Chronological Development of Supply Chain Management

1. Describe the development and practice of Supply Chain Management activity from the broad acceptance of the terminology and importance of the concept in the 1980s to the present day?

2. With reference to both the article at the BBC link provided and the statement below, compare and contrast a wide selection of differing modes and practice of operational relationship between supply chain partners. Your answer should seek to make some conclusion on what could be considered to be general best practice, and why?

 3. With reference to appropriate theory, consider and describe how your own organisation* seeks to manages its supply chain both in terms of upstream suppliers and downstream customers. Please conclude by making suggestions as to how this chain could be improved or developed in future?

The report here deals with the evolution and development of the Supply chain process within the organizations. The initial part of the report show the chronological order in which the SCM concept was introduced and later the concept was implemented within the processes in order to reduce lead time, increase product quality and decrease production cost. The major focus of the report was on the use of the different strategies within the organizations to make effective supplier relationship. The ending part of the report focuses on the SCM process of Dell that is the benefits and the negative impacts of the BTO process. Thus the report will clarify the information about the use of different SCM techniques and their value to the organizational gaols.

Supply chain management is systematic process of management of the raw materials; semi finished goods and finished goods within the organization (Myerson, 2012). The systematic arrangement of the products in the aisle of the retail stores and the timely delivery of the product to the customer’s doorsteps is some of the basic functions of the supply chain process within an organization. From the time of its inception, the concept and functions of a supply chain system are still being modified in order to attain customer value. The report here evaluates the development of the concept of supply chain and its importance from the beginning to the present day. Further, the report focuses in analyzing the different types of practice and evaluates the supply chain system within an organizational context.

Before 1950s, supply chain was connected with military tasks. The military tasks like procurement, maintenance and transportation of military facilities and materials were denoted as activities of logistics or supply chain management. In 1982, the concept of supply chain management in organizations originated. Booz Allen consultant Keith Oliver, was the first who introduced the term supply chain management to the public world in an interview given to Financial Times. According to Wook Kim (2006) although the concept was present however there was no implication of the same within the functions of the organization. During that time period the organizations were facing problems in terms of more inventory, long production runs, slow delivery, less warehousing etc. In the late 1980s, the organizations became aware that if they investment in supply chain process will help them to reduce cost and maximize customer satisfaction levels.

Benefits of Supply Chain Management

Further, in the year 1990, the emergence of the Enterprise Resource Planning (ERP) systems fuelled the growth of the supply chain management further. By the end of 1990, the Japanese manufacturing companies had already adopted that the basic SCM concepts like “Just in time approach” and “Kan ban” within their organizations. Christopher (2012) confirmed that the elements of supply chain were always present in the business however the recognition of the inter relation between the elements was necessary.

The following table shows the chronological development process of supply chain management.

From the early years with the development of the SCM process, the organizations realized the importance of SCM activities within the organizational process. Che and Chiang (2010) suggested that the general benefits that SCM provides are namely reduction of inventory costs, improvement of customer service, and improvement of process integration, improvement of bottom line and increment of cash flow within the business operations. For instance, adoption of direct selling technique by Dell helps the computer manufacturing company to reduce intermediary cost and receive direct feedback from the customers. Dell also uses Build to order approach to manufacture computers that helps to customize the orders. Although the company outsources some of its operations like component production, however it runs its own assembly lines in countries like America, Ireland, and China etc (Gunasekaran and Ngai, 2005).

Taking the example of Zara it is seen that the clothing company avoids mass production in order to keep pace with the changing trends in the fashion market. The company adopts the Just in Time approach to avoid over stocking and under stocking of materials. Wal-Mart embraced the concept of SCM by introducing a secured web based Retail link system that the suppliers can access in order to check the stock levels and sales level of individual stores. With the help of this system, Wal-Mart is able to manage its 60,000 suppliers.

According to Myerson (2012) in the present context it is important for the organizations to establish a collaborative relationship with the supply chain partners because the supply chain system has  a direct effect on the customer’s value. Keiretsu supply chain management system, initially introduced by the Japanese companies is a system that helps to build long continual business relationship with the suppliers. Wook Kim (2006) suggested that companies using this technique maintain a close relationship with the first tier suppliers in order to incorporate manufacturing, logistics and information process. This process gives the companies the opportunity to employ JIT approach and line side delivery. However, Christopher (2012) opined that in order to integrate and collaborate with the supply chain partners the organizations need to develop high sense of trust among the supply chain partners. The development of trust may be time consuming. Thus for collaborative supply chain, the organizations must follow the following steps:

Figure 1: Building trust between the supply chain partners

(Source: Christopher, 2012, pp-83)

Carter and Liane Easton (2011) suggested that at times it is seen that the high completion from the suppliers for the same type of product orders makes it difficult for the organization to coordinate with the right kind of suppliers. In an attempt to secure the orders he suppliers may adopt unethical trade practices like reduction of prices compared to the market price, making unrealistic product promises and degrades the product quality in an attempt to reduce the lead-time. In such circumstances, the use of Supply chain rationalization is advisable (Myerson, 2012). For instance, Nissan in the year 2002 had reduced the number of supply chain partners by half in order to reduce the costs and complexities associated with the supply chain process. The BBC article about Premier Foods shows the retailer is also set to adopt the Supply chain rationalization strategy. The company in order to reduce cost and pay more focused attention on the product quality is set to reduce the large supplier base that is hindering the cost as well as the quality of the products. Golicic et al. (2010) has suggested that reduction of the supplier base helps an organization to effectively commit to the needs of the existing supplier base. Premier Foods have devised the investment strategy on the part of the suppliers in order to control the supplier intervention (BBC News, 2014).

Contrasting Operational Relationships Between Supply Chain Partners

In order to maintain strategic relationships with the supply chain partners the organizations employ different partnership models namely the collaborative framework, mutual partnership framework, vertical partnership framework and horizontal partnership framework Fawcett and Magnan (2002).

The major approach taken by the organization for effectively controlling the supplier relations is the collaborative approach. According to Wook Kim (2006) the organization in this context uses cross-functional supplier teams in order to control the competition among the suppliers. If the cross-functional suppliers are appointed then they are not likely to compete against each other for the order and thus the suppliers will collaborate in order to make a high quality product. Further, in this process the organization uses the aggregate procurement strategy. This strategy gives each supplier a share of total orders based on their ability to deliver the order on time and according to the specifications.

According to Hofmann and Kotzab (2010) this is a part of the collaborative model where the organizations work along with different suppliers for different levels of production. The main aim of the partnership is to gain from the cooperation. The organizations that are planning to expand their business operations into areas that are diverse points of the same assembly path can avail the vertical partnership structure. However, Myerson (2012) argued that this process involves high co ordination costs since the organization needs to co ordinate with different suppliers and there exists a lack of competition within in between the suppliers. Hence, the major aim of vertical partnership is to combine different businesses in a single supply chain. For instance this type of supplier relationship is noticed in Toyota and the major SCM concepts that the company uses are Kaizen and JIT approach.

In this process, different supply chain processes are integrated within a common business process. According to Christopher (2012) this gives the organization the opportunity to share costs and maintain flexibility within the production process. Moreover, with the technological knowledge of the partners the organization is able to get access to the new products and make more developments to the products. However, Myerson (2012) argued that the cost coordination is again a threat in this partnership and the lack of control on the part of the organization will make to difficult for the organization to control the activities of the suppliers.

Christopher (2012), comments that an organization will not be able to improve its process if the organization is not able to get support from its suppliers. Thus to gain the support the acquiring of trust is necessary. The organization by adopting this process use emotional approaches in order to gain trust of the suppliers and make the suppliers focused towards the customer needs.

Analysis of the strategies shows that the collaborative approach is the best-used method since it gives benefits to the organizations as well as the suppliers both. The suppliers may benefit from the low cost and the low competition and the organizations may benefit from the increased product quality and presence of high market opportunities and knowledge from the different suppliers (Gaudenzi and Borghesi, 2006).

According to Miles and Snow (2007) to attain competitive advantage the organization in the current scenario needs to attain high customer satisfaction levels with low cost of operations. In this context it is effective to take the example of the US based Computer services company Dell Inc. The present SCM system of Dell has helped the company to reduce time, material waste and optimize customer satisfaction levels. Håkansson and Persson (2004) opined that Dell is the only computer manufacturing company that uses Configure-to-order (CTO) model in manufacturing of the computers. The SCM model helps Dell to control its inventory and costs with the help of demand-pull strategy. Dell can control the purchase cost of the components because the company makes purchase process based on the customer’s demand. The CTO model enables the customers to design the computers and laptops as per their choice. Hence, when the customer notifies the company about their requirements the company orders for the components to the suppliers. Ou. et al. (2010) commented that this approach helps the company to avoid any wastage in part of the inventory.

However, Melnyk et al. (2012) opined that the prevailing supply chain system of Dell is cost intensive for the company. The Company has to bear separate storage costs for the different computer parts hence the company incurs high warehouse costs. However again Christopher (2012) the company can compensate the cost by reducing the closing inventory costs and reduce the risk of over stocking of inventory. The adoption of the Just in time approach and production on demand technique has helped the company to start its production of the computer part on after the order of the computer is placed.

