BOK MATRIX

How Supply Chain Management Has Evolved 1

Table of Contents

How Supply Chain Management Has Evolved .............................................................................. 3

Definition of Supply Chain Management .................................. Error! Bookmark not defined.

History of Supply Chain Management ....................................................................................... 4

Era before and after 1950’s .......................................................................................................... 5

Cost of Logistics and Distribution in early days. ....................................................................... 6

Lessons Learnt from past ............................................................................................................. 6

Present Supply Chain Management ............................................................................................ 7

Integration and Collaboration ..................................................................................................... 8

Global supply Chain ..................................................................................................................... 9

Dimensions for Total Offshoring/Landed Cost ........................................................................ 10

Lean and Agile............................................................................................................................. 10

E- Supply Chain .......................................................................................................................... 11

Present Supply Chain Management in a Nut Shell ................................................................. 12

Future Supply Chain Management ........................................................................................... 12

Future Strategy ........................................................................................................................... 13

Future Processes.......................................................................................................................... 13

Future Collaborations ................................................................................................................ 13

Green Supply Chain ................................................................................................................... 14

Hurdles to Green Supply Chain ................................................................................................ 14

Evolution Based on Era .............................................................................................................. 15

Conception ................................................................................................................................... 15

Integration ................................................................................................................................... 15

How Supply Chain Management Has Evolved 2

Globalization ............................................................................................................................... 15

Specialization ............................................................................................................................... 15

Web-Based SCM ......................................................................................................................... 16

Evolution Drawbacks.................................................................................................................. 16

Lack of Knowledge Management .............................................................................................. 16

Sustainability Over-looked ......................................................................................................... 16

Conclusion ................................................................................................................................... 16

How Supply Chain Management Has Evolved 3

Introduction

The paper is about the evolution stages of Supply Chain Management (SCM), this paper starts

with the evolution of the definition of SCM and then discusses the history of Supply Chain

Management .The major developments in supply chain management started in late 1980’s and

has continued till date. Evolution in last two decades has been grouped under present status. The

future of SCM and new concepts yet to evolve or spread are discussed in the future of SCM. The

paper also discusses the drawbacks or limitations in the evolution of SCM.

Analysis

There is no single definition of supply chain Management (SCM). The term has been a hot topic

for research over three decades. The most recent and broader scope definition says “A supply

chain consists of everything involved, directly or indirectly in meeting customer request”

(Chopra et al., 2001). In the same year another researcher has defined supply chain Management

as “The strategy of systematic coordination of business functions and the integration across these

business functions within the company and across the supply chain, for long-term sustainability

of the company and the supply chain as a whole.” (Mentzer et al., 2001).

As per Council of SCM Professionals (CSCMP),”SCM encompasses all activities involved in

sourcing , procurement, conversion, and logistics Management activities. It also includes

coordination and collaboration with channel partners like suppliers, retailers, third-party

service providers, and ultimate user.. In a nut shell SCM integrates supply and demand

management within the company and across the supply chain (Ballou, 2007).

How Supply Chain Management Has Evolved 4

Hadfield and Nichols (1999) defined as “all activities associated with the flow and

transformation of raw-material to finished goods and ultimately reaching the end user, as well as

the associated information flow." A similar definition was given by Lee and Corey (1995)

wherein they defined SCM as “The integration of network facilities that procure raw material,

transform them into semi-finished and then final products, and finally deliver products to end

user through a distribution system”. The same has been better explained by Ganeshan and

Harrison (1995) as “a network of facilities and distribution system that performs multiple

functions of procurement of raw-materials, transformation to intermediate and finished products,

and finally distribution of these finished products to customers.” As per Towil and Winker

(1992) "The supply chain is a system, the constitute material suppliers, production houses,

distribution services and customers linked together via the feed forward flow of materials

and feedback information”.

When we observe the definitions provided in different era by different researchers, the evolution

is visible. By 21st century it started including everything to fulfill customer request where as in

early 1990’s it was limited to flow of goods from supplier through manufacturer and

distributor to the end-user (Cooper et al., 1991). So basically Logistics and distribution of early

days transformed to integrated supply chain management

History of Supply Chain Management

Operations management has its history way back in early 19th century where in the factory

physics was a popular terminology. Before the 1950s, logistics was associated with military

procurement, maintenance, and movement of military facilities, material, and officers.

The study and evolution of distribution system, inventory management and logistics emerged in

the late 1960s and 1970s (Heskett et al., 1973). The era prior to 1950 had no major contribution

How Supply Chain Management Has Evolved 5

towards logistics management. Around 1950s changes started to happen as logistics and

distribution started to become a strategic function. The importance of logistics was felt, when

distribution system was recognized as a separate organizational function for manufacturing

firms. (Heskett et al., 1964). The logistics management was transformed to concept of Supply

Chain Management in the early 1980s by consultants Oliver and Webber (1992). The authors

emphasized the importance of involvement of top management in taking strategic decisions of

supply chain and managing the supply chain.

