2.

1 SupplyChain Management:
Theory and Practices

JackC.A.). van derVorst

Introduction

Fierce competition in today's global markets, the introduction of products

with short life cycles, and the heightened expectations of customers have
forced business enterprises to invest in, and focus attention on, the relation-
ships with customers and suppliers (Simchi-Levi et al., 2000). Supply chain
management (SCM)hasbecomepart ofthe senior management agenda since
the 1990s.Executives are becoming aware that the successful co-ordination,
integration and management of key business processes across members of
the supplychain willdetermine the ultimate successofthe single enterprise
(Van der Vorst, 2000).According to Christopher (1998) businesses no longer
compete as solely autonomous entities, but rather as supply chains. The
increased interest in SCMhas been spurred bydevelopments in information
and communication technology (ICT)that enables the frequent exchange of
huge amounts of information for co-ordination purposes. Consequently,
there is a need and an opportunity for ajoint approach of chain partners
towards the establishment ofmore effective and efficient supply chains.

This chapter presents an overview of the background, theory and current

practices of SCM in primarily industrial supply chains that produce, trade
and distribute merchandise.First,weexplore the concept 'supply chain' and
discuss its hiccups and potential improvements. Section 3discusses the key
decisions andbenefits ofSCM. Section4presents anoverviewofcurrentprac-
tices in SCM.Weend this chapter with some concluding remarks.

2 What isasupply chain?

2.1 Definition ofasupplychain

Inthischapterwetakeaprocessview,which meanswelookatasupply chain

as a sequence of (decision making and execution) processes and (material,
information and money)flows that aimtomeet final customer requirements
and take placewithin and between different supplychain stages.The supply
chain not only includes the manufacturer and its suppliers, but also

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(depending on the logistics flows) transporters, warehouses, retailers, and

consumers themselves. It includes, but is not limited to, new product devel-
opment, marketing, operations, distribution, finance, and customer service
(Chopraand Meindl,2001).Figure1 depictsagenericsupplychainwithin the
context ofthe total supply chain network. Each firm belongs to at least one
supply chain:i.e.it usually has multiple suppliers and customers.

Figurel Schematicdiagramofasupplychain(shaded)withinthetotalsupplychain
network

The traditional view on a supply chain is the cycle view (Chopra and Meindl,
2001).In thisviewthe processes in asupplychain aredivided into aseries of
cycles, each performed at the interface between two successive stages of a
supply chain.This means that each cycle is decoupled from other cyclesvia
an inventory so it can function independently, optimize its own processes
and is not hindered by 'problems' in other cycles.For example, a cycle that
replenishes retailer inventories bydelivering products from the manufactur-
ers end-product inventory and a cycle that takes care of replenishing the
manufacturers inventorybyproducing newend-products.Acycleviewofthe
supply chain clearly defines the processes involved and the owners of each
process (hence roles and responsibilities).Although this might seem asatis-
factory situation, the next section will discuss some negative effects from a
supply chain perspective.

Boxi. Example of afood supply chain

Albert Heijn (AH),oneof the leading retailers inthe Netherlands, hasto provideover 650stores
withthe right products atthe right time,dependingonthe needsofthecustomers.Eachofthese
stores receives daily deliveries from anational (for non-fresh products) andfrom oneof the four
regional distribution centres (forfresh products).Onaverageeachstore carries about 15.000dif-
ferent kindsof articles.Therefore,alargenumber of manufacturers isrequiredto replenishinven-
tory levels at the distribution centres.And again,eachmanufacturer has many suppliers who
deliver keycomponents forthe manufacturing process.Often,the transport isarrangedviaa
third-party logistic service provider.

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2.2 Hiccups inthetraditional supplychain:thebullwhipeffect

TheBeerDistribution Gameisamanagement gamedeveloped at MIT'sSloan

SchoolofManagement in the USA(Forrester, 1961).Itintends tolend manag-
ersand students insight inthe consequences ofmanagerial actionsinsucces-
sivestages ofasupply chain. Itprovides an exceptional means of illustrating
the impact ofasupply chain viewon supplychain performance and is often
referred toin SCMliterature asthe starting point ofsupplychain research.

TheBeerDistribution Game isarole-playinggame inwhich the participants

have to minimize costs bymanaging inventory levels in a production-distri-
bution chain.The game consists offour supply chain stages:retailer, whole-
saler,distributor and producer (figure 2).Eachsectorhasitsownsmall buffer
stock to protect it against random fluctuations in final consumption. All a
sector has to do is to fill the orders it receives from its direct customer, and
then decide how much it wants to order from its supplier. The game is
designed so that each sector has good local information but severely limited
global (chain) information about inventory levels and orders. This means
that onlythe retailer knowsrealend customer demand. Ittakes twoweeks to
mail an order and twoweeks to ship the requested amount ofbeer from one
sector to the next. It is not possible to cancel orders. Stock-out costs (associ-
ated with the possibility of losing customers) are twice as high as inventory
carrying costs.Theobjective ofthegameistominimize the total sumofcosts
ofall sectors in the beer supply chain.

Figure2 Thebeersupplychain

J orders orders orders

• • | Lfa
**d
goods
,*^Jm
goods goods
'
goods
Producer ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^Wholesaler
^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ Distributor ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ Retailer

The results of this game after fifty weeks of play are remarkable. Although
consumer demand isonlydoubled onceinweekfive,hugeorder fluctuations
and oscillations takeplaceinthe SC.Usuallywhen playingthegame,thepro-
ducer receives demand patternswith 900% amplification compared to end
consumer demand fluctuations (see figure 3).Furthermore, huge stock-outs
occur at the retailer. When this game is played with different people (stu-
dents or managers) but the same structure, similar results are produced.
Even though the participants act very differently as individuals in ordering
inventory, the overall (qualitative) patterns of behaviour are still the same:
oscillation and amplification of order patterns and a phase lag in reaction
time resulting in bad delivery performances and high costs. The further
upstream the supply chain, the larger the variation in demand.

