Why Supply Chain Management is Important?

To face competition individual firms make transitions to world class manufacturing. But,
even if they upgrade their operations to world-class levels, this may not ensure the firm's survival.
This is because each firm operates in a broader chain of production, and that chain of production
is only as strong as its weakest link. So, if other links in the chain remain weak, the survival of all
firms in the chain may be threatened. But there is a second reason why supply chain management
is important. This is because efficiency does not only arise within each link in the chain, but also
in the relations between links in the chain. The various dimensions of efficiency are:
Elements of Supply Chain Efficiency
Inside the firm:
An effective business strategy
Effective product development
Efficient manufacturing operations in regard to quality, inventories

In the relations between firms:

Coordinating product development along the chain
Coordinating inventory logistics along the chain (just-in-time deliveries)
Ensuring quality-at-source along the chain

Because supply chain efficiency is such an important issue, an increasing number of firms around
the world have begun to tackle the problem of upgrading their suppliers. The impetus to these
changes came originally from the demonstrated efficiency of the supply chains managed in the
Japanese automobile industry during the 1960s and 1970s. This experience showed that supply
chains have to be managed if the efficiency gains are to be realised. They will not arise naturally
as a result of routine interactions between firms. Since the early 1980s many firms in North
America and Western Europe, as well as those in developing countries, have begun to introduce
programmes which target an improvement in the performance of their suppliers (as well as in the
performance of their customers).
From this experience it is possible to distil the key steps involved in supply chain management
(see box below). But, as more and more firms have begun to develop supply chain management
projects, so it has become increasingly obvious that such programmes lack bite unless the
leadfirm simultaneously also actively assists its suppliers to learn. In the most advanced cases,
lead-firms realise that learning goes both ways, and that they, too, can learn from their own
suppliers. There is a major difference between mandating change amongst suppliers and assisting
them to develop the capabilities to make the necessary changes.

31
National Institute of Technology Calicut

Department of Mechanical Engineering

International experience shows that in developing country environments, foreign investors can act
as important vectors in the promotion of supply chain efficiency as they force domestic suppliers
to conform to their global standards.
Key Issues in Supply Chain Management

The lead-firm (often called the "supply chain governor") has first to hear a "wake-up
call", which alerts it to the need to improve efficiency. Sometimes this awareness is only
induced by a crisis in profitability, but it can also come from pressures exerted by its
customers, through government support programmes, or from other initiatives.
The firm then has to begin by making appropriate changes in its internal operations:
there is little point in inducing suppliers to change if the firm has not itself engaged in a
programme.
Once these changes are in progress, the lead-firm then has to explicitly target supplychain (or customer-chain) performance improvement, and then to determine which key
performance parameters will be targeted. Usually this involves fewer, smaller and more
accurate deliveries of inputs; higher quality standards (measured defects in "parts per
million", ppm); more reliable and accurate deliveries; and shorter lead-times to satisfy
orders.
This requires the rationalisation of the vendor (customer) base, often with a significant
reduction in the number of suppliers, weeding out those that seem unlikely to improve.
Thereafter, the new standards need to be communicated to first-tier suppliers (and
customers).
Once the performance of these first-tier suppliers is reliably audited, and improvements
can be observed, the lead firm either needs to target improvement in its second- and
third-tier directly, or to ensure that first-tier suppliers engage in a similar programme
with second-tier suppliers, and so on down the chain.

32
National Institute of Technology Calicut

Department of Mechanical Engineering