Fig1: History of Supply Chain Management (Habib et al. 2008)

Era before and after 1950’s

Prior to 1950’s logistics was part of production management or factory physics. The logistics

was handled in fragments like transportation, purchasing, raw-material sourcing, warehousing

etc. These sub-divisions worked as individual departments leading to sub-optimized customer

service and higher cost. There was very little research or effort to balance and integrate these

activities. The research done by Lewis et al. (1956) for the airline industry played a pivotal role

in the direction of logistics management. The study answered how it might be a better cost

proposition using air freight for transportation than ship. The inventory carrying cost, reliability

How Supply Chain Management Has Evolved 6

and lead time reduction leading to lower total cost and better service levels was leading to a new

concept of logistics and distribution.

Cost of Logistics and Distribution in early days

Logistics cost was high in initial days. In the era of 1960 to 1970 the logistics cost for companies

ranged between 20 to 30 %. The high cost of the logistics was a major concern for many

companies and at national level also. The major reason for this cost was the integration of

production and sourcing was missing in early days.

Lessons Learnt from past

The important lesson was that logistics and distribution need to start from raw-material and end

with the customer. The objective should be global optimization and not local optimization of

individual functions. The total cost concept was the major breakthrough for future research in

the direction of supply chain management.

How Supply Chain Management Has Evolved 7

Fig2 Evolution Diagram (Ronald, 2006)

Present Supply Chain Management

Supply chain management in today’s world is a source of competitive advantage. Competitive

advantage is basically either because of product differentiation strategy or because of cost

advantage strategy. To make it simple, successful companies either have cost advantage because

of their unique supply chain model or have valuation advantage or a combination of both. The

supply chain today is an integral part of organization’s value chain.

How Supply Chain Management Has Evolved 8

Fig3 Competitive advantage framework

Integration and Collaboration

Integrated supply chain architecture focuses on both internal and external agencies that

can create value for the company and supply chain as a whole. By integration, we mean shared

goals and alignment of the processes, systems, and organizations needed to achieve those goals.

The goal of integrated supply chain is to create value within the supply chain partners and

increase end users value.

The Supply Chain Operations Reference model or the SCOR model for supply chain

management framework has extended emphasis on planning and integration with the channel

partners. Defining and deploying new shared objectives is the heart of the end-to-end SCM. It is

a critical activity for present day SCM wherein companies take the time to define shared

objectives, for internal integration among functions and external integration with customers and

suppliers. Some basic integration requirements include:

How Supply Chain Management Has Evolved 9

 Processes and supporting information systems are integrated within and beyond the

enterprise—reaching key suppliers and customers.

 Supply chain components like inventory and capacity are optimized within the

organization and with key suppliers and customers.

 Sharing of common metric and shared objective.

 Sharing of performance indicators and benchmarking with suppliers and customers.

Collaboration is a concept evolved from TOYOTA Company which actually extended

integration to the extent of collaboration and investment on supplier facilities for having an

effective supply chain. To distinguish integration and collaboration the former limits to

mechanical or automatic exchange of data and information on inventory, logistics, billing

whereas collaboration is more of working together, joint decision taking, investing on suppliers,

joint innovation and knowledge sharing with suppliers. In short collaboration is the ultimate

destination of integration journey.

Global supply Chain

Supply chain networks which were earlier confined to regional geographies are now expanding

to global platform. Sustainability now requires global presence and a lot of manufacturing

companies have realized this over the last two decades (Bovet et al., 2008). The various types of

global supply chain evolved over time are as follows:

International Distribution system Manufacturing happens domestically however distribution

and some marketing happen overseas.

International Suppliers: The raw-materials get shipped from overseas at lower cost and whole

processing and manufacturing is done domestic and then may be shipped or used to cater

domestic demand.

How Supply Chain Management Has Evolved 10

Offshore manufacturing: The product is sourced and manufactured offshore and then shipped

to domestic warehouse for further distribution.

Fully Integrated Global Supply chain: Here raw-materials are sourced from some location

then processed in some other location and finally distribution happens through another strategic

location. All locations are based on cost, availability and organization strategy. The shoe

company ECCO is an ideal example for fully integrated global supply chain. The raw material

handling centers are located in countries rich in livestock and so handling of the raw-hides and

livestock skin would be quick economical and better quality. Tanneries are located close to

manufacturing facilities to reduce the travel time and cost and demand supply correlation. The

majority of manufacturing is done through Asian facilities as it gives an advantage of low cost

labor. The distribution center in Denmark handles the maximum inventory however the sales

accounts for only 8-9 %., so most of the finished products get shipped to the local distribution

centers in Japan and Germany. ECCO’s major demand is from United States, Germany and

Japan however no production happens from these countries.

