7 Principles of Supply Chain Management

Introduction

“The seven principles of supply chain management” article was written by David Anderson, Frank Britt and Donavon Favre in 1997. With the help of this article, the term SCM has been introduced and explained well. By now, it has been twenty years since the article was first published. It has also been re-published a few times plus more than 160 citations currently (Supplychain247, 2016). Today’s business world has changed compared to past with globalization, free trade agreements, raise of highly automated production lines, raise of computers and so on. This following content will be discussed on whether or not the seven principles are still applicable today, key challenges and usefulness of the article both theoretically and practically.

Principle 1

The first principle of the seventh principles of supply chain management is about segmentation. This principle stated that traditionally customers were grouped by industry, product, or trade channel and served them with one size fits all approach. It argued that this method is not good enough. It suggested that tailoring the services to create segment-specific package will have greater appeal to particular segments. Jerry (2017) described various types of segmentation, how they work and risks associated with segmentation. Since principal one is based upon segmentation, all the risk of segmentation should be considered. The most relevant risks will be discussed below.

Segmentation Size: Generally, when segmentation is considered, the whole market including all age group, gender, ethnicity etc. should be included in consideration too. The segmentation analysis will only be effective if considered broadly. One might be segmenting a very small segment, which will not have impact on the profitability. However, the importance of segmentation size is not mentioned in principal one even though the size of the segments must be significant to be practical.

Number of Segments: The principle one is good as a theory but there is another perspective to look at it. There is a limit to how many segments a company handle. If the number of segment become more than what the company can handle, then it will be unpractical and unachievable. The company may even lose focus on existing segments. This is another risk factor to keep in mind if segmentation is considered to increase profit.

Therefore, this principle seems to be a good one if the situation and capability of the company match. However, practically, many other factors are needed to be taken into consideration in order to ensure success. The principle does not address how many segments a company can handle, what is the optimum size of the segment, how much profit can be made for segmentation and so on. All of these questions must be answered if the principle one is to be realized.

Principle 2

Principle 2 is focused on inventory, warehousing and transporting issues. It describes that there are only two ways that logistic networks are designed currently. First, the logistic network is designed to serve the average requirement of all customers. Second method is to serve a customer with a high degree of varying requirements. It has also mentioned that both methods are not good enough to create an excellent supply chain management. But it suggested to customize the logistics network to serve the different requirements of the customers.

Banker (2009) pointed out some difficulties regarding if the principle is to be actually implemented. In this increasingly modernized world, the retailers are demanding more and more from the manufacturers. The retailers may request specific packaging, advance shipment notices, RFIDs, green packaging, full truck load shipping etc. If the manufactures are not able to comply with all these demands, they may be losing customers. But that does not mean that manufactures should comply with whatever the customer demand. It is up to the manufactures to find the balance between the cost of the services and profitability of the segment. Therefore, it would be difficult to understand this principle.

Another weakness of this principle is that it will be difficult if the supply chain include reverse logistic. Return of unsold products and reusable packaging are the good examples of reverse logistic. Recently growing trends of green initiative are making the reverse logistic more relevant. For some regions or countries, it is enforced by law to reuse and therefore the reverse logistic for them becomes necessary. The skills, Info Tech and infrastructure needed for the reverse logistic is different from forward logistic (Banker, 2009).

In summary, principle two would need a considerable amount of resources to implement. Although customizing network is good but it is always needed to be cautious about profitability on the resources spent. It will not be applicable if the logistic network includes reverse logistic. All the weaknesses mentioned above should be considered if the principal two is to be implemented.

Principle 3

In principle three, the author pointed out that synchronizing the distributor demand and the actual end-user demand is the most concerned matter in good supply chain management. It is the good concept to understand how the actual sales and operations planning should be handled. The author mentioned if the distributors share the demand data from end users with trading partners and manufacturers, the required capacity and cost for inventory and warehouse will be lower and nobody has to keep the unnecessary stock. When independent forecasts by manufacturers are not tallying with distributor demand especially during great sales periods, they are still unable to prevent running out of stocks even with high inventory levels.

In other way, only the demand data from distributors is insufficient to forecast the demand of actual end-users. In the actual business world, a few companies such as Walmart, P&G, etc. are actively sharing the demand data to the rest of the groups in their supply chain. Chopra and Meindl (2016) stated that on the supply side, the more a company is available in alternate supply sources with short lead times, the more the demand forecast is inaccurate and unimportant. If only a single supplier with a long lead time is available, an accurate forecast will have great value.

On the product side, the manufacturers must know the variations of a product being sold and whether these variants substitute for or complement one another. When a product demand is influenced by another product or it influences the demand of other, forecast for these two products should be joined. For example, when a company

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