Suppy Chain

Supply Chain Concept (B)

Why the Supply Chain concept is different from terms Logistic or Distribution? What is the main concept of Supply Chain?

Posted: Mar 2008

Even some 15 or 20 years ago, either in theoretical approach on Universities or practical in the Business, the term Distribution was commonly used for the service within the company that was in charged for moving the goods around, according the needs of sales and customers. The supply chain concept as we know it today was not known.

Since Warehousing was separate segment at that time, as a different function within company, the link between Distribution and Warehouse was loosed.

It was working, but as the demand of the market was growing, these two functions finally merged into Logistic. Still there were warehouse and trucks, but the border was more transparent, links stronger, some assets shared, cost reduced, service to market better. It was a step in the evolution.

Finally, the next step was integration of Logistics ( Distribution and Warehouse ) with Production and Purchasing into single function – The Supply Chain. Now, under the same roof, all functions that were separate not that long time ago, are now aligned in the sequence:  

This new concept of whole Supply Chain was providing the Company to be more agile. Agility is something that companies needed through the Supply Chain concept, in the time of more and more demanding market, growing competition and expansion of range of categories and products. Simply, the market is becoming more volatile and less predictable.

Also, the modern Supply Chain concept needs to be more "Lean". This mean that it should not have more stock than needed, asset that could unnecessary slow down response time and increase costs.

So, the Lean and Agile are two key characteristics of a contemporary Supply Chain concept that is capable to offer sufficient service level for the growing demand.

The ratio between Lean and Agile should be well balanced. The key to this fine-tuning is the right approach to the product portfolio. As there are different products in the portfolio, contributing to the share in sales in different percentage, they should be treated accordingly.

This can be explained through Pareto principle, which says that 20% of the SKUs are 80% of sales share. Since these products are high volume, low variety and predictable, planning of production and stock should be more Lean. This demands the Supply Chain concept without large stocks, with focus on efficiency and economy of scale.

On the other end of Pareto principle scale are products that represent 80% of SKUs, but only 20% of sales share. These products are less predictable, so the planning should be more Agile.

Lean:

- Forecast at generic level
- Economic Batch Quantities
- Maximize efficiencies

Agile:

- Demand driven
- Localized Configuration
- Maximize effectiveness

The stabile, lean and agile Supply Chain is the backbone of the sustainable competitive advantage of the company, thanks to supply chain concept.