Strategic Supply Chain Management: Evaluation and Performance


The advent of globalization has provoked a major transformation not only in the production methods but also in the supply chain strategies employed by global companies. Majority of global firms have relocated their operations and outsourced raw materials from low-labour cost regions in an attempt to reduce production costs and boost profit margins (Hong & Holweg 2004, p.3). This paper will, therefore, analyze a number of strategic supply chain management strategies available to globally operating organizations.

According to Kaufman (1997), the main function of a supply chain management system is to eliminate communication obstacles and redundancies by synchronizing, monitoring and managing processes (p.14). At a time where Asian countries such as India and China are experiencing rapid industrialization progress, most companies in the industrialized West are facing growing pressure to outsource manufacturing and supply chain operations to developing countries with fairly low-labour cost in order to reduce operational costs and remain competitive in both domestic and international markets. Outsourcing has had a significant impact on the strategic supply network in terms of the sourcing strategy for supplying raw materials and components for these plants.

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With respect to competitive advantages, the decision to source raw materials from lower labour cost regions has had a strong justification. For instance, in the US automotive sector, component suppliers have shifted their operations to Mexico while their counterparts in Europe have moved to Eastern Europe in order to take advantage of low labour costs in these regions (Hong & Holweg 2004, p.4). The presence of efficiently developed logistics networks and decreased trade barriers has given the competition a global appeal. For instance, in the US automobile industry, 28% of the value of the car originates in South Korea; 17.4% in Japan; 7.6% in Germany; 5% in Taiwan; 2.6% in the UK; and 1.6% in Ireland. A mere 37.4% of the car value is produced in the United States (Antras & Helpman 2004, p. 554).

Global Sourcing

Monczka and Trent (1991) define global sourcing as the development of a worldwide sourcing strategy which takes place in four stages (p.2). The first stage is known as domestic purchasing only. Firms procure materials from local suppliers that are engaged in foreign sourcing. During this phase, firms do not need foreign sourcing information. They also lack advanced global data networks. The second stage is called foreign buying based on need. This stage is characterized by the absence of a qualified local supplier, or rival firms are benefiting from foreign outsourcing.

Thus local firms are compelled to seek overseas sourcing to sustain a competitive edge in terms of cost and efficiency. The third stage, foreign buying, as part of the procurement strategy, occurs when the firm realizes that a specific foreign supply chain management strategy leads to considerable gains. The shift to stage three is due to lesser purchase prices that firms gain from foreign sourcing. The fourth stage mirrors the true international sourcing effort, which is the most advanced procurement strategy. The fourth stage requires mutual cooperation among manufacturing, technology and supply chain groups to develop a global strategic supply chain management network (Monczka &Trent 1991. p.4).

There are several chain management strategies available to globally operating firms. For example, the Total Acquisition Cost Model (TACM), developed by Lowson, can be utilized to measure the cost of the supply system related to the sourcing strategies. This model will enable firms to assess the rigidity costs of foreign procurement in relation to the flexible domestic supply. The rigidity cost entails issues such as lengthy lead-times and inflexibility as part of a reaction to changes in consumer demands (Lowson 2002, p. 79). The TACM model can be used to evaluate certain aspects of a sourcing operation strategy by assessing: lead-time for supply; inventory at a specific supply phase; the level of customer service; the performance of vendors, which include vendor process time and the quality of supplier services (Lowson 2002, p. 82).

Significance of supply chain flexibility

The flexibility of the supply chain is a critical element in companies that operate on a global scale (Lummus et al. 2003, p.1). There are several reasons why international companies must adopt a flexible supply chain strategy. First, the rising demand for mass customization demands that supply chains satisfy personal requirements of customers without additional cost (Holweg & Phil 2001, p.75). Second, in several industries such as electronics and apparel sectors, demand is highly unpredictable hence developing a flexible supply chain management system can effectively mitigate uncertainty. Third, unanticipated fluctuations in business cycles require rapid development of novel products, swift response to customer needs in all parts of the globe in order to reduce response time to any alterations in the market and stay competitive (Hong & Holweg 2004, p.19).

