Summary of Managing the Global Supply Chain 4th edition
Term 1.2 2015-2016
Based on the 2015 book and slides by Damien Power
(Interpretation and explanation may be hairy at times)
Chapter 1
The supply chain is a concept of closely coordinated, cooperative networks, competing with other networks. It encompasses all organizations and activities associated with the flow and transformation of goods from raw materials through to the end user, as well as the flow of information and money.
Traditionally seen the supply chain consists of material resources and the organization of processors, distributors and users. It also involves supporting enterprises to provide transport, communications and other specialized functions. Together, they become a single coordinated entity that transcends organizational boundaries. They however, were difficult to manage. The only solution was vertical integration; the direct ownership of supplier or customer organizations. New communications methods made it possible to reach across the borders of the owned organization, and enabled the supply chain.
Vertical integration is an individual organization in the supply chain integrating (for instance by taking over) its own upstream parts
Horizontal integration is integration with other equal parts in the supply chain (for instance by taking over more production facilities)
The underlying framework for the supply chain is the value chain (Porter, 1985). The bottom activities add value to the firm. They are supported by the other, mentioned on top, external inputs. Differences among value chains become sources of competitive advantage. The value chain is embedded into a larger stream of activities; this is called the value system. This includes communication between value chains.
Integration means coordination across functional lines and legal corporate boundaries.
Business processes are related to the production of products, services and information.
Bechtel and Jayaram (1997) define five different SCM schools of thought:
1. Functional chain awareness, where a chain of functional activities provides a basis for materials flow.
2. Linkage/logistics emphasizes the linkages between functional areas and with a focus on logistics.
3. Information emphasizes information flow in both directions among chain members.
4. Integration of processes across the supply chain towards an objective of customer satisfaction.
5. A future perspective describing a demand-driven seamless comprehensive pipeline emphasizing relations as well as transactions.
The supply chain as a whole deals with the full scope of activities; production, procurement and distribution. In such, it can be seen as a supra-organization, linking all operations of its members. Firms with a strong brand will ultimately direct the development of the chain.
The supply chain is both a network and a system. The network properties involve sequences of connections among organizational units. The system is the interdependence of these organizational units and concepts.
There are five operating processes that describe the supply chain:
1. Demand management – e.g. forecasting, customer service, sales support, etc.
2. Distribution – the link between production and the market, allocation of roles; influences logistics
3. Production – processes that add the value to flow.
4. Procurement–purchasing that links stages of manufacturing together.
5. Returns – reuse and remanufacturing of products and components.
The global supply chain begins with the customer and walks through five successive stages.
See page 33.
There are roughly three parts of the supply chain:
1. Organizations (members – network structure);
2. Processes (linkages between members – business structure) and ;
3. Activities (deals with the level of linkages/integration – management components).
Chapter 2
The functional activities are the building blocks of the supply chain. Because many of these activities are performed through organizations responsible for their own performance, the quest is in how these activities should be organized for optimal performance.
The general flow within the value chain is as follows:
Inbound logistics operations outbound logistics sales and marketing service
Network structure / Business processes / Management issues1. What activities are necessary?
2. Who should perform the activities in the SC?
3. What are the structural dimensions in the network?
4. What types of process links should be established?
5. How should the business processes be managed across the supply chain? / A structured and measured set of activities designed to produce a specific output for a particular customer or market.
A collection of activities that takes one or more kinds of input and creates an output that is of value to the customer. / - physical elements
- technical elements
- managerial issues
- behavioural issues
The process of activities that shift together can enhance speed and reduce costs.
Which can be rearranged to the following sequence in which the customer is involved in the production process (like Dell does).
This approach is known as postponement, and mitigates the risk of demand uncertainty. There are three types of postponement known:
1. Manufacturing postponement – the manufacturing doesn’t take place until the customer’s order is received. This reduces inventory, enables to meet customer requirements, extends products in different forms to new markets and achieves economies of scale, but results in time delays, risk of stock-outs and a potential loss of control in production.
2. Logistics postponement–manufacturing based on speculation in which finished goods are stocked at a central location. It reduces inventory, but a larger warehouse is needed and it’s inflexible when considering longer distances.
3. Full postponement – combines postponement of production and logistics. Manufacturing is done at a central point near the customer, which allows low inventory levels and complete flexibility to meet individual orders. It leads to higher production costs and longer time requirements to meet orders.
