International Journal of Operations & Production Management

Emerald Article: A framework for analysing supply chain improvement Stephen J. New

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To cite this document: Stephen J. New, (1996),"A framework for analysing supply chain improvement", International Journal of Operations & Production Management, Vol. 16 Iss: 4 pp. 19 - 34 Permanent link to this document: http://dx.doi.org/10.1108/01443579610114059 Downloaded on: 30-04-2012 References: This document contains references to 69 other documents Citations: This document has been cited by 16 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 3473 times.

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A framework for analysing supply chain improvement

Stephen J. New
Manchester School of Management, UMIST, Manchester, UK
Introduction This paper will discuss the need for a robust conceptual framework for supplychain management. It forms part of a continuing research programme at UMIST aimed at producing a broadly applicable theoretical basis for work in this important area. The discussion adopts the following structure. First it is argued that despite the explosion of interest in the field, there remain significant obstacles in formulating sensible research strategies. A simple taxonomy is then presented, which allows some of the evidence in this area to be classified; without this differentiation of approach there is a danger of mistaking different types of supply-chain phenomena and thus in formulating an unreliable prescription. Some examples are given which illustrate the use of the framework. Finally, the implications of the taxonomy are examined, and some avenues for further work suggested. The supply chain: some problems The recent popularity of the supply chain concept has been driven from many directions: the quality revolution[1]; the notions of materials management and integrated logistics[2]; the growing interest in industrial markets and networks[3,4] and influential industry-specific studies (most notably by Womack et al.[5] and Lamming[6]). It has resulted in a plethora of terminology, including supply chains, demand pipelines, value streams, support chains, and many others. In an earlier paper[7], it was argued that: Arguments about the precise metaphor are generally fruitless, as much writing in this area is based around a loose agreement on a general theme. There are several meanings of the term supply chain in popular use, and this makes interpretation of anecdotal evidence particularly difficult. For example, the term is used as a synonym for logistics in both integrative (the single logic[8]) and technical senses[9].

Analysing supply chain improvement 19

Received September 1994 Accepted January 1995

An earlier version of this paper was presented to the 1994 conference of the British Academy of Management, Lancaster, 12-14 September. The author is indebted to Dr Bernard Burnes for his helpful comments.

International Journal of Operations & Production Management, Vol. 16 No. 4, 1996, pp. 19-34. MCB University Press, 0144-3577

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The new orthodoxy of supply-chain management is in danger of collapsing into a discredited management fad unless a more reliable conceptual basis is developed. The dominant interpretation, however, of the supply chain label seems to revolve around the following three ideas[10-17]: effective purchasing and distribution; a focus on long-term relationships between trading partners; and the operational integration of trading organizations. The first of these reflects the fact that for some writers the terminology is an opportunity to re-badge established prescriptive material under an attractive new logo. The second refers to the emerging understanding that industrial marketing and purchasing activities are often more like quasi-hierarchies than traditional markets, and that co-operative partnership may be more effective than adversarial competition with suppliers. The final idea is that organizations may collaborate to make their operational systems interlock effectively; examples include just-in-time purchasing, mutually determined standards for packaging and deliveries, and inter-organizational teamwork for product development or quality improvement. These ideas combine to generate the supply chain hypothesis:
Organizations will reap commercial benefits from understanding the supply chain and (somehow) managing it. Effective firms will increasingly focus their efforts on strategies which seek to enhance the performance of the whole chain[7].

Perhaps the most eloquent expression of this notion is found in Womack and Jones recent article in Harvard Business Review[18], where the same concept is presented as one of the foundations of the lean enterprise (see also [19,20]). This fusion of ideas appeals on many levels, but also generates severe problems for developing research strategies. A particular difficulty is the status of the hypothesis: is it a description of how firms do operate; is it a prescription of how firms could choose to operate, or is it a fundamental challenge to the established organization of the contemporary industrial economy? (This question is raised in an earlier paper in regard to the parallel concept of strategic networks[21].) One of the most serious problems for theoretical progress in the area is that it is difficult to interpret reports from the field. There is no shortage of anecdotal evidence concerning supply-chain management and partnership, but these frequently reflect a combination of possibly separable initiatives. In short, it is difficult to work out what is going on. This gap in knowledge is illustrated by the diversity of interpretations of the term supplier development from simply identifying potential suppliers to investment improvement programmes within supplying organizations[22-24]. Watts and Hahn[25] point out that: Although the supplier development concept has been around for many years, little has been documented about the actual practices of the programs in terms of their objectives, key characteristics and effectiveness.