Supply Chain Integration

The major drivers of supply chain integration within a global organization are information revolution; increased international competition resulting from demanding driven markets; and the surfacing of novel inter-organizational relationships. Handfield and Nicholas (1999) enumerate the three key aspects of an integrated supply chain structure: management of inventory; information and financial flow management; and supply chain relationships (p.65). The basis of supply chain integration is thus described by collaboration, cooperation, trust, information sharing, mutual technology and the management of combined supply chain processes.

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The potential benefits of an integrated supply chain management model are that the firm is able to optimize its profit margins and remain competitive in the both domestic and global market (Power 2005, p. 253). The concept of an integrated supply chain management has transformed over time to one where it functions as a corporate unit independent from conventional organizational boundaries. Currently, it is run by consumer demands through access to online storefronts. As a result of this new trend, companies are compelled to utilize outsourced services in their operations so as to reduce cycle time and costs.

Information Flows

The adoption of information technology in strategic supply chain management activities can effectively mitigate levels of both dynamic and detailed complexities in business operations. For example, the bullwhip effect is a classic supply chain management upshot emerging from conditions that are dynamically intricate. The characteristics of this effect are poor customer services; excessive inventories; untimely and erroneous capacity planning; rising transport costs; and lost income (Chen et al. 2000, p.269). Bullwhip effect takes place when firms buy excess production materials to benefit from lower unit prices. Thus, the ultimate outcome of the Bullwhip effect is a decline in profit margins or additional costs to the end-users. As a result of this, both the buyers and suppliers are thus unable to project their expected cash flows and profits (Power 2005, p.254).

The role of information technology in supply chain management

Information technology can play a key role in the supply chain management strategies of global companies. For example, companies can now use the internet and optic fibre networks to access crucial information that eradicates information-related time setbacks in any supply chain network. The rapid spread of internet use on a global scale has granted companies unlimited access to information that is not only accurate and affordable but timely.

This transformation is illustrated by the escalating use of e-mail services to facilitate communication within organizations and outside. E-mail is now used to convey word processor files and create transaction documents such as invoices and orders between trading partners. Thus, the e-mail platform is extensively used to streamline supply chain communication between trading partners in a global context (Power 2005, p.254).

A major transformation in internet technologies and software has also had a significant impact on the supply chain management activities of globally operating companies. For example, the Extensible Markup Language (XML) and EDI/XML have facilitated the smooth transmission of information via the internet between trading partners. XML is a basic language for online communication and was developed because of the drawbacks of HyperText Markup Language. XML thus enables trading partners to exchange vital information (which was previously accessible via EDI) at a reduced cost. It adds semantics and meaning to the transcript, thus enabling the content to be decoded by the computer. XML can also is user-friendly and can be modified easily compared to HTML (Power 2005, p.254).

A number of software applications have been developed to improve information flow through the supply chain system including ERP systems (created from MRPII system); order management systems to computerize the order execution process; warehouse management system to manage inventory; transport management system to plan and dispatch shipments; superior planning and scheduling systems to develop and manage productions plants; and customer relationship management systems to provide customer support, service and information on customer demographics.

These systems have traditionally been poorly linked within several parts of an organization. A superior and powerful XML application that facilitates supply chain integration can be used to integrate numerous corporate systems. For instance, the XML translation software can be used by companies to decode numerous communication standards. For example, an EDI purchase order can be decoded into an XML document that is easily understood by the inventory system of the supplier (Power 2005, p.255).

