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SUPPLY CHAIN MANAGEMENT AND ITS IMPACT ON OPERATION DECISIONS

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Vol. 4, No. 1, December 2007 ISSN 1547-3708

SUPPLY CHAIN MANAGEMENT AND ITS IMPACT ON

OPERATION DECISIONS

Amarpreet S. Kohli, University of Southern Maine, Portland, Maine, USA

Dinesh K. Sharma, University of Maryland Eastern Shore, Maryland, USA

ABSTRACT: There has been a paradigm shift in traditional operation management ideology with the

adoption of supply chain management (SCM) which is known for having a strategic, tactical, and

operational impact on traditional business functions. The purpose of this paper is to study and analyze

SCM from an operation manager’s perspective and analyze its impact on such critical operations decisions

as: Quality, Process Strategy and Inventory Management

Keywords: Operation Decisions, Supply Chain Management, Inventory Management, Business Strategy

1. INTRODUCTION

In the era of globalization and competition, companies have recognized that they have to increase their

efficiency by using strategies and technologies like Just-in-Time (JIT), Kanban, lean manufacturing, and

total quality management (TQM) etc. However, the implementation of these strategies requires a sizeable

investment. To remain competitive and enhance a firm’s profitability, respective Supply Chains (SC) or

networks must be effectively managed (Simchi-Levi et al., 2000).

In the 21st century, the business environment has been changed because of the proliferation of

multinational companies, joint ventures, strategic alliances, business partnerships, and technological

changes, which have contributed in the development of SC. For firms to survive in this extremely

competitive environment, it is imperative for them to synchronize their strategies to meet changing

demands while looking for new and more efficient ways to keep their costs at optimum levels. Supply

Chain Management (SCM) provides a platform to accomplish this goal (Chapman et al., 2000; Tang et al.,

2001).

As firms coordinate across multiple channels and levels, the concept of SCM is gaining

momentum (Cooper et al., 1997). This momentum continues to be influenced by ever-increasing global

competition, reduced product life cycles, increased international governmental de-regulation, as well as

ever-increasing customer expectations. Premkumar (2000) asserted that inquisitiveness in SCM has been

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triggered because of a series of transformations in the competitive environment, accompanied by reduced

product life cycles, JIT manufacturing, mass customization, globalization, and recent advancement in B2B

(business-to-business) commerce. Rapid advancements in communication and transportation technologies

have also been the driving forces for the continuing growth in SCM and new techniques that are being

developed to manage it in the most efficient manner (Bovet & Sheffi, 1998; Simchi-Levi et al., 2000).

A SC manager has to change the focus from the traditional cost side to the identification of

operational processes which are making an impact on the financial results. The role of corporate finance is

to connect the investor mandate with operations whereas a well run SC brings positive benefits and is a

strategically important goal. The main purpose of this paper is to study and analyze supply chain

management from an operation manager’s perspective. The impact of supply chain management on critical

operations decisions, and the changes presented for the manager are also explored.

The remainder of the paper is organized as follows. Section 2 discusses various concepts

pertaining to SCM from diverse standpoints. Section 3 reviews the historical significance and the link

between SCM with core business strategies. Section 4 presents the premise that SCM should be viewed

from operation management’s perspective. Section 5 provides an insight into the implications of SCM on

key operation decisions such as quality, process strategy and inventory management and finally Section 6

concludes.

2. SCM CONCEPTS

In an abstract way, SCM is the combination of art and science which goes through the long process of

converting a raw material into a finished product. According to the Council of Supply Chain Management

Professionals (CSCMP), SCM encompasses the planning and management of all activities involved in

sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes

coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party

service providers, and customers.

A supply chain consists of unified components that carry out a wide range of tasks: from

procurement of materials to delivery of finished products or services to consumers through its structure of

various facilities and supply locations. Suppliers and customers play critical roles by providing value added

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activities in the chain of events that bring raw materials from the source to the end consumer. The

interaction between an organization and suppliers as well as customers on materials flow management

issues can have a significant impact on the time-related performances which are, in turn, mediated by

internal practices (Salvador et al., 2001).

