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Issues in Supply Chain Management

Daniel Dumke — Wed, 22 Jun 2011 10:26:00 +0000

Very often this blog is concerned with the risk part of supply chain risk management. But to understand the risks within supply chain management, one has to understand the supply chain part as well. In 2000 Lambert and Cooper published a paper on the current “Issues in Supply CHain Management” and I want to highlight the main points here.

Understanding of supply chain management

Since the development of the supply chain management concept there has been and still is some discussion on what supply chain management actually includes? A very broad definition of the term can be:

Supply Chain Management is the integration of key busi- ness processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders.

The process frontiers between the companies merge into one and with the help of the information flow all processes are managed (figure 1).

Figure 1: Integrated Business Processes within a Supply Chain (click to enlarge; Lambert and Cooper, 2000)

In the sense of this definition, logistics therefore…

… is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point-of-origin to the point-of-consumption in order to meet customers’ requirements.

Methodology

To come to a better understanding of supply chain management the authors used an practice oriented approach and conducted a case study of nine supply chains with over 90 in-depth interviews spanning 15 companies. The interviews were guided using a 36 question interview guide and lasted between one and three hours.

Results

Based on this large research base it is now possible to derive several key findings.
Figure 2 highlights the elements of supply chain management.

Figure 2: Framework of Supply Chain Management (Lambert and Cooper, 2000)

The Network Structure contains the identification of supply chain members (and non-members), furthermore the structural dimensions of the network in horizontal (number of tiers) and vertical (number of elements in each tier) terms.
Supply Chain Business Processes, where key processes are:

Customer relationship management
Customer service management
Demand management
Order fulfillment
Manufacturing flow management
Procurement
Product development and commercialization
Returns
Concerning the business processes the author find that the links between processes can be categorized into four different classes:
Managed process links, which are actively integrated and managed by the focal company
Monitored process links, are not seen as critical but still monitored
Not-managed process links, are links where the focal company is not actively involved in
Non-member process links, managers are aware of other, parallel supply chains.
An example of such supply chain with its links can be found in figure 3.

Figure 3: Example of a Supply Chain with different Links (click to enlarge; Lambert and Cooper, 2000)

The Management Components of SCM are described in figure 4.

Figure 4: Management Aspects of Supply Chain Management (Lambert and Cooper, 2000)

Missing pieces

Based on their research the authors state eight key questions related to their framework which need further research in the future:

What are the operational definitions of the key business processes and what are the relationships among these processes?
How should the existing supply chain be mapped? Should the map include all connected firms or only the primary firms?
What is the value proposition at the consumer level or end point of the supply chain?
What metrics should be used to evaluate the performance of the entire supply chain, individual members or subsets of members?
What is the process to take the map of the existing supply chain and to modify it to obtain the best supply chain given the desired outputs?
What determines with whom to link business processes?
What determines the processes to link with these key members?
What determines the type/level of integration that should be applied to each process link?

Conclusion

Of course some of these questions have already been answered in the meantime, at least partially. But I wanted to highlight this general framework since it shows several important aspects for risk management as well. E.g. the categorization of the links, which could be a great tool to maximize the efficiency of risk management efforts or that supply chain mapping overall also has positive effects for risk management.

Reference:

Lambert, D.M., & Cooper, M.C. (2000). Issues in Supply Chain Management Industrial Marketing Management , 29, 65-83 DOI: 10.1016/S0019-8501(99)00113-3

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How Systems Design Themselves

Daniel Dumke — Wed, 02 Mar 2011 08:22:00 +0000

Continuing with on with articles on general Systems Design and foundational articles, today I would like to talk about Conway’s seminal paper on “How Do Committees Invent” from 1968. If you want to read the paper completely, you can do so on Conway’s web page.

In his article Conway describes system design at its most generic level. Be it a system to prevent natural disasters or a new product of a company.

