Principles of Supply Chain Management

In order to service the needs of customers and fulfill their expectations and to meet the organizations' growth and profitability objectives, managers focus on improving the effectiveness of the supply chain. If an organization follows the principles of supply chain management, it can attain a balance between customers' expectations and its growth and profitability objectives. 

Segment Customers Based on Service Needs

Most organizations segment customers based on the industry, product or trade channel without differentiating their specific requirements. In order to serve customers properly, organizations should segment markets based on the specific needs of customers. Once the market is segmented, organizations can develop a supply chain plan that takes into account the specific requirements of the different segments. Based on the segment requirements, merchandising, distribution and other supply chain plans are generated and implemented.

Customize the Logistics Network

Companies usually design their logistics system either to meet the average service requirements of all customers or to satisfy the toughest requirements of a single customer. However, both these approaches lead to poor resource utilization. For instance, an organization may need to follow two different logistics networks to service two organizations whose lead times are significantly different. In order to meet specific requirements, organizations have to customize their logistics network so that they can supply items to customers based on their specific requirements. 

Plan Based on Market Demand

Traditionally, each department in an organization makes demand forecasts for the same set of products independently. But the assumptions and measures made by each department differ significantly from those of other departments. Therefore, their forecasts also vary widely. Such forecasts make the supply chain inefficient. Therefore, a process which can recognize the needs and demands of different functional groups is required. A company should see that every link in the supply chain is involved in collaborative forecasting and should provide the required capacity for all operations. The process should foresee surges and slumps in demand, if any, from ordering patterns.

Enhance Ability to Meet Customer Requirements

Organizations traditionally set their production goals on the basis of demand forecasts. They also kept a cushion of extra inventories of finished products to offset forecast errors. They assumed that the lead-time to convert raw material into finished goods was constant. They could also cut costs by reducing their set up time, and by using just-in-time techniques, etc. Today, many manufacturers are recognizing the greater potential of less traditional strategies like mass customization. They are questioning the validity of assuming fixed lead-time for production. Manufacturers can gain competitive advantage if they reduce the lead-time along the supply chain and the conversion time (from raw material to finished product) and tailor their products to the requirements of specific customers.

Improve Relationships with the Suppliers  

Organizations can derive significant cost advantages if they maintain strong and long-term relationships with their suppliers. Organizations should demand the highest level of service from their suppliers, but they should not forget that their suppliers also play a significant role in reducing cost. On the basis of market positions and industry structure, manufacturers can decide how to approach suppliers - invite competitive biddings, enter into long-term contracts, make strategic alliances, outsource, etc.

Have a Supply Chain-wide Technology Strategy

Organizations need to adopt enterprise-wide systems and replace inflexible and poorly integrated systems. The main drawback of fragmented systems is that they can capture data but cannot translate it into business intelligence that can enhance the capability of business operations. Therefore, an IT system should integrate three kinds of capabilities. In the short term, it should be able to handle day-to-day transactions, so that demand and supply are aligned to a certain extent by sharing information. In the medium term, it should help in planning and decision making and effective resource allocation through a master production schedule. In the long term, it should provide the top managers with tools for strategic analysis. The information required to enhance the capabilities of the supply chain management system, usually resides outside the organization. And, only a few companies are adequately connected to the outside to get the required information. Through electronic connectivity, organizations can improve the performance of the supply chain considerably. 

Devise a Complete Supply Chain Performance Measure

Instead of just having inward-looking performance measures, organizations should develop a comprehensive system to measure overall performance of the supply chain system. By establishing common measures, organizations can assure that all the supply chain entities are working towards common goals and objectives. As all the activities in the supply chain are interdependent and interrelated, non-performance of one entity of the supply chain is reflected in the entire supply chain. Exhibit 16.1 shows how companies can benefit from supply chain activities.

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