Supply chain management

Introduction to Supply Chain Management

Supply Chain Management (SCM) is the management of a network of interconnected

businesses involved in the ultimate provision of product and service packages required by
end customers. Supply Chain Management spans all movement and storage of raw
materials, work-in-process inventory, and finished goods from point of origin to point of
consumption.

• According to the Council of Supply Chain Management Professionals (CSCMP),

Supply chain management encompasses the planning and management of all
activities involved in sourcing, procurement, conversion, and logistics
management. It also includes the crucial components of coordination and
collaboration with channel partners, which can be suppliers, intermediaries, third-
party service providers, and customers. In essence, supply chain management
integrates supply and demand management within and across companies. More
recently, the loosely coupled, self-organizing network of businesses that
cooperate to provide product and service offerings has been called the Extended
Enterprise.

Historical developments in Supply Chain Management

Six major movements can be observed in the evolution of supply chain management
studies: Creation, Integration, and Globalization, Specialization Phases One and Two,
and SCM 2.0.

1. Creation Era

The term supply chain management was first coined by a U.S. industry consultant in the
early 1980s. However, the concept of a supply chain in management was of great
importance long before, in the early 20th century, especially with the creation of the
assembly line. The characteristics of this era of supply chain management include the
need for large-scale changes, re-engineering, downsizing driven by cost reduction
programs, and widespread attention to the Japanese practice of management.

2. Integration Era

This era of supply chain management studies was highlighted with the development of
Electronic Data Interchange (EDI) systems in the 1960s and developed through the 1990s
by the introduction of Enterprise Resource Planning (ERP) systems. This era has
continued to develop into the 21st century with the expansion of internet-based
collaborative systems. This era of supply chain evolution is characterized by both
increasing value-adding and cost reductions through integration.

3. Globalization Era

The third movement of supply chain management development, the globalization era, can
be characterized by the attention given to global systems of supplier relationships and the
expansion of supply chains over national boundaries and into other continents. Although
the use of global sources in the supply chain of organizations can be traced back several
decades (e.g., in the oil industry), it was not until the late 1980s that a considerable
number of organizations started to integrate global sources into their core business. This
era is characterized by the globalization of supply chain management in organizations
with the goal of increasing their competitive advantage, value-adding, and reducing costs
through global sourcing.

4. Specialization Era—Phase One: Outsourced Manufacturing and Distribution

In the 1990s industries began to focus on “core competencies” and adopted a

specialization model. Companies abandoned vertical integration, sold off non-core
operations, and outsourced those functions to other companies. This changed
management requirements by extending the supply chain well beyond company walls and
distributing management across specialized supply chain partnerships.

This transition also re-focused the fundamental perspectives of each respective

organization. OEMs became brand owners that needed deep visibility into their supply
base. They had to control the entire supply chain from above instead of from within.
Contract manufacturers had to manage bills of material with different part numbering
schemes from multiple OEMs and support customer requests for work -in-process
visibility and vendor-managed inventory (VMI).

The specialization model creates manufacturing and distribution networks composed of

multiple, individual supply chains specific to products, suppliers, and customers who
work together to design, manufacture, distribute, market, sell, and service a product. The
set of partners may change according to a given market, region, or channel, resulting in a
proliferation of trading partner environments, each with its own unique characteristics
and demands.

5. Specialization Era—Phase Two: Supply Chain Management as a Service

Specialization within the supply chain began in the 1980s with the inception of
transportation brokerages, warehouse management, and non-asset-based carriers and has
matured beyond transportation and logistics into aspects of supply planning,
collaboration, execution and performance management.

At any given moment, market forces could demand changes from suppliers, logistics
providers, locations and customers, and from any number of these specialized
participants as components of supply chain networks. This variability has significant
effects on the supply chain infrastructure, from the foundation layers of establishing and
managing the electronic communication between the trading partners to more complex
requirements including the configuration of the processes and work flows that are
essential to the management of the network itself.

Supply chain specialization enables companies to improve their overall competencies in

the same way that outsourced manufacturing and distribution has done; it allows them to
focus on their core competencies and assemble networks of specific, best-in-class
partners to contribute to the overall value chain itself, thereby increasing overall
performance and efficiency. The ability to quickly obtain and deploy this domain-specific
supply chain expertise without developing and maintaining an entirely unique and
complex competency in house is the leading reason why supply chain specialization is
gaining popularity.

