INTEGRATION
PERFORMANCE
COMMUNITY
EXECUTION
FRAMEWORK
y
THE EIGHT ESSENTIAL
The Global Supply Chain Forum
of The Ohio State University has
identified eight processes that form
the foundation of supply chain success.
The challenge is to integrate these
processes both internally and externally
with key partners in the supply chain. Two of
those key processes — customer relationship
management and supplier relationship management — help companies accomplish this integration
and realize the revenue and profitability gains that
inevitably follow.
James O'Brien
18
CH\!N
^I^\.\c;EME^r
2004
SUPPLY CHAIN
MANAGEMENT
PROCESSES
By Douglas M. Lambert
u c c e s s t ti I sup ply c h a i n m a n age ni e ti tthe term- Many people consider it to be synonunotts witb
requires cross-functional integration of key logistics or with logistics tbat also includes customers and
business processes within the firm and suppliers. Others view supply chain management (SCM) as
across the network of firms that comprise the new tiame for purchasing or operations—or the eomhinatbe supply chiiin. It is focitsed on relation- tion of purchasing, operations, and logistics. Increasingly,
ship miinagement and the performance however, executives in leading companies are recognizing
improvements that result. In many compa- supply chain management as the management of relationnies, however, executives struggle to ships across tbe supply ebain. They view SCM in terms ot
achieve the necessary integration and, consequently, the business process excellence and as a new way of managing
resulting improvements. The problem is that they don't fully tbe business and the relationships with other members of the
understand the supply chain business processes—and the supply chain.
hnkages necessary to integrate those processes.
In this article, we adopt tbe following definition of SC,\1
Drawing from work done by The Global Supply Cbain developed by tbe Global Supply Chain Forum: Supply chain
Forum, this article identifies the eight processes tbat need to management is the integration of key business processes from
be managed and integrated for successful supply cbain man- end user through original suppliers that provides products, seragement. (For more on (he Global Supply Chain Forum, see vices, and information that add value for custo»iers and other
tbe sidebar on page 21.) Two of tbese processes provide tbe stakeholders.
linkages rcqitired to facilitate integration among the supply
This view ot supply chain management is illustrated in
chain members to coordinate tbe otbcr processes. These two Exhibit I. It depicts tbe following: a simplified supply chain
ke\ linkages are customer relationship management (CRM) network structure of a manufacturer with two tiers of cusand supplier relationship management (SRM).
tomers and two tiers of suppliers; tbe related information and
produet
flows; and tbe eigbt supply cbain management
By understantling the key supply ebain management
processes
that must be implemented witbin organizations
processes—and recognizing why and bow tbey should be
integrated—supply cbain managers ean sueeessfully position across the supply cbain. All of the processes are cross-functional and cross-organizational in nature. Further, as the
their companies for higher reventies and prolitahility.
exhibit illustrates, every organization in tbe su|)ply cbain
needs lo be involved in tbe implementation of tbose processJust What Is Supply Chain Manageuient?
es.
But at tbe same time tbe exbibit shows tbe corporate silos
IJelore [irocccding, it's inifiortant to define supply chain manat
ibe
top, wbicb can work against tbis integration.
agement beeatise theres still a great deal ol contusion over
In reality, of eotirse, a supply cbain is mucb more cotiiplex tban tbe row of silos de|)icted in Kxbibit I. For a comDouglas M. Lambert is the Rtjymond H. Mason Chair in
pany
in tbe middle ol the supply cbain, tbe supply ebain
Transportation cintJ Logislics and Director of The Global Supply
looks more like an uprooted tree (see Exbibit 2) wbere the
Chain Forimi al the I ishfr College of Business, ihe Ohio State
roots represent ibe supplier network and tbe brancbes repUniversih'. This article is adapted j rum his new hooh Supply
resent tbe customer network. Moreover, tbe supply cbain
Chain Managcmciil: Proct'sst's. Partnerships, Performance
will look differently depending on a company's position in it.
(Supply Chain Management Institule, 2004). Far more in/orFor example, in tbe case ol a retailer, like Wal-Mart, tbe
mation, visit u'ww.sem-institutf.org.
