Supply Chain Management: what is it?

This is a first posting on our new blog on Supply Chain Management 2. I thought it would be a good idea to first set the premise, so everyone can put the discussions on where we are heading into a shared perspective of where we are now. I think this may become a multiple posting topic, since there is just so much to say. This topic also does run the risk of running amok with acronyms and buzzwords. Given that the industry is riddled with them, there is no easy way to avoid that when describing the status quo.

I can imagine that all the acronyms that are going around in the enterprise software space are confusing to many people. It gets confusing to me sometimes, and I am deeply immersed and have been for well over a decade. What is SCM? How does it relate to ERP, CRM, SRM, EPM, EAM, BI, SaaS, cloud computing, Web 2.0, sustainability? How about Value Chain Management or demand-driven supply chain? How are these different from SCM? These are just a few of the buzzwords going around. It is impossible to give a straight answer that will make everything perfectly clear, once and for all. If it were, someone would already have done it. Worse, I believe that at least a few of the buzzwords were introduced with the specific purpose to confuse matters; some of the more powerful vendors out there have in the past introduced terms for the simple purpose of hiding the fact that they lacked functionality and making the market believe that they had more, rather than less. Some of them stuck, and are here to stay to confuse an already confusing jumble of terms. In this article I will try to clarify as much as possible.

I’ll take a 2-step approach. First,I’ll introduce an overly simplified approach with which you may determine for yourself where SCM fits in your systems landscape, if at all. Then I will provide more generalized background and definitions. I find that it helps to take a step backward to more general concepts that apply to any process that we want to do well, and continuously improve upon. You may already be familiar with the schematic on the left-hand side of figure 1 below:

Figure 1: Concepts landscape versus an example of a systems landscape

To achieve continuous improvement of a process you need to plan it, execute the plan, measure the effects, analyze the measurements, and use the outcome of the analysis to plan better next time around. This schematic is only a simplification; in practice there may be many other influences, or additional links between steps, or shortcuts. For example, the result of an analysis may be to better execute upon a plan, rather than to better plan, which would result in a link between analysis and execution. Or, there may be no formalized measurement step, resulting in a shortcut from execution to analysis. In broad lines though, I find that this schematic works well, for decisions ranging from minor to major process overviews such as a systems landscape.

A common occurrence of a systems landscape that fits the plan-execute-measure-analyze-repeat paradigm is the example on the right-hand side of figure 1. ERP covering the execution aspect is almost universally applicable; and where it doesn’t one may ask themself, shouldn’t it? However, not for all businesses can the case be made for a Manufacturing Execution System (MES). Sometimes, a Laboratory Information Management System (LIMS) is more applicable, and there may be other types of measurement application that apply to certain industry niches. In either case, there may be additional measurement systems that facilitate these systems, such as RFID or barcoding. Similarly, Business Intelligence (BI) may be overkill for certain applications or industries. Or (Enterprise) Performance Management (EPM/PM) may take the place of BI in many cases. Arguably the latter may simply be specific approaches to BI anyway. Finally, depending on your industry and business process, SCM may or may not be the best type of system to cover the planning aspect of the cycle. For example, if you are planning introductions of new product, a Product Lifecycle Management (PLM) is better suited than if you are planning production for an existing product, even in the same industry.

To confuse things a little more, most enterprise applications do not strictly confine themselves to one of the functional domains above. This is a good thing! But it does not help in obtaining clarity. So why is this a good thing? Well, say you absolutely need ERP, but only need a very small portion of what fullscale SCM has to offer. You will be happy to learn that pretty much every ERP vendor out there provides basic functionality that should strictly fall under the SCM umbrella, at no or little additional cost. Not only can you get the functionality you need; it also prevents you from having to embark on yet another major project. The aforementioned is not just true for ERP covering basic SCM needs. In fact, most ERP systems boast basic functionality in almost any other enterprise application domain in existence (watch this blog for a future article on ERP II, discussing the continuation of this trend). Likewise, most systems that focus on any of  the other domains cover basic needs in any related domains.

After this lengthy introduction the time is now right to pose a definition of Supply Chain Management:

Supply Chain Management focuses on planning, or managing the future of, anything directly related to the product flow within your supply chain.

Let me first add the disclaimer, that this will likely not be a universally accepted definition, nor will any one definition ever be. But it is general and broad enough to accommodate the most common intersection of opinions on the matter.

The definition begs for some explanation. First, notice the bold discriminators in the definition. These truly capture the essence of SCM:

planning - SCM is about making plans. Forecasts fall under this categorization too. Plans change. Plans change all the time. Until something is executed it is possible, even likely to change. Execution is the realm of ERP, and once something is executed, that is the way it went. This requires unique identifiers for pretty much everything captured. But the further out you plan, the less likely it will happen that way, and unique identifiers become less of benefit and more of a burden.

future - SCM applies to the future. The past and present are reserved for MES, LIMS, ERP, and CRM, to name a few. There will be some overlap of course. For example an order will exist within ERP before it actually takes place, but at that time it is a firm stated objective. Some readers may note that for example a planned production order exists well ahead of its planned date, but this happens to be one of those examples where ERP actually covers some of the SCM basics. Planned orders should strictly speaking be owned by SCM. Another example is Demand Management, which falls within SCM. It heavily uses demand history, but it does so for one purpose only: to forecast the future.

