Supply Chain Integration and the Supply/Demand Imperative
Ralph G. Kauffman, Ph.D., C.P.M.
Ralph G. Kauffman, Ph.D., C.P.M., Assistant Professor, University of Houston-Downtown, Houston, TX 77002, 713-221-8962, firstname.lastname@example.org
Thomas A. Crimi, MBA, MAPA, C.P.M.
Thomas A. Crimi, MBA, MAPA, C.P.M., Supply Chain Team Coordinator, Texaco, Inc., Bellaire, TX, 77402, 713-752-3981, email@example.com
86th Annual International Conference Proceedings - 2001
Abstract. This paper takes the subjects of integrating supply chain operations (to obtain superior performance) and the imperative of matching supply and demand throughout the supply chain (if the chain is to function effectively) and provides insights and a plan for achieving necessary harmony between integration and supply/demand matching.
Introduction to Supply Chain Management
Definition of supply chain management. A number of definitions have been proposed for supply chain management. Perhaps the best is simply, "an integrative approach to managing supply and distribution networks." The key word is "integrative," making the chain work better and at lower cost than would be possible by managing each segment of the chain independently. Another way of defining supply chain management is to state that it is the management of physical materials, services, information, money, and time across and between organizations in a business relationship in a manner that achieves the objectives of all the organizations at the least total cost.
Objectives of Supply Chain Management. Some common goals of supply chain management include: Reduce waste and nonvalue-added activities (i.e. cost reduction) including excess inventory, increase customer service/responsiveness, improve supply chain communication (speed/timeliness, accuracy of information, information sharing), reduce cycle time (e.g. new product development, supply leadtime), improve coordination of efforts (continuous improvement, understanding of goals) (Ellram 1994).
Results of Applying Supply Chain Management. The most-sought and most common result of applying supply chain management is reduced costs in the supply chain. A cost that exists throughout most supply chains and therefore is often the target of supply chain management is the cost of inventory, managing it and carrying it. Many supply chain management efforts are aimed at reducing inventory costs. Other results of supply chain management include improved quality, more dependable quality, more reliable supplier performance, e.g. in order fulfillment and delivery, improved transportation service, reduced packaging costs, elimination or combination of steps in the supply chain, faster cycle times, and more satisfied customers. It is by nature an integrative approach, as much entrepreneurial as logistical, and results come from the following:
- Having knowledge of a variety of methods, processes, techniques, and systems that can be used to manage supply chains
- Studying particular supply chains to identify areas of potential improvement
- Applying and implementing methods, processes, techniques, and systems as appropriate to improve supply chain performance
- Evaluating changes, revising as needed, and practicing of continuous improvement through periodic performance reviews and value analysis.
The Supply/Demand Imperative
To obtain maximum benefits from supply chain integration, the supply provided must closely match the demand required. For each product demand required by a buyer, suppliers must provide a supply. For suppliers to provide the required supply, they must forecast the demand. The forecast may be provided by the buyer, or it may be based on the buyer's history of purchases, if there is one. The matching of supply and demand must also be done at the lowest possible cost, consistent with meeting the buyer's requirements, for the supply chain to be able to compete effectively. For example, one way for a supplier to match supply to demand when demand varies over time is to have plenty of inventory ready to ship at all times. Such inventory is costly and such methods of meeting the supply/demand imperative will result in a non-competitive supply chain. Similarly, a supplier can meet a buyer's quality demands by conducting extensive inspection and rework activity on finished products instead of improving the quality of product coming out of the manufacturing process. Again, the buyer's requirements are met, but at high cost. It should be obvious that the matching of supply and demand, quantitatively, qualitatively, and at least cost, is an imperative — without an efficient way of matching, the downstream supply chain members will not be satisfied at the lowest possible cost and the chain will have difficulty to compete with other supply chains.
The supply/demand imperative is not limited to physical products, another example is provision of transportation. If two members of a supply chain are connected by common carrier transportation and their shipping requirements vary over time or are in rapid growth, the transportation provider must be given advance information of equipment requirements (demand) in order to have the needed vehicles available when needed (supply) without maintaining an excess of vehicles.
