Stages of Supply Chain Management Evolution

Stage 1: Multiple Dysfunction

The nucleus firm lacks clear internal definition and goals and has no external links other than transactional ones.

In the dysfunctional organization, this is what tends to happen:

  • Internal activities tend to be undertaken impulsively rather than according to plan.
  • Management provides only the most general sense of mission, communicated perhaps by pep talks at the best or threats at worst.
  • Forecasting tends to be mostly guess work, often inflated by unwarranted marketing optimism.
  • Products are designated without advice from other areas that could provide guidance, such as manufacturing or marketing.
  • Warehouses are cited near each market, stocked with an overabundance of inventory in anticipation of big sale, and staffed with manual laborers who have little training.
  • Trucks and trains are unloaded when they arrive and loaded when an order comes in, without much advance warning in either case.
  • There may be flaws of payments (but collection may be poorly executed) as well as materials but the exchange of information tends to be tied mostly to giving orders internally, accepting bids and sending invoices.
  • Material requirements planning (MRP) takes place at basic level, involving a Bill of Material (BOM), a master schedule, and current on-hand/on-order data.

Stage 2: Semi Functional Enterprise

The nucleus firm undertakes initiatives to improve effectiveness, efficiency, and quality within functional areas.

There is little or no overlap in decision making from one department to another.

An individual firm undertakes initiatives to improve specific functional areas. For example:

  • The largely manual operations in warehouses may be augmented by the addition of basic materials – handling equipment.
  • Inventory management may find ways to reduce levels of inventory within the firm’s own facilities.
  • Procurement might take advantage of new purchasing strategic to obtain supplies and services at the lowest possible prices.
  • The traffic department may reduce transportation costs by strategic selection of carriers and routes.
  • Some departments may institute more effective hard skills training and adopt strategies for making jobs more challenging.
  • Marketing may develop more reliable research and forecasting techniques.
  • Manufacturing resource planning (MRP II) software may be in peace and the company may have cross-functional integration of planning processes.
  • When the nucleus firm concentrates only on improvements within its separate departments, it may find its efforts wasted through lack of communication.

Stage 3: Integrated Enterprise

This firm breaks down silo walls and brings functional areas together in process such as sales and operations planning (S&OP) with a focus on companywide processes rather than individual functions.

Historically, this shift in supply chain strategy is associated with the late 1980s and early 1990s, the same time when personal computers were becoming more powerful, reliable and affordable.

There are a few key milestones that mark this phase:

  • Introduction of manufacturing and enterprise-wide software.
  • Increased cross-functional communication and training.
  • Centrally located and easily accessible database and files.
  • Periodic sales and operations planning meetings attended by representatives for all departments involved.

This stage is marked differently from the previous one because of the following:

  • The focus on business processes is facilitated with the increased availability of e-mail, file transfers, powerful databases, and enterprise wide software applications. Cross functional cooperation becomes must faster and easier and takes place almost instantaneously across functions, time zones, and international boundaries.
  • A variety of initiatives reduce the time it takes to get an order from a supplier, create the product, and deliver it to the customer, including MRP II and ERP:
    • MRP has been upgraded to MRP II, a breakthrough development that allows cross-functional communication between manufacturing a finance.
    • Enterprise Resource Planning (ERP) extends that process by adding modules for each functional area until the most advanced version tie together entire companies. Further advances have reached through the corporate wall to tie supply chain partners together.
  • Product design in some firms is now a team effort in which production engineers and other stake holders, such as marketing and purchasing, collaborate with design engineers to “design for marketing”, “design for logistics” or “design for the environment”. This approach results in products that are on target for customer desires and are ready to be manufactured without making costly modifications in processes, equipment or staffing.
  • There are improvements in customer service due to absolute segmentation of markets and more efficient replenishment policies suited to each segment.
  • Inventory is treated more strategically as just-in-time procedures, more accurate demand planning and improved logistics work together to make fulfillment more efficient and reliable.
  • Warehousing and transportation decisions are carried out in tandem to achieve the optimal balance of cost-effectiveness and customer service.
  • Warehouse management benefits from more advanced equipment and automation.
  • At this point the nucleus firm may begin to take a step toward integration with the external members of the chain by contracting with a logistics supplier, such as UPS, to “insource” by using its expertise to help optimize logistics decision.

