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Section I

Supply Chain Overview

We begin with a look backward at the development of supply chain thinking.
A primary theme of this book is that supply chain management is not just a
tactical discipline. The basis for competition in many industries has shifted
from inside to outside the single company. Competitive success will rest in
the total enterprise that develops, makes, and delivers both products and services.
Within the field of what we call supply chain management (SCM), there are
many communities. These include the purchasing community, the warehouse and transportation community, the manufacturing community, and
the technology community, among others. This section will attempt to
address all these in terms of the impact on their functions from changes in
supply chain management practice.
Section I describes some early, pertinent models for thinking about strategy. We combine these models into one to which we return several times in
describing initiatives to improve the supply chain. Section I covers six chapters. Highlights from each are shown in the following paragraphs.
1. Introduction to the Supply Chain
Supply chain definitions.
The idea of the extended product
2. Supply Chain Paradigms
Different views of SCM.
Examples of the impact of the supply chain in competing.
3. Supply Chain Potency
What it means to have a great supply chain.

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Handbook of Supply Chain Management

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4. Evolution of Supply Chain Models

Description of models for strategy development and how they
affect SCM.
5. Generic Model for Competing Through SCM
The supply chain and the product life cycle.
Model for classifying supply chain improvement projects.
6. Linking the Supply Chain with the Customer
Functional versus Innovative supply chains.
Use of the QFD tool for establishing customer requirements.

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Introduction to the Supply Chain

Manufacturers now compete less on product and quality which are often comparable and more on inventory turns and speed to market.
John Kasarda, Forbes, October 18, 1999

1.1

Introduction

The above quotation by John Kasarda, a professor of logistics at the University of North Carolinas Kenan-Flagler Business School, supports a principal
theme of this book. This is the belief that supply chain management will
increasingly be the principal determinant of the ability to compete. We begin
by setting the stage with a few basic definitions related to the supply chain.
Any discussion of the supply chain can legitimately be broad or narrow
depending on the perspective of the definer and the interests of those
involved in the conversation. In meetings of the Council of Logistics Management, for example, the discussion turns to distribution systems, transportation, and warehousing. The Society of Manufacturing Engineers may focus
on the manufacturing systems that promote supply chain effectiveness.
Whatever the forum, the trend is to broaden the definition of the supply
chain. One consensus definition holds that the supply chain is all that happens to a product from dirt to dust. In this view, the supply chain begins
with mining ores or growing crops, extracting raw material from Mother
Earth. The chain goes on to a multitude of conversion and distribution processes that deliver the product to the end user. It ends with ultimate disposal
presumably back in Mother Earth somewhere.
This book also subscribes to the broad view of the supply chain. We think
the supply chain and supply chain management topics deserve that kind of
coverage. Well cover topics ranging from strategies for using the supply
chain down to improving supply chain cost effectiveness. For products and
services, we also cover the so-called life cycle from inception to market
maturity to decline. We hope to strike the right balance of theory and practice, of art and science.
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1.2

Defining Supply Chains

Defining terms will help us frame our supply chain discussion. A beginning
is a working definition of supply chain. The supply chain is more than the
physical movement of goods from earth to earth. It is also information,
money movement, and the creation and deployment of intellectual capital,
or, as some call it, knowledge work.
Joel Sutherland of J.B. Hunt Logistics, Inc. has captured the essence of the
discussion when he describes the difference between the term logistics and
supply chain. Sutherland was an active participant in the deliberations of
the Council of Logistics Management and its efforts to build the lexicon of
supply chain terminology. He points to three different common views of the
supply chain.
1. Supply chain is just another term for logistics.
2. Supply chain includes other functions such as purchasing, engineering, production, finance, marketing, and related control activities in the single company.
3. The supply chain is all the functions in definition #2 plus those in
a companys suppliers suppliers and a companys customers customers as well extending far outside the traditional enterprise.1
For his part, Sutherland subscribes to definition #3. We would add our two
cents worth with the following definition:
Supply chain: Life cycle processes comprising physical, information, financial, and knowledge flows whose purpose is to satisfy end-user requirements with products and services from multiple linked suppliers.

Lets examine the definition in greater detail. First, the supply chain is made
up of processes. These cover a broad range including sourcing, manufacturing, transporting, and selling physical products. The definition includes the
corresponding activities for a service. Life cycle refers to both the market life
cycle and the usage life cycle. For many durable goods and services these
arent the same. Many products may be sold in a time window thats relatively short compared with their useful lives. That computer, a product, and
that 30-year mortgage, a service, must be supported long after newer products take the place of older ones. For this reason, product support after the
sale can be an important if not the most important supply chain component. For this reason, the longevity of the seller and its reputation for product support are important factors in the purchasing decision.
Physical, information, and financial flows are frequently cited dimensions of
the supply chain. The viewpoint of supply chains as only physical distribu-

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tion is too limiting. Information and financial components are as important as

physical flow in many supply chains. Often omitted from the supply chain
discussion is the role of knowledge inputs into supply chain processes. A
prime example is new-product development. Such knowledge inputs are the
stuff of future growth through product innovation. This supply chain process
for new products requires close coordination of intellectual input (the design)
with physical inputs (components, prototypes, market studies, and the like).
Today, added value in the form of intellectual capital is vital to marketing
profitable goods and services.
The supply chain should support the satisfaction of end-user requirements.
These requirements give rise to the fundamental reason for the supply chain
in the first place. We also qualify a supply chain as having multiple linked suppliers. If we take the point of view of the end-users view of the chain, we have
a supply chain when there are multiple enterprises backing the one from
which the user makes his or her purchase. Also, we think a supply chain
could be multiple outlets representing a single enterprise. So the neighborhood barber would not constitute a supply chain under our definition. A
chain of barbershops would be a supply chain. The farmer selling watermelons from his field by the side of the road would not qualify; the supermarket
would.
The supply chain is not limited in terms of flow direction. Many consider
supply chains only in terms of flow from suppliers to end-users. For the
physical processes, this is largely true. But supply chain design cannot ignore
backward flows for product returns, rebates, incentive payments, and so
forth. So much of what flows in the supply chain is two-way, including physical product, information, money, and knowledge.
Services also have supply chains. Production planning for the research and
development department, which produces designs, not products, can benefit
from the same techniques used by product manufacturers. Federal Express
and UPS operate service businesses. But they are certainly also complex supply chains. A software company is challenged to constantly improve its product through upgrades, so it too could be considered a supply chain for a
knowledge-based product. A new business category, application service
provider or ASP, is redefining the supply chain for distributing software
applications. These examples represent supply chains also.
Through the book, well use the term product to describe the basic product
or service. The extended product includes the basic product or service, the supply chain that delivers it, plus other features and factors that go along with
the product or service.
In many markets, there may be little difference in the physical products, as
weve defined them. Examples include automobiles, personal computers, or
cups of coffee. However, there can be great differences in extended products.
Examples are the broadened choices we have for buying personal computers
like the one used to write this book. We can purchase them in a store, over the
Internet, or by telephone. The furniture industry offers another example. We
can buy assembled furniture at a neighborhood store or go to a warehouse

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operation and buy it unassembled. The prices paid and the hand-holding
by sales consultants is vastly different in the two cases.

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Our buying decision likely begins with a need for the basic product or service, but quickly moves to extended product factors such as delivery, service,
and reputation. Often, the functionality of the product is taken for granted.
Extended product factors rule the buying decision. For many products, the
supply chain design is the residence of the most important extended product
features.
Figure 1.1 demonstrates the point. It shows some of the factors that might
influence us to buy a computer. Once we decide we need a computer, many
more decisions must be made. We must decide what kind of computer factors associated with the physical base product. Should the computer be a
laptop or a desktop? Latest technology or something adequate for our tasks?
How much capacity for the hard drive, the memory? What should it cost?
How much can we afford to pay? Where can we get the best deal?

Obsolescence

FIGURE 1.1
The extended product.

Once we make these decisions, we still have decisions based on extended

product features. These tend to be more subtle and intuitive. Figure 1.1
shows some outside the box factors one might consider. These include
dealer quality, selection, brand image, service, and customer support. The
supply chain enters into a number of these extended product factors. Here
are a few examples:
Dealer quality: If the sale is through a dealer or retail network,
how it operates, its facilities, its reputation are key factors in the
buying decision.

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Availability/delivery and selection: Having the right model at the

right time for the right buyer often means a sale. Supply chain cycle
times and information systems improve the chances.
After-sale service and warranty: Many buyers look to this important support network when buying. For many, this service is also
very lucrative.

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Financing: Except for those who pay cash, the convenience and
speed of this closely related service may make or break a deal.
Some computer sellers set a monthly price and will keep your PC
up to date forever.
Accessibility ease of doing business: This covers the whole
range of contact points between the customer and supply chain.
How well is the organization staffed? Are the procedures user
friendly? Are responses prompt? Will the organization be around
when the need arises?
Many products we buy or contemplate buying have similar customer
dynamics. A poorly executed base product will fail in the market. On the
other hand, having a well-executed base product doesnt necessarily assure
success. When competitors loom, it will be the best basic product along with
the best extended product features that will succeed.

1.3

Defining Supply Chain Management

Lets move on to define supply chain management. This term is gaining

currency, implying that there is something different about managing the supply chain. The acronym SCM is employed by many as shorthand for the
term. Here is our definition of SCM.
Supply chain management: Design, maintenance, and operation of supply chain processes for satisfaction of end user needs.

We feel that SCM is a discipline worthy of a distinct identity. This identity

puts it on a level with other disciplines like finance, operations, or marketing.
Indeed, many companies now have an executive with just such a title. Our
definition reflects the idea that SCM extends to both the supply chain formulation and its subsequent operation and maintenance. This book focuses on
both. We discuss SCM in terms of strategic design, getting the most in competitive success from supply chain design. We also discuss options for organizing to sustain the design in operation. Another topic, wringing costs out
of the supply chain, strikes at the maintenance and improvement of an existing chain.

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SCM creates new challenges for managers. Old missions must be achieved
in new ways. This book reports on progress in redefining the managers work
brought on by SCM. In general SCM is broadening the roles of many. We
begin in Chapter 2 with a description of the frequently encountered supply
chain viewpoints that reside in different organizations.

References
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1. Sutherland, Joel, unpublished data, 1999.

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