A major hindrance to understanding the dynamics of supply chain improvement is in untangling its various components. Managerial and commercial reality is complicated; interpreting the glory stories[7] that feed supply chain mythology is problematic. Without an ability to classify activities and situations, the development of clear theory or reliable prescription is unlikely. One particular problem is in identifying what can be included within the orbit of supply chain improvement. Many activities presented under the label could equally be used as illustrations of, for example, total quality management, or even just good management. Furthermore, Lloyd et al.[26] comment that the effects of explicit supplier development activity may be difficult to distinguish from the consequences of just trading with a world-class customer obsessed with quality (Burnes and New[27] present a case study which illustrates this). The following section presents a simple taxonomy which helps to classify some of the possible approaches to supply chain improvement. A simple taxonomy The taxonomy presented here uses a simple, four-dimensional labelling scheme which allows examples and case studies to be differentiated into (potentially) 250 distinct categories (see Figure 1). The four dimensions are: Specificity the degree to which the actions taken generate outcomes specific to one relationship. For simplicity, actions are designated specific (S) or general (G). The limitations of this are discussed below. Action/investment identifies which party in a trading relationship is taking the active lead in the improvement activity and bearing the cost (including time and effort). This is designated as a scalar between 1 and 5, where 1 means that the improvement is entirely the work of the vendor, and 5 means it is ascribed entirely to the buyer. Activities that are equally shared between the parties are 3; more refined estimates may be made as required, although a five-point integer scale seems sufficient resolution for most purposes. This dimension does not represent the amount of effort or investment, merely how it is shared. Location/focus refers to the domain of the improvement, and again is measured in terms of 1 (entirely within the vendors organization) and 5

Analysing supply chain improvement 21

General (G) Specific (S) Action/investment (15) Location/focus (15) Benefits (15)

(n1,

n2,

n3)

Figure 1. A simple classification scheme

(1 = vendor only; 5 = buyer only)

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(entirely within the buyers organization). Thus a supplier development exercise in which a car manufacturers engineers work to improve a process within a suppliers factory would score 1; an exercise to improve the goods receiving area in the buying firm would rate 5. Making this quantity a scalar allows for activities which are focused on the links between organizations (in terms of material or information flow) to be designated between these figures. Benefits this expresses how the direct results of an improvement activity are divided up, and again uses the 1-5 spectrum. As with the action/investment dimension, it does not describe the amount of benefit, just the distribution. Further, it does not say anything about the secondorder effects of an improvement. For example, if a firm helps its supplier reduce costs, this benefit may be passed on to the customer in terms of reduced prices. However, this may not happen; the flow of benefit is contingent on the business strategy of the organizations involved. Therefore, if a supplier development programme reduces the number of faulty goods delivered to a customer, then there is a direct benefit; an appropriate coding may be S(5,1,3). If, on the other hand, the outcome is that the supplying company merely saves money, then this would be summarized as S(5,1,1). This point is important and its explication is one of the main rationales behind the taxonomy; the issue is pursued in more detail below.

Examples The use of the taxonomy may be illustrated by some simple examples: G(1,1,3): A total quality management programme in a vendor produces benefits for its customers. The results are general are not limited to one supply chain relationship. G(1,5,3): A vendor conducts an investigation into the communication problems with a major customer and identifies a flaw in the latters method of generating delivery schedules from materials requirements planning. S(5,1,1): An engineering firm sends its engineers to help a subcontractor overcome quality problems with a new part. S(5,5,5): A manufacturer changes its material handling system to help it move unique containers provided by a supplier. It is not suggested that a simplistic four-character code can capture the richness of a real situation; the intention is to summarize and differentiate possible options in the process of supply-chain improvement. The use of the scheme is illustrated further in Table I, where 29 well-known cases are categorized. These are taken from six booklets published by the UK Department of Trade and Industry under the Managing into the 90s programme[28-33], a booklet published by Partnership Sourcing Ltd[12], and a set of case studies prepared

