what is “supply chain management”? · of managers to define supply chain management, or scm....

10 — BLUEPRINTS OCT/NOV/DEC 2005

By Brian Gibson, Ph.D.

t tarting an argument these days is easy — just ask a group

of managers to define supply chain management, or

SCM. The responses will range from narrow, func-

tionally based perspectives to broad, encompassing

descriptions that equate supply chain management

with business. Then, there are issues of supply chain

management as a strategy versus an activity, internal versus

external supply chains and the inclusion or exclusion of specific pro-

cesses in SCM. It is enough to make the most seasoned executives

scratch their heads.

At the risk of starting a firestorm, this article will take on the def-

inition challenge and more. Key questions regarding the fundamen-

tal issues of supply chain management will be addressed, including:

• What is supply chain management?

• Why should my organization focus on supply

chain management?

• How can my organization adopt a supply

chain perspective?

Drawing upon a wealth of research, expert perceptions and com-

pany experiences, the nuts and bolts of supply chain management

have been assembled in this article. Read on, and you will gain valu-

able insights into the purpose, processes and benefits of supply

chain management as it applies to the fresh produce industry.

Depending on the article, the term supply chain managementwas coined in the early 1980s by either Thomas Stallkamp of

Chrysler Corp. or consultants Keith Oliver and Michael Webber of

Booz-Allen & Hamilton. These initiators spawned an ongoing

effort to define supply chain management that continues today. A

basic Google search for “supply chain management definitions” pro-

duced 522 responses from industry associations, consultants,

What is “Supply Chain Management”?

Discover why and how your organization should focus on supply chain management.

Feature - Front 9/9/05 1:55 PM 0

www.bluebookprco.com

researchers and other pundits.

A supply chain is a network of facili-

ties and transportation linkages that

performs the functions of procurement

of materials; transformation of these

materials into intermediate and finished

products; and distribution of these

finished products to customers. In the fresh produce industry, the

supply chain extends from the field to the shopping cart. Figure 1

on the following page provides a common depiction of a supply

chain, its key flows and primary participants.

Supply chain management, in turn, focuses on the collaborative

coordination and control of the supply chain. This involves the cre-

ation of a synchronized two-way flow of materials as well as infor-

mation, finances, equipment and manpower resources within and

among organizations. The ultimate goals of supply chain manage-

ment are to create visibility across the network and to ensure effi-

cient, fast delivery of goods and services to end customers.

As the definition implies, supply chain management entails both

strategy and key processes. These interrelated components include:

1. Plan: creation of an overall strategy for synchronizing supply

with demand in your supply chains. This involves developing

plans for managing resources, flows and relationships for opti-

mal cost and service across the supply chain.

2. Source: procurement of the key inputs that your organization

needs to create products and services. This involves supplier

selection, transaction term or contract development, delivery

receipt and verification, payment and performance control.

3. Make: conversion of the procured

inputs into products and/or services.

This may involve processing raw

materials, manufacturing components

or assembling finished goods. These

execution processes produce, test and

prepare outputs for delivery.

4. Deliver: fulfillment of customer demand for your

products and services. Key logistics processes involving

inventory management, distribution and transportation are

developed and executed to ensure the timely, low-cost flow of

products to customers.

5. Return: disposition and reverse flow of customer returns of

defective, outdated, recyclable, or otherwise unneeded goods.

Returns-management processes focus on minimizing the num-

ber of items that need to enter the return flow and controlling

the flow through well-organized reverse logistics processes.

These individual components are common to nearly every orga-

nization. So what is the key to transforming them into an integrated

supply chain that can be managed for competitive advantage?

“Supply chain success requires a commitment to change and to

integrate critical activities and processes,” states Dr. John Langley,

professor of supply chain management at Georgia Institute of

Technology, Atlanta, GA. “Also essential is an ability to

structure effective supply chain relationships with both customers

and suppliers.”

As Langley indicates, the five components must not be managed

independently. Narrowly focusing on individual activities will lead

OCT/NOV/DEC 2005 BLUEPRINTS — 11

Feature - Front 9/9/05 1:55 PM Page 11

to localized decision making and suboptimal

results. Instead, integrated internal manage-

ment of the five components will produce

consistent strategies, common goals and

effective business processes. Greater results

will be accomplished by focusing on the

sum rather than the parts.

