Why Do You Need To Know About Supply Chain Management (SCM)?

Supply chain management is as much a philosophical approach as it is a body of tools and techniques, and typically requires a great deal of interaction and trust between companies to work. For right now, however, let’s talk about three major developments that have brought SCM to the forefront of management’s attention.

• The information revolution
• Increased competition and globalization in today’s markets

• Relationship management

The Information Revolution

In the early 1960s when computers were first developed, a mainframe computer filled an entire room. With the development of the integrated circuit, the cost and speed of computer power increased exponentially. Today, a laptop computer exceeds the storage and computing capacity of mainframe computers made only 15 years ago. With the emergence of the personal computer, optical fiber networks, and the Internet, the cost and availability of information resources allows easy linkages and eliminates information-related time delays in any supply chain network. Wal-Mart’s ability to send daily sales information to its suppliers is just one example.

Organizations are moving towards a concept known as electronic commerce, where information transactions are automatically completed via Electronic Data Interchange (EDI), Electronic Funds Transfer (EFT), Point of Sale (POS) devices, and a variety of other approaches. The late 1990s and early 2000s saw the emergence of on-line “trading communities” that put thousands of buyers and sellers in touch with one another . Ariba is just one example of a business-to-business (B2B) exchange.) The old “paper”-type transactions are becoming increasingly obsolete. At the same time, the proliferation of new telecommunications and computer technology has made instantaneous communications a reality. Such information systems — like Wal-Mart’s satellite network — can link together suppliers, manufacturers, distributors, retail outlets, and ultimately, customers, regardless of location.

Increased Competition and Globalization

The second major trend is increased competition and globalization of businesses. The rate of change in markets, products, and technology is increasing, leading to situations where managers must make decisions on shorter notice, with less information, and with higher penalty costs. New competitors are entering into markets that have traditionally been dominated by “domestic” firms. At the same time, customers are demanding quicker delivery, state-of-the-art technology, and products and services better-suited to their individual needs. In some industries, product life cycles are shrinking from years to a matter of two or three months. One management guru even compared current global markets to the fashion industry, in which products go in and out of style with the season.

Despite the imposing challenges of today’s competitive environment, some organizations are thriving. These firms have embraced the changes facing today’s markets, and have put a renewed emphasis on improving their operations and, in particular, supply chain performance. For instance, Johnson Controls can now receive an order for seats from a Ford assembly plant, make the seats, and deliver the order — all within four hours. This requires incredibly flexible operations within Johnson’s own manufacturing systems, as well as dependable information links with its supply chain partners.

To survive, many firms today find that they must increase market share on a global basis and be on the “ground floor” of rapid global economic expansion. Simultaneously, these firms must vigorously defend their domestic market share from a host of “world class” international competitors. To meet this challenge, managers are seeking to find ways to rapidly expand their global presence. They must position inventories so products are available when customers (regardless of location) want them, in the right quantity, and for the right price. This level of performance is a constant challenge to organizations, and can only occur when all parties in a supply chain are “on the same wavelength”.

Relationship Management

The information revolution has given companies a wide range of technologies for better managing their operations and supply chains. Furthermore, increasing customer demands and global competition have given firms the incentive to improve these areas. But this is not enough. Any efforts to improve operations and supply chain performance are likely to be inconsequential without the cooperation of other firms. As a result, more companies are putting an emphasis on relationship management.

Of all the activities operations and supply chain managers perform, relationship management is perhaps the most difficult, and is therefore the most susceptible to break down. A poor relationship within any link of the supply chain can have disastrous consequences for all other supply chain members. For example, an unreliable supplier can virtually cripple a plant, leading to inflated lead times and resulting in problems across the chain, all the way to the final customer.

To avoid such problems, firms must manage the relationships with their upstream suppliers as well as their downstream customers. In many American industries, strong supply chain relationships like those found Japan might not develop readily. Firms are often geographically distant, and there are not as many small, family-owned suppliers as in Japan. In the case of high-tech firms, many components may be sole-sourced from overseas suppliers who are proprietary owners of the required technology. In such environments, it becomes more important to choose a few, select suppliers, thereby paving the way for informal interaction and information sharing.