A SC primarily helps in the conversion process, as raw material is transformed into finished

goods, and thereafter in transporting the inventory from a source of supply to the end user. It assists in

matching products as per customer demand (Fisher, 1997). The number of partners in a specific SC, and

related tasks, determine the extent to which the SC can be applied (Cooper et al., 1997). By reducing the

number of partners and related tasks in a SC, an organization can increase efficiency and reduce the

possibility for impediments in production due to delays in receiving necessary materials. Since logistics and

supply chain management are closely related terms, the past definitions of SCM focused on improving the

operation of customary procedures by optimizing production and supply while expediting the stream of

information and inventory through the SC network (Ross, 1998). The following table briefly summarizes

the diverse conceptual definitions for SCM that are being currently employed in the field.

TABLE 1 – SUPPLY CHAIN MANAGEMENT DEFINITIONS

Year Author(s)/Researcher(s) Conceptual Definitions – SCM and related terms

2006 Heizer and Render It is the integration of the activities that procure materials and

services, transform them into intermediate goods and final products,

and deliver to customers.

2002 Monczka, Trent, and SCM focuses on applying system’s approach to assimilate and

Handfield control the procurement and flow of raw materials and goods across

different functions and channel members.

2001 Korpela, Lehmusvaara, SCM is a constructive way to reinforce the chain through an

and Tuominen effective coordination between the trading partners of the chain.

2001 Keskinocak and Tayur Aim is to ensure that the right products at a right price are distributed

to the right place at right time.

2000 Chandra and Kumar Supply chain integration has turned out to be extremely necessary to

increase consumer satisfaction and realize constructive development.

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1998 Lambert, Stock, and SCM deals with integration of all the value-creating elements in the

Ellram procurement, manufacturing, and distribution processes from raw

material stage, through the transformation process, and finally

utilization at the end consumer.

1997 Cooper, Lambert and The focus in the supply chain is on integration across firms, although

Pagh many companies gave importance to internal integration before

starting the process of external integration.

1996 Kranz SCM is the effort involved in producing and delivering a final

product from the supplier’s supplier to the customer’s customer.

SCM has the potential to deliver increased returns, decreased operating expenses, and improve services

(Cross, 2000). The incredible achievement of companies like Wal-Mart, Proctor & Gamble, and Hewlett-

Packard prove the extent of the benefits that can be derived by making effectual use of SCM. Along with

large companies, small businesses can employ these vital concepts in their business approach, thereby

reaping benefits from the nascent stages of their enterprise (Chapman et al., 2000). In short, it is possible to

create a balance between supply and demand by making effective use of supply chain practices.

3. HISTORICAL SIGNIFICANCE

It has been argued, that supply chain management, while an emerging area for practice and research, is still

an outgrowth of earlier research work conducted in production and operation management (New, 1997).

According to Cooper et al. (1997), the major tenets of SCM that historically includes managing inter-

organizational operations that originated in channels and systems integration research (Buklin, 1966;

Forrester, 1968). The more recent premise pertaining to “sharing information and exchange of inventory”

further supports the foundation of supply chain management (La Londe, 1983). Bruce(1997) asserted that

in order to appreciate the emergence of supply chain management, it is essential to examine the sequence of

changes in areas of production and operation management that gives direction to this new thought.

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In the 1970’s, business was characterized by a hierarchical arrangement where each function

played a role in achieving the synchronization of tasks. The manufacturing system was based on the famous

MRP (Material Requirement Planning) approach. The MRP approach assists in converting the master

production schedule developed for the final product into actual requirements. These requirements consist of

components, parts, sub-assemblies, and raw materials (Chandra & Kumar, 2000; Schroder, 2000). Between

the late 1970’s and 1980’s, production focus shifted to MRP II which involved cash flows sales,

production, inventory, schedules, and basic functions of planning and controlling the manufacturing

process.

The roots of what is now termed SCM emerged in the early 1980’s, when Chrysler decided to

establish long-term relationships with a few key suppliers in order to gain competitive advantage through

price reduction and subsequently benefiting its suppliers through decreased costs (Cavinato, 2002). The

supply chain concept was coined in the early 1980’s by consultants in logistics (Oliver & Webber, 1982).

