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  GUIDE TO SUPPLY CHAIN MANAGEMENT

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  GUIDE TO SUPPLY CHAIN MANAGEMENT

  David Jacoby

  Guide to Supply Chain Management

  David Jacoby

  PublicAffairs

  THE ECONOMIST IN ASSOCIATION WITH

  PROFILE BOOKS LTD and PublicAffairs

  Copyright © The Economist Newspaper Ltd, 2009

  First published in 2009 by Profile Books Ltd. in Great Britain.

  Published in 2014 in the United States by PublicAffairs™, a Member of the Perseus Books Group

  All rights reserved.

  publicaffairsbooks.com

  No part of this book may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book, except in the case of brief quotations embodied in critical articles and reviews. For information, address PublicAffairs, 250 West 57th Street, 15th Floor, New York, NY 10107.

  The greatest care has been taken in compiling this book. However, no responsibility can be accepted by the publishers or compilers for the accuracy of the information presented. Where opinion is expressed it is that of the author and does not necessarily coincide with the editorial views of The Economist Newspaper.

  While every effort has been made to contact copyright-holders of material produced or cited in this book, in the case of those it has not been possible to contact successfully, the author and publishers will be glad to make amendments in further editions.

  PublicAffairs books are available at special discounts for bulk purchases in the U.S. by corporations, institutions, and other organizations. For more information, please contact the Special Markets Department at the Perseus Books Group, 2300 Chestnut Street, Suite 200, Philadelphia, PA 19103, call (800) 810-4145, ext. 5000, or e-mail [email protected].

  Text copyright © David Jacoby, 2009

  Library of Congress Control Number: 2014932066

  ISBN 978-1-61039-514-4 (EB)

  First Edition

  Contents

  List of figures

  List of tables

  Acknowledgements

  Introduction

  1A historical perspective on industry, trade and transport

  2The bullwhip problem

  3What supply chain management is and where it is going

  4Why CEOs need supply chain management today

  5Setting the right supply chain strategy

  6Rationalisation: competing on low cost

  7Synchronisation: competing on reliability

  8Customisation: competing on customer intimacy

  9Innovation: competing on revitalisation

  10Organising, training and developing staff

  11Leveraging information technology

  12Measuring success

  13Challenges for the future

  Notes and references

  Appendices

  1A brief history of supply chain thought

  2Strategic sourcing techniques based on competition

  3List of abbreviations

  4Glossary

  Index

  List of figures

  1.1 The “sundial” of operations management

  1.2 Increasing productivity from competition and deregulation: productivity in the US air transportation industry, 1987–2006

  1.3 Explosion of world trade, 2003–08

  2.1 The bullwhip effect in the oil industry: oscillation in the oil and gas supply chain, 1998–2008

  2.2 The bullwhip effect in the semiconductor industry, 1957–2008

  2.3 The butterfly effect

  2.4 US GDP and manufacturing prices, 1960–2006

  3.1 Relationship between operations management disciplines

  3.2 The supply chain strategy framework

  4.1 Supply chain map of EVA opportunities

  4.2 Supply chain strategy impact on EVA

  5.1 Generic manufacturing strategies

  5.2 The four supply chain strategies

  5.3 Hybrid strategy relative emphasis map

  5.4 The integrated supply chain strategy

  5.5 National supply chain maturity model

  6.1 Sourcing and supply chain strategies

  6.2 Sample fishbone diagram

  7.1 Throughput capacity analysis – example

  7.2 Typology of operating environments

  7.3 The prisoner’s dilemma

  7.4 Supply chain risk factors

  7.5 The security risk cube

  7.6 Probability assessment of risk using Monte Carlo simulations

  8.1 The house of quality

  8.2 The seven production process models

  10.1 The functional supply chain organisation

  10.2 The order fulfilment supply chain organisation

  10.3 New York City Housing Authority’s operations

  10.4 The C-level supply chain organisation

  10.5 The integrated supply chain organisation

  10.6 The partnering continuum

  11.1 Supply chain system components

  12.1 Supply chain balanced scorecard

  12.2 Representative forecast of cyclical prices

  13.1 Information assets and shareholder value

  Appendix

  1 The value chain model: channels of distribution for consumer goods

  2 Collaboration at the centre of it all

  3 Early attempts at mapping best practices to value chain activities

  4 Each function’s contribution to supply chain management

  List of tables

  3.1 Value-adding supply chain activities compared with traditional functional responsibilities

  5.1 Correlation between the value chain role and supply chain strategy

  5.2 Correlation between business strategies and supply chain strategies

  6.1 Benchmark net margins of rationalisation-focused companies

  6.2 The leverage impact of cost reduction on corporate profit

  7.1 Benchmark asset turnover rate of synchronisation-focused companies

  7.2 Benchmark cash flow: sales ratios of synchronisation-focused companies

  8.1 Benchmark gross margins of customisation-focused companies

  9.1 Benchmark one-year revenue growth rate of innovation-focused companies

  9.2 R&D as a percentage of sales, by industry group
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br />   10.1 The change in CPOs’ backgrounds

