Supply Chain: Evolution

This is a series on Supply Chain Basics looking at the discipline from the Society of Operations Management perspective. Supply chain is also essential to project management as PMs are typically trained in world class contracting. The Defense Acquisition Workforce Improvement Act, DAWIA, certification highlights the combination of project management and supply chain. In this post, we will explore Supply Chain Evolution adding some additional support as well.

Supply Chain: Evolution

Traditionally, the supply chain has been either lateral or vertical integration. Vertical integration refers to the practice of bringing the supply chain into one organization. This approach has become antiquated as companies increased in size and became more global. The lateral supply chain model has replaced the vertical approach as preferred approach.

First, let's look more at the vertical supply chain which has been around longer than the supply chain concept. The idea is to internalize nearly all of the supply chain and control it. All of the planning, design, execution, monitoring, and control belongs to one organization. Vertically integrated supply chains grow out of expanding companies that layer departments and management or from mergers and acquisitions.  Supply Point Control or Value Chain profit is different as a dominant company has control the market supply managing demand and pricing versus controlling the supply to the producer then to then consumer with multiple competitive chains operating in the market.  While vertically integrated supply chains persist, usually when companies expand globally they divest themselves of the non-core functions moving towards a lateral supply chain.

The trend over the past several decades has been towards lateral supply chains having various outsourced activities and companies lose control of these activities. The reasons for a lateral supply chain are

1. To achieve economies of scale.
2. To Improve business focus and expertise.
3. Because its possible.

Despite the attraction of a lateral chain, synchronizing the activities of the network is an enormous challenge.  What a firm gains in scale, scope, and focus they may lose in the ability to see, understand, or even care about the larger supply chain processes.

There is an intermediate form of supply chains called "keiretsu".  Japanese companies form cooperative relationships remaining legally and economically independent even though working closely such as sole sourcing and financial backing. Members generally have shares in the other member companies anf forms around a bank or trading company.

Stages of Supply Chain Management Evolution

Advances made in supply chain over the past several decades have been reproduced in the models improving them over time. The evolutionary trend has been as follows:

Stage 1:  Multiple Dysfunction 

The potential nucleus organization lacks internal definition and goals. Other than a few transactional links there are no external connections.

These organizations tend to act impulsively rather than according to a plan. Management provides only the most general sense of a mission.  Forecasting is mostly guesswork and often over inflated by unwarranted market optimism. Product design may be myopic and of a few internal designers. Product and payments flow irregularly. Material Resource Planning (MRP) is at the most basic level having the Bill of Materials (BOM) and short term production planning.

Stage 2:  Semi-functional Enterprise

The nucleus organization begins to improve effectiveness, efficiency, and quality within functional areas. While some or all functions engage in initiatives designed to increase efficiencies within departments, there is little to no overlap in decision making from one department to another.

Partnerships with customers and supplier have not yet formed. However, the departments begin seeking efficiencies that reduce handling, reduce inventories, procurement and logistical processes improve, marketing forecast become reliable, and production planning systems begin to emerge. The efficiencies come at a cost though since they have not been achieved through cross communication.  For example reduced inventories could result in shortages and lower cost logistics may take longer or be unreliable.

Stage 3:  Integrated Enterprise

Silos or stovepipes are broken down pulling functional areas together.  Focus shifts from individual functions to a company wide process focus.

These organizations are fully integrated between departments using Enterprise Resource Planning, ERP. This is a prelude to end-to-end supply chain management. focusing on interdepartmental processes does not depend on technology. Although smartly leveraging technology can act as a force multiplier.  MRP was create in the 1950s then expanded to MRP II which wrapped together manufacturing and finance. ERP then expanded upon MRP II tying in the entire organization. Additional, advances pushed across the corporate boundaries and linked to supply chain partners.

Cross-collaboration among departmental lines has been experimental and tentative at first. However, cross functional approaches such as collaborative planning, forecasting, and replenishment have emerged. Departmental representatives, teams, now meet to develop demand forecasts, production planning, and other functions.

Inventory receives a strategic consideration as markets are astutely segmented improving customer service.  The nucleus firm begins to move towards integration of the external members of the supply chain.

Stage 4:  Extended Enterprise

The firm integrates its internal network with the internal networks of supply chain partners in order to improve efficiencies, product/service quality, or both.

The APICS program combines the discrete steps between integrated supply chain and fully networked supply chain into a continuous process.  The approach assumes a significant breakthrough at this juncture that extends at least one business process past the boundary of the corporation.  The process that leads to an extended enterprise typically begins with an exploratory collaboration between a channel master and one component supplier. This relationship will become a model for future partnerships and multi-firm collaboration.

The first collaboration can fail if the channel master becomes dominant and coerces the weaker partners for on-time deliveries at low prices for example. Manufacturers and retailers can dominate the channel exerting considerable leverage on the suppliers. This can create circumstances in which suppliers agree to difficult-to-keep promises in exchange for access to global markets. The dominant firm in the chain may require suppliers to hold the inventory. True partnerships requires a contract that benefits all stakeholders to the agreement.

Overall, this is a conceptual breakthrough and not a technology except for e-commerce but technology does enable the enterprise and is deeply embedded in stage 4.  ERP systems are synchronized between all partners. Competition among supply chains may be revolutionary. 

In conclusion, supply chains have caused companies to mature in ways that may be revolutionary. Companies can be gauged on their maturity through a 4 stage evolutionary process arriving at the digital profit model which has attenuated the business-to-customer relationship removing the middle men in many cases.  Supply chain evolution has created value which we will discuss in the next post. 

References:

(2011). APICS Certified Supply Chain Professional Learning System. (2011 ed.). Version 2.2.