Chapter 2 SCM & Risk Management
2.4 Combining SCM & Risk Management
2.4.1 Choosing a Perspective on SCM
As described previously the origins of SCM are logistics and manufacturing but the focus of SCM has dispersed across almost any type of activity, supporting any rationale or objective (Storey et al., 2006; Burgess, Singh, & Koroglu, 2006). Furthermore the acronym SCM has
26 Source: Figure 1 in Wilding (1998a), p. 600.
been widely used to add a sense of novelty to existing frameworks/concepts. This problem is broadly recognized, e.g. Cooper & Ellram (1993) state:
“To consider supply chain management to be a different approach from other channel relationships, there should be some characteristics that could be used to differentiate it.” (p. 15), and
“Since the original goal of supply chain management is system-wide inventory reduction, this characteristic should exist in all supply chains.” (p. 22).
On choosing a perspective on SCM the author therefore chooses to address personal aversions in the SCM literature, aversions which relate to:
¾ Type of organization (service vs. manufacturing)
¾ Innovation (product and process) vs. operation
¾ Current process models
These aversions are described in more detail below.
Aversion One: Service versus Manufacturing Organizations
To the author the notion of SCM in service organizations does not make much sense. Service organizations resemble manufacturing organizations in that they also need to perform e.g.
capacity planning and make sure the internal infrastructure enables employees to perform the needed activities with the right timing, sequence etc. But service organizations do not have an upstream supply chain as their primary input is the knowledge (or at least the presence) of their employees. Obviously, most service organizations have the need for certain physical inputs (e.g. paper for the printers at a car rental agency), but these relate to the enablement of the service, and is not a part of the service as such.
Aversion Two: Innovation versus Operations
The second aversion is the meshing together within the SCM domain of innovation and operations. Intuitively, closer interaction between supply chain partners might lead to better innovative processes and better products, but might just as well lead to the opposite. An extensive European survey performed in 2002 (Bagchi, Skjøtt-Larsen, & Sørensen, 2003) revealed amongst other things that performance was perceived to be decreasing with the length of the relationship. This definitely counters the argument of improved innovation.
On a more conceptual note, the difference in time perspective (innovation versus operations) gives rise to more skepticism as does the issue of participation. The existence of professional product development agencies conflicts with the notion of tight integration as these partners will participate in innovation only, and leave when innovation goals are reached. Figure 2-6 below illustrates the “Innovation Perspective” as understood by the author.
Figure 2-6: The Innovation Perspective
Etc… HRM
PurchasiProducting on Finance Sales/Distribution Innovation
Etc…
HR M
PurchasiProductng ion
Finance Sales/Distribution
Innovation
Focal company
Etc… HRM
PurchasiProducting on Finance Sales/Distribution Innovation Etc…
HRM
PurchasiProducting on Finance Sales/Distribution Innovation HRM
Purchasing Finance Innovation
Innovator
Supplier
Competitor
Customer
Etc…
HRM
PurchasiProducting on Finance Sales/Distribution Innovation
Supplier
???
???
Albeit product innovation is becoming an ongoing task for many companies, it is still beneficial to view innovation (at least when innovating with external parties) as separate projects27. This further complicates the membership issue as certain parties are member in innovation projects for a limited period of time only.
In contrast hereto, the fulfillment perspective presents a more stable constellation of companies participating in the fulfillment of end-customer needs. Borrowing from Porter’s Value Chain (see Figure 2-7 below), a distinction is made between primary and secondary (support) activities. Primary activities are the activities directly oriented towards the fulfillment of end-customer needs: Purchasing, Production, and Sales/Distribution.
27 For incentive and risk management (if for no other) reasons. Behavior of external parties may be adjusted through re-negotiation of innovation contracts. External parties may then have a strong incentive to behave non-opportunistic. It may also have a performance perspective.
Figure 2-7: The Generic Value Chain28
INBOUND LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
& SALES
SERVICE FIRM INFRASTRUCTURE
MA RG
IN
A M G R IN
PRIMARY ACTIVITIES SUPPORT
ACTIVITIES
PROCUREMENT TECHNOLOGY DEVELOPMENT HUMAN SOURCE MANAGEMENT
The concept of SCM extends further than the concept of Value Chain, though. The holistic perspective, the ideal of aligned strategies and of appropriate integration of processes across corporate boundaries makes SCM a much more sophisticated framework. The inclusion of external parties both up- and downstream as critical entities in fulfilling end-customer needs differentiates SCM from other concepts, and adds complexity as the before mentioned
“membership issue” becomes critically important.
