Relevance of materials management in SCM

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Background

In this section the basic concepts of material management and its role in SCM are defined to clarify the area of this study. This background will be used to frame the study and discuss its academic relevance. The first part of this section will clarify the relevance of materials management in general while the second section will summarize current knowledge of SCM and give necessary definitions on key terms used in this topic.

Relevance of the research topic in general

Materials Management as a core function of business management includes inventory management, sourcing, storing as well as distributing materials and waste management. Its importance is increasing since the beginning of the 1990s in business practice and science steadily, since researchers have pointed out the importance of sourcing as one main cost driver of modern business organizations (Lee & Billington, 1993). The number of material-economic reorganization measures in the company and the many publications on this subject furthermore confirm this (Farmer, 1977; Busch, 1988). Additionally, the opportunities to reduce costs and increase profits in other functional areas, especially in sales are largely exhausted or only realizable at high costs (Christopher, 2005). At the same time increasing global competitive pressures occur in the cost, quality and timing of organizational processes. Therefore supply-chain-based mechanisms are also used in materials management. The main purpose of materials management is to supply the business organization reliable and efficiently with materials needed to achieve the organizations strategy and if necessary dispose them ecologically. In this definition three goals are included: the supply problem, the efficiency maxim and the quality goal. This main goal has to be reformulated for each core function and to operationalize the core functions (What is the Role of Purchasing and Materials Management?, 1988).
As SCM manages the material, financial and information flow of organizations (Harrison & van Hoek, 2005), materials management has a special importance in the field of integration of supply chains. This master thesis is examining the role of supply-based materials management methods and compares them with classical competitive-based materials management methods, to explore the specific factors of supply-based materials management. Therefore it uses literature of both classical and supply-chain based materials management to explore the differences in focus and mechanisms. The thesis therefore is providing an in-depth comparison of classical competitive-based and supply-chain-based materials management, examining the differences in scope and focus of these instruments and deriving conclusions for materials management in both competitive-based and supply-chain-based business organizations.

Relevance of materials management in SCM

First of all, the relevance of materials management in the field of SCM should be discussed. This is important to clarify the linkages between the research topic and the field of study and to clarify and legitimate the research problem. Therefore in this section the basics of SCM are defined and the relevance of materials management in SCM is discussed.

Definitions and key terms in SCM

The main concept of SCM is the notion of a supply chain. Definitions of supply chains are manifold but all basically share the same main points: a supply chain is about a group of businesses, a supply chain is about collectively producing some value, and at the end of the supply chain lays the consumer. Harrison & van Hoek (2005) for example use the following definition of a supply chain:
“A supply chain is a group of partners who collectively convert a basic commodity (upstream into a finished product (downstream) that is valued by end-customers, and who manage returns at each stage” (Harrison & van Hoek, 2005, p. 7)
Similarly, Wisner, Leong & Tan state that “… the series of companies that eventually make products and services available to consumers, including all of the functions enabling the production, delivery, and recycling of materials, components, end products, and services, is called a supply chain.” (Wisner, Leong, & Tan, 2005, p. 6)
Therefore the networks structure and the collective production of a good produced for an end-customer are the main factors explaining supply chains. In Figure 1 the typical network structure of a supply chain is visualized.
Supply Chain Management though “is concerned with managing the entire chain of processes, including raw material supply, manufacture, packaging and distribution to the end-customer” (Harrison & van Hoek, 2005, p. 6).
In this perspective Supply Chain Management offers a holistic view on economic production processes. Consequently SCM is concerned with the structure and process within the supply chain, to effectively manage the network of companies within the supply chain and the relationships between them. Essential tasks of SCM have been formulated by Oliver and Weber in 1992 (Harrison & van Hoek, 2005, p. 10):

  • SCM views the supply chain as a single entity
  • SCM demands strategic decision making
  • SCM views balancing inventories as a last resort
  • SCM demands system integration