Dimensions for Total Offshoring/Landed Cost

In evaluating a supply chain location the total offshoring cost should include the following

parameters :Unit cost, Freight cost, Supply lead time, Raw-material cost, Inventory carrying cost,

working capital cost, Minimum order quantity, On-time delivery, Taxes and tariffs (Peter Meindl

et al., 2010). Many of these parameters have hidden cost and therefore it becomes essential from

the perspective of the organization to analyze total landed cost.

Lean and Agile

Modern supply chain management is focused on agility and lean management. Agility is a

business-wide capability of having flexibility through automation to enable rapid change and

How Supply Chain Management Has Evolved 11

thus a greater responsiveness to changes in product mix or volume. ZARA is a perfect example

of agile supply chain management. Lean originated from the concept of reduction in waste and

rework. In supply chain management the target is to minimize inventory. The introduction of

Just-in-time technology brought a major change towards minimizing inventory across the supply

chain. Fast food giant MC Donald’s is a classic example for JIT implementation. The JIT

integrated supply chain helps MC Donald’s to minimizing inventory at any particular location.

The whole system is integrated with ERP and material procurement and inventory is handled

from central location. The central procurement process help’s to maintain similar quality

standards and taste across locations. The delivery model and service model became a key

differentiator for MC Donald’s during the early years of adoption.

E- Supply Chain

DELL computer is a perfect example for E-supply chain business model wherein its website has

replaced the retail shops and distributors. The web-site is like virtual shops wherein anybody can

configure a system based on his/her budget and requirement and place an instant request for

meeting with a sales representative for placing the order. The website has all details of the

products and also customer data. DELL’s E- supply chain is the source of competitive advantage

because of zero inventory and elimination of distributors from the supply-chain. The model

requires high degree of information system coordination and acceptance of the business model

by its customers. DELL has no separate retail stores therefore the only contact point is its web-

site. The advantage is that it has no operating time limitations nor it has a fixed cost of rent and

wages. Website is a centrally controlled and therefore reaction times to a price change or

marketing strategy is very quick. Customers have the privilege to try as many system

configurations they want and that too without going from shop to shop. The website also gives

How Supply Chain Management Has Evolved 12

status of the order after order placement to delivery i.e. whether assembled, shipped, expected

delivery date etc. The other internet service which DELL offers is remote maintenance of the

system and data back-up. DELL strategy is highly dependent on the word of mouth about its

service and reliability. Customer care is of prime importance to DELL’s business model as it

becomes the only point for receiving customer feedback.

Present Supply Chain Management in a Nut Shell

In today’s business scenario supply chains are crucial for competitive advantage. Many of the

successful business models have their key source of competitive advantage in their supply chain.

Companies like ECCO shoes, PepsiCo or Dell are highly dependent on a fast and agile supply

chain. The supply chain in today’s business scenario is having a far important role than only

delivering goods. The supply chain today is integrated with strategy, marketing, new product

development and even HR functions. Contemporary supply chain used to only serve as a

delivering mechanism from finished goods to end users however now it has to reduce inventory,

lead time, provide forecasting data, customer feedback , understand customer requirements and

develop partnerships also. In today’s world supply chain needs to be more agile to bridge the gap

between customer expectation and available products.

Supply chain now has gown global with sourcing of cheap raw-material from countries

abundant in that raw-material then lower operating and processing cost. In the world of

globalization the first mover advantage is the key to success and so developing a quick and

efficient supply chain becomes the biggest challenge for any organization.

Future Supply Chain Management

How Supply Chain Management Has Evolved 13

The supply chain management is improving continuously and now the focus is to extend the

integration, collaboration and information sharing to the next level. The other topic which is

gaining focus is the concept of green supply chain.

Future Strategy

Future-generation supply chain strategies will not be limited to continuous improvement of

productivity but also be an effective tool for achieving business-level outcomes—with a strong

focus on the end-user. The future strategies of supply chain will include new revenue-

generating services, time-to-produce and time-to-market, customer-segment-specific capabilities.

In the future, supply chain will become a part of an extended business architecture and

consider key targeted outcomes with suppliers, customers, and partners as core elements.

Supply chain capabilities and performance objectives shall be extended and combined with,

technology, product development, marketing and sales strategies.

Future Processes

In future generation the processes will be integrated starting from plan, then to source, make,

delivery and ultimately return. The processes will have online interaction and performance

monitoring against plan, making the business more agile further this can be extended to

suppliers, partners, and customers. The simulation and real-time business problem solving

techniques will find more value proposition. The supply chain business processes will emerge as

assets and business leaders and IT will jointly handle SCM in future (Cohen et al., 2005).