S
Suppi^
CHAIN
MANACEMEIVT
R h v n u
• SipirviUKn
2004 1 9
Processes
EXHisrr 1
Supply Chain Management Players and Processes
Information Flow
Customer Relationship Management
Customer Service Management
Demand Management
Order Fuifiliment
Manufacturing Flow Management
Supplier Relationship Management
Product Development and Commercialization
conciuded that they cannot
optimize product Hows without first i m p l e m e n t i n g a
process approacb to tbe business. Yet while s e v e r a i
authors have suggested implementing business processes
in tbe context of suppiy cbain
management, tbere is not yet
an "industry standard" on
what tbese processes should
be. Tbe value of baving standard business processes in
plaee is that managers from
organizations across the supply chain can use a common
language and can link up
their companies' processes
with tbosc oi the other supply
ebain members.
Returns Management
Tbe eigbt key supply cbain
management processes identified by members oi Tbe
Source: Adapted from Douglas M Lambert, Martha C. Cooper, and Jarus D. Pagh, "Sjpply Chain Management: Implementation Issues and
Global Supply Cbain Forum
Research Opportunities,' The InternalionalJournal of Logistia Management, Vo\.'), No. 2 (1998), p. 2.
(as shown in Exbibit I) are:
end consumers would also be the "tier-1 customers" next to
• Customer relationship management.
the dark square in the center (indicating the iociil company,
• Customer service manageirtent.
Wal-Mart).
• Demand management.
Managing the entire supply chain—that is. managing ail
• Order fuifiliment.
suppliers baek to the point of origin and all products/serviees
• Manufaeturing flow management.
out to the point of consumption—<;an be a daunting task. So
• Supplier relationship management.
most exeeutives tend to Foeus on managing their supply
• Product development and cummerciali/ation.
chains to the point oi consumption. The reasoning here is
• Returns iiianagcment.
that whoever has tbe relationship with tbe end user has tbe
Customer Relationsbip Management, ihe CM^M process
power in tbe supply ehain. Intel, for example, created a rela- provides the structure lor how reiationsbips with eustomers
tionship with tbe end user by having computer manulactur- are de\'elopcd and maintained. Throtigh this process, maners plaee an "Intel inside" label on their eomputcrs. This posi- agement identities key customers and ctistomer groups to be
tioning also affects the computer manufacturer's ability to targeted as part of tbe firm's business mission. Ibe goai is to
switch microprocessor suppliers. Yet while most of tbe focus segment eustomers based on their \alue ()\er time and to
to date has been downstream, opportunities exist to signifi- increase customer loyalty by jiroviding customized products
cantly improve profits by managing the upstream sLi|iplier and services appropriate to tbe particular value proposition.
network as well.
Leaders in this process create cross-lunetional customer
teams
to tailor product and serviee agreements (PSA) that
At the end of tbe day, a supply ehain is managed link by
meet
the
needs of key aecoimts and customer segments and
link, relationship by relationship. And tbe key linkages in
document
how the two firms will engage in business. Tbe
all ol these activities are formed by tbe customer relationi-'SAs
sjiecily
levels ot perlormance lor the lirm. They also
sbip management (CRM) process of the seller organization
provide
the
hasis
for jierformance reports thai measure the
and the supplier relationship management (SHM) process
profitability
of
individual
customers as weli as the firms
of ihe buyer organization. C R M and SHM are tbe tools the
financial
impact
on
(he
customer's
financial periormance.'
supply ehain manager uses to bring tbe eigbl key processes
CRM
teams
will
then
work
wiih
key
customers to improve
togetber.
processes and eliminate demand variability and nonvalueadded actixities.
The Eight Key SCM Processes
Suecesslul supply ebain management re(|tiires a cbange from
managing indi\iclual lunctions to managing a set oi integrated
processes. In many leading corporations, management bas
2 0
Suppi.i
C H A I N
M A N A C : I; M K N T R I - V I K W
• S n - r r M H I n
2 0 0 4
Customer Service Management. Ibe customer service
management process represents tbe company's faee to the
customer. It is the key point ot contact for administering the
www. scmr. com
EXHIBIT 2
The Supply Chain Network Structure
Tier 3 lo
Initial
Suppliers
Tier 3 to
Tier 2
Suppliers
Tier 1
Suppliers
Tier 1
Customers
Tier 2
Consumers/
Customers End Users
and coordinated witb key suppliers and customers. Tbe
objective is to develop a seamless system frotn tbe supplier to
the firtii, and iben on to the various customer segtnents.