Firm

Example

General/ Action/ Location/ specific investment focus Benefits

Logistics and Supply Chain Management: A Management Overview [28] GLS Introduction of new logistics strategy (including third-party distribution) and new stock control system G 1 Ross Young New warehouse working practices and software G 1 Johnson and Establishment of business unit Johnson dedicated to National Health S 1 Service Manufacturing resource planning (MRPII) G 1 Yorkshire Barcoding G 1 Water Purchasing: A Competitive Business. A Strategic Overview [29] Falcon Vertical reintegration of frame G 5 Cycles manufacture R Goodwin Analysis of suppliers operations International G 3 Ackermann Good purchasing management International G 5 Linn Products Technical advice to suppliers S 3 Briton New stock control systems G 1 Electronics Getting the Most from Your Suppliers: A Management Overview [30] Dale Electric Centralization of procurement; International supplier evaluation; improved communications G 5 Electrolux Supply-base rationalization; supplier performance G 5 measurement Dunlop Supplier awards G 5 Aviation Managing Your Purchasing Operation: A Management Overview [31] Tankfreight Centralization of purchasing G 5 HD Plastics Supplier rationalization G 5 Problem solving with supplier G 3 Swan Hunter Better purchasing G 5 Better Value for Money from Purchasing: A Management Overview [32] IBM Total cost of acquisition G 5 programme TR Fastenings Just-in-time delivery systems to customers S 2 Centralized procurement G 5

Analysing supply chain improvement 23

1 1 1

1 1 3

1 1

1 1

1 5 1 1

1 5 3 1

5 5 5

5 5 5

5 5 3 5 5

5 5 3 5 5

4 5

5 5 (Continued)

Table I. An analysis of supply chain improvements

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Firm

Example

General/ Action/ Location/ specific investment focus Benefits

24

Table I.

Building a Purchasing Strategy: A Management Overview [33] Racal Strategic approach to purchasing (including training, purchasing information systems) G 5 5 Avon Industrial Supplier education and early Polymers supplier involvement S 5 1 Mars Improved purchasing and Confectionery planning systems G 5 5 Partnership sourcing [12] Laing Homes Suppliers involvement in specifications and performance improvement programmes S u 3 Rigorous supplier performance measurement G 5 5 Development of high quality G 3 1 supplies IBM Multi-faceted collaboration with Thomas Cook S 3 3 Kodak Performance measurement of suppliers; supplier certification G 5 5 Direct assistance to Croda Colloids in total quality management S 3 3 Nissan Deployment of supplier development team G 5 1 Tesco Use of food technologies to advise suppliers S 5 1 Heath Springs Multi-faceted collaboration S 3 3 with Lucas Glaxo Collaboration with Courtaulds S 3 3 Boundary Strategies: Case Studies in Purchasing and the Operational Limits of the Organization [34] TR Fastenings Collaboration with major customers to rationalize inventory management and deliveries for class-C items S 3 3 Technofirm Supplier development activities component supplier S 5 1

5 3 5

3 5 3

3 1 3 3 3

3 2

published by Partnership Sourcing Ltd[12], and a set of case studies prepared by the author[34]. The taxonomy may also be used in partial form; Figure 2 illustrates 14 initiatives which were scored by four members of the North West Supply Chain

Benefits Buyer 5 Developing joint business opportunity Consignment stock 4 Improved forecasting Improved supplier process TQM for suppliers Product quality improvement

Analysing supply chain improvement 25

E-mail and EDI Cost reduction

EDI

JIT supply Cost reduction database Nominated carrier scheme

Joint contribution to best practice club 2 Prototyping new products Vendor 1 3 4 5 Buyer

1 2 Vendor Action/investment

Key Bank

Figure 2. A two-dimensional analysis of initiatives from the NW Supply Chain Improvement Group

