*This is an edited version of the prize-winning full-time undergraduate submission in the 1999 International Student Awards Program
sponsored by the APICS Educational and Research Foundation. University of Indianapolis, 10148 South County Road O, Clayton, IN 46118
Reprinted with permission of APICS--The Educational Society for Resource Management, Alexandria, Virginia, Production and Inventory Management Journal, Vol. 41, No. 2, 2nd Quarter, 2000.

In today’s global market managers are realizing that their suppliers have a major influence on customers’ satisfaction level. A quality product is not enough by itself. A company must get the product to its customers when, where, and how they want it, and in the quantity they want at minimal cost [6]. Although the power of supply chain management in the global market has been described in magazines and newspapers and in seminars [7], managers are not being shown how to implement it in their companies. This article explains what the advantages of supply chain management are, how it can be implemented into the company, and what role technology plays in the process.

ADVANTAGES OF SUPPLY CHAIN MANAGEMENT

“Supply chain management is a collaborative-based strategy to link cross-enterprise business operations to achieve a shared vision of market opportunity. It is a comprehensive arrangement that can span from rawmaterial sourcing to end-consumer purchase,” explains John McConnell, professor at Michigan State University [7]. This definition incorporates two important ideas. First, supply chain management is a collaborative
effort that combines many parties or processes in the product cycle. Second, it shows that supply chain management can cover the entire product cycle [2], from the introduction of raw materials to the point at which the consumer purchases the product.

A company should implement supply chain management because of its powerful impact on short- and long-term goals like profit, market share, and customer satisfaction [1]. To put the advantages in numeric terms, companies that have implemented supply chain management have a 45% supply chain cost advantage over their competitors [4].

A study by Pittiglio, Rabin, Todd, & McGrath showed companies that had implemented supply chain management had an order-cycle time and an inventory days of supply that were 50% lower than their competition. Finally, these companies met their promised delivery dates 17% faster than their competition [7].

IMPLEMENTATION OF SUPPLY CHAIN MANAGEMENT

Before beginning the implementation, a company must know what a supply chain looks like. A simplified integrated supply chain model is shown in figure 1. The thick arrows show how the product and its materials move through the supply chain; the thin arrows show the flow of informational and financial data [7]. The figure illustrates a product’s complete cycle from raw materials to the final sale. Every business in the supply chain has an important role in the chain’s success. The continuous communication between all the businesses in the supply chain at every step of production allows for a smooth and continuous flow of products.

The first step to take once the decision to implement has been made is to lay the necessary groundwork so that supply chain management can operate properly. A study by management consultants A.T. Kearney found that inefficiencies and implementation mistakes in the supply chain can waste as much as 25% of a company’s operating costs [6]. After that internal work has been done, the next steps are to select supply chain partners, work to maintain supply chain relationships, and make groundwork decisions.

Laying the Internal Groundwork

Before a business can even concern itself with the other companies in the chain, it must have its own business in order and functioning properly. Richard Thompson of Ernst & Young says that “functional integration must occur within the organization before integration can occur throughout the entire supply chain” [7, pg.2]. Functional integration is the process of integrating or uniting all the functions of the business to work together. For example, logistics functions within the company such as distribution must integrate with supply-management, manufacturing, and even information technology before the company’s functions can be integrated with other companies in the supply chain.

The biggest struggle in integrating a business is gaining the support of the most powerful department in the company. Most of the time that would be either manufacturing or marketing. Without their support the supply chain will not work. The best way to gain their acceptance is to show them how the company and their function in particular will benefit from supply chain management [6].

Selecting Supply Chain Partners

The second step is to integrate with external partners such as suppliers, customers, and logistics providers. Partnerships must be forged with those other businesses. The responsibilities involved include the sharing of information about upcoming production plans, new products, promotions, even financial data. The many benefits these partnerships can bring include significant cost efficiencies, customer-service improvements, and marketing advantages.

One company that has benefited greatly from such partnerships is Texas Instruments. According to Julie England, vice president of Texas Instruments’ Semiconductor Group, the company defines a partnership “ as a tailored business relationship based on mutual trust and openness, and shared risk and rewards. It can yield a strategic competitive advantage for both parties and result in business performance greater than
either partner could achieve individually” [6, pg. 3].

When companies implementing supply chain management select their suppliers, they must look for partners that have the capabilities to serve the organization, are not too distant, and are interested in developing a partnership. Once the selection is made, the company may consider forming a relationship called a strategic alliance [6], a process in which companies share confidential information, use assets to invest in joint
projects, and pursue joint improvements. The three steps involved in forming a strategic alliance are conceptualizing, pursuing, and confirming the
alliance. The alliance is conceptualized when the need for improved performance is recognized and an initial goal is created. Global competitors, industry consolidation, or major technological change in an industry are a few actions that may trigger alliance conceptualization. A marketing manager, for example, may seek a customer and identify a need or goal that can be met only through an alliance.

An ECR Alliance study found that the most typical barriers to alliance conceptualization are a firm’s fear of change and the inability to relinquish traditional business practices [6]. Managers must access the risk of forming an alliance and make certain that the potential improvement is great enough to justify the risk. They must communicate with their own employees and answer any questions and fears employees may have concerning the alliance. Open communication and internal training programs that explain possible new work practices will help solve any problems that
occur [6].

During alliance pursuance, the firm initiating the alliance clarifies and defines its new strategies and finalizes the decision. Initial goals are reviewed and secondary goals are created to identify the potential degree of achievement. For example, if the initial goal is inventory reduction, the secondary goal could be reducing inventory by 20%. The secondary goals dictate the strategic and operational characteristics the potential alliance firm should possess to qualify as an alliance member [6].

For example, if the secondary goal was to improve quality by 15%, then a characteristic that must be met could be ISO 9000. Once the goals
are defined, a detailed assessment of the potential alliance member should be made, including an assessment of all corporate and financial information. Consider company profile information, management capability, personnel capabilities, cost structure, financial capability and stability, production scheduling, supplier sourcing strategies, and information systems capability [6].

Although it may not be possible to obtain access to all this information, the information that is gathered will help to determine the potential for success and can highlight possible problems that need to be addressed. After a thorough evaluation of all the information gathered about each possible alliance member is made, a small group of finalists with the most promise for success can be selected [6]. Once the most promising
company is chosen, a formal commitment must be made in the form of a verbal or written contract. The contract should include the length of time the alliance will last. Both partners in the alliance must also determine the effective standards for the alliance. These standards include how to manage power imbalances, how to manage conflict in the supply chain, how to allocate net benefit, and how to build a suitable match between the partners. Finally, possible joint investments or projects and the possible need for more investment in physical resources and human resources
must be discussed [6].

Maintaining Supply Chain Relationships

Supply chain relationships are probably the most fragile and the most susceptible to breaking down. A poor relationship in any part of the supply chain can have disastrous consequences for all members of the chain. Communication between all businesses is vital. Instituting an objective performance measurement system is an important method of ensuring a good relationship with a supplier or any other business in the supply chain. The system will ensure that both parties are operating according to expectations and are meeting stated objectives. As an example, two companies may set the goal of increasing sales by 5% every year. When the businesses set these expectations and discuss potential sources of conflict, communication is facilitated and problems can be solved. As the communication grows, further improvements can be made in the supply chain relationship [6].

In today’s global market, the power in the supply chain has shifted downstream to customers. As customers have the power, everyone else in the supply chain must be quick to satisfy their demands or face the prospect of losing them. Trust, however, must occur on each end of the supply chain spectrum. Customers must provide suppliers in the chain with information about their service and product [6]. That information can then be used to increase the responsiveness, delivery time, and expectations of the supply chain in serving the customer.

Making Groundwork Decisions

Businesses must embrace all their supply chain partners, free from the gaps that have traditionally separated businesses [5]. Goods must move seamlessly from sources to consumers, and information must flow immediately up and down the supply chain. Short and long-term decisions about location, production, inventory, and transportation must be made to achieve this seamless movement.

First the location of production facilities, stocking points, and sourcing points in the supply chain must be decided. A long-term commitment by all firms involved is required. Once the size, number, and location of the firms are determined, the possible paths the products will follow to the final customer can be decided. These decisions may seem simple, but they have a great significance to each firm in the chain. The decisions will have an impact on revenue, costs, and the level of service that can be offered to each customer; therefore, many variables should be taken into account, including each firm’s production costs, taxes, duties, tariffs, and distribution costs [5].

