Management Decision

Successful Supply-Chain Management

Graham C. Stevens
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Graham C. Stevens, (1990),"Successful Supply-Chain Management", Management Decision, Vol. 28 Iss 8 pp.
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Håkan Håkansson, Göran Persson, (2004),"Supply Chain Management: The Logic of Supply Chains and Networks", The
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S
upply-chain management can be an im­
portant competitive weapon. The rele­
vance of this logistics-based issue to senior
management is examined.
Successful
Supply-Chain
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Management
Graham C. Stevens
What is the Supply Chain?
The role of manufacturing industries is to create wealth
by adding value and selling products. All manufacturing
companies must control the flow of material from suppliers,
through the value-adding (production) processes and
distribution channels, to customers. This flow is the supply
chain, as illustrated in Figure 1. It is, in fact, concerned
with two distinct flows through the organisation: material
and information. Its successful management involves
planning, co-ordinating and controlling material — parts
and finished goods — from suppliers to the customer. The
scope of the supply chain begins with the source of supply
and ends at the point of consumption.
The aim of managing the supply chain is to achieve a
balance between the goals of high customer-service and
low inventory-investment/low unit-cost goals which are
often seen as conflicting. Supply-chain management
extends much further than simply a concern with the
physical movement of material. In addition to the issues
of transport and physical distribution, supply-chain
management is also concerned with:
• supplier management;
• purchasing;
• material management;
• manufacturing management;
• facilities planning;
• customer service;
• information flow.
SUCCESSFUL SUPPLY-CHAIN MANAGEMENT 25
The design and operation of an effective supply chain is
of fundamental importance to every manufacturing
company. If properly designed and managed, it will:
• improve customer service;
• achieve the necessary balance between costs and
service;
• give your company a competitive advantage.
Customer Service
It is important to understand that customer service
encompasses all the points of contact between the
customer and the supplier, including delivery, pre- and
post-sales service, technical support, and financial
packages. Customer service can be seen as the output
from the supply system: it results from the combined effect
of all the functions along the supply chain. The activities
carried out by all the functions are important in establishing
a desired level of customer service. They are also
interdependent: if one activity fails the chain is disrupted,
creating poor performance and destabilising the workload
in other areas, thereby jeopardising the effectiveness of
the supply chain.
All the activities in the supply chain must be in balance,
in order to provide a higher level of customer service
without incurring an undue burden of cost.
Inadequaty of Traditional Approach
To achieve the necessary balance between cost and
service involves trade-offs throughout the supply chain.
To do this successfully means leaving behind the traditional
approach, which looks at the process in terms of separate
functions — purchasing, production, finance, marketing,
distribution — and means thinking instead of the whole
process as a single integrated chain.
Unfortunately the functional attitudes and goals in most
companies are in conflict, and so hinder integration along
the supply chain. The traditional approach to managing
these conflicts has been to concentrate on the operational
and planning levels, and to compensate for the imbalance
with excess inventory and capacity. For some companies
the results of this approach have been at best frustrating
and expensive, at worst disastrous.
To resolve these conflicts effectively and turn the supply
chain into a weapon for gaining competitive advantage
requires the development of an integrated supply chain
driven by the needs of the business.
Developing an Integrated Supply Chain
The development of an integrated supply chain means
viewing the management of material flow from three
perspectives:
 I 26 MANAGEMENT DECISION 28,8
• strategic
• tactical
• operational
At each of these three levels, the use of facilities, people,
finance and systems must be co-ordinated and harmonised
as a whole.
TheStrategicPerspective
Businesses often spend a lot of time and thought on
strategic issues in the areas of manufacturing, finance and
marketing. But the focus on supply is rarely strategic —
it tends to be primarily operational. If supply issues are
disregarded and the supply chain is excluded from strategic
debate, there is imbalance, exploitable opportunities are
missed, and the impact of competitive threat is increased.
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The focus at strategic level should be to develop:
• objectives and policies for the supply chain. These
should be expressed in terms of what the supply
chain has to do well to support the needs of the
business (e.g. be responsive to change, operate at
lowest cost, ensure a high level of product
availability);
• the shape of the supply chain in terms of key
facilities and their locations;
• the company's competitive package, planned by
product and market segment, detailing the balance
between product availability, service level, lead
time, technical support and after-sales support;
• an outline organisational structure able to bridge
functional barriers and operate an integrated supply-
chain effectively.
TheTacticalPerspective
The tactical perspective should focus on the means by which
the strategic objectives can be realised. It involves translating
the strategic objectives into goals for each function, enabling
the functions to provide complementary balance as parts
of the supply chain. The functional goals provide the focus
for achieving the balance; and inventory, capacity and service
are the levers by which balance is achieved.
The operational perspective
should be concerned with
the efficient operation of the
supply chain □
Additionally the tactical dimension involves determining
the tools, approaches and resources necessary to achieve
the strategic aims, in particular the most appropriate mix
of systems necessary to manage the supply chain and
provide the information infrastructure: e.g. Just-in-time
supply.
The Operational Perspective
The operational perspective should be concerned with the
efficient operation of the supply chain. It focuses on the
detailed systems and procedures, and ensures that
appropriate controls and performance measures are in
place. Typically, a company should measure the
performance of the supply chain in terms of:
• inventory investment;
• service level;
• throughput efficiency;
• supplier performance;
• cost.
Integrating the Perspectives
Linking the strategic, tactical and operational perspectives
is crucial to effective organisation development, because
it provides a framework which precludes the need to
consider centralised or decentralised supply-chain control
as exclusive structures. It provides the flexibility to
centralise the strategic and decentralise the operational
where practical, and to tune the tactical decision making
according to the organisational requirements of the
particular company.
Developing an Integrated Supply-chain
Strategy
Companies are having to face up, and respond, to a
number of issues relating to the supply chain, including:
• the high cost of supply-chain activities, estimated
at between 5 and 20 per cent of net sales value;
• the level of inventory — typically, stock levels are
between three and five months' usage;
• interdepartmental conflicts;
• goal restructuring.
If a company is to respond successfully to these issues
and develop an integrated supply-chain strategy, a
structured approach is required — i.e. all its business areas
must interact closely on a structured, rather than an ad
hoc, basis.
Developing an integrated supply-chain strategy can be
considered as a three-phase process (see Figure 2):
Phase 1: evaluation of the competitive environment;
Phase 2: diagnostic review of the supply chain;
Phase 3: development of the supply chain.
 SUCCESSFUL SUPPLY-CHAIN MANAGEMENT 27