Manufacturing Flow Management, Manufacturing flow
management includes all activities necessary to obtain,
implement, and tnanage manufacturing flexibility in tbe supply cbain and to move products through tbe plants. Ibe ability to make a wide variety of products in a timely manner at
tbe lowest possible cost is a reflection of tbis process, 'lo
acbieve tbe desired manufacturing flexibility level, planning
and execution must extend beyond tbe four walls of tbe manufacturer and oul to tbe supply cbain partners.
Supplier Relationsbip M a n a g e m e n t .
Focal Company
Members of the Focal Company's Supply Chain
Source: Adapted from Douglas M. Lambert, Martha C. Cooper, and Janus D, Pagh,
"Supply Chair Management: tmplemeniation [S5jt5 arid Research Opportunities,'
The Internat'ionalJournal of Logistics Management,Vo\. 9, No, 2,1998, p. 3,
PSAs developed by customer teams during tbe customer relationship managemetit [process. Customer service provides the
customer with real-time information on [lromised shi[i|Mng
dates and produet availability through ititerfaces with stich
lunctional areas as manulacturing and logistics. Tbe customer service process may also include assisting the customer
witb protltict ap|)licatiotis.
Demand Managemetit. DemaiKl management is the
process tbat balances customer re(.|uirements witb sitpply
cbain capabilities. With tbe right process in place, management can matcb supply with demand proactively and execute
the plan wilh minimal disrtiptions. It is important to note
that this prcjcess is not limited to forecasting. It also includes
synchronizing supply and demand, increasing llexihilJty, and
reducing variability. Demand management entails controlling
all of those practices that increase demand variahility, including end-of-qtiarter loading and terms of sale that encourage
volume btiys. A good demand management system uses
point-of-sale and key customer data to reduce uncertainty
and provide efficient flows tbrougbout the supply ebain. It
also effectively coordinates marketing retpiirements and |irodtiction [ilans.
Order Fulfillment. Ihis suppK chain |>rocess involves
more than just tilling orders. It also eneompasses all activities
necessary to define customer re(;|uirements. design a network, and enable a firm to meet customer retjuests while
minimizing tbe total delivered cost. While tnttch of the actual
order ftilfilhneiit v\ork will be performed by tbe logistics function, the process needs to be implemented cross-functionally
www .scnir.torn
Ibe SRM
process
provides tbe structure for bow relationsbips witb suppliers
are developed and maintained. As tbe name suggests, tbis
process is a mirror image of customer relationsbip management. And as is tbe case for CRM, it involves developing
close relationsbips wiib a small subset of suppliers based on
tbe value tbat tbese suppliers bring to the firm over time.
Note tbat tbese are long-term relationships tbat provide winwin outcomes for botb parties. For eacb key supplier, tbe
firm should negotiate a |)roduct and service agreement tbat
defines tbe terms of the relationsbip. For less critical suppliers, tbe firm sbould follow tbe more traditional approacb of
simply providing tbe PSA, which iti most cases would he
non-negotiable. In sbort, supplier relationshi|) management is
abotit defining and managing tbese PS.As,
Product D e v e l o p m e n t and Commercialization.
Ibis sup-
ply cbain management process provides tbe structure for
working with customers and suppliers to develop products
antI bring them to market. F^^lfective itnplementation of tbis
process not only enables management to coordinate tbe efficient flow of new products across tbe supply cbain but also
bel[)s otber members of ibe supply cbain to ramp up matitifacttiring, logistics, marketing, and other activities necessar\'
to support product commercialization. A product development and commerelalization process team would work with
CRM process teams to identify ctistomer needs (botb articu-
The Global Supply
Chain Forum
The Global Supply Chain Forum of The Ohio State
University is a group of noncompeting firms and a team of academic researchers that has been meeting regularly since 1992.
The group's objective is to improve the theory and practice of
supply chain management.
