Handfield, R. B. and Nichols, E. L. (1999).

Chapter 1. Introduction to Supply Chain

Management … . In, Introduction to Supply Chain
Management. pp. 1-13. Upper Saddle River,
N.J. : Prentice Hall.

Introduction to Supply
Ch.in Management

Managers in the last two decades have witnessed a period of change unparalleled in the
history of the world, in terms of advances in technology, globalization of markets, and
stabilization of political economies. With the increasing number of "world-class" com-
petitors both domestically and abroad, organizations have had to improve their internal
Pl10cesses rapidly in order to stay competitive. In the 1960s-1970s, companies began to

~
veiOP detailed market strategies, which focused on creating and capturing customer
I alty. Organizations also realized that strong engineering, design, and manufacturing
f nctions were necessary in order to support these market requirements. Design engi-
.. eers had to be able to translate customer needs into product and service specifications,
which then had to be produced at a high level of quality and at a reasonable cost. As the
demand for new products escalated in the 1980s, manufacturing organizations were re-
quired to become increasingly flexible and responsive to modify existing products and
processes or to develop new ones in order to meet ever-changing customer needs. As
manufacturing capabilities improved in the 1990s, managers realized that material and
service inputs from suppliers had a major impact on their organizations' ability to meet
customer needs. This led to an increased focus on the supply base and the organization's
sourcing strategy. Managers also realized that producing a quality product was not
enough.fGetting the products to customers when, where, how, and in the quantity that
they waht, in a cost-effective manner, constituted an entirely new type of challenge.
More recently, the era of the "Logistics Renaissance" was also born, spawning a whole
set of time-reducing information technologies and logistics networks aimed at meeting
these challenges. 1
As a result of these changes, organizations now find that it is no longer enough to
manage their organizations. They must also be involved in the management of the
network of all upstream firms that provide inputs (directly or indirectly), as well as
the network of downstream firms responsible for delivery and after-market service of

1 WorldClass Logistics: The Challenge of Managing Continuous Change, prepared by The Global Logistics
Research Team, Michigan State University (Oak Brook, IL: Council of Logistics Management, 1995).

1
2 CHAPTER 1 Introduction to Supply Chain Management
the product to the end customer. From this realization emerged the concept of the "sup-
ply chain." For purposes of this book, we define the terms supply chain and supply chain
management as follows:
The supply chain encompasses all activities associated with the flow and transfor- .
mation of goods from the raw materials stage (extraction), through to the end user,
as well as the associated information flows. Material and information flow both up
and down the supply chain.
Supply chain management (SCM) is the integration of these activities through im-
proved supply chain relationships, to achieve a sustainable competitive advantage.
If we consider an individual firm within the context of this definition, we must in-
clude both its upstream supplier network and its downstream distribution channel (see
Figure 1-1). In this definition, the supply chain includes the management of information
systems, sourcing and procurement, production scheduling, order processing, inventory
management, warehousing, customer service, and after-market disposition of packaging
and materials. The supplier network consists of all organizations that provide inputs, ei-
ther directly or indirectly, to the focal firm. For example, an automotive company's sup-
plier network includes the thousands of firms that provide items ranging from raw
materials such as steel and plastics, to complex assemblies and subassemblies such as
transmissions and brakes. As shown in Figure 1-1, the supplier network may include
both internal divisions of the company as well as external suppliers. A given material
may pass through multiple processes within multiple suppliers and divisions before
being assembled into a vehicle. A supplier for this company has its own set of suppliers
that provide inputs (called second-tier suppliers) that are also part of this supply chain.
The beginning of a supply chain inevitably can be traced back to "Mother Earth"; that
is, the ultimate original source of all materials that flow through the chain (e.g., iron ore,
coal, petroleum, wood, etc.). Supply chains are essentially a series of linked suppliers
and customers; every customer is in tum a supplier to the next downstream organiza-
tion until a finished product reaches the ultimate end user.
It is important to note that from the focal firm's perspective, the supply chain in-
cludes internal functions, upstream suppliers, and downstream customers. A firm's inter-
nal functions include the different processes used in transforming the inputs provided
by the supplier network. In the case of an automotive company, this includes all of its
parts manufacturing (e.g., stamping, power train, and components), which are eventually
brought together in their final assembly operations into actual automobiles. The coor-
dination and scheduling of these internal flows is very challenging, particularly in a
large organization such as an automotive company (see Figure 1-1). For example, order-
processing managers are responsible for translating customer requirements into actual
orders, which are input into the system. In the case of an automotive company, these in-
dividuals work primarily with the extensive dealer network to ensure that the right mix
of automobiles, spare parts, and service parts are available so that dealers can meet the
needs of their customers. Order processing may also involve extensive customer interac-
tion, including quoting prices, possible delivery dates, delivery arrangements, and after-
market service. Another important internal function is production scheduling, which
translates orders into actual production tasks. This may involve working with materials

