Supply Chain Management (SCM) is meant to reduce costs while improving customer service. Some wholesalers know that SCM involves the electronic flow of information between the partners in a distribution chain. But, what exactly is SCM, how does it work, and can it really help wholesalers? This article outlines how a typical SCM works, and the benefits and problems.
Roughly speaking, SCM is interconnected computer systems that automatically and seamlessly plan, produce, stock and distribute items among the partners. SCM also involves some manually initiated functions (e.g., inquiries to another level). The Internet can be used to connect all the computers in a chain, or partners can interact via sophisticated online exchanges that have been created to tightly interconnect partners' systems.
In theory, partners in a typical supply chain include suppliers to a manufacturer (suppliers could be manufacturers themselves), the manufacturer, some wholesalers of that manufacturer, and some customers of each wholesaler. As a practical matter, most supply chains involve only a manufacturer and some of its wholesalers, mainly because suppliers and customers tend to be unable to afford the costs of participating in a supply chain.
(The questions of who to partner with, where to build factories and/or warehouses, which items to produce, etc., are strategic decisions that must precede the interconnection of computer systems, but are not addressed in this article).
SUPPLY CHAIN EXECUTION
At its ultimate, this involves fully automatic electronic execution of forecasts and plans: automatic purchasing from suppliers, with automatic bills from them and payments to them; automatic production, shipping to wholesalers, billing and payments by wholesalers; automatic shipping to customers, billing and payments by customers.
Automatic purchasing actually doesn't involve purchasing. Each supplier has an MRP(Manufacturing Resources Planning) system, and MRP uses forecasted demand (described above) to automatically create work orders (to make) and shipping orders to ship "just in time" (JIT) to the manufacturer.
Automatic production occurs because a manufacturer's MRP system uses that same upwardly aggregated forecast to determine when to make, and how much.
Automatic shipping to wholesalers is VMI, Vendor Managed Inventory, which is based partly on the forecast and partly on the arrangement made between manufacturer and wholesaler.
Automatic shipping to customers is DMI, Distributor Managed Inventory, which is based partly on the forecast and partly on the arrangement made between wholesaler and customer. Wholesalers need the distribution equivalent of MRP, which is an Enterprise Requirements Planning (ERP) system.
The handling of return goods can never be fully automatic, but the process can be close. Once an item is returned, credits and/or refunds are handled as automatically as payments are handled.
Back to reality. Very few supply chains are as fully automatic as described above. To purchase from suppliers, a manufacturer can send electronic purchase orders that are created by its computer software. Production at a manufacturer is based on both the forecast and firm orders from wholesalers. Shipments to wholesalers are based partly on VMI and partly on electronic POs sent by wholesalers. Similarly, shipments to customers are based partly on DMI and partly on electronic POs sent by customers.
Clearly, software (and data communications) is what makes SCM work, but software is one of the obstacles to widespread SCM.
First, the main business software (MRP, ERP, etc.) must contain all the basic underlying functions, such as aggregating forecasts from multiple sources - customers, in the case of wholesalers. For many companies that want to participate in a supply chain, this requirement means that new, expensive software has to be obtained (or the current software modified).
Second, in addition to the basic functions, few software packages contain the SCM-specific functions, such as rules for routing transmissions to different partners. SCM-specific functions have to be added to existing software (which is time consuming and costly), or a separate SCM package purchased and interfaced to the main system (also time consuming and costly).
Third, the partners in a supply chain usually each use a different brand of business software, which means that something as simple as "customer number" could have a different meaning in different systems. And different partners are likely to use different schemes for item, customer and partner numbers. So software/data changes are needed so that each partner communicates using the same formats, definitions, etc., and these changes can involve a substantial effort. (Where industry-standard item and partner codes exist, a major portion of this challenge disappears).
The few specialized online exchanges mentioned earlier were created in part to convert each partner's unique formats and definitions into a standard one - thereby saving some partners the effort of having to change their software/data. The exchanges also handle some of those SCM-specific functions not found in most software.
Supply Chain Management can substantially decrease various costs across a chain, and the reductions benefit partners and the ultimate consumer through lower prices. This is because, first, the overall level of inventory throughout a chain is lower in an SCM arrangement, so carrying costs are lower. When interest rates were almost double the current rate, the reduction in carrying cost was the biggest benefit.
Production costs decrease because manufacturers and their suppliers are making exactly what is to be shipped, not guesstimated quantities that include excess that often doesn't sell. Distribution costs decrease because less is shipped and orders can be consolidated, thereby reducing transportation costs. And, of course, personnel costs decrease - fewer people are needed to do the planning, execute the plans, move raw materials or items, send bills, apply payments, etc.