Second, extensive relationships must be

established between organizations to build

a true supply chain. Direct, ongoing

involvement with suppliers and customers

provides access to end user demand data and

promotes inventory visibility and awareness

of critical events. Such knowledge helps

organizations develop credible responses to

supply chain challenges.

Finally, key performance indicators

(KPIs) must be established to monitor the

results of each component and the overall

impact of the supply chain. These KPIs

must focus on customer service effective-

ness, supply chain process efficiency and

financial results. Without the feedback of

internal and external metrics, it is nearly

impossible to determine how well the sup-

ply chain is performing or where to focus

improvement initiatives.

Ultimately, these integration efforts, rela-

tionships and metrics move supply chain

management from a mere concept or buzz

word to a concrete opportu-

nity. They create the

foundation for supply chain

management planning,

execution and performance.

According to a recent

Supply Chain ManagementReview article, Dr. Hau Lee,

a professor at Stanford

University says, “The success

of companies like Procter &

Gamble, Hewlett-Packard

Co., Dell Computer and

Wal-Mart is testimony that

a well-orchestrated, tightly

integrated supply chain is

crucial to the competitive-

ness of an enterprise.” (See

sidebar on page 16.)

Conventional wisdom

may say that supply chain

management is a great idea for Fortune 500

companies, but too difficult for small- to

medium-size enterprises. After all, it requires

a vastly different approach than the practices

that are traditionally used. Also, supply

chain management represents a significant

undertaking for organizations that are

already resource and time challenged.

However, it is shortsighted and very

risky to let such obstacles delay action.

As your customers, suppliers, and competi-

tors embrace supply chain management,

your organization will not be able to ignore

it. The problem lies in adopting a supply

chain management focus out of obligation

or fear. Neither will create momentum,

buy-in, or resource commitment from

organizational leadership.

Instead, focus on the benefits of supply

chain management, rather than fear, to drive

your organization toward a supply chain ori-

entation. These benefits include greater

effectiveness and efficiency of supply chain

transactions and relationships. Simply

stated, appropriately designed supply chain

capabilities help organizations serve their

customers better, faster, and cheaper. Also, a

more proactive, benefits-driven approach

generates stronger interest and support

throughout the organization.


Carol-Ann ProducePackaging Corp.

444 Big Island Rd. • Goshen, NY 10924

All Size Consumer Packs

E-mail: [email protected]

Call Andrew Urbanskior Andrew Urbanski, Jr.

800 295-4601845 651-7915

Fax 845 651-1966

Why should my organization focus on supply chain management?

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COORDINATE / COLLABORATE / MEASURE

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Figure 1.


Enhanced effectiveness is a primary

driver of supply chain initiatives. The

relationship–building aspects of supply

chain management helps organizations

better understand the needs and expecta-

tions of their customer base. In turn, com-

panies can collaborate with their suppliers

and customers to develop processes capa-

ble of meeting these requirements. The

result will be higher quality service, with

less variability and waste, in the form of

• better product availability

• shorter order cycle times

• faster, more reliable transit times.

“There’s an old saying in the produce busi-

ness – you can’t sell from an empty wagon,”

says Mike Maxwell, president of Procacci

Brothers Sales Corp., a Philadelphia, PA-

based produce wholesale distributor.

“Without strong logistics capabilities, we can’t

get product from our suppliers to sell to our

customers.” Procacci Brothers takes a hands-

on approach, working closely with transporta-

tion providers and their drivers to ensure

needed capacity and maintain visibility of in-

transit product. The net result is timely, cost

effective deliveries – no small feat, given cus-

tomer trends toward appointment-based

receiving with narrow delivery windows and

penalties for noncompliance.

Of course, supply chain quality improve-

ment can be expensive if you do not simulta-

neously achieve efficiency. Supply chain

partners must work together to maximize

resource productivity, develop standardized

procedures and eliminate duplicate efforts.

