Development of strategies for shortening supply chain and demand chain

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1 Human Systems Management 25 (2006) IOS Press Development of strategies for shortening supply chain and demand chain Ming-Hon Hwang a,b andhsinrau b, a Department of Information Management, Diwan College of Management, Taiwan b Department of Industrial Engineering, Chung Yuan Christian University, Taiwan Abstract. Supply chain management (SCM) recently has attracted a lot of attention from industrial practitioners and academics worldwide. Moreover, shortening a supply chain has been a main issue in supply chain management. Shortening supply chain means reducing the process time required for supply chain activities, which are logistics, business, information, cash flow and design process, etc. This study proposes methods of shortening supply chain based on the activities listed above together with their classification and descriptions. To analyze the cause and effect between those solutions and methods of shortening supply chain, this study uses the cause and effect diagram as a supporting method. Additionally, to understand the efficiency of these methods, this study builds up a supply chain performance measure to evaluate the efficiency of methods of shortening supply chain. Keywords: Supply chain, competitive strategy, demand chain Ming-Hon Hwang is a PhD candidate at the Department of Industrial Engineering, Chung-Yuan Christian University, and a Senior Lecturer at the Department of Information Management, Diwan College of Management, Taiwan. His research interests include supply chain management and strategy management. He may be contacted as follows: Department of Industrial Engineering, Chung-Yuan Christian University, Chung-Li 320, Taiwan. Tel.: ; Fax: ; hwangmh@dwu.edu.tw. Hsin Rau is a Professor of Industrial Engineering Department at Chung-Yuan Christian University, Taiwan. He received the PhD degree from UCLA. His research interests include e-business and supply chain management. He has published many papers in journals and conferences. He may be contacted as follows: Department of Industrial Engineering, Chung-Yuan Christian University, Chung-Li 320, Taiwan. Tel.: ; hsinrau@ cycu.edu.tw. * Corresponding author. Tel.: ; hsinrau@ cycu.edu.tw. 1. Introduction To ensure corporate survival, enterprises have to compete globally by consolidating supply chain members and maximizing the end-product value of the supply chain. Thus, supply chain management has become a major factor for enterprises in improving their competitiveness. Many scholars have believed that the whole supply chain should be taken as a virtual entity [1 3]. Based on these characteristics, this study builds up a process of strategic supply chain management (SSCM) that comprises three stages: planning, execution and control (Fig. 1). The Planning stage involves deciding the supply chain and its members to pursue future achievements; this stage mainly consists of environmental scanning and strategy formulation. The Execution stage involves supply chain members using various functional strategies and methods to efficiently complete the competitive strategy and the objectives set at the Planning stage. Meanwhile, the Control stage involves comparing the objectives set at the Planning stage with the results during the Execution stage. If any difference is found, then feedback should be given and some adjustments should be made. The major action occurs at the Control stage, supply chain performance measurement phase and supply chain feedback phase. Furthermore, if supply chain members find any difficulties or wrong target during the Execution stage, they /06/$ IOS Press and the authors. All rights reserved

2 256 M.-H. Hwang and H. Rau / Development of strategies for shortening supply chain and demand chain 2.1. Environmental scanning Fig. 1. Process of strategic supply chain management. should come back to the supply chain strategy formulation phase then re-set the strategy and target. Similarly, if in supply chain performance measurement people find bad execution or miss targets, they should return to the strategy implementation phase for problem discussion and solution. This study presents a novel strategy for shortening the supply chain in the Planning stage and Execution stage, and the performance measure during the Control stage of supply chain management. This study thus proposes solutions for shortening the supply chain with their classification and descriptions. To analyze the cause and effect between the solutions and methods used for shortening the supply chain, this study uses the cause and effect diagram as a supporting tool. Finally, this study builds up the supply chain performance measure to evaluate the efficiency of shorten supply chain solutions. The remainder of this paper is organized as follows. Section 2 describes the content of the Planning stage. Section 3 then describes how to shorten the supply chain in the Execution stage. Section 4 describes the supply chain performance measurement in the Control stage to evaluate the efficiency of