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Most
organizations consider themselves as entities that
exist independently from others. They compete with
others in order to survive. However, such a
approach can be self-defeating if it leads to an
unwillingness to cooperate in order to compete. Opposite
to this concept is the idea of supply chain
integration.
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The
supply chain is the network of organizations that
are connected, through upstream and downstream
links,
in the different processes and activities that
produce value in the form of products and services
that are delivered to consumer. For example, a oil
refinery is a part of a supply chain that extends
upstream through the oil rigs and oil
transporters, and downstream through distributors
and retailers of oil based products to the final
consumer. Each of these organizations in the chain
are dependent upon each other. They do not closely
co-operate with each other.
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Supply
chain management is different from sheer "vertical
integration". Vertical integration usually involves
ownership of upstream suppliers and downstream
customers. Previously this was considered to be
desirable approach. But today, increasingly
organizations are now focusing on their "main
business"
– the things they do really well and
where they have a differential advantage. Everything
else is "outsourced" – it is procured
outside the company. For example, companies that used to
made
their own components now only assemble the finished
product.
During
the previous years it was often the case that relationships with
suppliers and downstream customers (such as distributors
or retailers) were more opposing than co-operative. It
is still happening today that some companies will seek to
achieve cost reductions or profit improvement at the
expense of their supply chain partners. Companies such
as these do not understand that simply transferring costs
upstream or downstream does not make them any more
competitive versus other companies. The reason for this is that
finally all
costs will make their way to the final marketplace to be
reflected in the price paid by the end user. Therefore,
the leading-edge companies recognize this and they are
looking for solution that will make the supply chain as a whole
more competitive through the value it adds and the costs
that it reduces overall. They have realized that the
real competition is not company against company but
rather one supply chain against the another supply chain.
This
concept of supply chain management is relatively new and
is different from logic of logistics. Logistics
management is primarily concerned with optimizing flows
within the organization, whilst supply chain management
understands that internal integration by itself is not
enough. Historically, the flow from logistic
management was in 4 stages:
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Historically,
the flow from logistic management was in 4 stages:
First
stage incomplete functional independence where
each business function such as production or
purchasing does their own thing in complete
isolation from the other business functions. An
example would be where production seeks to
optimize its unit costs of manufacture by long
production runs without regard for the build-up of
finished goods inventory and heedless of the
impact it will have on the need for warehousing
space and the impact on working capital. This is
also called functional thinking.
Second
stage recognized the need for at least a
limited degree of integration between adjacent
functions, e.g. distribution and inventory
management or purchasing and materials control.
Third
stage requires the establishment and
implementation of an 'end-to-end' planning
framework.
Fourth
stage represents extension of third stage to
upstream suppliers and downstream customers. This
is what truly makes distinction between logistics
and supply chain management.
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