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7 Principle of Supply Chain Management Essay

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Paper type: Essay Pages: 11 (2617 words)

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1. Introduction

Before we are to analysis this article, first let us clarify something before we start .In this article, it states the 7 principles of supply chain management and its importance in practical ,many of us must have a question, what is a supply chain management and why is it important for a company today ?

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Supply chain management (SCM) is the process that is used by a company to ensure that its supply chain is efficient and cost effective.

They are aiming at provide the highest degree of customer satisfaction at the lowest possible cost through management of material and information flow in the supply chain .It requires the commitment of supply chain partners to work closely to coordinate order generation, order taking, and order fulfillment.

Supply chain management consists of three flows: product flow, information flow and finance flow. Product flow is the physical movement of raw materials, work-in-process and finished product from supplier to manufacturer to the wholesaler and on to the consumer.

Information flow is the shared information within the supply chain garnered from the various systems such as the transport planning systems, warehouse management systems, customer record management, order fulfillment systems and more. The third flow is the flow of money. This would be billing, the giving of credit, the transfer of money from manufacturer to supplier or from the consumer to the manufacturer or reversed. Any documentation with regards to money will be managed as part of this flow. Benefits of integrated supply chain management:

There are countless benefits that supply chain management can bring to companies. Not only does it make for shorter lead-times to a customer and improved planning and forecasting capabilities for all partners of the supply chain, it also leads to cost savings and efficiency optimization. Time advantage is created when one of the business processes is faster than the other in achieving the same result. It is created through eliminate those processes that don’t add value but only add lead time. It becomes a competitive advantage when the firm develops processes that will enable it to quickly introduce new products in the market and portray the company as a pioneer.

Cost advantage is created when the superior business process is cheaper to operate than the inferior other. It arises from better manufacturing process, cheaper inputs, or higher levels of automation that increase efficiency.

Efficiency advantage is created when the superior business processes provide higher throughput, better asset utilization which include people, machine, technology and those can provide useful function in the business process .It normally results in more favourable cost structure and supports a cost-based business strategy.

2. Analyzing 7 principles

Principle 1: Segment customers based on the service needs of distinct groups and adapt the supply chain to serve these segments profitably.

Customer Segmentation is the subdivision of a market into discrete customer groups that share similar characteristics. Companies try to boost profitability by tailoring their supply chain strategy to each customer and product in their portfolio through segmentation. It help companies to gain competition by identify those underserved segments and then developing unique appealing products and services.

By understanding the profit profiles of their customers and products, companies can develop marketing campaigns and pricing strategies to get maximum value and thus increase the overall profitability of their portfolios. However in today’s real market, there still existing “one size fits all” supply chain processes and policies, some companies use this method to serve their customers .The result is obvious, some customers are over serving and undeserving others, the more deeper influences are result a significant profitability from the over serving customers and cash-flow leakages and potentially lost sales from the undeserving customers.

Segmentation can help address some problems in the supply chain processes .First is demand variability, properly structured segmentation policies for customers and products can significantly reduce the impact of demand variability. So what is variability? Variability is basically the difference between what we expect from something and what actually happens. It is the statistical distribution of outcomes one can expect from a process. Another is to simultaneously provide high levels of responsiveness and efficiency.

In order to maximize sales and profits, companies may choose to use different methods to serve customers .Some products within a portfolio could be served through an efficient supply chain while others are served through a responsive supply chain. For example, a chip company manufacturing two different types of chips which are normal one and high-tech chips .company may deliver their normal chips through efficiency supply chain and deliver their high-tech chips through highly responsive supply chain. This is what we can understand as segment products through its features .One segment is for normal products which are predictable and another for high-tech products which is unpredictable .Company can through monitor the different segments to set different forecasting and stocking policies.

