Supply chain management

Supply chain management (SCM) is a key aspect of business strategy, especially where e-business is involved.

Many businesses prosper or fail depending on the success of their relationship with their suppliers and with those who they supply. Businesses that rely on other businesses to this extent are in what is called a supply chain - each supplying each other right up to the final link in the chain, the consumer. The internet can help make this relationship work more effectively and efficiently.

About supply chains

A supply chain encompasses all activities and information flows necessary for the transformation of goods from the origin of the raw material to when the product is finally consumed or discarded.

This typically involves distribution of the product from the supplier to the manufacturer to the wholesaler to the retailer and to the final consumer, otherwise known as nodes in the supply chain.

It is helpful to make a distinction between upstream and downstream supply chain management. For an Internet retailer, for example, upstream SCM would involve transactions between the firm and its suppliers (equivalent to buy-side e-commerce) and downstream, customers (equivalent to sell-side e-commerce).

The transformation of product from node to node includes activities such as:

• production planning
• purchasing
• materials management
• distribution
• customer service
• forecasting.

While each firm can be competitive through improvements to its internal practices, ultimately the ability to do business effectively depends on the efficient functioning of the entire supply chain.

Managing the chain

Managing the chain primarily concentrates on managing the movement of the following three areas:

• materials/inventory
• information
• funds.

Inventory control

Amongst other things, this will include a consideration of:

• number, location and size of warehouses and distribution centres
• production scheduling (including life cycle management to ensure that new products can be successfully integrated into the chain)
• a transportation strategy (in terms of routes, timing etc.)

Information management

The key elements of information required for successful supply chain management include:

• potential levels of end-user and customer demand
• daily production and distribution plans
• resource availability and utilisation

Fund management

For the system to work it needs to be sufficiently liquid at all nodes to ensure that bottlenecks are avoided and supply can be sustained. There also needs to be a strong relationship of trust between each party in the chain.

The Importance of Information Technology

IT plays an obvious role in providing, storing, managing and interrogating the information management part of supply chain management. But IT can provide aid for all of the areas that require consideration through systems such as e-procurement and customer relationship management, and there will also be links to other areas such as BPR, project management, organisational structure etc.

 Illustration

In the supply chain shown, ABC Manufacturing Ltd must be responsive to its customers. Direct supplier 1 and Direct supplier 2 must be responsive to ABC Manufacturing Ltd, and Indirect supplier 1 must be responsive to Direct supplier 2.

Obviously, if e-business capability is present in all members of the supply chain, management of the chain is becoming more feasible: selling, delivering, ordering, designing and manufacturing can all be linked electronically permitting:

• cost savings
• time savings
• faster innovation
• better marketing
• better quality.

Push and pull supply chain models

In the traditional supply chain model, the raw material suppliers are at one end of the supply chain.

• They are connected to manufacturers and distributors, who are in turn connected to a retailer and the end-customer.
• Although customers are the source of the profits, they are at the end of the chain in the 'push' model.

Driven by e-commerce's capabilities to empower clients, many companies are moving from the traditional 'push' business model, where manufacturers, suppliers, distributors and marketers have most of the power, to a customer-driven 'pull' model.

This new business model is less product-centric and more directly focused on the individual consumer - a more marketing-oriented approach.

• In the pull model, customers use electronic connections to pull whatever they need out of the system.
• Electronic supply chain connectivity gives end customers the opportunity to give direction to suppliers, for example, about the precise specifications of the products they want.
• Ultimately, customers have a direct voice in the functioning of the supply chain.

E-commerce creates a much more efficient supply chain that benefits both customers and manufacturers. Companies can better serve customer needs, carry fewer inventories, and send products to market more quickly.

Upstream SCM

The key activities of upstream SCM are procurement and upstream logistics.

e-procurement

The term 'procurement' covers all the activities needed to obtain items from a supplier: the whole purchases cycle:

• Identifying when items are needed, how many are needed and gaining authority to acquire them.
• Finding suitable suppliers.
• Choosing which supplier to order from.
• Agreeing the price or perhaps a range of prices depending on volumes.
• Ordering the goods with the chosen supplier(s).
• Receiving goods into the organisation.
• Checking the goods are as ordered and handling queries.
• Recording the goods in inventory or the fixed asset register as appropriate.
• Storing of goods.
• Receiving, checking and processing the supplier's invoice.
• Paying the supplier according to cash flow/cash discount priorities.

E-procurement is the term used to describe the electronic methods used in every stage of the procurement process, from identification of requirement through to payment. It can be broken down into the stages of e-sourcing, e-purchasing and e-payment.

E-sourcing covers electronic methods for finding new suppliers and establishing contracts.

Not only can e-sourcing save administrative time and money, it can enable companies to discover new suppliers and to source more easily from other countries.

Issuing electronic invitations to tender and requests for quotations reduces:

• administration overheads
• potentially costly errors, as the re-keying of information is minimised
• the time to respond.

E-purchasing covers product selection and ordering.

Buying and selling online streamlines procurement and reduces overheads through spending less on administration time and cutting down on bureaucracy. E-purchasing transfers effort from a central ordering department to those who need the products.

Features of an e-purchasing system include:

• electronic catalogues for core/standard items
• recurring requisitions/shopping lists for regularly purchased items. The standard shopping lists form the basis of regular orders and the lists can have items added or deleted for each specific order
• electronic purchase orders despatched automatically through an extranet to suppliers
• detailed management information reporting capabilities.

Improvements in customer service can result from being able to place and track orders at any time of day. An e-catalogue is an electronic version of a supplier's paper catalogue including product name, description, an illustration, balance in hand and so on. User expectations have increased dramatically in recent years as a result of their personal experiences of shopping on the internet. Well-designed web sites and web interfaces are essential to offer good functionality so as to maintain user satisfaction.

E-payment includes tools such as electronic invoicing and electronic funds transfers. Again, e-payment can make the payment processes more efficient for both the purchaser and supplier, reducing costs and errors that can occur as a result of information being transferred manually from and into their respective accounting systems. These efficiency savings can result in cost reductions to be shared by both parties.

Benefits and risks of e-procurement

The benefits of e-procurement

The more of the procurement process that can be automated, the better as there will be considerable financial benefits.

• Labour costs will be greatly reduced.
• Inventory holding costs will be reduced. Not only should overstocking be less likely, but if orders are cheap to place and process, they can be placed much more frequently, so average inventories can be lower.
• Production and sales should be higher as there will be fewer stock-outs because of more accurate monitoring of demand and greater ordering accuracy.

Other benefits include the following:

• The firm may benefit from a much wider choice of suppliers rather than relying on local ones.
• Greater financial transparency and accountability
• Greater control over inventories
• Quicker ordering, making it easier to operate lean or JiT manufacturing systems
• There are also considerable benefits to the suppliers concerned, such as reduced ordering costs, reduced paperwork and improved cash flow, that should strengthen the relationship between the firm and its suppliers.

Potential risks of e-procurement

There are some risks associated with e-procurement. These are:

• technology risks. There is a risk that the system (whether software or hardware) will not function correctly. There are risks that it might not interface properly with the organisation's system. There are very high risks that it will not communicate properly with a wide range of supplier systems
• organisational risks. Staff might be reluctant to accept the new procurement methods
• no cost savings realised. As with all IS/IT projects, it is very difficult to predict all the benefits that can arise. Tangible benefits (such as might arise if fewer staff have to be employed) are relatively easy to forecast. However, intangible benefits (such as better customer service giving rise to an improved reputation) are very difficult to estimate with any accuracy.

Restructuring the supply chain

A key aspect of strategic choice involves looking at outsourcing, vertical integration and strategic alliances, where the main issues relate to cost, quality and control.

These are still relevant for online businesses as much as for conventional 'bricks and mortar' organisations. All organisations must decide between:

• vertical integration - manufacturing in-house
• virtual integration - the majority of supply chain activities are undertaken by third parties
• virtual disintegration (disaggregation) - in between these two extremes.

However, Internet technology allows more efficient and cheaper communications within the chosen structure and may make virtual integration preferred to vertical integration

Downstream SCM

Downstream supply change management is about managing relationships with both customers and consumers, as well as any other intermediaries along the way.

Examples of downstream supply chain management actions are:

• providing displays for retailers
• creating a website for end users
• creating user forums on web sites
• determining which retailers and distributors to use
• use of different logistical methods/providers
• changes to finished goods inventory policies
• setting recommended retail prices
• giving retail exclusivity rights
• forward integration.

Advantages and disadvantages of downstream SCM

Dealing with intermediaries

A typical downstream for a manufacturer might involve selling to distributors, who then sell on to retailers, who in turn sell on to end users. Distributors and retailers are therefore intermediaries between the manufacturer and the consumer of the product. One element of supply chain management is to manage intermediaries.

• E-commerce can lead to disintermediation. In this process intermediate organisations (middlemen) can be taken out of the supply chain.
• The process of reintermediation is also found, i.e. new intermediaries are introduced to the value chain, or at least to some aspects of it.
• Countermediation is where established firms create their own new intermediaries to compete with established intermediaries.

Examples

An example of disintermediation is seen in the travel industry where travel agents have been cut out of many transactions as the public can book directly with hotels, airlines and rail companies.

The travel industry also gives an example of reintermediation. Companies like lastminute.com and expedia.com are like new travel agents, presenting a wide choice of products and services.

An example of countermediation is Opodo.com, set up by a collaboration of European airlines to encourage customers to book flights directly with them rather than using cost-comparison intermediaries such as lastminute.com.

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