The 7 Principles that Make Up Supply Chain Management
The 7 principles of supply chain management is a classic article on supply chain management, written more than two decades ago in the year 1997, by David Anderson, Frank Britt and Donavon Favre and published in the Supply Chain Management Review. Supply chain management was a very new concept at that time. Much has changed and progressed in the logistics network over these past two decades, yet this remarkable article is considered as one of the most optimum and unrivalled articles pertaining to the principles of supply Chain management.
The 7 pioneer principles of supply chain management that stand rewarding to any mainframe, even today, and surely for many more decades to come are:
- Segment customers based on service needs.
- Customize the logistics network.
- Listen to signals of market demand and plan accordingly.
- Differentiate product closer to the customer.
- Source strategically.
- Develop a supply chain-wide technology strategy.
- Adopt channel-spanning performance measures.
We will discuss the above principles in detail and derive its relevance to the current scenario of supply chain management.
Principle 1: Segment customers based on service needs and adapt supply chain based on the service needs of each customer segment.
Business managers and sales professionals traditionally focus on customer needs only. However, every business has a large base of customers and they need to divide or as we call it in business terms ‘segment’ the customers into smaller groups. This segmentation can be done on the basis of sales volume, demographics, customer types, etc.
The 1st principle suggests that for better efficiency of the supply chain management the customers should be grouped on the basis of their service needs like same day delivery, one week delivery, etc.
Principle 2: Customize the logistics network to the service requirement of the customer segments.
Customisation is the key to providing the best service experience. Once customers are segmented as per their service needs, tailor made supply chain networks must be designed to meet separate customer segments. Many business houses run into the mistake of using a median technique of supply chain to reach out to all customers.
However, the 2nd principle strongly holds that separate, distinct and customised logistics networks must be implemented for different segments of customers like different modes of transport, diverse delivery type, etc.
Principle 3: Listen to signals of market demand and plan accordingly ensuring steady forecasting and optimum resource allocation.
The 3rd principle focuses on cumulative forecasting. A single business involves many departments like production, warehousing, sales, etc. It is of utmost necessity that forecasting of market demand must be done at a cross functional level and not at an individual department level alone. Each department must plan towards a common operational goal for minimising costs, cutting down inventory levels and maximising profits.
Principle 4: Differentiate product closer to the customer and speed conversion in the supply chain process.
The 4th principle stresses on having different variants of the product for different segments of the customers. The basis of product differentiation must be the customer needs. There must be provisions for differentiation of the products as one single standard product cannot fulfil the demands and needs of all customers. There must be a flexibility to modify, alter, redesign the product and also make it readily available to the end customer on time. The redesigned products or parts of the product must be readily available within a shorter lead time. To achieve this, the flexibility to modify the product must be as near to the end of the production as possible.
Principle 5: Source strategically and reduce the cost of owning materials and services.
Outsourcing a part or all of the operations must be done strategically. The 5th principle suggests that having multiple players when it comes to sourcing is the key to maintain a competitive environment and receive the best quote on the services. Every business should be smart enough to realise that suppliers costs are indirectly the cost of the company. The goal of cost reduction should be shared by the channel partners to lower market prices and enhance the profit margin.
Principle 6: Develop a supply chain-wide technology strategy that supports multiple levels of decision making.
Principle 6 is nothing but the IOT (Internet of Things). Even powerful and well established businesses can benefit from the use of advanced technologies. However, the use of advanced and complex information system is not the real solution to achieve reengineered business process. The information system in use must be such that it not only captures the data pertaining to the supply chain management process but also translates them into actionable and useful insights. These insights must help the business to better their practices and operations on a real time basis.
A detailed report with all the information that flows in and out of the business but provides no real output is not desirable by any business manager. Internet applications and advanced systems should make the process easier and speed up the supply chain management process by reducing time, effort and cost through automated electronic transactions, invoices and payment records.
Principle 7: Adopt channel-spanning performance measures to achieve collective success in reaching the end user effectively.
The 7th and the last principle in this context focuses on performance measurement. No business can determine their success or identify new opportunities for betterment until and unless their performance is regularly monitored and measured. Every supply chain management also needs to have its own assessment card highlighting the achievement of its goals and targets. This allows the process to showcase the areas of expertise and also identify scope for further utilisation of these expertise to the overall advancement of the supply chain management process.
A perfect cargo is one that arrives on time, correctly priced and billed and most important arrives undamaged. An excellent supply chain determines the true profitability of a business and its services. These seven principles alone cannot make a very big impact on the supply chain process but when applied in collaboration with one another can enhance the supply chain operations to a magnanimous level. It can create wonders in terms of services which even the latest advanced technologies cannot remit for many more years to come.