Actors and Stages of Design

Under most circumstances the newly designed system has a sponsor who needs the system for an specific end. The task to can be carried out by the affected organization or an external group.
Two basic milestones have to be reached to continue with the design:

Understanding the boundaries, those can be in place by reality or set by the sponsor of the design
Information about the status quo of the system

The next step is then to organize the design team and set the scope of the the tasks of the sub groups.
The fourth and fifth step are the coordination of the tasks and the consolidation into a single design.

The System itself

A given system can be divided into a number of subsystems. Conway gives the example of the public transportation system, which consists on the top level of buses, trains, planes, etc. On the next level an airplane can be split up into subsystems for structure, propulsion, … and so on.

To illustrate this concept the author draws the following picture. The circles represent a (sub)system and the lines the connections between them.

System and Subsystems with Interfaces (Conway 1968)

This thinking about systems can be deployed for other concepts as well. So not only the “to be designed” system can be described this way but also the organization which designs it.

Systems / Design Group

The system and its design group are related. For a given subsystem x there will be a (part of the) design group (X) which designed this subsystem. The same holds true for the connections between subsystems (eg. x and y). If they are connected, we know that the design teams X and Y had to communicate at some point in time to design the interface.

So the design of the finished system is dependent on the preexisting design of the design group.

This kind of a structure-preserving relationship between two sets of things is called a homomorphism.

To underline his point Conway describes the following example from informatics:

A contract research organization had eight people who were to produce a COBOL and an ALGOL compiler. After some initial estimates of difficulty and time, five people were assigned to the COBOL job and three to the ALGOL job. The resulting COBOL compiler ran in five phases, the ALG0L compiler ran in three.

Results

The author summarizes the following thesis:

Organizations which design systems are constrained to produce designs which are copies of the communication structures of these organizations.

Since the initial organization of the design group may not be the right one for the newly designed system, flexibility is a key to effective design. Rewards have to be given to support the design manager in keeping the organization lean and flexible

Conway also takes a short detour, that especially large systems might be prone to failure, since the task of designing those systems is huge and overwhelming so that already the communication within the design group disintegrates, leading to the same result in the designed system.

Conclusion

What effects does this have for a supply chain designer? Can the supply chain be seen an image of the company’s structure itself? How does this affect business and research for the “optimal” supply chain design.

Update: Have a look at the comments below, Eleanor recommends a working paper from the Harvard Business School testing above hypothesis: https://hbswk.hbs.edu/item/first-look-feb-8

Reference:

Conway, M. E. (1968). How Do Committees Invent? Datamation, 14 (4), 28-31

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System Failure

Daniel Dumke — Mon, 21 Feb 2011 09:14:00 +0000

I was looking for more general insights into the topic on why systems fail. I stumbled on a talk of Eleanor Saitta from last years Chaos Communication Congress in Berlin. There is a recording of the talk here and the slides for the talk can be obtained here.

I am going to summarize some of the key points Saitta made in her talk in this article.

Types of System Failures

There are two general types of system failures: Simple and chained failures.

The systems propensity for failure is related to the complexity of the system and affected by the aspiration to increase efficiency, optimality and accelerate the Prozesses weithin the system.

Example of the Determinants of System Collapse

Figure 1: System Effect Circle (in Saitta 2010; from Vinay Gupta 2009)

In many cases, system complexity is very overwhelming. So the task of analyzing why a system fails can be very demanding.

To answer the specific question what kind of failure of the economic system (eg. the near-collapse of the financial system in 2008) leads to the death of one or more individuals, Saitta presents the system effect circle.

The individual is placed in its center, next come the possible causes of ones death, the essential foundations of society (like work, resources, transportation and communication). The last two circles show the underlining concepts to generate and sustain the former items.

Multiple systems are affected by those concepts, the following example should clarify the logic.In Figure 2 Saitta shows the connections between the individual systems and how they affect each other.

Figure 2: Example of Connections within the System Effect Circle (Saitta 2010; from Vinay Gupta 2009)

Preventing Collapse

To prevent collapse systems have to be designed to be resilient. The graphic shown in the example above can be used as a basis for the analysis of “what can go wrong”. These results can be generated by defining the Need-Matrix (Figure 3) for the system in focus.

