The Role of Supply Chain Management in Corporate Strategy
James S. Keebler
WHAT IS SUPPLY CHAIN MANAGEMENT?
In a Harvard Business Review article published in 1958, Jay Forrester introduced a theory of management that recognized the integrated, interdependent nature of organizational relationships in distribution channels.1 He pointed out that system dynamics can influence the activities of various business functions and their impact on production and distribution performance. Forrester stated that "there will come general recognition of the advantage enjoyed by the pioneering management who have been the first to improve their understanding of the interrelationships between separate company functions and between the company and its markets, its industry, and the national economy" (p. 52). Thus, the foundation was laid for key strategic management issues and the dynamics of factors associated with what we today call supply chain management (SCM).
In the early 1980s, management attention to the functions of materials management, production, transportation, and warehousing was driven by two significant conditions: opportunities for cost reduction provided by deregulation of transportation, and the oppressively high cost of capital to fund inventories (the prime rate was 20% in 1980). Until the concept of total quality management (TQM) was understood and commonly imbedded in the 1990s, a total systems approach to multiple-company materials, information, and cash flows could not be realized. The commonly used terms of operations management and logistics management began to give way to SCM as a newer, broader perspective for corporate management. The term SCM became a hot topic in the business press and the academic literature by the year 2000. Specific drivers of top management interest in SCM included global sourcing, international markets, growing emphasis on time—and quality—based competition, and a need for stronger, more flexible relationships with key customers and suppliers to mitigate environmental uncertainties. An increasing number of firms began outsourcing noncore activities to improve their return on assets, to give them control, through effective relationships, without the burden of ownership.
In 2001, the Journal of Business Logistics published an article "Defining Supply Chain Management."2 This contribution summarized the existing definitions and supporting constructs of SCM into a framework that produced a robust conceptual model and a unified definition of SCM. Supply chains were defined as the companies involved in the upstream and downstream flows of products, services, finances, and information from initial supplier to ultimate customer. A supply chain orientation (SCO) is the recognition by an organization of the systemic, strategic implications of the activities involved in managing the various flows in a supply chain to satisfy an ultimate customer of that supply chain. This SCO is necessary regardless of the organization's position within the supply chain. SCM is simply the implementation of the SCO, defined as "the systemic, strategic coordination of the traditional business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole" (p. 18).
THE INPUT/OUTPUT MODEL OF THE FIRM, EXPANDED
A simple model of the single firm would require an estimation of its outputs so that the firm can establish the capacities necessary and the inputs required to produce and provide the contemplated outputs. The firm must also add some value in the conversion or transformation process to justify the price paid by its customers, which includes their profit. Figure 9.1 portrays this input/output process.
The fundamental element of a supply chain, then, is the single firm, which both buys from a supplier and sells to a customer. The focal firm's buying activity establishes a linkage to the supplier's selling activity and the focal firm's selling activity links to the customer's buying activity. Thus, the linkages formed by a single firm in a supply chain include at
Figure 9.1. Basic Model of the Firm
least two other firms. To achieve the proper balance in both supply and demand, or inputs and outputs, each firm in the supply chain must, at a minimum, coordinate the activities of its internal functions and those of the triad it has established. An SCO requires a new unit of analysis—multiple firms in the supply chain, to effectively implement SCM (as is illustrated in Figure 9.2).
Each firm must manage the supply side of its operations, including forecasting, aggregate demand planning, master scheduling, material requirements planning, the bill of materials, production planning,
Figure 9.2. Basic Model of Supply Chain
purchasing, supplier relationship management, production scheduling, production, and distribution. Each firm must also manage the demand side of its operations, including marketing, development of new products and services, sales, customer service, and customer relationship management. Both supply side and demand side functions must be coordinated to achieve effectiveness and efficiency. Consequently, SCM has two major roles: supply management and demand management. The physical function of a supply chain (supply management) is to convert raw materials into goods, and transport them from one point in the supply chain to the next point and ultimately to the consumer, managing the dimensions of time, cost, quality, and compliance. A market-mediation function (demand management) is to insure that the variety of goods and services reaching the marketplace matches what customers want to buy, how, when, and where they want to acquire them.