Defining supply chain management: a historical

perspective and practical guidelines

Rhonda R. Lummus
Central Missouri State University, Warrensburg, Missouri, USA
Robert J. Vokurka
Texas A&M University, College Station, Texas, USA

Keywords from the supplier’s supplier to the customer’s

Competitiveness, Introduction to supply chain customer. Four basic processes – plan, source,
Operations, Strategy, concepts make, deliver – broadly define these efforts,
Supply-chain management
Firms can no longer effectively compete in which include managing supply and demand,
Abstract isolation of their suppliers and other entities sourcing raw materials and parts, manufac-
Interest in supply chain manage- turing and assembly, warehousing and inven-
in the supply chain. Interest in the concept of
ment has steadily increased since
supply chain management has steadily tory tracking, order entry and order manage-
the 1980s when firms saw the
benefits of collaborative relation- increased since the 1980s when companies ment, distribution across all channels, and
ships within and beyond their own saw the benefits of collaborative relationships delivery to the customer.” Quinn (1997)
organization. Firms are finding within and beyond their own organization. A defines the supply chain as “all of those activ-
that they can no longer compete
number of definitions have been proposed ities associated with moving goods from the
effectively in isolation of their
suppliers or other entities in the concerning the concept of “the supply chain” raw-materials stage through to the end user.
supply chain. A number of defini- and its management. This paper defines the This includes sourcing and procurement,
tions of supply chain management concept of the supply chain and discusses the production scheduling, order processing,
have been proposed in the litera- inventory management, transportation,
evolution of supply chain management. The
ture and in practice. This paper
defines the concept of supply term does not replace supplier partnerships, warehousing, and customer service. Impor-
chain management and discusses nor is it a description of the logistics func- tantly, it also embodies the information sys-
its historical evolution. The term tion. Industry groups are now working tems so necessary to monitor all of those
does not replace supplier partner- together to improve the integrative processes activities.”
ships, nor is it a description of the
of supply chain management and accelerate In addition to defining the supply chain,
logistics function. The competi-
tive importance of linking a firm’s the benefits available through successful several authors have further defined the con-
supply chain strategy to its overall implementation. The competitive importance cept of supply chain management. As defined
business strategy and some of linking a firm’s supply chain strategy to its by Ellram and Cooper (1993), supply chain
practical guidelines are offered for management is “an integrating philosophy to
overall business strategy and some practical
successful supply chain manage-
ment. guidelines are offered for successful supply manage the total flow of a distribution chan-
chain management. nel from supplier to ultimate customer”.
Monczka and Morgan (1997) state that “inte-
grated supply chain management is about
Definition of supply chain going from the external customer and then
managing all the processes that are needed to
Various definitions of a supply chain have
provide the customer with value in a horizon-
been offered in the past several years as the
tal way”. They believe that supply chains, not
concept has gained popularity. The APICS
firms, compete and that those who will be the
Dictionary describes the supply chain as:
strongest competitors are those that “can
1 the processes from the initial raw materi-
provide management and leadership to the
als to the ultimate consumption of the
fully integrated supply chain including exter-
finished product linking across supplier-
nal customer as well as prime suppliers, their
user companies; and
suppliers, and their suppliers’ suppliers”.
2 the functions within and outside a com-
From these definitions, a summary defini-
pany that enable the value chain to make
tion of the supply chain can be stated as: all
products and provide services to the cus-
the activities involved in delivering a product
tomer (Cox et al., 1995).