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Figure3 TheForresterorbullwhip effect

Order pattern

This phenomenon in which orders to the supplier tend to have larger vari-
ance than orders from the buyer, and the distortion propagates upstream in
an amplified form (i.e.variance amplification) is called the Forrester effect
(Towill, 1997), named after the person who discovered it, or the bullwhip
effect (Leeet al., 1997),named for thevariations in reaction down the length
of a whip after it is cracked. The effect has serious cost implications. The
increased variability in the order process (i)requires each facility to increase
itssafety stockinordertomaintain agivenservicelevel,(ii)leadsto increased
costsdue tooverstocking throughout the system, and (iii)can lead toan inef-
ficient use of resources, such as labour and transportation, due to the fact
that itisnot clearwhether resources should beplanned based onthe average
order received by the facility or based on the maximum order (Chen et al.,
1999).Furthermore, material shortages can occur due to poor product fore
casting.

2.3 Causesofthe bullwhip effect andpotential solutions

The amplification is not caused by external factors (e.g.consumer demand)

but created by the parties in the supply chain themselves.The main causes
are the perceived demand, the quality of information and the inherent
delays that may be found within the supply chain (Lewis and Nairn, 1995).
There is no timely information on changes in demand and one has to deal
with a long lead time between placing an order and receiving the products.
Because of this long lead time, the reaction time is too long; in the game it
takes over four weeks to respond to sudden changes in demand. This also
leads to 'misperceptions of feedback', i.e. subjects tend to disregard the

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inventory inthepipeline they ordered earlier andkeep on ordering more

(Sterman, 1989).Nexttotheseaspects Leeetal(1997)found anumber ofaddi-
tional causes inreal-life supply chains:
- order batching due toeconomies ofscaleinordering (quantity discounts)
and transportation (full truck loads) and the useofperiodic planningsys-
tems;
- price fluctuations driven bypromotions; and
- rationingand shortagegaming;i.e.the incentivetoincreaseorders during
shortages, placeorderswith multiple firms, and cancelordersonceinven-
tory arrives.

Severalredesign strategies areproposed toreducedemand amplification and

improve supplychain performance:
- Eliminate all time delaysingoods and information flows from the supply
chain.
- Exchange information concerning true market demand with parties
upstream the supply chain.
- Remove one ormore intermediate echelons inthesupply chain by busi-
ness take-over.
- Improve thedecision rules ateach stage ofthe supply chain: modifythe
order quantity procedures ortheir parameters.
Evansetal. (1995) quantified theimpact ofthese improvement optionsand
showed that the performance could bedrastically improved ifthe configura-
tion and operational management ofthe supplychain, the essenceofSCM,is
changed (table1).

Table l Implications of redesign strategies for the Beer Distribution Came

(Evans et al., 1995)

Scenario Total chain Costs index Demand

cost amplification (%)

Basecase Beer Distribution Game 3358 1.47 900

Noordering delays 1944 0.85 500
Nointermediaries between producer and retailer 939 0.82 350
Producer hasaccesstoconsumer demand data 2295 1.01 425
All stages haveaccesstoconsumer demand data 1293 0.57 200

Current research showsthat thebullwhip effect isstillpresent inallkindsof

supply chains (food, health, insurance, and soon).Current designs of supply
chains arestill causing inefficiencies and inflexibility. To improve supply
chain performance, anewwayofmanaging the supplychain isrequired that
focuses onthe alignment ofsupply chain processes:i.e.SCM.

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3 What issupply chain management?

3.1 Definitionofsupplychainmanagement

The term 'supply chain management' is relatively new. It first appeared in

logistics literature in 1982 as an inventory management approach with an
emphasis on the supply of raw materials (Oliver and Webber, 1982).Around
1990,academics first described SCMfrom a theoretical standpoint to clarify
how it differed from more traditional approaches to managing the flow of
materials and the associated flow of information (Cooper and Ellram, 1993;
seetable 2).Literature on SCMstresses the need for collaboration amongsuc-
cessive actors, from primary producer to final consumers, to better satisfy
consumer demand at lower costs (see, for example, Bechtel and Jayaram,
1997;Lambert and Cooper, 2000).Adriving force behind SCMisthe recogni-
tion that sub-optimization occurs if each organization in a supply chain
attempts to optimize its own results rather than to integrate its goals and
activities with other organizations to optimize the results of the chain
(Cooper et al., 1997). SCMfocuses on the management of relationships.We
define SCMas follows:

SCMisthe integrated planning, co-ordination andcontrol of all businesspro-

cesses'andactivities in the supply chainto deliver superior consumer value at
less costto thesupplychainasawholewhilst satisfying requirements ofother
stakeholders inthesupplychain(e.g. governmentandNCO's).

Value istheamount consumers are willing topayforwhat acompanyprovides;

it is measured by total revenue. The concept'value-added activity' originates
fromPorter's 'valuechain'frameworkandcharacterizesthevaluecreated byan
activity inrelationtothecostofexecutingit (Porter, 1985).

1 Abusiness process can be defined as astructured measured set ofactivities designed

to produce aspecified output for a particular customer or market (Davenport, 1993).
Forexample,orderfulfilment, demand management orproduct development.

