Guide to Supply Chain Management Read online

  Innovation includes traditional processes in engineering, R&D, and new product development that facilitate change, such as bill of materials (BOM) maintenance and new product introduction new product introduction (NPI). It extends to important SCM activities such as early involvement from suppliers, gain sharing for innovative ideas, make-or-buy/outsourcing, partnering, risk management, supplier consolidation, supplier pre-packaging, consignment and vendor-managed inventory (VMI), and design for prototypeability, manufacturability and the supply chain. (Table 3.1 provides a complete list.)

  Financial processes, including trade finance, which have been considered in the traditional definition of logistics since the mid-1990s, are not part of SCM per se. Billing, collections, claims processing, auditing and trade finance are operational in nature and do not make any of the supply chain strategies more successful. These types of financial considerations sometimes affect the design of the supply chain, but in themselves they offer no supply chain benefit like the four core supply chain strategies do. For example, a tax strategy might suggest producing in China rather than South Korea, but that difference provides no supply chain benefit, just tax benefit, and can even make the supply chain more complex and costly than it would otherwise be.

  4 Why CEOs need supply chain management today

  A competitive necessity to stay in business

  For many companies that have become caught in a profit squeeze, especially manufacturing firms that are threatened by low-cost competition, SCM has become a competitive necessity. And as many competitors have implemented SCM solutions and programmes and realised cost savings, the pressure has been on to understand and implement the concept.

  Dell faced the same competitive environment that all PC-makers faced in 1985. Its success stems from its decision to compete on SCM, and specifically the skipping of levels in the supply chain through direct to customer sales, the co-location of suppliers for just-in-time (JIT) delivery, and the deliberate up-selling and cross-selling through a highly trained inside sales force that handled customers who entered the website and then had questions.

  Meanwhile, thousands of smaller private companies in industries such as plastic injection moulding, steel, industrial distribution and wholesale consumer goods that were late to pick up on the SCM signals have been crushed as their competitors sourced from China and established anchor distributorships that were able to efficiently import product in bulk and ship it to national retailers such as Wal-Mart. For small distributors such as Boston Warehouse Trading Company, a US distributor of household goods, and Carolina Biological, a US educational products wholesaler, supply chain management is a key to survival. Explains Peter Jenkins, CEO of Boston Warehouse Trading Company:1

  If you disappoint a key customer like Target, your business will halt immediately with them, and there are fewer and fewer retailers to sell to.

  Shorter product life-cycles

  Many factors have led to the increasing importance of SCM in recent years, such as the following:

  Shorter product cycles are increasing the risk of stock-outs and obsolescence. With short product life-cycles, late deliveries result in stock-outs and overstocking results in obsolescence.

  Fiercer competition is increasing the importance of low costs and product availability which can both be addressed by better inventory management practices.

  Technologies such as e-commerce, e-procurement, auctions, automated requests for quotation and compliance solutions are “flattening the world”2 and enabling global supply chains. As a result, new technological platforms will carry SCM into the next generation. As Claus Heinrich and David Simchi-Levi reported in Supply Chain Management Review in 2005:3

  Companies that support their demand planning modules with a corresponding software module (such as a demand planning module) shorten their order fulfilment lead time by 47% and cut their cash-to-cash cycle by almost half… supporting the demand planning process with IT systems reduces inventory days of supply by about 40%.

  These improvements will be implemented by tools4 in areas such as:

  returns, repairs, recycling and maintenance;

  product management, design and engineering;

  radio frequency identification (RFID);

  manufacturing;

  supply chain software and technology;

  collaboration between supplier and customer;

  marketing, sales and customer service;

  inventory and materials management;

  forecasting, planning and scheduling;

  logistics, transportation and warehousing;

  purchasing, procurement and sourcing.

  To keep up, manufacturers need to combine value-added services, technology and a focus on premium quality. The “mutually reinforcing cycle of technical and commercial advances … bring full circle the link between the economy’s services-intensity and its information-intensity, creating a huge, growing market for the most advanced information technologies that the economy’s goods-producing industries can deliver.”5

  SCM will play a critical role in helping manufacturers build a strong revenue base in ancillary services. In the light of a global trend towards service economies, manufacturers achieve growth by leveraging the service-technology-premium cycle to achieve sustainable high margins.6

  This cycle integrates value-added services, technology and a focus on premium quality. Value-added services extend the life of manufactured products and increase the value of the products to the buyer. Technology, when embedded in the products’ design, makes them difficult to copy or reverse engineer. And premium quality differentiates the products in the marketplace and pre-empts comparison with low-cost competition. SCM can help the transition to services since it provides the basis for better goods and ancillary services management.

  Advanced SCM is critical to executing this services-technology-premium cycle. Customer knowledge management together with cost and pricing, elements of the customisation strategy, can help to reliably deliver the value-added services and ensure premium positioning. Rapid and repeatable new product introduction (NPI), part of the innovation strategy, can secure the technology edge.