from raw material through to the customer
Another source defines supply chain as, the including sourcing raw materials and parts,
network of entities through which material manufacturing and assembly, warehousing
flows. Those entities may include suppliers, and inventory tracking, order entry and
carriers, manufacturing sites, distribution order management, distribution across all
centers, retailers, and customers (Lummus channels, delivery to the customer, and the
Industrial Management &
and Alber, 1997). The Supply Chain Council information systems necessary to monitor all
Data Systems (1997) uses the definition: “The supply chain – of these activities. Supply chain management
99/1 [1999] 11–17 a term increasingly used by logistics profes- coordinates and integrates all of these activi-
© MCB University Press sionals – encompasses every effort involved ties into a seamless process. It links all of the
[ISSN 0263-5577] in producing and delivering a final product, partners in the chain including departments
[ 11 ]
Rhonda R. Lummus and within an organization and the external part- problem through maintaining inventory at
Robert J. Vokurka ners including suppliers, carriers, third- various locations throughout the chain. How-
Defining supply chain party companies, and information systems ever, the dynamic nature of the marketplace
management: a historical providers. Managers in companies across the makes holding inventory a risky and poten-
perspective and practical
guidelines supply chain take an interest in the success of tially unprofitable business. Customers’ buy-
other companies. They work together to make ing habits are constantly changing, and com-
Industrial Management &
Data Systems the whole supply chain competitive. They petitors are continually adding and deleting
99/1 [1999] 11–17 have the facts about the market, they know a products. Demand changes make it almost a
lot about competition, and they coordinate sure bet that the company will have the
their activities with those of their trading wrong inventory. The cost of holding any
partners. It encompasses the processes neces- inventory also means most companies cannot
sary to create, source, make to, and to deliver provide a low cost product when funds are
to demand. They use technology to gather tied up in inventory.
information on market demands and A third reason for the shift in emphasis to
exchange information between organiza- the supply chain is due to a realization by
tions. A key point in supply chain manage- most companies that maximizing
ment is that the entire process must be performance of one department or function
viewed as one system. Any inefficiencies may lead to less than optimal performance
incurred across the supply chain (suppliers, for the whole company. Purchasing may nego-
manufacturing plants, warehouses, tiate a lower the price on a component and
customers, etc.) must be assessed to deter- receive a favorable purchase price variance,
mine the true capabilities of the process. but the cost to produce the finished product
Figure 1 describes the total integration may go up due to inefficiencies in the plant.
required within the supply chain. Companies must look across the entire sup-
ply chain to gauge the impact of decisions in
any one area.
Interest in supply chains Advanced Manufacturing Research, a
Boston-based consulting firm, developed a
Why has managing the supply chain become
supply chain model which emphasizes mater-
an issue for the 1990s? In part, the answer lies
ial and information flow between manufac-
in the fact that few companies continue to be
turers and their trading partners (Davis,
vertically integrated. Companies have
1995). They believe the changes required by
become more specialized and search for sup-
management are due to the following changes
pliers who can provide low cost, quality mate-
in how manufacturers are doing business:
rials rather than own their source of supply. It
• Greater sharing of information between
becomes critical for companies to manage the
vendors and customers.
entire network of supply to optimize overall
• Horizontal business processes replacing
performance. These organizations have real-
vertical departmental functions.
ized that whenever a company deals with
• Shift from mass production to customized
another company that performs the next
products.
phase of the supply chain, both stand to bene-
• Increased reliance on purchased materials
fit from the other’s success.
and outside processing with a simultaneous
A second reason partially stems from
reduction in the number of suppliers.
increased national and international compe-
• Greater emphasis on organizational and
tition. Customers have multiple sources from
process flexibility.
which to choose to satisfy demand; locating
• Necessity to coordinate processes across
product throughout the distribution channel
many sites.
for maximum customer accessibility at a
• Employee empowerment and the need for
minimum cost becomes crucial. Previously,
rules-based real time decision support
companies looked at solving the distribution
systems.
• Competitive pressure to introduce new
Figure 1 products more quickly.
Supply chain integration
Companies are streamlining all operations
and minimizing the time-to-customer for
Total Information Visibility their products.
