An analysis of Supply Chain Management in business

Introduction

Several definitions of supply chain management can be found in the literature. One of the most inclusive is the one found in Simchi-Levy et al. (2000): Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed in the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying customer level requirements.

Nowadays the field of supply chain management have gained and increased interest from both academics and practitioners alike. Several factors can be used to justify and explain this renewed interest; some are discussed below.

The evolution of process and product technologies require new approaches

Never in the past has technology evolved in such a fast pace as recently. This evolution makes it very difficult for companies today to be able to keep up with the evolution of technology in all aspects involved in all parts of the products and services they offer to customers by using internal resources exclusively. Long gone is the time when companies such as Ford Motor Co. had very high levels of vertical integration, making in the great majority of the parts used in their cars. Amazing as it may seem, Ford used to own land in the Northern Region of Brazil, for instance in which they grew the trees which provide the raw material for latex, used to make rubber which in turn allowed Ford to make the tyres to go in their cars. Nowadays to avoid ending up being mediocre in everything for trying to excel at everything most companies try to focus only on whatever activities they see as potentially capitalizing on their core competencies. As a consequence, they tend to outsource whatever activities which are considered as requiring competencies considered as non-core by the company. These may include not only the supply but also the development of parts and even whole sub-assemblies (sometimes called “systems” or “modules” in the automotive industry). This gradual trend of outsourcing more (and more relevant) parts of the products companies offer to their customers have made the number and importance of the interfaces between companies and their suppliers to increase to levels never seen before. This has caused academics and practitioners to focus more of their attention on such interfaces: issues related to patterns of relationships between companies, forms and content of information exchange, modes of transportation of physical goods between companies, the distribution of management activities between companies who are part of the supply chains and several other issues started to occupy the top of their agendas and became what now comprises the broad area of supply chain management.

The area of business operations management has always focused on companies rather than on “chains” of companies. Historically, the bulk of the operations management techniques have focused on trying to improve the management of companies, putting relatively less emphasis on the management of chains of companies and their interfaces. Although without academic rigour, the major operations management techniques found in today’s textbooks were listed in the chronological order of the years in which they were developed (first and second columns). In the third column the attempt was to determine (somewhat arbitrarily) whether the emphasis of the technique was on improving the performance of the individual companies or improving the overall performance of the supply chains. In the determination of the different “emphases”, in general terms except for honorable exceptions - such as Jay Forrester (1999) “Industrial Dynamics” in the 50s, for instance, the techniques which more directly deal with the complexities of supply chains started to be developed during the last, say, 15 years. If compared with the maturity and volume of techniques dealing with the “insides” of companies, the principle of diminishing returns determine that the marginal improvements in performance “inside” companies (where operations management techniques have been intensely applied for more than a century) are relatively more costly than marginal improvements “outside” companies (in the interfaces). In other words, companies have recently noticed that the potential ROI (Return on Investment) of initiatives related to supply chain management would (at least for some time) probably be higher than the ROI of initiatives related to improvements inside the companies.

Information and management technologies have evolved and allowed for new approaches. Similarly to product and process technologies, arguably, never in past have the development of management technologies evolved at a faster pace. Nowadays, companies find available advanced software solutions generically called “supply chain managers” (such as Manugistics, APO/SAP-AG, i2 among others), which supposedly have the potential of helping companies better integrate with the supply chain to which they belong, helping automate and systematize information flows between companies and also helping support decision processes. Although it becomes increasingly clear that supply chain management goes far beyond the simple attainment of more automated information flows, it is also beyond any doubt that better information flows between companies within a supply chain is a “sine qua non” (necessary albeit not sufficient) condition for companies to achieve better supply chain management. Another technological development which has tremendously increased the potential of supply chain integration is the evolution of the Internet. Up to the mid 90s information flows between companies in a supply chain had to rely on expensive point-to-point connections via EDI (electronic data interchange), in the years 2000, the Internet have improved in terms of reliability, availability and speed of connection allowing that companies connect in much cheaper, simpler and more reliable ways.

Supply chain management: suffering from a paradox of origin?

It is increasingly argued by the literature (Simchi-Levy et al., 2000; Lambert, Stock and Ellram, 1998; Kuglin and Rosembaum, 2001) that for a company which aims at being excellent in competitive terms, it does not suffice that they excel at managing their own assets. According to those authors, it would also be necessary that overall supply chain management initiatives are in place to make sure that the overall chain is able to provide appropriate service levels to the consumer so providing more sustainable competitive advantage with appropriate levels of overall supply chain costs to ensure appropriate levels of ROI for the companies involved. However one question that one might ask is, who should be responsible or able to lead initiatives to achieve an “overall supply chain management”? No single participant or member of most supply chains has ownership of or hierarchical superiority upon the overall chain to actually be able to “manage” it. Put in simple terms, this is because managing involves having power to influence behavior of others.

In traditional arrangements, business management is based on influencing power which derives from ownership or hierarchical superiority. Companies normally cannot count on those sources of power when leading with their supply chains. It is usual, however that at least in some supply chains there are companies who detain more power than others (possibly from other sources, e.g. bargaining power, buying power, brand name power, proprietary technologies-based power). In this instance having power can be understood as having the potential of influencing behaviour of other companies in the chain (a characteristic which would be necessary for the management of the chain). It also seems plausible that if it is possible for someone to manage supply chains, the more powerful companies in the chain have a crucial role to play – since they are the ones who can in fact influence behavior of others. Out of this reasoning we can make one first proposition:

1. The responsibility and initiatives related to achieving supply chain management could only be assumed by the stronger companies (who have more power) in the chain because they are the ones with the power to make it happen.