In their original formulation, they specified that the concept must be viewed as a single entity and that

strategic decision-making at the top level is essential to manage the chain (Gripsrud et al., 2006). Managing

quality was considered a decisive way to attain a differential advantage through techniques like TQM

(Total Quality Management). Quality experts such as Deming (1982), and Juran and Gryna (1988) also

emphasized the effective management of vendor quality (Chandra & Kumar, 2000).

In the last decade, manufacturing technology has observed an unprecedented change because of

increased global competition. Advancements in information technology have given rise to new concepts

such as ERP (Enterprise Resource Planning), DRP (Distribution Resource Planning), CPFR (Collaborative

Planning Forecasting and Replenishment), E-commerce, and many others (Aberdeen, 1996). SC

applications are becoming more standardized, packaged, and widely deployed (Aimi, Hillman, &

Hochman, 2007). The goal is to minimize the total cost across the supply chain rather than looking for new

ways to reduce costs pertaining to materials procured from suppliers (Turbide, 1997). This is achieved by

evaluating all processes in the SC and eliminating non-value added activities. In order to decide which

activities contribute value to the SC, companies must first focus on their production process. Similarly, if

we look at the manufacturing environment, it has been undergoing an evident change from “make to stock”

to “make to order”, resulting in shorter product life cycles. To incorporate these changes, companies must

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have increased flexibility in terms of production, process, and labor so that they can effectively and timely

respond to customer requirements. As a result, the supply chain management concept was evolved to

address changing market needs.

3.1 SCM and Its Relation to Business Strategies

Nowadays the term “supply chain management” has become a buzz word. However, organizations can only

reap higher benefits by broadening their focus from individual operations to an integrated value chain

approach that critically analyzes their core business strategies. Jacobs and Chase (2006) purported that

operations and supply chain strategies are comprehensive and involve long-term processes that foster

inevitable positive change. This philosophy has considerable influence on tasks such as: SC design for

strategic advantage, collaborative and SC partnerships, and information sharing among partners - all vital

for a SC design and operation. Cross-functional collaboration plays a fundamental role in order to gain

advantage from supply chains. Products can no longer contend on features alone and depend on the supply

chains through which they are distributed (Ayers, 1999). Additionally, numerous other factors should not

be ignored when considering a SC strategy.

A company must analyze and understand the applicable external SC before devising the business

strategy. Reviewing the products and members of the supply chain can help a company acquire an

extensive perception of their supply chain, and provide insight into areas to be explored for further growth

(Chapman et al., 2000). Porter (1980) categorized business strategies into two main types: cost leadership

and differentiation. The cost leadership strategy is characterized by standardized products, continuous

process flow, with a greater emphasis on efficiency. Whereas companies using a differentiation strategy

compete based on distinctive products with a focus on customization and innovation, the production

environment is typical job shop. These differentiations have become the basis for other strategies used

today.

The above framework is similar to one proposed by Fisher (1997) who recognized the need to first

understand the demand patterns of the products before developing an effective supply chain. Standardized

or functional products that are available in the majority of stores have a predictable demand, extended life

span, and low return rates. Firms with their strategy based on these products concentrate primarily on

reducing costs; especially those related to the manufacturing, storage, and movement of goods. On the

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other hand, non-standardized or innovative products have an unpredictable demand, shorter life span, and

higher return rates. As a result, firms dealing with these types of products are focused on minimizing

opportunity costs and costs resulting from an excess inventory. This is accomplished through customization

and quick response times (similar to the differentiation strategy presented by Schroeder (2000)). The

decisions related to the placement of inventory and utilization of available resource capacities plays a

significant role. Firms adopting such product strategies design their supply chain in a way that allows them

to have extensive gains by being more receptive than their competitors.

4. PERSPECTIVES OF SUPPY CHAIN MANAGEMENT

Normally organizations observe SCM from three different perspectives, i.e. a) Operational, b) Technical,

and c) Business Perspective.

Operational Perspective: This is focused on how to manage the flow of goods and balance the network of

warehouses, distribution centers and transportation services. The main attention is keeping raw materials

and finished goods in stocks. It is also focused on managing the flow of components across suppliers and

production centers. The technical terms involved in this perspective are Kanban, order fulfillment, lean

production, and economic order quantity.

Technical Perspective: This perspective depicts SC as network of hardware, middleware, and software

components that collaborate for the support of SC operations while using the collection of data, automation

and information. This is the technical perspective where IT people see the flow of goods as a flow of

information. The technical terms are: ERP, EDI, CRM, and Database.