  10.2 Illustrative profile of a category manager in a large industrial company

  10.3 Topics addressed by selected professional supply chain certification programmes

  10.4 Supply chain organisation maturity model

  11.1 Supply chain IT requirements at each supply chain stage

  12.1 Supply chain metrics maturity model

  13.1 Tertiary sector as percentage of GDP

  Acknowledgements

  I would like to thank the companies which have given permission for their experiences in supply chain management to be used in this book, including: American Honda, APL, APM Terminals, Atherton Trust, BASF, Beretta, BNSF, Boston Warehouse Trading Company, Brown Shoe, Cabur, Carolina Biological, Charles River Laboratories, CLP Power, Cochlear, CSX, CVS, Dana Farber, DB Schenker, Dreams, DSTS/Grupo CTT, FedEx, FMC, Fulham, Futuris Automotive, General Motors, Hasbro, IBM, Incyte Corporation, Interswitch, Iron Mountain, JDA Software, John Deere, Life Fitness, M&C Specialties Co, MacGregor, MTR Foods, Netflix, New York City Housing Authority (NYCHA), Nypro, Plaxo, Popular Telephony, Port Said, Qatar Fuel, Road Runner Sports, Royal Ahold, Royal Philips, Saudi Aramco, Savi Networks, Siemens, Stanley Works, Sydney Airport, Thoresen Thai Agencies Public Company, Tiffany & Co, Volvo China, Wikipedia and Wilhelmsen Ships Service. In addition, Alcoa, Cabot, Cabur, Galeries Lafayette, Georgia Pacific, Jabil Circuit, McDonald’s, Nokia, PepsiCo and Qualcomm are some of the companies that contributed to white papers and briefings I have written for the Economist Intelligence Unit, on which this book draws.

  I would also like to express my gratitude to a number of authors for allowing the reproduction of their charts, citations and examples, including: Lewis Dartnell, University College London; James Greene, Purdue University (who sadly passed away while the book was being written); Robert Handfield, North Carolina State University; Douglas Lambert, Ohio State University; Michael Maccoby, The Maccoby Group; John Mentzer, University of Tennessee; John Sterman and Stephen Miles, Massachusetts Institute of Technology (MIT); Charles Poirier, CSC; and Robert Rudzki (Greybeard). Thanks also to Janelle Heineke, Department of Operations Management, Boston University, and Jerry Wind, Wharton School, for their advice, clarifications and permissions.

  Thanks are also owed to those at the following institutions for their contributions to the body of knowledge: APICS (the Association for Operations Management), the Institute for Supply Management, the Council of Supply Chain Management Professionals, the Supply Chain Council and the American Society for Transportation and Logistics. Several organisations have helped stimulate debate about important supply chain ideas through their conferences, and for this recognition is due to Transport Events, IQPC Worldwide and the International Air Transport Association (IATA).

  Special thanks go to consultants at Boston Strategies International who supported my effort to write this book despite their already full workload. Fei Rong gathered and analysed numerous benchmarks; Matt Fixler analysed survey data; Erik Halbert and Luis Gondelles researched and organised case-study material; Betul Altintas, Rob Casper, Bruna Figueiredo, Katy Weener and Patrick Yang provided much appreciated encouragement.

  Finally, Jessica, Weston, Brent, Camille and my extended family deserve enormous credit for their tireless patience, understanding and support of this and other projects that compete for my time.

  If you have suggestions for improvements to future editions of this guide, please send them to me at [email protected].

  Introduction

  The term “supply chain management” (SCM) entered the public domain when Keith Oliver, a consultant at Booz Allen Hamilton, used it in an interview with the Financial Times in 1982.1 The term was slow to take hold and the lexicon was slow to change. It gained currency in the mid-1990s, when a flurry of articles and books came out on the subject. In the late 1990s it rose to prominence as a management buzzword, and operations managers began to use it in their titles with increasing regularity.