For these reasons, expertly managing the
supply chain has become critical for most
companies. As Ralph Drayer, vice president of
Create Demand Source to Demand Make to Demand Deliver to Demand product supply/customer service at Procter
and Gamble put it, “Winning in the market-
place of the 1990s is going to require a far
[ 12 ]
Rhonda R. Lummus and different kind of relationship – one that rec- (EDI) between companies. Retailers began
Robert J. Vokurka ognizes that the ultimate winners will be installing point of sale (POS) scanning sys-
Defining supply chain those who understand the interdependence of tems to transfer sales information rapidly to
management: a historical retailer/manufacturer business systems and distributors and manufacturers. “QR maxi-
perspective and practical
guidelines who work together to exploit opportunities to mizes the profitability of inventory by placing
deliver superior consumer value” (Drayer, the company’s dollars where and when they
Industrial Management &
Data Systems 1994). Managers in companies across the are needed based on point of sale data plus
99/1 [1999] 11–17 supply chain take an interest in the success of sales history” (Mullin, 1994). QR incorporates
the other companies. They work together to marketing information on promotion, dis-
make the whole supply chain competitive. counts, and forecasts into the manufacturing
They have the facts about the market, they and distribution plan.
know a lot about competition, and they coor-
dinate their activities with those of their Efficient consumer response, the grocery
trading partners. They use technology to business initiative
gather information on market demands and In 1992, a group of grocery industry leaders
exchange information between organiza- created a joint industry task force called the
tions. Critical to managing the supply chain efficient consumer response (ECR) working
is managing the link between each node group. The group was charged with examin-
within the chain to synchronize the entire ing the grocery supply chain to identify
supply chain. opportunities to make the supply chain more
competitive (Kurt Salmon Associates Inc.,
1993). Kurt Salmon Associates were engaged
History of the supply chain by the group to examine the grocery supplier/
initiative distributor/consumer value-chain and deter-
mine what improvements in cost and service
The history of the supply chain initiative can could be accomplished through changes in
be traced to early beginnings in the textile technology and business practices.
industry with the quick response program The results of the study indicated little
and later to efficient consumer response in change in technology was required to
the grocery industry. More recently a variety improve performance, other than further
of companies across many industries have development of EDI and POS systems. How-
begun looking at the entire supply chain ever, the study identified a set of best prac-
process. This section will discuss those early tices which, if implemented, could substan-
beginnings of the supply chain and some tially improve overall performance of the
more recent success stories. supply chain. As Kurt Salmon and Associates
(1993) found: “By expediting the quick and
Quick response, for general merchandise accurate flow of information up the supply
retailers and their suppliers chain, ECR enables distributors and suppli-
Owing to intense competition in the textile ers to anticipate future demand far more
and apparel industry world-wide, leaders in accurately than the current system allows”.
the US apparel industry formed the Crafted Through implementation of best practices
With Pride in the USA Council in 1984 (Kurt they projected an overall reduction in supply
Salmon Associates, Inc., 1993). In 1985, Kurt chain inventory of 37 percent, and overall cost
Salmon Associates were commissioned to reductions in the industry in the range of $24
conduct a supply chain analysis. The results to $30 billion.
of the study showed the delivery time for the The successful adoption of ECR for a manu-
apparel supply chain, from raw material to facturer depends on their ability to maintain
consumer, was 66 weeks long, 40 weeks of manufacturing flexibility which enables
which were spent in warehouses or in transit. them to match supply with demand. Key to
The long supply chain resulted in major this flexibility is a process that tightly inte-
losses to the industry due to financing the grates demand management, production
inventory and lack of the right product in the scheduling, and inventory deployment to
right place at the right time. allow the company to better utilize informa-
The result of this study was the develop- tion, production resources, and inventory
ment of the quick response (QR) strategy. QR (Weeks and Crawford, 1994).
is a partnership where retailers and suppli- A further development from ECR was the
ers work together to respond more quickly to concept of continuous replenishment (CRP).
