Five principles of supply chain management: connectivity, collaboration, synchronization, leverage, and scalability have emerged as the core supply chain principles. (Insight).
From a careful reading of the business and academic literature, five basic principles of supply chain management seem to emerge. We're certain that these principles do not precisely target every enterprise, and additions and subtractions may be in order for specific companies. But there is a certain level of universality that we think qualifies them as true principles. These five principles deal with connectivity, collaboration, synchronization, leverage, and scalability.
The first principle, the Principle of Connectivity, addresses the strategic, tactical, and operating connection between the company, its suppliers, and its third-party service providers. Connectivity includes the important role of IT, the Internet, and other forms of communication between the supply chain partners. It is, in fact, a basic foundation for the other principles identified here. The Principle of Connectivity is strategic in implementation since it deals with the planned linkages, visibility, and architecture of the supply chain relationship. At the daily operation level, it is tactical, dealing with the tactical decision-making processes between the supply chain partners.
The second principle is the Principle of Collaboration. As with connectivity, collaboration can be focused on either strategic, tactical, or operational decision making. This principle enables a closer link age of the supply chain partners by integrating planning and decision making across organizational boundaries. True collaboration is an ongoing investment in the extended supply chain. It requires all of the participants to better understand the role, business processes, and expectations of each supply chain partner. Collaboration occurs not only when times are good but also (and maybe more importantly) when times are bad. It is this ongoing investment in the learning process that continues to nurture the supply chain relationships. This investment is not typically made in all customers or suppliers but is reserved for key partners.
An analogy for the Principle of Synchronization might be a symphony orchestra with all of the various parts--strings, horns, percussion, and so forth--playing in harmony to achieve the desired effect. In the supply chain, there is a similar attempt at harmony both within and outside the individual company's domain. Vendors, manufacturing, sales and marketing, finance, and customers all play a role in the supply chain orchestration. The interfaces, which take place both internally and externally between the supply chain partners, need to be seamless, frictionless, and transparent. Through the principles of connectivity and collaboration, this synchronization takes place at the strategic, tactical, and operational level.
The Principle of Synchronization presents a way of thinking about the supply chain as a horizontal flow model rather than as a traditional command-and-control structure. Full implementation of this principle will allow the company and its supply chain partners to relieve choke points in the system, eliminate buffers of inventory stock, and more effectively deploy noninventory assets across the supply chain. This principle calls for capturing original demand data as close to the source and time of demand as feasible--and concurrently relaying this information to all partners in the supply chain network. To ensure a synchronized model, this demand data might be required by tier-one, tier-two, and tier-three suppliers. This data could also be made available to third-party logistics providers (3PLs) so that they could more efficiently position transportation capabilities and more accurately estimate warehouse requirements.
The fourth principle, the Principle of Leverage, requires a focus on core customers, core suppliers, and core 3PLs. This is not to say that all qualified suppliers or willing customers don't deserve careful attention. The principle does suggest, however, that added resources be committed to high-volume or critical-item suppliers. In the past decade, many companies have reaped important cost savings by rationalizing their supplier base. By reducing the number of suppliers from seven to one or two for a specific item, they've been able to synchronize the supplier interfaces more easily. This, in turn, can lead to successful just-in-time (JIT) delivery initiatives, collaborative planning, and a more efficient overall operation. Similarly, a focus on core customers and 3PLs can offer synchronized strategic, tactical, and operating opportunities as well. This fourth principle simply suggests that the company cluster and focus its assets on high-leverage and high-payout opportunities with core suppliers, customers, and 3PLs.
The last principle is the Principle of Scalability. As it is used here, scalability refers to the company's ability to develop a set of supply chain business processes that can be duplicated with additional suppliers, customers, and 3PLs. The principle requires a balance between customization and scalability. Companies that successfully adhere to this principle build up a core of supply chain processes that can be customized with minimal changes for additional supply chain partners. These processes also can be migrated to a larger customer or supplier base with minimum modification. No supply chain executive wants to run 20 different distribution systems for 20 key accounts. But some core customers might require special packaging, bar codes, JIT sequencing, or security tags. We know one company that put more than $40 million into a high-tech warehouse that could handle such customer modifications without slowing down the basic efficiency flow of the operation. Note that unless supply chain solutions are scalable, demands for customization will destroy leverage and synchronization, thereby diminishing overall supply chain efficiency.
Our handy desk dictionary defines a principle as "a basic truth, law, or assumption." The principles offered here obviously do not qualify for the first two definitions. So by the process of elimination, they are offered here as assumptions. The presentation of these principles is an attempt to provide a framework in which the supply chain process can fit. It certainly is not perfect--and in some ways represents an ideal or objective rather than a slice of reality. And like all such attempts, it is subject to the biases of the author and the unique prism through which he views the world. Yet we believe that understanding the rationale behind these principles is an essential first step toward making real supply chain progress.
Bernard J. "Bud" La Londe is professor emeritus of logistics at The Ohio State University.
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|Author:||La Londe, Bernard J.|
|Publication:||Supply Chain Management Review|
|Date:||May 1, 2003|
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