Beyond Logistics: Supply Chain Management

Product excellence fails to guarantee competitive advantage. Successful companies use supply chain partnerships to reduce costs and complement their products with basic and value-added services.

November 1 1994 by Alfred J. Battaglia


Is supply chain management on your agenda? If you are like most corporate chiefs, the answer is: probably not. In a recent survey of 35 CEOs by A.T. Kearney’s James E. Morehouse, executives most often ranked as their priorities initiatives such as cost reduction, investment decisions, strategic alignment, elimination of excess capacity, and global expansion. Further down the list was the notion of “extending,” which means supply chain integration with internal and external partners-including process integration-to get raw materials to the manufacturer and finished products to the consumer. According to the survey, CEOs fail to integrate their supply chain strategies for a number of reasons-among them are excessive workload and fragmented supply chain responsibilities. But in neglecting integration and the broader concept of supply chain management, you might be missing an opportunity to cut costs and boost customer service. SCM rests on the premise that product excellence alone fails to guarantee corporate success. In fact, customers expect many services, including the prompt delivery of products to precise locations with near-perfect administrative and physical quality.

Becton Dickinson derives a significant competitive advantage from SCM, an offshoot of the logistics function. The company evaluates its supply chain program against strategic imperatives involving productivity, quality, service development, and chain integration. Seeking integration, we engage in supply chain relationships; in one of these, we’ve paired with the health-care products firms, West Co. and Baxter International. We maintain that SCM-a true value-added process-is most effective when it is championed by both the CEO and a senior-level officer specifically designated to monitor SCM execution.

LOGISTICAL EVOLUTION

Most CEOs don’t understand the differences between logistics and supply chain management. In fact, the lineage runs like this: Such mundane areas as materials management and distribution have evolved into a more powerful function called logistics, which in turn has become an integral component of SCM.

The benefits of integrated logistics, a first-cousin of SCM, have been promoted by consultants and other experts for at least the past 15 years. Why haven’t CEOs gotten the message? Partly because some advocates of the concept ask such scintillating questions as, “Do you have plans to use bar coding or electronic data interchange?” “How do you manage your warehouses?” and other technical questions.

Boring. Instead, we should be asking questions with an immediately identifiable bottom-line impact:

€.If your company manufactures products, what services do your customers expect?

€.Does your delivery of these services meet the expectations of your customers-and exceed that of your competitors?

€.Do you realize that order processing and product fulfillment processes may cost more than 15 percent of sales? What programs does your company have in place to reduce these costs?

If you cannot answer questions like these, chances are that significant hidden opportunities are here waiting to be seized.

 

FROM LOGISTICS TO SCM

Logistics is a relatively new discipline. For decades, executives were more likely to think in terms of its component activities, such as forecasting, purchasing, production planning, or warehousing. Typically, these activities were managed in a fragmented manner. As a result, it was not uncommon to find them under separate functions, including sales, marketing, manufacturing, finance, and distribution.

But business processes cut across an organization’s functional and departmental boundaries. Take product development, a process that integrates areas including R&D, marketing, engineering, manufacturing, logistics, finance, and law. Leading-edge development goes beyond organizational boundaries, reaching out to suppliers and customers. Among the most important business processes in manufacturing companies are those that develop, produce, sell, process orders, and deliver products. SCM plays an important role in most of these processes.

Essentially, supply chain management is an integrating process, based on the flawless delivery to customers of basic and unexpected services. Simply put, when a company delights its customers, it moves into the realm of value-added service. Led by senior line executives, SCM optimizes information and product flows from the purchase of raw materials to the delivery and consumption of finished goods. The process also is supported by key sales and marketing personnel-those who have an in-depth understanding of customers’ product and service requirements. The innovative use of information technology-which over the last decade has revolutionized such mundane areas as order processing, customer service, and warehousing-completes the SCM package. The benefits of the approach are accrued by all participants in the supply chain.

The integration of materials management and physical distribution into a broader function called logistics is a necessary step in the process. Many companies have not gotten even this far. Although many structure their logistics function in this way, it is important to emphasize that not every activity must report directly to one executive. It may be appropriate for certain activities such as plant production planning to report to manufacturing. What is critical: One senior executive should have the line and functional responsibility to represent SCM. Once such integration is achieved, an opportunity arises to merge professional logistics disciplines with the required strategic planning capability. The merger of logistics and strategic planning illustrates the alignment of a company’s logistical capabilities with its business strategy (see graphic).

 

SCM IN PRACTICE

The combination can have a powerful effect on the bottom line. Here’s one example. In a strategic alliance among West Co., Becton Dickinson, and Baxter, West obtains raw materials, manufactures rubber stoppers, and sells them to us. We, in turn, manufacture final medical products and supply them to Baxter, which distributes them to hospitals. What’s important in all of this is the activity going on in our companies at all management levels. Working together, we are reducing cycle times and costs while improving quality and service. We have built strong relationships, and each company is winning.

As mentioned, the expansive, complex SCM process works best when it is coordinated by a senior-level executive who reports directly to the CEO or to the senior operating officer. I am talking about a new breed of senior operating executive-not a transportation manager, a warehouse manager, or even a logistics director. (The requirements of this position are detailed in a sidebar that appears in this month’s logistics roundtable.) This executive must have a broad range of expertise, enabling him or her to interact with the sales, marketing, and information technology functions. The new executive’s work with IT personnel may be particularly important, because most companies don’t yet have systems and platforms in place to support supply chain integration.

Revisiting the Kearney study, CEOs must realize that SCM plays a role in all their critical initiatives and not just integration, or “extending.” If the strategic concepts and focused leadership I have described are properly initiated, supported, and monitored, the result will be a sustainable competitive advantage and an improvement in profitability. Indeed, these rewards are well-earned. And in the long run, the benefits of SCM are distributed throughout the supply chain among suppliers, manufacturers, distributors, and customers.


Alfred J. Battaglia is a group president of Franklin Lakes, NJ nased Becton Dickinson and Co. , a $ 2.6 billion worldwide manufacturer and marketer of medical supplies and diagnostic systems for use by health-care professionals, medical research institutions and the general public.