Supply chain

Supply Chain Management

M. Eric Johnson David F. Pyke

The Tuck School of Business Dartmouth College Hanover, NH 03755 603 (646) 2136

July 27, 1999

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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 to distribution (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 management has 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 successfully streamline 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 sales incentives 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 “Beer