Electrical

Pharmaceutical

Electronics

Improvement Group. The questionnaire used to gather these data asked for a mark to be made on a continuous line; hence the non-integer scores. The bottom left-top right diagonal represents the point at which organizations inputs and outputs are balanced; the top left and bottom right corners represent the extreme of imbalance. In these cases, one side is doing something for the principal benefit of the other party. It is not always the case, however, that a firms interference in the operations of a trading partner is for the other partys benefit. An example is provided by Landeros et al .[35], who discuss ways in which a purchaser may perform detailed evaluations of a suppliers costing procedures in order to provide counter-proposals to be used in the negotiation process. Here an activity is suggested which is (conceptually) located at the supplier, yet is carried out by and for the benefit of the customer: S(5,1,5). Discussion A general tool ? One of the main benefits of the proposed taxonomy is that it is a potentially general tool. This is an important feature in view of the dependence in much of

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the supply chain literature on a single industry (automotive) and on large manufacturing firms. Unless the limitation is overcome, there are few prospects for the development of a broadly applicable theory. Ramsay[36] has argued, for example, that most research in purchasing pays little attention to the smaller company (see also [37]). Focus on costs and benefits The taxonomy highlights the important issues of who benefits and who pays for supply chain initiatives. In the more romantic treatments of partnering it is common to find the following assumed sequence of events: a customer helps a supplier reduce costs; the customer benefits through reduced prices, as the benefits are shared. While there may be cases where this pattern applies, there are several reasons to believe that it will not be automatic. These may be summarized as: It is frequently difficult to quantify accurately the reduction in costs achieved by an improvement (although most prescriptive writing enjoins organizations to construct measures to enable this). It is common for benefits to be intangible. The commercial agreements between organizations are often complex and prices may be affected by a large number of external factors (inflation in a general sense, input prices of raw materials) and internal factors (variations in products and volumes). These factors are one of the main reasons why it is so difficult to measure purchasing performance merely on the basis of prices paid. Even when savings are calculable, there will normally be a complex accounting procedure needed to translate this into price reductions against particular products, especially where a wide range of different items is purchased from a supplier. The harmonious division of the pie assumes a partnership mentality which is consistent and not abused by one side exploiting its power over the other. Several writers have expressed doubts about the altruistic model of partnership[38-40]. The taxonomy draws out the fact that supply chain improvements require a degree (often significant) of investment, and that the party putting in the time and money may not be getting the return automatically. This appears to be a particular problem in accounting for supplier development activity[34]. A similar problem besets the large body of theoretical work on price-discount structures (for example [41-43]); theoretical prescriptive methods may be developed for discounting strategies that work for both vendor and buyer. However, there is little, if any, empirical evidence which shows how these ideals translate into practice.

26

The taxonomy is useful in that it highlights the possibility for organizations to pay for supply chain improvements in their trading partners for which they do not get paid and from which they reap no operational advantage. Of course, there may be non-fiscal benefits (such as improved quality and better deliveries) but there are some important questions about how these are transmitted through the chain. Some of these questions concern the strategies and structures within an industry; an issue examined in the next section. Focus on strategy and structure The heart of the supply chain hypothesis is that a chain of organizations may compete against another chain. This general assertion is in fact unsubstantiated empirically as there is little known about the pattern of interconnections between firms. It is clear, however, that: the commonly used caricature of the integrated keiretsu structures in the Japanese economy are in fact rather complex; and despite some notable exceptions, there is relatively little evidence of such formal clustering and tiering in Western economies (see, for example [44]). For research in supply-chain management to make significant progress, this issue requires significant attention. This is because supply-chain improvements may be made which end up benefiting competitors. The supplier development team of a Japanese car manufacturer in the UK is well known for working on parts of its suppliers factories which might manufacture parts made for other people. The explanations generally given are that this helps build the relationship between the two organizations, cultivates an undifferentiated approach to quality and efficiency in the supplier[1] and is good for the industrial base. A more cynical interpretation is that it allows the buyers engineers better knowledge of the suppliers (and potentially competitors) cost structures. However, even with a less explicit policy, many of the case studies in which firms collaborate produce advantages which are not specific to a single relationship and which potentially could aid competitors. Therefore, the logic of supply chain improvement is contingent on industrial structure in terms of who supplies whom. Consider the simple diagram shown in Figure 3. In this simplified example, two firms (B1 and B2) operate in the same market selling essentially the same product. There are two supplying firms (V1 and V2); B2 buys its components from V1 and V2; B1 from just V1. It is clear that if B1 engages in supplier development activity to improve V1s processes, B2 may also benefit. If this is the case, then B1 may well reap no competitive advantage from its investment in general projects with V1. However, a relationship specific activity S(X,X,X) may result in advantage, as the benefits will be particular to the V1-B1 link. On the other hand, B2 could perhaps undertake general collaborative programmes G(X,X,X) with impunity. This obvious point is worth making because the mythology of supply-chain management tends to ignore the issue of structure and assumes that performance improvements equal increased competitiveness; this is patently