Figure 3: Need Matrix for System Analysis (click to enlarge; Saitta 2010; from Vinay Gupta 2009)

A system not only consists of the foundation factors found in the Need-Matrix, but also the assets and actors within the system, and the rules which control the the access from the actors on the resources.

The goal for building resilient systems is therefore to analyze the connections between actors and assets and explore how the rules have to be designed for the system to work effectively.

Conclusion

Building resilient systems is hard on every level. On a large scale (eg. banking system) existing power distributions often prohibits the establishment of a resilient infrastructure. Nonetheless an in-depth analysis might help prevent the most severe consequences.

For smaller scale systems, like a supply chain, analyzing the foundational factors, actors, assets and rules is mandatory for building a resilient system.

The key concepts are the same on every level: actors, assets, their connections and access rules.

Update:

You can find more on the Simple Critical Infrastructure Model on these slides by Vinay Gupta.

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Supply Chain Disruptions and Operating Performance

Daniel Dumke — Wed, 12 Jan 2011 09:39:00 +0000

I just realized, that up to now I have not written much about why Supply Chain Risk Management should be an important factor many more companies.

Hendricks and Singhal wanted to understand this as well and researched on what effect a missing supply chain risk management can have on a company’s performance. They therefore started a research series, the first article was on the “Effect of Supply Chain Glitches on Shareholder Wealth” (mentioned here). And today I have a look at their second article in this series: “Association between Supply Chain Glitches and Operating Performance”.

Introduction

The authors conducted an empirical study to learn more about the relationship between supply chain glitches (which are defined as supply exceeding or not meeting demand) and operating performance of the company.

Negative Impact of Glitches

First it is important to think about how supply chain glitches work and why the can have negative impacts on different parts of the company and its supply chain:

Demand Side
- short and long-term loss in sales
- market share
- lower sales price
- oportunity costs of unavailability of products
- customer service (dissatisfaction, lower loyalty)
- reputation / credibility
Cost Side
- expediting
- premium freight
- obsolete inventory
- additional marketing
- penalties paid
- increase public relation expenses
- capital cost
Assets
- productivity
- utilization of assets (over- or underutilization)

Methodology

A sample of public announcements is analyzed for supply chain glitches. 885 glitches are identified and on that basis the performance during a period before (4 quarters) and after the glitch (8 quarters) is assessed for effects of the glitch. A typical glitch announcement looks like this:

“Apple Computer Inc. Cuts 4th-period Forecast Citing Parts Shortages, Product Delays,” The Wall Street Journal, September 15, 1995.

Hypothesis and Results

The following hypothesis are then tested using available data:

Supply chain glitches will be associated with a decrease in profitability
Supply chain glitches will be associated with a decrease in net sales
Supply chain glitches will be associated with an increase in costs
Supply chain glitches will be associated with negative asset and inventory performance

Single firm performance is compared to a peer company before and after the glitch.
The analysis reveals that before the glitch operating income is down by 107%, return on sales is down 114% and return on assets down by 93%.
After a glitch the authors found that the changes in operating income, sales, total costs, and inventories are insignificantly different from zero.

Conclusion

Hendricks and Singhal also provide an interesting statistic on the responsibilities for the glitches, on the top: internal (then customers and suppliers). This might indicate a priority for supply chain risk management as well: a reduction in internal errors and disruptions can have a huge leverage on company performance.

Reference:

Hendricks, K.B., & Singhal, V.R. (2003). The effect of supply chain glitches on shareholder wealth Journal of Operations Management, 21 (5), 501-522 DOI: 10.1016/j.jom.2003.02.003

Hendricks, K., & Singhal, V. (2005). Association Between Supply Chain Glitches and Operating Performance Management Science, 51 (5), 695-711 DOI: 10.1287/mnsc.1040.0353

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Supply Chain Crisis Management

Daniel Dumke — Mon, 25 Oct 2010 10:23:00 +0000

Supply Chain Risk Management is one way to look at risks within a company (and beyond). But there are broader and more narrow disciplines as well, with Business Continuity on the one end and Supply Chain Crisis Management on the other.

