Supply chain is more accurately viewed as a set of linked processes that take place in the extraction of materials for transformation into products or perhaps services for distribution to customers.
(Definition) Supply Chain Management is the design, planning, execution, control and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply chain demand, and measuring performance globally.
- Supply chain management is about creating net value.
- There should be value creating activities in the supply chain that transcends the activities of particular entities in the chain.
- Managing supply chain requires a balancing act among competing interests.
Value Chain and Mapping
A value chain is a string of collaborating players who work together to satisfy market demands for specific products or services.
(Definition) The value chain is made up of the functions within a company that add value to the goods or services that the organization sells to customers and for which it receives payment.
The intent of a value chain it to increase the value of a product or service as it passes through stages of development and distribution before reaching the end user.
Not all value chain activities are technically part of the supply chain. Those activities might include:
- Information Technology
- Human Resource
(Definition) It is the process of creating, producing and delivering a good or service to the market. For a good, the value stream encompasses the raw material supplier, the manufacture and assembly of good, and the distribution network.
For a service, the value stream consists of supplier, support personnel and technology, the service “producer”, and the distribution channel.
The value stream may be controlled by a single business or a network of several businesses.
A value stream encompasses all the primary actions required to bring a product or service from concept to placing it in the hands of the end user. It also includes timing.
Value Stream Mapping
(Definition) Value stream mapping is drawing the current production process/flow and then attempting to draw the most effective production process/flow.
Mapping the stream aids in process improvement.
There are five primary objectives that supply chain management can help a company or organization accomplish:
Objective 1: Add Value for Customers and Stakeholders
Supply chain management aims to create value through financial benefits, match the values of its various customers, and appeal to social value of its customers, stakeholders and community.
(Definition) Value is the worth of an item, good or service.
Adding value to a good or service is the responsibility of each entity and process in the supply chain.
(Definition) Value Added is the actual increase of utility from the view point of the customer as a part is transformed from raw material to finished inventory. It is the contribution made by an operation or a plant to the final usefulness and value of a product as seen by the customer.
The goal is to add value at each step in a service oriented value chain as well as in manufacturing oriented supply chain.
Utility may not be the only value, or worth, of a good or service from a customer’s point of view. Price, availability, and attractiveness are also values to consider.
Financial Benefits: Profit and Profit Margin
- Adding value that customers desires promotes increased sales, which improves the bottom line.
- In order to be successful and have longevity, any organization must have a positive cash flow.
* Triple Bottom Line (TBL):
- Term coined by John Elkington 1994.
This refers to the concept that corporate success should also be measured in 3 dimensions:
Measuring Value One Stakeholder at a Time
- When planning any new supply chain activity or monitoring continuing practices, it is important to identify all the stakeholder groups and determine the impact the activity will have on each one.
- The primary stakeholder in any business is the business itself. A business must be profitable to survive and create value for any other stakeholder group.
- Customers are also significant stakeholders in supply chain. Each business must create value for its customers as well as profits for itself. Moreover, the end result of each partner’s activities must optimize value for the supply chain as a whole.
- There are also stakeholders that are external to the supply chain’s business partners and end customers. These include public or private investors, lenders, and communities and governments. To investors and lenders, supply chain value may be defined as capital growth, dividend income, or interest payments and eventual return on invested capital. Value as defined by these external partners must be considered when making business decisions.
- Communities and local governments may also feel the impact of supply chain operations because they affect community members and their environment, both built and natural. The location of a retail outlet, warehouse, or other supply chain facility will have impact on the community where it is built and maintained. The community, and its political leadership, may judge this impact to be a positive value or a detriment.
Balancing Varied Stakeholder Values
|Supply Chain Stakeholders||Stakeholder Values|
|Firms in supply chain||Profit margin, market share, revenues, expenses, image and reputation.|
|End customers||Affordable, safe, attractive, useful products; affordable, timely, secure, easy, pleasant services; sustainable manufacturing practices.|
|Investors||Return on Investment (Capital growth, dividend income), comprehensive and comprehensible communications.|
|Lenders||Interest rate, long-term stability, return of principal.|
|Communities / Environment||Tax based enhancement, sustainable manufacturing practices, environmental impact (safety, ethics, convenience, and natural resources), and growth of attractive jobs.|
|Governments||Legality, regulation, overall impact on community members and environment.|
|Employees||Job security, wages and benefits, opportunity, good working conditions, sustainable and safe manufacturing process.|
Green, Sustainable Supply Chain Management
- One value that is important to most of these groups is sustainable manufacturing process and practices, because it impacts so many around the globe.
- Green Supply Chain Management (GSCM) has been brought to the forefront of most companies’ strategic goals in response to the demands from customers and stakeholders.
- The objective of supply chain sustainability is to create, protect and grow long term environmental, social, and economic value for all stakeholders involved in bringing products and services to market.
- Today GSCM requires supply chain managers to integrate environmental thinking into each step within the supply chain. That means that they must employ innovative environmental technologies to provide practical solutions to the environmental problems facing the global community.
(Definition) Green Supply Chain is a supply is a supply chain that considers environmental impacts on its operations and takes action along the supply chain to comply with environmental safety regulations and communicate this to customers and partners.
Sustainability figures significantly in supply chain management decisions for the following reasons:
- Government and regulatory pressures.
- Good environmental management and sustainability concerns.
- Public opinion and power of consumer choice.