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Table 2 Characteristics of SCMaccordingto Cooper and Ellram (1993)

Element Traditional Management Supply Chain Management

Inventory management Independent efforts Joint reduction in channel

approach inventories

Total cost approach Minimize firm costs Channel-wide cost efficiencies

Time horizon Short term Longterm

Amount of information sharing Limited to needsof current Asrequiredfor planning and

and monitoring transactions monitoring purposes

Amount of co-ordination of Singlecontactforthe transaction Multiple contacts between levels in

multiple levels inthe channel between channel pairs firms and levels of channel

Joint planning Transaction-based On-going

Compatibility of corporate Not relevant Compatible at least for key

philosophies relationships

Breadth of supplier base Largeto increase competition Smallto increase co-ordination

andspread risk

Channel leadership Not needed Neededfor co-ordination focus

Amount of sharingof risks & Eachon its own Risks& rewards shared over longer
rewards term

Speedof operations, 'Warehouse'orientation(storage, 'DC'orientation (turnover speed).

information andinventory flows safety stock). Interrupted by Interconnecting flows;JIT,Quick
barriers toflows. Localized to Response acrossthe channel
channel pairs

Itisworth noting that agrowingnumber ofterms arebeing utilized byindi-

viduals and organizations that are presented as being more appropriate,
comprehensive and/or advanced than SCM. Such terms include demand
chain management (todistinguish it from the typeofmanagement in which
'supply' begins and drives the chain of activities), and value chain manage-
ment or value networks (to emphasize the value-added focus on processes).
Sincein ourviewthe essenceofthese terms isalike,wewill employthe most
commonly used term SCM in this chapter as a representative for all these
terms.

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3-2 Keydecisions insuppiychain management

Lambert and Cooper (2000) distinguish three key decisions in SCM, summa-
rized in figure 4. The conceptual framework emphasizes the interrelated
natureofSCMand theneed toproceedthrough severalstepstodesignandsuc-
cessfully manage a supply chain. Each step is directly related to the supply
chain objectives, i.e. the degree to which a supply chain fulfils end-user
requirements concerning the keyperformance indicators atanypoint in time,
and at what total cost. KeyPerformance Indicators (KPIs)refer to a relatively
smallnumberofcriticaldimensions thatcontributemorethan proportionally
to the success or failure in the marketplace (Christopher, 1998).KPIscompare
the efficiency and/or effectiveness ofa system with a norm or target value. A
well-defined set of supply chain performance indicators will help establish
benchmarks and assesschangesovertime.AgoodexampleistheSupplyChain
Operations Reference-model (SCOR) developed by the Supply-Chain Council
(SCC)asthe cross-industry standard for SCM (seewww.supply-chain.org).

Figure4 KeydecisionsinSCM (adaptedfromLambertandCooper, 2000)

SupplyChain Management
2)What processes shouldbe
linked with eachof these
Supply Chain keysupplychain members?
Business
Processes

Supply Chain
Objectives

SupplyChain
Management
Components

3)What level of integration 1) Whoarethe key supply

and management should be chain memberswith whom
appliedfor each process link? to link processes?

SCORprovides an integrated, heuristic approach for supply chain improve-

ment via (i) the modelling of business processes, (ii) the definition ofSCM
metrics for evaluating the supply chain and rapidly identifying high value
opportunities and (iii)the identification ofbest practices to provide acandi-
date list ofimprovement options.

Supply chains can be managed as a single entity through the dominant

member or, alternatively, through a system of partnerships requiring

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well-developed cooperation and co-ordination. Formulating supply chain

objectives istherefore not an easytasksinceall partners havetoagreeon the
selection ofindicators, the definition ofthe indicators and the target values.
The present performance measures used in most companies have several
problems that prevent them from effectively measuring total supply chain
performance. Supplychain participants should startwithjointly identifying
order winners and satisfiers for the supply chain, because these provide the
intended direction ofcontrol actions to improve supply chain performance.
Byanalysing the goals of each individual organization and by identifying
market requirements, integrated KPIscanbedefined and norms established.
Wewill now discuss the three keydecisions in more detail.

3.2.1 Who arethekeysupplychainmembers with whomtolinkprocesses?

Thefirststepinanalysingand redesigning asupplychainistodetermine the

organizations that arepart ofthe supplychain under investigation.For most
manufacturers, the supply chain looks less like a pipeline or chain than an
uprooted tree,where thebranches and rootsaretheextensivenetworkofcus-
tomers and suppliers.Thequestion ishow many ofthese branches and roots
need tobemanaged, and howintensive.Management willneed tochoose the
level of partnership appropriate for each particular supply chain member
knowing that firm capabilities in time and effort are limited (Lambert &
Cooper, 2000).With some suppliers partnerships are required since the raw
materials they deliver are crucial;others are lessimportant and onlyhave to
bemonitored.Thekeyistosortoutwhich members arecritical tothe success
of the company and the supply chain - in line with the supply chain objec-
tives - and, thus, should be allocated managerial attention and resources.

3.2.2 Whatprocessesshouldbelinkedwith each keymember?

Successful SCMrequires a change from managing individual business proc-

esses within one organization to integrating activities over organizations
into keysupply chain processes.Lambert and Cooper (2000) have identified
eight keybusiness processes that could be integrated with the key members
in the supply chain (see table 3).It is usually not necessary to integrate all
processes;e.g.ifthe orderwinner isresponsiveness,focus should beon order
fulfilment, whereas if the order winner is innovation, focus should be on
joint product development.