Analysing supply chain improvement 27

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V1

B1

28

Figure 3. A simplified example of supply chain interconnection

V2

B2

not true in all cases. A further and more subtle point concerns the rather sloppy language of competition applied to supply chains. It is common for organizations or supply chains to be considered to be competing on the basis of low cost, and for cost savings made in the supply chain to be passed on to the final consumer. However, firms cannot compete directly on cost, but only on price, delivery, quality, service and so on. It is normally assumed that cost savings can be naturally transmitted into these tangible forms, but in a supply chain of legally separate organizations this is not necessarily so. This is because of two factors: an organizations perception of its partners strategic intent and its judgement on the behaviour of the final market. The first of these issues is illustrated by the following example. Considering Figure 3 again, it is clear that if V1 achieves an internal cost reduction it has a choice: it may pass on that reduction to its customer in terms of reduced price, or it may retain the savings as profit or to be reinvested in different ways within the organization. However, a strategic decision to follow this route needs to account for a number of uncertainties: How replaceable is V2 as a supplier of B2? This entails an evaluation of the switching costs for B2 to shift more of its requirements to V1. How will B1 and B2 react to a price cut? Will the saving be translated into price reductions further down the chain, or used in other ways? What is the elasticity of the final marketplace? If price reductions by B1 and B2 do not stimulate an increase in absolute sales, then there could be little benefit to V1. There are then, a series of intermediary stages before cost savings may be necessarily translated into competitive advantage. Indeed, it is possible to

create a range of plausible numerical simulations which illustrate cases where price cutting by V1 has the main effect of reducing profits for V1, B1 and B2. (While this approach is admittedly simplistic, it is no more so than much theoretical inventory modelling of sourcing strategy[45-47]). The working of the supply chain hypothesis, therefore, is more complicated than the all pull together, lads slogans of the prescriptive literature. The taxonomy above is suggested as one way in which the logic and consequences of supply chain improvement activity may be brought to the surface. Focus on managerial choice The proposed taxonomy also focuses attention on the range of options available for the adoption of practices associated with the supply chain approach. An example of this is provided by the involvement of purchasing departments and suppliers in the development of new products. This is a cornerstone of the lean manufacturing paradigm and has been the focus of several research studies[48-52]. However, organizations may seek a purchasing input in different ways. For example, a firm may develop its own interdisciplinary teams so that procurement issues are dealt with early in the development process, without this necessarily entailing significant involvement of suppliers: G(5,5,5). This may, however, spill over into direct benefits for the suppliers: G(5,5,3). Alternatively, the buying organization may seek the active co-operation of the suppliers in finding new organizational patterns and systems to speed the research and design process, and this may mean internal changes within the supplier; the focus then becoming G(3,3,3) the sharing of the initiative between the organizations. It is probably true that the outcomes will be of general applicability for both parties, but is conceivable that in certain cases the consequences will be specific to particular relationships: thus, S(3,3,3). Explication of power relationships By bringing to the surface the issue of who pays and who benefits, the taxonomy helps uncover organizations motivations in supply chain improvement activity, and helps to untangle the problem of commercial power in purchasing relationships. This is an area which has been seriously neglected by the purchasing literature[7,53] but has been more extensively examined in the marketing literature (see [54] for an extensive bibliography). Galt and Dale[55] refer to one organization in which supplier development was perceived to be an instrument of extending the power of a firm over selected vendors. The issue of power is closely associated with the nature of dependency in commercial relationships, and therefore the notion of transaction costs[56-58]. While the citation of Williamson in purchasing literature is almost as commonplace as that of Foucault in most other areas, there is still some way to go towards a satisfactory development of transaction cost economics (TCE) framework in this field. Simplistically, it is argued that co-operation between trading partners can increase trust and thus reduce transaction costs[34,59,60].