  Large impact on financial results

  For an individual company, the benefits of SCM translate to improvements in revenue, cost and assets. Since economic value added (EVA) captures all of these in one metric, it can be said that the primary benefit of SCM is an improvement in EVA. Figure 4.1 shows the relationship between the underlying levers affected by supply chain management initiatives and EVA. Revenue increases the top line. Cost savings improve profits and/or profit margins. And inventory and capital asset utilisation reduce assets and thereby improve EVA.

  Figure 4.1 Supply chain map of EVA opportunities

  Source: Lambert, Douglas, Supply Chain Management: Process, Partnerships, Performance, Supply Chain Management Institute, 2008, p. 296 (adapted from Douglas M. Lambert and Terrance L. Pohlen, “Supply Chain Metrics”, International Journal of Logistics Management 12(1), 2001, p. 10

  Effective SCM offers at least a 30% potential improvement in EVA. Rationalisation strategies can contribute 4–6%. Synchronisation strategies can generate 5–7%. Customisation can add up to 6–10%, and innovation benefits can exceed 15% (Figure 4.2).

  Figure 4.2 Supply chain strategy impact on EVA

  Source: Author

  These estimates are based on actual results achieved by companies worldwide over 20 years, as well as statistical compilations of companies that practise each strategy compared with their peer groups. SCM has demonstrated cost leverage opportunities. Boston Strategies International, a consulting firm that has conducted an annual benchmarking study since 2004, tracks the savings from 13 SCM techniques. According to its 2008 study, low-cost country sourcing saves companies 4–7% of expenditure on their largest spend category, net of all costs. Although the saving is down from previous years (some of the ripe fruit has already been picked), such sourcing still has a substantial effect on the bottom
line. Request for quotes saves 4–6%. Long-term agreements, group purchasing and auctions all save companies around 3–5%. Value engineering saves 4–5%.7

  Rationalisation allows a 12–13% cost decrease to yield the same profit impact as a 19% sales increase because of the leverage of cost reduction (there is a detailed example of this in Chapter 8). Moreover, supply chain management can increase revenues. A 2006 study8 showed that 29% of respondents said that SCM increased their companies’ revenues by more than 5%. Out of the total, 3% said it increased by more than 20% and 9% said it increased by 10–20%. Successful implementations with large categories of goods at large companies have reduced inventory by 25–30%; the average cycle time by 30–40%; and total costs by 15–30%; and have increased sales by 8–15% and availability by 10–20%.

  The savings multiply when considering extended supply chains composed of multiple layers. Funda Sahin, an associate professor at the University of Tennessee, estimates:9

  The potential savings from co-ordination in the supply chain and avoidance of the bullwhip effect could reach 35% of total system costs… Comparing the research findings across the studies indicates that information sharing and co-ordinated decision-making may reduce supply chain costs anywhere from 0% to 35% depending on the specific supply chain structure and problem assumptions.

  In addition, the application of the principles of SCM to anticipate and smooth patterns of capital investment in the economy at large could dampen the destructive impact of business cycles, since they are primarily caused by reverberations of overcorrection in investment and inventory caused by the same bullwhip phenomena that create inventory imbalances in supply chains. While most people use SCM to reduce inventory fluctuations resulting from moving boxes across space, others will apply the underlying principles to reduce price inflation and capital investment peaks and valleys over time. Michael Hugos, in the conclusion to his book Essentials of Supply Chain Management, says:10

  Adaptive supply chain networks using real-time information and negative feedback can effectively dampen excessive market swings. This ability alone will have a wealth creation effect that is even more powerful than what was created by the effect of the steam engine.

  A geopolitical weapon for countries

  At a higher level, SCM practices can improve national competitiveness. Robert Metcalfe’s law11 states that the value of a telecommunications network is proportional to the square of the number of nodes in the system. SCM connects the nodes in a trading system, adding synergistic value. Conversely, insufficient nodes lead to the system underperforming. Boston Strategies International’s analysis of worldwide transportation infrastructure12 showed that countries with poor infrastructure spend more on logistics as a percentage of their national economies than countries with well-developed arteries and high transportation and logistics productivity. For example, France, which has a radial hub-and-spoke road network and builds roads to last a long time, has relatively low logistics costs as a percentage of its GDP. In contrast, China, which has a less developed infrastructure compared with its land mass, has high logistics costs as a percentage of its GDP.

  South-East Asia is growing more rapidly than any area of the world, in part because of the links and connections that are being established and catalysing trade in Asia and between the region and other areas of the world. Efficient supply chains bring cost advantages, which enhance export competitiveness, and the supply chain effect – the interaction between infrastructure and exports – grows interactively and exponentially.

  Vietnam

  Vietnam’s transport costs are as low as 1% of its GDP, but its supply chain costs are high on the same basis, especially for international water-borne commerce. Vessels face major delays in port because of inefficient practices. In a country where container traffic is growing at 20–25% per year, inefficiency is inhibiting the country’s fast growth path.

