Introduction
Supply chain management (SCM) pertains to the process of managing the general flow of goods and services. In a real life setting, SCM is more focused on the management of the flow of raw materials, especially in industries where the output (i.e. final) products tend to be more complex and sophisticated and where a wide range of supplier or provider firms’ (i.e. business partners) are necessary. A good example would be the case of automobile manufacturing. Automobile manufacturers, in order to come up with their final products which obviously would be the automobiles, have to work with other firms, particular those who will manufacture the individual major and minor components of their output product. Considering this, the automobile manufacturers can be considered as assemblers rather than the absolute producers because their output is fundamentally the result of the collaboration of the work of a wide range of firms. However, since the automobile manufacturers in this example are the ones responsible for the final assembly of the participating firms’ individual and respective outputs, it would only be safe to say that they are also the ones primarily (but not solely) in charge of the SCM processes. In which case, their main task, as in any other SCM case, would be to ensure the effective, efficient, planned, and on-time delivery of all the necessary components for their output, because otherwise, their production would be affected and a lot of other secondary problems could stem from that.
In this paper, the author attempts to discuss two main things, SCM in general, and the specific ways how its effectiveness and or efficiency can be measured, focusing on numerous mainstream SCM strategies.
How the contribution of effective supply chain management can be measured
There are, in general, two ways how supply chain management can be evaluated. It can either be in a qualitative or quantitative form. In this paper, however, the author shall focus more on the quantitative side. Between the two, qualitative measurement of SCM performance is more common. This is mainly because SCM is in a stage where it is not yet highly established. In fact, “supply chain management does not have a long history relative to other business disciplines such as accounting or economics” . When it comes to the scientific way of solving problems, the qualitative approach is often used to set up notable notions and observations about a theory or a phenomenon. In this case, the phenomenon being observed is the process of implementing an SCM. Therefore, when the qualitative approach is used, the goal is to observe and then validate the things that have been observed. This is just perfect for a budding business disciplines such as SCM. The quantitative approach of assessing SCM performance, on the other hand, is more focused on the preciseness of the observations. It is important to note that quantitative approaches succeed the use of qualitative approaches, be it in terms of systematically solving a problem or in terms of observing a phenomenon as in the case of research. This is because one of the main goals of quantitative means of evaluation is to answer the question by how much. It also aims to validate the results, observations, and findings that have been obtained from the implementation of the qualitative form of SCM evaluation.
It is important to note that the application of SCM concepts and theories is not an exact science like physics and other business disciplines where the answers and figures have to be precise and exact in order to attain a certain level of performance advantage. In fact, the way how one firm evaluates, quantitatively, its SCM performance may vary from that of another firm. This is because a supply chain network of a firm can just be as unique as that firm’s identity. In the earlier scenario, for example, the supply chain framework of an automobile manufacturer may be totally different from say, a company that operates in the food industry (i.e. a food manufacturer), despite the possibility that they are employing the same quantitative approach in evaluating the effectiveness of their SCM strategies.
Quantitative approaches in measuring the effectiveness of an SCM strategy can be done by basing it on different outcome measures or metrics. These outcome measures or metrics, in turn, would depend on the focus of the firm that is employing the SCM improvement strategy that wants to see quantitatively significant improvements in their SCM process .
Supply chain-related indexes appear to be one of the most common quantitative ways how the contributions of SCM strategies are measured. Examples of such indices include, but may not be limited to the SCM cost index, collaboration index, performance index, among others.
It is also worth noting that the focus of the quantitative approach of measuring SCM strategy effectiveness may greatly vary from one firm to another . There are, for example, firms that may give higher importance to the improvements that using a certain SCM strategy brings to its products’ value proposition, pricing competitiveness, production or delivery time, or at some point, even quality . In an ideal scenario, however, quantitative improvements in all of those metrics should be targeted by a truly effective SCM strategy. But here is also where the famous adage that suggests that one cannot have it all should be considered. This is why in most cases, it would be better to focus on one metric at a time than to try to rake in improvements across all those metrics . After all, the use of an SCM strategy is not a one stop or a plug and play thing—it is more of a process, it takes time and requires numerous iterations in order for the most ideal effects to be realized.