Future Collaborations

In future generation the following advancement in collaborations are expected:

 Customer satisfaction will target delighting the customer and collaborations will be

focused more than just cost and quality.

How Supply Chain Management Has Evolved 14

 Real-time data collaboration will become a hygiene factor than competitive advantage.

 The threats of data security in collaboration shall be effectively answered with more

secured sharing platforms.

 Collaborations shall be towards new technology development and joint R&D.

 Data Collaboration will be automated to the extent that it can be handled without any

human support.

 Collaboration and data sharing will extend to all tiers of supply chain.

 Online and internet based collaboration strategy will find more application. This will be

more for forecasting and inventory control.

Green Supply Chain

The present supply chain focuses on two prime objectives i.e. cost and service level. The green

supply chain has its focus towards a third parameter called sustainability. Sustainability is the

third lever which will focus on society economy and environment. The modern day supply chain

factors which are becoming critical are availability of natural resources, traffic congestion in

urban areas, energy consumption, CO2 emissions and the rising transport costs. Important

features of green SCM include focus on life cycle costing, waste reduction, recycling asset

utilization and service innovation. Green supply chain is a win-win situation considering long-

term benefits. The KPI of green supply chain will include measuring, co2 emission, traffic

congestion, natural resource consumption, re-usable packaging etc. Companies who transform

their supply chain to green supply chain will have first mover advantage and will have product

differentiation also (http://www.nhtv.nl/, 2010). Life cycle cost will reduce and will also help

mitigate many sustainability related risks.

Hurdles to Green Supply Chain

How Supply Chain Management Has Evolved 15

Sustainability regulations are not mandatory yet and this is actually keeping many probable

adopters on the edge. Companies are targeting greener solution in isolation like in packaging or

waste treatment or re-use. Most of the adoption is more of marketing and eye wash. The price

parity of greener supply chain to normal supply chain is actually the main hurdle for adoption of

green supply chain.

The specialization Evolution Based on Era

The SCM evolution based on era can be split into five major stages i.e. conception, Integration,

Globalization, Specialization and web-based SCM (Jain et al., 2010).

Conception

Existence of SCM can be tracked long back to 20th century through the assembly line production

system, example Ford motors; however it got first introduced by an American consultant in the

early 1980s.

Integration

The era started primarily in 1960’s through the electronic data exchange systems and evolved in

the 1990’s as Electronic Resource Planning system (ERP). The focus was on data integration

across the supply chain. The era was focused on reducing inventory along the supply chain.

Globalization

The era concentrated on minimizing the supply chain cost and gaining competitive advantage

through sourcing various supply chain components at ideal global locations.

Specialization

The era concentrated on developing core competencies within the organization and offloading

the other areas to external suppliers. This way a major shift from the earlier concept of vertical

How Supply Chain Management Has Evolved 16

integration and was focused towards outsourcing of non-key areas. Phase extended from

outsourcing to channel partners when the need for developing channel partners was felt.

Web-Based SCM

This era started in the late 20th century and is there to continue and evolve. The use of internet

and other web-based application for managing the supply chain is fast improving and spread

across all sectors.

Evolution Drawbacks

Knowledge management and knowledge sharing across organizations has not been evident in

evolution of SCM. Sustainability is another aspect which has been over-looked.

Lack of Knowledge Management

The knowledge management across the value chain or supply chain has is limited to silo

approach. Although it forms the basis of integration and collaboration, but still it has not evolved

to that extent. Knowledge transfer from one end to the other end of supply chain is hardly

visible.

Sustainability Over-looked

In the process of optimization of cost and meeting customer requirements, an aspect which is

frequently overlooked is the sustainability. Present SCM is not really sensitive to eco-system

integrity, biodiversity, social responsibility and human well-being. Some south –East Asian

countries serve as major manufacturing hub because of cheap labor availability, however very

few companies really focus on community development or human-well-being in these areas.

Conclusion

From the evolution we can conclude that SCM has actually come a long way from pure logistics

and distribution to integrated, collaborative, web-based Supply Chain Management. Supply

How Supply Chain Management Has Evolved 17

chain is fast becoming a part of business strategy and sometimes business strategy is decided

based on organizations supply chain capability. The scarcity of resources and cut-throat

competition has helped SCM evolve. SCM has been a successful business differentiator and

many companies have purely made profit because of their supply chain management. Successful

SCM has actually proved to be an entry barrier for new competitors and thus eliminated the risk

of new entrants. The future of SCM will focus on life cycle cost and thus sustainability and green

initiatives will dominate along with web-based SCM.

How Supply Chain Management Has Evolved 18

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