The member companies of the Global Supply Chain Forum
ar-e 3M, Cargill, The Coca-Cola Company, Colgate-Palmolive
Company, Defense Logistics Agency, H e w l e t t - P a c k a r d
Company, I n t e r n a t i o n a l Paper, L i m i t e d Brands, Lucent
Technologies, Masterfoods USA, fVloen Inc., Shell Global
Solutions I n t e r n a t i o n a l B.V., Taylor Made-adidas Golf
Company, and Wendy's International.
M AN A ( i i
.VI h \ r
Ri.viKW
• SFLPTF:MBI.H
20(14
21
Processes
hiR'd iiiid uniirliculalL'd), willi ihf SRM [M-OCCSS tciims lo
select tnaterials and suppliers, and wilh ihe manLikicturinj;
Flow maniiuement process team to develop prodLiction [(.'clinology appropriate to the prodiiel/inarkel fomhination.
Returns Managetnent. Rett.rrns nKiiuijj,emenl is ihc process
l)\ uhicli acli\ilic's associaled with returns, reverse logistics,
"giitek(.'epi[ig, ciuil return avoidance are managftl within the
firm and aeross key members ol the sii|)piy ehain. Avnidanee.
whieb is a key jsart of this process, involves finding ways to
minimize the numher of return requests. It ean include
ensuring that the [iroduct s t|uality iintl user Iriendliness are
at the liighest attainahle level before the [iroduct is sold antl
shipped. Avoid.ince could also entail changing promotional
[jroj^rams that load the pipeline when there Is no realistic
chiince that ihe |ir(xluet shipped will be sold. Properly implemented, then, the returns management process enables firms
not only to manage the reverse product How ellieiently hut
also to identify opportunities to reduce UTiwanted returns and
to eontrol reusable assets such as containers. Effective
returns management is an important part ol SCM and provides an opportunity to achieve a sustain a hie competitive
advantage.
Kach of the eight sup|i!y chain maniigemcnt processes hiis
hoth strittegic and operational elements—that is, a strategic
element in which the firm establisbes and strategically manages the process and an operational element in whieh the
lirm executes tbe process. The strategic elements should he
led by a management team eomprised of representatives from
multiple fimctions ineluding marketing and sales, finance,
produetion, [purchasing, logistics, ami research and develo|)meiit. This team is res|)onsihle lor tlexeluping the proeedures
at the strategic le\el and seeing that they are implemented.
I h e strategic leam also identifies how the external partners
will he integrated into the supply chain. The operational
eomponent of eaeh proeess. v\here tlie day-to-tia) acti\itics
take plaee. is exeeuted h\ the managers within eaeh lunetional area.
Lxhihit ^ shows how ihe husincss kmctions within the
organization provide input to the eight supply chain management proeesses. In the customer relalionship management
process, for example, marketing and sales pro\'idcs the
aecount management expertise, engineering provides the
spccilieations, logistics provides knowledge of logistics and
customer service eapahilities, manulacturing provides the
manulacturing ea|iabilities, purchasing provides knowledge of
sujjplier capabilities, and iinance provides customer profitahihty reports. Customer service requirements must he factored into ihc manufacturing, sourcing, and logistics inputs.
Customers and suppliers are shown as hookcnds on the
exhibit to reinforce the point that each ol these processes, to
he properly implemented, requires the in\()lvemcnt of customers and suppliers.
CRM and SRM: The Critical Linkages
Customer relationship management and supplier relationship management provide the critical linkages throughout
EXHiBrr3
Functi anal Input to the Supply Chain Proce SS
Business FunctionsH^
Marketing &
Sales
Research &
Development
Logistics
Production
Purchasing
Finance
Account
Management
Requirements
Definition
Logistics
Capabilities
Manufacturing
Capabilities
Sourcing
Capabilities
Customer
Profitability
Account
Administration
Technical
Service
Performance
Specifications
Coordinated
Execution
Priority
Assessment
Cost to
Serve
Demand
Planning
Process
Requirements
Forecasting
Manufacturing
Capabilities
Sourcing
Capabilities
Tradeoff
Analysis
Special
Orders
Environmental
Requirements
Network
Planning
Made-to-Order
Capabilities
Material
Contraints
Distribution
Cost
Manufacturing Flow
Management
Packaging
Specifications
Process
Stability
Prior ttization
Criteria
Production
Planning
Integrated
Supply
Supplier Relationship
Management
Order
Booking
Material
Specifications
Inbound
Material Flow
Integrated
Planning
Supplier
Capabilities
Total
Delivered Cost
Product Development
& Commercialization
Business
Plan
Product
Design
Movement
Requirements
Process
Specifications
Material
Specifications
R & D Cost
Returns Management
Product
Lifecycle
Product
Design
Reverse
Logistics
Remanufacturing
Material
Specifications
Revenue &
Costs
Business Processes
f
Customer Relationship
Management
Customer Service
Management
Demand
Management
2
Order Fulfillment
"a.