Outsourced technology hosting for supply chain solutions debuted in the late 1990s and
has taken root primarily in transportation and collaboration categories. This has
progressed from the Application Service Provider (ASP) model from approximately 1998
through 2003 to the On-Demand model from approximately 2003-2006 to the Software
as a Service (SaaS) model currently in focus today.

6. Supply Chain Management 2.0 (SCM 2.0)

Building on globalization and specialization, the term SCM 2.0 has been coined to
describe both the changes within the supply chain itself as well as the evolution of the
processes, methods and tools that manage it in this new "era".

Web 2.0 is defined as a trend in the use of the World Wide Web that is meant to increase
creativity, information sharing, and collaboration among users. At its core, the common
attribute that Web 2.0 brings is to help navigate the vast amount of information available
on the Web in order to find what is being sought. It is the notion of a usable pathway.
SCM 2.0 follows this notion into supply chain operations. It is the pathway to SCM
results, a combination of the processes, methodologies, tools and delivery options to
guide companies to their results quickly as the complexity and speed of the supply chain
increase due to the effects of global competition, rapid price fluctuations, surging oil
prices, short product life cycles, expanded specialization, near-/far- and off-shoring, and
talent scarcity.

SCM 2.0 leverages proven solutions designed to rapidly deliver results with the agility to
quickly manage future change for continuous flexibility, value and success. This is
delivered through competency networks composed of best-of-breed supply chain domain
expertise to understand which elements, both operationally and organizationally, are the
critical few that deliver the results as well as through intimate understanding of how to
manage these elements to achieve desired results. Finally, the solutions are delivered in a
variety of options, such as no-touch via business process outsourcing, mid-touch via
managed services and software as a service (SaaS), or high touch in the traditional
software deployment model.

Theories of supply chain management

Currently there is a gap in the literature available on supply chain management studies:
there is no theoretical support for explaining the existence and the boundaries of supply
chain management. A few authors such as Halldorsson, et al. (2003), Ketchen and Hult
(2006) and Lavassani, et al. (2008b) have tried to provide theoretical foundations for
different areas related to supply chain by employing organizational theories. These
theories include:

• Resource-Based View (RBV)

• Transaction Cost Analysis (TCA)
• Knowledge-Based View (KBV)
• Strategic Choice Theory (SCT)
• Agency Theory (AT)
• Institutional theory (InT)
• Systems Theory (ST)
• Network Perspective (NP)
Resource-based view
The resource-based view (RBV) is a business management tool used to determine the
strategic resources available to a company. The fundamental principle of the RBV is that
the basis for a competitive advantage of a firm lies primarily in the application of the
bundle of valuable resources at the firm's disposal. To transform a short-run competitive
advantage into a sustained competitive advantage requires that these resources are
heterogeneous in nature and not perfectly mobile. Effectively, this translates into valuable
resources that are neither perfectly imitable nor substitutable without great effort . If these
conditions hold, the firm’s bundle of resources can assist the firm sustaining above
average returns. The VRIN model also constitutes a part of RBV.

Transaction cost theory

The model shows institutions and market as a possible form of organization to coordinate
economic transactions. When the external transaction costs are higher than the internal
transaction costs, the company will grow. If the external transaction costs are lower than
the internal transaction costs the company will be downsized by outsourcing, for
example.

According to Ronald Coase, people begin to organise their production in firms when the
transaction cost of coordinating production through the market exchange, given imperfect
information, is greater than within the firm.[5]

Ronald Coase set out his transaction cost theory of the firm in 1937, making it one of the
first (neo-classical) attempts to define the firm theoretically in relation to the market.[1]
One aspect of its 'neoclassicism' in presenting an explanation of the firm consistent with
constant returns to scale, rather than relying increasing returns to scale.[6] Another is in
defining a firm in a manner which is both realistic and compatible with the idea of
substitution at the margin, so instruments of conventional economic analysis apply. He
notes that a firm’s interactions with the market may not be under its control (for instance
because of sales taxes), but its internal allocation of resources are: “Within a firm, …
market transactions are eliminated and in place of the complicated market structure with
exchange transactions is substituted the entrepreneur … who directs production.” He asks
why alternative methods of production (such as the price mechanism and economic
planning), could not either achieve all production, so that either firms use internal prices
for all their production, or one big firm runs the entire economy.

