New Developments in Supply Chain Management for the Millennium

Richard A. Lancioni
The supply chain design is becoming an important management discipline in the United States. The millennium will present many challenges for the supply chain manager. These range from the need for agility to more accurate forecasts. Each of these changes is discussed in this article. 2000 Elsevier Science Inc. All rights reserved.

INTRODUCTION The field of supply chain management has undergone tremendous changes over the last 25 years. The field that was once considered the last frontier of cost reduction in 1965 has now become the new area of profit and growth for businesses. The area that was once considered to be of only minor concern to managers is now at the forefront of business planning. The discipline that had a difficult time getting the attention of senior management in firms
Industrial Marketing Management 29, 16 (2000) 2000 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY 10010

now has representatives in the top echelons of most organizations. The field that once had a difficult time getting people to agree on what exactly it wasphysical distribution, logistics, transportation, purchasingnow has a body of knowledge that is structured and in which academics and practitioners understand. Supply chain management was the forgotten management science, and it was only for the military to use and could only partially be applied in the commercial business world. Supply chain management was not a field that academics were interested in 30 years ago. Today, more than 600 colleges and universities in the United States offer courses in the area. What has changed to make supply chain management the new management science of the millennium? Why are companies focusing more of their attention on logistics and supply chain management? What is behind the renewed interest in logistics? What new management

0019-8501/00/$see front matter PII S0019-8501(99)00106-6

Logistics was misunderstood.

techniques will influence supply chain management in the future? Of course, it is not easy to provide simple answers to these questions, but in this issue of Industrial Marketing Management, the authors provide some insights into the challenges and opportunities facing supply chain managers in the future. They include: 1. Viewing supply chain management as a multi-dimensional discipline 2. Continual customer focus and accurate forecasts of supply chain requirements 3. Optimal supply chain design 4. The need for agility in the supply chains 5. The use of the Internet in supply chain operations 6. Measuring supply chain performance 7. Effective management of the supply chain. SUPPLY CHAIN MANAGEMENT A MULTI-DIMENSIONAL DISCIPLINE Supply chain systems were for years regarded as channels of distribution. From this perspective, the focus of channel management was on making each firm in the distribution channel more efficient and productive. Each firm operated on its own, seeking to make the highest profits with little attention paid to its channel counterparts (i.e., retailers, wholesalers, and manufacturers), depending upon which role it played in the distribution channel. With the advent of supply chain management, the perspective of managers changed from one of an intrafunctional vision, where the focus was on the individual firms in the channel, to an interfunctional view, where emphasis is now placed on the cooperation that takes place between firms. As Ballou, Gilbert, and Mukherjee point out in the first article, New Managerial Challenges From Supply Chain Opportunities, the intrafunctional perspective of distribution channels looks at the importance of cost tradeoffs and the maximizing of customer service levels. This was a very narrow perspective with the end result being that it was every firm for itself or survival of the fittest. Who ever made the most money was considered the model for success. Little emphasis was placed on the customer and cooperation with other channel members. The interfunctional view went a step further and held that . . . altering the levels of the various activities, often referred to as logistical in nature (such as transportation, inventories, facility location, and order processing) may adversely affect achieving the objectives of these other functional areas [1]. The customer becomes the driving force in this approach to supply chain management. Management control is maintained by the firm but is out of the hands of the logistics or supply chain group. The new view of supply chain management and one that should take hold in the new millennium is the interorganizational approach. According to Ballou, Gilbert, and Mukherjee, here is the broadening of the perspective of supply chain management to coordinate product flows that span multiple enterprises [2]. The goals of the entire supply chain become the common objectives of each firm. Cost and service improvements that were not achievable by individual firms will now be attained by the companies acting together. Of course, there are downsides to this new approach; for if one firm benefits at the expense of others in the supply chain, then a conflict could arise. Managing the coalition of firms becomes very important to ensure that the supply chain runs smoothly. The inter-organizational coordination approach to supply chain management will necessitate that a focus on conflict resolution be maintained at all times. The benefit of the entire supply chain must be stressed at all times.

RICHARD A. LANCIONI is Professor of Marketing and Logistics and Chair, Department of Marketing, Fox School of Business and Management, Temple University, Philadelphia. He has authored more than 100 articles in the field of logistics. He has conducted numerous seminars for many of the Fortune 500 companies, the Department of Defense, the Air Force, the Navy, and navies throughout the world including Europe, England, Australia, Japan, South America, and the Middle East. He is recognized as one of the leading logisticians in the United States. His research interests include supply chain management, customer service, and marketing management.

Supply chain management is multi-dimensional.