Q.
^
2 2
S l I M ' M
C l l \ l \
M A N A C K M I N V
R i V l l V V
• S l . P I F M R I R
2 0 0 4
Manufacturing
Cost
^
S
c
o
=
www ,S(.'nir,i'i)m
Processes
IIK' sLipply ch.iin. As dcpiLlctl in Exhibit 4, ior (.-ath siipplicr
in the supply chain the ulUmalc measure ol suecess ot the
CRM process is the change in profitahility of an individual
customer or segment ot customers. Por each fiis/oii/cr. the
irue nifasurc of success of the SRM process is the impact
thai a supplier or supplier segment makes on that eustomer's
[irolitahility. ( \ ' o t e ihat in eases where commodities or
undiffercntialcd components are heing bought for inclusion
in another product, it makes more sense to do a total eost
report than a specific profit-and-loss statement for each
commodity/component.) The goal is to increase the joint
profitability by de\'el<)ping the relationship. Accordingly, the
overall performance of the supply chain is determined by the
combined improvement in prolitability ol all nii'mbers Irorn
t)ne year to the next.
EXHIBIT 4
CRM and SRM:The Critical Linkages
Supplier
D
Manufacturer
C
P&L
for C as
Customer
Total Cost
Report
for D as
Supplier
Wholesaler/
Distributor B
P&L
P&L
for B as for C as
Customer Supplier
Retailer/
End User A
P&L
P&L
for A as for B as
Customer Supplier
Let's begin by eonsidering the CRM linkage. Companies
typically spend large sums ol moncv' to attract ncv\' customers, ^et these same eomjianies often are complacent
when it comes to nurturing and strengthening relationships
with existing ctistomcrs.- In most cases, hov\cvcr. existitig
customers rcjiresent the best opportunities ior prolital^lc
growth. In faet, studies sbow strong, direct rciationsbips
between prolit growth and customer loyalty, eustomer satisfaetion, and the value of goods delivered to customers.^ CRM
|ii'o\ ides tbe structure lor leveraging
tbcsc t|ualitics and evaluating tbc prolitability—and potential profitability—
ol indiv idual eustomers. Aeting on tbis
evaluation, cross-lunctional customer
teams can taihir product and service
agreements to meet the needs of key
accounts and customer segments."^
related to trans|iortation incltitling deli\eries, order minimums, driver instructions, will-calls, and appointments; billof-lading instructions; pallets to be used; purchase-order confirmations; order-status information: details related to prieJng
inquires; availability of market-development funds; marketing
promotional allowances; acceptability of haek orders and bow
tbey will be handled; and contract terms.
Supplier relationship management is the mirror image oi
cttstomer relationship management. Remember that all suppliers are not the same. Some contribute more to a firm's
profitability than others. Its important to ha\e en)ss-functional teams that interact elosely with these high contributors. Tbe strategie relationship sbould be led by a management team responsible for developing strategies and seeing
tbat they are implemented. At tbe operational le\el. teams
are established for each key supplier and for eaeb segment of
nonkcy, or less eritiea!. suppliers. I'hese teams are eoniprised
of managers from several funetions, including marketing,
finance. R&D, produetion, purehasing, and |{)gisties. While
employees who arc not members ol the S H \ ! teams may he
involved in e.Kecuting the activities, the teams maintain overall managerial eontrol of the process. (I he same holds true
for the CRM |iroeess,l
Criven the current emphasis on business etbies, both the
C'R.M and SR\f teams need to have an agreement up Irorit
on what lypes ol data will be shared. Teams need to be mindlul ol the line line betv\een using proeess knowledge vs.