consumer needs by sharing information. CRP is a move away from pushing product
Significant changes as a result of the study from inventory holding areas to pulling prod-
were the industry adoption of the UPC code ucts onto grocery shelves based on consumer
used by the grocery industry and a set of demand (ECR Performance Measures Operat-
standards for electronic data interchange ing Committee, 1994). Point of purchase
[ 13 ]
Rhonda R. Lummus and transactions are forwarded by computer to Wal-Mart
Robert J. Vokurka the manufacturer allowing them to keep the The company began its own supply chain
Defining supply chain retailer replenished and balanced just-in- initiative by working directly with key
management: a historical time. manufacturers (Johnson and Davis, 1995).
perspective and practical
guidelines CRP has been introduced by a number of The manufacturers are responsible for man-
manufacturers (Garry, 1994). Procter & aging Wal-Mart’s warehouse inventory of
Industrial Management &
Data Systems Gamble and Campbell soup are delivering as their products, termed vendor managed
99/1 [1999] 11–17 much as 30 to 40 percent of their volume by inventory (VMI). In return, Wal-Mart expects
CRP. Ralston, General Mills and Pillsbury near 100 percent order fulfillment rates on
distribute about 10 percent by CRP. Estimates those products. KMart and other large
of improvements in performance with CRP retailers have implemented similar VMI
include increasing inventory turns from 10 programs.
up to 50, reducing days of supply from 30 to 5
and increasing net margin from 5 percent to 7 West Co., Becton Dickinson, and
percent. Baxter
Within the medical products industry, three
firms engaged in supply chain relationships
Other early supply chain initiatives in the early 1990s (Battagia, 1994). West sup-
Besides the apparel and grocery industry plies rubber stoppers to Becton Dickinson
initiatives, other early manufacturing efforts who supplies medical products to Baxter.
to improve supply chain performance have Becton Dickinson implemented the program
been documented. Some of these include: by assigning a senior-level executive officer
Hewlett-Packard, Whirlpool, Wal-Mart, West with the responsibility to monitor supply
Co., Becton Dickinson, Baxter, and Georgia- chain execution. Working together at all
Pacific Corp. A brief outline of their supply management levels the three companies have
chain initiatives are described as follows. made improvements in quality and service
while at the same time reducing cycle times
Hewlett-Packard and costs.
The computer components manufacturer,
systematically linked its distribution activi- Georgia-Pacific Corp.
ties with its manufacturing activities in the A leader in the manufacturing and distribu-
computer terminal business in the early tion of building products in North America,
1990s (Hammell and Kopczak, 1993). The Georgia-Pacific began implementing supply
implementation included changes in both the chain management practices within the
physical distribution of the product, and a decentralized operations of their company
new distribution requirements planning (Blackwell, 1994). Previously, traffic man-
(DRP) system. The DRP system nets customer agers in each division controlled inbound and
orders with forecasts and serves as the begin- outbound shipments for their unit. Shipping
ning pull in the supply chain. priorities were fragmented and internal and
external customers were not satisfied. A new
Whirlpool centralized Transportation and Logistics
The appliance manufacturer, began its Division was created to coordinate and
supply chain implementation with a team of streamline the distribution process. The new
executives in 1992 chartering this vision – division looks at needs and priorities across
“Winning companies will be those who come the business units and has recognized sav-
the closest to achieving an inter-enterprise ings to the company in reduced freight costs
pull system. They will be linked in a short and other logistics improvements of $20 mil-
cycle response mode to the customer” lion per year.
(Davis, 1995). Whirlpool has created a new Many other examples of companies imple-
vice-president of logistics position, estab- menting supply chain management concepts
lished cross-functional teams for key product are available (Blaser and Westbrook, 1995;
areas, entered into single source agreements Cook and Rogowski, 1996; Semich, 1994). The
with suppliers based on reliability and the vast interest in the topic indicates the con-
ability to assist in product design, and is cept has become a key issue for a diverse
using EDI to communicate daily with group of companies who are taking steps to
suppliers all as part of its supply chain man- improve customer delivery and at the same
agement program. As a result, product avail- time reduce overall costs. Better managing
ability is up in the 90-95 percent range, the supply chain also involves managing the
inventories have been reduced by 15 to 20 marketing link to the supply chain and link-
percent and lead times reduced to as low as ing supply chain strategies to the overall
five days. company strategy.