Business Perspective: This perspective is focused on the flow of money where corporate executives

monitor the performance indicators which measure the value generated by SC execution.

These are the different perspectives which an organization normally observes. However, our paper

is mainly focused on the Operational Perspective (Camerinelli, 2007).

4.1 SCM From An Operation Management’s Perspective

The supply chain basically comprises of three components: sourcing, manufacturing and distribution

(Clinton & Calantone, 1997; Korpela et al., 2001). These components are generally controlled with a

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corresponding amount of stock. Accordingly, a firm has to make the decisions in relation to location,

production, inventory and transportation.

Location - It is important to identify where production facilities, stocking locations, and sourcing sites are

located to establish routes along which materials will flow. The supply chain can often be improved by

locating facilities in countries where unique resources are available (Heizer & Render, 2006).

Production - An organization needs to make decisions regarding products to be manufactured at specific

plant location/s, suppliers where service those plants, production facilities that will furnish distinct

allocation centers, and finally the delivery of goods to the end consumer. These judgments have an

immense effect on returns, costs, and desired service levels that a company intends to accomplish.

Inventory - Inventory related decisions are critical as each member in the supply chain has to maintain a

definite inventory of raw materials, parts, subassemblies, and finished goods that provides cushion against

uncertainties that could happen anytime.

Transportation - Strategic decisions related to transportation involve information pertaining to the

distribution of materials, parts, and products from one part of the supply chain to the next. Selecting the

preeminent means to transport goods frequently involves a trade off between the distribution cost and the

implicit cost of inventory (Ganeshan & Harrison, 1995).

5. ROLE IN OPERATION MANAGEMENT DECISIONS

Operation management is considered a vital function in manufacturing company. Nevertheless, from the

SC perspective, it is only one of the key elements having a strategic impact on business as a whole.

Operation strategies ascertain how operations can sustain a firm’s business strategy and other functional

strategies within a structure of corporate strategy (Krause et al., 2000). According to Chandra and Kumar

(2000), operations as comprised of all the manufacturing related activities and the SC in provides a

distinctive and innovative tactic to manage these cohesive tasks, which working to enhance an

organization’s overall efficiency.

The impact of supply chain management on key decisions that operation managers make on a

routine basis can be analyzed by understanding the relationship between various supply chain components

and operation decisions as shown in Supply Chain Operational Decision Making Model (Figure 1).

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The proposed framework is based on Schroder’s operational model which comprises of four

factors: (1) mission; (2) objectives; (3) policies and (4) distinctive competence. (1) A firm’s mission

statement defines the purpose of operation function with the support of main objectives: cost, quality,

delivery, and flexibility. (2) Objectives are developed for each of the major decision areas including

quality, process strategy, and inventory management. (3) Policies specify how the defined objectives would

be accomplished. Since quality and cost are no longer a basis to compete, business firms consider

innovation to be a crucial objective in remaining aggressive. The firm’s distinctive competencies must

support its mission and objectives in order to derive benefit from its operation (Krause et al., 2000). (4)

Distinctive competences are established on unique resources that a company possesses to remain

competitive (Schroder, 2000).

5.1 Quality

Quality embodies a key objectives that and is a crucial decision making area in operations. There is a

definite relationship linking supply chains and the enhancement in quality: the latter requires effective

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synchronization among the members of the supply chain in terms of the sharing of information and

identification of relations between various systems. Firms can equate this enhancement in quality with

other tasks that are carried across the supply chain network (Schroeder, 2000).

Quality experts, Deming (1982) and Garvin (1987), emphasized the importance of reducing the

number of suppliers to decrease variation in quality. They insisted that quality should be delegated as the

most relevant criteria for evaluating vendors, carrying a greater weight than cost. Juran (1988) asserted that

the relationship between buyer and supplier should be managed with the support of statistical tools and

techniques. The preliminary involvement of suppliers in new product development processes results in a

diminished number of defects during the production stage (Cusumano and Takeishi, 1991). Bowersox,

Mentzer, and Speh (1995) purported that customer contentment in terms of superior quality products,

excellent customer service, and speedy delivery can be achieved by implementing programs like JIT in the

purchasing function.