solutions for shortening supply chain. Next, Section 5 gives the further discussion. Conclusions are finally drawn in Section Content of the Planning stage This section deals with two issues: environmental scanning and the way to build up the overall competitive strategic direction of the supply chain. Supply chain overall competitive strategic direction is the output of the supply chain strategy formulation phase. However, before the strategy formulation, it is necessary to first scan the inner and outer environments. Min and Zhou [4] pointed out that objective setting is the first step of building up a supply chain model, but before objective setting, the supply chain model builder should define the main driving force of the supply chain. The main driving force should be the subject of investigation during the environmental scanning phase. This phase must investigate four subjects: the first subject is understanding the customer value in various market segmentations and the potential profit of each market segmentation. Due to resource limitations of our supply chain, it is impossible to use a single well-known strategy to please all customers. Instead, resources should be concentrated on a specific market segment with the highest customer value for the supply chain and potential profit. Customers in different segmentations believe in different values, some are concerned about price, some care about product or service quality, some are focused on delivery flexibility and others are interested in after-sales service or brand. Customers in different industries or areas may have different value concerns. For example, in transportation services, time is what they care the most, and for certain manufacturers, accurate specification design may the most important customer concern [5]. Furthermore, in developing or third world countries, product price may be the most important customer value, whereas in first world countries the most important customer value could be product brand or quality. The second subject is competence against other supply chain competitors. Before setting the overall competitive strategic direction of the supply chain, it is crucial to understand the core competitive advantages of the world-class competitors and avoid direct competition. The third subject is the mission and vision of the whole supply chain members. Short term profits or threats should not be made the focus at the expense of future ideals and long term objectives. Some studies using the balanced scorecard method to evaluate supply chain performance emphasized that the supply chain must balance long term and short term profits [6 8]. The fourth subject is the competence of the whole supply chain and its members. Before setting overall competitive strategic direction and objectives, it is necessary to consider supply chain core competence and set reachable targets.

3 M.-H. Hwang and H. Rau / Development of strategies for shortening supply chain and demand chain 257 Table 1 SWOT matrix tool for situational analysis Table 2 Generic competitive strategy type Outer environment Inner environment Competitive advantages Strength Weakness Opportunities SO: Max Max WO: Min Max Threats ST: Max Min WT: Min Min To summarize, the first two subjects of investigation are the outer environment of the supply chain, and the last two subjects are the inner environment of the supply chain. In practical applications, Weihrich [9] proposed a SWOT matrix tool for situational analysis. This study uses this method to analyze the above mentioned for four subjects to obtain information on the competitive position of supply chains in industries, as shownintable1. The SWOT matrix is described as follows: Using Strength-Opportunities (SO: Max Max) strategy: this is the best strategy, i.e. there is mutual cooperation between the strength of the outer and inner environments. Using Strength-Reducing Threats (ST: Max Min) strategy: external threats can be dealt with by using supply chain strength. Reducing Weakness-Using Opportunities (WO: Min Max) strategy: using external opportunities to overcome internal weakness. Reducing Weakness-Reducing Threats (WT: Min Min) strategy: reducing internal weaknesses and external threats Building up overall supply chain competitive strategic direction Once we completed the environmental scanning, it is possible to fully understand supply chain strength and weakness, external opportunities and threats, as well as the related information and potential profit for each market segmentation. With this understanding it is possible to enter the strategy formulation phase. In this phase, the focus is on the overall competitive strategic direction of the supply chain. In building up overall supply chain competitive strategic direction, the three generic competitive strategies proposed by Porter [10] (Table 2) as the approach of building up supply chain s overall competitive strategic direction. Porter believed that there are three types of generic competitive strategy: cost leadership strategy, differentiation strategy, and focus strategy. Cost leadership strategy uses the functional