Class is now in session for the third week of Augusta Business Daily’s Mini-MBA for the month of March. Hopefully, you found our first two lessons, “Competing on Quality” and “Effectively Managing Inventory,” beneficial as you run your business.
For those of us who teach Supply Chain Management (SCM), events of the recent weeks (Iran), recent months (tariffs), and recent years (pandemic, bridge collapses, hurricanes) have given us plenty to discuss in our classes.
I will also discuss their importance in today’s column. However, before looking into those events, it is important to understand what supply chains are and how and why the management of supply chains has evolved in recent decades.
A supply chain is simply the entire network of entities, directly or indirectly linked, that move a product or service from the raw material stage to the final customer. One of the best ways to understand how supply chains have changed during the last century is to consider the production of the Model A at Ford’s River Rouge Complex in Michigan, starting in 1927. During production of the Model A, Ford achieved self-sufficiency and vertical integration (i.e., produced all vehicle parts itself), taking iron ore and other raw materials to produce steel, glass, and tires to ultimately end up with a finished automobile. In contrast, today, Ford only makes its own engines and transmissions for its combustion vehicles, with over 70% of its total vehicle components outsourced to “Tier 1” suppliers. Tier 1 suppliers are vendors who directly sell parts to Ford. Ford’s “Tier 2” suppliers are those who sell raw materials or parts to its Tier 1 suppliers so that the Tier 1 suppliers can provide Ford the components parts it needs to assemble its automobiles. Suppliers such as these are considered “upstream” supply chain partners to manufacturers as their components travel “downstream” to the manufacturer. Once a manufacturer makes the finished product, it travels further downstream to distributors/wholesalers/retailers who ultimately sell the product to the final customer. The suppliers, manufacturers, and “sellers” are connected by the logistics of the supply chain, which is responsible for the storing and transporting of items between those entities.
For the most part, supply chains have always existed, but as firms have focused more on their core competencies (i.e., what they do best), they have become more dependent on supply chain partners. However, supply chains had not truly been “managed” until the late 1990’s or early 2000’s. Until then, supply chains had been handled transactionally, through purchase agreements with vendors of raw materials, parts, and transportation. However, true supply chain management (SCM) became a discipline as information and communication technology matured to the point that supply chain partners could truly coordinate their actions to better support each other. Retailers could provide manufacturers with real-time demand information so that manufacturers could better plan their production to support demand. In turn, manufacturers could provide production scheduling information to suppliers such that they could deliver their inventory “just-in-time.” Having such information also allows logisticians and transportation providers to better plan the movement of items throughout the supply chain. Supply chain management allows for the efficient, integrated, coordinated, and timely delivery of products and services to customers.
Now that we know what supply chains and SCM are, as we did in our previous lessons, we have three key takeaways or essentials of supply chains:
- Communications and Relationships are the keys to strong SCM: In order for SCM to work well, supply chain partners need to build strong relationships with one another and make communication/data-sharing a priority. I believe in this so strongly that I teach an undergraduate elective course entitled “Supplier Relationship Management.” Such relationships are important so that partner companies can depend on each other in critical situations. For instance, when a buying company has a spike in demand and needs something from its vendor in a rush, the vendor will likely only do that if the two companies have built a strong and trusting relationship. Supply chains work best when there is transparency of data between partners, and this can only happen when a mutually beneficial relationship has been established.
- Who holds inventory and where it is held is a key element of successful SCM: As promised in last week’s lesson on inventory, there are decisions to be made as to where inventory is held and who holds it. In retail, it has become critical that manufacturers hold inventory until it is needed at the store and then deliver it to the store in a timely manner. This requires the supplier to hold the inventory somewhere close to where it needs to be delivered. A supplier is only willing to do this if the retailer provides it with timely data and has built a relationship with the supplier as described above.
- In recent years, we have learned the importance of supply chain resilience: COVID, the Baltimore Bridge collapse, and Hurricane Helene are but three examples from recent years that have taught us to build up our supply chain resilience by having multiple suppliers and alternative forms of transportation. Tariffs have also challenged firms to find domestic suppliers, and the Iran conflict has demonstrated how foreign conflict can block previously unfettered transportation corridors. It is critical that firms conduct risk management analysis and mitigation for supply chains similar to what is done in project management to make their supply chains more resilient.
You are now 75% of the way through your Mini-MBA, and while this program has no tests, I am sure your business tests you every day. Next week, we will wrap up our program with a focus on how service industries can manage the waiting lines they have at their businesses.