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RFID Application

One of the vital aspects of RFID application in the supply chain is consistency for encoding data on RFID tags that resemble the modern bar codes on the Universal Product Code (UPC) system. When one firm ships supply to another firm, these standards assist in simplifying the electronic transactions that take place between the firms’ enterprise resource planning (ERP) systems. The standards will ascertain how middleware manages information scanned by an RFID reader when suppliers enter a warehouse. It also conveys the same information to an enterprise application. Both the ERCglobal specifications and standards for the supply chain are the key industry standards for RFID application. EPCglobal Inc. handles standardization for programming data on RFID tags. EPCglobal is a non-profit organization that was created in 2003 to establish and sustain the EPC network as the worldwide standard for the automatic and precise identification of any product in the supply chain.

Lack of reliable data is one of the major problems in demand planning; hence implementing RFID would yield precise information associated with the inventory of finished goods; work-in-progress; and in-transit phases with dependable completion dates. Data retrieved from RFID can abolish errors in data as a result of a lack of data or human mistakes. Consumer demands for high-quality products at affordable prices are the major factors that have compelled companies to improve their supply chain management processes. Apt information on the market demand for products and services would assist in developing effective production, marketing and supply chain strategies. The RFID forecast offers the input for harmonizing demand with supply via cumulative planning (Sabbaghi & Vaidyanathan 2008, p.78)

Order fulfilment is a major process in satisfying consumer needs and boosts the efficiency of the supply chain. RFID will facilitate process automation in selection, shelving, cross-docking and avoiding costly logistical errors such as sending supplies to wrong locations. The RFID technology enables a firm to precisely establish the location of the supplies, track its movement through the supply chain and make instant routing decisions. For example, RFRID portals- placed in strategic locations in the supply centre can be employed to interpret tags and update inventory levels automatically as tagged cases when they enter the centre. The incoming supplies will be matched against the accurate purchase order, and differences will be easily identified (Sabbaghi & Vaidyanathan 2008, p.78)

In the manufacturing sector, the use of RFID can streamline assembly line operations. The computerization in the production line will, without doubt, minimize cycle time and boost production levels. The improved process automation and tracking abilities as a result of implementing RFID, the visibility and velocity of goods in the supply chain will improve. This process will assist producers with their just-in-time assembly lines. For example, Procter &Gamble (P&G) is confident that RFID technology can assist the firm to monitor the status of each item in the production process and supply chain. By implementing RFID, P&G expects to save about $0.9 billion in working capital and a further $210 million in inventory costs (Sabbaghi & Vaidyanathan 2008, p.78.)

Reference

Antras, P., & Helpman, E. (2004) Global Sourcing. Journal of Political Economy 112, 552-580.

Chen, F., Ryan, J, & Simchi-Levi, D. (2000) The impact of exponential smoothing forecasts on the bullwhip effect. Naval Research Logistics, 47, 269-86.

Handfield, R, & Pannesi, R. (1992) An empirical study of delivery speed and reliability. International Journal of Operations & Production Management, 12,60-74.

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Holweg, M. and Pil, F. K. (2001) Successful Build-to-Order Strategies start with the Customer. Sloan Management Review, 74-83.

Hong, E., & Holweg, H. (2004) Evaluating the Effectiveness and Efficiency of Global Sourcing Strategies: A Conceptual Note. Cambridge, UK. University of Cambridge.

Kaufman, R. (1997) Nobody wins until the consumer says. Apparel Industry Magazine, 58, 14-16.

Lowson, R. (2002) Assessing the Operational Cost of Offshore Sourcing Strategies. International Journal of Logistics Management 13, 79-89.

Lummus, R., Duclos, K. & Vokurka, J. (2003) Supply Chain Flexibility: Building a New Model. Global Journal of Flexible Systems Management 4, 1-13.

Monczka, M. & Trent, J. (1991) Global Sourcing: A Development Approach. International Journal of Purchasing and Materials Management, 27, 2-8.

Power, D. (2005) Supply chain management integration and implementation: a literature review. An international Journal, 10, 252-263.

Sabbaghi, A., & Vaidyanathan, G. (2008) Effectiveness and Efficiency of RFID technology in Supply Chain Management: Strategic Values and Challenges. Journal of Theoretical and Applied Electronic Commerce Research, 3, 71-81.

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