Supply Chain Management (SCM)

Introduction

Supply Chain Management is increasingly becoming an important aspect of any company’s strive for efficiency and cost saving. Unfortunately, many of today’s managers have misinterpreted the term to only withhold the activity of good management of suppliers. However, for a company to be cost efficient and productive the concept of supply chain management has to be thoroughly understood and the savings and risk reductions stemming from it have to be acknowledged.

Supply Chain Management (SCM) is increasingly used as the new “buzz word” and managers proclaim its importance in business success. However, research has shown that although the majority of purchase managers may believe it to be of great importance, firms are not as committed to the concept as them might lead others to believe (Spekman, Kamauff and Myhr 1998, Tan, Kannan, Handfield and Ghosh 1999 and Smock, 2003).

This pm will offer an introduction to the topic and present possible reasons for why the managers are “talking the talk, but not walking the walk”.

The Concept of Supply Chain Management

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 (Smock, 2003).

Uncertainty

Uncertainty leads to increased inventory and costs, which could be invested in other projects (i.e. opportunity cost). With increasing pressure to cut cost managers will reduce inventory and probably do this at the expense of customer service. To retain the level of customer service the customer company will put pressure on the supplier to respond to orders more quickly. This will force the supplier to increase its stock and therefore increase its inventory costs. The more variable the orders, the more stock is required to balance the variability. In this situation one can see that no real ...

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Uncertainty

Effective supply chain management concerns predicting future demand as accurately as possible. If the future demand is predicted well the need for excessive inventory will be diminished. To explain it in another way, inventory is insurance for the company for unpredictability in future demand. Unfortunately it ties up precious capital. There are three separate sources of uncertainty; suppliers, manufacturing and customers.

It is suggested by research that only analytical techniques or “darned good luck” can precisely tune a supply chain (Davis 1993).

Possible reasons for lack of commitment

There may be a number of reasons why managers are reluctant to invest in SCM activities. The following are thought to be the most relevant ones by the authors.

Most companies will prioritise their own well being before their partner’s. Therefore creating a win-win situation requires a high level of trust and equal opportunities for mutual benefits. Laying the foundations for such a relationship will demand resources in form of time as well as money. Inefficiencies in SCM may, as has been shown by consultants A.T. Kearney, may waste as much as 25% of a company’s operating costs. Therefore, a firm, which has little experience in SCM, may be reluctant to commit significant resources to SCM activities.

Real benefits might not readily materialise, since it might take a long period of time for these to show. Change does not readily come about and it also incurs cost. If the new scheme fails to deliver these benefits within a reasonable time period management might lose faith in the programme and, possibly subconsciously, reduce investment in it

The accurate prediction of demand is a cornerstone in efficient SCM. However, firms might not recognise that the necessary data collection will take at least six months (Davis 1993). Existing historical data may certainly be used, however it will not be as accurate. The knowledge of this may create hesitancy on behalf of the managers since investments needed for the development of the scheme are substantial, and using sub-quality data may therefore seem unacceptable. It may also be very difficult to collect the necessary data if the supply chain is extensive. In addition, the accuracy of the data might be compromised if some of the members within the chain are less capable of reporting, or if different reporting systems are used. Hence resources may be wasted on collecting the wrong type of/inaccurate information. Failing to take uncertainty into account may also be a potential pitfall. By not acknowledging this factor and making the appropriate allowances for it costly miscalculations may result.

Moreover, the actual factory capacity of the production may be unknown or miscalculated. If this is the case estimating possible improvements will be difficult if not impossible and the exact benefits of the scheme will not be felt.

Conclusion

Despite the clear evidence that there is a general lack of commitment in investing in SCM, it is felt that in the future the use of SCM will increase, since there is evidence that the trend in manufacturing is towards increasingly generic products. The past mistakes of companies such as HP and Lucent, who were left with redundant stocks, partly due to over-engineering, will be a lesson to future managers. By reducing the complexity of output it is therefore felt that suppliers will be more willing to hold an increasing amount of stock since this offers more flexibility to the buyer.

Bibliography

Davis, T.,(1993) “Effective Supply Chain Management”, MIT Sloan Management Review, Vol. 34, Issue 4

Smock, D., (2003) “Supply Chain Management: What is it?”, Purchasing, September, Vol. 13

Spekman, R., E., Kamauff, J., W.and Myhr, N., (1998) “An empirical investigation into supply chain management: A perspective on partnerships”, International Journal of Physical Distribution & Logistics Management, Vol. 28, Issue 8

Tan, K-C., Kannan, V., R., Handfield, R., B. and Ghosh, S., “Supply chain management: an empirical study of its impact on performance”, International Journal of Operations & Production Management, Vol. 19, Issue 10