SCM Principle

7 Principles of Supply Chain Management

1. Adapt Supply Chain to Customer’s Needs

Both business people and supply chain professionals are trained to focus on the customer’s needs. In order to understand the customer better, we divide customers into a different group and we call it “segmentation”. The most primitive way to segment customers is ABC analysis (as in inventory management) that groups customers based on the sales volume or profitability. Segmentation can also be done by product, industry and trade channel.

2. Customize Logistics Network

When you segment a customer based on the service needs, you may have to tailor the different logistics networks to serve a different segment. However, this principle doesn’t hold true in all situations.

For example, if you were a contract manufacturer in China, you might already have different logistics networks for different customers. Each customer in the US or EU might already control the source of raw materials, ask you to provide dedicated production lines, nominate 3pl companies and air/sea carriers. So, logistics network design is a kind of initiative driven mainly by the customer.

3. Align Demand Planning Across Supply Chain

Supply chain practitioners are taught to share the demand data with trading partners so nobody has to keep the unnecessary inventory. In general, this principle holds true. But in reality, only Walmart is actively sharing the demand data with trading partners.

There is a very interesting paper “Top-Down Versus Bottom-Up Demand Forecasts: The Value of Shared Point-of-Sale Data in the Retail Supply Chain” by Williams and Waller 2011, the result of research found that,

• If you make the demand forecast based on SKU/Customer level, using your own historical order data is more accurate than using the POS data you get from retailers.
• If you make the demand forecast based on the SKU/Store level, using the POS data you get from retailers is more accurate than using your own historical order data.

The implication is that the absence of demand sharing is not necessarily bad. But when you got the demand data from trading partners, you MUST use it the right way.

4. Differentiate Products Close to Customer

Dell keeps components and assembles them only after a customer places the order in order to increase the product variety. This principle is still true, but, there is another principle that you should consider.

“Standardization” is in the opposite polarity of “Differentiation”. For example, some cosmetics manufacturers formulate products and choose packaging and labeling that complies with the regulations of multiple countries in Asia. So they only make one SKU that can be sold in 15 countries instead of 1 SKU/Country. By standardizing product appropriately, they can drive the purchasing cost down drastically due to the economy of scale and improve international business operations. So standardization is something that you should also consider.

5. Outsource Strategically

This is the principle that stands the test of time. In short, don’t ever outsource your core competency.

6. Develop IT that Support Multilevel Decision Making

If you search Google for the term “critical success factor ERP”, you’ll find lots of information about how to implement ERP successfully. My opinion is that IT project management shouldn’t be done in the isolation, business process re-engineering is something that you have to do before implementing an IT project. This will equip you with the full understanding of process deficiencies, then you can determine what kind of technology you really need.

7. Adopt both Service and Financial Metrics

Anderson et al. suggested that the activity-based costing (ABC) be implemented so you can determine customer’s profitability. However, there is an interesting twist on the ABC concept.

In 1987, Robert Kaplan and W Bruns defined the activity-based costing concept in his book “Accounting and Management: A Field Study Perspective”. However, in 2003 Robert Kaplan said that it’s difficult to maintain an ABC costing model to reflect the changes in activities, processes, products, and customers. Then, he introduced the refined concept called “Time Driven Activity Based Costing.”

From my understanding, practitioners are still using the traditional ABC and supply chain researchers are still citing the traditional ABC articles. My question is, does the traditional ABC really work?

Anyway, supply chain practitioners can adapt service and financial metrics from initiatives like lean manufacturing and six sigma.