The Term Supply Chain Management

 

Supply Chain Management

Introduction

            The term supply chain management (SCM) was initially used in wholesaling and retailing to denote the integration of logistics and physical distribution functions with the goal of reducing delivery lead times. Manufacturers and service providers have used the same term to describe integration and partnership efforts with first- and second- tier suppliers to reduce cost and improve quality and delivery timing. Terms such as integrated purchasing strategy, integrated logistics, supplier integration, value chain management, supply base management, strategic supplier alliances, lean production, Just-In-Time (JIT) logistics, and supply chain synchronization have been used in the literature to address certain elements or stages of this new management philosophy (Tan et al., 1998; La Londe and Masters, 1994).

            Conceptually, SCM includes all value-adding activities from the extraction of raw materials through the transformation processes and through delivery to the end user. SCM spans organizational boundaries and treats the organizations within the value chain as a unified virtual business entity (Scott and Westbrook 1991; New and Payne 1995). Baatz (1995) further expanded SCM to include recycling or reuse activities. In general, SCM seeks improved performance through elimination of waste and better use of internal and external supplier capabilities and technologies (Morgan and Monczka 1996).

            The retailing industry has focused on different aspects of SCM, namely, location, transportation, and logistics issues. Indeed, the origin of supply chain management can be traced back to efforts to better manage the transportation and logistics functions (Fisher 1997; Lamb 1995; Whiteoak 1994; Turner 1993; MacDonald 1991; Stock and Lambert 1987). The wholesaling and retailing industries incorporate a logistics focus within their strategic decisions. In this respect, SCM is synonymous with integrated logistics systems that control the movement of goods from the suppliers to end customers without waste (Ellram 1991).

            Moreover, integrated logistics systems seek to manage inventories through close relationships with suppliers and transportation, distribution, and delivery services. A goal is to replace inventory with frequent communication and sophisticated information systems to provide visibility and coordination. In this way, merchandise can be replenished quickly in small lot size and arrive where and when it is needed (Handfield 1994; Shapiro et al 1993). Firms that use advanced process technology to increase flexibility and involve manufacturing managers in strategic decision making alter the role of logistics in firm success (Tracey, 1998). A supply chain can reduce overall inventory while maximizing customer service by efficiently redistributing stock within the supply chain using effective postponement and speculation strategies (Pagh and Cooper 1998; Davis 1993; Scott and Westbrook 1991).

            New logistics technology gives businesses a complex way to make things easier for their customers and suppliers. Within logistics industry, Dell’s system is recognized as one that takes advantage of technology to decrease storage and increase efficiency. The computer company’s supply and shipping networks exemplify the latest trend in logistics, that is, visibility. Companies with the money and foresight are making sure their inventories can be traced and tracked throughout their entire logistical operations, even if their systems are entirely outsourced. Executing a supply chain with full visibility gives companies better information to work with and a more agile system.

Discussion

            Dell has a better control of their operation which has reduced safety stocks and has operate faster to get cash-to-cash conversion cycles. By producing custom products at a rapid pace, the computer manufacturer receives payments from customer before it pays suppliers. Companies can do this only if there’s a short window between receiving an order and shipping it.

             In addition, Dell’s customers can also keep track of their order status. They can trace their computer as is moves through assembly and testing, and can track its shipment due to the technology of major shipping companies.

            The pulse of Dell’s execution effort centers on increasing business velocity and eliminating waste. Dell employees are constantly focused on driving down backlogs, promoting best practices, and creating synergies among adjacent processes as seen in cross-functional initiatives such as the design-for-manufacturability effort between manufacturing and R&D. This initiative successfully promoted product designs that are easier to assemble.

            In 1994, Dell was a struggling second-tier PC maker. Like many others, the company ordered its components in advance and manufactured to inventory. Then Dell began to implement a new business model. It converted its operations to a build-to-order process, eliminated its inventories through a just-in-time system, and sold its products directly to consumers.

            Dell carefully targeted corporate relationship customers that had predictable, budgeted needs and that wanted a pre-determined set of product models. The company also selected individual customers who were high-end, repeat purchasers with a preference for early technology adoption. Both account segments had the stable, predictable purchase patterns that Dell needed to make its joint build-product-to-order/buy-component-to-plan system work.

            In connection with this, Dell developed a set of new operations capabilities in five crucial areas (Byrnes, 2005). First, it created the flawless make-to-order system that has been widely noted. Secondly, Dell worked at length to build an effective supplier management function in order to shorten component lead times and maintain the absolute quality standards required by the just-in-time operation. Third, Dell developed the “sell what you have” system that was essential to matching supply and demand. Fourth, it instituted an extraordinarily crisp set of product life cycle management capabilities that yielded great cost reductions and strategic advantage. Fifth, the company worked with its suppliers to shorten their product life cycles, extending the Dell business model to the whole channel. Together these operating capabilities formed a cornerstone for Dell’s business model.

