Supply Chain Management of Network Enterprises

7.2 Supply Chain Management of Network Enterprises

7.2.1 Overview of Supply Chain Management

Since 1990’s, as various automation and information technologies have been continuously applied in manufacturing enterprises, manufacturing productivity has already been greatly improved, while the potential of technology means themselves in the manufacturing processes to raise the whole competitive capabilities of products has been diminished. To further tap the potential to lower the product cost and to satisfy customers’ needs, people begin to turn from managing the internal production process of enterprises to the supply links in the whole product life cycle and the whole supply chain system. Many a scholar points out that, the ratio between the cost of products in supply links of the whole life cycle (for example, storage and transport costs) and the total cost becomes higher and higher. Michael ˜ W, a professor in the business school of English Columbia University in Canada, thought, as concerns to the enterprises, the stock expenses take about 3% of the sale, transport cost about 3%, and the purchasing cost about 40% and the related labor force is also above 10% of the total. Moreover, along with the global economic integration and the development of information technology, the cooperation between enterprises increasingly has been strengthened and the trend of cooperating manufacture across regions even nations is increasingly obvious. More and more manufacturing enterprises continuously outsource a great deal of regular business to the developing countries in the world except the core business (such as the market, the key system design and system integration, total assembly and sale). For example, the manufacture of Boeing 747 airplanes needs more than 4,000,000 parts; however the majority of these parts are not produced in Boeing but by 1500 large enterprises and 15,000 medium and small enterprises in 65 countries.

Therefore, as a new academic concept, SCM (Supply Chain Management) was — firstly proposed in the west, which was researched by many people and practiced by enterprises. Fortune has listed the capability of supply chain management as an important strategic competitive resource in enterprises. In the

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times of global economic integration, it is of great significance to consider the whole production and management activities of enterprises from the perspective of supply chain management and form core capability of this aspect, which will be very important for raising competitive capabilities of business enterprises.

The process from purchase of raw materials and parts, transportation, processing and manufacturing, distribution and delivery to customers in enterprises is viewed as a connected chain, that is, the supply chain. The concept of the supply chain is developed from the concept of extended production, which extends the production activities of enterprises. For example, the Lean Collaboration of the Japanese Toyota Company views the activity of suppliers as the organic components of the production activities to control and adjust. This is forward extension. Backward extension refers to extension of the production activity to the sale and the service stages. Therefore, the supply chain is the interface formed between customers and suppliers through some activities such as plans, acquisition, storage, distribution, and service, thus to satisfy the needs of the interior and exterior customers. The supply chain and the concept of the sale channel in marketing have both differences and similarities. The supply chain includes all corporations and enterprises involved in supply, production, distribution and sales before the product reaching customers. Therefore its definition contains the concept of sale channel. The supply chain regards equally the upstream suppliers (supply), middle producers (manufacture) and transporters (storage and transport), and downstream consumers (distribution).

Therefore, the supply chain management refers to the various activities and processes to plan, coordinate, operate, control and optimize the whole supply chain system, whose object is to deliver the right product needed by the customer to the right place in the right time, with the right quantity, the right quality and the right state, meanwhile to make the total cost minimum.

7.2.2 Construction of Supply Chain Management

It is very important for each manufacturing enterprises to design and operate an effective supply chain, because it is advantageous to improve consumer service level, attain effective balance between cost and service, raise the enterprise competitive ability, flexibility, and soak into the new markets and improve working efficiency through declining inventory. But it also leads to waste and failure due to the bad design of the supply chain. Fisher thinks that the design of the supply chain should focus on products and first figure out consumers’ needs of the products of the enterprise. Product life cycle, requirement forecast, product diversity, ahead of schedule and market standard of service are extremely important and affect the design of supply chain. It is required that a supply chain should be coherent with the product characteristics, that is so-called Product-Based Supply Chain Design (PBSCD) strategy.

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Different product types have different requirements of the supply chain design. The design of the supply chain of the high marginal profits, instable requirement innovation products differs from that of the low marginal profits and the stable requirement functional products. The comparison of the two different types of products is shown in Table 7.1.