The bullwhip effect is the result of a distortion of information about the customer’s final demand. This results in amplified demand forecasting further upstream, towards the purchasers. There are four major causes for the bullwhip effect:
1. Demand forecast updating; if customers’ demand increases, the next player in the supply chain doesn’t just replenish, but may also increase safety stock.
2. Order batching; in economies of scale, a small increase might mean having to order a whole pallet instead of box, resulting in more erratic ordering.
3. Price fluctuations; sales promotions encourage to purchase larger quantities, resulting in an unrealistic reflection of the actual demand.
4. Rationing and shortage gaming; in case of shortages, customers might adapt by ordering a whole lot in order to secure their own needs.
Activities take on a specific set of characteristics:
-They should be related to each other and the objectives of the supply chain as a system.
-They must be manageable as individual units, capable of standing alone or as part of other organizational units
-They must be economically significant; adding value and incurring costs
-They must have economic characteristics that allow organizations to specialize in them
Core competencies should create unique and significant value to the final customer, provides access to a wide variety of markets and be hard to imitate.
Components in supply chain management.
Network structure
The network structure involves collaboration between the most important partners in a supply chain, as well as the relationships between these partners. Because you cannot include all partners, you distinguish between tiers of suppliers and customers.
Business processes
Business processes encompass the activities and flows of information that are connected with conducting materials, products and services through the supply chain and on to customers, such as:
-Order to cash; all activities that are tied in with expediting customers’ orders. The total time elapsed between order placement and order receiving by the customer is referred to as the order cycle time.
-Customer service; a number of services before, during and after the actual sales transaction, like advising, track-and-trace and customer support.
-Time to market; activities connected with the development of new products to be launched on the market. This measures the speed at which a company is able to transform ideas into products.
-Procure to pay; all activities from procurements of goods and services, receiving the invoice and payment to the supplier.
Management issues
There are roughly two major groups of managerial components:
Physical and technical systems / Operational and behavioural systems1. Planning and control systems
2. Process structure
3. Organizational structure
4. Information distribution
5. Production flow / 1. Management principles
2. Power structure
3. Incentives
Chapter 3
Activities define the scope of an organization, but the relationships of organizations within this network define the supply chain. The key in this network is with inter-organizational connections.
Organizational relationships are embedded within a broader network of interdependent relationships. This is the:
1. Industrial network, which provides an overall orientation and the;
2. Social network, which describe the structure and behaviour of firms within inter-firm relationships.
Industrial relationships provide an overall perspective on relationships within the supply chain. It treats firms, their actions and resources as a set of linked networks. The network consists of three components and have mutual relationships, being: activities, actors and resources.
-Activities are the commercial, technical and administrative functions of individual firms that we discussed in the previous chapter. In the SC, they become tasks that must be linked together in order to create the supply chain.
- Exchange involves mutual transfer of goods, services and information.
- Adaptation involves the processes that adjust things like administration for exchange.
-Actors include organizations and individuals. They hold decision power, but have a form of commitment as well.
- Technical bonds are attached to processes applied by the firms.
- Social bonds are established through personal trust.
- Administrative bonds result from administrative routines and systems.
- Legal bonds form contracts between firms.
-Resources are tangible resources like manpower, equipment, financials, capacity but also intangible resources like knowledge, market image etc.
Social networks consider the power structure in which individual players have different relative strengths as a basis to act and influence actions of other players. They distinguish between formal and informal networks; formal is visible to the outside world, informal is based on trust through social exchange processes.
Networks tend to cluster, in which information may be restricted to small groups of decision makers, which is dangerous as new information is hence restricted. The solution is to loosen the network ties to allow connection to other networks. If key nodes in a clustered network fail, this might harm the whole network. Limit decisions; control the flow of information and separate operations from strategy.
Nature of contracts
In transactions, the principal-agent theory focuses on the optimal contract between principal and agent. They have different goals, however and the agent usually is more risk averse than the principal. There are two main aspects in this theory, namely moral hazard (the lack of effort on the agent’s side) and adverse selection (where the agent claims to have certain skills which cannot be verified when the agent is working).
Transaction cost analysis
TCA presents an economic approach for determining the boundaries where activities should be insources and where activities should be outsourced.
Transaction costs are the costs of running the economic system;
-Ex ante costs (external); searching and evaluation business partners, drafting and negotiating contracts.
-Ex post costs (internal); enforcing agreements, correcting misalignments and solving disputes.
Contracts can become legal and private. In case of violation of a legal contract, the court settles it. In case of a private contract, is mostly is solved by negotiations.