I wanted to get an overview of current research on Supply Chain Crisis Management first, so today I explore “Managing supply chains in times of crisis: a review of literature and insights” by Natarajarathinam, Capar and Narayanan. The article is focussed on providing the researcher with a current state of supply chain crisis management, but practitioners will probably find the “Practical Implications of SC Crisis Management” in figure 3 (below) useful.

Crisis

So how do crises fit into the Supply Chain Risk Management landscape? The authors cite Merriam-Webster on crisis, where it is defined as:

an unstable or crucial time or state of affairs in which a decisive change is impending; especially: one with the distinct possibility of a highly undesirable outcome.

So in a supply chain context, a crisis is comparable to a disruption where the flow of goods, information or money is interrupted.

Methodology

The authors used an review of peer-reviewed articles as a basis for their work. For their sample they were using keywords like “crisis”, “risks”, “disaster”, “uncertainty” and more. This search resulted in 118 relevant articles published between early articles before 1990 and 2008.

Figure 1:Published Articles on Supply Chain Crisis Management by Year (Natarajarathinam et al., 2009)

Classification

As a next step the articles were classified according to the framework in the figure below.

Figure 2: Classification Framework (Natarajarathinam et al., 2009)

Results

One purpose of the article was to guide future research on the topic of supply crisis management, so the authors conclude:

Sources: More than 60 percent of the literature reviewed is exclusively concerned with external sources of risk and there is a high concentration on handling natural and man-made crises.
Scale: Most research focusses on crises on the supply chain or regional level, so no surprise there.
Stages: A major part of the current research is done on the proactive side, like preparation and mitigation rather than response and recovery
Research method / Respondent: The authors conclude that “There is a need for more case studies and empirical research in crisis management for not-for-profit supply chains.”

The authors also filtered the practical implications of current supply chain crisis management research and listed them in figure 3.

Figure 3: Practical Implications of SC Crisis Management Literature (Natarajarathinam et al., 2009)

Conclusion

It has been a long time since I have read such a clearly written article. I liked the presentation of the methodology. The only thing missing there would be the inclusion of non-peer reviewed journals as well considering the relatively small number of articles screened.

I found that the discussion of the term “Crisis Management” could have been more elaborate. How is the relation between Disruptions and Crisis? Are crises really just grave disruptions? If yes, is there really a need for another category here and how are the less grave disruptions called?

Reference:

Natarajarathinam, M., Capar, I., & Narayanan, A. (2009). Managing supply chains in times of crisis: a review of literature and insights International Journal of Physical Distribution & Logistics Management, 39 (7), 535-573 DOI: 10.1108/09600030910996251

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Segmenting Supply Chain Strategies

Daniel Dumke — Wed, 01 Sep 2010 06:05:00 +0000

For researchers and practitioners alike it is important to differentiate supply chain strategies.

Introduction

Not only Fisher (1997) showed, that there is no one-fits-all supply chain. But what are the criteria for should be used for supply chain segmentation?
Fisher focusses on on the product only, and he concludes, that a standard/functional product should be processed by a lean supply chain and innovative products by agile supply chains.

Segmentation Tree

Brun and Castelli (2008) base their research on an in-depth case study of the Italian fashion industry and a literature review. Their goal was to find a categorization for supply chain strategies and they found that strategies are segmented using a tree structure based on products, brand and distribution channel.

Segmentation Tree to categorize Supply Chain Strategies

Conclusion

I found two major drawbacks of this study:

The case study is located in an industry where supply chain management is viewed more as an subordinate function to marketing and communications, therefore it is quite unclear if these results also apply for other industries.
I am missing recommendations for the right strategy for different products, channels, etc.

Reference:

Brun, A., & Castelli, C. (2008). Supply chain strategy in the fashion industry: Developing a portfolio model depending on product, retail channel and brand International Journal of Production Economics, 116 (2), 169-181 DOI: 10.1016/j.ijpe.2008.09.011

Fischer, Marshall L. (1997). What is the Right Supply Chain for Your Product? Harvard Business Review, 105-116

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