strategy to reach its ba- Overall cost Differentiation leadership Field of Whole Cost Differentiation competition industry leadership Specific Cost focus Differentiation target focus sic objective, that is, to become an overall cost leader; in another words, this strategy seeks to produce standardized goods and control all cost and expense, and to offer lower product prices than all competitors. Many studies have mentioned different functional strategies such as: just in time strategy, standardization strategy, design for manufacturing strategy, design for logistics strategy, outsourcing strategy, vendor managed inventory strategy, delay differentiation strategy, transportation strategy, inventory reduction strategy, crossdocking strategy and so on, as methods of cost control. The differentiation strategy refers to differences between products or services provided by the supply chain and those of other supply chains, enabling the supply chain to offer a unique product or service, and also enabling the charging of higher prices than competitors. Examples of differentiation strategies includes customer relationship management, door to door sales, and so on. The focus strategy focuses on specific customer segmentation, product lines or regional markets, doing so with higher efficiency or effectiveness than competitors to reach our target in the market. For example, LEXUS focuses on the high quality and high price car market segment. 3. Methods of shortening the supply chain in the Execution stage 3.1. Literature review Shortening the supply chain has always been the main issue of supply chain management. Many scholars have proposed various solutions to this problem. Cook and Rogowski [11] proposed a work flow for reducing resources, inventory and lead time; reducing time wastage in transportation and improving the accuracy of demand plan, reducing lead time before delivery, variation of lead time, improving customer satisfaction and delivery on time, and increasing prod-

4 258 M.-H. Hwang and H. Rau / Development of strategies for shortening supply chain and demand chain uct availability. Hammel et al. [12] proposed a product design for increasing process efficiency, reducing costs and response to customer demands, reducing waste from materials and manufacturing, and improving product readiness. Hammel et al. [12] also mentioned Distribution Requirement Planning (DRP). It uses Pull-Pull-Pull to replace the Pull-Push-Pull and it helps HP ensure the product availability, improve quality and increase profits. Simchi-Levi et al. [13] proposed using Design for Logistics in the product design. It downs transportation cost, warehouse cost and packing cost, and increases the quality of transportation. It also increases customer convenience and satisfaction. Besides, Design for manufacturing adjusts product design, adjusts manufacturing process to reduce lead time, and reduces inventory and safety stock level. Additionally, through standardization of spare parts and products, it is possible to balance risk and reduce the inventory level, and then reduce cost via economies of scale. Furthermore, in manufacturing design, with the postponement of the process standardization, it is possible to eventually efficiently solve the demand uncertainty. Through standardization of procurement, it is possible to reduce equipment cost; moreover based on pull supply chain it is possible to accurately predict orders, reduce lead time, and reduce retailer inventory. Reducing lead time reduces the bullwhip effect, and due to the reduction of variation, it reduces manufacturer inventory. Furthermore, with consolidation of the product, geography and time, it is possible to more accurately monitor the accuracy of the prediction. Chopra and Meindl [14] divided strategy execution into three levels: competitive strategy, tactic and operation process. Moreover, Min & Zhou [4] pointed out problems in managing the supply chain on the basis of those three levels. Competitive strategy problems in the supply chain include assignment decision, planning demand, planning delivery channel, strategic alliances new product development, outsourcing strategy, supplier selection, informative technology selection, pricing, network reconstruction, etc. Meanwhile, tactical problems include inventory control, coordination of production/delivery operations, consolidation of purchase order/transportation, material control, selection of equipment and layout design, etc. Furthermore, problems in operation process are vehicle routing and scheduling, distribution of labor, storage of the records, packing, etc. Lin et al. [15] used the multiagent system to simulate the order fulfillment process, and proposed multiple order processes such as strategy of demand coordination and information sharing to synchronize the availability of materials and productivity, and to distribute the active materials to improve performance. Wisner [16] used a questionnaire to study the connectivity between the four aspects of supplier management, customer relationship management, supply chain management and company performance. Notably, Cook