The strongest link

Supply chains are being extended by the use of Internet technology. Butler Group analyst Mike Thompson explores the opportunities...

Supply chains are being extended by the use of Internet technology. Butler Group analyst Mike Thompson explores the opportunities and threats

The term 'supply chain' has always struck me as being something of a misnomer, given that a chain is a series of enclosed loops that are interlinked in a static manner. Even with the traditional view of the supply chain, there was nothing enclosed or static about, for instance, even the most basic manufacturing supply chain.

At various points along the chain, decisions had to be made, and different routes could be taken. A static chain would, by definition, indicate only one supplier, one distribution channel and one customer; hardly a concept that fits the reality of the true manufacturing supply chain.

More accurately, the supply chain is a network - albeit one with definable starting and finishing points. Many solution providers are talking about supply nets and supply Webs as being the new model, whereas they are an extension of the old model. This should not be seen as a marketing exercise being perpetrated by solution providers; the new supply net is far more complex than the old supply chain, even though many of the internal structures are similar.

The sum of its parts

One of the strangest concepts of the new supply chain is the compartmentalising, or componentising, of different parts of the supply chain. Historically, conflicts always existed within the supply chain model. Thus, planning, direct purchasing, manufacturing, marketing and distribution, each had their own separate control elements and, in effect, tended to operate almost independently of each other.

A major shift in redefining the supply chain came with systems - most notably ERP solutions - that integrated these separate elements into (so the theory went) a smooth operational whole.

The basic premise behind the need for this integrated supply chain was that each separate element had its own goals and objectives, which caused conflict within the total operational process. The task of marketing was to get the product recognised, and there was often very little thought given to manufacturing capabilities.

Similarly, and to expand on the conflicts within the supply chain, it was the perceived remit of the direct purchasing function to obtain goods at the best possible price. Now, even within the worst organised company, this would not have been allowed to have a negative impact on inventory. But exactly how far down the supply chain the purchasing department would look is more problematic. It might very well have been that they could look as far as the order book, but rather less likely that they would have any realistic involvement of marketing campaigns.

I use the word 'realistic' for a specific purpose as it indicates one of the problems that came from having this driven-by-department objective model. No doubt, purchasing departments had been informed numerous times about the expected success of a specific marketing campaign, and had been told to react accordingly. Something along the lines of, "We will sell one million extra units in the first three months after the start of the campaign, so you'd better be sure we have inventory available." The reality would almost certainly be a fraction of the expected increase.

Having been caught in the trap before, purchasing departments would take the expected forecast sales and reduce them by their experience margin, thus ensuring that inventory did not run out of control. The problem occurred, of course, when the marketing department got it right, but inventory was not available, or a premium had to be paid to get inventory at short notice.

Integration of the supply chain did not remove all of these issues despite the promises, but it did allow management to understand the reasons for the breakdowns when they occurred, and to manage the whole process better in the future without entering into a blame-culture. Having spent so much time and resource on the integration of the supply chain - moving away from the departmentalised objective approach - why are we now looking at models that break down the supply chain into its constituent parts?

In other words, moving away from a supply chain towards a supply net. The answer is simple.

The key words here are integration and interaction. The old supply chain model, with its encapsulated constituent parts, did not support interaction between the various elements. It was by its very structure divisive in its implementation. The integrated supply chain answered the interaction issues and removed the departmental encapsulation, but failed to deliver - mainly because there has to be a point of control within each of the departmental elements.

With the ERP-based integrated model, control passed from departmental function to process flow. It made specific functions subservient to total process. It created a system that was too static to respond to change.

Best of both worlds

The new model is designed to take the best of both worlds. It should allow for departmental objectives to be taken into consideration; it should rationalise and codify those objectives in relationship to other departmental objectives; it should allow for management of distinct process parts to be handled by the departments that have the ownership; and it should also run process flow through the departments in a transparent manner and not allow the total process flow to sit on top of the whole model.

This then, is the new model; a componentised system with multiple process flows, connecting all of the components in a complex network. Conceptualising a model does not make it instantly implementable, and in this instance problems occur with creating and managing the network of process flows.

This is difficult enough within a supply chain that has few external points of entry, but the new way of doing business does not allow for the encapsulation of a supply chain primarily within an organisation; it has numerous external points of contact and areas of interaction.

Whereas the old model extended beyond the organisational boundaries at each end of the supply chain, the new model demands that external influences be allowed within multiple points of the process flow. As an example, one key area where this is becoming apparent is the breakdown in the traditional relationships between buyer and seller. Bearing in mind that most organisations will be both buyer and seller at some point in their supply chain process.

With the birth of e-markets, the cosy relationships that used to exist have been thrown out the window. Although buying and selling has always been a combative process, it was normally carried out within well-defined parameters. It could be likened to the haggling in a market. The buyer would come in at a low price and the seller would respond at a high price.

Due to the understanding of the nature of the market, both were aware that the final price would be somewhere in between the two, and most deals would be struck around a narrow mid-point band. No buyer expected to shave more than a few percentage points off the expected price and, likewise, no seller expected to gain more than a few.

Ignorance isn't bliss

The supply chain relationships are being extended, thus adding to the complexity. No buyer or seller can ignore the new opportunities and threats that are posed by the introduction of the new ways of trading. For example, it may not be a part of the current business model to enter into auctions for buying or selling, however, this is becoming an increasingly popular way of trading within all areas. Failure to recognise this model may have a significant impact on the viability of the business supply chain.

Implementation of the new supply chain will give organisations the opportunity to re-examine many parts of their business model and understand where inefficiencies exist. More importantly, it will create new opportunities for revenue generation.

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