In the 1990s Dell revolutionized both the computer industry and supply chain management with its direct-to-consumer business model. For the past several years, however, the company has been transforming its supply chain into a multichannel, segmented model, with different policies for serving consumers, corporate customers, distributors, and retailers. Through this transformation, Dell has saved US $1.5 billion in operational costs1 and has moved to the number two spot on Gartner’s “Top 25 Supply Chains” list.

Dell is one of a number of enterprises that are benefiting from supply chain segmentation, a process by which companies can create profitable one-to-one relationships between their customers and their supply chains. Under this model, different customers associated with different channels and different products are served through different supply chain processes, policies, and operational modes. The goal is to find the best supply chain processes and policies to serve each customer and each product at a given point in time while also maximizing both customer service and company profitability.

Principle 2: Customize the logistics network to the service requirements and profitability of customer segments.

Logistics networks configuration is such kind of problems concerning with the number and site of warehouses and manufacturing plants, allocation of customer demand, distribution of warehouses to production plants along the whole process of material flow .Ideally, the best configuration must be able to deliver the goods to the customers within the shortest period of time meanwhile at the lowest cost. The objective of design or reconfiguration of the logistics network is to minimize annual system wide cost subject to a variety of service level requirements.

In today’s environment of global economy, companies must be figured out some special ways that can utilize worldwide resources to keep the advantages of competition .They need to concern variety of problems such as where the most appropriate manufacturing facility should be that available for source products ,how to keep the balance between inventory ,transportation and manufacturing costs ,how to meet the demand uncertainty ,especially for those multinational companies because they have large scale of production and the cost definitely will be complicated than those small companies .All the successful companies have a well developed and realizable logistics system .High efficient logistics system will benefit companies from cost controlling ,high level customer service satisfaction and reach a business successfully .

Now let’s take a look at Audi, one of the most successful car manufacturer in the world and how does the logistics network help them stand in the world. Audi outsource its logistics function to third-party logistics firms, so their manufacturing companies can focus their efforts on their core competencies and 3PL only needs to be efficient and effective to meet customers’ demands. In Audi Company, there are three new models for logistics network design with special focus on the perspective of 3PL companies. The objective of these new models is to increase the effectiveness of the resulting network design and the utilization of facilities in the network.

3 models of logistics network: • Logistics network design with differentiated delivery lead time, • Logistics network design with price discount, and • Consolidated logistics network design using consolidation hubs.

This shows that designing network with differentiated delivery lead time can reduce the network cost, while the other shows price discount can result in a network design with higher net profits, adding consolidation hubs at suitable locations near to the suppliers, it can leverage on concave Audi’s cost to reduce the overall network cost. This reflect that how does a good logistics network can help a company to be more productive.

Principle 3: Listen to market signals and align demand planning accordingly across the supply chain, ensuring consistent forecasts and optimal resource allocation.

This principle teaches us the importance of a good sales and operations planning to a company. Sales and operations planning is a process where executive level management regularly meets and reviews projections for demand, supply and the resulting financial impact. S&OP is a decision making process that makes certain that tactical plans in every business area are in line with the overall view of the company’s business plan.

Each year, companies always have to spend a large amount of money on out of stock, excess inventory and excessive discounting due to imbalance between supply and demand .In addition ,promotions, new product introductions, packaging changes and changing demand patterns can all wreak havoc on the demand and supply planning process. But if companies implement sales and operations planning, it will help them gain the visibility and agility to improve product management and promotional planning, better understanding those necessary and unnecessary build-ups of inventory. S&OP is effective because it comprehensive and take everything into consideration .It develops a well coordinated operating plan in support of customer demand, business plan as well as companies strategy .It describe a complete picture of forecast demand ,supply capacity and financial information .

Principle 4: Differentiate product closer to the customer and speed conversion across the supply chain.