and Rogowski [11] also mentioned that Just in time (JIT) can continuously improve productivity and efficiency of the manufacturing process, reduce lead-time, provide on-time delivery, improve the efficiency of material transportation, and avoid time wastage. Korpela et al. [17] used the Analytical Hierarchy Process (AHP) to build the supply chain and applied it to the seven analysis, namely: defining and describing the core process, defining the performance measure and objective, analyzing customer needs, the status of the competition and the operating environment, analyzing the current process, performing high effect analysis, and confirming benchmarking and possible new technologies. Andreas & Herbert [18] proposed studying functional strategy and their relative performances index through six perspectives. These perspectives are system-dynamic, operation research/information technology, logistics, marketing, organization and strategy. Moreover, Tan [3] conducted a questionnaire of supply and materials controllers in the United States and proposed practical executions in the supply chain, and use regression analysis to build the relationship between those practical executions and company performance. Hammel et al. [12] referred to HP using the product design to reduce the quantity of spare parts to less than 40% of the original, before execution. Additionally, products are compatible with other vendors like IBM and DEC, which previously was not the case. This study also mentioned that through the process design, HP improved their product availability from 90% to 98%. Furthermore, Cook and Rogowski [11] mentioned that DOW Chemicals used Just in Time in process design, helping the supply chain to predict 25% of the order accuracy, to reduce 50% of the lead time variation and improve customer satisfaction, while simultaneously achieving savings of $ per day Methods of shortening supply chain The documentation demonstrated that during the execution phase, any functional strategy can be used to shorten the supply chain, and to increase overall sup-

5 M.-H. Hwang and H. Rau / Development of strategies for shortening supply chain and demand chain 259 ply chain efficiency. Thus, this study consolidates the above and classifies methods for shortening the supply chain into six categories: Product design, process design, system environment, optimization tools, crossdepartmental integration and partner relationship. The functional strategies for each category are: (1) Product Design: this category focuses on product design of the supply chain, and seeks to shorten the time. Design for manufacturing: adjust the product design to have the manufacturing and finishing process work in parallel to reduce lead time. Design for logistics: adjust the product design to fit the logistics and thus reduce transportation costs and time and improve transportation quality. Design for retail: adjust the product design such that the retail products possess time and space savings features. (2) Process Design: reduce the time required for process design of the supply chain. Postponement strategy: delaying process standardization can reduce demand uncertainty. JIT strategy: use a Pull-Strategy to accurately predict orders and avoid time wastage. (3) System Environment: this system aims to reduce the time in a dynamic operation model for the supply chain system. Eliminating working levels: eliminating working levels and building a correct channel can accelerate the circulation of products and information. Transparency of order: to fulfill end customer demand: Inform the supply chain members about this demand so they can develop strategies accordingly. Cooperative planning strategy: supply chain members should consolidate order prediction to make order status transparent and reduce order lead time. Channel transparency: make transportation and inventory transparent in the transportation channels, and reduce operation time. Stable order strategy: use an automatic order processing system. Such a system mainly focuses on daily or regular orders, and can improve efficiency and avoid order exaggeration. Cooperative production strategy: by coordinating production supply chain members can eliminate order exaggeration. (4) Optimization tools: this system uses operational research or informative techniques to plan operations, with the ultimate aim of operation optimization. Mathematic planning: using linear or integer planning to optimize calculations. Best calculation based on informative techniques: the best calculation based on informative techniques optimizes the possibility of change throughout the supply chain. Heuristic algorithm: the heuristic algorithm obtains better solutions than the classic linear calculation. (5) Cross-departmental Consolidation: this system focuses on operations involving multiple supply chain members, to shorten the time. Consecutive consolidation: consecutive consolidation is a process design, mainly designed for connecting relationships between members, and for consolidating relationships between departments. Vertical consolidation: vertical consolidation