A METHODOLOGY FOR EVALUATING THE SUPPLY CHAIN MANAGEMENT USING A CONCEPTUAL MODEL AS REFERENCE [004-0099] Alexandre T. Simon Sílvio R. I. Pires* The Methodist University of Piracicaba - UNIMEP Luis C. Di Sério Getulio Vargas Foundation – EAESP-FGV * Corresponding author address: Rodovia Santa Bárbara – Iracemápolis, Km 1, Santa Barbara do Oeste, SP, 13450-000, Brazil, Tel. 55-19-31241822 and 23 [email protected]

ABSTRACT Despite the increasing interests in supply chain management (SCM) within the academy and industrial environment, there is still a lack of academic literature concerning topics such as methodologies to guide and support SCM evaluation. Therefore, most developed methodologies have been provided by consulting companies and present a restrict publication and use. This article presents a methodology for evaluating companies´ adherence degree to a conceptual model of SCM. The methodology is based on the Cooper, Lambert and Pagh original contribution and it involves eleven analysis referential axis established from key business process, horizontal structure, and initiatives & practices. It was pre-tested and supplemented with findings from interviews with academics and practitioners. Additionally, an illustration application was conducted in three relevant companies for refining and demonstrating its applicability. In general terms, the methodology can be considered as a diagnosis instrument that permits the companies to evaluate its status concerning the SCM. Keywords: Supply Chain Management, Supply Chain Management Models, Business Process, SCM initiatives and practices. INTRODUCTION Business management has entered the era of inter-network competition. This means that individual businesses no longer compete as solely autonomous entities, but rather as supply chains. In this emerging competitive environment, the ultimate success of the single business will depend on management’s ability to integrate the company’s network of business relationships. Supply chain management is a strategy through which such an integration can be achieved (SADEH et al., 2003) (CHRISTOPHER, 2001) (CHRISTOPHER & RYALS, 1999). Supply chain management (SCM) is a new and important area in the field of management research. Despite the increasing interests in this area and the proliferation of SCM within the academy and industrial environment, yet there is still a lack of academic literature concerning topics such as methodologies to guide and support SCM evaluation and implementation (AKKERMANS et al., 2004; CROXTON et al., 2000; LAMBERT et al.,

1998). Specially, the absence of a methodology for evaluating supply chain management can be considered one the most critical lack in this area. Additionally, most methodologies related to SCM implementation have been provided by consulting companies and present a restrict publication and use. Therefore, before implementing SCM in a company, as any other concept, it is first necessary to evaluate its status concerning SCM related concepts and for that it is of utmost importance to establish measurement scales. Considering limitations in current literature and in SCM practical applications, the objective of this article is to present the development of a methodology for evaluating in what extent companies adhere to a conceptual model of SCM. A very important aspect of this development is that it should provide a framework for analysis, an efficient method for SCM field development and a clear explanations for practical applications, what can be considered of fundamental importance for researchers and practitioners (WACKER, 1998). In summary, it focuses on identifying and selecting a SCM conceptual model as a reference, identifying and defining the adequate research methodology and developing the methodology for evaluating companies' adherence degree to the conceptual model. The methodology was based on the conceptual model of Supply Chain Management proposed by Cooper, Lambert and Pagh (Cooper et al. 1997), and on SCM initiatives & practices. It involves eleven analysis referential axis established from key business processes, SCM horizontal structure and initiatives & practices. The key business processes involves Customer Relationship Management, Customer Service Management, Demand Management, Order Fulfillment, Manufacturing Flow Management,

Supplier

Relationship

Management,

Product

Development

and

Commercialization and Returns Management. The SCM initiatives & practices selected for the methodology are: Supplier and Customer base Reduction and Consolidation, Postponed Manufacturing, In Plant Representatives, Early Supplier Involvement, Electronic Data Interchange, Vendor Managed Inventory, Efficient Consumer Response, Collaborative Planning, Forecasting and Replenishment. Finally, the SCM horizontal structure considers which tiers of suppliers and customers, beyond first tier, are monitored by the focal company.

