How do supply chain management systems coordinate planning, production, and logistics with suppliers?

If you manage a small firm that makes a few products or sells a few services, chances are you will have a small number of suppliers. You could coordinate your supplier orders and deliveries by using just a telephone and fax machine. But if you manage a firm that produces more complex products and services, you will have hundreds of suppliers, and each of your suppliers will have its own set of suppliers. Suddenly, you will need to coordinate the activities of hun­dreds or even thousands of other firms to produce your products and services. Supply chain management (SCM) systems, which we introduced in Chapter 2, are an answer to the problems of supply chain complexity and scale.

1. The Supply Chain

A firm’s supply chain is a network of organizations and business processes for procuring raw materials, transforming these materials into intermediate and finished products, and distributing the finished products to customers. It links suppliers, manufacturing plants, distribution centers, retail outlets, and custom­ers to supply goods and services from source through consumption. Materials, information, and payments flow through the supply chain in both directions.

Goods start out as raw materials and, as they move through the supply chain, are transformed into intermediate products (also referred to as components or parts) and, finally, into finished products. The finished products are shipped to distribution centers and from there to retailers and customers. Returned items flow in the reverse direction from the buyer back to the seller.

Let’s look at the supply chain for Nike sneakers as an example. Nike designs, markets, and sells sneakers, socks, athletic clothing, and accessories through­out the world. Its primary suppliers are contract manufacturers with factories in China, Thailand, Indonesia, Brazil, and other countries. These companies fashion Nike’s finished products.

Nike’s contract suppliers do not manufacture sneakers from scratch. They obtain components for the sneakers—the laces, eyelets, uppers, and soles— from other suppliers and then assemble them into finished sneakers. These suppliers in turn have their own suppliers. For example, the suppliers of soles have suppliers for synthetic rubber, suppliers for chemicals used to melt the rubber for molding, and suppliers for the molds into which to pour the rubber. Suppliers of laces have suppliers for their thread, for dyes, and for the plastic lace tips.

Figure 9.2 provides a simplified illustration of Nike’s supply chain for sneak­ers; it shows the flow of information and materials among suppliers, Nike, Nike’s distributors, retailers, and customers. Nike’s contract manufacturers are its primary suppliers. The suppliers of soles, eyelets, uppers, and laces are the secondary (Tier 2) suppliers. Suppliers to these suppliers are the tertiary (Tier 3) suppliers.

The upstream portion of the supply chain includes the company’s suppli­ers, the suppliers’ suppliers, and the processes for managing relationships with them. The downstream portion consists of the organizations and processes for distributing and delivering products to the final customers. Companies that manufacture, such as Nike’s contract suppliers of sneakers, also manage their own internal supply chain processes for transforming materials, components, and services their suppliers furnish into finished products or intermediate products (components or parts) for their customers and for managing materials and inventory.

The supply chain illustrated in Figure 9.2 has been simplified. It only shows two contract manufacturers for sneakers and only the upstream supply chain for sneaker soles. Nike has hundreds of contract manufacturers turning out fin­ished sneakers, socks, and athletic clothing, each with its own set of suppliers.

The upstream portion of Nike’s supply chain actually comprises thousands of entities. Nike also has numerous distributors and many thousands of retail stores where its shoes are sold, so the downstream portion of its supply chain is also large and complex.

2. Information Systems and Supply Chain Management

Inefficiencies in the supply chain, such as parts shortages, underused plant capacity, excessive finished goods inventory, or high transportation costs, are caused by inaccurate or untimely information. For example, manufactur­ers may keep too many parts in inventory because they do not know exactly when they will receive their next shipments from their suppliers. Suppliers may order too few raw materials because they do not have precise information on demand. These supply chain inefficiencies waste as much as 25 percent of a company’s operating costs.

If a manufacturer had perfect information about exactly how many units of product customers wanted, when they wanted them, and when they could be produced, it would be possible to implement a highly efficient just-in-time strategy. Components would arrive exactly at the moment they were needed, and finished goods would be shipped as they left the assembly line.