d
.. •

CHAPTER 1 Introduction to Supply Chain Management 3

_-- - Car Dealers +- ....:C;..::,.AR=S -,
,/ I
", Assembly Material Shippmg
-
',.. Sales Planning (19 plants) . t
Operations - - - - - -~~~~- ___ • Vehicle scheduling ) Assembly Line
wl:ble '~. Preproduction planning t
Ne'Y ~r__ ~ • • Components scheduling Warehousing
-- - - pi-Oducts and --: • Planning/sequencing t
ProduC! engineering _-<:;: Receiving
Engln~nng
'
changes
'
" : "
I \
T
: : " '..... PARTS
• Ship'" "-- - ------------------___ S;.-
Manufacturing release " ---------- -- ~
(57 plants) .... Stampings ---,Request ~-,,~
I ""to buy ()'Cl<! \~_
Engines I Transmissions I
Castings
Request to
'
~
\\0....'&
-~\\l/> ~
ell

ElectricalJFuel I
Handling Devices I
Components
Group
IElectromcs
- --
-6iiy--.. PURCHASING .\ ~
'(\Q , ""

.I
Glass I
Plastics!
Trim Products
I Climate
Controls
\,
'-,
e.-\
!\
\ ~ Sourcing 't a~
-..,.... .iI.i.
" I I

';q;"i7q. " MATERIALS ~ Suppliers •

(hundreds)