Phase 1: Competitive Environment Evaluation marketplace demands that a company must be competitive
Step 1: Develop and document the characteristics of the (see Figure 1). Therefore it is necessary to evaluate the
marketplace. The reason for this evaluation is to focus and market. This can also provide a framework for the evaluation
direct the total strategy-development effort to where it of alternative solutions which can be developed later.
can be applied to best effect. Too often, when companies
evaluate the supply chain, it is done either at the whim
of the individual involved or it focuses only on areas where
the company has had success in the past. This narrow
approach is invariably ineffective. Effort should be focused
only on those activities
which provide opportunities
for improvement □
The process used to evaluate market characteristics
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involves looking at and surveying vendors, customers and

competitors in order to determine:
(a) the needs of the customers;
(b) the pressures which the vendors, customers and
competitors can apply in a particular situation.
In effect, the questions being asked and answered are
'What do the customers want?' and 'How much weight
do they have in the market to get what they desire?' The
output from this work is a list of the market characteristics
for each product. The characteristics can then be weighted
in order of importance.

Step 2: Review and summarise existing strategies. The rea

for this is not to evaluate the sophistication and appropriate-
ness of particular strategies, but to focus and direct the
supply-chain development effort (see Figure 2). The purpose
is simply to identify the internal constraints which may impact
on the development of a supply-chain strategy.

Step 3: Determine the order-winning criteria. The objec

of this is to define, prioritise and eventually weight the
customers' critical purchasing factors. To do this, it is
necessary to combine the internal and external factors
which have been identified and develop a single, prioritised
list for each product market-segment so that effort can
be concentrated on the important areas. This approach
also provides a clear framework which can be used to
determine which techniques and strategic elements are
most important to the company.

Phase 2: Supply-chainDiagnosticReview
Once the order-winning criteria have been defined, the
next step is to review the supply-chain operations and to
identify those areas which offer potential for improvement.