According to a number of authors (e.g. Hines at al., 2000; Lamming, 1993; Kanter, 1994; Jarillo, 1993; Harland, 1996), the interest in a better supply chain management amongst other reasons comes from the fact that the traditional type of relationship between companies within a supply chain tend to lead to a “win-lose” game. In other words, in a traditional type of relationship, one party has to lose in order that other party wins (resulting in a “zero-sum” game, without net gains which might be partly passed on to the end consumer in order to make the chain more attractive to him/her as a supplier). This is because, in traditional arrangements, each company is trying to maximize their own results and one of the most obvious ways to maximize a powerful company’s results is to put in jeopardy the profit margins of others in the chain (immediate customers or suppliers) in arms-length price-based negotiations. Nobody is overseeing the overall performance of the chain which might result in net gains (or in a “win-win” game). These net gains could result from co-operation between partners in the chain: information sharing, for instance which could result in less uncertainty for both partners and therefore less costly “safety” resources (safety stocks) to deal with such uncertainty.

Another proposition then follows:

2. Initiatives related to supply chain management aim at, among other things, to substitute win-win relationships for the traditional zero-sum win-lose relationships. This is because win-win relationships can generate net gains which can be absorbed by the partners in the chain in the form of better ROI or can be at least partly passed on to the end user potentially resulting in competitive advantage over other chains; However, put in a more pragmatic way, when one analyses the history of the traditional win-lose relationships, which have been dominant for instance in Latin America as in other parts of the world, it is easy to notice that the most powerful companies are used to being on the “winning side”.

Another proposition follows from that.

3. In many traditional win-lose relationship within a supply chain, the most powerful companies are deliberately on the winning side. This is because they use their power to secure larger parcels of profit margins in the chain when they take part in arms-length negotiations; Now let us imagine a powerful company within a supply chain analysing pragmatically its alternative courses of action of whether or not to trigger supply chain management initiatives. For them to trigger efforts to actually achieve an overall supply chain management, they would certainly incur in costs as a consequence of these efforts and the major beneficiaries of such efforts would not be themselves but exactly the weaker companies who would cease being in the “loser” end and would after the initiative be in the “winner” end (since both ends are now at winner ends).

The strongest companies would, after the initiative, be in the winner end too, but that is where they were already in the first place.

Another proposition can follow:

4. The most powerful companies in a supply chain, exactly those companies with the best odds to lead the effort to achieve better supply chain management because of the strong power to influence behaviour of the other companies within the chain many times do not see enough advantages at least in the short term, to allocate managerial efforts and resources to do it;

If valid, the four propositions above might lead to a fifth one:

5. Initiatives to lead an effort to achieve better supply chain management can only be triggered by the most powerful companies in a supply chain because they are the one with enough power to influence and change behavior of other companies.

However, in a stable regime condition they many times do not have the immediate interest to trigger such initiatives. This can be called a “paradox of origin” in supply chain management and this paradox can be a killer of supply chain management initiatives.

Companies with the power to make it happen many times do not have the interest to make it happen. This can be noticed in Brazil, where initiatives such as the ECR (efficient consumer response) movement, for example. The ECR movement have for a decade tried to bring together large manufacturers of fast moving consumer goods and the large retail players to cooperate aiming at making the response to the consumer more efficient, but in reality, ECR has never taken off at least in Brazil. This can be explained, at least in part for the resistance of some strong players in the retail side who have made substantial profits from the traditional arms-length relationships because of their increasing purchasing power, a result of a great concentration which has happened in the retail industry in Brazil. In some other situations witnessed in Brazil, however, one way of escaping this paradox is when a specific supply chain’s stable condition is disturbed by a factor (generally) external to the chain – a new law, a new competitor, a change in macro-economical conditions, for instance. When this external factor “rocks the boat” of the entire chain sufficiently to convince the most powerful companies that they are also in jeopardy, it is more likely that they trigger initiatives and put efforts to improve the overall performance of the supply chain where they are.

One situation in which an industry (and their most powerful companies) had their boat rocked sufficiently is the Brazilian pharmaceutical industry. In 1999, a bill was passed in the Brazilian House of Representatives regulating the offer of the so-called generic drugs (prescription drugs sold bearing the name of their active principles or “salts”, and not brand names). Before that, the powerful pharmaceutical companies were protected by brand name, the margins were generally comfortable and the efforts to better manage the supply chain were not perceived as worthwhile because they were frankly in the winning side of the win-lose relationships established e.g. with their distributors who were forced to buy drugs from the particular laboratories whose brand name drugs were protected. They used to work in a situation of quasi-monopoly regarding the brand name-protected drugs market. With the recently established commodity-like generic drugs competition, margins of the traditional laboratories started to get squeezed and at the same time the pharmaceutical companies started to experience lost sales because their products were not present in the points of sale (the drugstores) – now by law generic drugs could be substituted for the corresponding brand protected drugs prescribed by MDs. Only then the pharmaceutical companies started to trigger initiatives to better manage their supply chains in order to be able to compete with the new competitors in the market and their chains: the generic drug manufacturers. Such initiatives are described below and try to show why the pharmaceutical industry in Brazil is quite well positioned to face the new realities. In order to describe the ways in which the supply chain management in the pharmaceutical industry has been changing in Brazil, a brief introduction of the industry is also given.