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Table3 Businessprocessesthat couldbeintegrated inthesupplychain

Business process General description

Customer relation- Specifying service levelagreements with key customers

ship management

Customer service Providingthe customer with real-time information on promised shippingdates and
management product availability through interfaceswith the organizations' production anddistri-
bution operations

Demand management Balancingthe customer's requirements with the firm's supply capabilities

Order fulfilment Delivering products and meeting customer need dates

Manufacturing flow Pulling product through the plant basedon customer needs
management

Procurement Developing strategic plans with suppliers to support the manufacturing flow man-
agement process and development of new products

Product development Customers and suppliers must beintegrated into the product development process
and commercialisa- in orderto reduce time to market
tion

Returns process Aligning processesto realise anefficient return of re-usable items

SCMliterature suggests several redesign strategies to improve the effective-

ness and efficiency of these business processes in the supply chain.Van der
Vorst and Beulens (2002)have identified ageneric list ofSCMredesign strat-
egies to facilitate the redesign process and accomplish joint supply chain
objectives.These are the following:
- Redesign the roles and processes performed in the supply chain (e.g.
change or reduce the number of parties involved, re-allocate roles and
eliminate non-value-adding activities).
- Reduce customer order lead times (e.g.change the position of the decou-
pling point (seethe next section), implement ICTsystems for information
exchange and decision support, reduce waiting times, increase manufac-
turing flexibility).
- Create information transparency (e.g.establish an information exchange
infrastructure in the supply chain and exchange demand/supply/inven-
tory orWIPinformation, standardise product coding).
- Synchronizelogistical processes toconsumer demand (e.g.increase execu-
tion frequencies of production and delivery processes, decrease the lot
sizes).
- Co-ordinate and simplify logistical decisions in the supply chain (e.g.co-
ordinate lot sizes, eliminate human interventions, differentiate and sim-
plify products, systems and processes).

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Van der Vorst and Beulens (2002) propose that in order to identify the most
effective strategies in a specific supply chain one should focus on the identi-
fication and management of the sources of uncertainties in the supply
chain's decision-making processes.Werefer to their article for an elaborated
discussion.

3.2.3 Whatlevelofintegration andmanagementshouldbeappliedtoeach process

linkage?

The literature on business process reengineering and SCMsuggests numer-

ous possiblecomponents that must receivemanagerial attention when man-
aging supply relationships. Lambert and Cooper (2000) distinguish two
groups ofmanagement components;seetable 4.Thefirst isthe physical and
technical group, which includes the most visible, tangible, measurable and
easy-to-change components. The second group, the managerial and behav-
ioural components, defines the organizational behaviour and influences
how the physical and technical management components can be imple-
mented. If the managerial and behavioural components are not aligned to
drive and reinforce an organizational behaviour supportive to the supply
chain objectives and operations,then thesupplychain willlikelybelesscom-
petitive and profitable. Ifone or more components in the physical and tech-
nical group are changed, then management components in the managerial
and behavioural group likewise may have to be re-adjusted. Especially the
managerial andbehavioural components arewell-known obstaclestoSCM,as
they might hinder the development of trust, commitment and openness
between supply chain members (aswewill discuss in section4).

Table4 Twogroupsofmanagement componentsthat havetobealignedinthesupply

chain

Physical and technical components Managerial and behavioural components

- Planningandcontrol methods (e.g.pushor pull - Management methods(i.e.thecorporate philoso-

control); phy and management techniques);
- Workflow/activity structure (indicates how the - Corporate culture and attitude;
firm performs itstasks and activities); - Riskand reward structure;
- Organization structure (indicates who performs - Powerand leadership structure.
the tasks andactivities,e.g. cross-functional
teams);
- Communication and information flow facility
structure (e.g.information transparency);
- Product flow facility structure (e.g.location of
inventories, decoupling points).

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Thegroundwork for successful SCMisestablished byan explicit definition of

the supply chain objectives and related keyperformance indicators and,suc-
cessively, by taking the three key SCMdecisions. The optimal supply chain
design will differ for each supply chain depending on the competitive strat-
egy and the market, product and production characteristics. To illustrate
this, the next section will discuss in more detail one ofthe main trade-offs to
be made in SCM,that is,the trade-off between efficient and responsive sup-
ply chains.

3.3 Thetrade-off between efficiencyandresponsiveness

Marshall Fisher (1997)suggests that the nature of the demand for a product
should be carefully considered before a supply chain strategy is (re)devised.
Fisher divides products into two categories:
- primarilyfunctional products, satisfying basic needs which have stable, pre-
dictable demand and long life cycles typicallywith high levelsofcompeti-
tion resulting in lowprofit margins;
- primarily innovative products with higher profit margins, unpredictable
demand and short life cycles,and usuallyhigher levelsofproduct variety.
Fisher states that the root cause of the product availability problem in
present-day supplychains isamismatch between the typeofproduct and the
type of supply chain. Supply chains that deal with functional products
should focus on efficiencyßeanness to minimize the physical costs related to
production, transportation and inventory storage.Ontheother hand, supply
chains that deal with innovative products should be designed focussing on
responsiveness/agility to minimize market mediation costs (i.e. the cost that
arisewhen thevariety ofproducts reaching the marketplace doesnot match
what consumers want tobuy resulting in lost sales opportunities and dissat-
isfied customers).Table 5compares both types ofsupply chains.

Figure5 Supplychaindesigninrelationshipwiththenatureofproductdemand

Efficient (lean)
supply chain Match ^ ^ ^ Mismatch

Responsive(agile)
Mismatch Match
supply chain

Functional Innovative
products products

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Table 5 Physically efficient versus market-responsive supply chains (Fisher, 1997)

Physically efficient (lean) process Market-responsive (agile) process

Primary purpose Supply predictable demand efficiently Respondquickly to unpredictable

at the lowest possible cost demand in orderto minimize stock
outs,forced markdowns, and obsolete
inventory

Manufacturing focus Maintain high average utilisation rate Deploy excess buffer capacity

Inventory strategy Generate high returns and minimise Deploy buffer stocks of parts or
inventory throughout the chain finished goods

Lead-time focus Shorten leadtime aslongasit does not Invest aggressively inwaysto reduce
increase cost lead time

Approach to choosing Select primarily for cost and quality Select primarily for speed,flexibility
suppliers and quality

Product-design Maximize performance and minimize Usemodular design in orderto post-

strategy cost poneproduct differentiationfor aslong
as possible

What we have seen in the last fifteen years is that consumers and retailers
havebecome much more demanding and product life cycles have shortened
significantly in all kind of sectors (e.g. computers, food, automotive). In
today's marketplace the keystolong-term competitive advantage are flexibil-
ity and customer response.This has resulted in functional products becom-
ing innovative products.Theproblem isthat the supply chains that produce
those innovative products are still efficient. According to Fisher they should
transform towards responsive customer-driven supply chains in order to be
competitive again; see figure 5.