,
C('i4p~oti___
Ce ----- --
_-----_.
__ --:
II••
~~~~~------
~gCh --------------------
----------
anges and ship releases

requirements planning (MRP) systems, scheduling work centers, employees, and main-
tenance on machines.
The second major part of supply chain management involves the management of
upstream external supply chain members. In order to manage the flow of materials be-
tween all of the upstream organizations in a supply chain, firms employ an array of
managers who ensure that the right materials arrive at the right locations, at the right
time. Purchasing managers are responsible for ensuring that (1) the right suppliers are
selected, (2) they are meeting performance expectations, (3) appropriate contractual
mechanisms are employed, and (4) a good relationship is maintained with these suppli-
ers. They may also be responsible for driving improvement in the supply base and act-
ing as a liaison between suppliers and other internal members (engineering, accounting,
etc.). Materials managers are responsible for planning, forecasting, and scheduling ma-
terial flows between suppliers in the chain. Materials managers work closely with pro-
duction schedulers to ensure that suppliers are able to deliver the materials on time to
the required locations, and that they have some advance warning regarding upcoming
requirements so that they can plan ahead of actual production and delivery dates.
4 CHAPTER 1 Introduction to Supply Chain Management

Finally, a firm's external downstream supply chain encompasses all of the downstream
distribution channels, processes, and functions that the product passes through on its way
to the end customer. In the case of an automotive company's distribution network, this
includes its finished goods and pipeline inventory, warehouses, dealer network, and
sales operations (see Figure 1-1). This particular distribution channel is relatively short.
Other types of supply chains may have relatively small internal supply chains but fairly
long downstream distribution channels. For instance, Figure 1-2 shows the supply chain
for a cereal manufacturer, and the extensive distribution network involved in getting
the packaged cereal to the final customer. Within the downstream portion of the supply
chain, logistics managers are responsible for the actual movement of materials between
locations. One major part of logistics is transportation management, involving the se-
lection and management of external carriers (trucking companies, airlines, railroads,
shipping companies) or internal private fleets of carriers. Distribution management in-
volves the management of packaging, storing, and handling of materials at receiving
docks, warehouses, and retail outlets.
An important new trend in supply chain management is the recovery, recycling, or
reuse of products from the end user after they have reached the end of their useful life.
Organizations are now extending their distribution channels beyond the end customer
to include the acceptance and "disassembly" of final products for reuse in new products.
Organizations are seeking to "close the loop" and eventually transform used products
into new products and/or materials that can be returned to the earth without harming
the environment. In other cases, organizations have developed extensive repair net-
works to handle warranty and quality problems that occur with products returned by
customers. This function may include after-sales service functions, maintenance ser-
vices, and other types of activities related to continually satisfying the customer. Here
again, organizations are actively working to improve their "reverse logistics" functions,
to manage the flow of products and services moving backward through the supply
chain.

Packaged Packaged Packaged

Grain Cereal Cereal Cereal Cereal
p

CHAPTER 1 Introduction to Supply Chain Management 5

All organizations are part of one or more supply chains. Whether a company sells
directly to the end customer, provides a service, manufactures a product, or extracts
material from the earth, it can be characterized within the context of its supply chain.
Until recently, however, organizations focused primarily on their direct customers and
internal functions, and placed relatively little emphasis on other organizations within
their supply chain network. However, three major developments in global markets and
technologies have broughtsupply chain management to the forefront of management's
attention:
1. The information revolution.
2. Customer demands in areas of product and service cost, quality, delivery, technol-
ogy, and cycle time brought about by increased global competition.
3. The emergence of new forms of interorganizational relationships.
Each of these developments has fostered the emergence of an integrated supply
chain approach. The model presented in Figure 1-3 illustrates the nature of supply chain
management and integrates all three developments mentioned above. The model also
provides a framework for this text, where a chapter is devoted to each of the three evo-
lutionary developments. Before moving on, it is worthwhile to provide a brief overview
of the model and its components first.

II Product and material flows

1 Infonnation and financial flows

1st Tier Suppliers ~ Strategic business units

. . . . Relationship management

Bidirectional arrows reflect the accommodation of reverse materials and