Coase begins from the standpoint that markets could in theory carry out all production,
and that what needs to be explained is the existence of the firm, with its "distinguishing
mark … [of] the supersession of the price mechanism." Coase identifies some reasons
why firms might arise, and dismisses each as unimportant:

1. if some people prefer to work under direction and are prepared to pay for the
privilege (but this is unlikely);
2. if some people prefer to direct others and are prepared to pay for this (but
generally people are paid more to direct others);
3. if purchasers prefer goods produced by firms.

Instead, for Coase the main reason to establish a firm is to avoid some of the transaction
costs of using the price mechanism. These include discovering relevant prices (which can
be reduced but not eliminated by purchasing this information through specialists), as well
as the costs of negotiating and writing enforceable contracts for each transaction (which
can be large if there is uncertainty). Moreover, contracts in an uncertain world will
necessarily be incomplete and have to be frequently re-negotiated. The costs of haggling
about division of surplus, particularly if there is asymmetric information and asset
specificity, may be considerable.

If a firm operated internally under the market system, many contracts would be required
(for instance, even for procuring a pen or delivering a presentation). In contrast, a real
firm has very few (though much more complex) contracts, such as defining a manager's
power of direction over employees, in exchange for which the employee is paid. These
kinds of contracts are drawn up in situations of uncertainty, in particular for relationships
which last long periods of time. Such a situation runs counter to neo-classical economic
theory. The neo-classical market is instantaneous, forbidding the development of
extended agent-principal (employee-manager) relationships, of planning, and of trust.
Coase concludes that “a firm is likely therefore to emerge in those cases where a very
short-term contract would be unsatisfactory,” and that “it seems improbable that a firm
would emerge without the existence of uncertainty.”

He notes that government measures relating to the market (sales taxes, rationing, price
controls) tend to increase the size of firms, since firms internally would not be subject to
such transaction costs. Thus, Coase defines the firm as "the system of relationships which
comes into existence when the direction of resources is dependent on the entrepreneur."
We can therefore think of a firm as getting larger or smaller based on whether the
entrepreneur organises more or fewer transactions.

The question then arises of what determines the size of the firm; why does the
entrepreneur organise the transactions he does, why no more or less? Since the reason for
the firm's being is to have lower costs than the market, the upper limit on the firm's size is
set by costs rising to the point where internalising an additional transaction equals the
cost of making that transaction in the market. (At the lower limit, the firm’s costs exceed
the market’s costs, and it does not come into existence.) In practice, diminishing returns
to management contribute most to raising the costs of organising a large firm, particularly
in large firms with many different plants and differing internal transactions (such as a
conglomerate), or if the relevant prices change frequently.

Coase concludes by saying that the size of the firm is dependent on the costs of using the
price mechanism, and on the costs of organisation of other entrepreneurs. These two
factors together determine how many products a firm produces and how much of each.[7]

Knowledge-based theory of the firm

The knowledge-based theory of the firm considers knowledge as the most strategically
significant resource of a firm. Its proponents argue that because knowledge-based
resources are usually difficult to imitate and socially complex, heterogeneous knowledge
bases and capabilities among firms are the major determinants of sustained competitive
advantage and superior corporate performance.

This knowledge is embedded and carried through multiple entities including

organizational culture and identity, policies, routines, documents, systems, and
employees. Originating from the strategic management literature, this perspective builds
upon and extends the resource-based view of the firm (RBV) initially promoted by
Penrose (1959) and later expanded by others (Wernerfelt 1984, Barney 1991, Conner
1991).

Although the resource-based view of the firm recognizes the important role of knowledge
in firms that achieve a competitive advantage, proponents of the knowledge-based view
argue that the resource-based perspective does not go far enough. Specifically, the RBV
treats knowledge as a generic resource, rather than having special characteristics. It
therefore does not distinguish between different types of knowledge-based capabilities.
Information technologies can play an important role in the knowledge-based view of the
firm in that information systems can be used to synthesize, enhance, and expedite large-
scale intra- and inter-firm knowledge management (Alavi and Leidner 2001).