It is not necessarily the case that a complete supply chain should be either
lean or agile. Mason-Jones et al. (2000) and Christopher and Towill (2000)
expanded on the thoughts ofFisherand alsostatethat the supplychain strat-
egy and structure should be in tune with the characteristics of the market-
place.They focus on hybrid strategies byintegrating the lean and agile para-
digms and introduce the concept ofleagility, i.e.'the combination ofthe lean
and agile paradigm within a total supply chain strategy by positioning the
decoupling point so as to best suit the need for responding to a volatile
demand downstream, yet providing level scheduling upstream from the
decoupling point.'

Thedecoupling point (DP)refers tothe inventory point the most upstream in

the supply chain at which real demand penetrates upstream in a supply
chain. Downstream of the DP the material flow is controlled by customer

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 T H E E M E R G I N G W O R L D OF C H A I N S A N D NETWORKS

orders/demand and the focus is on customer lead time and flexibility

(employingsmall batch sizes).Upstream towards suppliers, the material flow
iscontrolled byforecasting and planning, and the focus ison efficiency (usu-
ally employing large batch sizes). The DP creates the opportunity for
upstream activities to optimize independently from irregularities in market
demand. It must be determined where the decoupling point should be for
each product-market combination or product group in the company.There-
fore acompany can haveseveral different DPsand even asingle product can
have more than one, as it can serve multiple product-market combinations.
However, the control complexity will increase significantly when the
number ofDP'sincreases. Hoekstra and Romme (1992)distinguish five posi-
tions ofthe decoupling point depicted in figure 6.

Figure6 Fivepositionsofthe DP (after HoekstraandRomme, 1992)

Production Local warehouse

Distribution Customers

There are many factors exerting an upstream or downstream influence on

the DP.Itisabalancing processbetween (i)market related factors, such as the
delivery lead time requirements set by the market, product demand uncer-
tainty, product range and product customisation requirements; (ii) product
related factors, such aspossibilities for modular product design and product
customisation opportunities; and (iii)production related factors, such as the
production lead time and the flexibility of the production process (Olhager,

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2003).All these factors indicate towhat extent it is possible or reasonable to

make products toorder or tostock;e.g.the more unpredictable the demand,
the more responsive the supply chain should be.And the longer the delivery
lead time can be,the more efficiently the supply chain can be managed.

Thegeneral trend for the position ofthe DPistoshift upstream inthe supply
chain, i.e.the planning and execution ofactivities at industrial manufactur-
ers and primary producers are more and more based on consumer demand
information (VanderVorst et al., 2001).Agood example is the fabrication of
cars; nowadays cars are assembled only after the customer order has been
received requiringveryflexible manufacturing systems(seealsobox2and5).

Box 2. Increasing responsiveness by relocating the decoupling point in the supply

chain
Fifteenyears ago,the computer industry wascharacterized bydelivery leadtimes upto multiple
weeks- mainly becausethe production leadtime wasvery long.Sincethen,customer require-
ments havechanged,resulting inarequest for short delivery leadtimes andalarge product port-
folio. Producers have reactedto this byshiftingthe decoupling point upstream inthe supply
chain.Inorderto keepthe businessprofitabletheyfocusedon(i)internet technologyto establish
high-speed information exchange and havedirect customer order information (thereby eliminat-
ingthedealernetwork),(2)product standardisation andmodularisation (byusinggenericor mod-
ular inventory thefinal commitment to aspecific customer order ispostponed),(3)close partner-
shipswith suppliers that deliver the requested modules at the requested time and place,(4)
increased production/assembly flexibility,and(5)fasttransportation structures. Nowadays,com-
putersareassembledtoorderandthe requestedconfiguration canbedeliveredwithin afewdays
(seefor example,www.dell.com).

3.4 Benefits ofsupplychain management

Theprofitability ofthe supplychain could be improved drasticallyvia better

delivery performance (improved responsiveness and reliability of deliveries,
fewer stock outs, higher product quality, more receiver-friendly loads) and
increased information availability (better demand insight, more predictable
order cycles, accurate, real-time) at the operational level and a reduction of
time-to-market at the tactical and strategic level.The potential for improve-
ment when applying SCM-concepts is based on the reduction of inventory-
carrying (reduced overstocks, faster inventory turns) and transportation
costs (pooling oftransport), the reduction ofindirect and direct labour costs
and the increase ofsales and sales margins.
Many companies are re-engineering and rationalising their supply chain
network to obtain these benefits. Thenext section will discuss the currently
most prominent SCMprojects in practice.

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4 PracticesinSupplyChain Management

4.1 Anoverview
In the last ten years numerous projects on supply chain collaboration were
done to analyse how firms could use their suppliers' and customers' proc-
esses,information, technology, and capability toenhance competitive advan-
tage.Most projects weredone in the front-end ofsupplychains,that isin the
interface between retailer and manufacturer. But also in the interface
between manufacturers and suppliers and/or third parties numerous
enhancements weremade.Overthe lastyearsmanufacturers havebeen insti-
gated tofocus oncorebusiness resultingin theoutsourcing ofnon-coreactiv-
ities such as transportation and the centralisation of manufacturing activi-
ties. The practical experiences can be categorized into the following areas
(seefigure 7),which wewill discuss in more detail in the coming sections:
- Collaborativedemandplanningandreplenishment:retailers and manufacturers
work together to assess consumer demand and to determine the most
appropriate supply management and replenishment approach to meet
this consumer demand;
- Collaborativeproduction: manufacturers and suppliers work together to har-
monise the supplyofrawmaterials and the production ofend products in
such awayastominimise the stockswithin the supplychain and maxim-
isethe responsiveness;
- Collaborative logistics planning:co-ordinating transport and warehousing
between the various parties involved, including trans-shippers, logistic
service providers,carriers and recipients.
Aprecondition for supply chain co-ordination is the establishment of con-
nectivity and transparency, i.e. interconnecting the information systems of
the successive partners in the supply chain and exchange information via
this infrastructure.

