The 7 Principles of Supply Chain Management

The 7 Principles Of Supply Chain Management

        Introduction

In today's competitive society, managers play an increasingly important role in the operation of a company, not only they need to understand and satisfy customers’ needs, but also they have to pay close attention to company’s profitability. These basic elements require managers to think supply chain as a whole, and require managers to clearly understand the flow of its supply chain, from suppliers to customers. In 1997, Supply Chain Management Review published one article called “The Seven Principles of Supply Chain Management” written by David Anderson, Frank Britt and Donavon Favre. ("The 7 Principles Of Supply Chain Management - Supply Chain 24/7 Paper"). These 7 principles include segment customer based on needs, customise logistics network, listen to market signals and plan accordingly, differentiate products closer to customers, source strategically, develop supply chain technology strategy and adopt channel-spanning measures. Through these principles, the main objective is to achieve competitive advantage and align business goals with increasing revenue, maximising asset utilisation and reducing all cost involved. To illustrate the importance and advantage of the principles the authors of the article provided real life examples and exhibits for each principle. Despite the year that the article is published, the principles are still highly applicable in today’s context. However, with globalisation, there are more limitation, complexity and planning required for the implementation. The following report will provide critique on the usefulness of the article and highlight any missing details such as limitations and applicability of each principle.

Principle 1: Segment customers based on the service needs of distinct groups and adapt the supply chain to serve these segments profitably.

Principle 1, illustrates that to maximise profitability, companies must define the degree of segmentation and variation. Therefore it is important that profit profiles are established in order to boost profitability. Instead of using surveys, interviews, and industry research for collecting data and defining key segmentation criteria, which does not guarantee the value of data and is too subjective. In today’s rapidly changing world, data collecting must be institutionalised and information must be validated as a foundation for the company to analyse the demand dynamics. This can be based on market, product and hybrid. For example, based on market-driven segmentation, Hill (1985) segmented the market into order qualifiers (OQ) and order winners (OW). Key criteria used for this approach are cost, availability, and delivery lead-time. The other approach by Hjort, Lantz, Ericsson, and Gattorna, is to segment the market according to customers buying and returning behaviour, and developing a differentiated return service (2013). From the examples, we can understand that segmentation of customers should be according to their needs and demand such as price of the product, desired rate of innovation in the product, service level required, variety of products needed and response time that customers are willing to tolerate (L.Anderson, et al., 1997).

Principle 2: Customize the logistics network to the service requirements and profitability of customer segments.

Principle 2, highlights the need to tailor the logistics networks according to the different segment it serves by new inventory deployment strategy and outsourcing of the management of response centres and transportation activities. Despite the spike in assets and revenues for the example in the article, by implementing new inventory deployment strategy and creating the alliance with third-party logistics providers, companies must understand the complexity of this strategy. Logistics network design, including inventory, warehousing and transportation activities is only one part of the Network design. It is essential for companies to integrate the logistics network with the overall network design, as each factor affects one another.

Next, as the inventory and facility cost is negatively correlated to the transportation cost, companies must be able to design the logistic and facilities configuration to their best fit. Also, companies must put into consideration if it increases the inventory and facility to make them near to the customers, will the company be able to cope with the drop in demand. Ultimately, the companies must design the logistics network design not only to satisfy customer requests, but also need to consider the cost of facility, inventory, and transportation cost. (Chopra and Meindl, 2016)

Another point of consideration is the issues involving the alliance with third-party logistics providers. There are three issues that need to be considered. First, the difficulty to realise whether they are reliable and cost-effective, and second, limited control of their service quality to the end customers. Lastly, if third-party logistic provider encounters demand risk, inventory risk, transportation risk and so on, it is complex to define who will take this responsibility and fulfil customers’ demand. Hence, to achieve superior asset utilisation and accommodate different segment specific logistics requirements, companies not only requires meticulous planning, they must also make use of useful tools and models to understand what works best for them.

Principle 3: Listen to market signals and align demand planning accordingly across the supply chain, ensuring consistent forecasts and optimal resource allocation

Principle 3, clearly state that excellent supply chain management can be achieved through sales and operation planning (S&OP). When channel-wide SP&OP is implemented, it allows companies to capture early signals to make better forecasts of the market demand and thus develop better supply chain management. Using Exhibit 2, authors illustrated the advantage that with S&OP, synchronised information system between the end-user and manufacturer can significantly close the gap between supply and demand, thus increasing gains.

However, to reap these gains, it can be tedious, complicated and time consuming For example, in Sunsweet case study by Upton & Singh, Sunsweet Growers took several months to transform its current S&OP process, involving many parties and functions since the change is across all areas of the company. The step change improvement certainly did not come easy, as pointed out by Upton & Singh some companies could not achieve the same due to 3 reasons. One, the custom-configured software can be cumbersome and cause users to turn to more convenient alternatives. Two, system are developed according to the initial user and not the current user. Three, difficult to quantify the benefits as problems are eliminated before they occur (2007). Therefore, for successful implementation and sustainability of S&OP, it requires a high level of effort and involvement. Constant review and high level of embracement of change must also be present in order for the success.

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