Market governance is used in high frequent contracts with nonspecific assets. An example of a hybrid governance with safeguards is a long-term contract with a penalty clausule. An example of a hybrid governance without safguards is an informal collaboration relying on mutual trust.
TCA focuses on cost efficiency. This efficiency criterion should maximize the joint transaction value of a given transaction for the involved parties. The balance is between the initial costs of setting up a relationship followed by lower transactional costs.
Trust is often seen as one of the building blocks of a relationship. Trust is founded on an assumption that the other party acts from self-interest by not acting opportunistically. Sako (1992) identified three types of trust:
1. Contractual trust (written promises)
2. Competence trust (confidence in a party’s ability and resources)
3. Goodwill trust (reflects the willingness to look beyond formal agreements)
The resource based view is an important framework to understand how competitive advantage within firms is achieved and how that advantage might be sustained in the long run. RBV encompasses the VRIN-framework (valuable, rare, inimitable and non-substitutional).
For an overview of the principal-agent theory, TCA, RBV and network perspective is given in table 3.2 on page 86.
The development of collaborative relationships is described as a three-phase iterative process (Ring van de Ven, 1994). Negotiation, commitment and execution.
Chapter 4
The most important benefit of IT in SCM is that it enables visibility throughout the whole supply chain. Hence the most important factor is that it reduces inventory.
Logistics information
Logistics information can be grouped according to its functionality:
-Transactional information (formalized, standardized and routine information that records individual logistics activities and functions)
-Management control information (information on performance measurements)
-Decision analysis information (information that helps to identify, evaluate and to compare strategic and tactical logistic alternatives)
-Strategic planning information (information for wide-range business planning an decision-making models).
For a pyramid-wise overview of this concept, see page 98.
Information exchange
The traditional information stream of a SC moves further upstream from each side. This often results in an amplification of demand patterns, known as the bullwhip effect. Today, this information is shared within the supply chain, known as the enabled model which contains EDI.
Information and operations
Optimizing the supply chain means inter-organizational integrated information systems. Complete orders can release advance shipping notices to customers, carriers and automated invoicing systems. This MRP system is now in place, but not always incorporated in the same supply chain.
The concept of a supply chain information system
The essential role of the information system is to bind the entire chain together as a single integrated unit. It contains both an intra-firm dimension that is largely vertical and an inter-firm dimension that is horizontal, following the transaction flow. To link intra- and inter-firm information systems, interface optimization is needed.
Elements of the information system
The information system contains three main parts:
-Hardware
-Connecting links within the supply chain
-Software
Software systems
The collective term for all computer programs. In the SCM they bring different entitites together, but it has become a critical problem to make them intercompatible.
Enterprise resource planning (ERP)
System that manages financial, human and material resource transactions within the boundaries of a single organization. It’s software distinguishes itself into supply chain design, network design, supply chain planning and supply chain execution.
Supply chain information systems can be applied to;
-Distribution management (links customer orders)
-Warehouse management (stock locations, inventory management, vehicle routing etc)
-Order management (manages contact with customer, hub orders from different locations)
-Demand planning ( sales planning, forecasting, delivery estimation)
-Production planning (schedules when products have to be finished in stages etc)
-Procurement (automatization of the purchasing process)
-Transportation (track-tracing, dispatch management etc)
-Collaboration (relationship management, forecasting, transportation)
-Product life cycle management (quality management, environmental information etc)
Read p 122-125 for two examples of information systems concerning RFID.
Chapter 5
Distribution refers to the steps taken to move and store a product from one supplier stage to a customer stage in the supply chain and occurs between all trading partners in a supply network.
Distribution is the final stage of supply chain management, as successful distribution makes the final products and services available to the ultimate customers. Distribution is related to the four marketing P’s: price, product, place and promotion.
Place refers to:
-Sales; refers to the legal, economic, informational and social relationships between distribution partners. This stage is closest to the customer, so interprets customer patterns and communicates this further upstream.
-Logistics; refers to the design of the physical distribution, order processing and delivery. Logistics involves all decisions to be taken in order to organize the flow of finished goods and related information.
Changes in the market environment (not in terms of the product, but in terms of customer functionality) might influence the distribution. Think of low costs, responsiveness, or customer service.
The marketing channel describes the path of the goods and services while they move from production to final consumption. Distribution is making the products available to be consumed. It’s the task of distribution to overcome differences related to time, quality, spatial differences and quantity through:
-Break bulk (the adaptation of the produced amount of products and services to the customer desired number of units)
-Spatial convenience (the linkage between the location of the production and the location of consumption)