Understanding Supply Chains by Ray Carter

Supply chains have existed for thousands of years, from the ancient Silk Route through to the excellence of the UK retailers. In many instances the competition that once characterised industry and commerce has been greatly diminished. Many organisations now fully appreciate that they are not competing on the basis of company X v company Y. Today it is whole supply chains that compete with each other for global markets and global dominance. Choi and Hartley (1996) state that the members of a supply chain face different competitive environments, which are defined as the different requirements of buyers or product markets. Therefore the study and understanding of supply chains has become of critical importance. “Companies are no longer the units in the competitive battle; supply chains compete with each other” (Christopher, 1992). No process can be improved or developed, unless it is first completely understood. We need to fully understand supply chains in terms of the key concepts, practices and theories that surround the overall process.

Charles Poirier states “Supply chain management has emerged as one of the most powerful business improvement tools available today. This would seem to indicate that while organisations realise the need for supply chain management concepts, the issue of implementation has yet to be fully tackled. Much effort has been expended on supply chain improvement over the past decade, when the practices were described under such labels as partnering, logistics re-engineering, process re-design, or distribution-channel improvement”. Yet in a recent survey conducted by Supply Management it found that: “Less than a quarter (22 per cent) of respondents has a dedicated supply chain manager. In fact, 35 per cent of companies have supply chain responsibility spread out among a variety of department heads. In 9 per cent of companies, overall responsibility for supply chain management rests only at board level”. Another recent study, this time by Anderson Consulting, discovered that in the retail sector, 90% of respondents identified improving the supply chain as their number one area of focus. We can see here that the nature of the business sector has a direct impact o the importance and status of supply chain management. The research also found that 75% of companies surveyed realised the need to integrate the supply chain as a key challenge for the future.

Supply Chains Defined

There are many definitions and descriptions of what a supply chain is. Some focus on the physical aspects of the process and have their roots in the transformation of traditional, physical, logistical entities, through to definitions that describe supply chains in terms of intellectual networks and virtual organisations. John Gattorna states: “The traditional view of logistics was very narrowly defined. It focused on the physical movement of goods and (more recently) information, from suppliers to customers and their consumers. This led to a pre-occupation with internal functions and processes within the firm in the name of increased efficiency”.

In an article by Groom, Romano and Giannakis (2000) a review of supply literature produced a sample of the definitions from well known authors in the field (see Fig 1):

A sample of definitions of supply chain management

Authors	Definition
Tan et al. (1998)	Supply chain management encompasses materials/supply management from the supply of basic raw materials to final produce (and possible recycling and re-use). Supply chain management focuses on how firms utilise their suppliers' processes, technology and capability to enhance competitive advantage. It is a management philosophy that extends traditional intra-enterprise activities by bringing trading partners together with the common goal of optimisation and efficiency.
Berry et al. (1994)	Supply chain management aims at building trust, exchanging information on market needs, developing new products, and reducing the supplier base to a particular OEM (original equipment manufacturer) so as to release management resources for developing meaningful, long term relationship.
Jones and Riley (1985)	An integrative approach to dealing with the planning and control of the materials flow from suppliers to end-users.
Saunders (1995)	External Chain is the total chain of exchange from original source of raw material, through the various firms involved in extracting and processing raw materials, manufacturing, assembling, distributing and retailing to ultimate end customers.
Ellram (1991)	A network of firms interacting to deliver product or service to the end customer, linking flows from raw material supply to final delivery.
Christopher (1992)	Network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer.
Lee and Billington (1992)	Networks of manufacturing and distribution sites that procure raw materials, transform them into intermediate and finished products, and distribute the finished products to customers.
Kopezak (1997)	The set of entities, including suppliers, logistics services providers, manufacturers, distributors and resellers, through which materials, products and information flow.
Lee and Ng (1997)	A network of entities that starts with the suppliers' supplier and ends with the customers' custom the production and delivery of goods and services.

