Supply Chain Management: Corporate Vision: Part I – SCM, VCM and EPM defined
In business an enterprise is an open system composed of interconnected subsystems that work and integrate together to achieve a common objective. This system is composed of four principal subsystems:
- Inputs: Capital, human resources, financial resources, raw materials, hardware, software, and data.
- Processes: Transformation of raw materials, data analysis. handling, and operations.
- Outputs: Finished product and information (financial statements, reporting).
- Feedback: Control (variance analysis between planned objectives and actual results), verification and audit (procedure control), and customer relationship management (customer satisfaction analysis).
To overcome the challenges of today’s environment of growing variety and complexity and to improve flexibility and proactivity, enterprises are implementing supply chain management systems.
A supply chain (SC) is a set of structures connected to each other through an information system. Its purpose is to add value to customers and other stakeholders to reduce cost in order to deliver products customers need at the right price and the right time to ensure sustainable performance. Supply chain management (SCM) is one of the key components of any organization and is responsible for balancing demand and supply along the entire value-adding chain. (i) The goal of SCM is to make sure products are delivered to satisfied customers. The SC manager is entrusted with the responsibilities of ensuring the entire process is planned and realized in accordance with the strategy of the enterprise in an efficient way.
Supply chain and value chain:
Michael Porter’s research indicated a company seeks to build a competitive strategy at the level of one or more activities that constitute its value chain. « Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value (ii) » For Porter the value chain is a set of activities and processes to design, produce, market, deliver, and support the product and service. He considers the company as an open system that consists of interrelated subsystems from upstream (suppliers) to downstream (customers). For example, raw material and financial resources are inputs, manufacturing is processing, and finished goods are outputs. The company cannot create value or reduce its costs if it treats activities globally. Separate activities like raw material receiving, quality control, and delivery can support a competitive advantage.
For example, an effective inspection of raw material helps avoid production defects, reduces waste and saves time to control the quality. The value chain describes the activities a company utilizes to analyze its competitive advantages. A well understood value chain will highlight activities that add value to the product (activities that have a positive value-add) and the activities that consume value (activities that have a negative value-add). The value chain for any enterprise includes all value-creating activities; basic raw material sources from component suppliers to the end-use product delivered to the final consumers’(iii). Regarding this definition, supply chain and value chain are synonymous. According to Porter, Value Chain Management (VCM) aims to maximize the competitive advantage (i.e., to be different from competitors). In this regard its scope is wider than that of the supply chain.
The main activities of the supply chain can be summarized as follows:
Figure 01: Supply chain activities
Supply chain management (SCM) and enterprise performance management (EPM):
Supply chain management (SCM) is a cross-department and cross-enterprise integration and coordination of material, information, and financial flows to transform and use the SC resources in the most rational way along the entire value chain, from raw material suppliers to customers. SCM is a key activity of any organization. Its goal is to balance demand and supply along the entire value-adding chain(iv).
The enterprise maximizes its value chain when it simultaneously reduces costs and increases revenues. (Learn more about the Value/Cost Ratio in this piece, Can’t Thrive Without These Fundamentals in Place ) The additional value created by the supply chain in the scope of the strategy execution leads to sustainable performance improvement, which can be measured with Enterprise Performance Management (EPM) methods.
EPM is the integration of multiple managerial methods to improve an organization’s strategic and operational performance. (Enterprise and Corporate Performance Management (CPM) are synonymous.(v)) EPM creates sustainable improvement by ensuring cohesion between individuals, teams and the organization. It then determines what individuals must do, and the way in which they proceed. It applies responsibility accounting - management accounting that supports budgets, responsibility centers and generates periodic reports for feedback and corrections - monthly profit center reports comparing actual to budget for general ledger accounts. It supports the staff learning at all the levels within the organization.
Enterprise performance management and supply chain management are complementary. They generate a composite of several activities:
- Real-time data acquisition (concerning products, raw materials, suppliers, customers, governments law, etc.);
- Real-time monitoring (to avoid manufacturing defects and delays);
- Problem diagnostics (in order to solve them as quickly as possible, such as, for example, the lack of means of transport, breakdowns, cancellations, changes in production or delivery programs, high demand volatility)
- Automation of operations (in order to respect standards and ensure the desired quality generated in given time);
- Creation of historical databases (using integrated business management software such as Enterprise Resource Planning (ERP) software. These are used to not only report results but also to forecast the future. They are used to plan operations and to communicate effectively with suppliers, customers, the board of directors and the various partners)
- Development of historical statements and progress reporting (to measure the performance of each department and products profitability);
- Variance analysis (by comparing between the budget and the actual costs and revenues);
- Capacity planning (Planning the financial and asset capacity that allows the business to meet customer orders in an effective and efficient manner.
Supply Chain Management is a tool to achieve operational excellence. Professor Robert S. Kaplan and Dr. David Norton claim that value creation through internal productivity management and supply chain management is what enables organizations to provide efficient, zero defect, and timely production and delivery of existing products and services to customers.(vi)
Part II of the series describes where SCM is today and how it is leveraging technology to create value in the extended enterprise.
(i) DMITRY Ivanov, ALEXANDER Tsipoulanidis, JÖRN Schönberger, Global supply chain and operations management, 2nd edition, Springer, Switzerland, 2019. P 07.
(ii) PORTER Michael, What is strategy?, Article, Harvard Business Review, November 1996, P 64.
(iii)(iii) SHANK Jan and COLLEGE Dartmouth, Strategic Management Accounting: New wine or just new bottle, Article, Journal of Management Accounting Research, Fall 1989, P 50.
(iv) IVANOV Dmitry & others, Global supply chain and operations management, 2nd edition, Springer, Switzerland, 2019, P07
(v) Gary Cokins, https://www.garycokins.com/Date of consultation 15/07/2022.
(vi) KAPLAN Robet & NORTON David, the strategy focused organization, Harvard Business School Press, Boston, 2001, P79
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