The ultimate demand imperative that must be satisfied is the final consumer product. Any problems anywhere in the supply chain that negatively affect the final product or the timely delivery of what the consumer desires will have repercussions through the entire chain.
Integration in Supply Chains
Integration in the supply chain consists of having one entity provide materials or perform services where formerly there were multiple providers. It must be kept in mind that, in reality, actual supply chains are more web-like than chain-like, but must be broken down into chain-like pieces to analyze. But, because of the web-like nature, integration may involve combining functions both horizontally and vertically at the same time. An example is integration of MRO electrical parts and materials. Prior to integration, a firm may have five or ten suppliers of electrical materials and deal with each of them separately. In addition, the firm may have its own internally-managed inventory of electrical materials purchased from these suppliers. After integration, there may be only one supplier who now has the responsibility to provide the products that they represent and to obtain from other sources all other electrical items. This is horizontal integration. The remaining supplier may also have the responsibility of maintaining and managing an inventory of the items used by the buying firm, either at the supplier's or firm's location. This is vertical integration.
One of the advantages of supply chain integration is the greater the degree of integration and the more partners integrated, the fewer interfaces where supply and demand must be matched. This reduces the complexity of the supply chain, and reduces the number of forecasts of supply and demand that must be made, and makes satisfying the supply/demand imperative much easier.
How to Meet the Supply/Demand Imperative
Meeting the supply/demand imperative requires first of all a clear vision of the desired ultimate state of the supply chain. Such a vision will guide efforts to define objectives and reach the desired state. Once the vision has been accepted by members of the supply chain actions must be taken to obtain or generate information and provide information needed to meet the supply/demand imperative in the chain and to synchronize the information cycle with the process cycle of the supply chain. Key enablers to meeting the supply/demand imperative include:
- Forecasting Needs. Perhaps the most critical factor in meeting the supply/demand imperative in any supply chain relationship is forecasting of supply and demand. Ideally, supply forecasts are made by suppliers based on demand forecasts from buyers. However, in many situations, buyers either do not have the capability to forecast, or have no basis on which to make forecasts. When demand forecast data is not available from buyers, other means of forecasting must be used, e.g. estimation of the total market and the supplier's market share based on history and expected performance of promotional activities and new products, or use of market research or economic and market activity indicators.
Forecasting resources for buyers include historical data of what was spent in the past. Such data must be organized by supplier and product in a manner that individual histories of spend on individual products from individual suppliers can be obtained. Another group of forecasting resources are production plans, production schedules, material requirements plans (MRP), construction schedules, and service schedules. Budget data, such as from capital budgets, maintenance budgets, and production budgets can also be useful although these usually are too general to identify expected demand for individual products. Some companies have a comprehensive business forecasting model which can be used to indicate quantities and timing of requirements.
- Timely Data for Supply Chain Partners. As mentioned previously, data from buyers should be the best source of forecasts of the supply that must be provided. When buyer forecasts are available, the necessary degree of detail and timing of data availability to suppliers depends to some extent on the relationship between supplier and buyer. If a just-in-time relationship exists, much detail and coordination will be needed for day to day matching of supply to demand. If the relationship is not just-in-time, less coordination is needed as there will be buffer inventory in the relationship.
- Communication of Forecast Data to Supply Chain Partners. The method and timing of communication of forecast data to supply chain partners is critical to the successful meeting of the supply/demand imperative. The more closely the supply chain is linked, the more critical the timing and accuracy. For example, an automobile company that receives assembled seats just-in-time from a supplier on a daily basis must provide the supplier with specific quantity and usage sequence information daily or even more frequently. Ideally, in such a situation the supplier receives its requirements directly from the buyers production scheduling system. Situations that are less just-in-time require less frequent communication but it must be reliable, regular, and accurate.
- Data Source and Communication Tools. Forecast data can be obtained from many sources. The particular source used depends on what is available and the accuracy and timing required. Some sources and means of communication to suppliers include:
- Time-phased requirement schedules
- Global data base
- Production plans and schedules
- Service plans and schedules
- MRP systems
- ERP systems
- Supplier access and extraction from buyer information systems
- Buyer access and input to supplier information systems
Results of Meeting the Supply/Demand Imperative
Meeting the supply/demand imperative in a supply chain will result in:
- Improved supply chain organization
- Improved communication up and down the supply chain
- Improved performance of the supply chain, e.g.