Another important topic to touch here would be the evolutionary of an appropriate SCM strategy. According to a journal article published in The Online Journal of High Performance Business, an SCM strategy that is expected to have the capacity to bring in a sustainable streak of quantitative improvements to a firm should both fit with the business strategy and be sufficiently executable . It was also mentioned in the same source how effective and efficient supply chain management strategies can affect a business in terms of its bottom line and other specific aspects. For example, it was explained how the role of SCM has changed throughout the years. In the 1980s, for example, one of the early days for SCM, its role was to enable the company to meet its minimum internal commitments. Now, over the course of three and a half decades, that changed into something that is more complex. Now, its role is to enable the company to design sophisticated products and services that fulfill certain functions and to drive up profits . In terms of operational focus on the other hand, SCM’s emphasis has evolved from compliance to interdependence to collaboration and finally to agility . Despite being one of the newest business disciplines, SCM still appears to be subjected to growth and progress fast, as evidenced by the dramatic changes that have been made and put in place in its various scopes.
How effective supply chain management can contribute to the bottom line of an organization
It has to be reiterated that there can be numerous positive effects of an effective and efficient supply chain management. The real question that has to be answered here is actually on what part of the business the implemented SCM strategies would have an effect on and to what extent because in general, SCM strategies are expected to yield a certain level of net positive effects. In an entry authored by Bartosik (2015), he mentioned how consistent improvements on demand management and reduction of supply holding costs, often through the use of materials and software solutions that would enable precise material flow controls could have a net positive effect on return on investment (by means of reducing the logistics costs because of higher efficiency). Now that was just one of the exciting ways how effective SCM can contribute to the bottom line of an organization.
Bottlenecks and process weaknesses can both (i.e. collectively) be considered as public enemy number one of logistics and supply chain managers. This is because they can easily prove to be the top drivers of less than stellar results when it comes to cost reduction efforts, especially those that are related to supply chain management. Using the same example that was used earlier, an automobile manufacturer that is experiencing a production bottleneck because of the delays in the delivery of the engines that it is going to use for its cars would most likely suffer additional costs as a result of the increase in the holding time of the other components needed to build its current batch of products plus the costs related to loss of opportunity mainly as a result of the delay. The source of the bottleneck in that case would be the production of the automobile engines. Clearly, the production process cannot proceed to the next step without the engines being delivered and because of the delay; everything has to be put to a stop.
Potential problems and weaknesses of supply chain management effectiveness measurements
One major weakness of these SCM effectiveness measurements is that there is not a standardized and uniform approach in measuring the success of an SCM’s effects, at least quantitatively. This is because the focuses of each company greatly differ; there are companies that focus more on the effects of the SCM on value proposition, costs, time of delivery, and so on. This is, in fact, why a more common approach that is being used in the SCM evaluation process is to simply check whether the general and specific goals of the SCM initiative have been met or not (i.e. conditional approach) .
Another potential weakness of the SCM effectiveness measurement strategies that were discussed earlier would be the fact that some of them may not be in line with the company’s cost savings initiatives (CSI). In order for the full effects of an effective SCM strategy to be realized, its effects should be reflected in the business’ bottom line. However, that would most likely not happen if the company’s CSI is not in line with the goal of the SCM department. What is more likely to happen is that the cost savings obtained as a result of the SCM department’s increased efficiency would only be used to cover for the losses brought about by the inefficiencies of another department .
How identified problems and weaknesses can be addressed
In order to address the first problem, the only solution is to make sure that the goals that have been set for any particular SCM initiative are all specific, measurable, attainable, realistic, and time-bound—following the smart principle in goal setting. Because after all, there is no uniform way how to quantitatively assess every firm’s SCM success aside from measuring the effects of the SCM strategy implementation on a single aspect that the company tries to improve itself on. So, based on the notion that suggests that one should focus more on things that can be modified (i.. the process of goal-setting in this case), supply chain managers should indeed focus on making sure that the SCM-related goals are met.
When it comes to addressing the second problem or weakness on the other hand, the firms implementing a new SCM strategy should simply make sure that the goals of their SCM plans would be in line with the goal of the entire organization so that the fruits of the SCM department would not be underappreciated. After all, one of the fundamental reasons why firms conduct SCM initiatives is to improve the company’s bottom line and make it more competitive and not to simply offset the inefficiencies of other intra-organizational departments. An exact quantitative measure that can be used to address this problem would be to use a collaboration index, in order to measure the extent of supply chain collaboration within the firm and how it affects the organization as a whole .
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