using specific competitive marketing knowledge gained from
a ctistomer or supplier. In a similar vein, individuals should
not he put in a position where they are working on teams
involving competing suppliers or eustomers. The reason; Its
iust too diilicult to kce[i the tv\)) sets of relationships and
PSA tliscussions separate and distinct.
lSup|ily ehain managers shouki note that CRM ami Sf-{M
themselves have seveii subprocesses, which are not addressetl
in this artiele. These subproeesscs are dillercntiating CLIS-
Profitability reports that capture all
of the costs and revenue implications
of a relationship are the key to tracking supply
PSAs document how the two firms
will engage in business- For key customers, llie PSAs are customized; for segments of otbcr Ltistomers, stantlard values arc
used for each element of the agreement. PSAs come in many
forms, both formal and informal, and mav be referred to by
different names from company to company, fo achieve the
desired results, however, they need to be lormali/ed as written doctiments. 3NT for example, has comprebensive, written
PS,\s that inelude tbe following: eontaet information ineluding name, tide, telephone number, and e-mail address lor
both .-^M and tbe customer representatives; all ol tbc details
2 4
S L I'I'M
(.' II VI \
\1 V \ \(.l
M I \ I
I! I V I
I I \ l l i l li
2004
chain process improvements over time.
tomers/su[)(iliers; preparing the account/segment management
team; internally reviewing tletails related to the business conducted; identifying opporttmities lor sales grov\th, eost reduction, and service improvements; developing the product and
service agreements; implementing the product and ser\iee
agreements; and measuring performanee and generating profitability reports and total cost reports as appropriate.)
In addition to linking partners across tbe sufiply cbain, the
CR.M and SRM processes coordinate each of the other si.x
processes. Any improvements made in these processes are
in customer iind su|>[ilii_'r |ir<iliLal)ility rcpiirts. For
il the CRM and SRM Icjiiis idcnlily an opportunity
t(t imiinnc' pcrlormancc by focusing on demand management,
the\' iTihirm the demand management process teams from the
two companies. If those teams do impro\c the demand management proeesji, then product availability imprcnes—which
increases revenue for the customer and the supplier. In addition, better demand planning could reduce inventories, thereby
lowering tbe inventory- cam-ing cost cbarged ro the customer's
profitability report. There also may be fewer last-minute production changes and less expediting ot inbound materials,
which will decrease the costs assigned to each customer. For
these improvements to he realized, measurements must be in
place to motivate and compensate team members.
Having aceurate customer prolitability reports is tbe key to
tracking these kinds of process improvements. These reports
enable the CRM process teams to traek performance over time
across all of the supply chain processes. Good profitability
reports relleet all of tbe cost and revenue implications of the
relationship. Variable manufacturing costs are deducted Irom
net sales to calculate a manufacturing contribution. Next, \ariable marketing and logistics costs, such as sales eommissions,
transportation, warehouse handling, special packaging, order
processing, and account receivable cbarges, are deducted to
calculate a eontribution margin. Assignable nonvariable costs,
sueb as salaries, customer-related advertising expenditures,
slotting allowances, and inventory' carrying costs, are subtraeted to obtain a segment-controllable margin. Tbe net margin is
obtained after deducting a charge for dedicated assets. These
statements contain opportunity costs lor in\estment in reeeivables and inventory' as well as a charge for dedicated assets, in
this sense, tbey are much closer to cash-flow statements than a
traditional profit-and-foss (P8rL> statement.
EXHIBIT 5
Sysco Sales and Earnings History
Sales
(Billiors)
Net Earnings
(Millions)
30
5 Year CAGR:
Sales = 11.3%, Net Earnings = 19.1%
25
10 Year CAGR:
Sales = 10.1%, Net Earnings = 14.5%
20
20 Year CAGR:
Sales = 14.6%, Net Earnings = 16.0%
15
Sales
800
J
^ ^ Net Earnings
/^
700
jj
600
/ /
500
1
400
•^
200
5 100
0 '70
^""^""^^^^
'75
'80
'85
'90
'95
'00
0
'03
Source: Neil Theiss, senior director, Supply Chain Management, Sysco Corp.
