Supply chain management oversees the businesses providing a product or service, through all stages from raw materials to purchase of a final product. The supply chain begins with natural resources and the cultivation, development, or discovery thereof. It proceeds from there to encompass the harvest, removal, or extraction of those resources, their processing into usable forms, the construction of components of the product, the assembly of those components, the use of storage and transportation resources, and the sales venue.
The supply chain of Coca-Cola, for instance, involves something like this: the agricultural concerns producing corn, vanilla, spices, and citrus; the processing and sale of clean water; the processing of the agricultural goods into corn syrup and flavor extractives; the production by the Coca-Cola Company of Coca-Cola syrup from those ingredients and water; the sale of that syrup to soda fountains and the Coca-Cola Bottling Company; the dilution and carbonation of that syrup by same, and subsequent packaging and distribution by the Coca-Cola Bottling Company; and the final sale to a customer of a fountain drink or canned or bottled Coca-Cola; as well as all transport of goods from one company or facility to another. Most consumer goods can be expected to involve at least four companies or subsidiaries: the provider of the raw material, the manufacturer of components, the manufacturer of the product, and the vendor of the product.
The group of businesses allied together in the production of a good or service is often called the Extended Enterprise, a term that emphasizes their mutual interests. These businesses can be subsidiaries of some larger company, or part of formal partnerships or alliances, or may only be linked by contracts. In the Coca-Cola example, the company has a long-standing association with the Coca-Cola Bottling Company, for instance, and long-term vending contracts with various chains of convenience stores, restaurants, sporting venues, and so forth. But many of the items it uses in the production of its product are purchased on the open market, its association with those providers thus maintained transaction to transaction, and likewise the majority of the locations where Coca-Cola products are purchased have no formal relationship with the company, having acquired the product from a distributor and nearly always stocking the company’s competitors’ products as well. The Extended Enterprise includes advertisers, marketing agencies, public relations firms, franchise attorneys, real estate lessors, consultants, IT firms, and other companies who are involved in the life of the product—the extended family thereof, so to speak—but not in the supply chain as such. As business processes like customer service, tech support, and accounting procedures become standardized in the international community, the Extended Enterprise increasingly includes outsourcing firms.
For that matter, businesses in general are less likely to perform every task themselves anymore, making most supply chains multicompany. The farmer driving his goods to market represents a smaller and smaller portion of the pie, and considering how many farmers’ markets are patronized by restaurants’ kitchen staffs, even that farmer often is not selling to the end consumer. The involvement of multiple businesses in a supply chain makes management of that chain a thing of mutual benefit to all, just as a single company doing multiple operations benefits from streamlining the operations. The term supply chain management dates from the 1980s, when business growth and the sophistication of business philosophy led to the recognition of the benefit of integrating and streamlining the processes involved in bringing a product to market.
Fundamentally, supply chain management involves sharing information among the companies participating in the supply chain. If there is a vanilla shortage on the horizon, Coca-Cola needs to know; if CocaCola is premiering a new flavor in the coming quarter, manufacturers of soda fountains need to know. Everyone’s business runs more smoothly when they understand the supply chain they are part of. Ideally, optimizing the supply chain rather than optimizing each business’s operations individually at the local level will benefit everyone. To an extent, supply chains form competitive units, competing against other supply chains—here the Coca-Cola example is less than ideal, because too many parties involved in its supply chain participate in Pepsi’s as well.
One of the principal objectives of supply chain management’s optimization efforts is to keep inventory at a minimum: supply should he was close to demand as is feasible, never undersupplying but also avoiding warehouse and spoilage costs as a result of oversupply. The techniques used to optimize manufacturing flow toward this end are often called Justin-Time techniques.
Supply chain management approaches are operational, strategic, and tactical. Operational activities include the optimization of production and distribution, down to minute-by-minute scheduling of manufacturing production at every facility in the chain; demand forecasting, in order to better serve inventory optimization; and the managing of process outsourcing. Strategic activities include the negotiation of partnerships among the companies of the supply chain, the engagement of third-party logistics providers, the use of information technology to integrate supply chain operations, and an informed design of new products such that they are easily integrated into the existing supply chain. Tactical activities focus on customer demand and inform inventory optimization.
Since the 1990s, it has become more common to outsource supply chain management to companies called third-party logistics providers (3PLs), though some definitions limit the scope of logistics to distribution issues, leaving out manufacturing and retail concerns. 3PLs do often specialize in scalable warehouse and transportation services. There are four broad types of 3PLs: the common 3PL that offers warehousing and distribution services; the service developer that adds security and advanced services; the customer adapter that optimizes a company’s in-house logistics; and the customer developer that takes over the whole of the logistics operations for a company. 3PLs do not always own their own warehouses and distribution facilities, and may merely liaise between them, like a travel agent, arranging discounts or special treatment that the business would be unable to secure on its own. The small but growing sector of such 3PLs is sometimes referred to as the 4PLs, distinguished by their expertise and intellectual capital, and low operating expenses.
- Sunil Chopra and Peter Meindl, Supply Chain Management (Prentice Hall, 2006);
- Martin Christopher, Logistics and Supply Chain Management: Creating Value-Added Networks (Financial Times Press, 2005);
- John J. Coyle et al., Supply Chain Management: A Logistics Perspective (South-Western College Publishing, 2008);
- Stanley E. Fawcett, Lisa M. Ellram, and Jeffrey A. Ogden, Supply Chain Management: From Vision to Implementation (Prentice Hall, 2006).
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