Table 7.1 Comparison of two different types of products (in requirements)

Requirement Characteristics

Functional Products

Innovative Products

Product life circle (year)

1 3 Marginal contribution (%)

5 20 20 60 Product diversity

Low (10

20 per catalog) High (Above thousands per catalog)

Predictive average marginal 10 40 100 error rate (%)

Average OOS rate (%) 1 2 10 40 Season end depreciation

0 10 25 rate (%)

Ahead of schedule of

1 day 2 weeks product as order

6 months

1 year

It can be figured out from Table 7.1 that, the functional products are usually used to meet the basic requirements of consumers, which seldom change and have the stable and predictable requirements and longer life cycle, but lower marginal profits. In order to avoid low marginal profits, many enterprises reform in pattern or technology to stimulate consumers to buy, thus acquiring higher marginal profits. The requirements of this kind of innovative products are generally unpredictable and have short life cycle. Just because of the differences of these two kinds of products, it needs different kinds of the supply chain to satisfy the different management demands.

Product-Based Supply Chain Design Strategy

A supply chain consistent with product requirements could be designed after knowing the characteristics of products and supply chains. The design strategy is shown as Table 7.2.

Table 7.2 Design of supply chain and product type strategy matrix

Functional Products

Innovative Products

Validity Supply Chain

Mismatching Reactivity Supply Chain

Matching

Matching The four elements of the strategy matrix represent the four probable

Mismatching

combinations of products and the supply chain, from which it can be figured out the characteristics of products and the supply chain. Managers are able to use it

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to estimate whether the design of the supply chain process of the enterprises is in accordance with the product types. This is Product-Based Supply Chain Design Strategy: the validity supply chain is applicable for functional products, while the reactivity supply chain process is applicable for innovative products, otherwise problems will arise.

7.2.3 Cooperation Management of Supply Chain

The highest level of supply chain integration is the strategic cooperation between enterprises. It opens out a cooperation countermeasure process when the enterprise joins the supply chain in the form of dynamic alliance. It seeks a win-win goal through a consultation mechanism. Since 60’s in 20th century Shark researched multilevel repertory, many scholars have concentrated on solving the optimal question of multilevel repertory, but few scholars studied cooperation of the supply chain from the strategic perspective. In the study of marketing and industry organization theories, people notice this problem earlier, and study it from the perspective of price consultation and resource allocation. Just as pointed out, integrating supply chain management based on logistics is different from traditional supply chain management of individual enterprise based on logistics. It gives priority to the cooperation mechanism between enterprises, especially the supply chain of the dynamic alliance. While it becomes a member of a certain supply chain, the enterprise would carry out the research of cooperation countermeasure from its own interest, and form a collaboration negotiation mechanism and entrusting agency mechanism between entrusting enterprises and contracting enterprises.

Since the 90’s in the 20th century, owing to the emergence of advanced manufacture patterns such as the global manufacture, agile manufacturing and virtual manufacturing, a new enterprise organizational form appears characterized by the dynamic alliance, thus greatly changing the original enterprise production organization and resource configuration form, which can be clearly reflected by supply chain management. The integrated supply chain is the integrated enterprise network (extended enterprise model) characterized by external usage of resources. It transits from the original portrait integral whole mode to the transverse integral whole mode. The market competition is not the competition of the individual enterprise any more, but the competition between alliances, the competition between supply chains. Therefore, the original single-handed enterprise competition strategy does not fit the world economic development, and the enterprise needs to learn the category and skill of how to cooperate with other enterprises; at the same time, it still needs competitive advantages and strategy in the process of competing with other enterprises and joining some supply chain alliance, which is the cooperation-competition mode in the process of the supply chain alliance. This kind of competition is the competition of the core capability. The Americans C.K.Prahalad and Gray Hamels think that the core capability is a set of harmonious

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assembly of advanced technology, including science, technology, production and organization management, such as the product development technology, the manufacturing technology, cost control technology, the marketing technical ability and after-sales services and market-responding capability. As a brand-new management idea, the supply chain management emphasizes on how the enterprise pool its own core ability to create tactic cooperative relation with other enterprises by strategic cooperative relation, and that each enterprise should concentrate the energy to consolidate and develop its own core capability, and build up strategic cooperation relationship, and make good achievements in key business that could create value and be dominative and better than other enterprises by making use of its own resources advantage. Win-win is the final purpose of the supply chain mode of cooperation.