infonnation feedback flows.
6 CHAPTER 1 Introduction to Supply Chain Management

Information Systems and Supply Chain Management

In the early 1960s when computers were first developed, a mainframe computer filled
an entire room with vacuum tubes and wires. With the development of the integrated
circuit, the cost of the computer decreased radically while at the same time the speed of
computer power increased exponentially. Today, a laptop computer weighing 5 pounds
exceeds all of the power of an old mainframe by several orders of magnitude.
With the emergence of the personal computer, optical fiber networks, the explosion
of the Internet and the World Wide Web, the cost and availability of information re-
sources allows easy linkages and eliminates information-related time delays in any supply
chain network. This means that organizations are moving toward a concept known as
Electronic Commerce, where transactions are completed via a variety of electronic media,
including electronic data interchange (EDI), electronic funds transfer (EFT), bar codes,
fax, automated voice mail, CD-ROM catalogs, and a variety of others.This means that the
old "paper"-type transactions are becoming increasingly obsolete. Leading-edge organi"
zations no longer require paper purchase requisitions, purchase orders, invoices, receiving
forms, and a manual accounts payable "matching" process. All required information is
recorded electronically, and associated transactions are performed with a minimum
amount of human intervention. Recent developments in database structures allow part
numbers to be accumulated, coded, and stored in databases, and electronically ordered.
This means that with the application of the appropriate information systems, the need
to constantly monitor inventory levels, place orders, and expedite orders will soon be-
come a thingofthe past.
The proliferation of new telecommunications and computer technology has also
made real-time, on-line communications throughout the entire supply chain a reality.
These systems are now being linked between suppliers, manufacturers, distributors, retail
outlets, and ultimately, customers, regardless of location. These technologies are supply
chain "enablers," in that they can substantially reduce paperwork, improve communica-
tion, and reduce lead time and non-value-added activities if properly implemented.
Managers developing information systems should not visualize information as a set
of repetitive transactions between entities such as buyers and suppliers, or distributors
and retailers. Rather, an ideal system should span all functions and organizations through-
out the entire supply chain. With the explosion of the Internet, the World Wide Web, and
company "Intranets," future systems will possess the following set of characteristics:2
• Centralized coordination of information flows.
• Total logistics management-integrating all transportation, ordering, and manufac-
turing systems.
• Order-change notices that trigger a cascading series of modifications to production
schedules, logistics plans, and warehouse operations.
• Global visibility into transportation resources across business units and national
boundaries.
• Global inventory management-ability to locate and track the movement of every
item.

2 F. L. Duboisand E. Cannel, "Information Technology and Leadtime Management in International Manufac-

turing Operations," in Global Information Systems and Technology: Focus on the Organization and Its Func-
tionalAreas, ed. P. Candace Deans and Kirk R. Karwan (London: Idea Group Publishing, 1994),pp. 279-293.
 CHAPTER 1 Introduction to Supply Chain Management 7

• Global sourcing~onsolidation of the purchasing function across organizational

lines, facilitating purchasing leverage and component standardization across busi-
ness units.
• Intercompany information acces~larity of production and demand information
residing in organizations both upstream and downstream throughout the value
chain.
• Data interchange-between affiliates and nonaffiliates through standard telecom-
munications channels.
• Data capture-ability to acquire data about an order at the point of origin, and to
track products during movement and as their characteristics change.
• ltansformation of the business from within-managers who can see the "big pic-
ture" and accept the new forms of business processes and systems.
• Improvements in supplier-customer relationships-to justify investments in tech-
nology linkages.
The ideal supply chain information system is shown in Figure 1-3 (information
flows between organizations are indicated by the bold arrows). Note that information is
available to any party within the chain, as well as the number of feedback loops defin-
ing a totally integrated system. These linkages are critical, as they allow just-in-time
(JIT) deliveries to occur between every linkage in the chain, inventories to be mini-
mized, and entities to respond to fluctuations in a timely and effective manner. Point-of-
sale data is transferred immediately throughout the supply chain, allowing managers to
spot trends, plan capacity requirements, allocate materials, and notify suppliers
throughout the entire chain. The information flows also permit interorganization pay-
ments for goods and services through electronic funds transfers between banks, which