Figure7 Areasforcollaborationinthesupplychain(after BarrattandOliveira,2001)

Connectivity and transparency

Collaborative logistics planning

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Although alotofresearch and practical experiencewith SCM-issueshas been

obtained, we have to acknowledge that few companies have actually estab-
lished a management environment that supports the integration required
for effective SCM. Instead, manychains arestill functionally oriented and are
characterized by a lack of trust and credibility among the supply chain
organizations.Inthe comingsectionswewill focus on companies and efforts
that haveexcelled in SCM.Thereader should keep in mind that they are the
front-runners.

4.2 Collaborativedemandplanning and replenishment

Vendor Managed Inventory (VMI) is a technique developed in the mid 1980s,

whereby thesupplier hasthesoleresponsibility formanaging the customer's
inventory policy, including the replenishment process.VMIwas adopted by
many companies in different business sectors; two of the first companies to
put the theory into practice were Procter & Gamble and Wal-Mart in theUSA
(seebox 3).Themajor weakness ofVMIlies in the insufficient visibilityof the
whole supply chain; point-of-sale (POS)data as well as the backroom inven-
tory level data are disregarded whilst the replenishment process (and the
inventory policy) is based in the variation of stock level in the customer's
main warehouse or distribution centre (Barratt and Oliveira, 2001).This has
led the search for alternative, more effective, techniques.

Box 3. Wal-Mart and Procter & Gamble

Severalwell-knownfirms involved insupplychaintyperelationships (e.g.,Procter&Gamble(P&G)
andWal-Mart,the US'sfastest growing retailer) owe much of their successto the notion of infor-
mation andthe systems utilised to sharethis information with oneanother.Through state-of-
the-art information systems,Wal-Mart shares point-of-sale information from its many retail out-
letsdirectly (via satellite) with P&Candother major suppliers.The product suppliers themselves
become responsible for the salesand marketing oftheir products intheWal-Mart stores through
easyaccessto information on consumer buying patterns andtransactions. P&Cexpanded these
working methods with anew distribution systemthat allowed customers to buy and receive all
P&Cproductstogether onthe sametruck- regardlessofwhich businesssector manufactured the
brand.This development, together with the introduction of new pricing structures, palletstand-
ardisation, electronic invoicing and new procedures for handling damaged products resulted in
huge savings.Becauseof the speed of this system,Wal-Mart pays P&Cafter the merchandise
passesover the scanners asthe consumer goesthrough the checkout lane.

The first robust initiative created to enable integration in the food supply
chain datesback to 1992,when Kurt SalmonAssociates (1993)issued a report
on Efjfîrient Consumer Response. Supply chain benefits could be achieved by
excelling in four core strategies: efficient promotions, efficient replenish-
ment, efficient store assortment and efficient product introductions. The
report proposed, for the first time, the driving need to"developa trust-based
relationship between manufacturers and retailers (including suppliers and
customers in general), with the sharing of strategic information in order to

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optimise overall supply chain results". Having this requirement outlined,

the various sectors ofthe industry began to develop anumber of techniques
to make the ECR promise a reality. More information can be found on
www.ecrnet.org with hyperlinks toall national initiatives and currently run-
ning projects.

The logistical branch of ECR,Efficient (or Continuous) Replenishment (ER),moves

one stepahead ofVMIand reveals stock levels in retailers' stores and usesPOS
datatogenerateasalesforecast.Itaimsfora.o.theestablishment ofresponsive
and efficient replenishment byshifting the decoupling point asfar upstream
the supply chain as possible. ERuses concepts such as automatic replenish-
ment systemsbased on(i)the salesforecast, built from historical demand data
and nolongerpurelybased onthevariations ofinventorylevelsatthe custom-
ers' main stock-holding facility, (ii) high frequent deliveries with short lead
times, and (iii)cross docking, i.e. eliminating product storage at warehouses
whereproducts received areturned around forshipment toretailstoreswithin
24hours.Theprocess ofcreating the sales pattern and then predicting future
eventsisER'smajor weakness (Barratt and Oliveira,2001).

Collaborative Planning, Forecasting & Replenishment (CPFR)deals with this weak-

ness and has been described as a step beyond ECR,because of the high level
of co-operation and collaboration needed. Rather than trying to independ-
ently project demand patterns, buyers and sellers share information in
advance and work together to develop realistic, informed and detailed esti-
mates that can be used toguide business operations (Stank et al., 1999).Uti-
lizing principles of CPFR, a retailer and manufacturer work together to
jointly create a single, combined promotion calendar in advance of the sell-
ing period that is subsequently up-dated on a real-time basis over the Inter-
net. The retailer also provides point-of-sale (POS) data, longer-term promo-
tional plans,prescribed inventory levels,etc.for theconsumer goods trading
partner. Both firms create sales and order forecasts and a collaborative sys-
tem is used to compare the retailer's forecast to the consumer goods firm's
own forecast. Discrepancies or exceptions are identified and appropriate
managers advised.Working together, the 'team' decides on one, i.e.collabo-
rative, forecast extending across the supply chain.