  The Council of Logistics Management hotly debated changing its name to the Council of Supply Chain Management in 2002, but rejected the idea at the time because many experts disagreed on the definition of SCM. Joel Sutherland, the board chair of the organisation at the time, said: “Surveys turned up hundreds of definitions.” He pointed out that the term was too broad and unclear, and could not be managed or measured. He said: “Logistics is part of the supply chain process as the Earth is part of the universe.” While we know the weight, the speed of rotation and the composition of the Earth, Sutherland pointed out that the universe is infinite in size and is expanding, and that 95% of it is made of a type of matter or energy that we cannot see or understand. After spending two more years developing an acceptable definition of SCM and deciding on a new name, the Council of Logistics Management ended up renaming itself in 2005 the Council of Supply Chain Management Professionals (CSCMP), but its official definition of SCM left many ambiguities unresolved by describing the set of disciplines that are evoked by the term rather than defining exactly what SCM is.2

  Other professional associations – for example, APICS (the Association for Operations Management)3 and ISCEA (the International Supply Chain Education Alliance) – have since developed certification programmes in SCM. APICS’ certification is called the Certified in Supply Chain Practitioner, or CSCP, and ISCEA’S certification is called the Certified Supply Chain Manager (CSCM). Another, the Institute for Supply Management, is developing one called the Certified Practitioner in Supply Management (CPSM). However, since the CSCP and the CPSM certifications require practical experience as a prerequisite for certification, one may mistakenly infer that SCM must be learned on the job, like a trade, and cannot be codified into a clear body of knowledge that can be learned by students and general managers.

  As of the writing of this book, there is no succinct definition of SCM, nor (more importantly) is there a definitive formula for executives and managers desiring to create shareholder value from the supply chain. So, while a new breed of companies such as Wal-Mart and Dell have demonstrated that managers can indeed use SCM for competitive advantage, most companies have found it difficult to replicate such success because the available resources fail to accurately and clearly provide a clear recipe for doing so. To most business people, SCM is still a broad term that covers many functions, including but not limited to purchasing, logistics, production, sales, customer service and engineering.

  Conflicting definitions and interpretations

  Use of the phrase “supply chain” has become widespread. According to Ohio State University’s 2004 career pattern survey in logistics, 27% of the respondents had the words “supply chain” in their title.

  Yet many practitioners use key words like logistics, procurement, transportation and supply chain interchangeably and without a consistent hierarchy, confusing the supply chain’s role with respect to the other functions, and implying that everybody who works in any of those fields is a supply chain practitioner.

  Academics have written extensively on the subject, but their definitions have at times been unclear or evasive. For example, one book defines supply chain management as “the integration and management of supply chain organizations through co-operative organizational relationships, effective business processes, and high levels of information sharing to create high-performing value systems that provide member organizations a sustainable competitive advantage.”4 Another sidesteps a definition in favour of an unquantifiable goal: “to achieve linkage and co-ordination between the processes of other entities in the pipeline”.5 Many others amalgamate principles from lean management, re-engineering, quality and manufacturing,6 which raises questions about whether SCM is part of these movements or something separate, and if so, where the overlap is.

  Practitioners’ books are typically biased towards the functions in which the author has the deepest experience. Consultants’ books usually offer best practice models that characterise the stages that com
panies must pass through in order to attain supply chain excellence, but provide managers with little guidance regarding the payback to be expected from the efforts, leaving the business case shaky.

  None of the books makes clear a business case for the value of SCM to the “C suite”, which describes senior executives whose job title begins with the word “chief” or “chair”. Sitting at the highest level in the organisation, these executives ultimately make the largest budgetary decisions. Hierarchically, the next level down is usually called director, and below that is a manager. “C”-level leaders have to make change happen, usually under time pressure from the stockmarket and their boards of directors. They frequently operate under circumstances of high expectations, where ambiguity or uncertainty can consume precious time and organisational goodwill. Senior management is increasingly aware of the importance of SCM, but lacks a definitive formula or roadmap for creating shareholder value from it.

  Purpose of this book

  The purpose of this book is to distil the essential supply chain concepts into a convenient reference for chief executives. It is designed to be clear, objective, relevant and effective (CORE) in helping executives achieve rapid results. It seeks to clarify the ambiguities surrounding the concept of SCM and its relationship to the functions from which it stems. It will be objective, not biased towards the viewpoint of logistics, manufacturing or any other traditional related function. It will concentrate on what is most relevant by eliminating and subordinating minor concepts that are not essential to getting shareholder value from SCM. The strategies outlined in the book have proved to be effective in achieving significant financial results in companies worldwide.

  Clarity means no ambiguity, and to be unambiguous the content is mutually exclusive and exhaustive (MECE). Clarity also means that the key concepts can be reduced to numbers. As with so many concepts, their strength and durability can be tested by whether or not they can ultimately be quantified, because numbers do not allow for ambiguity or overlap. Whether or not a financial business case can be made for supply chain practices or technologies can be the litmus test between concepts that should be taught and implemented, and those that should fall off the bottom of the agenda.