Supply Chain Management

When supply chain managers compare notes, the talk will eventually get round to the perfect order. That's an order which reached the customer complete, in the right place, undamaged and on time. like other manifestations of perfection, it is not as common as some companies would like. Lower-than-necessary perfect order rates not only create unhappy customers, but suggest supply chain inefficiencies that are costing the company money. So attention to the supply chain has moved out of warehouses and loading bays and into Mahogany Row.

The supply chain is made up of the physical and information links between suppliers and the company on one side, and the company and its customers on the other. It includes production planning, purchasing, materials handling and, under the subset of logistics, transport and storage (warehouses and distribution centers). Though companies used to think of the supply side and the demand (customer) side as two separate strands, today they increasingly regard them, and manage them, as one continuous chain. For many years, it was the chain from their suppliers that preoccupied manufacturers most. The route to the customer was the distribution channel, a problem that belonged to a different part of the company.

The history of the supplier end of the chain was written largely by the big motor companies, for whom it has always been a crucial issue. In the early days, Ford manufactured most of its components itself, so suppliers were not a huge consideration. General Motors outsourced parts manufacture in 1920, but only to its own subsidiaries. It wasn't until 1950 that Ford began to outsource in the true sense, to other companies, and it was then that the tricky supply chain business of delivery dates, quantities, inventory, quality and breakages began to arise.

In those days, if you had too many supplies, you simply stored them in a warehouse until they were needed - rather have too much than run out, was the attitude. But holding stocks -- inventory -- ties up money. You have paid for it and there it sits, idle. Until the stocks are incorporated in a product and sold, the working capital they represent is non-productive. The same applies to finished products gathering dust in a warehouse. You have laid out more money than if you had planned the inventory flow better, and the surplus could be sitting in a bank, earning interest, or being spent on something more useful. So inventory is a cost - reduce it and you save money. Managers of old might have gazed on a bulging warehouse with pride. For today's managers, if they have any sense, it's with despair.

Just in time Learning from the Japanese, large manufacturers began to slash inventory in the 1980s by arranging for deliveries to arrive just as they were needed -- just in time. This meant cooperating more closely with suppliers, who have come to be regarded by smart firms as partners or stakeholders, with whom their fortunes are closely intertwined. In sophisticated industries, the old days of hammering down the suppliers and picking the one with the lowest price are all but gone. Price remains a vital part of the mix, but no longer the only one.

If companies are running the supply side more efficiently, they have less control over the demand side. Produce too many products and you're stuck with the inventory curse. Produce too few and it's out of stock -- words that strike a chill into a salesperson's heart. That's why accurate sales forecasts are so important, not so that the company can congratulate itself on a good month, but so that it can ensure it has matching levels of production -- not too much, not too little.

Forecasts are notoriously unreliable, however, and customer demand can rise or fall for any number of unexpected reasons. The effects of fluctuations in real demand reach all the way back down the chain to the supplier, which needs to know promptly whether to raise or lower its own production or keep it the way it is.

Integration

That's why much supply chain talk these days is also about integration, creating information systems that will flash messages of shifts in sales back to the company and its suppliers as soon as possible. Consumer goods manufacturers are getting better at this. With Procter & Gamble's (P&G's) old supply chain model, gaps on the retailer's shelves could take weeks to fill. Point-of-sale data collection systems at the checkout were used to trigger a message to P&G's distribution center when a certain number of products had been sold, and they would then be replenished. This could take time. Now the system informs P&G's supplier directly of every sold item on a daily basis. The empty shelf situation is much improved.

That's all very well in highly industrialized domestic markets, but globalization has added another dimension entirely. When a US firm manufactures a mobile phone in China and sells it to a retailer in Austria, the supply chain is stretched to breaking point, and sometimes beyond. There are so many links in the chain, including transport, that things are more likely to go wrong. And fancy information systems still have little effect on a supplier in some remote places, where a phone and fax is as good as it gets.

The links in the supply chain represent many of the links in Michael Porter's value chain and there are cost savings to be had in every one, from managing inventory to drivers' waiting time. For companies whose real business is not moving boxes of parts around the globe, there are others who can do it more efficiently, and the supply chain manager's third favorite topic of conversation is outsourcing. Today, a growing number of manufacturers outsource every link in the logistics chain. The woman on the forklift truck, driving the crate of ball bearings around the factory floor, probably doesn't work for the car company but for a specialized logistics provider. The supply chain can be a source of competitive advantage, and that's how far some companies will go to achieve it.