By Ik-Whan Kwon, Ph.D.
Ik-Whan Kwon, Ph.D is the Professor of Supply Chain Management, Director Emeritus at Center for Supply Chain Management Studies Saint Louis University and Member, Missouri Enterprise Board of Directors
Everyone talks about supply chain as if it is a panacea that will solve all managerial problems. More so for small and medium size enterprises, as they lack resources to implement the complex supply chain strategies compared with some of their big “brothers and sisters.” Implemented correctly, supply chain operations indeed create extra value for companies, according to research published in academic as well as trade journals. The same studies also shed a light on how hard it is to implement supply chain in the right way. More than half of the efforts fail for many reasons.
Such a challenge is more so for small and medium size companies. As few as 14% of small and medium size companies use supply chain concepts in their business plan.** Supply chain design is a long-term strategic decision and it is costly to set up a supply chain structure. Failure causes a tremendous financial and emotional toll for many people involved.
The goals of supply chain are to improve customer values (enhance customer’s shopping experiences; right product, right place, right time, right amount, right invoice), enhance shareholder value (return on assets, return on investment, profitability), meet and exceed stakeholder expectations (socially responsible supply chain) with minimum costs (efficiency) all in the most productive ways (effectiveness). To achieve the above goals successfully, we have to design effective and sustainable supply chains to compete in the global market. Such framework requires an important process.
The first step is to start with a sound supply chain foundation; a spirit of collaboration among strategic players. The rewards from collaboration have been well documented. For example, the best collaborator (top 25 quartile) has 7.4 full-time equivalent (FTE) employees per $1 billion in revenue, as opposed to 50 FTE for the bottom quartile collaborators, and inventory carrying cost for the best collaborators is 2.8% vs. 14.8% for the bottom collaborator (Partidas, 2015).
Collaboration improves the level of open communication (trust) among the players, which information sharing much easier and more focused. Information sharing usually reduces or in some cases eliminates unnecessary paper work and lessens transaction costs. Transaction costs for any company range from 30 to 40% of their operating expense in search for the right suppliers (– ex ante cost), and verifying and monitoring progress (- an ex post cost). One recent study claims that loss of trust cost Chrysler $24 billion in profit over the past 12 years (Henke, Stallkamp and Yeniyurt, 2014).
A similar story has been reported on transaction costs under collaborative framework in supply chain (Kwon, Hamilton and Hong, 2011). Another study specifically addresses the relationship between the level of collaboration and the size of investment return (Kwon, Hong and Kim, 2017). The findings from the above studies indicate a strong positive relationship between the level of collaboration and the size of investment return.
Once a workable supply chain foundation is in place, a company is ready to implement supply chain drivers which lead to profit improvement. Supply chain drivers includes strategic sourcing, inventory management, transportation optimization, customer management and other important supply chain tools that improve overall profitability. Well-designed supply chain supported by a strong foundation and implemented with well thought-out supply chain tools WILL improve profitability of the company.
One study reports that the supply chain cost for the best-in-class is almost half of that of median class. For example, supply chain cost for the best-in-class in the automotive industry was 5.4% of total revenue vs. 9.2% for the median company. In the consumer goods industry, the comparison was 4.5% vs. 10.7%;, for pharmaceutical, 3.4% vs. 9.1% (PRTM/The Performance Measurement Group, 2010).
Since its inception in the late 1990’s, Supply chain management has seen a remarkable evolution; from internal implementation (within an organization) to inter-organizational expansion to a global supply chain stage. We once reminded ourselves that “we are not competing with our competitors. Rather our supply chain is competing with our competitor’s supply chain to survive in the market.” Such a bold statement is still true as we are one small player in this global market where supply chain plays such an important role to grow with global customers. Digitization of information flow, 3D Printing, Fourth Industrial Revolution and the introduction of block-chain make it even more relevant to understand the fundamentals of supply chain foundation, to reap boundless global opportunities that supply chain provides. Now it is more important than ever to understand the supply chain foundation correctly to survive in this age of information supply chain.
**A similar study was conducted for the State of Missouri in 2007. The result from the study shows only 32.6 % of small and medium size companies in Missouri use supply chain as one of their business strategies
Henke, Jr. John, Stallkamp, Thomas and Yeniyurt, Sengun (2014). Lost supplier trust, lost profit. Supply Chain Management Review, May/June: 24-32.
Kwon, Ik-Whan, Hamilton, John and Hong, Seock-Jin (2011). Trust and Transaction Cost in Supply Chain Cost Optimization: An Exploratory Study in Inter-Organizational Information Systems and Business Management: Theories for Researchers, 2011.
Kwon, Ik-Whan, Hong, Seock-Jin and Kim, Sung-Ho (2017). Does Collaborative Relationship in Supply Chain Pay-Off? International Journal of Collective Intelligence, Vol. 6 (4): 45-55.
Li, Yuan, Lozano, Karinna and Armstrong, Brad (2010). Status report on supply chain implementation for small and mi-size manufacturers in Missouri. Student Project for the Center for Supply Chain Management Studies at Saint Louis University.
Partidas, Becky (2015). Closer Relationships lead to superior planning, Supply Chain Management Review, May/June: 70 – 72.
PRTM/The Performance Measurement Group (2010). Does SC Matter? Superior Supply Chain Management (SCM) has Long Been a Source of Competitive Advantage.