The authors point out that cooperation must be emphasized and enforced through power, reward, or shared values. The benefits of this cooperation will flow to all members of the supply chain, including customers who will be the driving force. Continual Customer Focus One of the most important elements in supply chain management is the emphasis on continual improvement. This is manifested in many ways, such as improved productivity, better service levels, lower transport costs, reduced damage in transit, faster order processing, and more responsive complaint processing. One area that heretofore has not been driven by continual customer focus is sales forecasting. In the second article of this issue, Customer Demand Planning at Lucent Technologies: A Case Study in Continuous Improvement through Sales Forecast Auditing, the authors discuss the need for a company to accurately forecast its business opportunities and then effectively plan throughout its supply chain to exploit them. The accuracy of the forecast is paramount to achieve success. The new approach utilized by Lucent Technology is customer based and utilizes a sales forecasting audit. Moon, Mentzer, and Thomas, Jr., the authors of the article, point out that forecasting and planning are distinct management activities and sequential in nature. The firm also realizes that without an accurate forecast many aspects of its supply chain will not operate properly. These aspects include finished goods inventory, production planning, supplier coordination, and inventory allocation. Realizing that supply chain factors will be adversely affected by inaccurate forecasting presents future supply chain managers with the challenge of striving for even more accurate sales forecasts. Supply Chain DesignA Critical Factor The goal of firms in the future will be to work for the optimal supply chain structure. The hope is that this one structure can be applied to all supply chain structures in business-to-business markets. The hoped for results will be low costs, high service levels, and improved operating quality. In order for these so-called ideal supply chains to arise, specific design parameters must be in place. These parameters include: *The consolidation of supply chain activities to realize economies of scale *The integration of all supply chain activities through the use of common organizational and information technology (IT) standards at every echelon in the system *Performance measurements to measure service and cost performance results. In the article The Use of Conjoint-Analysis for Measuring Preferences in Supply Chain Design, Reutterer and Kotzab reject the idea that there can be an overall valid best practice solution for the design of supply chains [3]. The authors demonstrate how a proven statistical technique that has been used in marketing research for many yearsconjoint analysiscan be applied to the design of supply chains. They point out that the design of a supply chain is dependent upon the economic, market, and competitive conditions that exist in the market place. They emphasize that markets are dynamic and that firms must design flexible and responsive supply chains to compete effectively in the future. Market Turbulence and Volatility: A Challenge for Supply Chain Management The new millennium will bring about new challenges for supply chain managers. One of these will be the commonality of turbulence and volatility in markets. The speed with which a firm can respond to that change is important. Time will be the most potent competitive weapon for the supply chain managers in the new millennium. As Martin Christopher points out in his article The Agile Supply Chain: Competing in Volatile Markets, agil3

Accurate forecasts are essential.

ity will be an important factor in the design of future supply chains. This refers to the ability of the supply chain to respond quickly to changes in customer and competitive demands. Christopher holds that agility is based on a number of factors that include: *Being market sensitive *Developing a virtual relationship with suppliers through the sharing of information with them *Collaboration between firms in the supply chain regarding the integration of their respective manufacturing and distribution processes. The concept of inventory will have to change in the future. No longer will firms be able to afford the luxury of having large quantities of finished goods inventory throughout the supply chain. Inventory, according to Christopher, will have to be held in a semifinished state as close to the final demand point as possible awaiting final assembly. This postponement will enable firms to remain agile and to respond quickly to both competitive challenges and customer product changes more easily. Customization as close to the final demand point as possible will be required to remain competitive. Such changes are occurring now in the computer, automotive, and apparel industries. The supply chains of the future will have to be less complex. Even with the proliferation of brands and product line extensions, manufacturing will have to be simplified, and the distribution of products made less complex. For example, modularization in the electronics industry and the reduction in model assemble platforms in the auto industry have enabled firms to expand their product lines, while at the same time reducing the complexity in manufacturing and simplifying inventory stocks in their respective supply chains. As Christopher points out, the companies with agile supply chains . . . are the organizations that will be best equipped for survival in the uncertain markets of the twenty-first century [4]. The Role of the Internet in Supply Chains The Internet is gradually being accepted as a normal part of peoples lives. The Internet is like the develop4 ment of television in the 1950s. Millions of people rely on the Internet each day for information, stock trading, buying products, etc. The Internet will become even more important in the future. But what about Internet usage in supply chains? What is the current status of this new technology, and how is it being used? These and many other issues are addressed in The Role of the Internet in Supply Chain Management. The article points out that the Internet offers supply chains significant opportunities for cost reduction and service improvements. These opportunities include: 1. On-line vendor catalogs, from which buyers can select and procure items from suppliers 2. The tracking of shipments of the various modes of transportation, including truck, rail, and air 3. The use of the Internet in processing customer queries, complaints, and handling technical issues 4. The timely receipt of orders from international customers 5. Scheduling pickups and deliveries 6. Providing 7-day/24-hour customer service on a worldwide basis 7. Communicating with suppliers regarding deliveries, stock availability, etc. 8. Negotiating with vendors on new purchases, etc. The study uncovered widespread usage of the Internet in supply chains in a number of areas. These usages included purchasing, transportation, order processing, customer service, production scheduling, and the management of vendor relations. The research also indicated that the size of the firms affects how the Internet is used. For example, small companies in supply chains use the Internet to: 1. Communicate with vendors on inventory levels 2. Check the credit status of customers 3. Obtain price quotes from vendors. Large companies, in contrast, rely on the Internet to purchase supplies from the on-line catalogs of their vendors. As the article points out, in the future . . . the Internet will enable logistics managers to monitor their supply chain operations and reduce costs when inefficiencies