ensures quick payment for supply chain members. With all of these elements in place,
total information freedom permits accessibility, improved decision making, and quicker
action. These critical information systems issues are discussed in chapter 2.

Inventory Management across the Supply Chain

The second major trend facing organizations today is the demand for ever-greater levels
of responsiveness and shorter defined cycle times for deliveries of high-quality goods
and services. A variety of changes occurring throughout global markets have resulted in
an increasingly competitive environment. The rate of change in markets, products, tech-
nology, and competitors occurs at an increasingly rapid pace, leading to a condition in
which managers must make decisions on shorter notice, with less information, and with
higher penalty costs. At the same time, customers are demanding quicker delivery re-
sponsiveness. These same customers require products that incorporate state-of-the-art
technology and features. Products are becoming less standardized, and customers are de-
manding options that are tailored to their unique requirements. In many segments of the
marketplace, only those firms that have the ability to "mass-customize" are successful. 3
Computers are assessed based on their speed and cost, automobiles on their safety and
reliability, and long-distance telephone carriers on price competitiveness. This means

3 B. J. Pine, Mass Customization: The New Frontier in Business Competition (Boston: Harvard Business School
Press, 1993).
8 CHAPTER 1 Introduction to Supply Chain Management

that such products are becoming more complex, have a greater variety of options, and
must be tailored to a greater number of shrinking market "niches." In some industries,
product life cycles are shrinking from years to a matter of 2 or 3 months. This has led one
popular management author to compare many current global markets to the fashion in-
dustry, in which products go in and out of style with the season. 4
Managers throughout the supply chain are feeling the full effect of these changes.
Cutbacks in staffing are forcing managers to handle a greater number of channels with
fewer people, while cost pressures require that they do so with less inventory. Because of
the ever-increasing levels of competition found in many markets, supply chain-related
mistakes leading to lost sales cannot be easily dismissed and written off. Furthermore,
both customers and suppliers are becoming better at measuring performance, so that
these mistakes are more easily detected. "Perfect orders" are being demanded, requir-
ing a supply chain that is quick, precise, and provides a top-quality product every time.
Despite the imposing challenges of today's competitive environment, some organi-
zations are thriving. These firms have embraced these changes and have integrated quick
response and flexibility into their day-to-day culture. They are managing by paying at-
tention to time. For example, the reduction of delivery times both in the marketplace and
throughout the supply chain has earned such firms as Hewlett-Packard, Northern Tele-
com, Toyota, and Xerox a reputation as "time-based competitors."5 Entire industries
have changed to reflect time-based capabilities. For instance, Johnson Controls can now
receive a seat order release from Ford and deliver the order 4 hours later, starting from
the raw materials stage. Another auto supplier producing stamped metal parts has re-
duced its finished goods inventory to 2 hours' worth of goods, yet is faced with a penalty
of $10,000 per minute if it delivers late to its customer's assembly line. A number of
"buzzwords" have emerged to describe time-based capabilities: throughput time reduc-
tion, delivery speed, fast cycle capability, quick response or resupply time, lead-time reduc-
tion, and time compression. 6 Unlike many management fads, however, time-based
competition is a phenomenon that is here to stay because of its direct linkage to profits.
The advantages achieved by time-based competitors enable them to grow faster and
earn higher profits relative to other firms in their industry; increase market share
through early introduction of new products; control overhead and inventory costs; and
move to positions of industry leadership'?
A number of firms, including Wal-Mart, Thomasville, Northern Telecom, Xerox,
and Motorola, have experienced a significant improvement in corporate performance,
whether measured using return on assets, return on net assets, or return on sales as a
result of their focus on cycle time. All of these firms were able to link corporate per-
formance to several market factors. 8 First, they were able to translate time into profits

4 Tom Peters, Liberation Management (New York: Alfred A. Knopf, 1992).

5 Roy Merrills, "How Northern Telecom Competes on Time," Harvard Business Review 67 (July-August
1989),108-114; George Stalk Jr. and Thomas M. Hout, Competing Against Time: How Time-Based Competi-
tion Is Reshaping Global Markets (New York: The Free Press, 1990); Joseph D. Blackburn, "The Time Factor,"
in Time-Based Competition: The Next Battleground in American Manufacturing, ed. Joseph Blackburn
(Homewood, IL: Business One Irwin, 1991), pp. 3-23.
6 Roger W. Schmenner, "The Merit of Making Things Fast," Sloan Management Review, Fall 1988, pp. 11-17.
7 Robert Handfield and Ronald Pannesi, "An Empirical Study of Delivery Speed and Reliability," Interna-