It is clear that this intensive collaboration is not suitable for all businesses;
the additional management attention is only fruitful if the product volume
in therelationship islargeenough, demand uncertainty ishigh and the part-
ners (want to!) deliver additional knowledge/information that reduces the
forecast error. Ifvolumes are small it might be wiser to use low delivery fre-
quencies.Thishas been called SupplyChain Synchronization. Itaims tosynchro-
nise the replenishment to the efficient production schedule facilitating full
truckload (FTL)transport and shift stocks downstream to the stores where
they are needed.

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Practice shows that the true benefits are realized only when collaborative
plansarelinked tooperational change;theinformation mustalsobeused for
production and distribution planning. Accurate demand planning enables
manufacturing to postpone production of anticipatory stock and can also
result in shorter, more predictable order cycles. Guaranteed sales targets
allow logistics and distribution managers to make better use of storage and
delivery resources to reduce costs as well as to increase customer service by
tailoring operations. Retail receiving departments, for example, may work
morecloselywith amanufacturer's shipping department toallow shipments
tobe loaded in the order inwhich products are needed, facilitating off-load-
ingand sorting timeand further streamliningcycletimes(Stanket al.,1999).
Formore information on CPFRwe refer to www.cpfr.org.

Box 4. Shortened Fresh Collection (www.k/ict.org)

Nowadays,consumersandretaildemandavariedassortment offloricultural productsandayear
round supply oftop quality produce,allfor areasonable price.Tomeet the growing consumer
demandsthefloricultural chainswill haveto bereversedfrom product oriented (push)to market-
oriented (pull).Aconsumer driven chaincanonly besuccessful ifthechain isorganized inaflex-
ible,efficient and responsiveway.Inorder to speed uptheflow of goodsthroughout thechain,
fromthegrowertotheretailer orflorist,newlogisticalchainconceptshavebeendeveloped inthe
project Shortened FreshCollection.Thesenewconceptswhere inspired bythe needto deliver
morefrequent, in lower batcheswithin aleadtime shorter than the current 27hours.

Theproject aimed at optimising the logistical processesof the ornamental plant cultivation net-
work in Bleiswijk,the Netherlands.Theobjective wasto clarify andsignificantly reducethe lead
timeofthe product rangefora supplychain,fromthe momenttheexporter placesanordertothe
time of actual deliveryto the exporter's premises. Participants inthe project were FloraHolland
FlowerAuction,growers,wholesaler Lemkesandcarriers.

Viachain analysis,simulation of logisticalflows andapilot study new logistical chain concepts

weretested in practiceand evaluated on environmental burden,feasibility,total costs and lead
time.Theresults showedthat leadtimes could besignificantly decreasedat lower costs. It
requires:(1) the useof electronic ordering systems;(2)reduction of waitingtimes inthe supply
chain implicating a change intheworkingmethods ofespeciallygrowers;(3)collaboration inthe
transport of plants from specific regions.

Theproject showedthat 'people makethe difference'inverticalchain partner shipping.Time is

neededto build trust andto create commitment between the successive links inthe chain.It
requiresthe useof tools likeworkshops with the partners,chain performance measurements,
agreements on responsibilities andthe division ofcosts andrevenues.Inthe project, trust
between the partners inthe chain hasgrown significantly. Especially the understanding of each
other's role,addedvalueandwinsfor chainco-operation leadto acommon competenceto actas
awhole.Thechain asawhole haschangedtheir wayofworking,from adailytrade operation
beingconcernedwith daily pricesandorders,intoa longterm partner shippinginwhichjoint con-
sumer concern isleadingand supply performance is under control.This should befollowed by
scaling upbymeansofdevelopingauniversally applicable solutionwith whichto reducethe lead
times of anornamental plant cultivation cluster.

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4.3 Collaborativeproduction

The second area where a lot of SCMpractices are achieved, is collaborative

production. The need for customer-order driven supply chains that are
responsive at low cost has placed a high demand on the flexibility and effi-
ciency of the manufacturing processes.These are enhanced by several prac-
tices:product standardisation, re-allocation ofproduction and warehousing
facilities, outsourcing of production volume, sharing capacity of a single
plant, and supplier partnerships/contracting. Especially in food industry
wereonehas todealwith seasonality insupplyand perishable products,pro-
duction capacities are often limited. Supplier contracting is a common way
of assuring supply of the right products at the right time at the right place.
Several manufactures have started to co-operate within a single plant to
exchange capacities and increase manufacturing flexibility (e.g.automotive,
call centres and printing services). Others have started partnerships with
their suppliers and have integrated supplier activities within their plant;
please seebox5.

Box 5. The Smart car (Van Hoek and Harrison, 2003)

MicroCompactCarAC(MCC),awholly ownedsubsidiary of Daimler-Benz,isthe company behind
Smart.Together these manufacturers havedeveloped anew supply chain concept that went
beyond existing practices.It ischaracterized asfollows:
- customers cansayhow theywant their product to beconfigured;
- carsarebuilt from about fifty modules to customer orderwith lead-times counted inweeks;
- dealers/importers have beeneliminated inthe supply chain;Smart centres canorder directly
atthe plant;
- suppliers haveco-invested inthe production location andtake agreater share inthe final
assembly process;
- the value addedduringfinal assembly,which takesjust 4,5hours,isjust ten percent of the
production cost price becauseofthe modular product layout.Thisenables MCCto supplycus-
tomer choicewith minimum product complexity, facilitates 'upgrading'during its lifetime,
and permits engineers to renew the caror extendthe product linewithin short time frames.
Featuresthat might disturb production if made optional (such asABS,etc.) areintegrated as
standards inthe car;
- sevenfirst-tier suppliers areintegrated inthe assembly hall of MCC;their pre-assembleof
modules issynchronizedtothe planningofthefinal assembly processandmodules aredeliv-
eredon ajust-in-time basis.Sixteen non-integrated suppliers deliver the first-tier suppliers
and MCC.
Contracts with the suppliers areintended to last the entire lifecycleof the SMARTcar,andare
baseduponsingle-sourced modulessatisfyinghigh-standard requirements.Eachpartner receives
ashareof the profit of eachsold car (relatedto the investments made) instead of being paid for
the modules delivered.Tofacilitate communication andthe exchange of ideasamongstaff and
partners,acentral areaofthe factory (which intotal covers 68hectares!) isdesignedasaopen
meeting room.Furthermore,standard performance measuresforeachsub-section ofthe process
aredisplayed electronically for everyonetosee.

