A structure that coordinates the diverse activities within a supply chain contrasts greatly with one where separate supply chain groups or activities report to different executive managers. The latter model can result in each function or activity pursuing conflicting organizational goals and objectives. Organizing as an integrated supply chain structure requires traditionally separate activities to report to an executive responsible for coordinating the flow of goods, services, and information from supplier through customer.
Most large organizations have materials or supply chain executives responsible for coordinating separate supply chain activities. Historically, the concept of supply chain management evolved from earlier organizational forms called materials management and physical distribution. In fact, some organizations still maintain these as organizational functions. Materials management was a consolidation of functions required to purchase, manage inbound transportation for, receive, store, inventory, and schedule material flows. Physical distribution then took the finished product to market either directly or through warehouses. Earlier research revealed that 70% of U.S. operations organizations used the materials concept (i.e., the predecessor to supply chain management) to some extent, a figure that was consistent across all sizes of organizations.
Historically, the greatest growth of the materials management concept occurred during the mid-1960s to late 1970s.
In the 1980s and through the mid-1990s, many firms combined these two functions into logistics. From the mid-1990s and continuing through the current period, firms realized that other factors such as information and process flows were as important as (if not more so than) the physical flow of goods. Hence many adopted the moniker of “supply chain management” to indicate this complex web of relationships, processes, and information flows from the supplier to the final customer. Perhaps one of the best comments that captured this new philosophy was made by Frederick W. Smith, the chairman and CEO of FedEx, who stated that the “information about the package is more important than the package itself.”
Organizations that develop a coordinated approach to materials and supply chain management show a greater interest in the control of material costs. This can only increase the importance of purchasing within the organizational hierarchy because of purchasing’s influence on cost and quality.
It is easy to see why organizations have endorsed the concepts of materials management, physical distribution, logistics, and now supply chain management. All these organizational approaches can lead to some tangible benefits:
- Controlling material costs while improving customer service
- Developing an awareness of supply chain total cost tradeoffs
- Opening channels of communication that promote the sharing of ideas across organizations and functional groups
- Supporting the career paths of talented personnel by providing the means to develop multifunctional expertise
- Developing operating efficiencies across various supply chain activities to streamline material processes, coordinate procedures, and improve movement of materials and data
- Creating a direct link from the customer back to external suppliers
Advances in software and systems have enabled visibility across the supply chain that allow multiple participants to coordinate and schedule more efficient material information and processes. Ideally, there is increased access to demand forecasts, production requirements, and inventory levels at any point within the supply chain.
Each party could now plan its own production and distribution requirements with greater accuracy. The result of this integration will be lower inventories, shorter cycle times, an improved ability to plan, and lower costs.