tional Journal of Operations and Production Management 12 (1992),60-74; Stalk and Hout, Competing.
8 Steven Melnyk, Phillip Carter, and Robert Handfield, "Identifying the Basic Strategies for TIme-Based
Competition," Production and Inventory Management, First Quarter 1995, pp. 65-70.
 CHAPTER 1 Introduction to Supply Chain Management 9

by satisfying their "impatient" customers. These customers are willing to pay a premium
if they can get their goods and services very quickly. Customers will award their busi-
ness to time-based competitors because it means that they too can reduce their inven-
tory levels while saving time and money. In a well-managed integrated supply chain,
the amount of inventory held throughout the chain decreases, such that inventory
is now "flowing" between parties in the chain with only minor delays (as shown in
Figure 1-3). Organizations such as Bose, Black and Decker, Ford, and others have
developed "dock to stock" delivery systems. Supplier deliveries of component parts
that are made directly to the plant floor end up in finished products by the end of the
day!
There is a secondary effect for companies that achieve time-based capabilities: Re-
ductions in delivery lead time translate into not only less inventory but also less rework,
higher product quality, and less overhead throughout every element of the supply
chain. Each of these improvements has a direct impact on the organization's bottom
line. In many cases, these benefits are jointly shared by all of the parties within a given
supply chain.
There are both internal and external benefits associated with being a time-based
competitor. The external effects refer to benefits enjoyed by time-based organizations
in the marketplace relative to their competitors (such as higher quality, quicker cus-
tomer response, technologically advanced products). The internal benefits are found
within and between the different functional areas in the firm (including simplified or-
ganizations, shorter planning loops, increased responsiveness, better communication,
coordination, and cooperation between functions).
These capabilities become even more important when considered on a global scale.
To survive, organizations today must increase market share on a global basis, in order to
sustain growth objectives and be on the "ground floor" of rapid global economic expan-
sion. Simultaneously, these same organizations must vigorously defend their domestic
market share from a host of "world-class" international competitors. To meet this chal-
lenge, managers are seeking ways to rapidly expand their global logistics and distribution
networks, in order to ship products to the customers who demand them, in a dynamic
and rapidly changing set of market channels. This requires the strategic positioning of in-
ventories, so that products are available when customers (regardless of location) want
them, in the right quantity, and for the right price. This level of performance is a contin-
uous challenge facing organizations and can occur only when all parties in a supply chain
are "on the same wavelength." The management of inventory in a supply chain is dis-
cussed in chapter 3.

Supply Chain Relationships

This leads us to the final, and perhaps most difficult and important component of effec-
tive supply chain management shown in Figure 1-3: supply chain relationships. The
prior two components (information systems and supply chain cycle-time reduction) are
both relatively well understood. Information technology is constantly changing, but
the primary technical elements required to achieve the linkages shown in Figure 1-3 are
currently available. Inventory strategies are also relatively well understood, and the pro-
cesses associated with cycle-time reduction have been successfully implemented in
many different organizations and continue to evolve. However, without a foundation of
I 10 CHAPTER 1 Introduction to Supply Chain Management

effective supply chain organizational relationships, any efforts to manage the flow of in-
formation or materials across the supply chain are likely to be unsuccessful.
Of the three primary activities associated with supply chain management, relation-
ship management is perhaps the most fragile and tenuous, and is therefore the most sus-
ceptible to breaking down. A poor relationship with any link in the supply chain can
have disastrous consequences for all other supply chain members. For example, an un-
dependable source of parts can virtually cripple a plant, leading to inflated lead times
and resulting in problems across the chain, all the way to the final customer.
To avoid such problems, organizations must develop a better understanding of their
processes, as well as their suppliers' quality and delivery performance, in order to find
better ways to serve their customers. To ensure that this occurs, communication links
with customers and suppliers must be established and utilized on a regular basis. In
short, supply chain relationships are probably one of the most important management
interfaces within the entire supply chain and are the subject of chapter 4.
Nevertheless, many organizations continue to view suppliers (and even customers!)
as adversaries who are not to be trusted and with whom long-term relationships should
be avoided. This model is reflected in the typical procurement and logistics function
