Supply Chain Management Systems
Supply chain management has been defined by De-Treville, Shapiro and Hameri (2003, p. 615) as “the integration of key business processes from end user through original suppliers that provides products, services, and information that adds value for customers and other stakeholders. ” In recent times, optimization of the supply chain has become one of the main techniques through which organizational value is both derived and enhanced. According to Gofin, Szwejczewski and New (1997), supply chain management is a key source of competitive advantage for organizations.
As organizations do away with their vertically integrated models and increasingly focus on their core business, significant opportunities for operational and cost efficiencies open up to them thus providing the basis for overall low cost leadership strategies. Not only can supply chain management help firms attain least cost structures and therefore pursue an overall low cost leadership strategy, optimization of the supply chain provides bases along which organizations can differentiate themselves and therefore successfully pursue differentiation strategies based on unique selling propositions such as best quality and innovation.
As defined earlier, supply chain management involves the integration of business processes from end user through original suppliers that provides products, services, and information that adds value for customers and other stakeholders (DeTreville, Shapiro and Hameri, 2003). DeTreville, Shapir and Hameri (2003) write that this integration is made up of two elements identified as supply integration and demand integration.
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On supply integration, we have Just In Time (JIT) deliveries, supplier base reduction, supplier selection and auditing, implementation of paperless processes and procedures, and the establishment of enduring supplier relationships. Demand integration on its part has been identified as including the enhancement of the availability and accessibility of demand information. According to Xia and Wu (2005), supplier selection is one of the most important activities of the acquisition department and a significant source and driver of organizational value.
When optimized, Xia and Wu (2005) state that supplier selection helps to significantly cut down the acquisition costs of raw materials and improve the competitiveness of the organization since it enables the organization to identify and settle on suppliers who offer the best quality at the least cost. Through supplier selection and auditing, the organization is not only able to settle for the supplier that offers the best quality at the best price, the organization is also bale to monitor the quality, reliability and efficiency of the supplier.
In this regard, supply chain management helps the organization choose suppliers that are capable of delivering the highest quality materials, most efficiently, reliably, and at the best possible price. With supplier auditing, the basis upon which the suppliers are evaluated is not price but quality and reliability of delivery. The efficiency and quality of the deliveries can offer potential points of differentiation for the organization (Xia and Wu, 2005). One of the most common contributors of inefficiency within organizations is the holding of excess inventory.
Inventory comprises of stocks of raw materials, work in progress, as well as stocks of finished products (Donovan, 2004). According to Frohlich and Westbrook (2002), inventories account for up to sixty percent of organizational costs, particularly for manufacturers. Donovan (2004) states that excessive inventory levels tie up the organization’s capital, leads to higher costs for the organization (in the form of high inventory carrying costs), and brings about longer lead times. Therefore, Frohlich and Westbrook (2002) aver that reduction of excessive inventories is often the most significant cost reduction driver within the supply chain.
Accordingly, Donovan (2004) states that effective supply chain management helps cut down excessive inventories and increase organizational effectiveness and efficiency by eliminating the seven wastes. It results in cheaper, quicker, and better order deliveries, improvement of quality and customer service, and the reduction of cycle times. This is usually achieved through the adoption of lean manufacturing processes, with Just In Time (JIT) processes where buffer inventories are substantially cut down with raw materials (delivered in frequent small lots) being pulled into the production stream as and only when they are needed.
Apart from helping the organization reduce inventory carrying costs, this also helps the organization eliminate or at the very least significantly cut down obsolescence costs. By freeing up the capital that would otherwise have been held up in inventory, supply chain management helps the organization invest the capital in activities that lead to more value-addition for the organization (DeTreville, Shapiro and Hameri, 2003).