This spread and depth of study is a further indication of the growing importance of supply chains as a field of credible research. G Capaldo et al confirm this view with "the weight which externalisation strategies and collaboration have assumed in the creation of value for firms. Typically, the incidence of purchasing costs from suppliers is around 60% for an OEM (Original Equipment Manufacturer). What is more, many products are made up of a system of numerous components realised via a complex network of activities within which many different firms interact".

Classic Definitions

“Supply Chain Management is the efficient and effective management of the flow of product, services, materials, information and funds from their sources to their end customers. The goal of Supply Chain Management is to create competitive advantage by satisfying the customer while achieving optimal operational cost levels and asset performance”. This definition attributed to the CIPS is interesting in that it starts upstream (that is away from the customer) and its goal is limited to only satisfying the customer, whereas the definition provided by Frank Lalonde begins with a much more downstream focus. “The delivery of enhanced customer and economic value through synchronised management of the flow of physical goods and associated information from sourcing to consumption". Here we can see the focus is on customer value and synchronised management, however this definition also relates closely to the traditional physical (logistical) process.

Poirer & Reiter describe supply chains as “a system through which organisations deliver their products and services to their customers”. Here again we can see this focus on the physical aspects in the form of delivery. Both of these definitions seem not to realise the inherent value that could be contained within the supply chain.

Davis gives us a much more comprehensive and all embracing definition:

“Supply chain management is defined as a process for designing, developing, optimising and managing the internal and external components of the supply system, including material supply, transforming materials and distributing finished products or services to customers, that is consistent with overall objectives ad strategies. Analytically, a supply chain is simply a network of material processing cells with the following characteristics: supply, transformation and demands”.

Alastair Charaton comes back to basics with “Supply Chain Management is ultimately about meeting customer demand as effectively as possible. He believes that “the key to effective Supply Chain Management is supply-chain integration – ensuring that all parts of the supply-chain work together, rather than at cross-purposes”.

Many other writers in the field come back time and again to this theme of co-operation and integration across the supply chain, to enable the organisations within the supply chain to be able to delight the customer and yet make profits.

Cox & Hines perceive supply chains in terms of “A process of realignment of activities, from each firm’s point of view, in order to reduce value losses, so that the output from the total chain satisfies the consumer and results in the success of all parties to the chain”. However, a pan-European survey by consultants Arthur D Little reveals businesses appreciate the value of an integrated supply chain, but face major barriers to its implementation. Results show that 52% of companies said that 'resistance to change' was th most common cause of difficulty in supply chain management, while other organisational issues, such as the 'complexity of supply chain management', inappropriate organisational structures' and 'poor alignment of objectives' closely follow.

In the same survey the key finding of the study into European supply chain practices were:

• Supply chains are recognised as major opportunities for business improvement.
• Supply chains must be managed differently in different industries.
• Organisational problems are the main obstacle.
• Speed, reliability and customer satisfaction at low cost are the challenges for the hyperdynamic market of the future.

From a practical perspective, Dupont’s Director of Logistics states:

“Supply chain management as a loop: ‘It starts with the customer and it ends with the customer’. Through the loop flows all materials and finished goods, all information, even all transactions. ‘It requires looking at your business as one continuous process’.

Another practitioner, Bjorn Bastrom of Ericsson's states: "supply chain success is knowing your customers and the market in which they operate".

Charles Poirier describes supply chains in terms of networks, he states “organisations have formed networks for sourcing raw materials, manufacturing products or creating services, storing and distributing the goods, and ultimately delivering the products and services to customers and consumers".

Lawrence Christensen of Safeways states: "an efficient supply chain delivers real competitive advantages".

Cox & Hines state that “the alternative to the supply chain is the network, in which firms play several roles simultaneously".

At this stage it would be useful to separate the physical description of a supply chain from the management of supply chains. Many definitions seem to link the two concepts together, which can cause confusion as to where the physical aspects take over. We could describe a supply chain as “a network of organisations and individuals, interrelated and linked at both the physical and intellectual level. These networks come into line for the purpose of delivering value to the customer, at an acceptable rate of return”.

