Unformatted text preview: Tuck School of Business at Dartmouth Working Paper No. 02-09 November 11, 2001 Supply Chain Management: Integration and Globalization in the Age of eBusiness DAVID F. PYKE Tuck School of Business at Dartmouth M. ERIC JOHNSON Tuck School of Business at Dartmouth This paper can be downloaded from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract_id=307462 Supply Chain Management: Integration and Globalization in the Age of eBusiness M. Eric Johnson David F. Pyke Forthcoming in Manufacturing Engineering Handbook The Tuck School of Business Dartmouth College Hanover, NH 03755 603 (646) 2136 November 11, 2001 1 1. Introduction Supply chain management (SCM) refers to the management of materials, information, and funds across the entire supply chain, from suppliers through manufacturing and distribution, to the final consumer. It also includes after-sales service and reverse flows such as handling customer returns and recycling of packaging and discarded products (See Figure 1). In contrast to multiechelon inventory management, which coordinates inventories at multiple locations of a single firm, or traditional logistics management, SCM involves coordination of information, materials, and financial flows among multiple firms. Figure 1 about here Supply chain management has generated substantial interest in recent years for a number of reasons. Managers in many industries now realize that actions taken by one member of the chain can influence the profitability of all others in the chain. Competition has moved beyond firm-tofirm rivalry to supply chain against supply chain. Also, as firms successfully squeeze inefficiency from their own operations, the next opportunity for improvement is through better coordination with suppliers and customers. During the 1970’s and 1980’s global competition forced many manufacturing companies to improve the quality of their products and reduce their manufacturing costs. With 20 years of progress, many of these manufacturers found that the biggest challenges they faced in the new millennium were outside of their immediate control and solutions required better coordination with their upstream and downstream partners. While they have reduced their own costs, they found that costs of poor coordination could be very high. For example, both Proctor & Gamble and Campbell Soup sell products whose consumer demand is 2 fairly stable – the consumption of Pampers or Chicken Noodle Soup doesn’t swing wildly from week to week. Yet both these firms faced extremely variable demand at their factories. After some investigation, they found that the wide swings in demand were caused by the ordering practices of retailers, wholesalers, and distributors. For example, seeing a small increase in consumer demand, a few store stocking managers decided to place larger than usual orders at the retailer’s distribution center. The distribution center managers, not knowing the actual store demand, yet seeing the increase in orders, placed even larger orders with the wholesaler to ensure product availability. The snowballing effect was off and by the time it hit the factory, the demand was greatly exaggerated. (See Figure 2.) This phenomenon – termed the bullwhip effect – has many causes . Sometimes it is caused by supply chain members forecasting in isolation, as in the example above. Order batching may also set the snowball rolling since changes in demand are hidden. Some of these practices may be exacerbated by the marketing efforts of the company. For example, in the grocery industry, price promotions cause grocery chains to place very large orders – termed forward buying. These spikes in demand ripple through the supply chain causing shortages upstream while filling up downstream warehouses. Regardless of the cause, the end result is a greatly distorted demand signal for upstream members of the supply chain. These large demand swings erode order fulfillment and drive up costs. Fortunately, as discussed below, the bullwhip can be tamed through an integrative approach that employs timely information shared by supply chain partners and strong relationships that enable coordination . 3 Figure 2 about here Such inter-firm integration, long the dream of management theorists, finally began gaining momentum in the late 1990s. Some would argue that managers have always been interested in integration, but the lack of information technology made it impossible to implement a more “systems-oriented” approach. Industrial dynamics researchers dating back to the 1950’s (, ) have maintained that supply chains should be viewed as an integrated system. With the recent explosion of inexpensive information technology, it seems predictable that businesses would become more supply chain focused. However, while information technology is clearly an enabler of integration, it alone cannot explain the radical organizational changes in both individual firms and whole industries. A sea change in management theory was needed as well. Two fundamental catalysts have conspired over the past decade to initiate the required change in management theory. The first is the power shift from manufacturers to retailers. Wal-Mart, for instance, has forced many manufacturers to improve their inventory management, and even to manage inventories of their products in Wal-Mart stores and distribution centers. Following Wal-Mart’s lead, most major retailers are asking suppliers to tighten up their inventory management and improve their order fulfillment capabilities. Second, the Internet and associated eBusiness initiatives are forcing managers to rethink their supply chain strategies. eBusiness facilitates the virtual supply chain, and as companies manage these virtual networks, the importance of integration is magnified. Firms like Amazon.com are superb at managing the flow of information and funds, via the Internet and electronic funds transfer. Now, the challenge is to efficiently manage the flow of products. 4 2. Key Components of Supply Chain Management Supply chain management is really a whole set of topics covering multiple disciplines and employing many management and engineering tools. Within the last few years, several textbooks on supply chain have arrived on the market providing both managerial overviews and detailed technical treatments. For examples of managerial introductions to supply chain see ,  and , and for logistics texts see  and . For more technical, model-based treatments see  and .  