[lating member of tbe Global Supply Chain Forum, offers a
good example of bow tbis can be done effectively. I his international provider ol food and agricuftural products worked
vvitb a key customer to develop a method for sbaring sup|ily
ebain benefits tbat inct)rporated tbese elements:
• An agreement in principle on a fair allocation ol benefits. (Sbouid it be 50/50, 60/40, or some otber breakdown?)
• A timeframe for benefit sharing. (Sbouid it be for tbe
fife of tbe agreement, for five years, or re-assessed annually?)
• A decision on w bat benefits/costs to include.
• A fair apjiroacb to bandling ca[iital expenditLire costs.
• An accurate baseline to use as a starting point lor measuring sav ings.
• A comm{)n process to measure value captured.
Sysco, a $23.4 billion food distributor, began implement• A benefit reviev\ and approval procedures,
ing profitability reports by customer In \9'~)9 with great suc• A mechanism to accrtie and transfer value Iwbere, how,
cess. Tbcse reports bave enabled management to make
how often, and so forth).
strategic decisions about the alloeation of resources to
• A methodology re\iew.
accounts, f he li\t'-year cumulati\e annual growth rale
The process improvement teams from both companies
(CAGR) for the period 1499 to 2003 was 1 1.3 pereent for agreed that benelits deri\ed from su]ipfy cbain initiatives
sales and 19.1 percent for net earnings. As sbown in Exhibit must f)e explicitk' recognizetl in supply cbain project outS, net earnings growth improved shar|ily after the [jrolitahility comes (l(jr e.xamplc. redtieed freigbt. iov\er invcntorv-earr\ ing
reports were im|ilcmented.
costs, and redueed transaction costs). Additionally, tbese
benelits must be in excess of a pretfetermined baseline for
One Success Story
each area. They ftirther agreed that the costs to f)c considManagement should work to implement proeess improve- ered sfiotifd (I) directly relate to recommended stippK chain
ments that increase the profitability ol tbe total sup|ily cbain, initiatives (capital costs, transaction costs, system-related
not just tliat ol a single firm. This means encouraging actions costs, and so lorth); (2) the addition or deletion of fuli-time
that henefit the entire supply chain while, at the same time, employees (not the increase or decrease in the v\orkload of
etjuitably sharing the risks and the rev\ards. It's especially existing employees): (3) be greater than an agreed-iipon miniimportant lo develop clear guidelines fOr sharing tbe rev\ards. mtim dollar amount: and i,4l be ftilK' ditcumentcd. I he two
If any one of the parties perceives that its not gaining any- companies decided that a 50/50 split ot benelits was in keepthing from the process improvement efforts, it v\ill be diffi- ing with the overall partnership. Plus, they lelt that this
arrangement wotild motivate botb [larties tcj maximize tbe
cult to obtain tbat party's full commitment.
The CRM and SRM teams must (|uantif\- the benefits of opportunities vvbile acknowledging that neither partv eould
process improvements in financial terms. Cargill, a partici- have achieved the savings without the other.
Su I'!• I Y CIIVI \ M
\ I Rl \ I I W •
SFL
P T l M II I I! 2 0 0 4
25
Processes
Ciirgill's manajtcmfiU hdicxcd thai it was Importaiil ti> idcntiR- the ran^f ol llu' cApcelations that each icani hroiight to the
project. This would help hoth parties reach iifirt'cmcni on realistic and nuitLKilly henefieial ohiecti\es in sueh areas as proeess
elliciency, growth/proiit stabilit\'. c{)sts savings, improxed customer senice. orjiuni/ational alif^nmcnt, and mclrics.
thus improving per-unit [inilitahilit). Six \cars later, the manufacturer had not seen the anticipated inventory reductions
and redueed the serx'iee promise to 48 to 72 hours. Vel the
reason llial the rapid delivery system never aehie\ed its lull
potential was that the manufaeturers sales and marketing
organization was still |iro\iding eiistomers with ineentives to
The key lessons learned Irom Cargills e.xperience can he hu\ in large volumes.'' ()])\ iously, the husiness proeesses ol
this company were nol integrated and coordinated.
summarized as lollows:
• Gain sharing agreements need to he tletcrminctl at the
This example should make it clear that lailure to manage
outset so that it doesn t untlermine the accomplishment of all the touehes hetween suppk chain partners will diminish
the joint oh|eeti\cs.