And the management of supply chains as “the process of enabling, energising and co-ordinating member organisations and individuals through the application of SCM principles, to ensure customer delight and the efficient utilisation of resources”

The consultants, Arthur D Little, also take the view that supply chains and supply chain management should be defined separately. They describe supply chains as "the integrated and coordinated flows of goods from source to destination, as well as the information and money flows that are associated with it", and supply chain management in terms of its aim, which is ¨"maximising value contribution to the customer while simultaneously optimising infrastructural and operational costs of the supply chain. Supply chains are business process combinations of sourcing, making, delivery and planning processes."

Spekman, Kamauff Jr and Myhr state: "we are witnessing a transformation in which suppliers and customers are inextricably linked throughout the entire sequence of events that bring raw material from its source of supply, through different value-adding activities to the ultimate customer. Success is no longer measured by a single transaction; competition is, in many instances, evaluated as a network of cooperating companies competing with other firms along the entire supply chain (Spekman et al., 1994)

From a purely commercial perspective “supply chains are energised by customer demand, yet driven by profit”

What Supply Chains Look Like

Supply chains can be illustrated and represented in several ways. The use of a "flow style" format helps to illustrate the concept of material and information flows, along with the perception that supply chains are made up of many individual, yet hopefully cooperating organisations. Here are some examples:

• This illustration, developed by Hughes, Rolf and Michaels tends to highlight the flow aspect of the supply chain. It is however a simple representation and obviously the designers intended it to be so.
• Spekman et al (1998) have focused on the internal supply chain in this illustration.
• Martijn et al (1998) have used the Dutch Potato supply chain to illustrate some of the basic aspects of the supply chain, flow of materials, upstream and down stream activities and the various pathways to the consumer.
• Joe Sanderson (1999) has used the Electrical Supply Industry to describe the supply chain in terms of functional stages and key resources.

Primary Fuel	Generation	Transmission	Distribution	Supply
Licensed access to specific sites	Technical skills to ensure efficient use of fuel and plant	Free access to land on which network infrastructure is based	Free access to land on which infrastructure is based	Efficient and secure system for managing customer data
Expertise in finding and exploiting those sites as efficiently as possible	Expertise in repair and maintenance to minimise 'downtime'	Technical skills to ensure safe, reliable and efficient operation	Technical skills to ensure safe, reliable and efficient operation	Understanding of specific customer requirements
Ability to provide a reliable supply of satisfactory quality	Access to specific sites for efficient fuel delivery and electricity transfer	Licence to operate	Licence to operate	Strong negotiation and contract management skills
	A diversity of plant			Good reputation, strong brand identity

Types of Supply Chains

Hughes, Ralf & Michaels have identified nine types of supply chains that can be identified across a wide range of sectors. This provides us with a useful description of the variety of supply chains that exist and also to be able to speculate about the types of supply chains that dominate particular sectors or markets.

1	Arm's length, open competition
2	Commodity trading: A sells to B sells to C, sells to A
3	Partnering for customer delight
4	From suppliers' suppliers to customers' customers
5	Lean supply chains and systems integration
6	Competing constellations of linked companies
7	Interlocking network supply between competitors
8	Asset control supply: dominate or die
9	Virtual supply. No production, only customers

For example, we can expect to see type (3) in many of the advanced manufacturing industries, whereas the more traditional aerospace industry probably has a pre-dominate of (1). The major retail organisations such M&S and JS have adopted type (5).

In SCM terms, Arthur D Little's experience shows that there are five different business 'types', each characterised by the extent to which it has adopted SCM techniques. For each type, specific SCM concepts can be prescribed which will enable it to overcome its dominant business problems. The five types are set out below:

Supply Chain Structure	Desperado	Integrator	Architect	Core focus	Virtual
ROCE	4%	8%	16%	45%	50%
Dominant Pain	Loss of sales Low service quality High stock level	Capacity utlisation low High stock levels	Global presence required High capital need innovation pressure Slow growth	Markets served not growing Increasing ROCE	Opportunities: High ROCE potential Very low capital needs
	Low efficiency	Low efficiency Service quality not competitive	Margin erosion	expectations Limited access to capital	Exchangeability of partners Enter many sales channels and micron markets
SCM Actions	Manufacturing stability Planning process Supplier management Close gaps in IT systems install SCM metrics and measure	New supply chain structure Centre of competence in manufacturing Company wide seamless IT Data exchange with external partners Transparency for all participants	New sales channel with E-commerce New modular product, co-developed Customisation to order Direct delivery to customer ex plant Customers/suppliers integrated in IT	Increase outsourcing, reduce capital employed intensify partnership agreements Focus on branding, marketing, sales and R&D	Threats: High dependency on partners No direct impact on product quality Danger of copying the concept Reputation damage

Notice that the greater the level of SCM integration, the greater the ROCE.

Many of these approaches to supply chain management have the overall objective of elimination of costs and service failures, by the use of new technology and modern supply chain management concepts. However, organisations that focus primarily on the internal efficiency aspect of SCM and not the added value and service to the customer are bound to fail. The development of any supply chain must be driven by the concept of customer delight and not just cost reduction.

The transformation of supply chains from the traditional schedule push dominated process to the modern 'lean approach' (see Fig 2).

SUPPLY CHAINS

Present	Future
Schedule Push	Demand Pull
Satisfaction	Delight
Standards	Variety
Long	Short
JIC	JIT
Multi-source	Single Source
Procurement Interface	Empowered Customers
Procurement Interface	Empowered Customers
Cost-Based	Value
Efficient	Effective
Price	Time to Market

Many organisations have moved significantly toward the future in terms of supply chain organisation and management. This transformation has to a greater or lesser extent, been driven by competitive pressure and the development of new technology.

From a historical perspective, the development of supply chains can be traced from the traditional supply organisations of the late 1960's to virtual supply chains of the new millennium (see Fig 3).

Characteristics	Traditional Supply 1960’s	Logistics 1980’s	Supply Chains 1990’s	Value Chains
Organisation	Fragmented	Co-operative	Unified	Virtual
Relationships	Adversarial	Co-existence	Partnerships	Extended enterprise
Focus	Physical Movement	Cost	Customer satisfaction	Customer delight
Role of technology	Accounting based	Control systems	Linkage of customers and supplies	Seamless process
People	Non-specialist	Technical	Professional	Commercial
Process	Efficient	Effective	Both	Adding value

This table illustrates how the focus of the supply chain has shifted from the purely physical operation to the customer delighting and adding value aspects.

The competitive pressure of the last decade, compounded by the spector of e.commerce, virtual organisation and global competition may have seen improvements in supply chains as the key to a sustainable competitive advantage.

Poirier and Reiter have identified four ‘schools of thought’ (see fig 1) as to how supply chain management can deliver the holy grail of competitive advantage.

School	Focus	Competitive Advantage
Process	Efficiency and shorter cycle times	Innovative products and first to market
Cost	Extracting every possible cost saving	Price advantage
Technology	New technology to link all members of the supply chain	Information
Demand	Demand pull	Cost and service

Many experts believe, including the major consultancies, that the successful implementation of advanced supply chain management requires four crucial success factors to be in place – and in balance:

• Collaboration
• Technology
• Structural 'backbone'
• Functional excellence

Lean Supply Chains

Some experts have made supply chain management a key part of the drive for a 'lean' approach. The work of Jones and Woods is particularly significant in this field. They have identified the Five Principles of 'lean' thinking.

The Five Principles of ‘Lean’ Thinking

Five principles which are fundamental to the elimination of waste:

• Specify what does and does not create value from the customers
• Perspective and not from the perspective of individual firms, functions and departments
• Identify all the steps necessary to design, order and produce the product across the whole Value stream to highlight non-value-adding waste
• Make those actions that create value flow without interruption, detours, backflows, waiting or scrap
• Only make what is pulled by the customer just-in-time
• Strive for perfection by continually removing successive layers of waste as they are uncovered

Martine Christopher (1999) states: "Lean is about doing more with less and is often used in connection with lean manufacturing to imply a 'just-in-time' approach to the business".