The main contribution of SCM to logistical theories is the focus that SCM gives on competitive strategy. In SCM the main insight is that companies do not solely compete with direct competitors, independent from their value creation process, but that rather production chains compete with each other for the part of the budget of the end-customer.
This new strategic perspective changes fundamentally the way of economic thinking in several ways. First of all, it provides a customer-centric paradigm of business, away from direct customers to the end-customer. The main insight here is that organizations therefore compete with practically every product for the budget of the customer, called generic substitution (Johnson, Scholes, & Whittington, 2005).
Second, the main mechanisms change from sales-based and cost-sensitive management, to a management of cooperation and trust (Christopher, 2005, p. 5). The importance of cooperation and trust is especially important to achieve the gains from SCM in the long term (Bolton & Dwyer, 2003). Otherwise a successful integration between the organizations in the supply chain is not possible. Trust, thus, is a main concept in SCM to achieve win-win-situations and outperform other supply chains (Wisner, Leong, & Tan, 2005, p. 423).
Third, SCM is about managing relationships instead of operations (Christopher, 2005, p. 5). The essential manageable parameters in a supply chain are the interfaces between the different parts in the SCM, and with that the relationships within the supply chain network.
Last, SCM is about competitive advantage (Christopher, 2005, p. 6), but the benchmark of this competitive advantage is not the direct competitor, but other supply chains delivering similar value for the end-customer. Competitive Advantage can be reached according to Porter, either through delivering value with lower costs, or delivering higher value at the same costs (Christopher, 2005). Porter first of all claimed that often, competition is viewed too narrowly and too pessimistically (Porter M. E., 2002, p. 3). Furthermore a value-chain-based view on the company is preferred here (Christopher, 2005, p. 13). SCM goes even further and promote a value-chain-focus on the whole supply chain. Therefore the concepts of the supply chain (many companies contributing to the end product in a chain of production) and the value chains (examining the value-creating and value-destroying activities of the production process) are combined.

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Integration in SCM

The main objective of SCM is an integration of the organizations that represent a supply chain of a certain end-product. Therefore integration, coordination and control of production activities are at the core of SCM. Generally the “need for aligning processes and collaborating between organizations within supply chains” (Harrison & van Hoek, 2005, p. 217) is a new concept fostered by SCM. Contrariwise in traditional business management competition was the main paradigm. Integration in SCM includes the following key issues (Harrison & van Hoek, 2005, p. 218; Mentzer, et al., 2001, p. 3; Bolton & Dwyer, 2003):

  • Collaboration in the supply chain
  • Efficient consumer response
  • Collaboration planning, forecasting and replenishment
  • Managing supply chain relationships

 Collaboration in the supply chain

Collaboration in supply chains generally defines the activities of internal, external and electronic integration of structure and process. Internal integration is concerned with the systematic integration of functions within an organizations own value chain. Here interfaces between functions should be managed frictionless and mutually reinforcing. Strategic fit is the main instrument leading to an internal integration of the value chain. External integration addresses to the integration of the organizations within the supply chain. Here the actual material, financial and information flows between organizations in the value chain are integrated. The methods addressing to materials management (material and information flows) in SCM are discussed in detail in section 4 starting p. 53. Furthermore electronic integration addresses to the integration of ICT-systems within the supply chain, to ensure fast and correct information flows. Main aim is the compatibility of the systems in the chain. Electronic integration should enable the supply chain to use electronic transactions, share knowledge and information across organizational borders and ensure collaborative planning and strategic management (Harrison & van Hoek, 2005).

Efficient Consumer Response

ECR is that part of the supply chain management methods that ensure that the entire supply chain is focusing on the end-customer and meet his demands. Meeting end-customers requirements should be ensured by collaboration throughout the supply chain. Efficient customer response includes category management, continuous replenishment and enabling technologies. Category management balances demands between suppliers and customers in the supply chain towards the end-customer. Continuous replenishment is an inventory concept that allows supplier and customers to manage their inventory efficiently, through joint-inventory management. Last, enabling technologies are used to detect, analyze and implement end-customer needs. (Harrison & van Hoek, 2005

Collaborative planning, forecasting and replenishment

A main task of SCM is collaboration of organizations in planning, forecasting and replenishment. Here collaboration is fostered on strategic and operational levels to ensure competitiveness of the supply chain. The main aim is to improve customer service while decrease costs in inventory management. Therefore the trade-off between efficiency and effectiveness should be resolved by collaboration in planning and implementation between organizations within the chain. (Harrison & van Hoek, 2005)

Managing relationships in SCM

The main aim of building a supply chain is to increase coordination between organizations within a value chain. Coordination though requires trust. Trust though is built up in relationships. Therefore the relations within the organizations have to be managed carefully. Managing relationships in SCM includes creating close relationships initial, managing factors that influence the relation in the supply chain and monitor the relationship.

