing, transportation and warehousing activities. Spatial integration of these activities across vendors, facilities, and markets forms the second dimension. The Third dimension entails inter-temporal integration of these activities over strategic, tactical and operational planning horizons. Broadly speaking, strategic plan involves resource acquisition decisions to be taken over long-term planning horizons, while tactical planning involves resource allocation decisions over medium-term planning horizons, and operational planning involves decisions affecting the short-term execution of the company's business.

Inter-temporal integration, which also is called hierarchical planning, requires consistency and coherence among overlapping supply chain decisions at the various levels of planning. Although it is not yet widely appreciated, inter-temporal integration is critical to the firm's sustained competitive advantage. Efficient operations will not lead to superior profits if the company's products are being manufactured in plants with outdated technologies. Improper location in relation to the company's vendors and its markets is also a deterrent. Conversely, to evaluate a new or re-designed supply chain network, we must, at least approximately, optimize operations to be carried out under the design.

The fourth and final dimension is enterprise integration, which serves the purposes of strategic and tactical planning within integrated supply chain management. For effective long-term planning, supply chain management has to be integrated with demand management in order to maximize the company's net revenues. Similarly, supply chain management also needs to be integrated with corporate financial management to evaluate capital investments in the company's supply chain, the return on assets, and ultimately, to maximize shareholder value.

Developments in integrated supply chain management have been both facilitated and driven by advances in IT. Astonishing gains in PC computing speed, e-commerce, and the power and flexibility of data management software have promoted a range of applications. Widespread implementation of the Enterprise Resource Planning (ERP) systems offers homogeneous transactional databases that will facilitate integration of supply chain activities. In many companies, however, the scope and flexibility of installed ERP systems have been less than expected, and their contribution to integrated supply chain management is yet to be fully realized.

Moreover, competitive advantage in supply chain management is not gained simply through faster and cheaper communication of data, just as ready access to transactional data does not automatically lead to better decision-making.

A guiding principle is: To effectively apply IT in managing its supply chain, a company must distinguish between the form and function of Transactional IT and Analytical IT.

Manufacturing and distribution companies in a wide range of industries have begun to understand this distinction. As a result, they are seeking to either develop or acquire systems that analyze their corporate databases. This aids in identifying plans for re-designing supply chains and operating them more efficiently. An essential component of these systems are optimization models, which can unravel the complex interactions and ripple effects that make supply chain management difficult and important. They are the only analytical tools capable of fully evaluating large, numerical databases. In addition to identifying cost minimizing or net revenue maximizing plans, optimization models can measure the tradeoffs among these objectives and cost, service, quality, and time.

The application of an optimization model in a company requires the construction of an optimization modeling system. A key element in such a system is the supply chain decision database, which is derived from, but significantly different than, the company's corporate databases. It is constructed from aggregate descriptions of the company's products, customers and vendors. It contains:

Direct and indirect cost relationships for all sourcing, manufacturing and distribution activities.

Capacity and resource relationships associated with transportation, warehousing and inventory management.

Order information and forecasts of demand for finished products.

Finally, it combines data inputs with outputs from model optimizations to create graphical mapping representations of the company's current and future supply chain structure and activities.

Optimization models for strategic and tactical planning often integrate the traditional objective of supply chain management, which is to minimize the cost to meet fixed and given demand.