Evolution of Supply Chain Management

Evolution of Supply Chain Management Over the past 40 years, the traditional purchasing and logistics functions have evolved into a wider strategic approach to materials and distribution management known as SCM. This chapter will review the SCM evolution over the past decades and the factors that have influenced this evolution. 1.2 Supply chain management evolution After Second World War there was a high need to increase production, the most part of the world was suffering from hunger. The world entered in the Productivism era, most manufacturers gave priority to mass production to minimize unit production cost as the primary operations strategy. This was the first stage of the creation of economies of scale. However, these years 1950s and 1960s the concept of supply chain management was unknown. During these years new product development was slow and counted only in firms own technology and capacity. Inventory cushioned bottleneck operations in order to maintain a balanced line low, resulting in huge investment in work in process (WIP) inventory (Tan, 2001). Logistics cost were high as well. At a national level in the USA and UK, they accounted respectively for 15% and 16% of gross national product (Ballou 2007). Furthermore, issues concern with purchasing was neglected by managers at that time, since purchasing was considered as a service to production (Famer, 1997). As mentioned above increasing production was the main objective of this period, little emphasis was on cooperative and strategic buyer supplier partnership. According to Tan (2001), Sharing technology and expertise with customers or suppliers was considered too risky and unacceptable. Tan 2001 argues that, in the 1970s, managers become aware of the huge WIP on manufacturing cost, new product development, quality, and delivery time. One of the factors of this increased awareness was the introduction of Manufacturing Resource Planning (MRP). The focus in this period changed; it is not just increase production through spreading the fixed cost to a bigger output (economies of scale), rather, to increase performance. The introduction of IT (MRP) in planning the resources of the firm proofs this. During the 1980s and 1990s, firms deal with increased demands for better, faster, cheaper logistical service. As a result, many manufacturers outsourced logistics activities and their focus transferred to core competencies (Daugherty, 2011). According to Daugherty (2011), the outside specialist presented an economically viable means of achieving productivity and efficiency. Therefore, many manufactures went more for a relationship oriented approach with their supplier and customer. They understood the benefits of cooperative relationship with the other firms in the different chain levels (Stank at al, 1999). Stank at al (1999), show in their paper some of the advantages and benefits that this cooperative relationship had: synergy gain through shared expertise and resources, better planning and support, exchange of information, and joint problem solving. Another reason that influenced the partnership between supplier buyer was the increased global competition (Tan, 2001). In the 1990s was the introduction of Enterprise Resource Planning (ERP), this gave a boost to the evolution of the SCM and buyer supplier relationship. Movahedi at al (2009) argues, while the previous IT resource planning systems (e.g. EDI Electronic Data Interchange) used by manufactures were concern mainly with inter organizational integration, ERP systems were mainly concern with intra organizational integration. The evolution continues in the 21st century with the development of more sophisticated IT systems (internet base solution systems) which are concerned for both inter-organizational integration and intra-organizational integration. Moreover, the relationship buyer supplier in this period have gone one-step forward, from normal partnership to long-term relationship and strategic alliances. Manufacturers and retailers now commonly exploit supplier strengths and technology in support of new product development, distribution channels, cost reduction etc (Morgan and Moncz ka, 1995). For example retailers like Tesco use supplier strengths and technology to make own label products which contribute to Tesco overall image. The latest trend of evolution in the supply chain management is the movement towards systems of supplier relations over national boundaries and into other continents (Movahedi at al, 2009). Global Supply Chain Management (GSCM) is the latest concept introduced to the literature of SCM. Now days firms are much bigger than they used to be. They have achieved economies of scale and with the establishment of trade liberalisation policies they are internationalising their businesses to find the lowest sources of inputs and growing markets to sell their products. The concept of SCM is not enough for being efficient and competitive in the new environment that is why new concept and management strategies (i.e. GSCM) are emerging. An Integrated supply chain gives considerable competitive advantage to the individual actors participating in the chain. Now days in the developed economies there is a switch from firm firm competition to chain chain competition (Koh at al, 2007). This last sentence describes best how the supply chain management has evolved over the past decade, by making the different actors in a chain to operate as one big entity. 1.3 Evolution stages of supply chain management By looking at the above evolution history, we can identify some turning points in the concept and philosophy of SCM. Some authors have segmented the evolution of supply chain management into stages (Movahedi at al, 2009; Ballou 2007 ). Movahedi at al, (2009) segmented SCM evolution into three stages: Creation era During the 1980s Integration era During 1990s and continued in the 21st Globalisation era Now days Creation era, starts (1980s) when the buyer supplier understand the benefits that a cooperative relationship offers. In this period we encounter for the first time the term supply chain management. Integration era starts (1990s) when the IT system EDI is replaced by ERP. ERP focus not only in managing the resources of the individual firm but also the resources of the integrated supply chain. Globalisation era, starts with the creation of the trade liberalisation policies and the establishment of institution such as World Trade Organization (WTO) and other international institutions that deal with global/regional trade policies. According to Ballou (2007) SCM is not new, it is a evolution of the purchasing and distribution function. The integration of these two functions has generated what we call SCM. Figure 1 shows the evolution of SCM as described by Ballow (2007). He has segmented the evolution of SCM into three stages. Activity fragmentation 1950s and 1960s Activity integration 1960s to 2000 Supply chain management 2000+ As we can see from the figure, in the first stage the activities (from purchasing row materials to finished product in the shelf of a retailer) are fragmented, there is no integration between them. As a result the cost of finished products (transportation cost, inventory cost etc) are high. In the second stage, there is some integration between the activities but still not fully integrated. The SCM 2000+ is the last stage where all the activities are fully integrated leading to cost reduction, shortening of the new product development process, better flow of information, improved cash flow, faster order fulfilment, improved shelf availability and last but not least increased customer satisfaction. From the SCM literature it comes out that customer satisfaction is one of the key driving factors of supply chain evolution. Figure 1 Supply Chain Evolution Source: Ballow (2007) 1.4 Factors that have affected SCM evolution