Supply Chain Frontiers issue #12. Read all articles in this issue
Supply chain management has grown beyond its operational roots to take on a more strategic role, a transition that can be attributed to the strong impact of integrated SCM on companies' operational and financial performance. Enterprises such as Wal-Mart and Dell have built their success on the strategic application of supply chain practices.
But which practices have the greatest impact on a company's bottom line?
That question is answered in a recent working paper published by the MIT Center for Transportation and Logistics as part of its ongoing MIT Supply Chain 2020 (SC2020) research initiative, a multi-year research effort to identify and analyze the factors that are critical to the success of future supply chains. CTL Researcher Dr Ting Shen wrote the paper entitled "Linking Supply Chain Practices to Operational and Financial Performance" under the direction of Larry Lapide, CTL's Research Director. In the paper, Shen not only establishes clear links between SCM practices and operational and financial performance, but also identifies those SCM practices that have the greatest impact on a company's bottom line.
To first prove the link that exists between SCM practices and operational and financial metrics and then to isolate the practices that make the most impact, Shen surveyed 25 studies from industry and academia. She identified trends across these distinct studies by classifying various factors that could be derived from each of the findings.
Supply chain practices were classified into five broad types:
1. Supply Chain Integration (SCI) includes integration with customers, with suppliers, and across the internal organization. From the functional perspective, integrated collaborative product development is also included.
2. Complexity Management refers to coping with supply chain complexity in a cost-effective way.
3. Aligning Strategy and Supply Chain implies that supply chain management is well integrated into the strategic planning of a company and its CEO-level agenda.
4. Information Technology (IT) with Process Improvement means adoption of advanced supply chain management software combined with process improvement.
5. Operational Innovation means creating and implementing leading-edge practices and technologies in supply chain management.
Financial performance metrics were classified into three categories: short-term financials, market share, and stock market; and six types of operational performance metrics were used: customer service, responsiveness, supply chain cost, asset utilization, product quality, and operational flexibility.
"The studies surveyed revealed the supply chain challenge," said Shen. "A continuously growing network of supply chain partners with incredible complexity caused by product variety and globalization must compete in a fast-changing and super-competitive environment. The supply chain has to not only be lean and efficient but also responsive and dynamic."
So which supply chain practices best equip companies to meet this challenge? Shen identified supply chain integration and complexity management as the most critical supply chain practices that are linked to a firm's performance. Of the two, supply chain integration showed the strongest link to both financial and operational metrics. In the paper, SCI was characterized by supplier-side collaboration, such as information sharing; internal integration through cross-functional teams; and customer-side collaboration, the integration of customers' needs and wants into the whole supply chain process. From the product perspective, supply chain integration was reflected in integrated collaborative product development. According to Shen, the underlying reason for SCI's close link to performance is the reduction of "silos" throughout the whole supply chain.
Complexity management took a close second, since it innately complements supply chain integration - as integration itself expands the scope of the management issues and thus increases complexity. Complexity management included complexity-reducing methods such as partnerships, long-term relationships, and the rationing of product lines. Other methods did not reduce complexity but instead managed complexity through modularity and postponement to improve the efficiency and effectiveness of supply chains. The study also found that advanced information technologies enabled companies to manage higher levels of supply chain complexity.
According to Shen, the combination of supply chain integration and complexity were key enablers, allowing companies to synchronize across customer, product, and supply chain strategies and operations. Moving from sub-optimization the companies could create a profit cycle: a series of coordinated activities meant to squeeze the greatest profit from each product or product line.
As for the three remaining SC practices, both "Aligning Strategy and Supply Chain" and "Operational Innovations" were found to be crucial to gain competitive advantage in supply chain management. However, despite the fact that businesses worldwide invest more than $19 billion annually in information technology systems solutions to improve their supply chain performance, Shen's research found that the actual value delivered was less than satisfying, and many companies were disappointed with the results. "Information technology is simply an enabler but not a silver bullet," Shen said. "It must be combined with significant process improvement to contribute to the bottom line improvement of companies in this information era."
Ting Shen's working paper "Linking Supply Chain Practices to Operational and Financial Performance" is available online on the MIT Supply Chain 2020 website. Any questions or comments should be sent to CTL Research Director Larry Lapide.