Ideal designs do not exist.

arise. The effects of this are and will continue to dramatically affect the profitability of firms [5]. Measuring Supply Chain Performance As the importance of supply chain management grows, one of the key issues is for firms to measure the cost performance of their supply chain systems. The single highest cost in a supply chain is inventory that accounts for close to 50% of total logistics costs. With the development of channel partnerships, strategic alliances, and closer supplierbuyer relationships, how inventory is managed in the supply chain becomes increasingly important. If inventory imbalances occur in a supply chain due to the improper management of these alliances, significant inefficiencies can develop. In Calculating the Cost of Variances in the Supply Chain: Determining Supplier and Buyer Effect on Inventory Performance, Weber provides . . . a framework that can be used to diagnose the causes of inventory related variances in the buyer seller relationship and analyze the costs to the channel associated with these variances [6]. The model proposed by Weber helps to . . . determine channel member responsibility for system variance . . . in supply chain inventory costs [7]. In addition, the model provides management with insights into how another channel member can . . . compensate for planning or performance errors by one channel member and the cost of that compensation [8]. Variances in inventory in supply chain partnerships include: *Supplier performance variance *Product supplier performance variance *Time supplier variance *Quantity supplier variance, and many others. of the various management groups in firms that affect supply chain operations. Integrating the influences of these management groups and developing a set of common goals that they can all work toward is paramount. The two most influencial departments are marketing and logistics. The marketing department in a company seeks to satisfy customers and maximize sales. It stresses product proliferation, product line extension, high levels of customer service, decentralized storage, and maximum inventory levels. Logistics, in contrast, seeks standardization, shipment consolidation, low inventory, and centralized storage. But as Lambert and Cooper point out in Issues in Supply Chain Management, the . . . individual businesses no longer compete as solely autonomous entities, but rather as supply chains. Business management has entered the era of inter-network competition. Instead of brand versus brand or store versus store, it is now suppliersbrandstore versus suppliersbrandstore, or supply chain versus supply chain [9]. The conflicting goals of marketing and logistics can no longer be tolerated. They must work to manage their supply chains as agile, competitive systems. Lambert and Cooper point out that this competition will be difficult, and managing the supply chains successfully will be necessary for survival. The authors point out that supply chains have several processes that must be considered. These processes include: *Customer relationship management *Customer service management *Demand management *Order fulfillment *Manufacturing flow management *Procurement *Product development and commercialization Returns.[10]

The goal of an efficiently managed supply chain is to narrow these variances to keep costs low. Management of the Supply Chain: Integrating Marketing and Logistics The greatest challenge that supply chain managers will face in the millennium will be coordinating the activities

Encouraging cross-function integration in supply chain management requires that a firm establish a series of incentives for other departments as well as for suppliers in the supply chain. Ellinger, in Improving Marketing/Logistics Cross-Functional Collaboration in the Supply Chain, suggests that maintaining a high level of customer service by all members of the supply chain will encour5

Agility is essential in supply chains.

age integration [7]. He suggests that individuals, departments, and firms in the supply chain must work closely together to achieve this integration. REFERENCES
1. Ballou, R., Gilbert, S., and Mukherjee, A.: New Managerial Challenges from Supply Chain Opportunities. Industrial Marketing Management 29, 718 (1999). 2. Reutterer, T., and Kotzab, H.: The Use of Conjoint-Analysis for Measuring Preferences in Supply Chain Design. Industrial Marketing Management 29, 2735 (1999). 3. Christopher, M.: The Agile Supply Chain: Competing in Volatile Markets. Industrial Marketing Management 29, 3744 (1999). 4. Lancioni, R., Smith, M., and Oliva, T.: The Role of the Internet in Supply Chain Management. Industrial Marketing Management 29, 4556 (1999). 5. Weber, M.: Calculating the Cost of Variances in the Supply Chain: Determining Supplier and Buyer Effect on Inventory Performance. Industrial Marketing Management 29, 5764 (1999). 6. Lambert, D., and Cooper, M.: Issues in Supply Chain Management. Industrial Marketing Management 29, 6583 (1999). 7. Ellinger, A.: Improving Marketing Logistics Cross-Functional Collaboration in the Supply Chain. Industrial Marketing Management 29, 8596 (1999).

CONCLUSIONS Supply chain management is not a business discipline that will fade away. Supply chains are an important component in the U.S. economy. Understanding how supply chains will change in the new millennium is important for managers to comprehend. These changes are presented in this special issue of Industrial Marketing Management. The task of supply chain managers is to adapt to the changes and develop strategies for improved profitability in the millennium.