In terms of its structure, this article consists of five major sections besides this introduction. In section two is summarized the theoretical framework of SCM. In section three is discussed the selection of the reference SCM conceptual model used to develop the methodology. In section four is presented the research methodology. In section five is presented the development of the methodology for evaluating companies' adherence degree to a conceptual model of SCM. In section six is pointed out the main conclusions. SUPPLY CHAIN MANAGEMENT Nowadays most individual business no longer compete simply as autonomous organizations but rather as supply chains. Supply chain is referred as a set of companies involved in the upstream and downstream flows of products, services, finances, and information from a source to a customer (MENTZER et al. 2001). In brief, it can be understood that the supply chain constitutes a network of business relationships. Under this point of view, as stated in section 1, the success of a single business depends, primarily, on its ability to integrate the company's network of business relationships. Thus, what definitely matters is not the competitiveness of an individual company but that of the supply chain in which the company is inserted. Christopher (1992) pointed that currently the real competition is not company against company, but rather supply chain against supply chain. In this context, Supply Chain Management (SCM) has emerged as a form of achieving adequate integration of company's network of business relationships. Supply chain management extends the idea of integrating internal business functions, departments, and processes beyond the company's frontier to all the companies in the supply chain (Cooper et al. 1997). Hammer (2002), suggest that will succeed companies that are able to work in close association with its partners for the development of projects and for the management of processes that involves all the supply chain. There are many definitions for supply chain management. Taking into account all the above mentioned aspects and specific objectives and purposes, The Global Supply Chain Forum definition was adopted for the development of this article: "Supply Chain Management is the integration of key business processes from end user through original suppliers that

provides products, services and information that add value for customers and other stakeholders" (LAMBERT et al. 1998 a; CROXTON et al. 2001). THE REFERENCE SCM CONCEPTUAL MODEL From a review of relevant literature, six SCM conceptual models that recognize the need of implementing business processes were identified (Cooper, Lambert, and

Pagh 1997;

Supply-Chain Council - SCOR 1996; Bowersox, Closs, and Stank 1999/Melnyk, Stank, and Closs 2000; Srivastava, Shervani, and Fahey 1999; Vollman, Cordon, and Heikkilä 2000; Mentzer 2001). According to Lambert et al. (2005) and Pires (2004), only two of those conceptual models provide enough information to support research development in this important area: Cooper, Lambert, and Pagh 1997, and the Supply Chain Council - SCOR models. In this context, Cooper, Lambert and Pagh SCM conceptual model (Cooper et al. 1997) was selected to support the evaluating methodology development proposed in this article, based on many reasons. One is its high frequency of inclusion in existing research, much superior than the SCOR model. Another is the fact that it is defined broadly and abstractly enough to facilitate its potential study (LUCAS, 1974 in LEWIS, 1998). Additionally it is of ample comprehensiveness, since encompasses eight main business processes involving at least six functional areas of the companies. It has a more academic and didactic base since it presents clearly a conceptual structure and provides detailed information about the business processes what amplify the possibilities to theory development. RESEARCH METHODOLOGY The research methodology adopted for this paper combines three different methodologies. Firstly, to define the basic model, it involves the use of Discovery Oriented Approach (Kohli & Jaworski 1990; Menon et al. 1999) to create a preliminary methodology and to complement the literature investigation with discussions in small groups of professionals from academy and industry, directly involved with the area. Secondly, it is complemented with an additional step that involves pre-testing the methodology by submitting it to a group of potential respondents and integrating the obtained knowledge to the preliminary methodology (FORZA, 2002). Finally, it is also supported by Lewis (1998) iterative

triangulation. It employs systematic iterations between literature review, case evidence and intuition based on the researcher experience and judgement. Therefore, according to the research methodology adopted for this study, three stages were necessary for the development of the evaluating methodology; -

Stage 1: development of the preliminary methodology based on an extensive review of diverse, relevant literature (Preliminary Methodology);

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Stage 2: development of the adjusted methodology from academy and industry perspectives (Adjusted Methodology), and

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Stage 3: development of the methodology for evaluating companies' adherence degree to a conceptual model of SCM by integrating knowledge obtained from the illustration application (Evaluating Methodology).