Figure 2-8: The Fulfillment Perspective
Purchasing Production Sales/Distribution
Finance HRM Etc… Purchasing Production Sales/Distribution
Finance HRM Etc… Purchasing Production Sales/Distribution
Finance HRM Etc…
Purchasing Production Sales/Distribution
Finance HRM Etc… Purchasing Production Sales/Distribution
Finance HRM Etc…
Focal company T ier 1
supplier T ier 2
supplier
T ier 2 customer T ier 1
customer
Primary activitiesSecondary activities Management
Management Management Management Management
28 Source: Figure 2-2 in Porter (1985), p. 37.
But as a certain degree of stability is to be assumed29, membership is determined through participation in meeting the “meta-objective” of the supply chain as a “fulfillment system”. A graphical illustration of the fulfillment perspective is shown in Figure 2-8 above.
Aversion Three: Current Process Models
The last aversion to be described here is an objection towards the highly influential model put forward in Cooper, Lambert, & Pagh (1997), see Figure 2-2. In this model all processes cross all participating supply chain members, and all functions within each company participate in all processes. To this author the focus on operations clearly illustrates the distinction between primary and secondary activities. Functions like HR and Finance are crucial to the survival of the company but do not participate directly in operations. Research and development is obviously of critical importance but again: does not participate in the fulfillment of end-customer needs.
Figure 2-9: Supply Chain Process Model
Purchasing Production Sales/Distribution
Finance HRM Etc… Purchasing Production Sales/Distribution
Finance HRM Etc… Purchasing Production Sales/Distribution
Finance HRM Etc…
Purchasing Production Sales/Distribution
Finance HRM Etc… Purchasing Production Sales/Distribution
Finance HRM Etc…
Focal company T ier 1
supplier T ier 2
supplier
T ier 2 customer T ier 1
customer
Primary activitiesSecondary activities
Customer Relationship Mgmt
Procurement
Returns Handling Supplier Relationship Mgmt
Collaborative Planning
Management
Management Management Management Management
Order Fulfillment
The names of the processes suggested in Figure 2-2 set aside, it seems obvious that processes have different scopes, e.g. that the process “Supplier Relationship Management” points upstream only and the process “Customer Relationship Management” points downstream30. Whether these processes encompass more than the first tier or not will depend on the context, e.g. the power distribution in the supply chain. These processes, and other processes like
29 In some articles the concept of Virtual Enterprise (VE) is considered a form of SCM. This is rejected by the author, primarily due to the temporal nature of the relationships promoted in VE. For a comparison of SCM and VE, see Pires et al. (2001).
30 In the tradition of explaining SCM from the point of view of ”the focal company”, relationship management with suppliers will naturally differ from the relationship management with customers albeit the overall goals are identical: to ensure win-win in the long term.
“Collaborative Planning”, “Procurement”, and “Returns Handling” are examples of processes supporting the “meta-process” of “Order Fulfillment” as illustrated in the Supply Chain Process Model depicted in Figure 2-9 above.
Choosing a Perspective
The elaboration over the author’s personal aversions has resulted in this dissertation focusing on manufacturing firms. By choosing the “Fulfillment” perspective the supply chain is perceived as a “long-linked technology” (Thompson, 1967). Interdependence is constituted (in part) by the activity dependency (same author) and the supply chain becomes a system which can be designed. Fulfillment is the “meta-objective” crossing legal boundaries, justifying the holistic approach and the emphasis on win-win to create long-term, stable organizational structures to achieve corporate and shared goals for the entire supply chain.
This should in no way be perceived as a rejection of the importance of innovation in process or product, but simply that the “raison d’etre” for SCM is to optimize the fulfillment of end-user demand. Innovation is crucially important to most companies, but is perceived as different from SCM. Finally, recognizing the process orientation is crucial to SCM, the emphasis on fulfillment is supported by the elaboration over the scope and relevance of processes. The “Order Fulfillment” process is therefore perceived as the “meta-process” of SCM, and the principal object for risk management.