M. Eric Johnson David F. Pyke
The Tuck School of Business Dartmouth College Hanover, NH 03755 603 (646) 2136
July 27, 1999
Introduction Supply chain management (SCM) is the term used to describe the management of the flow of materials, information, and funds across the entire supply chain, from suppliers to component producers to final assemblers todistribution (warehouses and retailers), and ultimately to the consumer.1 In fact, it often includes after-sales service and returns or recycling. Figure 1 is a schematic of a supply chain. In contrast to multiechelon inventory management, which coordinates inventories at multiple locations, SCM typically involves coordination of information and materials among multiple firms. Supply chain managementhas generated much interest in recent years for a number of reasons. Many managers now realize that actions taken by one member of the chain can influence the profitability of all others in the chain.2 Firms are increasingly thinking in terms of competing as part of a supply chain against other supply chains, rather than as a single firm against other individual firms. Also, as firms successfullystreamline their own operations, the next opportunity for improvement is through better coordination with their suppliers and customers. The costs of poor coordination can be extremely high. In the Italian pasta industry, consumer demand is quite steady throughout the year. However, because of trade promotions, volume discounts, long lead times, full-truckload discounts, and end-of-quarter salesincentives the orders seen at the manufacturers are highly variable (Hammond (1994)). In fact, the variability increases in moving up the supply chain from consumer to grocery store to distribution center to central warehouse to factory, a phenomenon that is often called the bullwhip effect (see Figure 2 as an example). The bullwhip effect has been experienced by many students playing the “BeerDistribution Game.” (Sterman (1989); Sterman (1992); Chen & Samroengraja (2000); Jacobs (2000)) The costs of this variability are high -- inefficient use of production and warehouse resources,
Much of the material in this article is based on Chapter 12 of Silver, Pyke, & Peterson (1998) and Johnson & Pyke (2000a).
high transportation costs, and high inventory costs, to name a few. AcerAmerica, Inc. sacrificed $20 million in profits by paying $10 million for air freight to keep up with surging demand, and then paying $10 million more later when that inventory became obsolete.3 It seems that integration, long the dream of management gurus, has finally been sinking into the minds of western managers. Some would argue that managers have long been interested in integration, but thelack of information technology made it impossible to implement a more “systems-oriented” approach. Clearly industrial dynamics researchers dating back to the 1950’s (Forrester (1958); Forrester (1961)) have maintained that supply chains should be viewed as an integrated system. With the recent explosion of inexpensive information technology, it seems only natural that business would become moresupply chain focused. However, while technology is clearly an enabler of integration, it alone can not explain the radical organizational changes in both individual firms and whole industries. Changes in both technology and management theory set the stage for integrated supply chain management. One reason for the change in management theory is the power shift from manufacturers to retailers.Wal-Mart, for instance, has forced many manufacturers to improve their management of inventories, and even to manage inventories of their products at Wal-Mart. While integration, information technology and retail power may be key catalysts in the surge of interest surrounding supply chains, eBusiness is fueling even stronger excitement. eBusiness facilitates the virtual supply chain, and as companies...