The second decision to be made is what products will be produced and which plants will produce them. The allocation or allotment of suppliers, distribution centers, and customer markets must also be included in the decision-making process [5, pg.3]. That information will determine the exact path a product will take through the chain. To reduce backlog in the process the production capacity of each firm must be addressed.

The third decision involves inventory. Inventory will exist at every stage in the supply chain as raw materials, semi-finished goods, or finished goods. The primary purpose of having inventory is to have a buffer against any uncertainty that might exist in the supply chain. Since holding inventory can cost between 20% and 40% of its value, managing inventory is a critical factor [5]. Managers in the supply chain must set goals
for inventory levels as inventory reduction is a primary goal of supply chain management and allows for the efficient operation of the supply chain.

According to most experts, these goals are usually managed by setting safety stock levels, using deployment strategies, and setting control policies. The final decision concerns transportation. Transportation suppliers are selected in the same manner discussed earlier in the article. With supply chain management, the transportation decisions will be closely linked to inventory decisions. For example, shipments by air are fast, reliable, and call for less safety stock, but the costs are very high. Shipments by sea or land can be much cheaper, but call for relatively large amounts of inventory to buffer against their uncertainty.

The geographic location of suppliers plays a vital role in the mode of transportation that will be taken. Efficient operation is important as transportation accounts for more than 30% of logistics costs [5].

FUTURE OF SUPPLY CHAIN MANAGEMENT

Three main factors will shape the future of supply chain management: consumer demands, globalization, and competition. Consumer demands are the top priority in today’s global market. Businesses are trying to balance operations that are low cost and have a high level of customer service and customization. Customers want more-customized, inexpensive products at a faster rate and they want a high service level. This process
has already occurred in the home computer industry.

Thanks to companies like Dell and Gateway, consumers can have their own customized computer in a period of 48 hours. The trend will continue to grow and expand into many sectors of the economy [3]. Globalization of the market will produce dramatic shifts in global demographics and economic power in the next few years. A large amount of money has been invested in emerging nations’ markets. The trend will likely continue, and the attractiveness of product sourcing from China, Mexico, and other emerging countries will keep increasing. As these emerging countries continue their growth, companies will have to provide comparable levels of service worldwide [3]. Competition will continue to intensify, spurred by industrial technology advances, information availability improvements, plentiful venture capital, and creative business design. The increased competition will prompt supply chain innovation. Look for the focus to be not on market share but on companies redefining their own personal competitive space, or profit zone. Many companies from small countries will continue to challenge larger companies and thus raise competition
to a whole new level [3].

CONCLUSION

All companies that compete globally should implement supply chain management. It is vital that they continually reach new customers and attract their existing customers. Companies unwilling to take the time to correctly implement supply chain management may not survive.

REFERENCES
1. Anderson, D., F. Britt, and D. Favre. “The Seven Principles of Supply Chain Management.” http://www.manufacturing.net/
magazine/archives/1997/scmr/11princ.htm.
2. Arnold, J.R., L. Clive, and H. Hutchins. Basics of Supply Chain Management. White Plains, N.Y.: MGI Management Institute, 1997.
3. Bovet D., and Y. Sheffi. “The Brave New World of Supply Chain Management.” Supply Chain Management Review. http://www.manufacturing.net/magazine/archives/1998/scmr/05brave.htm.
4. Brooker, D. “Building a Better Supply Chain.” http://www.mhbizlink.com/Content/purchasing/1997/01-97/f08_features.html.
5. Ganeshan, R., and T. Harrison. “An Introduction to Supply Chain Management.” http://silmaril.smeal.psu.edu/misc/supply_chain_intro.html.
6. Handfield, R., and E. Nichols. Introduction To Supply Chain Management. Upper Saddle River, N.J.: Prentice Hall, 1999.
7. Quinn, F.J. “Building a World-Class Supply Chain.” Logistics Online.
http://www.manufacturing.net/magazine/archives/1998/scmr/05brave.htm.

About the Author—
BRAD R. FERGUSON is currently a full-time undergraduate
in economics and finance at the University
of Indianapolis, Indianapolis, Indiana.

FIGURE 1: Integrated supply chain model (view .pdf file)