involves close connections during a process; for instance, connecting by condensing the time between interfaces. Horizontal consolidation: horizontal consolidation involves vertically handling different operations and making them closer. (6) Partner Relationship: this strategy mainly focuses on building good relationships between members of the supply chain. Relationship maintenance: it is important to check the relationship between supply chain members. Confirm the complexity of the relationship: understand the resources needed for team building and reduce transaction time and costs, creates the win-win situation. Replace authority by trust: trust and promise are the main drivers in a long term relationship Cause-and-effect diagram To clearly describe the cause-and-effect relation between the above functional strategies and the shorten-

6 260 M.-H. Hwang and H. Rau / Development of strategies for shortening supply chain and demand chain Fig. 2. Cause-and-effect diagram of supply chain shortening. ing of supply chain, a fishbone diagram is presented below. Fishbone diagrams are designed to list large numbers of causes of particular outcomes. Fishbone diagrams can help to confirm and explain particular results or questions, determine the causes of problems and identify the causes of variations in a process. The cause-and-effect diagram shown in Fig. 2 uses the above six categories of functional strategy. 4. Supply chain performance measurement in the control stage To understand the extent of supply chain achievements during the execution phase by using all the functional strategies, performance measurements must be conducted during the control stage. Chan [5] believes performance measurements involve feedback or information of activities designed to fulfill customer expectations and team objectives, and points out areas for improvement. Such improvements can help enhance efficiency and quality. Chan [5] also mentioned a new structure based on quantitative and qualitative structure for performance measurement, and used AHP as decision maker for performance evaluation. Gunasekaran et al. [19] created a structure for supply chain performance evaluation, which was based on supply chain activities/processes, including planning, resources, manufacturing/assembling. Edward [20] used a questionnaire to understand the priority of supply chain core competence for 7000 enterprises in the States and Canada, and as well as the criteria difference between the fist three and last three enterprises. Thus, to understand the efficiency of every supply chain strategy, it is necessary to develop relative performance measures. In response to the six categories of Section 3 for supply chain shortening, corresponding performance measures are established as follows: (1) Product Design. Production cycle measure: for accelerating production process to reduce production cycle. Production lead time measure: for designing processes to reduce lead time. Delivery time criteria: for logistics design to reduce transportation time.

7 M.-H. Hwang and H. Rau / Development of strategies for shortening supply chain and demand chain 261 (2) Process Design. Lead time measure: the lead time of manufacturing. Customer satisfaction measure: customer waiting period. (3) System Environment. Time gap of the order: time gap from order to delivery. Time adjustment in response to change in an order request: when order requests change, the supply chain is adjusted to adapt to the time needed. (4) Optimization Tools. Service level measure: can be shown by on time or order fulfillment rate. Time measure of order fulfillment: time needed for certain goods to travel from the warehouse to the customer. (5) Cross-departmental Consolidation. Consolidation measure: different interfaces needed for an order process. Lead time measure: lead time represents the time needed to complete a process, namely the purchase, production and delivery processes. Time measure of order cycle: time needed from a customer placing their order to receiving the goods. Flexibility measure: time required to respond to obstacles due to time, resources, cost or performance. (6) Partner Relationship. Network time measure: time needed for building a special system. Flexibility measure: time needed to act obstacles due to time, resources, cost or performance. Connectivity level measure: connectivity can be measured from social, technological, cultural, geographical and time differences. Table 3 summarizes the six categories of methods for supply chain shortening and their relative performance measure. 