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Rather less has been done to refine the concept of asset specificity[61,62]. Four different types of asset specificity are normally cited: site, physical, human and dedicated assets. In TCE, a relationship with high asset specificity is regarded as a contribution to the lock-in effect, which, while reducing the threat of opportunism, also reduces the scope for switching. High asset specificity is a driver, ceteris paribus, of vertical integration. The taxonomy suggested here indicates that supply chain improvement activity introduces an alternative form of specificity in terms of the dedication of an improvement to a particular relationship and its location in or between organizations. This leads to the possibility of the evaluation of a trading relationship in which relationship-specific initiatives may play a role in the transaction cost equation; it may suit an organization to avoid relationship specific initiatives. The taxonomy, and the classification of existing cases, highlights the opportunity of collaboration with trading partners which may have general application. In purchasing terms, it means that in some instances it may make sense to seek straightforward operational improvements with customers and suppliers which are of general benefit, rather than develop relationship-specific improvement programmes. This accords with research conducted by the author in conjunction with consultants A.T. Kearney[38]. Limitations The taxonomy has a number of limitations which are discussed below: The temptation of reductionism. The taxonomy cannot summarize the complexity of the real world, but its very nature means that there is a strong temptation to use it in this fashion. Clearly, any use of the method which sought to use this as a complete description would be flawed. Its purpose is to highlight alternative approaches and to differentiate between them; it cannot be used as a way of capturing the essence of supply chain initiatives. However, there are good reasons to keep any model simple[63], particularly at such an early stage in theoretical development. Transparency. Despite its relative simplicity, the framework can be difficult to grasp at first. Preliminary attempts at using the framework with practitioners has indicated that it can most easily be introduced by considering one dimension at a time for several initiatives. Coverage. The proposed taxonomy does not adequately address three main aspects of collaborative arrangements. First, it ignores the temporal dimensions: benefits may be reaped over different timescales to the related investment. It is difficult to see how this could be overcome effectively without introducing the scale of investment/benefits, and without complicating analysis with, for example, calculations of discounted cash flow. Second, the framework cannot account for collaboration between non-trading partners, such as the formation of supplier associations or user groups. This is clearly a significant feature

of some industries[64]. Third, the scheme ignores failed projects ; a buying firm may genuinely intend, for example, that a supplier development programme will help a supplier, but it may actually just make life more difficult. Further research One of the main benefits of the simple taxonomy advocated in this paper is that it allows a degree of structure to be imposed in the interpretation of case material[65], and allows the classification of other work[66]. Such classification is essential for the formulation of theory and the establishment of clear nominal units[67]. The main value, therefore, is as a descriptive and interpretative tool, and significant work will be required before grounded prescription may be developed from it. However, the practical value in any model in management and business may be less in its predictive power and more in its ability to allow practitioners to reflect critically on and reinterpret situations[68,69]. Work is currently beginning to embody the framework in a computer-based diagnostic tool. As with most such tools, the goal will be less to capture definitive truth but to stimulate thought and debate. This research will overlap with the development of tools to allow the modelling of supply-chain structures. In particular, this work will explore the relationships between different styles of co-operation (as reflected in the taxonomy) and the patterns of buyer-seller interconnections. Summary This paper has described a simple taxonomy which allows examples of supply chain improvement to be classified. The chief merit of the scheme is that it stimulates the structured analysis of the dynamics of inter-firm relationships and highlights important questions which risk being overlooked in the hyperbole of supply-chain management. It also provides a stepping stone to much needed theoretical development.
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