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The special importance of relationships in SCM

SCM is about coordination and collaboration and therefore requires relationships of the organizations that are part of the supply chain (Harrison & van Hoek, 2005). Relationship management as a result is a main concept that supports SCM (Christopher, 2005), which will be discussed in detail here.
Main parts of relationship management in SCM include selection of partners; choose a form of partnership and collaboration, rationalization of partners, development of supplier networks, supplier development and implementing partnerships. (Harrison & van Hoek, 2005).
Supplier networks are formal or informal groups who share a common customer. Supplier networks arise in the form of supplier associations, keiretsu or Italian districts.
A supplier association basically is an organizational form for the purpose of coordination and development. Through a supplier association the suppliers participating are provided with training and resources for production and logistics process improvements. Furthermore through this form, quality improvements can arise. More frequent communication is another main advantage of this network structure (Harrison & van Hoek, 2005).
Keiretsu is a Japanese business structure, which is recently revised by western researchers. In keiretsu coordination and control is reached through cross-ownership within the supply chain. That ensures mutual objectives and collaboration. In the keiretsu, a lead organization is organizing collaboration. The equity-structure is ensuring that all firms in the supply chain follow the supply chain strategies. (Harrison & van Hoek, 2005)
Italian districts are the supplier networks that are presented by a cluster form and were first discovered by Porter in the Italian ceramics industry (Porter M. E., 1990). Therefore a cluster of an industry is built, if certain factor conditions, demand conditions, supporting industries and firm structure are met. This supply chain network model focuses on geographic proximity and the fit of supplier, demand, supporting industries with firm strategy. Therefore a holistic management of the whole network (the cluster) is necessary.

Tasks of SCM

Due to the high complexity of SCM, the main tasks of SCM are interface coordination, optimization of material and information flows and strategic development of the supply chain. Additionally to these tasks, successful SCM performs the following strategic and operative tasks (Bechtel & Jayaram, 1997).

Strategic tasks of SCM

The strategic tasks of SCM are manifold and include development of the supply chain vision and image. According to this vision and image the structure and process of SCM, also including the ICT-systems supporting the supply chain, can be developed. Furthermore contracting and distribution of rights and responsibilities have to be defined. Subsequently make-or-buy-decision and the allocation of the production volume of the supply chain can be managed. Another important aspect of strategic SCM is the distribution of know-how. The formulation of cross-organizational strategies concerning products and processes, as well as integrated recycling is then the result of the main task of the strategic SCM work. Furthermore strategies of mutual production and quality management have to be formulated and implemented. The functional strategies formulated then include the supply and sales strategies for the whole supply chain as well as for the member organizations within and installing an SCR-management. The last function of strategic SCM is to install an integrated controlling and benchmarking into the SCM to implement and control the strategic integration of efforts within the supply chain.

Operative tasks of SCM

The operative tasks of SCM are following the strategic SCM in time and importance. These include materials scheduling and optimization of processes, quality management of production as well as planning, implementing and controlling the necessary ICT-systems that are accompanying the production process of the supply chain. Furthermore procurement market research and supplier evaluation is part of the operative SCM, as well as the following contracting and handling with suppliers. The coordination of interfaces is the main task of an integrated SCM. All activities then are controlled and supervised by strategic SCM’s controlling function.

1. Introduction
2. Background
2.1. Relevance of the research topic in general
2.2. Relevance of materials management in SCM
3. Research problem
4. Purpose 
4.1. Structure of findings
4.2. Research criteria / Limitations
5. Research methodology 
5.1. Critical discussion on methodology
6. Competitive-based Materials Management
6.1. Introduction
6.2. Supporting instruments in competitive Materials Management
6.3. Scheduling of materials
6.4. Sourcin
6.6. Materials disposal
6.7. Summary on competitive materials management
6.8. Conclusion
7. supply-chain-based materials management in SCM
7.1. Initial situation
7.2. Supporting instruments in supply-chain-based MM.
7.3. Supply-chain-based concepts in scheduling
7.4. Supply-chain-based MM in sourcing
7.5. Supply-chain-based methods in distribution and storage
7.6. Supply-chain-based methods in disposal
7.7. Summary on Chapter 7
8. Analysis of competitive and supply-chain-based MM.
8.1. Comparison of steps in MM
9. Conclusion 
9.1. Theoretic results and review of research purpose
9.2. Managerial implications
Bibliography
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