is an extensive collection of research papers while  is a collection papers on teaching supply chain management. Also, there are several casebooks that give emphasis to global management issues including , , and . Introductory articles include , , , and . Research in supply chain management has identified twelve distinct management areas that are associated with the subject. Each area represents a supply chain issue facing the firm. For each area, we provide a brief description of the basic content and refer the reader to a few articles that apply. We also mention likely quantitative tools that may aid analysis and decision support. See  for a more detailed description of these twelve areas with references to academic research, management and popular press stories, and related teaching cases. For a more detailed review of recent research in supply chain management see . 5 The twelve categories we define are • • • • • • • • • • • • location transportation and logistics outsourcing and logistics alliances sourcing and supplier management marketing and channel restructuring inventory and forecasting service and after sales support reverse logistics and green issues product design and new product introduction information and electronic mediated environments metrics and incentives global issues. Location pertains to the vast set of issues facing a firm in a facility location decision. Of the twelve categories, decisions in this area have perhaps the longest time horizon. Decisions at this level set the physical structure of the supply chain and thus create constraints for more tactical decisions, such as transportation, logistics and inventory planning. Engineering tools such as mathematical models of facility location and geographic information systems (GIS) are very useful in sorting through the many important quantitative and qualitative differences between location choices including country differences, taxes and duties, transportation costs associated with certain locations, and government incentives (). Exchange rate issues fall in this 6 category, as do economies and diseconomies of scale and scope, labor availability and skill, and quality of life issues for employees. Mathematical optimization using binary integer programming models play a role here, as do simple spreadsheet models and qualitative analyses. There are many advanced texts specially dedicated to the modeling aspects of location () and most books on logistics also cover the subject.  presents a substantial treatment of GIS while  dedicates a chapter to issues of taxes, duties, exchange rates, and other global location issues.  examines several software products that provide optimization tools for solving industrial location problems. Transportation and logistics includes all issues related to the physical flow of goods through the supply chain, including transportation, warehousing, and material handling. Decisions in this category assume that location decisions have been made; the firm has decided where to operate factories, distribution centers and retail outlets. However, the two categories interact when managers determine which mode of transportation to use, and which factory, say, will supply a given distribution center. This category addresses many of important choices related to transportation management including vehicle routing, dynamic fleet management with global positioning systems, and merge-in-transit. Also included are topics in warehousing and distribution such as cross docking, vendor hubs () and materials handling technologies for sorting, storing, and retrieving products. Both deterministic models (such as linear programming and the traveling salesman problem) and stochastic optimization models (stochastic routing and transportation models with queueing) are used here, as are spreadsheet models and qualitative analysis. Recent management literature has 7 examined the changes within the logistics functions of many firms as the result of functional integration () and the role of logistics in gaining competitive advantage (). With growing numbers of firms involved with the global management of materials, outsourcing of logistics services has become very popular. However, because of the importance of logistics outsourcing, we devote a separate category specifically to it. Outsourcing and logistics alliances examines the supply chain impact of outsourcing logistics services. With the rapid growth in third party logistics providers, there is a large and expanding group of technologies and services to be examined. These include fascinating initiatives such as supplier hubs managed by third parties. The rush to create strategic relationships with logistics providers suggests that issues in this category will be important for some time, and yet several well-published failures have raised questions about the future of such relationships. (See , .) Broadening the outsourcing discussion beyond logistics services, the sourcing and supplier management category addresses the issue of outsourcing components and the management of the suppliers who provide them. Make/buy decisions (, , , , and ) fall into this category. These decisions should involve top managers and strategic thinkers because they can literally define the future of the firm. Witness the decision of IBM to outsource its PC operating software to Microsoft and its central processing unit to Intel! Global sourcing also falls in the sourcing and supplier management area. While the location category addresses the location of a firm’s own facilities, this category pertains to the location of 8 the firm’s suppliers. Once a decision is made to outsource a given component, and a supplier is chosen, the firm must carefully manage its relationship with the supplier ( and ). We have observed two competing trends in recent years. On the one hand, some firms are posting part specifications on the Internet so that dozens of suppliers can bid on jobs. GE, for instance, has developed a trading process network that allows many more suppliers to bid than was possible before. The automotive assemblers have developed a similar capability called Covisint; and independent Internet firms, such as Ariba and Commerce One, are providing similar services focused on certain product categories. On the other hand, some firms are reducing the number of suppliers, in some cases to a sole source ( and ). Determining the number of suppliers and the best way to structure supplier relationships is becoming an important topic in supply chains (, , and ). While the sourcing and supplier management category addresses upstream relationships, marketing and channel restructuring focuses downstream. It includes critical decisions related to getting the products from a firm’s factories all the way into the customers’ hands. As with facility location, these decisions impact the supply chain structure () as well as define an interface with marketing (). While the inventory and forecasting category addresses the quantitative side of these relationships, this category covers relationship management, negotiations, and even the legal dimension. Most importantly, it examines the role of distribution strategy and channel management (), affecting the availability of products at the retail level while defining the way information and materials flow through distribution. 