The most significant cause of confusion in reading about issues relating to the Supply Chain is what on earth the term means.
If we were to commission research across all published material, web sites and conferences, would we reach a generally-accepted definition? Our perception is that, sadly, we would not. The most common occurrence of the term during the late years of the twentieth century and the beginning of the twenty first was in the promotional material of IT solution providers. Packages initially sold under the Material Requirements (MRP) banner grew to being promoted as Manufacturing Resource Planning (MRPII) as extended facilities developed to provide tools to manage the high-level planning processes as well as the more detailed tracking of work. The MRPII community were unhappy with the software suppliers stealing the term, arguing that MRP as a computer tool failed to deliver the anticipated benefits until the management disciplines of MRPII evolved to make best use of the system. “The system isn’t MRPII,” they said, “the management processes of the company using the system are – or should be.”
So the system suppliers needed another name. Enterprise Resource Planning (ERP) appeared in the mid-nineties and was a fair reflection of the fact that the packages now managed far more than manufacturing resources – most had always provided financial ledgers but they now also helped manage remote stocks and distribution networks as well as offering modules for Human Resource records and assets such as vehicle fleets. ERP systems are the subject of a separate page on this site. <click here>
So why did ERP solution providers hit upon the name of Supply Chain? If we may be permitted just a slight degree of cynicism, we might suggest that they needed something ‘new’ to sell. Of course, it’s always easier to create a new name for an existing product than to create a new product. If they could come up with a term carrying intellectual weight, so much the better. The term ‘Supply Chain’ did indeed carry such weight, so there followed a race in which software companies fought for the privilege of selling SCM systems while their old-fashioned competitors promoted outdated ERP.
The Chain Supplying Our Own Business
Why did Supply Chain carry such credibility? Well, because the first time that Western managers heard of or read about the term was in the Japanese-inspired JIT revolution.
Ford, GM and other western car manufacturers saw many differences in the approach adopted by their counterparts in Japan. Many of these were cultural – the idea of ‘partnership sourcing’, for example, where the car manufacturers and suppliers worked together to attack quality and cost issues, and then shared the benefits. This was in marked contrast to the established Western approach where cost reductions were negotiated (or, more accurately, imposed) and the suppliers then worked on alone to try to retain some measure of profit from the deal. Inevitably, this meant corners being cut and resultant supply problems. What the Japanese taught us was that if our suppliers have problems then it is not only they who suffer.
What we also learned about improved supply at this time was that our procurement process cannot be restricted to the companies supplying our own plants. If our suppliers’ suppliers let them down, then ultimately we will suffer. Our sourcing exercises must include investigating where the companies bidding for our business will source their own components and raw materials – and then visiting those companies to assess them as we would if they were to be our direct supplier. Thereafter we need to manage our supply by evaluating and supporting our suppliers and their suppliers on an ongoing basis. One of the MLG team had the experience of being approached by a process engineer from the Nissan plant in Washington with a series of questions some time in the mid-eighties. The Nissan team had arrived, unannounced, and had immediate access to all areas within the plant of a business supplying a Nissan supplier. They took a lead role in initiating and contributing to performance improvement exercises.
In other words, they were managing their Supply Chain.
The irony, then, when software suppliers began to promote their packages under this banner, was that packages could do nothing of the sort – and nothing has changed. They allow what we now refer to as ‘tier one’ suppliers to be defined against each item / commodity but went no further than this. They contribute nothing to the ‘chain’ that professionals in the procurement field now recognised as having to be managed. Even if a package comes along with the facility for suppliers to transfer information over a web link which allows us to see that our order for item X is being supported by suppliers of materials Y and Z, could we consider this to be management of our supply chain? We think not.
A Broader Definition
Having established a definition as the chain working back through our suppliers through tiers one, two, three and as far back as we need to go (we don’t always need to manage supply all the way back to the point when the rawest of raw materials is dug from the ground) we began to ask ourselves if our supply chain should not include the steps from our own organisation to the customer. Distribution and logistics channels can play a major part in cost and service and surely require as much management focus as the elements relating to our procurement processes.
Then, of course, we have to think even further! We can think of this chain covering everything from raw material to satisfaction of customer requirements but what do we really mean by ‘customer’? We may limit this to the customer with whom we trade, but this might be to miss an opportunity, or a problem. If we sell to companies whose own processes and performance are inadequate then our prospects are limited. As our customers lose market share we will follow them into oblivion. We need to think beyond the next link in the chain.
Supply Chain Management
The supply chain is then the entity from raw material to ultimate consumer – and it has to be managed, so Supply Chain Management is a broad discipline. Of course, different people use it in different ways; some use the term referring to planning and control systems (ERP under another name), some mean the activity of managing our supply sources and others the whole nine yards. When we hear the term ‘Supply Chain’ we have to consider the context in which it is being used and sometimes have to ask questions to clarify its meaning in each particular case.