Supply Chain Management: A seat at the CEO's table
Ram Bala, Assistant Professor of Operations Management and Information Systems
The first question I pose to students in my graduate Supply Chain Management (SCM) class is a rather rudimentary one: What is Supply Chain Management? I get answers that range from the study of procurement and logistics to an analysis of typical supply side variables such as inventory and quality control. All of which are covered in a typical operations management courses.
So how is Supply Chain Management different?
The answer lies in the term itself. A “chain” implies links and in this context, the links connect two different firms. Thus, Supply Chain Management is the act of coordinating two or more different firms to deliver a product to end consumers.
An economist might ask, as the Nobel prize-winning Milton Friedman (left) did: “Why does this need to be studied? If there is demand and the appropriate supply, the market determines the price of the transaction and supply-demand match occurs.” Although this seems alright at first glance, spot markets such as the one alluded to by Friedman do not always work effectively in all contexts.
First, economies of scale for the supplier and buyer might work differently implying that the optimal quantity to ship for the supplier in a particular transaction might be quite different from the buyer, resulting in “money left on the table” for both entities and the supply chain.
Second, exposure to demand uncertainty differs across supply chain entities. Retailers face the brunt of demand uncertainty directly but manufacturers do not. Retailers respond to this by varying their orders. Manufacturers over adjust their demand forecasts in response to this fluctuation in orders from retailers. This leads to escalating but spurious demand fluctuation in the supply chain, also known as the bullwhip effect. Both parties could once again benefit by better coordination. This requires thinking of them as “supply chain partners” as opposed to arms-length entities.
Traditionally, the objective of SCM was to minimize the total sum of inventory and transportation costs. However, supply chain efficiency loss due to lack of coordination is not just an increase in the real costs incurred, but the lost opportunity cost of higher prices or additional sales from end consumers. Thus, the absence of coordination leads to a revenue loss that might hurt all firms in the supply chain in the long run.
These revenue implications have given SCM a seat at the CEO’s table and given companies greater impetus in improving supply chain functioning.
This requires redefining our objectives. Costs continue to be important of course, but responsiveness to customer needs is almost as important. But what do we mean by responsiveness? It takes two forms.
- Customers expect to receive the product in a timely manner and are willing to switch providers if not convinced about the promptness of delivery.
- Customer demands have increased, leading to levels of customization never seen before.
Yet, ensuring that the right product is available continues to be a challenge. Thus, responsiveness is about customers getting the right product at the right time.
This tradeoff between cost and responsiveness in an innovative-intensive Silicon Valley context is the key focus of the MS in Supply Chain Management at the Leavey School of Business at Santa Clara University. More information about the program can be found at: https://www.scu.edu/business/ms-supply-chain-management/
Ram Bala is an assistant professor of Operations Management and Information Systems in the Leavey School of Business at Santa Clara University. He research focuses on pricing, resource allocation, and other operational variables in innovative-intensive industries. He is a faculty director of the MS in Supply Chain Management program within the Leavey School of Business.