- Delivery reliability and accuracy
- Cost reduction
- Consistent provision of required quality
- Reduced lead times and cycle times
- Increased economic value added (EVA)
- Faster velocity of materials through the chain
- Improved supply chain leveraging
- Reduced inventory
- Competitiveness of the supply chain
Refer to Figure 1. for illustration of effects of the supply/demand imperative on buyer and supplier costs.
Development and Implementation Framework — Best Practice for Meeting the Supply/Demand Imperative in Supply Chains
For any change to take place and be effective, leadership is necessary to drive the change. For changes relative to supply chain management, leadership should come from the firm's supply chain management organization. In addition to leadership, top management support is vital. Without concurrence by top management, significant change is not possible. Even with top management's support and/or edict, a change management strategy is necessary to successful implementation of any change. A basic general process for developing and implementing methods of meeting the supply/demand imperative in supply chains is as follows:
- Select a supply chain where satisfaction of the supply/demand imperative is important to achievement of the company's goals.
- Form a team to determine improvements in how the supply/demand imperative is met at one or more interfaces in the supply chain
- Map the chain, noting the supply and demand situation at each interface:
- Include all members, not just buyers and suppliers
- Note current methods of communicating between members
- Note what, when, how supply/demand communication occurs
- Note value added at each step in the chain
- Note primary goals of each chain member
- Determine congruence of goals at each chain interface. Assure that interfacing members have compatible objectives.
- Determine information required for each member of the chain. What specifically does each party need to know to fulfill their side of the supply/demand imperative?
- Determine information timing required for each member of the chain. When does each supply chain member need to have information from the other member(s) to meet their part of the supply/demand imperative?
- Determine how to provide the required information for each member. How will the information required by each supply chain member be provided to them? (systems, processes).
- Determine actions required by each member of the chain. Who must act, what must each party do, and when must they do it, to satisfy the supply/demand imperative?
- Determine metrics to evaluate achievement of improvement in the matching of supply and demand throughout the chain (performance measurement)
- Plan implementation
- Detail who must do what and when and how
- Conduct training of affected parties
- Implement changes
Evaluation and Review
- Review performance measures on a planned regular basis
- Revise and improve methods and procedures as needed
- Practice continuous improvement
Supply Chain Integration and the Supply/Demand Imperative — Conclusion
Meeting the supply/demand imperative requires much planning, forecasting, and communication of demand requirements and planning of supply throughout the supply chain. Accurate coordination of information cycles with activity cycles is necessary to successful accomplishment at least cost. Achievement of such a high state of cooperation and communication is very difficult even in a simple 2-party supplier — buyer situation. In complex, multi-tiered, supply chain or web-like situations, difficulty increases exponentially. Integration of the supply chain is one way to simplify the planning, forecasting, information, and supply requirements. The greater the degree of integration, the simpler the supply chain. Trade-offs must be evaluated as in any supply chain improvement situation to determine the best combination of methods, members and information capability to contribute to the competitiveness of the supply chain. Supply chain integration is one more subject to consider in periodic reviews of insourcing/outsourcing and core competencies. Supply chain integration must also be supported by a collateral, pro-active, change management program. Refer to Figure 2. for a summary of effects of the interaction between supply chain integration and management processes on the ability to meet the supply/demand imperative.
Ellram, Lisa M. "The 'What' of Supply Chain Management" NAPM Insights, March 1994, 26-27.
Supply/Demand Match and Supplier/Buyer Costs (Graphic not available in text-only format of this document.)
Ability to Meet the Supply/Demand Imperative
Supply Chain Integration
|High||Fewer interfaces to match supply and demand, but minimal process makes meeting difficult||Relatively easy to meet the supply/demand imperative|
|Low||Very difficult to meet the supply/demand imperative||Can meet the supply/demand imperative, but the number of interfaces complicates the process|
Process for Planning / Forecasting / Communication of Requirements and Capabilities