[ 14 ]
Rhonda R. Lummus and • inventory management;
Robert J. Vokurka Collaborative supply chain • logistics management;
Defining supply chain initiatives • supplier partnerships;
management: a historical • driven from the supply side;
perspective and practical Recently, several industry collaborative
guidelines groups have developed to research aspects of • a shipping strategy;
supply chain management. The findings of • distribution management;
Industrial Management &
Data Systems these groups should provide practitioners • the logistics pipeline;
99/1 [1999] 11–17 with guidelines for “best practices” in supply • procurement management;
chain design and accelerate the implementa- • a computer system.
tions of these practices. Despite the acceptance of the concept of man-
In one year, the Supply Chain Council grew aging the supply chain and partly due to the
from 73 members to more than 300 of some of limiting misunderstandings, growth of inte-
the world’s largest manufacturers. The Coun- grated supply chain management has been
cil has incorporated as a non-profit organiza- slow. Reasons for the slow growth of inte-
tion to provide services and support for fur- grated supply chain management include the
ther increasing its membership. The Council following:
was formed to establish a framework to • Lack of guidelines for creating alliances
enable manufacturers and their suppliers to with supply chain partners.
build a stronger supply chain and reap the • Failure to develop measures for monitoring
benefits of improved supply chain manage- alliances.
ment. The Council is developing a supply • Inability to broaden the supply chain vision
chain operations reference model (SCOR) to beyond procurement or product distribu-
assist companies in evaluating their supply tion to encompass larger business
chain performance, identifying weak areas, processes.
and developing improvement solutions (The • Inability to integrate the company’s inter-
Supply Chain Council, 1997). nal procedures.
In another collaborative initiative, several • Lack of trust inside and outside a company.
leading manufacturers joined with the • Organizational resistance to the concept.
National Institute of Standards and Technol- • Lack of buy-in by top managers.
ogy (NIST) to create a new organization that • Lack of integrated information systems and
will improve and standardize communication electronic commerce linking firms.
and business processes throughout manufac-
turing supply chains and to share the results
with other interested firms. This group, the Linking the supply chain to the
National Initiative for Supply Chain Integra- business strategy
tion (NISCI) was formed after a NIST study
showed that an overwhelming majority of The supply chain improvements described
companies compromising manufacturing indicate that supply chain management has
supply chains are either small- or medium- the potential to improve a firm’s competitive-
sized businesses that lack the resources of ness. Supply chain capability is as important
larger firms. With a consortium of to a company’s overall strategy as overall
businesses, non-profit groups, and academic product strategy. Supply chain management
encourages management of processes across
institutions, the plan is to identify specific
departments. By linking supply chain objec-
supply chain initiatives, then select teams of
tives to company strategy, decisions can be
members to research and implement best
made between competing demands on the
practices (Anonymous, 1997).
supply chain. Improvements in performance
are driven by externally-based targets rather
than by internal department objectives.