This principle focus on two factors, one is product differentiation and the other is speed conversion across the supply chain .Product differentiation is the process of distinguishing a product or offering from others, to make it more attractive to a particular target market. In economics, successful product differentiation leads to monopolistic competition and is inconsistent with the conditions for perfect competition, which include the requirement that the products of competing firms should be perfect substitutes. The purpose of product differentiation is to develop a position that customer see could be seen as unique ,as the product become more different, categorization becomes more difficult and hence draws fewer comparisons with its competition. If a company does very in product differentiation, it will divert people’s eyes from price factors to non-price factors such as product characteristics, promotional variables.

After companies have differentiated their product ,they should think about some ways that can deliver it into customers hands which require them to speed conversion and compress the lead time .It has been consistently argued that time is the competitive weapon in the market .Lead time compression will have a greater effect on supply chain effectiveness .In the increasingly global marketplace most companies are competing with similar machines ,technologies and expertise ,the one who can launch product faster or speedup marketplace responsiveness will win market opportunities .This is the point they should catch up .

Principle 5: Manage sources of supply strategically to reduce the total cost of owning materials and services.

The relationship between buyer and supplier have been attracting a lot of people’s attention, a company maintain a good long tern buyer-supplier relationships will benefits both parties .No only company can keep its competitiveness in the marketplace meanwhile secure the access to external resources ,but also supplier can reach to a high profit for the sake of long term relationship .In other words which means the more close their relationship are ,the more benefits both parties will receive such as lowered costs and improve profits .Referring to this principle ,a company only with a good resource management system, knowing when to order, when to replenishment ,analyze the whole inventory system ,minimize the delivery time from supplier ,with all those factors implemented can make the company save money even make a profit .

Principle 6: Develop a supply chain-wide technology strategy that supports multiple levels of decision making and gives a clear view of the flow of products, services, and information.

The purpose of supply chain exists is to satisfy what the customers’ require .So in this case in order to meet customer requirement on time ,the information must be made available to those who need to plan and execute the operations of the supply chain. Thus a information technology should be implemented in the supply chain to ensure that information available when needed .We need communications technology to distribute information, storage technology to maintain databases, and processing technology to process the data into meaningful information. Under the technology strategies implement, efficiency and effectiveness of supply chain could be greatly enhanced based on the use of information technologies.

New technological solutions have provided companies with completely new ways for information sharing in support of coordination and on the other hand, for handling of transactions with less friction Technology also plays an important role in the success of supply chain management, the biggest benefits technology has given to supply chain is the ability for companies to collaborate. For example, a supplier may build a connection with their distributors through internet, so when there is a shortage appears distributors can realize it and an order for the shortage could be placed automatically. This kind of collaboration can better use of existing resources and achieve a large profit margin.

Principle 7: Adopt channel-spanning performance measures to gauge collective success in reaching the end-user effectively and efficiently.

In order to make the supply chain becomes more effectively ,we need to measure the supply chain performance not only focusing on cost measurement but also need to consider other metrics including service ,financial and innovation .This principle refers to the inadequate of traditional accounting systems, it points out some factors that traditional accounting system do not take into consideration .Traditional cost accounting allocates the costs to the list of overhead and supporting those activities that company needs to do .There are different volumes of activities so that higher volume activities absorb a higher share of costs .However ,not all the activities costs vary directly with volume ,there are other factors may cause them such as the number of new customers, production line set ups and different parts to manage .If a company wants to achieve true profitability, they need to better manage those cost relationships correctly .

3. Conclusion

Supply chain management typically begins with the acquisition of raw resources and ends with the delivery of the final goods to customers.It encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.

The 7 principles described in this article is just give us guide line in which if we want to make a successful supply chain .Keep learning from others and finding the shortcomings if we want the supply chain to be more effectively and efficiently, Improving a process as complex as the supply chain can be daunting, as companies are challenged with finding ways to meet ever-rising customer expectations at a manageable cost. To do so, businesses must identify which parts of their supply chain process are not competitive, understand which customer needs are not being met, establish improvement goals, and rapidly implement necessary improvements.

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7 Principle of Supply Chain Management. (2016, Dec 06). Retrieved from https://studymoose.com/7-principle-of-supply-chain-management-essay

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