Role of supply chain management decisions in effective inventory control

Journal of the Academy of Business and Economics, March, 2004 by Julius A. Alade, Dinesh K. Sharma, Hari P. Sharma

ABSTRACT

Supply Chain (SC), which involves the configuration, coordination, and improvement of sequentially related set of operations in establishments, integrates technology and human resource capacity for optimal management of operations to reduce inventory requirements and provide support to enterprises in pursuance of a competitive advantage in the marketplace. A coordinated SC integrates procurement, production, and distribution and links together suppliers, manufacturers, distributors, customers and carriers in a network system that allows for effective planning, information exchange, transaction execution, and performance reporting. This paper addresses the structures of supply chain management (SCM) and the activities involved in SCM decisions that help promote profound improvement in efficiency and effectiveness in business operations. In broader context, the paper examines the types of activities involved in SCM decisions; the dynamics of the traditional SCM, the complementarities of technology in achieving effective management of operations through enablers of electronic data interchange (EDI) and quick response (QR) disciplines to implement Just-in-Time (JIT) management techniques; and integrated SC and inventory control as it relates to capacity imbalances and transaction costs.

1. INTRODUCTION

Supply chain management involves the movement of products, services, and information between and within businesses, the creation of value, and support of enterprises in the pursuance of a competitive advantage in the market place (Kilty, 2000). It involves the cooperation and coordination of activities of all parties for the production and distribution of products to the final consumer with mechanism in place to optimize inventories across the entire supply chain (Haan, et al., 2003; Viswanathan and Piplani, 2001). With effective management of products to create added value and competition among firms move from national to regional and to a global level, new strategies are being adopted by a number of manufacturers and retailers, particularly, in the manufacturing industries to gain a competitive advantage in world markets (Kincade, Casill, and Williamson, 1983). Pressures from low-cost and the new global competitive environment require companies to be more productive, react faster to market changes, and maintain smaller inventories. These developments in the operation of businesses entail significant changes in the traditional ways of manufacturing system (Park, 1994).

The upstream and downstream coordination engendered by supply chain management with the goal of minimizing uncertainty and variations along the supply chain shows that businesses can no longer expect that the objective of business can be met just by becoming efficient in itself. As indicated by Hameri and Palsson (2003), process rationalization and measurement system would need to be implemented to improve the operational efficiency inside a company by reducing lead times and by partnering with upstream and downstream players of the supply chain. The situation requires that for value to reach the customers, efficiency must be evident even in the suppliers, the distribution channel, and all associated activities and partners. Competition is no longer between individual businesses, but between groups of companies that are linked together in a chain for delivering customer value (Chandra, 2000).

The organization of this paper is as follows. In Section 2, we examine the structure of supply chain management using a model of supply chain network that illustrates the flow of products from the vendor to until it reaches the final consumers in the markets. Section 3 looks at the supply chain management decision with a discussion on the link in the decision making processes. In Section 4, the paper discusses the dynamics of supply chain with a focus on traditional approach to supply chain and the implication for market disequilibria in demand and supply. Section 5 examines integration supply chain and inventory management with a model showing functional integration among procurement, production and distribution for optimum result. Finally, Section 6 provides summary and concluding remarks.

2. STRUCTURES OF SUPPLY CHAIN MANAGEMENT

Supply chain is often represented as a network similar to the one displayed in Figure 1 below. The nodes in the network represent facilities, which are connected by links that represent direct transportation connections permitted by the company in managing its supply chain (Shapiro, 2001). The network has four levels of facilities. Product flow downstream from vendors to plants, plants to distribution centers, and distribution centers to markets. In general, a supply chain network may have an arbitrary number of levels. In some instances, products may flow upstream when intermediate products are returned to plants for rework or reusable products are returned from markets to distribution centers for recycling.

[FIGURE 1 OMITTED]

The model that is demonstrated in Figure 1 below is assuming a process with physical product being produced and distributed to reach consumers. For a broader contest, models could be used to demonstrate supply chain network for service companies like banks, insurance, airways operation and other services that operate value chains of networks of facilities for which coordinated planning is required (Shapiro, 2001). As pointed out by Fine (1999), the supply chain structure could take different dimensions depending upon the structure of industry under which it operates. If the industry demonstrates vertical structure and the product architecture is integral, competitive market forces push the structure toward a horizontal and modular configuration (Hanna and Newman, 2001). The forces include among others the following: