The Internet Encyclopedia (Volume 3)

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388 SUPPLYCHAINMANAGEMENTTECHNOLOGIES

Table 1Seven Principles of Supply Chain Management

1. Segment customers based on customer needs.


2. Customize the logistics network.


3. Listen to signals of market demand and plan
   accordingly.


4. Differentiate product closer to the customer.


5. Source strategically.


6. Develop a supply chain wide technology strategy.


7. Adopt channel-spanning performance measures.

Source: Anderson, 1997

The technology strategy for SCM is dependent on tech-

nology infrastructure decisions. These decisions must

be made in light of the entire supply chain.


Channel spanning performance measures can be suc-

cessfully implemented and monitored only if the tech-

nology is in place to allow timely tracking and control.

WHAT IS THE SUPPLY CHAIN?

The supply chain for a product (or service) is the system

of companies and business functions that it goes through,

from creation to delivery to the ultimate customer. For a

typical manufacturing company, the supply chain might

be modeled as follows:

Suppliers⇒Manufacturer⇒Distributor⇒Consumer

Most companies, however, have much more complex-

ity in their supply chains. This includes multiple levels of

suppliers (the supplier’s suppliers) and multiple levels of

distribution and finished goods warehousing before the

product gets to the ultimate customer (Figure 1).

As mentioned earlier, the traditional production man-

agement approach has been internally focused on the

manufacturing process within the firm. These efforts fo-

cused on improving production efficiencies and schedul-

ing. The goal of SCM is to eliminate costs from inventories

and shorten delivery times by developing closer linkages

between the production and actual consumption of the

product. This linkage strategy is quickly becoming one of

the primary competitive advantage strategies of business

today.

Without an extended SCM focus, each company in the

chain manages delivery service requirements by building

inventories, without regard (information) to what others

in the chain are doing. Unfortunately, this adds cost to the

product for storage and obsolescence when the product

is not consumed as rapidly as it is produced, or for ex-

pediting product when it is consumed more rapidly than

Suppliers

Suppliers/

Warehouses

Manufacturing

Mfg/

FG Warehouse

Distribution

Retailers/

Customers

Figure 1: Extended supply chain model.

expected. This is true at each link within the supply chain.

Each member attempts to optimize inventories based on

demand history or a limited view along the chain, us-

ing inventory management techniques like economic or-

der quantity. This can produce a phenomenon called the

“bull-whip effect” (Lee, Padmanabhan, & Seungjin, 1997),

which results in unexpected demand patterns for suppli-

ers from changes further down the chain.

The shift to a customer-centric paradigm, which has

occurred over the last several years, has changed the way

the supply chain is managed. More focus on the customer

has placed emphasis on ways to reduce product cost and

at the same time shorten cycle times throughout the entire

chain. Managing the entire supply chain as a single entity

is the goal of current SCM techniques. The ability to do

this is only available through expanded use of information

technology.

The benefits of effective SCM can be great in terms of

lower inventory costs, better production scheduling, and

ultimately higher profits for the participants. To make it

work effectively, members of the chain must have a great

deal of trust in one another. This is not easy to accom-

plish, however, because the traditional attitude between

businesses has been that negotiations must produce a win-

ner and a loser (Poirier & Reiter, 1996). Additionally, the

practice of “squeezing suppliers” for price reductions by

dominant members of the supply chain has exacerbated

the problem.

To better understand SCM technologies and how they

can be used to overcome some of these problems, a better

understanding of exactly what SCM is and how it func-

tions is helpful. A quick review of Michael Porter’s value

chain analysis model (Porter, 1985) is a good place to be-

gin this discussion.

SUPPLY CHAIN MANAGEMENT AND

THE VALUE CHAIN

Porter’s value chain model depicts activities within a firm

or industry that show how value is produced through the

creation of a product (or service). Primary activities in-

clude inbound logistics, operations, outbound logistics,

marketing and sales, and after-sales service. There are

also support activities related to the infrastructure of the

business, human resource management, and technology.

These activities create a product that has a value to the

marketplace that is determined by what customers are

willing to pay for it. The difference between the value of

the product and the costs associated with all the activities

required to produce that value represents the margin or

profit for the business. Value chain analysis deals with

how to maximize a firm’s profit by studying the costs as-

sociated with the various activities of the business, and

reducing or eliminating costs that do not add to the value

of the product (Noble, 1999).

You can view a supply chain in the same light as Porter’s

value chain. It takes the structure of the value chain be-

yond a single organization and expands the concept into

a value system. The supply chain is the system through

which multiple organizations deliver their products and

services to customers. These interlinked organizations,