found in many organizations. These departments often have no strategic role and are
viewed as merely "buying" or "shipping" functions. In many cases, materials manage-
ment is considered a separate "silo" activity, and personnel have little or no process
communication with other internal functions, suppliers, or customers. Many of these in-
dividuals want to maintain the status quo, are protective of their "turf," and focus on in-
dividual transactions rather than on establishing and maintaining an ongoing set of
supply relationships. Performance measures are very often "efficiency-based" and rely
on metrics such as "purchase orders processed per buyer" or "$ purchased per buyer,"
rather than time-based or cost-based measures of overall supply chain effectiveness. Fi-
nally, most purchasing and logistics departments have a manufacturing and supply ori-
entation, with almost no input into critical new-product design, pipeline inventory
reduction, quality improvement, information systems, or process reengineering initia-
tives. Buyers and distribution managers in many purchasing organizations choose sup-
pliers and carriers on the basis of one criterion only-price. (Note that this criterion
does not include other factors that account for the "total cost," but rather reflects only
the bottom-line price, which includes both the supplier's/carrier's cost and profit.) As
such, suppliers/carriers are often played off against one another, are dropped on a mo-
ment's notice, and are chosen from a large pool on an order-by-order basis. (Unless oth-
erwise noted, carriers will also be referred to as "suppliers" from here on in).
An increasing number of organizations are attempting to develop closer relation-
ships with their major suppliers, and even their suppliers' suppliers. Given the depen-
dency of firms on supplier performance, some organizations are adopting strategies
that can help foster improvement, including greater information sharing between par-
ties and the visible presence of "co-destiny" relationships. The latter refers to the com-
mitment of the focal firm to using a single or dual source of supply over an extended
period of time. In such cases, the focal firm makes a set of long-term strategic decisions
focusing on improved supplier/carrier relationships. As the degree of trust between the
purchasing firm and its suppliers becomes firmly entrenched, a smoother flow of both
materials and information between the organizations within the supply chain occurs.

d
 CHAPTER 1 Introduction to Supply Chain Management 11

The contrary scenario, observed in many situations, is one in which the focal firm gen-
erally distrusts its suppliers, provides "shaky" schedules, and maintains high levels of in-
ventory to safeguard against the possibility of being crossed. Such adversarial supply
chain strategies do not consider the long term. It is surprising that given the benefits ob-
served from establishing closer buyer-supplier relationships, many supply chain man-
agers continue to adopt an adversarial, open-market view of suppliers.
A key element of improved supplier relationships is the presence of an objective
performance measurement system, which is used to ensure that both parties are op-
erating according to expectations and are meeting stated objectives. In addition, par-
ties must emphasize clear objectives, expectations, and potential sources of conflict
up front in order to facilitate communication and joint problem solving. As a result of
this communication, trust between buyers and suppliers begins to grow, leading to
further improvements.
At the other end of the spectrum, power in a broad array of channels has shifted
downstream toward the customer or user. As the customer calls the shots in the market-
place, the manufacturer and the intermediaries must be nimble and quick or face the
prospect of losing market share. To effectively implement integrated supply chain man-
agement, however, a relationship based on mutual benefits and trust must exist. This
means that downstream buyers must also be good "customers." Major customers must
provide supply partners with the information they need to be responsive, deliver on time,
and meet performance expectations. The improvement of supply chain relationships oc-
curs through a great deal of communication and problem-solving activities between or-
ganizations, including joint improvement projects, training seminars and workshops on
sharing corporate philosophies, and meetings between the respective organizations' top
management. Organizations are also beginning to hold supply chain councils, which in-
clude representatives from all major suppliers and customers in a supply chain, that meet
on a regular basis. Such councils can provide top materials management executives with
directives and insights regarding changes in policies, information systems and standards,
and other suggestions that can effectively remove costs from the supply chain and elimi-
nate non-value-added processes.
As the level of communication between customers and suppliers increases, parties
often witness greater informal information sharing. Managers and engineers from sup-
plying organizations may be invited to customer facilities to encourage a dialogue lead-
ing to improvements in the supplying process. Firms may share different types of