- Potential for competitive advantage.
In addition to adding value, sustainable supply chain management can make good business sense, which can:
- Drive growth
- Reduce costs
- Without forward looking environmental and social policies and supply chain practices, and organization’s reputation may suffer among investment analysts.
Supply chains must create three types of values:
One method of increasing the financial value is to reduce costs.
Cut cost to yield net gain at the bottom line:
- Cost cutting needs to aim for net gains at the bottom line.
(Definition) Inventory optimization software is a computer application having the capability of finding optimal inventory strategies and policies related to customer service and return on investment over several echelons of a supply chain.
- Changes at any one point in the system will create changes elsewhere, therefore changes have to be viewed historically. Supply chain management necessitates cross-functional team work for the lateral chain. If a leaner supply chain can deliver the same customer satisfaction with a great profit, then cost cutting is justified.
It takes money to make money:
- The end result should be net gain.
- If an improvement in the supply chain brings in more revenue than the cost of investment, then it is justified.
- Purchasing automated machinery to improve warehousing, upgrading hardware and software, training managers in team building and other investments may be necessary to build and maintain a competitive supply chain.
- The ultimate aim must always be for creation of value at the customer’s end of the chain with sufficient profits to satisfy the needs of other stakeholders.
Typical measures of success in the use of invested money and assets more generally are:
- Return on Investment (ROI)
- Return on Assets (ROA)
(Definition) Return on Investment (ROI) is a relative measure if financial performance that provides a means for comparing various investments by calculating the profits returned during a specified time period.
(Definition) Return on Assets (ROA) is defined as net income for the previous 12 months divided by total assets.
Gains should be equally distributed:
- Possibly the most common mistake in this regard is to send all cost savings all the way to the consumer’s end of the chain. If all efficiencies are plowed into retail price reductions, the supply chain itself will suffer from lack of financial sustenance.
- Investors require a competitive return on loans and equity. The maintenance and upgrade to the chain’s infrastructure requires virtually continuous investment.
- Employees have to be compensated at a competitive arte, trained in new processes and products, and more fundamentally, recognized for their contributions.
- Teamwork among supply chain entities can create improved value for customers for a net financial gain that is equitably shared by all stake holders.
(Definition) Market Driven is responding to customer needs.
- The ultimate goal of market-driven supply chain management must always be to deliver products and services that the customer values and of course will pay for.
Depending up the market being served, a supply chain may be managed so that it delivers one or more of these values to its end customers:
- Quality of product or service
- Availability Service
Generally a supply chain’s contribution to the society come from three factors:
- Creating a positive good by delivering socially desirable and useful products or services.
- Avoiding or reducing negative environmental side effects from extraction, processing and construction.
(Definition) The Reverse Supply Chain moves items from the consumer back to the producer for repair or disposal.
- Integrating sustainability into the supply chain.
- The SCOR model has applicability in sustainable chain management.
Objective 2: Improve Customer Service
(Definition) Customer Service is the ability of a company to address the needs, inquiries and requests from customers.
(Definition) Customer Service is a measure of the delivery of a product to the customer at the time specified.
Fundamental attributes of basic customer service:
- Availability is the ability to have the product when it is wanted by a customer.
- Operational Performance deals with the time needed to deliver a customer order.
- Customer Satisfaction takes into account customer perception, expectations and opinions based on the customer’s experience and knowledge.
Objective 3: Effectively Use System Wide Resources
- Resources can be in form of employees, raw materials, equipment, etc.
- Being effective means that supply chain gets the right product and the right amount to the right customer at the right time.
Objective 4: Efficiently Use System Wide Resources
(Definition) Efficiency is a measurement (usually expressed in percentage) of the actual output compared to the standard output expected. It measures how well something is performing relative to existing standards. Efficiency is inward-focused, in that a company looks internally to determine how a supply chain process can be done less expensively, in less time, and with fewer resources.
Efficiency is one of the measures of capacity in a supply chain environment.
Capacity is all about what can be accomplished by employing all the resources in the supply chain network that includes work centers, storage sites, people and equipment.
(Definition) Capacity has few meanings:
- The ability of a system to perform its expected function.
- The ability of a worker, machine, work center, plant or organization to produce output per time period.
- Required mental ability to enter into a contract.
When a supply chain is operating at high efficiency, it means that its utilizing its resources well to produce the level of output in a production plan within the time allowed.
Objective 5: Leverage Partner Strengths
(Definition) A Partnership in a supply chain is a relationship based on trust, shared risk and rewards aimed towards achieving a competitive advantage.
Well-chosen partners will benefit from a high level of mutual trust, respect of each other’s expertise and contributions and shared vision.
A strong and useful partnership will yield a combination of the following as it performs the functions needed by your organization:
- Adding value to products, such as shorter time to market.
- Improving market access, such as providing new market channels.
- Building financial strength through increased income and shared costs.
- Adding technological strength if there is internal expertise in use of more advanced software and systems.
- Strengthening operations by lowering systems costs and cycle times.
- Enhancing strategic growth to break through barriers to new industry and opportunities.
- Improving organizational skills that facilitate shared learning and insights of both firms’ management and employees.
Supply chain management technologies and practices can help a company select the appropriate sales partners and support them by:
- Providing timely and accurate information.
- Helping them deal successfully with channel customers.
- Aiding them in leveraging their strengths such as innovation, speed, high quality, low costs, etc.