Stage 4: Extended Enterprise

The firm integrates its internal network with the internal networks of selected supply chain partners to improve efficiency, product/service quality or both.

The starting point is generally one inside/outside partnership that points the way toward the completely networked enterprise.

What is unique to this stage is the following:

  • There is an initial exploratory collaboration between a channel master and one or several partners in chain often a manufacturer and are component supplier or a retailer and one supplier of finished goods.
  • With MRP II merged with other functional applications and transformed into ERP, enterprise wide planning software is able to link the entire internal supply chain together on one platform.
  • The networked enterprise is built on intranets, extranets, peer-to-peer networks, the internet, or a combination of those platforms. Partners begin to synchronize their ERP systems across corporate boundaries so they can share data as necessary for their efficient collaboration.
  • Cross-functional approaches are implemented with certain processes such as CPFR (Collaborative Planning, Forecasting and Replenishment). Stage 4 companies institute periodic sales and operations planning meetings in which representatives of sales and marketing, production (or operations), and other functions meet to coordinate demand planning and production scheduling.
  • In stage 4, there are advances in e-commerce such as interactive sites where customers can order products and services, track their shipment and communicate with customer service immediately upon their arrival.

Vertical Vs Horizontal Integration

Shift from Vertical to Lateral (Horizontal) Supply Chain Management

  • Vertical integration, or vertical supply chain management, refers to the practice of bringing the supply chain inside one organization.
  • It is difficult for one corporation to garner the expertise needed to excel in all elements of the supply chain, and it increases their risk, so corporation around the globe have turned instead to outsourcing those aspects of their business in which they judge themselves to be least effective.
  • Lateral supply chain management has replaced vertical integration as the favored approach to managing the myriad activities in the supply chain.
  • We usually assume that the customer-producer-supplier illustrations refer to three separate companies. This is, of course, not necessarily the case; the entities could be departments within one company.

Vertical Integration

  • By bringing many supply chain activities in-house and putting them under corporate management, vertical integration solves the problem of who will design, plan, execute, monitor and control supply chain activities.
  • A vertically integrated enterprise may grow from an entrepreneurial base by adding departments and layers of management to accommodate expansion, or it may be built through mergers and acquisitions.

  • The primary benefit of vertical integration is control.
  • A department or wholly owned subsidiary with no independent presence in the market place can’t deal with competitors to sell its components or services at a higher price.
  • Its operations are completely visible to the parent company (at least in theory) and can be synchronized with other company functions by directives from the top.
  • Its schedules, work force policies, locations, amounts produced, all aspects of its business are controlled by the overarching management.

Lateral Integration

  • When corporate ownership turns instead to outsourcing various activities, it loses control of these aspects of the supply chain and will deal separately with members of the chain as supplies or customers.
  • Each of them will focus on their core competencies such as extraction or production and deal with each other through discrete transactions or by longer-term contracts.

**Some Japanese companies favor an intermediate form of integration called KEIRETSU.

(Definition) KEIRETSU is a form of cooperative relationship among companies in Japan where the companies largely remain legally and economically independent, even though they work closely in various ways such as single sourcing and financial backing.

A member of KEIRETSU generally owns a limited amount of stock in other member companies

A KEIRETSU generally forms around a bank and a trading company, but “distribution” (Supply Chain) KEIRETSU alliances have been formed of companies ranging from raw material suppliers to retailers.

  • Rely on lateral supply chain:
    • To achieve economies of scale and scope.
    • To improve business focus and expertise.
    • To leverage communication and production competencies.
  • Despite the benefits of the lateral chain, however, synchronizing the activities of a network of independent firms can be enormously challenging.
    What each firm gains in scale, scope, and focus, it may lose in ability to see and understand the larger supply chain processes or to care about them.

  • Horizontal doesn’t quiet capture the complexity of the global supply network with multiple connections around the world and information shared on networks connected all along the chain.