The second of these relating to the concept of the “Value Stream” scopes out the extent of the supply chain, from conception to final customer. The last 3 principals are to be regarded as the overall purpose and objectives of lean supply chain management. Initial emphasis in the lean approach to supply chain management is that of waste elimination. Much of these ideas about waste and non-value added activities in the supply chain come from Taichii Ohno of the Toyota Manufacturing Company of Japan. It is interesting to note that despite the focus on elimination of waste, the first (and most important) principle of lean supply chain management is that of customer focus and perspective.

Best Practice

The automotive industry is extremely advanced in its application of supply chain management techniques. After the logistics services sector, it is the industry with the highest rate of SCM software use. This has resulted in significantly lower inventory levels and shorter lead times. As far as supply chain activities are concerned, the automotive industry is clearly a best-practice example.

Lean v Agility Debate

Currently the debate between the attributes of Lean v Agile supply chains is in full flow. Martin Christopher (1999) defines agility as:

"rapid strategic and operational adaptation to large scale, unpredictable changes in the business environment"

The debate is framed around the argument that whereas in the past the focus has been on developing lean supply chains, characterised by standardisation, predictable demand, today and in the future, the focus will be on variety, small batches and the new concept of "mass customerisation".

In supply chain terms the need to be agile is a function of the predictability of the environment and the degree of variety and customerisation

Agile or Lean?

In circumstances of unpredictable environments and empowered customers then the need for an agile approach is essential, whereas stability and standardisation drive the supply chain toward the lean approach.

In the future supply chains may well be being driven by a range of key factors, (see Fig) all of which are tending to push supply chains toward the agile methodology.

• Turbulent markets that change rapidly and unpredictably
• Highly fragmented 'niche' markets instead of mass markets
• Ever greater rates of technological innovation in products and processes
• Shorter product life-cycles
• Growing demand for tailored products, 'mass customisation'
• The delivery of complete 'solutions' to customers, comprising products and services

Source: Logistics Today

Some experts believe that supply chains must become like any typical agile organisation. They must:

• Focus on cost-effective processes providing compelling value to the customer.
• Be extensively connected with suppliers, customers and third parties (eg logistics service providers).
• Learn continually and use the acquired knowledge to increase customer value.
• Have people, processes and systems that are adaptive, flexible, empowered, and innovative.

The supporters of the lean school tend to counter with the fact that many organisations who proport to adopt an agile supply chain strategy, tend in fact to have more stable and predictable demand than would first seem apparent. They also tend to concentrate on a small part of the supply chain, rather than the more holistic view of the lean supply school.

Agile v Lean Mindsets

Professor Alan Harrison of the Cranfield School of Management has identified five main differences in emphasis in the supply chain between agile and lean mindsets:

Mindset	Agile	Lean
Primary goal?	Meeting customer demand	Elimination of waste
How do linkages work?	Partners reconfigure according to need and opportunity	Fixed long term partnerships
How is performance Measured?	Customer facing metrics (eg orders met on time)	Quality and productivity
How is work planned and controlled?	Immediate interpretation of demand	Balance resources, Synchronise material movements

Professor Harrison maintains that the research undertaken by Cranfield does not imply that lean supply organisations are no longer fit for purpose. It does however highlight that supply chains are primarily driven by the customer and that the agile approach does bring the customer into sharp focus. In very simple terms, lean tends to emphasise cost, quality and waste elimination, whereas agile tends to focus on customer delight, but at a price.

In a recent article by Mark Whitehead he has identified the key differences between the lean and agile approach. (See Figure 4).

The Main Differences

Lean	Agile
Satisfy the customer by eliminating waste	Satisfy the customer by configuring to order
Long-term relationships with suppliers	"Fluid clusters" of supplies
Measure output criteria (eg quality, cost and delivery)	Measure customer satisfaction
Smooth workflow	Allow for unpredictability
Reduce stocks to a minimum throughout	Supply chain stock reduction is not the key

The concept of a supply chain is still one that has yet to fully develop, and the process of supply chain management as a discipline (like marketing) is still not yet widely accepted. There is still a need for a theoretical model of what a supply chain is.

The well-known Forrester's effect model is a good example of the dynamics of the supply chain and how such a model helps us to understand the phenomenon of materials flow across the supply chain.

Period economic swings are inevitable in business and must be taken into account, but organisations themselves generally increase their vulnerability by inducing unreal business cycles and even further, amplify them by localised protective policies including buffer stocks.

In the case of organisations with long international supply chains, this means that many of the stakeholders in the supply chain such as manufacturers, distributors, distribution centres etc, are further away from the end user of the products. In an example like this, the swings in demand are greater. The effects experienced by organisation are the culmination of:

• Time delays
• Planning distortions
• Inventory movements

The Forrester Effect

The overall effect of this phenomena are as follows:

• An upswing in demand produces shortages somewhere on the supply chain, not necessarily a customer shortage, but certainly inventories falling below a predetermined target level.
• The normal reaction to any threat of a shortage is local protection, the most frequent symptom of which is over ordering which leads the excessive buffer stocks.
• Since most internal forecasting mechanisms are order-book driven, this surge in ordering will most likely have an impact on the new forecast and serve to distort further the internal perceptions of the upswing and growth in demand.
• Additionally, the conventional wisdom is that unreliable delivery should be compensated for by additional inventory investment.

This is yet another source of "demand" and further distort the demand profile.

The above characteristics are prevalent in simple, single organisational supply chains, but they are all the more apparent in international supply chains because:

• greater complexities involved in integrating systems, data flows, functional objectives, and local attitudes
• the sheer length of the supply chain and the large number of intermediaries

The above external and internal vulnerabilities are serious threats to the effectiveness of an international supply chain.

They are the principal contributors to a lack of performance in the supply chains causing:

• inadequate customer service
• high working capital investment
• excessive supply costs

The supply chain must be integrated with mutual objectives and policies for all the activities, both internal and external, throughout the supply chain.

Service, capacity and inventory must be strategically balanced using real-time reliable data.

The "Bullwhip" Effect

A variation on the Forrester effect is the so-called "Bullwhip" effect, and refers to the increasing variability of demand further upstream in the supply chain. The research of Fransoo & Worters highlights the benefits of providing the suppliers with EPOS data can help to reduce the bullwhip distortions. The term Bullwhip was first used by Proctor & Gamble in relation to their product 'Pampers, they describe the effect as the result of information distortions in the supply chain, whereby companies involved in the chain do not have information or actual consumer demand. Fransoo & Worters state:

"Consequently, their ordering decisions are based on the incoming orders form the next downstream company. This may lead to amplified order variability demand coming in from a downstream company has a lower variability than demand to an upstream company".

Lee etal (1977) have identified four major causes of the "bullwhip" effect:

• Demand Forecast Updating

Expectations about future demand, based upon orders received from the previous link in the supply chain, high forecast of demand equates to increased order quantities.

• Order Batching

Companies often batch orders together, due to fixed order cost and EO2 systems. This distorts the true demand pattern.

• Price Fluctuations

Discounts, trade promotion s, special offers etc can all affect demand for an item. Customers may decide to 'buy forward' and then reduce demand in the following months, again distorting the true demand pattern.

• Rationing and Shortage Gaining

When demand exceeds supply, customers may decide to order more than is required at the time, 'just in case' the shortages continue. In some instances customers will order the same product from more than one source, only to cancel the majority of the order later.

Combined, these factors create "distortions" in the supply chain. There are many examples of shortages, followed by excessive stocks in numerous supply chains.

Much progress has been made in the last 20 years in relation to our understanding of what supply chains are and how we should manage them effectively and efficiently. The remaining chapters in this book hopefully provide a framework of knowledge and understanding that will enable the reader to fully appreciate the complexity of the supply chain and the challenges associated with its management.

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