Supply Chain Management: What is it?

By Doug Smock
Purchasing
September 4, 2003

The concept of supply chain management was invented in the 1980s at Chrysler Corp. by top buyer Thomas Stallkamp, who remains an active member of PURCHASING magazine's Editorial Advisory Board. "We redefined purchasing from buyers of parts to professionals that managed material flow from extraction of the raw materials to the scheduling of final assembly," says Stallkamp. "I even had the lift truck operators reporting to purchasing." His ideas helped lead Chrysler out of financial disaster into a model of success. The shock troops of SCM were—and are today—suppliers who become long-term partners and integral parts of design and product development. In Stallkamp's world , the suppliers' role was an extreme case due to financial necessity. Suppliers designed the highly successful Viper composite car because Chrysler had virtually no development money. Stallkamp's buyers picked the players and managed the process.

As outsourcing mushroomed in the 1990s and demands on supply professionals grew in the 21st Century, the concept of supply chain management continued to evolve. Today, supply chain management refers to the process of how products are designed, sourced through an often-complex network, manufactured, and distributed from raw material to the end customer. The idea is to create as much cross-functional teaming and coordination as possible to reduce costs, standardize, simplify, reduce inventories and maximize profits from assets. Increasingly that process takes place through a single team leader, who may have the titles of executive of supply chain management, chief supply officer, president of supply networks, or even vice president of enterprise excellence. The words are not important, the concept is. Often, the individual in charge of sourcing takes the lead because of the vital role of suppliers and outsourcing partners on final successful outcomes. Any definition of supply chain management that focuses just on product distribution or logistics is failing to grasp the potential of the powerful SCM concept.

Supply chain management is customer-driven. That is, the supply chain responds as efficiently as possible to customer requirements, and is established in order to meet those requirements rapidly, accurately, with no waste and with zero defects. Where supply chains can fall down in practice is accurately gauging customer demands and communicating those well throughout the supply chain.

Logistics and product distribution are a critical part of supply chain management, but the really big payoffs are in optimized demand forecasting, supplier management, and product development. Every organization has some type of a supply chain, but implicit in the buzz about "supply chain management" is the idea of maximum efficiencies. These ideas receive a giant boost from new business process optimization software and the use of the Internet as a communications tool. The concept is also hot now because of increasing realization by senior management of the role of supply management in increased profitability. Total costs of supply chain management (including purchased goods and services) can now easily approach 75% of a typical manufacturing company's budget.

According to a study by consultants A.T. Kearney, inefficiencies in supply chains can waste up to 25% of a company's operating costs. In companies with profit margins of 3-4%, even a 5% improvement in supply chain efficiencies focusing just on material flow can double profit margins. A University of Michigan study shows that fewer than 50% of U.S. companies are involved in supply chain practices that go beyond traditional buy-sell relationships. There is no single model of optimum supply chain management. The requirements differ by market and company size. The idea of what constitutes optimum supply chain is still rapidly changing, and many good companies are still in the very early stages because of corporate fragmentation, lack of focus and internal politics.

At companies in the earliest stages of supply chain development, the critical function on the front line is purchasing. "If you look at supply chain management from a holistic point of view, purchasing is where the rubber hits the road," commented Greg Cudahy, associate partner at Andersen Consulting's Supply Chain Practice in an article in Logistics magazine in 1998. Using the food industry as an example, he states, "For most food processors, a 1-3% reduction in the cost of inbound materials greatly outweighs a 10% reduction in logistics costs." That idea has become a little outdated because few purchasing professionals view themselves any more strictly as buyers. A congruence research study conduced in 2002 by P URCHASING magazine showed that one in four respondents (all purchasing professionals) identified supply chain management as their principal job responsibility. Virtually all the rest viewed SCM as at least an important component of their job responsibility. Sometimes they still have purchasing titles, often they are part of supply chain organizations that include manufacturing, design, logistics, and distribution. One of the fundamental ideas in these organizations is that individuals with sourcing responsibilities make sure the supply chain is focused on customer requirements. "If your company's biggest customer is focused on product quality, then you have to get that into your suppliers' processes," comments Dr. Larry C. Guinipero, professor of purchasing and marketing at Florida State University. "If your customer wants timely delivery, then your purchasing system ought to be focused on that too. It falls on purchasing to communicate to the suppliers what their customers want."