In addition to reducing costs, SCM reduces production lead time and distribution time (items are made and shipped just in time), which leads to better customer service.
But not all partners benefit equally. For example, the overall level of inventory decreases, but it may be higher for some partners.
In addition to software complications, there are other reasons why SCM has not been widely adapted.
Accurate forecasting is critically important, but the battle for accuracy is SCM's search for the holy grail. The importance of having an accurate forecast increases with the level in a chain; for example, because manufacturing in an SCM arrangement means that there are no raw material or component inventories on hand (or at least, very little), suppliers deliver just in time for manufacturing to occur as planned. And, in an SCM environment, there are no finished goods on hand at a manufacturer - as items are produced, they are shipped to wholesalers. Even in a less than pure automatic supply chain, accurate forecasting is needed.
Potential "partners" in a chain are often reluctant to allow sensitive information to be sent to other computers - for fear that it will accidentally get into competitors' hands even though the "SCM rules" mentioned previously restrict who gets to see what.
Remember e-commerce and the new economy? It didn't happen because people are much more comfortable with faxes, phone calls, e-mails and letters - all the traditional mechanisms for doing business, which are eliminated by SCM.
There are different objectives at different levels - often conflicting objectives, so optimization at all levels is almost impossible. SCM usually works well where one partner forces the entire issue on the others, but this discourages the formation of chains.
Any MRP, ERP or SCM software package, no matter how sophisticated, will make mistakes as unforeseen events occur; any one mistake can be amplified by the other, interconnected software packages. Changing business and market conditions may not be handled well by the software, as can end-user promotions, excessive customer returns, natural disasters, etc. In other words, fully automated, seamless SCM is not reality.
Wholesalers are reluctant to participate in VMI arrangements, and customers are more reluctant to participate in DMI arrangements. Absent VMI/DMI, the just-in-time aspect of SCM doesn't exist; finished goods inventories need to be kept, which reduces one of the major benefits of SCM.
Additional IT people may be needed to set up the SCM participation and keep the integration working as changes occur in data definitions and/or software packages involved in a chain, and this increases the cost of membership.
Like e-commerce, SCM will take time to be adapted, but the benefits are too large for it not to be pursued. In the short term, more and more less than fully automated SCMs will be established, and as the bugs and glitches are worked out, SCMs will become increasingly automatic.
SUPPLY CHAIN PLANNINGThis primarily involves the use of formulas and rules to determine inventory/production quantities and timing at each level, and determine when and how much to ship to manufacturers/wholesalers/customers. Secondarily, supply chain planning involves maintaining item-related data.
Product Design and Specifications. When a new item is created, or its design/specification is changed, both the item design (drawings) and manufacturing/performance/usage specifications are transmitted by the manufacturer to suppliers of material/components/supplies; and transmitted to wholesalers, who in turn send it to participating customers. All recipients use this information to update their databases (e.g., a wholesaler's system creates new item master information, possibly including purchase cost information). Suppliers also use this information to prepare for production (e.g., establish sources for raw materials), while wholesalers may also use this information to estimate sales of a new/revised item. In a similar cascading fashion, when suppliers initiate a change, they transmit that to manufacturers, who in turn send the data to wholesalers, etc.
In some supply chains, preliminary design information is sent up and down the chain so that suppliers/wholesalers/customers can provide feedback about the design, manufacturing, distribution and use of the item before the design is fixed. The pre-final design exchange of information is sometimes called "collaboration" (which can also apply to the exchange of specifications for changes).
Request for Quotation. A partner at any level can transmit a request for quotation to the next highest level, and the partner at that level might in turn transmit a request to the next level up, and so forth. Depending on how a partner's system is set up, some requests are automatically forwarded while others must be manually forwarded. Similarly, each response to a request might be transmitted automatically or require a manual initiation.
Availability Inquiries. Just as some customers of some wholesalers can inquire into stock status (and perhaps, price) data, each partner can inquire into certain kinds of data at the level above, e.g., expected ship date on a PO. Rules established in the system of each partner determine which specific partners can see which specific data.
- Forecasting and Planning. This is one of the major benefits of SCM, because forecasted demand data is automatically aggregated upward from each level to the one above it, and partners at each level should be able to more accurately plan production, inventory levels and shipping rates/schedules. Across an entire chain, data is automatically aggregated from the lowest level (customers) to the highest (suppliers).