In a supply chain, however, uncertainties arise because many events can­not be foreseen—uncertain product demand, late shipments from suppliers, defective parts or raw materials, or production process breakdowns. To satisfy customers, manufacturers often deal with such uncertainties and unforeseen events by keeping more material or products in inventory than they think they may actually need. The safety stock acts as a buffer for the lack of flexibility in the supply chain. Although excess inventory is expensive, low fill rates are also costly because business may be lost from canceled orders.

One recurring problem in supply chain management is the bullwhip effect, in which information about the demand for a product gets distorted as it passes from one entity to the next across the supply chain. A slight rise in demand for an item might cause different members in the supply chain—distributors, man­ufacturers, suppliers, secondary suppliers (suppliers’ suppliers), and tertiary suppliers (suppliers’ suppliers’ suppliers)—to stockpile inventory so each has enough just in case. These changes ripple throughout the supply chain, mag­nifying what started out as a small change from planned orders and creating excess inventory, production, warehousing, and shipping costs (see Figure 9.3).

For example, Procter & Gamble (P&G) found it had excessively high inven­tories of its Pampers disposable diapers at various points along its supply chain because of such distorted information. Although customer purchases in stores were fairly stable, orders from distributors spiked when P&G offered aggressive price promotions. Pampers and Pampers’ components accumulated in ware­houses along the supply chain to meet demand that did not actually exist. To eliminate this problem, P&G revised its marketing, sales, and supply chain pro­cesses and used more accurate demand forecasting.

The bullwhip effect is tamed by reducing uncertainties about demand and supply when all members of the supply chain have accurate and up-to-date information. If all supply chain members share dynamic information about inventory levels, schedules, forecasts, and shipments, they have more precise knowledge about how to adjust their sourcing, manufacturing, and distribution plans. Supply chain management systems provide the kind of information that helps members of the supply chain make better purchasing and scheduling decisions.

3. Supply Chain Management Software

Supply chain software is classified as either software to help businesses plan their supply chains (supply chain planning) or software to help them execute the supply chain steps (supply chain execution). Supply chain planning systems enable the firm to model its existing supply chain, generate demand forecasts for products, and develop optimal sourcing and manufacturing plans. Such systems help companies make better decisions, such as determining how much of a specific product to manufacture in a given time period; establishing inventory levels for raw materials, intermediate products, and finished goods; determining where to store finished goods; and identifying the transportation mode to use for product delivery.

For example, if a large customer places a larger order than usual or changes that order on short notice, it can have a widespread impact throughout the supply chain. Additional raw materials or a different mix of raw materials may need to be ordered from suppliers. Manufacturing may have to change job scheduling. A transportation carrier may have to reschedule deliveries. Supply chain planning software makes the necessary adjustments to production and distribution plans. Information about changes is shared among the relevant supply chain members so that their work can be coordinated. One of the most important—and complex—supply chain planning functions is demand planning, which determines how much product a business needs to make to satisfy all its customers’ demands. JDA Software, SAP, and Oracle all offer sup­ply chain management solutions.

Supply chain execution systems manage the flow of products through dis­tribution centers and warehouses to ensure that products are delivered to the right locations in the most efficient manner. They track the physical status of goods, the management of materials, warehouse and transportation operations, and financial information involving all parties. An example is the Warehouse Management System (WMS) that Haworth Incorporated uses. Haworth is a world-leading manufacturer and designer of office furniture, with distribution centers in four states. The WMS tracks and controls the flow of finished goods from Haworth’s distribution centers to its customers. Acting on shipping plans for customer orders, the WMS directs the movement of goods based on immedi­ate conditions for space, equipment, inventory, and personnel.