Whether or not the Knowledge-based theory of the firm actually constitutes a theory has
been the subject of considerable debate. See for example, Foss (1996) and Phelan &
Lewin (2000). According to one notable proponent of the Knowledge-Based View of the
firm (KBV), “The emerging knowledge-based view of the firm is not a theory of the firm
in any formal sense”

Strategic Choice Theory

Strategic Choice Theory is a theory in which forces and variables in the external
environment are dynamic, and that business strategies are affected by the interactions
between these factors.

agency theory

A theory explaining the relationship between principals, such as a shareholders, and

agents, such as a company's executives. In this relationship the principal delegates or
hires an agent to perform work. The theory attempts to deal with two specific problems:
first, that the goals of the principal and agent are not in conflict (agency problem), and
second, that the principal and agent reconcile different tolerances for risk.

Institutional theory

Institutional theory focuses on the deeper and more resilient aspects of social structure. It
considers the processes by which structures, including schemas, rules, norms, and
routines, become established as authoritative guidelines for social behavior. Different
components of institutional theory explain how these elements are created, diffused,
adopted, and adapted over space and time; and how they fall into decline and disuse.

Powell and DiMaggio (1991) define an emerging perspective in organization theory and
sociology, which they term the 'new institutionalism', as rejecting the rational-actor
models of classical economics. Instead, it seeks cognitive and cultural explanations of
social and organizational phenomena by considering the properties of supra-individual
units of analysis that cannot be reduced to aggregations or direct consequences of
individuals’ attributes or motives.

Scott (1995) indicates that, in order to survive, organisations must conform to the rules
and belief systems prevailing in the environment (DiMaggio and Powell, 1983; Meyer
and Rowan, 1977), because institutional isomorphism, both structural and procedural,
will earn the organisation legitimacy (Dacin, 1997; Deephouse, 1996; Suchman, 1995).
Multinational corporations (MNCs) operating in different countries with varying
institutional environments will face diverse pressures. Some of those pressures in host
and home institutional environments are testified to exert fundamental influences on
competitive strategy (Martinsons, 1993; Porter, 1990) and human resource management
(HRM) practices (Rosenzweig and Singh, 1991; Zaheer, 1995).

There is substantial evidence that firms in different types of economies react differently
to similar challenges (Knetter, 1989). Social, economic, and political factors constitute an
institutional structure of a particular environment which provides firms with advantages
for engaging in specific types of activities there. Businesses tend to perform more
efficiently if they receive the institutional support.

Martinsons (1998) developed a theory of institutional deficiencies (TIDE) suggesting that

relationship-based commerce will prevail where rule-based markets can not flourish due
to institutional deficiencies. Martinsons (2008) extends TIDE to show how the
development of relationship-based e-commerce in China has resulted from that country's
lack of trustworthy and enforceable set of rules for doing business. His theory suggests
that factors such as personal connections (guanxi in China, blat in Russia, etc.), informal
information, and blurred business-government relations (which also encourage
corruption) will constrain the transition from the physical marketplace to online
marketspaces

Systems theory
From Wikipedia, the free encyclopedia
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Systems theory is the transdisciplinary study of systems in general, with the goal of
elucidating principles that can be applied to all types of systems in all fields of research.
The term does not yet have a well-established, precise meaning, but systems theory can
reasonably be considered a specialization of systems thinking and a generalization of
systems science. The term originates from Bertalanffy's General System Theory (GST)
and is used in later efforts in other fields, such as the structural functionalist sociology of
Talcott Parsons and Niklas Luhmann.

NETWORK PERSPECTIVE
The 'Network Perspective' has emerged as an important influence in organization and
management research over the last few decades. The network perspective in this context
has no specific definition; instead it generally encompasses the notion of networks and
the techniques of network analysis, both of which have long histories in sociology. In this
paper we examine empirical articles which use a network perspective in organization
studies to see how the use of network analysis and how the concept of 'network
organizations' is addressed. It is argued that the use of network analysis and the concept
of 'network organizations' have little overlap in the literature. The findings show that the
use of network analysis techniques is firmly established, however it is not used in
investigating network organizations. The literature addressing network organizations is
largely theoretical with only a few qualitative empirical studies. Several reasons for the
lack of empirical research on network organizations are proposed