Step 1: Develop a cost model. This is necessary because

The way to evaluate operations and to develop a supply- in many companies the traditional cost-accounting and
chain strategy is first to determine those areas where the measurement systems do not effectively allocate the costs
 28 MANAGEMENT DECISION 28,8
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of activities to the individual products or segments
incurring those costs. In fact, they are invariably presented
in such a way that the costs of particular activities cannot
be clearly defined. The aim of this step, therefore, is to
develop a realistic method of allocating overhead costs to
products, markets and activities.
Step 2: Identify activities which meet customer needs. This
should be carried out at the same time as developing the
cost model (Step 1). The objective is to identify those
parts of the company's operations which can significantly
affect the company's ability to satisfy customer needs.
Effort should be focused only on those activities which
have an impact and provide opportunities for improvement.
Step 3: Develop a list of improvement techniques for each
of the opportunities which has been identified. This list is
not intended to be a strategy or even a recommendation
of improvement techniques. Rather, it is the first step
towards identifying techniques for consideration in
developing a supply-chain strategy and a final
implementation plan.
Phase 3: Supply-chain Development
The final phase is the development of a supply-chain
strategy and tactical plan for implementing that strategy.
The objective here is to develop a strategy for the
company, based on the work done in thefirsttwo phases,
which is consistent with:
• customer desires;
• management focus;
• market characteristics
• the realities of the organisation.
The strategy should make full use of the company
operations and competitive tools, and allow an approach
to supply-chain improvements that is integrated with the
rest of the business.
The final task is to reduce the supply chain strategy to
actionable implementation plans by developing specific
tactical plans and a timetable for implementing the strategy.
This involves organising and prioritising the list of potential
improvements (developed in Phase 2, Step 3) to reflect
the strategic plans which have now been developed. The
outcome of this task is a set of timetabled action plans
for implementing the supply-chain strategy.
Achieving an Integrated Supply Chain
A detailed top-down approach to developing a supply-chain
strategy is essential — although its successful achievement
is likely to be bottom-up, evolving through a number of
stages, illustrated in Figure 3.
Stage 7; Baseline
This stage is typified by the traditional company that has
separate, almost independent, departments controlling the
different activities, in the supply chain. Even in fairly small
organisations, the base-line supply chain is fragmented,
and characterised by:
• staged inventories caused by failure to integrate and
synchronise activities;
• independent and often incompatible control systems
and procedures covering sales, manufacturing,
planning, material control, purchasing, etc.;
• organisational boundaries, whereby purchasing
might control the incoming material flow to raw-
material stocks. Manufacturing and production
control then cover raw material through the
processes which convert it into finished goods.
Further along the chain, sales and distribution
divide the outward supply-chain and inventories.
In Stage 1, company planning is very short term — to the
point where it is almost reactive. It is based on the quick
fix, lurching from crisis to crisis.
This situation causes inefficiencies in the operation of the
overall supply chain. In addition it jeopardises the overall