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4.4 Collaborativelogisticsplanning

The third area for SCM projects is related to the transportation of goods
between stages in the supply chain. Whereas in the past every actor organ-
ized his own transport, technological advances in logistics and ICT enable
the development ofnewparadigmsbased onco-operation.Thisfacilitates the
consolidation ofgoods, which decreases costs and increases responsiveness.
Agood example is the development ofManufacturing Consolidation Centres by
Lever Fabergé, Kimberly Clark, Ola and Iglo Mora. In these centres many
small incoming lots ofmaterial from different suppliers, that are tobedeliv-
ered to the same customer, are consolidated into fewer, larger loads for effi-
cient onward despatch.
Recently, activities havebeen deployed toevaluate the concept oforchestra-
tion inwhich afourth party manages the execution ofbusiness activities(e.g.
transportation) onbehalf ofthebusiness owners.Logistical service providers
can adopt the orchestrator role and perform the management of logistics
processes for manufacturers and retailers. This requires the support of
sophisticated ICT tools that provide product flow monitoring capabilities,
resourcecapacityand productvisibilityand flow planning and schedulingof
information. Seebox 6for an interesting case.

Box 6. An internet Hub for the Vos Logistics Supply Chain (Hiï/egersberg et al., 2003)
VosLogisticsisa third partylogistics service providerthat isactiveinaddingvalueto its portfolio
of logistics services.Vosisoneof the larger,asset based, transport and logistical companies on
the European Market.Thecompany employs overfour thousand peopleworking at more than
thirty officesthroughout Europe.Thefirm's long-term strategy istobecomeafull logisticsservice
provider for its customers,offering servicessuch aswarehousing,transportation management
andsupply chain(re)design.

Thecaseisconcernedwith theVosseacontainerstransport from itsVeendamterminal tothe Rot-

terdam harbourfor customers such asAvebe,Friesland Dairy Foods,Kappa,Akzoand DowChem-
ical. Dependent onthe cost andspeed requirements of the customer, transport takes placeover
road,water andrailconnections.Severalpartiesareinvolved inthe supply chainsuchasrail oper-
ators,bargeoperators,charters,terminals,etc.Current limitations inthe supply chainarethe fol-
lowing:there islack of real-time information onthe status of containers, alargenumber of con-
tainers areinvolved inexceptions such asnoshows anddelays,andthe same order information
isenteredinthesystem multipletimes.Althoughthetransport ofcontainersseemssimple,many
parties areinvolved,and many piecesof information from these parties needto be consolidated
at the right placeat the right time in order to avoid operational problems.

Early2000,Vosand informore, an ICTcompany that specializes in providing logistics hubs, initi-

ated aproject to create acentral logistics information hubthat would register and communicate
data within the supply chain andoptimizes the planningand monitoring ofthe transportation
system.Usingthe hub,Voscanmonitor the information exchangeandthe activitiestaking place
onareal-time basis.Other parties connected canmonitor part of the information inthe hub of
interest tothem.Thecaseshowedthat therewerealot of benefitsto beobtained:chain transpar-
encyandco-ordination resulted- viathe hub- inshorter throughput times and increased
resource utilization andproductivity. Foranelaborated description of the case,we refer to
Hillegersbergetal.(2003).

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One ofthe latest trends is called Factory Gate Pricing (FGP)- which makes the
retailer theorchestrator oftransportation.Themanufacturer makes itsprod-
ucts available at itswarehouse and gets the price ofgoodswithout transpor-
tation costs.The logistic service providers that also take care of the distribu-
tion from retail warehouse to outlets and returns flows, can optimize the
total flows by incorporating the flows from suppliers.Whether FGPis inter-
esting depends on demand characteristics (volume/variability), type of
replenishment (degree of responsiveness), product characteristics (perisha-
bility/value), the geographical distances and infrastructural characteristics
such asthe number ofdocks available.When wecompare FGPwith CPFR,we
can conclude that FGPis interesting when volume and demand variability
are low; CPFRis interesting when the volume and the demand uncertainty
are high. The main barriers for manufacturers to implement FGP are the
required internal changes at suppliers (tofacilitate the pull flow), the reduc-
tion oftransport volume (which makes the efficient planning ofthe remain-
ing flows difficult) and the required transparency in product prices and
transportation costs.

Concluding remarks

Despite many considerable efforts, supply chain management is to a large

extent still only apromise.Most supply chains are characterized bya lack of
chain transparency and co-operation, and SCM-projects usually deal with
only a part of the supply chain. Most SCM-concepts (such asVMI,CPFR and
FGP)require transparency and the open calculation ofcostsand revenues to
allocate them between supplychain partners.However,the definition ofcost
drivers and the related norms is not an easy task.It requires trust and an in-
depth insight in each other processes,which isdifficult, since thewidelyfol-
lowedcompetitive model suggeststhat companieswilllosebargaining power
- and therefore the ability tocontrol profits - assuppliers or customers gain
knowledge.Although organizations perceive the benefits of SCM,main bar-
riers to the implementation are the lack of trust, diverging objectives, com-
patibility ofmanagerial philosophy, and reward structures that support the
chain objectives.
The development ofan ideal supply chain isnot aone-time exercise.Each
relationship has its own set of motivating factors driving its development as
well asitsown unique dynamic operating environment. Therefore, the dura-
tion, breadth, strength and closeness of the partnership will vary from case
to case and from time to time.

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