product flow - SCM is all about the product flow: moving the product through its various stages and locations from raw material supplier via manufacturing and distribution networks to the customer. Anything that deals with other kinds of information is out of scope, unless it can be influenced directly to impact product flow. For example, relationship information is owned by systems such as Customer Relationship Management (CRM) and Supplier Relationship Management (SRM). Deviations to accepted guidelines and CAPAs to address these are owned by Enterprise Quality Management Systems (EQMS). SCM may use some inputs of such systems to influence product flow, but does not own them.

your supply chain - This bullet can be subdivided in two parts. First, every company’s supply chain is unique. Even though a supplier may be in your supply chain, it does not share your other suppliers, and it may have other customers besides you. In other words, your suppliers supply chain has overlap with yours, but is not identical. The same applies to every other party in your supply chain. SCM is not about managing a supply chain, but about managing your supply chain. Your supply chain, albeit different from that of your suppliers, 3PL’s, customers, etc, still contains them. SCM does include those parties (i.e. it expands beyond the borders of your enterprise) and all parties benefit from sharing information where your supply chains intersect. Second, it applies to your supply chain, not your relationship network, nor your information flow. Systems that manage those can be tightly integrated to SCM to influence each other, but can easily be separated without negative impact on the end result. In other words, this discriminator highlights that SCM covers the entire span and width of your supply chain, but limits which aspects of it are owned by SCM.

Last, but not least, note that the definition states that SCM focuses on, not that it is limited to, the above. This is in line with the observation that most enterprise applications cover some basics of bordering functionality, typically owned by other enterprise application domains. Any given SCM system may very well contain functionality that is not strictly within scope of the 4 bullets above. Similarly, any given ERP, CRM or other enterprise application will contain functionality that fits squarely within the combination of bullets above.

The discussion up to this point covers aspects of SCM that are definitive for the domain. Whether we are talking about the current state of SCM or the future, the definitions above should apply equally. In cases of ambiguity in any of the articles posted in this blog we will refer to current state of SCM as SCM1 to distinguish it from both the envisioned future state (SCM2) and the domain as a whole (SCM).

By now you should have a general idea of how SCM compares to distinctly different domains, such as ERP and CRM. But what about those buzzwords you hear such as Value Chain Management and Demand-Driven Supply Chain? Isn’t most of any manufacturers value in the supply chain? And isn’t every supply chain demand-driven? Yes, and yes. Truth is, these terms and other terms like it are merely variations on the same theme. The problem is, the term “supply chain” is poorly chosen. Usually it isn’t a chain at all, it is a complex network of relationship-, information-, and product flows. More of a chainmail, rather than a chain, and with many irregularities in the weave at that.  Also, it comprises not just supply, but also demand, and all the processes to make them meet. Many of the spin-off terms of SCM are simply due to the fact that vendors just did not recognize themselves in this ill-fitting term. And if one decides to distance oneself from the term, might as well pick a new one that highlights ones strengths and masks ones weaknesses.

Some buzzwords are clearly industry related. For example, the qualifier “demand-driven” would never be used by any vendor serving the process industries, because it indicates that the application cannot handle supply driving the supply chain. In process industries it is very common that supply has its own seasonality, forcing the supply chain to absorb peaks of supply, while demand follows a completely different pattern. When the harvest comes in, better purchase raw material while it is cheap and of high quality, and process it right away, rather than wait for demand to catch up only to have to purchase low quality material for a premium. To survive inside the enterprise application space one has to learn to see through the buzzword-screen. If you are selecting an SCM system, ask yourself why a vendor chose to stray from the common terminology. Ask about the positives and try to reveal the negatives. The buzzword may indicate that the product fits your business like no other, or it may indicate the opposite. Unfortunately, there is no clear road map that distinguishes one variation from another, or better still one application from another using the same variation. When choosing an SCM system, basic domain knowledge, detailed business requirements, common sense and perseverance will determine whether you buy a diamond or a lemon.

I think enough has been said about the various functional domains inside the enterprise application space. Very briefly I want to touch on some of the other terms mentioned in the first few paragraphs. In short, terms such as “SaaS” (Software as a Service), “web 2.0″ and “green” that you have been hearing about everywhere these days only apply tangentially to SCM. They apply. They just apply as much to any other functional domain within the enterprise application space. For example, SaaS, also known as on-demand, is merely a question on where to host the application, not what describes the application. The same with web 2.0. The general rule is: the newer the application (or more up to date) the more likely it allows you to choose between old-fashioned on-site deployment and modern day on-demand, rather than only allowing the former. Web 2.0 can easily be applied to an old application like a new coat, or a new application can be built from the ground up to support it. Neither is better or worse per se. Green or sustainability is a hot topic these days. And it certainly has application in SCM. Most businesses do not yet care about going green, or simply do not have the luxury to make that choice, especially in the current state of the economy. But if you do, plenty of vendors are now extending or building new systems that allow sustainability to drive the supply chain (not just demand ) Reducing waste, energy and emissions, increasing recycling and re-use are clear examples that can be driven via SCM. Personally, I am excited that this is finally getting some attention, and that vendors and manufacturers alike are making steps in the right direction.

All in all, they do not determine whether a product qualifies as SCM or not. But if any such objective is important to you, you’ll be happy to know that you have multiple vendors to choose from that support any or all of them.

I hope this first blog posting was useful to you. Hopefully the immense number of acronyms, buzzwords (including the buzzword “buzzword”) did not put you off, but rather helped make sense of the mess we call home away from home. As a first posting this may give the wrong impression, since I do not anticipate using nearly as many in future posts. I welcome any feedback!

Update March 17, 2009: Part 2 is now also available here.