effectiveness of the supply chain, as well as increasing
the company's vulnerability to the effects of changes in
supply and demand patterns.
Stage 2: Functional Integration
Functional integration focuses principally on the inward
flow of goods. This level of integration is characterised by:
• emphasis on cost reduction rather than
performance improvement;
• discrete business functions, each of which is
buffered by inventory;
• elements of internal trade-off between, for example,
purchase discount and the level of inventory
investment, high plant-utilisation and batch sizing;
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• reactive customer service — i.e. the customer who
shouts loudest gets the goods.
With regard to planning and control systems, Stage 2
companies typically use Materials Requirement Planning
(MRP) techniques to apply time-phased planning to the
materials and manufacturing areas. Within the distribution
network, demand is not properly gauged or controlled —
orders are simply thrown at manufacturing. For planning
purposes, therefore, the distribution infrastructure is
effectively unconnected with manufacturing. As a result
customer demand is not clearly understood, which leads
to inadequate planning and generally poor performance.
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SUCCESSFUL SUPPLY-CHAIN MANAGEMENT 29
Stage 3: Internal Integration
At this stage, the company has recognised that there is
little point in just focusing on the flow of goods into the
organisation unless the flow of products to the customer
is also well managed. This stage involves the integration
of those aspects of the supply chain which are in the
company's direct control — including the management of
finished-goods supply, and the integration of supply and
demand along the company's own chain. Internal
integration is characterised by a comprehensive, integrated
planning and control system. Typically Stage 3 companies
will use Distribution Requirement Planning (DRP)
systems, integrated via well-managed master-schedules
to a Materials Requirement Planning system for materials
management — using, where practical, Just-in-time (JIT)
manufacturing techniques to support the execution of the
material plan.
The need to react
to market changes is
paramount □
When a company has achieved this level of integration,
it can truly begin to talk about synchronised demand-
management — i.e. synchronising the demand from the
customer with the manufacturing plan with the flow of
material from suppliers. Such a company will also reap
substantial benefits by having extensive information
networks instead of a large inventory.
Stage 3 supply chains are characterised by:
• full systems-visibility from distribution through to
purchasing;
• medium-term planning;
• a focus on tactical rather than strategic issues;
• an emphasis on efficiency rather than effectiveness
— ensuring that what is done is well done, rather
than that the right thing is done;
• extensive use of electronic data-interchange to
support the customer link and facilitate a faster
response;
• reaction to customer demand, rather than
"managing" the customer.
Stage 4: External Integration
Full supply-chain integration is achieved in Stage 4 by
extending the scope of integration outside the company
to embrace suppliers and customers.
 I 30 MANAGEMENT DECISION 28,8

The significance of this development goes beyond scale
alone. It embodies a change of focus — to being customer-
orientated instead of product-orientated, penetrating deep
into the customer organisation to understand the products,
culture, market and organisation. This should ensure that
the company is attuned to the customer's needs and
requirements.
Integration back down the supply chain to include suppliers
also represents more than just a change of scope — it
is a change of attitude, away from one of adversarial conflict
and towards one of mutual support and co-operation. Co-
operation starts at the early stages of product development
and encompasses full management involvement at all
levels:
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Traditionally theflowof material has been considered only
at an operational level, at best driven by efficiency-
improvement and cost-reduction, at worst abandoned to
battering by the demands of a rapidly-changing competitive
environment.
The need to react to market changes is paramount for
many companies. The role of the supply chain is crucial
to this need. No longer can the potential of integrating
the supply chain be ignored. This potential will, however,
be realised only if the connections and inter-relationships
are recognised between different parts of the supply chain,
and a good fit is ensured between its design and operation
and the company's competitive strategy.

• the supply of high-quality products shipped direct

to the line on time;
• shared information on products, processes and
specification changes;
• technology exchange and design support;
• above all long-term commitment, which usually
means the elimination of multiple-sourcing.
Summary
The need to control the flow of material from suppliers,
through manufacturing and distribution, to the customer
is common to all manufacturing companies, regardless of
their size, type of product or manufacturing process.
Real benefits result from the
double-edged impact of
increased market-snare on a
lower asset-base □
Those companies that consider the supply chain during
the strategic debate, manage it as a single entity and
ensure the appropriate use of tools and techniques in order
to meet the needs of the market, will obtain real benefits
resulting from the double-edged impact of increased
market-share on a lower asset-base. Those that do not
will get left behind in the struggle for survival.

Graham C. Stevens is a Principal Management Consultant at KPMG Peat Marwick McLintock's Manufacturing Centre,
Birmingham.

Application Questions
(1) What is your company's attitude to the supply chain?
(2) How well is the supply chain managed in your organisation? List the strengths and weaknesses of its management
in the light of this article.
(3) What is your strategic approach to integration of the supply chain?
(4) Which of the stages in achieving an integrated supply chain (illustrated in Figure 3) best represents your own
company's position? What improvements could therefore be made to strengthen your company's competitive
advantage?
(5) In what specific ways could your company's ability to react to market changes be improved by supply-chain integration?

Action Points
• Work through the steps in the three phases of developing an integrated supply-chain strategy. Consider your own
company's position in relation to each one — the things you are already doing well and the areas as yet untouched.
What can you learn from this about the specific priorities needed in your own organisation?
• Make recommendations to colleagues and senior management about integrating the supply chain in your organisation.
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