What the supply chain is not
Managing the supply chain means manag-
The definitions described and developed ing across traditional functional areas in the
earlier and recent industry collaborative company and managing interactions external
activities indicate that supply chain manage- to the company with both suppliers and cus-
ment is not a standalone process. Many sup- tomers. This cross-boundary nature of man-
ply chain efforts have fallen short of the agement supports incorporating supply
potential advantages because the term is chain goals and capabilities in the strategic
often viewed as only relating to the supply plan of the company. This focus on integra-
side of the business or to the purchasing func- tion can then lead to using the supply chain
tion. As indicated above, supply chain man- to obtain a sustainable competitive advantage
agement is much more than just procure- over competitors. The impact of managing
ment. Among the misunderstanding overall product demand and the supply of
evidenced, supply chain management is not: product will impact the profitability of the
[ 15 ]
Rhonda R. Lummus and company. The supply chain strategy can be
Robert J. Vokurka viewed as the pattern of decisions related to Conclusions
Defining supply chain sourcing product, capacity planning, conver- This paper defined the concepts of supply
management: a historical
sion of finished product, deployment of fin- chain and supply chain management and
perspective and practical
guidelines ished product, demand management and discussed why managers are increasingly
communication, and delivery. Linking supply interested in the concept. The historical evo-
Industrial Management &
Data Systems chain strategy to the business strategy lution of the supply chain movement from its
99/1 [1999] 11–17 involves defining the key business processes early days of quick response and efficient
involved in producing a company’s product or consumer response was discussed. Several
service. early supply chain initiatives at companies
A company must develop objectives for the were described which indicate the competi-
management of the supply chain based on tive advantages and importance of linking
corporate objectives. From these higher level supply chain to overall business strategy.
objectives, a set of detailed objectives can be This discussion provides insight for those
companies investigating the concept of sup-
developed for each process within the supply
ply chain management. Companies who have
chain. This cascading method serves to inte-
achieved supply chain integration success
grate the supply chain processes with the
report lower investments in inventory, a
overall enterprise direction and provides
reduction in the cash flow cycle time, reduced
measures for monitoring and execution. cycle times, lower material acquisition costs,
Supply chain management can be utilized to higher employee productivity, increased
be a point of differentiation for a company. ability to meet customer requested dates
Excellence on a certain dimension in product (including short-term increases in demand),
position can provide a competitive marketing and lower logistics costs.
opportunity, but shortfalls in providing this To begin managing across the entire supply
dimension by the supply chain can eliminate chain, companies should consider the follow-
this advantage. For a company to be competi- ing guidelines in their plans and implementa-
tive, it is not enough just to vary marketing tion:
programs. They must define a working 1 Link supply chain strategy to overall busi-
relationship with customers and put them- ness strategy to align supply chain initia-
selves in a position to deliver customer value. tives to business objectives.
All components of the supply chain must 2 Identify supply chain goals and develop
have the capability to meet strategic objec- plans to assure every process is individu-
tives. ally capable of meeting supply chain goals.
Companies must evaluate the effectiveness 3 Develop systems to listen to signals of
of the supply chain strategy using a new market demand and plan accordingly,
set of measures. Typical rewards aimed at including changes in ordering patterns
and changes in demand due to customer
improving performance of functions or
promotions.
departments must be revised to strive to
4 Manage the sources of supply by develop-
improve supply chain performance overall.
ing partnerships with suppliers to reduce
By tying the supply chain strategy to the
the costs of materials and receive materi-
overall company strategy, the objectives als as needed.
become process objectives rather than func- 5 Develop customized logistics networks
tional objectives. tailored to each customer segment.
For example, traditionally, one of purchas- 6 Develop a supply chain information sys-
ing’s measurements is material cost or mater- tems strategy that can support decision
ial variance. Buying product at a lower cost is making at all levels of the supply chain
one way to improve that measure. Purchasing and offers a clear view of the flow of prod-
a carton at a lower cost from a new vendor ucts.
might lower the cost of the carton. However, 7 Adopt cross-functional and cross-business
the new carton may not run as efficiently performance measures that link every
through the production process as the one aspect of the supply chain and include
from the original supplier. Purchasing’s mea- both service and financial measures.
sure of material variance is favorable, but the Companies who are successful will be those
manufacturing facility is recognizing added that are managing across all nodes of the
costs in downtime, maintenance, etc. supply chain from their supplier’s supplier to
Measurements must be designed to look their customer’s customer. A clear under-
across the supply chain and become process standing of supply chain concepts and a will-
objectives. Included in that process is the ingness to openly share information between
internal structure of the supply chain which supply chain partners is a necessary first step
often is causing as much confusion/cost as to making the supply chain a competitive
external portions of the chain. force for a business.
[ 16 ]
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