The research and practice of the supply chain management reveal that: the key to implementing the supply chain management is to make each link of the whole supply chain be able to clearly observe the logistics, the capital flow, information flow and workflow, in order to coordinate better, lower the supply chain cost, lower the latency time of each link, and remove the effect of amplification of the information distortion by increasing contact and cooperation between the supply chain nodal enterprises, raising the information share degree, and replacing decision-making system that lacks of flexibility and badly-integration with the decision-making system that covers the whole supply chain. It provides the basic assurance for the operation of the enterprise supply chain through creating the MRPII (or ERP) agile supply chain system that is supply-chain-oriented and based on Internet/Intranet. Currently the research on the supply chain management (integrated and agile supply chain) basically follows a general research path which also has an emphasis: regarding the internal mechanism of the integrated supply chain management system as a network which is composed of cooperating intelligent agent modules, each agent module of which implements one or more functions of the supply chain and also cooperates with other agent modules.

From the prospect of enterprise integration mode of strategic colleague relationship, however, this can only make the supply chain attain the medium and micro integration, but does not present resource configuration, cooperation game and entrusting implementation mechanism in the macro aspect. Medium integration (information flow integration) can be implemented through MRPII/ERP, and workflow integration can be implemented through DRP or LRP (Logistic Resource Planning). As for implementing negotiation agent and cooperation game, it needs creating the high-level-decision-making-oriented management system EIS/NDSS (Executive Information System/Negotiation Decision Support System).

From the prospect of economics and marketing, since the 90’s in the 20th century, enterprise management strategy evolved from the original hostile competition to the cooperation competition, which is the world competition trend. The cooperative game is a hotspot problem in the game theory currently. The new enterprise management objects (in the form of group team and self-managing team), cooperation, competition and independence have become issues faced by

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the future enterprise administrators. Constructive controversy and group negotiation will play a strong role in the management mode. A few problems about how to effectively exert the effect of group negotiation in supply chain management still need resolving currently.

(1) Confidence in the enterprise alliance. Thoreli emphasizes the cooperation colleague’s firm honesty and keeps the promise using emphasis on reliability anticipation as a standard, and deems the real difference between the trust and distrust consists in the leap of both parties’ confidence: they mutually believe that the other party is concerned about its interest, and no one will take an action before clearly considering the mutual influence, which actually emphasizes the significance of the cooperation negotiation.

(2) Communication. Though the member of the supply chain alliance has gained mutual useful information resources through Internet/Intranet which guarantees information communication, it cannot guarantee individuals conceal private information for its own benefits, so the information asymmetric problem is another hard nut to crack in the negotiation theory.

(3) Trade cost. The trade cost includes: ķ The cost of reaching both parties satisfied agreement. ĸ The cost of dealing with unexpected emergences. Ĺ The cost of implementing agreement condition. ĺ The cost of terminating the agreement. The final purpose of the supply chain

management is to lower the customer cost. How to share trade cost in reason between the cooperation colleagues (cooperation management sharing mode) and lower consumer needs solving in the cooperation of the supply chain.

In the entrusting processing supply chain, the enterprise concentrates its own efforts on market research, product design, sale and service and production management of the enterprise by entrusting the chosen enterprise to complete parts of business. Because enterprises are all an independent benefit entity, they lack the trust mutually, causing the run-time cost of the supply chain higher. In principle-agent relation, these two problems are needed to be solved: adverse selection caused by asymmetrical information (for clients) and moral hazard (for agents). These problems are resolved by creating the agent inspiring mechanism and the trust mechanism between enterprises, to reduce the effect on the whole benefit of the supply chain.