The CTO process of Dell is undertaken in different sequential steps. Initially the company extracts information and customer requirements from the customer over their company website or through personal calls from the customer care service. Then the purchase order is given to the supplier. Dell collaborates with original supplier’s likw Hon Hai, Quanta, Arima and Celestica for the manufacturing of the final products like notebook PCs, subassemblies and PCBAs. The suppliers in Dell have a process of delivering the computer parts in every two hours. The manufacturing unit composes the parts in the sequence in which the suppliers deliver them. The company also relies on outsourcing of accessories like disk drives, CD-ROM drives, keyboards, monitors, speakers and mouse from the external suppliers. According to Ketchen and Giunipero (2004) this strategy helps Dell to reduce its production and manufacturing cost. Dell has set its manufacturing units in different parts of the world namely in America, Asia and Europe. For opening of the subsidiary Dell manufacturing units in different parts of the world, Dell decides on the location depending upon the distribution cost and time that can be minimized in accordance to the Build-to-Order (BTO) model adopted by Dell. The company further in order to reduce the logistics cost appoints suppliers who are within 30 minute distance of the manufacturing plant. Giménez and Ventura (2003) suggested that since the company adopts a BTO approach hence it is necessary for the company to meet the quick deadline of the customers. Thus, the location of the supplier for acquiring the parts within every two hours is essential. Moreover, the location of multiple manufacturing units within a country saves the shipment cost ad time for the company.

Figure 2: SCM process of Dell Inc

(Source: Gunasekaran and Ngai, 2005, pp-449)

For ensuring warranty and effectiveness of the supply chain process, Dell appoints suppliers only after acquiring ISO and OHSAS certifications from them. Moreover, the company conducts annual business reviews, internal audits and sustainable activities in order to ensure that the supply chain system is effective over the period.

On analysis of the above supply chain process, it can be concluded that Dell has a competitive advantage over the other companies because of the present SCM activities. According to Monden (2011) Build-to-order approach is the best method within the SCM process that helps an organization to deliver optimized customer value. The major concerned stakeholders for an organization in its SCM process are the customers and the suppliers. The delay in the supply of raw materials will decrease the customer satisfaction levels Simatupang and Sridharan (2002). Hence, Dell effectively manages both suppliers and customers to increase their business profit. The process has helped Dell to reduce inventory costs, make faster response to customer demands, adapt effectively to the changing trends in the customers demand, and avoid middle management and distribution. Moreover, the BTO approach has also helped Dell to reduce its inventory cycle to 6 days that in turn has reduced the warehousing cost, labor cost, inventory waste and technological costs (Blanchard, 2010).

It has been noted that to optimize the customer value Dell has introduced the process of Demand Sensing Initiative within the supply chain process. The build-to-order process is started only when sufficient and relevant demand specifications are obtained from Dell. This process involves a team of research analyst within Dell who forecasts demand at every single level of production. The researchers in order to improve the technological settings and retain or make the customers repurchase from Dell also track the demand processes of the existing customers.

Although Dell’s supply chain is considered to be one of the most successful supply chain process however there are certain flaws within the process which should be managed. Dell produces according to direct specifications of customers giving them opportunity to personally customize. However, this has been a disadvantage for Dell in case of B2B production. Jacobs et al. (2010) further added that the company is only focusing on short-term profits, which in turn is reducing the market share of the company. Moreover, the numbers of Dell repair centers are very low and hence the existing customers are shifting their focus to other computer producers like HP and HCL. Sheffi and Rice Jr (2005) further recommended that the direct selling technique that Dell adopts make the company incur high shipping costs. Moreover, the production based on BTO process does not give Dell the opportunity to avail the advantage of economies of scale. Further Aksoy and Öztürk (2011) commented that the BTO process of production encounters the Bullwhip effect. This effect makes fluctuations within the inventory levels of Dell since the inventory levels change according to changing customer demands.

Thus keeping in mind the problems that Dell is facing for the prevailing supply chain management it can be recommended that firstly Dell should adopt a mass production strategy for the B2B customers and retain the BTO strategy for the B2C customers. This will help the company to avail economies of scale. Targeting the B2B customers will help Dell to not only increase the market share but also increase the revenue. To avoid the bullwhip effect Dell needs to make semi-customized products. Relying totally on the customers’ demands for manufacturing of the products will make Dell miss revenue and increase costs (Hugos, 2011).

Conclusion

The report shows that the organization from the introduction of the concept to the present day is trying to establish the concept of SCM within the business processes. The use of the collaborative partnership will also help the companies to establish a trust worthy and effective relationship with the supply chain partners. Moreover, the report shows the effectiveness of the SCM process of Dell and the disadvantages in respect of the market share and price that the company is facing. Thus from the report it can be concluded that the SCM process is still under development within the organizations and requires more efficiency on the part of the organizations.

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