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Historically when a firm (typically a manufacturer or distributor) referred to its supply chain it primarily considered business processes directly within its control. Yes customers and vendors mattered, but these factors could be better controlled since relatively fixed production schedules were the norm, products were less commoditized, and local proximity mattered. Past initiatives to improve supply chain performance primarily focused on cost reduction, efficiency, and quality through total quality management (TQM), just in time (JIT), and six sigma initiatives. To be competitive today emphasis needs to be placed on maximizing not only cost reduction, but on greater agility, innovation, and partnerships.
According to Harvard Business School Professor Michael Porter any activity in a firm’s value chain that does not provide real competitive advantage is a candidate for outsourcing to a partner that can provide a cost or value advantage.1 With this trend towards outsourcing more functions, the supply chain extends well beyond the internal functions of an organization. While this presents opportunities for competitive advantage and business agility it also presents a greater need for communication, information sharing, trust, and shared goals between supply chain partners. Figure 1 illustrates the virtual supply chain’s potential for optimal performance.
Broadly defined, the term supply chain has come to mean value chain. Today supply chains exist in every type of business and represent all processes related to creating and providing value to stakeholders. For manufacturers, distributors, and retailers, a supply chain is the core business for other types of organizations: healthcare, financial services, state and local government etc. – when we think of the supply chain as the value chain the same principals apply.
Each year business executives emphasize strategy and lay out broad goals and initiatives to support corporate objectives. These lofty proclamations are put forth in annual reports, on corporate Web sites, and in company newsletters and posters that are hung in every corridor and by each watercooler. Dr. David Norton, who along with Dr. Robert Kaplan pioneered the balanced scorecard approach to translating strategy into operational execution, was recently quoted as saying, “Strategy is what differentiates a company, yet nine out of ten firms fail to execute on their strategies.” Norton goes on to say, “The value gap defines the difference between an organizations’ aspiration and its reality, how you close the gap is the essence of strategy.” A firm’s supply chain is the essence of how it delivers value to its customers. According to the Supply Chain Operations Reference Model (SCOR) the supply chain includes all processes related to planning, sourcing, producing, delivering, and returning goods. Today innovation is more tightly linked to these processes as supply chain partners must collaborate on ways to improve efficiency and quality.
Therefore the stakes are much higher for how a firm differentiates itself from its competitors as it seeks to achieve better alignment between its business strategy and operational execution. The supply chain is in effect a firm’s value chain and largely embodies the actual translation of the strategy into operations. This is made even more challenging, due to the need not only to create true alignment within the enterprise, but also with each supply chain partner.
The reason that supply chain performance management is so challenging and critically important lies in the very nature of the performance objectives themselves. For each objective there is an equally important objective that if managed in isolation, will adversely impact another objective. For example perfect order achievement – defined as delivering all of the items in the right quantities on time with zero defects – is critical to sustaining high rates of customer retention. In order to create a buffer for fluctuations in real demand, safety stock inventory is needed at various stages of the supply chain, but maintaining excess inventory directly conflicts with objectives related to maximizing inventory turnover and return on assets. Cost metrics should be broken down to the lowest level and by customer across the supply chain – known as ABC costing – so that inefficiencies and individual costs associated with individual customer buying patterns are identified. When this is done all players in the supply chain can treat cost reduction and each supply chain sub-process as a shared goal to be balanced with other important goals.
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