9 Many industry initiatives (for example, Efficient Consumer Response (ECR) in groceries or Quick Response in apparel) have focused on managing the channel as they strive to mitigate the bullwhip effect. The bullwhip effect has received enormous attention in the research literature. Many earlier studies argued that centralized warehouses are designed to buffer factories from variability in retail orders. The inventory held in these warehouses should allow factories to smooth production while meeting variable customer demand. However, empirical data suggests that exactly the opposite happens. (See for example , and .) Orders seen at the higher levels of the supply chain exhibit more variability than those at levels closer to the customer. In other words, the bullwhip effect is real and pervasive. Some recent innovations, such as increased communication about consumer demand, via electronic data interchange (EDI) and the Internet, and everyday low pricing (EDLP) (to eliminate forward buying of bulk orders), can mitigate the bullwhip effect. In fact, the number of firms ordering, and receiving orders, via EDI and the Internet is exploding. The information available to supply chain partners, and the speed with which it is available, has the potential to radically reduce inventories and increase customer service. Other initiatives can also mitigate the bullwhip effect. For example, changes in pricing and trade promotions () and channel initiatives, such as vendor-managed inventory (VMI), coordinated planning, forecasting and replenishment (CPFR), and continuous replenishment (, , ), can significantly reduce demand variance. Vendor Managed Inventory is one of the most widely discussed partnering initiatives for improving multi-firm supply chain efficiency. Popularized in the late 1980s by Wal-Mart and Procter & Gamble, VMI became one of the key programs in the grocery industry’s pursuit of ECR and the garment industry’s Quick Response. Successful VMI initiatives have 10 been trumpeted by other companies in the United States, including Johnson & Johnson, and by European firms like Barilla (the pasta manufacturer). In a VMI partnership, the supplier—usually the manufacturer but sometimes a reseller or distributor—makes the inventory replenishment decisions for the consuming organization. This means the supplier monitors the buyer’s inventory levels (physically or via electronic messaging) and makes periodic resupply decisions regarding order quantities, shipping, and timing. Transactions customarily initiated by the buyer (like purchase orders) are initiated by the supplier instead. Indeed, the purchase order acknowledgment from the supplier may be the first indication that a transaction is taking place; an advance shipping notice informs the buyer of materials in transit. Thus the manufacturer is responsible for both its own inventory and the inventory stored at its customers’ distribution centers. Because many of these initiatives involve channel partnerships and distribution agreements, this category also contains important information on pricing, along with anti-trust and other legal issues. These innovations require interfirm, and often intrafirm, cooperation and coordination that can be difficult to achieve. Inventory and forecasting includes techniques for ongoing inventory management and demand forecasting. Industrial engineers and operations managers have long employed statistical models for forecasting and inventory planning. Inventory costs are often the easiest to identify and reduce when attacking supply chain problems. Stochastic inventory models can identify the potential cost savings from, for example, sharing information with supply chain partners (), but more complex models are required to coordinate multiple locations. Of course there are 11 many full texts on the subject such as  and ). Useful managerial articles focusing on inventory and forecasting include  and . The service and after sales support category covers the important, but often overlooked, issue of providing service and service parts. Some leading firms, such as Saturn and Caterpillar, build their reputations on their ability in this area, and this capability generates significant sales (). Stochastic inventory models for slow-moving items fall into this category. While industry practice still shows much room for improvement, several well-known firms have shown how spare parts can be managed more effectively ( and ). Reverse logistics and green issues are emerging dimensions of supply chain management (). This area examines both reverse logistics issues of product returns ( and  and environmental impact issues (). Direct shipment from products ordered over the web have created many new and important problems in economically handling customer returns. For products such as home furniture, management of product returns has proven to be the most vexing issue facing on-line retailers . Growing regulatory pressures in many countries are forcing managers to consider the most efficient and environmentally friendly way to deal with product recovery. The term “product recovery” includes the handling of all used and discarded products, components and materials.  notes that product recovery management attempts to recover as much economic value as possible, while reducing the total amount of waste. The authors also provide a framework and a set of definitions that can help managers think about the issues in an organized way (see Figure 3). These 12 authors examine the differences among various product recovery options including repair, refurbishing, remanufacturing, cannibalization, and recycling.  