  Investors are addressing the capacity shortage. They plan to pour more than $4.5 billion into port infrastructure from 2009 till the end of 2013.13 To mitigate the congestion that is accompanying the port build-up, and thereby keep its supply chains flowing smoothly, the country needs to build more paved roads, continue to aggressively privatise (“equitise”, as it is called in Vietnamese) its manufacturing sector, and stabilise foreign investors’ concerns by establishing clearer judicial, legislative and financial frameworks and safeguards.

  The country’s ultimate supply chain advantage may be linkages to other countries in the region, especially to southern China through the north and to Thailand via Cambodia and Laos. The Asian Development Bank (ADB) has agreed to lend $60m to restore a 100-year-old rail link between Hanoi and the Chinese border,14 and an ambitious east-west corridor may one day connect Danang (Vietnam) to near Rangoon (Myanmar).15 However, for both domestic growth and connections to China, it must first build major north-south infrastructure; three-quarters of the cargo traffic activity is in Ho Chi Minh (in the south) and it can take up to 30 hours to make the 272km trip from Ho Chi Minh to Hanoi in the north.16

  Thailand

  Exports from ASEAN countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam) grew fivefold between 1988 and 200817 because US and European companies greatly increased their sourcing in Asia between 2004 and 2007.

  The development of Laem Chabang port, a deepwater alternative to Bangkok port with an expected volume of 11m TEU (20-ft equivalent units), with the prospect of a rail link connecting Thailand to China through Laos, are major supply chain advantages that will reinforce Thailand’s export growth. However, in its role as a hub, it both collaborates and competes with Singapore, which absorbs its exports but also limits its internal growth. In the longer term, integration within Asia and connectivity to Europe will greatly contribute to Asia’s export competitiveness, similar to the way in which hub-and-spoke networks allowed airlines to greatly increase passenger air-miles in the 1980s and 1990s at little incremental cost. After deregulation, larger airlines almost all switched to hub-and-spoke networks to benefit from greater traffic density, and “in 1985, the marginal cost of carrying an extra passenger in a high-density network was 13–25% below the cost in a medium- or low-density network, giving the high-density carrier a distinct competitive advantage. This advantage may help explain the failure of those smaller carriers that, despite rapid growth, could not achieve adequate density levels.”18

  The Trans-Asia railway project covers over 80,000km in South-East Asia (Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand, Vietnam), North and North-East Asia (China, South and North Korea, Mongolia and Russia), Central Asia and Caucasus (Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan), and South Asia (Bangladesh, India, Nepal, Pakistan and Sri Lanka), Iran and Turkey. The Trans-Asia highway projects are connecting Singapore north into Thailand, Laos and China, and west into Myanmar and through to Bangladesh and India.

  China

  China has the second-highest logistics costs in the world, according to a recent study for the US Chamber of Commerce.19 All-in logistics costs, including inventory and personal transport, are about 22%, compared with a world average of 13%.

  The reasons for this high figure are, for a start, that transportation takes up a higher percentage of GDP than other countries its size. China’s road system is inadequate. Inventory levels are higher than in other countries because transit time variability is high, and labour is relatively immobile, partly because personal transport expenditure is high.

  China’s high supply chain costs are limiting its growth. While its export and import capabilities are limited by port throughput, its internal demand for chemicals and other products that are not manufactured in sufficient quantity inside China is choked by the high cost of inbound logistics.

  As in other fast-growing world areas like South-East Asia and the Middle East, China’s government is investing massively in infrastructure. In its 11th Five-Year Plan,
the Chinese government laid out a broad-scale and ambitious programme to improve supply chain performance by creating third-party logistics (3PL) enterprises and deregulating certain transportation areas (especially in response to joining the World Trade Organisation); promoting the establishment of logistics networks throughout the country; and building 30 modern logistics parks that will serve as distribution centres throughout the country.

  5 Setting the right supply chain strategy

  Companies that focus on a specific supply chain strategy are more likely to build shareholder value than those that do not. Wal-Mart has used its supply chain to become a low-cost leader. Dell uses its supply chain to deliver reliably and just-in-time (JIT). Nokia lets its customers customise and even personalise its mobile phones. And Apple has refined its product development process to be able to innovate repeatedly and rapidly.

  Similarly, deploying the wrong supply chain strategy can create problems. Nypro, a US plastic injection moulding company, attempted to produce low quantities of custom orders in a job shop model in the 1980s. This flopped because the model did not provide a sufficient volume to justify the investment required in the moulding machines. To correct this, the company dropped more than 400 of its 500 customers to get to the high volumes that made sense. The result was a very profitable make-to-order (MTO) production operation that generated an average 34% annual revenue growth from 1996 to 2006.

  While it can be tempting to try to implement every supply chain improvement programme that is covered by the popular press, companies that try to apply all the supply chain strategies are less effective at achieving any of the desired results. Focused companies have these advantages over companies with dispersed supply chain strategies, according to the author’s consulting experience: