Principles of Supply Chain Management

Supply chain experts are more concerned with satisfying the needs of their customers. A thorough understanding of the consumer requires determining their distinct demands and separating them based on these qualities. Customer segmentation can be accomplished in a variety of ways, such as the ABC analysis, which focuses on segmenting consumers based on profitability and sales volume (Anderson et al, 2007). When compared to other methods, this one is considered more primitive and backward. It is also possible to create segments on products, trade channels, and industries.

In this article, the authors suggested that segmentation of customers can be done on the basis of “sales and merchandise” and “order fulfillment needs”.

Focusing on customer needs is an important aspect of the supply chain. However, it is not wise to exclusively focus on customer needs alone, considering the current trends in customer behaviors and patterns. Sometimes, the consumer does not appreciate their needs until a competitor emerges from the blues. Completion gives the customer several different angles through which a need can be looked at. For instance, Amazon experienced this effect back in 2011 when they developed the Amazon Prime programmer that involved 2 days of free shipping and a discounted shipping of one day (Rai 2006, p 242). This has created ripples in the supply chain world as different scholars have argued out the effectiveness of this programmer. However, one fact is that Amazon continues to increase its customer base and more and more people turn to Amazon for their purchases and shipping. Dell is a major beneficiary of supply chain segmentation. It has enabled it to build on one on one relationships with some of its customers including their supply chains (Rai 2006, p 242). Different supply chains serve different types of customers depending on the policies and the operational modes. Segmentation solely aids in managing some of the biggest challenges faced in the supply chain, for instance, minimizing the effects of demand variabilities.

Principle 2: Customization of the logistic network to suit the profitability and service requirements of customer segments.

By creating different segments based on customer needs, different logistics are tailor made to handle different segment. This is because the different segments might possess entirely different characteristics hence cannot permit the use of the same supply logistics. However, it is important to note that this principle does not auger in all situations.

|For instance, a contract manufacturer in China already has different logistics systems for the customers they serve. In the United States, each customer already has a hold on the source of raw material. When these companies ask for your help in providing dedicated lines of production, therefore there is need to develop different kinds of logistics. It is, therefore, true to conclude that the major driving force for logistics network design is mainly the customer (Anderson et al, 2007.

The consumer goods supply chain is characterized by retailers requiring manufacturers to meet a variety of specifications, for example, submitting of ASNs, use of RFID tagging, shipping of full truckloads, and environmentally friendly packaging (Chopra 2004, p. 23).. Non-compliance with these requirements are met with several chargebacks. Manufacturers can weigh the cost of offering such services to their resultant profitability to the individual customers and come up with a conclusion. A demanding retailer can be characterized as a sole segment if they are responsible for the consumption of more than twenty percent of the manufacturer’s annual revenues.

Logistics programs can also increase the competitiveness of the company and improve its revenue growth. For example, companies with a standard Vendor Managed Programs (VMI) that have established consistent processes to all their multiple customers can execute such a VMI cost effectively (Chopra 2004, p. 23).

Forecast errors, therefore, can be reduced by three main ways, better forecasting through the use of appropriate supply chain forecast indicators, ensuring improved visibility and flexibility within the supply chain systems. And reducing lead times especially in areas over which accurate forecasting is required. Forecast sharing is also a concept that has been introduced that expounds on the earlier principles stipulated by the authors. For instance, when a manufacturer shares their demand forecast with their supplier, the buyer can benefit in two different ways, for instance, the partner becomes more aware of the needs of the buyer, and the buyer develops trust and is more dependable on the supply source. Forecasting in the supply chain world is based on cab be based purely on intuition or judgmental evaluation (Crandall et al., 2004). Qualitative forecasting practices such as sales force estimates, personal insight, market research, panel consensus, and visionary methods. Quantitative forecasting involves the use of historical data to perform a projection of the demands that will occur in the future (Crandall et al., 2004)..

Principle 3: Listens to signals from the market and ensure the consumer demands are aligned across the supply chain hence ensuring consistency in forecasting and optimizing resource allocation.

It is common practice for supply chain practitioners to provide the demand data they have obtained to their different partners to prevent keeping of unnecessary stock. Therefore this principle generally holds. However, analysis of the market proves that only Wallmart has a well elaborated and functioning policy on sharing of their demand data with their different trading partners (Anderson et al, 2007).

When the demand forecast is solely based on the Stock Keeping Units versus Customer level, then the use of historical data proves to be a more accurate analysis than the use of the Point of Sale data obtained from retailers. A forecast based on the Stock Keeping Units verses Store level, then using the Point of Sale data obtained from retailers is a more accurate method of analysis the market as compared to the use of one’s own historical data (Bowersox et al, 2002). Therefore data obtained from trade partners should be used in the right way to avoid the risk of inaccurate forecasting that can result into losses than gains. The fact that some companies have opted not to share their demand data actually not bands to some extent.

Principle 4: Differentiate product closer to the customer and speed conversion across the supply chain.

This principle is true but not entirely. Considering companies like Dell, the principle is greatly applied in that the company keeps their electronic components, and assembles the only after a customer has placed an order. This principle of operation allows Dell to survive the market as their products are readily available in case of repairs which require changing of different electronic parts (Rai 2006, p 242). However, Standardization is a complete principle as compared to Differentiation. A good example is the cosmetic companies that develop different formulations of products and design different packaging and labeling materials in order to comply with the regulations of different countries, for instance, Asia. These companies make only one SKU which can be sellable in over 16 different countries instead of selling to only a single one (Chopra 2004, p. 23). Therefore standardization enables the cost of the product to be as low as possible when the economics of scale is considered. One can consider postponement and correlated inventories and assembly stratagems to decrease the cost of inventory and to increase price flexibility. Just-in-time product differentiation serves to locate the available leverage points present in manufacturing processes in which the product in designed to concur with a set a set single requirement and to include options such as modularized design, postponement, or modification of the design of manufacturer in such a way that increases flexibility (Chopra 2004, p. 23).

Successful implementation of this principle, therefore, aids to improve the service offered to the customers by ensuring there are fewer stock outs. It also ensures that the inventory carrying costs are significantly reduced and taken out from the supply chain. Supply chain efficiency can be ensured by the postponement of product differentiation up to the latest possible moment.

Principle 5: Manage sources of supply strategically to reduce the total cost of owning materials and services.

This principle has indeed stood the test of time from the time the book was authored in 1971 till now. It is important for companies not to outsource what they believe are their core competencies. The author argues out that since manufacturers always require the cheapest raw materials available in the market, they have created a sense of competition to the suppliers thereby the more the suppliers willing to supply the same raw materials, the cheaper the product. However, when the suppliers experience higher costs of operation in any way, these costs would eventually come back to haunt the manufacturers in one way or the other. This principle is widely applied by many industries, especially in the pharmaceutical market which has a long list of prequalified suppliers (Kapuscinski 2004, p. 193). They undergo rigorous quality checkups just to ascertain that they have the right material and of the desired quality to be supplied to the industry. However, more than one supplier of the same product is prequalified, creating a sense of completion. The suppliers, therefore, offer as little as possible in order to win such huge lucrative tenders. The idea is to slash as much fixed cost as possible by the large consignments required by the companies, therefore compensating the losses that may have occurred due to lowering of prices (Kapuscinski 2004, p. 193). The danger of this principle is the fact that if these changes are not embraced by all partners within the supply chain, then this can ultimately result in loss of quality of the final product, therefore retransferring the costs back to the manufacturer inform of product recalls, failed Quality Assurance test and other regulatory tests and product inefficiency in the market.

It is important that customers of every type possess the innate ability to have fact based knowledge of the cost of services and purchased products. This is because eventually any long-term supplier’s cost experiences are always passed down to customers as higher prices (Kapuscinski 2004, p. 195).. A balance should be created to enable suppliers and customers to work in unity, ensuring a more creative and positive way to fully achieve the objectives of any supply chain management system. This can be translated into short-term competitive bids and in the long term improve the relationship between the suppliers and the customers, contracts and strategies, outsourcing and vertical integration.

Principle 6: Develop a supply chain-wide technology strategy that supports multiple levels of levels of decision making and gives clear view of the flow of products.

Reliance on an Enterprise Resource Planning (ERP) software solely for the management of businesses alone is not adequate. Companies, therefore, are responsible for adding additional measures such as increasing visibility, secured data warehouses, and powerful analytical tools to enable the better understanding of supply chain performance. In the past, the ERP systems were mainly used for large industries and other companies of the same magnitude (Harland, 1996). However, the ERP system has broken into several unfamiliar territories including smaller scale businesses hence has considerably gained popularity (Heuring 2004, p. 1708). Modern ERPs have the capability of analyzing and matching supply and demand and calculate the profitability of offering different services. ERP use is slowly gaining acceptance in Supply Chain Management companies because of several reasons which include; improved efficiency of work, ability to track orders from the manufacturer all the way to the customer, forecasting and decision making, optimization of inventory, minimizing of delays, and reduced cost (Seuring 2004, p. 1709). However, the initial costs of installation and integration of a fully functional ERP are system is quite costly. To sum it all up, ERPs are an integral system in Supply Chain Management as it integrates as a unit different areas of commerce, for example, finance, sales, logistics, production and distribution of goods and services.