production and forecasting data, including product-level and part-level material re-
quirements planning schedules. Companies may even begin to share cost data in order
to identify non-value-added drivers (such as rework, scrap, excess inventory, etc.),
which could be reduced through joint efforts.
In many American industries, true "supply chain networks" like those found in
Japan may not develop as readily. Firms are often geographically distant, and there are
not as many small, family-owned suppliers as in Japan. In the case of high-tech firms,
many components may be sole-sourced to overseas suppliers who are proprietary own-
ers of the required technology. In these environments, it becomes more important to
choose a few select suppliers with whom to work, thereby paving the way for informal
interaction and information sharing that can foster time-based improvements.The topic
of developing supply chain relationships is discussed extensively in chapter 4.
 12 CHAPTER 1 Introduction to Supply Chain Management

Challenges Facing Supply Chain Managers

Although the topic of integrated supply chains holds great appeal to many academics,
consultants, and practitioners alike, the difficulty involved in implementing this strategy
is evident. The integrated management of information and materials across the supply
chain offers the benefits of increasing the value-added by supply chain members, re-
ducing waste, reducing cost, and improving customer satisfaction. However, deploying
and managing this strategy is a challenging and significant task.
The process of implementing an integrated supply chain has been shown to be
very difficult. In many cases, problems occur in the implementation of information
systems, such that the appropriate information is not available to the people who
need it. In other cases, the information is available, but supply chain members are re-
luctant to share it, due to a lack of trust and a fear that the information will be revealed
to competitors.
Inventory management is no less difficult. Although inventory systems are contin-
uously improving, the need for expediting late shipments never seems to disappear en-
tirely. There are always delays in shipments for a variety of reasons: Slowdowns
resulting from customs crossing international borders, adverse weather patterns, poor
communication, and, of course, simple human error, are inevitable. With the double-
edged sword of lower inventory levels and increasing demand for improvements in fill
rates and on-time delivery, the management of inventory throughout a supply chain
becomes an increasingly complex and demanding task. Finally, establishing trust be-
tween parties in a supply chain is perhaps the greatest challenge. Legal experts may
produce reams of contractual agreements that fail to work when parties inevitably
have a conflict. Conflict management in interorganizational relationships is becoming
increasingly difficult to manage. Having broken the fragile bond of trust, it becomes
more difficult to repair, and some supply chain relationships eventually buckle under
the strain.
Both of the authors have experience in working with companies that have at-
tempted to implement supply chains. Many organizations struggle to complete even
one link in the chain. The challenge of integrating information requirements and inven-
tory flows across multiple tiers of suppliers and customers is proving to be immense. To
provide additional insights about how these strategies are being deployed, chapter 5
presents several case examples of supply chain management in action. The cases were
developed through in-depth interviews with selected leading-edge firms currently im-
plementing integrated supply chain management. In some of the cases the names of the
firms are "disguised" to avoid confidentiality problems. These cases are instrumental in
illustrating the concepts described in the earlier chapters and provide a template to
guide managers and students. Based on our discussions with managers at these organi-
zations (as well as others not explicitly discussed in the book), we also provide a short
overview in the final chapter of what the future holds in store for supply chain manage-
ment. Chapter 6 focuses on emerging trends in supply chain management, including
such topics as the evolution of "reverse logistics" systems, "design for supply chain" pro-
cesses in new product development, the globalization of supply chains, and the future
for information technology and supply chain management worldwide.

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ht ...
 CHAPTER 1 Introduction to Supply Chain Management 13

Purpose of the Book

The purpose of this book is to provide the reader with a framework for understanding
supply chains and supply chain management and to show examples of what firms are
actually doing to better manage their supply chains. This book is intended to provide
readers with a topical discussion of what a supply chain is, why it is important, and the
types of challenges implicit in managing supply chains. The authors plan to periodically
update the book with the latest developments in supply chain management. In order to
facilitate this process, readers are invited to provide their insights and case examples to
the authors. We hope that you will benefit from the insights provided in this book and
that we can learn from you as well.