4. Global Supply Chains and the Internet

Before the Internet, supply chain coordination was hampered by the difficulties of making information flow smoothly among disparate internal supply chain systems for purchasing, materials management, manufacturing, and distribu­tion. It was also difficult to share information with external supply chain part­ners because the systems of suppliers, distributors, or logistics providers were based on incompatible technology platforms and standards. Enterprise and supply chain management systems enhanced with Internet technology supply some of this integration.

A manager uses a web interface to tap into suppliers’ systems to determine whether inventory and production capabilities match demand for the firm’s products. Business partners use web-based supply chain management tools to collaborate online on forecasts. Sales representatives access suppliers’ produc­tion schedules and logistics information to monitor customers’ order status.

4.1. Global Supply Chain Issues

More and more companies are entering international markets, outsourcing manufacturing operations, and obtaining supplies from other countries as well as selling abroad. Their supply chains extend across multiple countries and regions. There are additional complexities and challenges to managing a global supply chain.

Global supply chains typically span greater geographic distances and time differences than domestic supply chains and have participants from a number of countries. Performance standards may vary from region to region or from nation to nation. Supply chain management may need to reflect foreign govern­ment regulations and cultural differences.

The Internet helps companies manage many aspects of their global supply chains, including sourcing, transportation, communications, and international finance. Today’s apparel industry, for example, relies heavily on outsourcing to contract manufacturers in China and other low-wage countries. Apparel com­panies are starting to use the web to manage their global supply chain and pro­duction issues. (Review the discussion of Li & Fung in Chapter 3.)

In addition to contract manufacturing, globalization has encouraged out­sourcing warehouse management, transportation management, and related operations to third-party logistics providers, such as UPS Supply Chain Solutions and Schneider National. These logistics services offer web-based software to give their customers a better view of their global supply chains. Customers can check a secure website to monitor inventory and shipments, helping them run their global supply chains more efficiently.

4.2. Demand-Driven Supply Chains: From Push to Pull Manufacturing and Efficient Customer Response

In addition to reducing costs, supply chain management systems facilitate ef­ficient customer response, enabling the workings of the business to be driven more by customer demand. (We introduced efficient customer response sys­tems in Chapter 3.)

Earlier supply chain management systems were driven by a push-based model (also known as build-to-stock). In a push-based model, production mas­ter schedules are based on forecasts or best guesses of demand for products, and products are pushed to customers. With new flows of information made possible by web-based tools, supply chain management more easily follows a pull-based model. In a pull-based model, also known as a demand-driven or build-to-order model, actual customer orders or purchases trigger events in the supply chain.

Transactions to produce and deliver only what customers have ordered move up the supply chain from retailers to distributors to manufacturers and eventually to suppliers. Only products to fulfill these orders move back down the supply chain to the retailer. Manufacturers use only actual order demand information to drive their production schedules and the procurement of components or raw materials, as illustrated in Figure 9.4. Walmart’s continuous replenishment sys­tem described in Chapter 3 is an example of the pull-based model.

The Internet and Internet technology make it possible to move from sequen­tial supply chains, where information and materials flow sequentially from company to company, to concurrent supply chains, where information flows in many directions simultaneously among members of a supply chain network.

5. Business Value of Supply Chain Management Systems

You have just seen how supply chain management systems enable firms to streamline both their internal and external supply chain processes and provide management with more accurate information about what to produce, store, and move. By implementing a networked and integrated supply chain management system, companies match supply to demand, reduce inventory levels, improve delivery service, speed product time to market, and use assets more effectively.

Total supply chain costs represent the majority of operating expenses for many businesses and in some industries approach 75 percent of the total operat­ing budget. Reducing supply chain costs has a major impact on firm profitability.

In addition to reducing costs, supply chain management systems help in­crease sales. If a product is not available when a customer wants it, customers often try to purchase it from someone else. More precise control of the supply chain enhances the firm’s ability to have the right product available for cus­tomer purchases at the right time.

Source: Laudon Kenneth C., Laudon Jane Price (2020), Management Information Systems: Managing the Digital Firm, Pearson; 16th edition.

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