            Moreover, to maintain its rapid growth, Dell needs to hone its just-in-time process. Dell believes that the key to JIT is integrating with the suppliers into its operation.  It is important for the company to work with the suppliers to figure out how to minimize the supply chain and hold the least amount of inventory in it. Inventory can add costs, damage quality, slow production, and wreak havoc with Dell’s rapid response reputation. To guard against this, Dell has optimized its supply base and developed a tightly run system in which it “pulls” parts from suppliers just as they are needed for production.

            Dell has manufacturing facilities in Austin; Limerick, Ireland; and Penang, Malaysia, each of which produces PCs on a JIT basis. In order to ensure the smooth flow of production supplies into these plants, Dell has developed a two-tiered strategy that employs different sourcing arrangements and delivery schedules for custom and commodity parts.

            When Dell receives an order for a PC, it faxes or phones its requirements to suppliers who pick the proper parts and pack them in reusable bins with kanban cards attached. Trucks on a continuous loop between suppliers and Dell, known as a “milk run,” deliver the sorted parts to the computer maker’s plant for final assembly. This process frees Dell from having to manage inventories and the costs associated with them. However, Dell has made efforts to ensure that suppliers don’t get stuck with much inventory. The computer maker allows suppliers to participate in a “revolver program,” where they can sell parts stored at the warehouse to other customers.

            In comparison with Dell’s supply chain management, Baxter, a hospital supply company, developed a powerful new type of partnership with its hospital customers. Baxter develops a strategy which is the vendor-managed inventory system, then called the Stockless System in managing its customer’s inventories within their hospital facilities (Byrnes, 2001). The hospital specifies its stock requirements for each ward; an on-site Baxter employee counts the stock in each ward each day or every few days; the employee enters this information into a hand-held device and transmits it to Baxter’s warehouse, where a replenishment order is derived; at the warehouse, the order is picked into ward-specific containers; that order is delivered the next day or in a few days directly to the ward, and the Baxter employee puts the stock away; finally, Baxter invoices the hospital. Baxter’s Stockless System created a powerful new channel that changed the ground rules for all other hospital supply companies. However, in the long run, the shift to service competition led to significant sales increases as conversions to Baxter products naturally occurred. The company also gained significant first-mover advantage as it tied up key accounts with this new channel.

            In the case of Procter and Gamble (P&G), the company first partnered with Wal-Mart to develop a pioneering continuous replenishment system. Through this system, P&G replenishes Wal-Mart’s facilities without purchase orders based on the retailer’s product movement data. Based on this experience, P&G systematically shifted its strategic focus toward supply chain-based service innovation–and in the process transformed both the consumer products and retail industries. P&G also developed a careful account selection plan as part of an innovative product supply model. The company developed operating partnerships with major customers capable of linking electronically, taking full-truckload deliveries, and engaging in joint business process reorganization programs. Smaller accounts were shifted to master distributors, which in turn were selected for their ability to partner effectively with P&G.

            P&G, for its part, developed operations capabilities in two key areas (Byrnes, 2001). First, it created a sweeping new set of industry-change programs such as ECR (efficient consumer response), CRP (customer requirements planning), and streamlined logistics. These programs required a solid new understanding of channel economics and the impact of supply chain innovation. Second, the company developed sophisticated IT ties to coordinate its product flow, enabling it to raise service levels to meet the needs of the new system.

            With regards with Dell’s, supply chain competency of the company comprises of four qualities which includes demand management, internal collaboration, leveraging partners, and financial fundamentals (Metzer, 2004).

            Dell’s direct model enables the company to excel at demand management. The process of selling directly to customers and building product to order creates opportunities for true real-time collaboration and synchronization between manufacturing and sales. By being in direct contact with the market, Dell can quickly see changes in customer demand. Synchronization allows Dell to respond more quickly to customer demand than its competitors can. Additionally, this true internal collaboration allows for highly accurate forecasts.

            Another key aspect of Dell’s success is its ability to collaborate internally. This competency is driven by a culture that values information sharing and empowers all employees. At Dell, “direct” refers not only to how the company sells but also to how team members communicate and attack issues (Metzer, 2004).