the impaet of any suppK chain in[tiati\e. Conversely. im|ile• Working het\\ecn internal husiness units is (.hallenging menting the eight sLip|ily ehain management [processes
enough. \ \ hen yoti add into the mix cxtei'na! trading partners, iiiereases the likelihootl of success because all kmctions as
the challenge intcnsilies hecaiise ol issues ot trust, eulture. well as all key eustomers and suppliers—v\ill lie involved in
tbe initiative's planning and im|'>lementati{>n. This was corjirocess, and systems Cii|iahilily.
rob{)rated
at tbe Spring 2004 meeting oi Ibe Cllobal Supply
• Skeptics ahounti; success ret]Liires tocusetl leadership
C'bain Forum, wliich featured a series of breakout sessions
and management support.
• Partnerships work; they may take a while to develop, devoted lo tbe topic. ""Ihe Supply Chain of the Future," At
hut they work. Once trust is established, hoth ]iartics will the entl oi the day, the group concluded that if an organization can sueeessfully implement all eight of the processes, it
lind numy opportunities to learn Irom eaeh other.
• Hvcrynnc involved in this initiative enhanced their will have reaehed that supply chain of the luture and he ah!e
knowledge and capabilities, which will pni\e ad\antageous in to respond to whatever ehallenges the husiness might laccfuture initiatives.
As reflected in the Cargill e\aniple. the eustonier relationship management and supplier relationship management
processes do a numiier of important things at the strategic
level. Specifically, they identify eustomer and supplier segments, provide criteria for categorizing customers and suppliers, provide teams with guidelines for cust(jmi/ing product
and senice offerings, dexelop a iramework for metrics, antl
offer guidelines for sharing process improvement benefits. At
the operational level, these processes mainly focus on writing
and implementing ihe prncluet and seniee agreements.
How Are You Doing?
Failure t(i ini|ilenient those cross-functional business
prueesses can also result in missetl ojiportunities antl poor
decisions. I h e following real-lile example illustrates the
point. A manufacturer of consumer durable goods implemented a rapid deli\'ery system that pro\ided retailers with
deliveries in 24 to 4S hours anywhere in the United Slates.
The system was designed to enable the retailers to im|iro\e
seniee to their consumers while holding less in\enlor\ and
S L' iM'i \ C n \i N M \ \ M : I \ n \ I Ri v i f vv • S [^
Author's note: Ihe uuthoT ivuidd tike- to acknowledge the contrihuliiiii nj ihe members oj The Gloha! Sitpfyh (^Jiaiii Foniui at
I lie Oh'id State University whose practice, iiisii^ht. idens. mid
conniicnts hai'c cinitvibutcd sioujfjcuiith to (/(i,s iirticlc.
CS3D
Footnotes
f^csearch among the participants ol the Cllobal SuppK C'hain
f-orum shows that successful supply chain management
requires the integration of eight key business proeesses—
both internally and exlernally with key members of the supjily
chain. W h e n that necessary integration is nonexistent or
insuflieient, resources are wasted and supply ehain performance suffers.
26
1 las your company successfully integrated the eross-lunetional business processes descrihed in this article- If the
answer is anything les.s than an unqualified yes, then y{)u re
not creating the most value for your shareholders and vour
sLi[iply ehain partners. The time for aetion is now ,
2 004
^Lambert, Douglas M., and Terrance L, Pohlen. "Supply Chain
Metrics." The International Journal of Logistics Management Vol.
12, 1^0. 1 (2001): pp. 1-19.
^Barry, Leonard L., and A. Parasuraman, "Marketing to Existing
Customers/' Mari<eting Services: Competing Tiirougii Quality.
New York, PJY: The Free Press, 1991, p 11.
^Heskett, James L., W. Earl Sassser, and Leonard A. Schlesinger.
The Service Profit Ciiain, New York, NY: The Free Press, 1997, p.11.
•^Seybold, Patricia B. "Get Inside the Lives of Your Customers."
Harvard Business Reviev\/yo\. 78, No. 5 (2001): pp.1-17.
^Lambert, Douglas M, and Renan Burduroglu. "Measuring and
Selling the Value of Logistics." The International
Journal of
Logistics Management Vol. 11, Mo. 1, (2000): pp. 1-17.