5. Further discussion Despite the existence of considerable evidence supporting that SCM benefits firms, in reality many obstacles exist. For example, supplier delivery is hard to control, co-ordination between production and marketing is difficult, production schedules frequently change, and it is difficult to forecast customer demand. However, these problems can be solved through the concept of demand chain. Brace [21] believes that demand chain refers to the series of activities such as manufacturing and distributing which lead to endcustomer satisfaction. Vollmann et al. [22] emphasized that demand chain satisfies customer needs, particularly the needs of specific market segments, rather than seeking the optimization of supply chain. Tim et al. [23] suggested that the demand chain management should distribute products downstream and transfer information upstream throughout the entire supply chain, using electronic commerce, to increase endcustomer satisfaction. Therefore we can tell, demand chain develops products and marketing strategies according to the market trends. That is, demand chain is a management strategy used by customer orientation. Demand chain and supply chain share common basic concepts, supply chain is focused on a steady supply of materials, adequate inventory control, and applying the most efficient method of satisfying end-customers. Meanwhile, demand chain emphasizes guiding manufacturing, production and distribution based on market demand, focusing on maximization of effectiveness. Therefore, this study proposes six categories of strategies in Section 3, which are also applicable in demand chain. After identifying the end-customer need and customer value of the target market, strategies suggested in this study can also be used to shorten the demand chain, thus satisfying customer demand and increasing customer satisfaction. 6. Conclusion Supply chain management was performed via a strategic management process involving three stages, including planning, execution and control; and focused on an important issue, strategies for shortening the supply chain. On the basis of supply chain shortening, the methods were divided into six categories: product design, process design, system environment, optimization tools, cross-departmental consolidation and partner relationship. The functional strategies were also

8 262 M.-H. Hwang and H. Rau / Development of strategies for shortening supply chain and demand chain Table 3 Methods and performance measures for supply chain shortening Category Functional approach Performance measure Product design Design for manufacturing Production cycle Design for logistics Production lead time Design for retail Delivery Time Process design Postponement strategy Lead time Just in time strategy Customer satisfaction System environment Elimination working level Time gap of the order Transparency of order Time adjustment by order Cooperative planning strategy request change Channel transparency Stable order strategy Cooperative production strategy Optimization tools Mathematic planning Service level Best calculation based on informative Order fulfillment time techniques Heuristic algorithm Cross-departmental Consecutive consolidation consolidation consolidation Vertical consolidation Lead time Horizontal consolidation Order cycle Flexibility Partner relationship Relationship maintenance Network time Confirm the complexity of the relationship Flexibility Replace authority by trust Connectivity level studied. Additionally the cause and effect diagram is used to clearly describe the cause and effect between those six categories and the supply chain shortening. Finally, this study clarified the relative performance measure during the control stage, to evaluate the performance of supply chain shortening. References [1] S.J. New and P. Payne, Research frameworks in logistics: three models, seven dinners and a survey, International Journal of Physical Distribution and Logistics Management 25(10) (1995), [2] C. Scott and R. Westbrook, New strategic tools for supply chain management, International Journal of Physical Distribution & Logistics 21(1) (1991), [3] K.C. Tan, Supply chain management: practices, concerns, and performance issues, Journal of Supply Chain Management 38(1) (2002), [4] H. Min and G. Zhou, Supply chain modeling: past, present and future, Computer & Industrial Engineering 43 (2002), [5] F.T.S. Chan, Performance measurement in a supply chain, The International Journal of Advanced Manufacturing Technology, 21 (2003), [6] P.C. Brewer and T.W. Speh, Using the balanced scorecard to measure supply chain performance, Journal of Business Logistics 21(1) (2000), [7] A. Gunasekaran, C. Patel and E. Tirtiroglu, Performance measure and metrics in a supply chain environment, International Journal of Operations & Production Management 21(1/2) (2001), [8] J.P.C. Kleijnen and M.T. Smits, Performance metrics in supply chain management, Journal of the Operational Research Society 54 (2003), [9] H. Weihrich, The SWOT Matrix-A tool for situational analysis, Long Rang Planning 15(2) (1982), 60. [10] M. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, New York, [11] R.L. Cook and R.A. Rogowski, Applying JIT principles to continuous process manufacturing supply chains, Production and Inventory Management Journal (First Quarter) (1996), [12] T.R. Hammel, C.P.M. Cpim and L.R. Lopczak, Tightening the supply chain, Production and Inventory Management Journal (Second Quarter) (1993), [13] D. Simchi-Levi, P. Kaminsky and E. Simchi-Levi, Designing and Managing the Supply Chain, 2 edn, McGraw-Hill, 2003.

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