A report on supply chain management issued this year by Accenture (the successor to Andersen Consulting) states that one of the large emerging trends in SCM is emphasis on "the front end", customer demand. "Historically, supply chain management dealt largely with vendors, which meant that companies focused most intently on improving logistics or the back end of the supply chain," say David L. Anderson and Allen J. Delattre, partners at Accenture. "But because demand now manifests itself in many more ways—via the Web, through online marketplaces or in conjunction with partnerships—smart companies will likely increase their emphasis on the supply chain's front end. A key component will be developing better visibility into hard demand using distributed commerce management tools."

SCM received a giant boost in the 1990s when all the emphasis was on output. The result throughout business, and particularly in the high-tech sector, was a supply chain meltdown. Companies such as Cisco and Lucent Technologies were awash in unneeded inventories when demand rapidly evaporated in 2000. The problem was created by poor demand forecasting and poor communication throughout the supply chain. When chief procurement officers attempted to dispose of the inventories they discovered that much of it was useless because it could be used only in one plant or division due to over-engineering. The result is a massive drive toward elimination of product complexity so that materials can easily be re-used or sold.

The battle against supply chain complexity starts with a process that makes sure design engineers make decisions cognizant of their impact on the entire supply chain. Harley-Davidson, an icon American manufacturer that had flirted with bankruptcy, moved to a different supply model in the late 1990s for that very reason. Its motorcycle had become too expensive and noncompetitive because engineers failed to consider cost or supplier involvement in design. A Product Development Center was created under top buyer Garry Berryman to bring together purchasing engineers, design engineers and suppliers in a focal point of supplier collaboration. Key suppliers put forth their best ideas at the earliest stages of product development, saving Harley money and boosting quality. In the previous system, "We (engineers) picked suppliers whose forte was technical innovation," says Earl Werner, vice president of engineering at Harley. "They were low volume and didn't have a high degree of competency on the commercial side." They were high costs and often couldn't meet manufacturing schedules. "We failed to do well what the purchasing people do well, and that's consider all of the requirements for a successful relationship with the suppliers."

The roots of SCM

•	SCM was developed in the early 1980s by Tom Stallkamp, CPO at Chrysler Corp.
•	The phrase was logistics-oriented in the 1990s (3PLs, warehouse management)
•	The concept has always been supply-oriented

Essential aspects

•	Customer Driven
•	Optimized Material Flow
•	Multi-Functional (Sourcing, Distribution, Manufacturing, Design)
•	Seamless communications (even with outsourcing partners)

What makes it better

•	Business Optimization Software. 1) SRM, 2) Spend Mgt., 3) Decision-Support, 4) Contract Mgt., 5) ERP, 6) Collaborative Planning
•	Electronic/Internet-based Communications. 1) E-Sourcing: Automated RFx, Web Portals, E-Auctions
•	Sophisticated Outsourcing Implementations

Purchasing's fit

•	One in four PURCHASING readers describe SCM as a primary job duty
•	SCM is required by all purchasing mgt.
•	Purchasing is where the payoff is because it is the only supplier-facing function
•	SCM expands purchasing's role

Lucent and SCM

Pre-meltdown

	•	11 independent business units
	•	Minimal leverage, outsourcing
	•	Purchasing was contract negotiation organization
	•	CPO was junior corporate role

Business impact

	•	Lucent lost $6.7 billion in FY 2001; $7 billion in FY 2002
	•	Liquidity issues led to fears of insolvency
	•	Inventories had bloated to $7 billion

What Lucent did

	•	Created Supply Networks organization under Jose Mejia that is responsible for all sourcing, design, manufacturing, logistics and demand management.
	•	Mejia is one of four key operational leaders who report directly to the president.
	•	SN owns margin forecasting.

Lucent's results

	•	Outsourced logistics, indirect, much mfg
	•	Implemented strategic sourcing
	•	Inventories in 2003 are $965 million
	•	Implemented Design Chain
	•	Low-cost EMS strategy
	•	Gross margins at 31.5% 2Q 03 vs 14% in 2000

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