One of the key factors influencing the management of SC is the product quality that must meet or

exceed a customer’s expectation. An effective supply chain design has a significant influence on overall

quality owing to reduced lead times, improved information sharing among the technical and other expertise

of partnering firms ( Persson & Olhager, 2002). Garvin (1987) defined product quality in terms of its

“performance, reliability, durability, conformance, features, aesthetics, serviceability, and perceived

quality”. The quality of products is deeply affected by the quality of inflowing parts and components that

are used for manufacturing, which in turn, adds pressure to the procurement process. A company has to

look beyond the supplier’s quality level and their specification requirements. The rationale behind this

premise is that a particular component may be purchased from several vendors. However, even though a

vendor may be maintaining the desired quality requirements, the different supplier’s products in the

assembly process may result in a defective final product. To illustrate with a case example (Bowersox et

al., 2002), a floor cleaning manufacturer firm “Tenant” was experiencing oil leak problems in their

products due to “hydraulic hoses and fittings” procured from 16 different suppliers. After studying their

supply chain, the company realized that procurement policies and vendor relationships had a huge impact

on the quality of the finished products. Illustrating the quality enhancement through an effective

procurement process can have an extensive influence on the total manufacturing cost.

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Study conducted by Manoochehri (1984) revealed that the quality of the materials from suppliers

had a great bearing on the quality and cost of final products. As a result, information pertaining to quality

measures employed by vendors and quality performance is critical in determining the proper price of the

components. A strong relationship between buyers and suppliers is necessary in order to share information.

This area of SCM impacts on Total Quality Management (TQM) so much as in the end customer’s

perceived quality has important role to play in the success of companies involved in supply chain (Langley

et al., 1996).

5.2 Process Strategy

Process decisions are the strategic decisions that provide information on the type of processes necessary to

make a given product or service. These include- types of machinery and expertise needed, process charts,

work plans, facility designs, and human resource related issues. The nature of the product (uniform vs.

made to order) and the total production volume are the two key factors that assist in making the decisions

regarding the process type (Schroeder, 2000).

SC design has a significant impact on process selection. Although companies can achieve

efficiencies and considerable quality improvements by implementing product designs that facilitate speedy

and accurate operations, SC implications throughout the product’s life cycle the SC must not be ignored in

order to evade losses that may occur on account of excess inventory and/or increased delivery costs (Lee &

Billington, 1992). SC design has also a critical role to play in case of new products as it helps to define

performance in terms of accessibility to customers, delivery time, and responsiveness that may

consecutively be a deciding factor in product’s achievement or failure.

The generic process strategies are broken down into two broad categories: process oriented and

product oriented. The process oriented strategy is characterized by a job shop/project type production

environment intended to produce low volume and high variety products. On the other hand, a product

oriented strategy is based on high volume, low variety products (continuous-flow). Companies have been

repeatedly using either of these strategies based on their business needs. However, a novel production

philosophy known as mass customization is emerging which combines the best of both strategies: mass

production (which has primary focus on efficiency) and craft manufacturing (that utilizes expertise of

skilled and motivated workers to make innovative products). However, successful implementation of this

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approach is not an easy task. Various approaches and concepts of SCM, i.e. strategic alliances, supplier-

buyer relationships, and postponement (delayed customization- Dell) are essential in order to achieve mass

customization (Lee & Billington, 1992; Simchi-Levi et al., 2000).

5.3 Inventory Management

Inventory management process is used to ascertain optimal inventory levels at each stage in the SC. Since

holding inventory is considered an expensive issue, firms endeavor to look for ways to drive inventory in

their respective SC. Determining where to place the inventory is an exigent task - although pressure seems

to be on the manufacturer to distribute products in smaller batch sizes. Firms have acknowledged that

customary inventory management techniques need to be changed in order to respond successfully to an

unpredictable business environment. Thus, the inventories in the whole supply chain should be reserved at

an optimum level to guarantee reduce costs and increased ROI (Benton, 1999).

Collaboration initiatives such as vendor management inventory (VMI) are emerging as a SC

strategy for tracing of inventory in a proficient manner. With VMI, a supplier is responsible for all the

replenishment decisions, which consecutively reduces the vulnerability for the partners of the SC. The

objective is to purge retailer’s oversight on particular orders. Such a strategy plays an exceedingly

important part. Numerous firms including Campbell Soup and P&G have revealed successful VMI

relationships with their trading partners.