Such steps will help minimize waste, drive out

costs and achieve tremendous efficiencies in

the supply chain without sacrificing customer

service. Supply chain efficiency initiatives can

lead to the following benefits:

• Faster inventory turnover

• Rationalized product handling

and inspection

• Greater equipment and facility

utilization

Ballantine Produce, a major producer and

marketer of tree fruits and grapes located in

Sanger, PA, recognizes the importance of sup-

ply chain efficiency. Given its goal of deliver-

ing a fresher product to the retailer, the

company needs to turn product faster and

more efficiently. In response, Ballantine

has implemented a warehouse management

system to more effectively manage inventory

levels in its supply chain. “In the past, we

never really had any visibility of how much

inventory we had on hand and the associated

costs. Now we do,” says David Silva, director

of information systems. In one application,

Ballantine is working to reduce the amount of

packaging carried over to the next season,

which will lead to lower inventory carrying

costs and reduced obsolescence.

Finally, the goal of integration drives orga-

nizations toward supply chain management.

To overcome the challenges, conflicts and

complexities inherent in most supply chains,

internal and external alignment are needed.

When senior-level executives align supply

chain capabilities with internal business strate-

gies and other core functions, the opportunity

to create greater value increases. Also, as

companies work together to synchronize

critical activities, establish collaborative

strategies and plans, and use technology to

share real-time knowledge, supply chain

benefits can be maximized. Potential inte-

gration outcomes include:

• Improved demand planning accuracy

• Optimized total cost of ownership

• Standardized processes and metrics

Of the three drivers, integration is the

most difficult to pursue and remains a

future opportunity for most organizations

in the fresh produce supply chain. Dell Inc.

is one of few organizations that have achieved

a high level of supply chain integration

and the benefits that it brings. Through

a long-term commitment and focus, Dell

has developed the real-time ability to

align supplier inventories, factory capacity

and logistics capabilities with each computer

ordered. As a result, supply is balanced

with demand, customers are served in

a timely fashion and potentially obsolete

inventory is avoided.

As the industry examples clearly show,

proper execution on the key supply chain

drivers generates tangible benefits across the

supply chain. An issue remains regarding the

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scope of these benefits. While short-term

improvements in customer satisfaction and

supply chain costs are being achieved, what

about greater profitability and enhanced

shareholder value?

The answer is positive for both issues.

Using an adaptation of the strategic profit

model, it is easy to demonstrate that suc-

cessful supply chain initiatives contribute

to greater financial performance. For exam-

ple, a successful effort to accurately match

supply and demand through collaborative

forecasting creates not only supply chain

improvements, it also positively impacts

revenues and costs as well. The net result is

higher profitability as highlighted in

Figure 2.

In terms of shareholder value, a 2004

study by San Francisco, CA-based

Montgomery Research Inc. of 636 global

organizations determined that a direct rela-

tionship exists between an organization’s

financial success and the depth and sophis-

tication of its supply chain. They found

that organizations with superior supply

chain performance enjoyed a compound

average growth rate (CAGR) of market

capitalization between seven and 26 per-

centage points higher than their industry

average. Conversely, organizations with

weak or deteriorating supply chain capabil-

ities had a CAGR that trailed industries

averages from two to 25 percentage points.

While supply chain management looks

straightforward on paper and the potential

benefits are compelling, the real challenge

is the development of strong supply

chains. Part of the problem

exists because companies have

been performing individual

functions – procurement, pro-

cessing, transportation and

warehousing – successfully for

many years. However, in a recent

Supply Chain Management Reviewarticle, Dr. Robert Trent, supply

chain management program

director at Lehigh University

in Bethlehem, PA, reported

that many organizations fail to

view them as interrelated

activities that must be aligned,

coordinated and synchronized –

the essence of effective supply

chain management.

Aligning the activities

requires preparation and

patience. The following five

steps will help organizations

begin the journey toward supply chain

management.

Step 1 – Develop the vision. The tran-

sition begins when an organization recog-

nizes the value-adding opportunities that

supply chain management can create.

Someone within the organization must

take the time to learn the concepts,

articulate the benefits and generate inter-

est in moving forward. In short, this

visionary needs to sell the top manage-

ment of the organization, its suppliers and

customers, that supply chain management

will improve the competitive position of

all involved.

According to “What Works: More

Green from Green Beans,” by G. Pascal

Zachary, Vegpro Kenya, a Cargo Village,

Kenya, vegetable producer and processor,

has discovered that supply chain manage-

ment methods can help the company

exploit new opportunities. The company

moves 30 varieties of freshly picked veg-

etables to a facility inside the Nairobi

airport, where employees wash and sort

the produce. Instead of sending bulk

quantities to regional markets, the

company cuts, mixes and packages

the goods in store-ready containers that

are labeled and bar coded. The product is

shipped via airfreight to Europe in this

two-day field to store shelf supply chain.

