1.1.1 Supply chain management: The concept
Obviously, supply chain management is about managing the supply chain. So, what is a supply chain and why does it need to be managed?
In simple terms, a supply chain is the link between a firm or business and its suppliers and customers. And supply chain management is about managing the activities which support the movement of a product from a firm's supplier to a firm's customers, as in Figure 1.1.
Figure 1.1 A conceptual model of a basic supply chain
In a competitive environment a firm must be concerned about the efficient management of its immediate supply chain for both its survival and profitability. In the simple example of Figure 1.1, the firm buys from the supplier at an agreed price, and sells it to the customer at a competitive price that will produce profits for the business. In this model the firm adds value to the product by making it available to the customer in the way they desire it, when they desire it and at a place they desire it. These value adding activities are the primary business functions of the firm, and there are costs associated with these. The market price which the customer is willing to pay will depend on the value of the product as perceived by the customer; and if this price does not cover all the costs associated with procurement and value addition plus a reasonable profit for the firm, the business then obviously has no prospect of surviving in the long run.
This simple model of 'supplier - firm - customer' makes two interrelated concepts clear: the value of the product to the customer, which determines price and customer retention; and the costs of managing the supply chain, which also affect price and customer retention. These are the areas of main focus in supply chain management.
This simple model can help us to understand the basic concepts associated with supply chain management, but business organisation is rarely this simple. This model has to be extended to cover practical business situations which are complex and involve multiple supply chains linked to produce a final product which is purchased by the end consumer. This more complex arrangement of supply chains and businesses has given rise to a new concept in supply chain management: the extended supply chain.
In an extended supply chain, there are multiple stages in the manufacturing of a product and multiple inputs before the finished product is sold to the customer. These stages and points of input are the 'links' in the extended supply chain.
Figure 1.2 is a simple representation of an extended supply chain. In reality, each of the links will also have links until the chain resembles more of a 'web', as in Figure 1.3.
Figure 1.2 An extended supply chain: Extending from raw material sourcing to final consumer. (adapted from Stallkamp 1999)
Figure 1.3 An extended supply chain showing how each link will have other links until quite a complex 'web' shape will be formed of interlinked businesses and activities
As you can imagine, as the material flows along this extended supply chain from the raw material stage to the final finished product ready for consumption, the costs and values attached to the product are also transmitted downstream. The final value of the product and the costs attached to it will reflect inputs provided by all the firms in this extended supply chain.
The question we must consider is: How can a firm control all activities from raw material sourcing to marketing to the final consumer when the final product takes its shape by inputs from various firms with specialised skills and expertise, and when often these firms are located over a widely dispersed, and geographically and politically fragmented world?
This is a legitimate question in today's complex business environment. Many large corporations, like Ford motors in the USA , in the past have tended to vertically integrate to control everything from mining to manufacture to marketing. There are many multi national corporations (MNC) which control subsidiary supplier companies at the source in countries around the world. These companies have considerable control over their supply chains. But direct control and management of the extended supply chain is beyond most firms.
However, the appreciation of the extended supply chain is not lacking and new concepts in supply chain management are aimed at optimising a firm's control of its extended supply chain. Figure 1.4 illustrates industry perception about the major drivers of the current focus on supply chain management improvements. Customer satisfaction stands out as the dominant driver.
Figure 1.4 Major drivers of supply chain management improvements.
(Source: Stevens)
Supply chain management, as a business discipline, attempts to look at the challenges faced by modern businesses in the management of supplies, manufacturing, inventory and distribution. The aim of SCM is to enable the firm to remain competitive by effective management of activities related with supply chain management.
Activity 1.1
Take a paper and pencil and try to sketch the supply chains of each of the following familiar business types:
Your local baker
Your local milk bar or corner shop
The Sunday market trader
And:
Identify the source of supply.
Identify the customers.
Identify the transportation route and mode.
Identify the storage requirements.
Identify product shelf life and suggest inventory policies in each case.
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