Supply chain technologies like the Enterprise Resource Planning software and other IT systems employed in the operations of a supply chain process can, however, be faced with several challenges. These include high costs of implementation, fewer technological experts, high costs of retraining of staff in order to optimize on returns (Seuring 2004, p. 1709). This process can also be accompanied by worst professional procurement practices which may need a complete overhaul of the policies to ensure that these systems work. Some systems are not tweaked to ensure that the information stored or captured by them is as accurate as possible.

Principle 7: Adopt channel spanning performance measures to gauge collective success in reaching the end user effectively and efficiently

The authors of the book suggest to the idea that activity-based costing (ABC) should be implemented in order to determine the profitability from the customer. However, the ABC concept has got a twist that is rather interesting. Some scholars believe that ABC costing model is more difficult to maintain in such a manner to reflect the desired changes in processes, activities, customers, and products (Lumus 1999, p.13). This, therefore, results in the introduction of an improvement of the earlier concept, called the “Time-Driven Activity-Based Costing” (Tan 2001, p.41). The ability of the ABC costing to work is very questionable. Despite this fact, several companies and organizations continue to employ this strategy.

Also, it is important to observe that Key Performance Indicators, when used alone, may not generally result in an elaborate picture of the companies’ supply chain management performance (Jüttner 2005, p. 131). It is important, therefore, to look at the general performance of the whole chain, more or so from the perspective of the customer.

Conclusion

Considering the time in which these principles were written, it is also imperative to state the fact that some of them have definitely failed the test of time. Many of the principles have gone mainstream, for instance, the desire for improvement of sales and planning of operations. Others include calculating the cost to serve customers and different markets. Some have been efficiently adopted and well organized into the existing systems, for instance, many companies consider the total supply chain cost and not the individual or single costs of components and also the use of cross supply chain of Key Performance Indices. Also, characteristic of the current supply chain management systems is the growing use of strategies such as postponement and development of high-performance decision support and visibility technologies. This includes the ever growing incorporation of artificial technology which is believed to be the future of technological advancements.

The focus on supply chains and links as proposed by the article is no longer viable and is rather outdated. This because of the reduced sense of virtualization as was captured in the article, or also today’s supply webs.

Referencing

Anderson, D.L., Britt, F.F. and Favre, D.J., 2007. The 7 principles of supply chain management. Supply Chain Management Review, 11(3), pp.41-46.

Rai, A., Patnayakuni, R., and Seth, N., 2006. Firm performance impacts of digitally enabled supply chain integration capabilities. MIS Quarterly, pp.225-246.

Kapuscinski, R., Zhang, R.Q., Carbonneau, P., Moore, R. and Reeves, B., 2004. Inventory decisions in Dell’s supply chain. Interfaces, 34(3), pp.191-205.

Chopra, S. and Sodhi, M.S., 2004. Managing risk to avoid supply-chain breakdown. MIT Sloan management review, 46(1), p.53.

Crandall, R.E., Crandall, W.R. and Chen, C.C., 2014. Principles of supply chain management. CRC Press.

Bowersox, D.J., Closs, D.J., and Cooper, M.B., 2002. Supply chain logistics management (Vol. 2). New York, NY: McGraw-Hill.

Harland, C.M., 1996. Supply chain management: relationships, chains, and networks. British Journal of Management, 7(s1), pp.S63-S80.

Seuring, S. and Müller, M., 2008. From a literature review to a conceptual framework for sustainable supply chain management. Journal of cleaner production, 16(15), pp.1699-1710.

Lummus, R.R., and Vokurka, R.J., 1999. Defining supply chain management: a historical perspective and practical guidelines. Industrial Management & Data Systems, 99(1), pp.11-17.

Tan, K.C., 2001. A framework of supply chain management literature. European Journal of Purchasing & Supply Management, 7(1), pp.39-48.

Jüttner, U., 2005. Supply chain risk management: Understanding the business requirements from a practitioner perspective. The International Journal of Logistics Management, 16(1), pp.120-141.