provides a review of quantitative models for reverse logistics. Figure 3 about here The product design and new product introduction category deals with design issues for mass customization, delayed differentiation, modularity and other issues for new product introduction. With the increasing supply chain demands of product variety () and customization (), there is an increasing body of research available. One of the most exciting applications of "supply chain thinking" is the increased use of postponed product differentiation (). Traditionally, products destined for world markets would be customized at the factory to suit local market tastes. While a customized product is desirable, managing worldwide inventory is often a nightmare. Using postponement the product is redesigned so that it can be customized for local tastes in the distribution channel. The same generic product is produced at the factory and held throughout the world (Figure 4). Thus if the French version selling well, but the German version is not, German products can be quickly shipped to France and customized for the French market. Many times products can even be customized for individual customers or sales channels . Figure 4 about here In a fascinating interaction with the reverse logistics and green issues category, some firms are beginning to consider design for the environment (DFE) and design for disassembly (DFD) in 13 their product development processes. Unfortunately, AT&T discovered that designing products for reuse can result in more materials and complexity, thereby violating other environmental goals. (See , who also reports on product takeback and recycling initiatives in numerous countries.) Initiatives in this category have clear implications for product cost () and inventory savings. Inventory models are often used to identify some of the benefits of these initiatives. Also important are issues related to managing product variety () and managing new product introduction and product rollover (). The information and electronic mediated environments category addresses the impact of information technology to reduce inventory (, and the rapidly expanding area of electronic commerce ( and ). Often this subject takes a more systems orientation, examining the role of systems science and information within a supply chain (). Such a discussion naturally focuses attention on integrative ERP software such as SAP and Oracle (), as well as supply chain offerings such as Manugistics, i2’s Rhythm and Peoplesoft’s Red Pepper. The many supply chain changes wrought by electronic commerce are particularly interesting to examine, including both the highly publicized retail channel changes (like Amazon.com) and the more business to business innovations that are fundamentally changing the power structure in many supply chains . Metrics and incentives refer to the measurement of both engineering and organizational processes and the related economic motivations. Because metrics are fundamental to business 14 management, there are many reading materials outside of the supply chain literature, including accounting texts for instance. Several recent articles concentrate on the link between performance measurement and supply chain improvement (, ). Finally, global issues considers the issues beyond local country specific operating environments, to encompass issues related to cross-border distribution and sourcing. For example, currency exchange rates, duties & taxes, freight forwarding, customs issues, government regulation, and country comparisons are all included. Of course the location category, when applied in a global context, also addresses some of these issues (). As we mentioned earlier, there are several texts devoted to global management and many recent articles also examine challenges in specific regions of the world (for example, Asia --  or Europe -- ). 3. Conclusion Supply chain management is indeed a large and growing field for both engineers and managers. Nearly all major management consulting firms have developed large practices in the supply chain field, and the number of books and academic research papers in the field is growing rapidly. In fact, each of the twelve areas covered in our treatment of supply chains are important in themselves. While these areas may appear to be somewhat disparate, they are all linked by the integrated nature of the problems at hand. Large firms today operate in global environments, deal with multiple suppliers and customers, are required to manage inventories in new and innovative ways, and are faced with possible channel restructuring. Finally, the Internet 15 continues to change many fundamental assumptions about business, pushing managers to continue to evolve their supply chain practices or find themselves driven out the of the market. 16 References 1. Lee, H., P. Padmanabhan, and S. 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Orders Supply Production Distribution Retail Product Customer Requirements Designs/ Blueprints New Product & Process Development Recycle Reuse Remanufacture Figure 1. A Schematic of a Supply Chain 26 The Bullwhip Effect
800 700 Order Size (Units) 600 500 400 300 200 100 0 1 2 3 4 5 67 Month 8 9 10 11 12 Central Warehouse Distribution Center Grocery Store Figure 2. An Illustration of the Bullwhip Effect 27 Raw Materials Parts Fabrication Modules Subassembly Product Assembly Distribution Users Recycle Cannibalize Remanufacture Refurbish Repair Reuse Landfill Figure 3. Product Recovery Options (adapted from Thierry et al. (1995)). 28 Retailer
North America Distribution Center Retailer Retailer Retailer Supplier Supplier Supplier Fabrication and Final Assembly and Test Japan Europe Distribution Center Retailer Retailer 14 Weeks 4 Weeks 1 Week 1 Week Supplier Supplier Supplier Customization and Test Fabrication and Assembly of Generic Products Japan
North America Distribution Center Retailer Retailer Retailer Customization and Test
Europe Europe Distribution Center Retailer Retailer 14 Weeks 4 Weeks 1 Week 1 Week Figure 4. Using postponement a product destined for both US and Europe markets is redesigned so that local content can be added to a common platform within distribution (adapted from Johnson & Anderson (2000)). 29 ...
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