Not only are Vegpro and European

grocers able to fulfi l l the growing

demand for ready-to-eat fresh produce,


How can my organization adopt a supply chain perspective?

SUPPLY CHAIN BENEFIT

Increased forecast accuracyIncreased revenues

Reduced lost sales

Reduced variable costs

IncreasedProfits

Reduced fixed costs

Inceased on-time, complete delivery

Inceased customer responsiveness

Inceased in-stock availability

Reduced inventory carrying costs

Reduced shipment expediting costs

Reduced inventory investment

Reduced facility investment

INCOME STATEMENT IMPACT NET RESULTFigure 2.


they are generating higher margins

in the process.

Step 2 – Establish commitment.Supply chain management success

is dependent upon broad accep-

tance and support. Top manage-

ment must play an active role in

the process both financially and

strategically. First, they must sup-

port the development of key

resources – people, technology and

processes. Second, they must

acknowledge that supply chain

management is a key ingredient of

success, incorporate supply chain

issues in strategic plans and foster

strategic alliances with key suppli-

ers and customers. These top-level

actions convey a critical message

that supply chain management

must be understood, accepted

and integrated within and

across organizations.

The Harvard Business Reviewreported that a prime example of

top management commitment has taken

place within a major manufacturer of

retail, foodservice and food ingredients

products. During a strategic reorganiza-

tion of the company, the CEO recognized

the need to streamline the supply chain in

order to complete the organizational

transformation. He created a senior vice

president of Integrated Logistics position

and gave the new executive a key role on

an interdisciplinary team that is working

to transform the organization’s disparate

channels into a streamlined supply chain

with common processes and technology to

better serve customers.

Step 3 – Marshal the resources.Turning the supply chain vision into

reality requires more than interest; it

requires a commitment to assembling

key resources. First, identify the key

components—people who possess supply

chain skills, information technology

that promotes real-time information

access and supply chain processes that

provide efficient flows (see Figure 3).

Next, determine if these capabilities

exist in the organization or can be

developed internally. If development

time and cost is too steep or there are

internal barriers to success, leverage

the expertise and capabilities of supply

chain partners. Once the resources have

been identified, link them together in a

well-defined network.

A prime opportunity exists in the deliv-

ery component of SCM. While produce

wholesalers and retailers have in-house

procurement expertise, transportation may

not be their strong suit. Rather than build-

ing relationships with individual carriers

and installing transportation management

system (TMS) software, these organizations

could leverage the skills and technologies

of third-party logistics (3PL) firms.

“Customers look upon 3PL firms like us to

provide capacity, maximize cube utilization,

coordinate shipments and manage expe-

dited freight,” says Rob Goldstein, presi-

dent of GenPro Transportation Services in

Newark, NJ. “Our TMS helps with rout-

ing, communication, tracking and quality

assurance. The technology creates efficient

product flows.”

Step 4 – Get the ball rolling. Just like

Rome, Wal-Mart’s synchronized supply

chains weren’t built in a day. Organizations

should develop supply chain relationships

with a select group of key suppliers and

customers. The partners should focus on an

important, but manageable issue that is

impacting supply chain performance.

Next, apply appropriate supply chain

techniques and/or tools to the problem.

The key is to keep initial projects realistic

in scope to gain valuable experience and

minimize costly mistakes.

According to a recent article in Logistics

OCT/NOV/DEC 2005 BLUEPRINTS — 15www.bluebookprco.com

THE FOUNDATION — A WORKING KNOWLEDGE OF SUPPLY CHAIN CONCEPTS AND BENEFITS.

PEOPLE

• Strong supply chain knowledge& vision

• Able to manage key relationships

• Authority to assemble needed resources

• Creative problem solving skills

PROCESSES

• Provide efficient flows of product,data and $

• Responsive to unique customerrequirements

• Drive developmentfrom business strategy

• Establish common goals and metrics

TECHNOLOGY

• Links key partners for real-time dataaccess

• Provides visibility across supplychain

• Facilitates shared planning processes

• Optimizes decisions

INTEGRATEDSUPPLY CHAINCAPABILITIES

Figure 3.