            Moreover, Dell’s culture and processes not only help the company collaborate internally but also help it leverage its business partners. Dell leverages its partners by linking suppliers’ planning and execution activities with Dell’s systems. The company uses information technology to gather and share a constant stream of data on supply and demand trends. On the supply side, Dell gathers real-time information about the inventory levels of its suppliers at various positions in the supply chain.

            Finally, Dell’s entire supply chain is focused on fundamental business performance. Operating margin and not just profits or growth rate is the number that Dell cares about most to ensure long-term profitability.

            Dell Inc.’s renowned direct sales model is regularly cited as the key reason for its overall competitive prowess. At Dell, supply chain management is truly viewed as a strategic capability; it drives coordination with, and in many instances it includes, activities such as marketing, sales, finance, and information technology.

Conclusions and Recommendations

            The back end of the supply chain is robust, flexible, and responsive in order for

Dell to reap the real benefits of the customer side initiatives. Investing in front-end initiatives was not much use if Dell did not have strong internal capabilities and effective supplier networks. An efficient supply chain measures on-hand inventory in hours or days, not weeks of supply. Turn off the flow, and things grind to a halt pretty quickly. That’s a benefit when actual demand is driving the supply chain. If customers aren’t buying, you aren’t building costly and unnecessary inventory.

            A strategic, goal oriented approach to purchasing and supply management is important. Effective change management involves developing an understanding of the current state, articulating a clear vision of the future state, and guiding the organization through a delicate transition period .

            A responsive supply chain looks different when lack of supply is the issue. The flow stops just the same, but demand for the product may still be strong. Lack of inventory leaves no buffer between production and the customer. Logistics has closed the gap between source and production and between production and the customer. There are tremendous economic benefits to making capital–not just equipment–more efficient.

            In an effort to establish a direct link with its customers, Dell should envision every product to become part of a limitless, wireless telecommunications network. To become more customer-centric customer demands concerning vehicle delivery were examined. Assuming customers were demanding “quick delivery,” many  companies like Dell  had begun initiatives that would enable two- to three-day delivery. What customers really valued was that they got the products they wanted, at the desired time and desired price. Supply chain strategies don’t have to be a liability with customers. They help deliver what the customer wants or expects on time and in the right place . So what is needed was a differentiated supply chain response for each customer. Dell should be  able to leverage the power of the Internet and bridge the gap between customer needs and Dell’s product offering.

Dell should  also uses integrated supply in supply chain management which promises to simplify the operations and enhance the efficiencies of distributors. An important requirement of integrated supply is to develop a keen understanding of one’s cost structure and the customer’s as well. Understanding the customer’s costs will make selling an integrated supply relationship easier since the integrator can demonstrate customer savings to offset inventory management fees in the compensation negotiation (Varma, 1999).

            Different organizations’ supply chain management utilizes different strategies. Supplier integration is a kind of supply chain management wherein select suppliers are integrated more deeply into the development of new products and provision of services. Most health care organizations fall under this category. Commodity/supplier leveraging is another kind of supply chain management and this represents the traditional approach to sourcing and buying. Price and volume are at the forefront, while adding product and supply chain value is usually of secondary importance in this kind of supply chain.

            Lean supply chain management is planning, executing, and designing across multiple supply chain partners to deliver products of the right design, in the right quantity, at the right place, at the right time (Reeve, 2002). Dell  has plenty of work to do on the supply side, especially in supporting and enabling initiatives such as improving communications and collaboration capabilities across Dell’s vast network of suppliers.

            Based on the research that was done, Dell can benefit further from some recommendations. For the Dell supply chain to adjust to higher and lower rates of demand, supply chain participants must have advance warning of the expected execution rates and changes in those rates. In rate-based planning and execution, this is the purpose of the forecast. The forecast is not used for releasing orders in anticipation of demand, except for parts with long lead-times. The forecast is used to prepare suppliers for changes in demand rates (Reeve, 2002). For example, if the demand rate is expected to increase in the future, suppliers must be warned in advance.  In this way, planning should significantly reduce the level of surprises at or near the build date. Minimizing surprises and disruptions, in turn, reduces the likelihood of misallocated capacity on the part of Dell  and its suppliers.

            The ethical implications for this recommendation includes corporate challenges for Dell like adoption of standards, debates on the need to monitor and audit compliance on the suppliers, and ethical ways by which supplier activities can be integrated with the broader supplier management objectives of Dell. On the other hand, this recommendation can also strengthen the relationships of Dell with suppliers and licensees.

            The customer-focused internal supply and demand integration used by Dell provides customers with what they want as the result of improved supply activities. There is integration of the Dell value chain through information sharing, decision making, and collaborative planning. The leveraging of suppliers jointly creates solutions and opportunities for Dell.

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