Quick response (QR) is another significant retailer segment strategy to convalesce inventory

management and efficiency. The fundamental idea is to make effective use of barcode technology along

with EDI (Electronic Data Interchange) to pursue customer sales. Accordingly, with the help of POS (point

of sales) information, the supplier can devise its production and inventory based on actual sales at the retail

stratum. The ultimate outcome is lower inventory, better response time and reduced probability of out of

stock position (Lambert, Stock, & Ellram, 1998).

The increasing importance of inventory replenishment has resulted in the requirement for systems

that can improve customer service while keeping the inventory cost down. Cachon and Fischer (1997)

established this by implementing a Continuous Replenishment Program (CRP) at Campbell Soup, the result

was inventories reduced by 66% without compromising service level. In addition, there was a 12%

reduction in the total cost of goods. Similarly, retailers in particular are looking for time-phased

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replenishment instead of holding inventory in advance. Automatic Replenishment Systems (ARS) offer a

valuable way to handle replenishments based on the exact product utilization (Myers et al., 2000). For

example, P&G have prolifically implemented ARP systems linking companies like Wal-Mart & Kmart.

The results by Cooke (1998) revealed that over 40% of P&G’s sales are through these systems.

6. CONCLUSION

In this paper, we have studied SCM from an operation manager’s perspective and analyzed its impact on

critical operations decisions such as Quality, Process Strategy and Inventory Management. The paper has

also discussed various concepts pertaining to SCM from diverse standpoints and reviewed it’s historical

significance. In addition the link between SCM with the core business strategies was established.

Ultimately SCM is about influencing behavior in particular directions and ways (Storey et al.,

2006). When the SC and operations of an organization are understood and analyzed as separate entities, a

company can develop a strategy that incorporates these two operations in order to achieve the highest levels

of efficiency and success. Efficient operations will not lead to superior profits if a company’s products are

being manufactured in plants with outdated technologies that are poorly located relative to companies’

vendors and their markets. The impact of operations on SCM is evident through the planning and

coordination of various divisions within an organization as well as through the interactions with outside

vendors. While historically SCM has been viewed as a function of operations management, the emerging

research seems to insinuate that SCM has a larger impact on operations than previously realized. The

operations manger’s duties will become increasingly more complicated as the focus on SC increases. Once

the impact of the SC on operations management is realized, companies can implement more effective

strategies.

Acknowledgement

Authors would like to express their sincere thanks to Dr. Nicole Buzzetto-More and the referees for their
valuable and helpful suggestions.

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Dr. Amarpreet S. Kohli earned his Ph.D. at the University of Louisville, KY in 2005. He has more than
10 years of experience in Sales and Distribution, New Product Development, and Quality Assurance in
various multinational companies. Currently, he is working as an Assistant Professor of Business in School
of Business at the University of Southern Maine, Portland, Maine, USA. His research interests include
supply chain collaboration, lean management, and enterprise resource planning using simulation and
statistical modeling techniques.

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 Vol. 4, No. 1, December 2007 ISSN 1547-3708

Dr. Dinesh K. Sharma is a Professor of Quantitative methods & Computer Applications in the Department
of Business, Management and Accounting at the University of Maryland Eastern Shore. He received his
Ph.D. in Operations Research from the Chaudhary Charan Singh University at Meerut, India. His research
interests include system design and analysis, multi-objective programming, nonlinear programming, and
application of operations research to business & industry. He has over 60 journal publications and 65
articles in conference proceedings. He received several best paper awards. Some of Dr. Sharma’s journal
publications are in Yugoslav Journal of Operations Research, TOP, International Journal of Information
Technology and Decision Making, Applied Mathematics and Computation, Computers and Mathematics
with Applications, Journal of Applied Mathematics and Computing, International Journal of Production
Economics, International Journal of Logistics, International Journal of Computers and Applications,
International Modeling and Simulation to name a few. He is a member of Decision Sciences Institute and
Operational Research Society of India.

Copyrights @ International Journal of Effective Management. All rights reserved. 64

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