Today, Chiquita Fresh North America,

based in Cincinnati, OH, used this con-

trolled, go slow approach in its adoption

of the collaborative planning, for casting

and replenishment (CPFR) strategy. CPFR

is a major initiative that attempts to link

supply and demand, improve end-to-end

visibility, promote information sharing

between partners and create a more con-

sumer driven supply chain. Chiquita is

initially focusing on the replenishment

aspect of CPFR, using a transportation

software solution to match volume with

demand, balance inbound and outbound

freight and better manage on-time perfor-

mance to customers, according to Deverl

Maserang, vice president of Global Supply

Chain Strategy. As the process improve-

ments and information integrity are vali-

dated, Chiquita will expand collaboration

and information sharing with its supply

chain partners.

Step 5 – Monitor the results.Assessment of performance is critical to

understanding the impact of the supply

chain initiative. Metrics that span the sup-

ply chain to capture process performance,

malfunctions and variation should be

employed. A key misstep in many

organizations is to collect data and

measure performance but not to use the

results. Performance shortfalls should

be analyzed for root causes and process

modifications implemented if needed.

Positive outcomes should be used to

establish credibility in the organization

and build support for additional supply

chain initiatives.

Supply chain management is a field that

presents vast opportunities and challenges.

The benefits that can be gained are tangi-

ble and of keen interest to company execu-

tives. However, supply chain management

is not an overnight solution that provides

an immediate return on investment. As

Dr. Bernard “Bud” LaLonde, Professor

Emeritus of Logistics at Columbus,

OH-based Ohio State University wrote,

“There is no quick formula for successfully

integrating the supply chain. It takes time,

careful planning and a capacity for making

the right decisions.”


Dr. Brian Gibson is an Associate Professor of

Logistics at Auburn University and a former

logistics manager in the retail industry. He is

active in supply chain executive education,

research and consulting.

BP

Without question,Wal-Mart is oneof the undisputed

pioneers of supply chain man-agement in the retail industry.The organization has been mov-ing toward supply chain excel-lence for two decades through

technology investment, relationship building and strategic innovation. Here are just a few of its early forays into supplychain management:

• Technology — According to Business Week, a 1985investment of $16 million in satellite technology provided a pri-vate network to more effectively link their stores and headquar-ters. It also laid the foundation for Wal-Mart to distribute pointof sale information across their supply chains, manage inven-tory more effectively and facilitate rapid replenishment.

• Relationships — During the same era, a senior executivefrom Proctor & Gamble facilitated a unique liaison with Wal-Mart on a two-day canoe trip with Sam Walton. Their conver-sations revealed that both companies had a strong customerfocus, but no coordinated approaches to serving customers.There was no sharing of data and technology, joint planningor systems compatibility. In an effort to build a long-term, customer-focused relationship, top officers of the companiesdeveloped a collective vision of the future. Eventually, aBentonville, AR-based Proctor & Gamble/Wal-Mart team,

composed of representatives of each business function, wasestablished to implement this vision.

• Innovations — It was the Proctor & Gamble/Wal-Martteam that developed the well-known quick replenishment sys-tem. Capitalizing on Wal-Mart's state-of-the-art information sys-tems, which instantly capture movement data on all brands andsizes and stores, the team devised a way to trigger the replen-ishment process off actual sales. Instead of sending sales repsinto stores, P&G examined the data for itself, created the orderand shipped it as approved. The linkage allowed P&G to cus-tom produce and ship to demand, substantially reducing inven-tories for both parties. This supply chain innovation is nowbeing used throughout the retail industry to improve in-stockavailability with lower inventory levels.

During the subsequent years, Wal-Mart has continued tomake supply chain management a core competency and com-petitive advantage of the organization. From its early adoptionof electronic data interchange, material handling technologiesand time-based strategies, to their current rollout of radio fre-quency identification processes, Wal-Mart is at the forefront ofretail supply chain management. The result? Wal-Mart benefitsfrom significantly higher fill rates and lower fulfillment costs thanits competitors, some of whom are a decade or more behind inthe development of sustainable supply chain capabilities.

Source: Anonymous, “Pritchett on Quick Response,”Discount Merchandiser, Vol. 32, No. 4, 1992.

SUPPLY CHAINPIONEER


what is “supply chain management”? · of managers to define supply chain management, or scm....

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