The methodology is better detailed during the development of each stage, in next section. DEVELOPMENT OF THE EVALUATING METHODOLOGY In this section are detailed all the necessary stages for constructing the methodology for evaluating companies' adherence degree to a conceptual model of SCM. Development of the Preliminary Methodology Based on The Global Supply Chain Forum SCM definition, on conceptual model of Supply Chain Management proposed by Cooper, Lambert and Pagh and on some basic SCM initiatives & practices, the methodology establishes eleven analysis referential axis. The first nine analysis referential axis are related to key business processes and it should identify weather the company manages and integrates them within first tier key customers and first tier key suppliers. Key business processes proposed by Cooper et al. (1997); Lambert et al. (1998 a); Croxton, et al. (2001), are: -

Customer Relationship Management;

-

Customer Service Management;

-

Demand Management;

-

Order Fulfillment;

-

Manufacturing Flow Management;

-

Supplier Relationship Management;

-

Product Development and Commercialization, and

-

Returns Management;

In order to eliminate a possible source of confusion Returns Management process was separated in Returns Management from customers and Returns Management to suppliers. The tenth analysis referential axis is related to horizontal supply chain structure and should identify weather the company monitors the management of key business processes beyond first tier of key suppliers and first tier of key customers. The eleventh analysis referential axis is related to SCM initiatives & practices and should identify weather the company uses or intend to use these initiatives & practices to support business processes management. A defined number of requirements were associated to each analysis referential axis. From the analysis of each requirement in each one of the referential axis it is possible to establish the company's adherence degree to the conceptual model of SCM. It is important to note that the core of the methodology is related to the integration of key business processes. Requirements associated to the analysis referential axis related to key business processes Key business processes definitions, objectives and strategic and operational sub-processes stated in literature (Croxton et al. 2001, Lambert 2004, Bowersox & Closs 2001, Christopher 2001 and Lambert et al.1998b) were detailed, analyzed, and translated into evaluating parameters or requirements using the language of industrial environment. One hundred requirements were identified for key business processes. These requirements were submitted to a selected group constituted of a professional from industry, an academic and three professors/consultancy professionals. After a lot of discussions and many decisions meetings, were defined which requirements should be considered in the methodology. The final requirements are presented on Table 1 to 11.

Table 1 - Requirements of analysis referential axis related to customer relationship management business process Process: Customer Relationship Management Requirements: Company differentiates customers identifying key customers Company has a cross-functional team for customer relationship management Company provides the framework for managing relationships with customers Develops and implements customized product/service agreement for key customers Develops and implements product/service agreement for customers segments Develops process improvement programs with customers Develops efforts to reduce demand variability with customers Develops programs with customers to eliminate non value added activities Identify opportunities with customers Develops guidelines for sharing process improvement benefits with customers There are procedures to periodically evaluate customer, based on bought products, sales and position on its market Segment Designs performance reports to measure the firm's financial impact on those customers

-

Designs performance reports to measure the customer's financial impact on the company

Table 2 - Requirements of the analysis referential axis related to customer service management business process Process: Customer Service Management Requirements: Company has a cross-functional team for customer service management Develops customer service strategy There is a communication channel to provide customers information about PSA There is an action plan to evaluate alternatives for manage events and its effects on the customer and on internal operations of the company The team determines a set of actions working jointly with the specialists in each of the functions affected by the event to evaluate the situation and define solutions The team coordinates the implementation of the selected alternatives The event is recorded in a database that can be used for future reference The evolution of the event is monitored in order to know to what extent the response has been implemented

-

The team inform the customer about how the issue is being resolved

Table 3 - Requirements of the analysis referential axis related to demand management business process Process: Demand Management Requirements: -

Company has a cross-functional team for demand management There are guidelines to collect data/information for forecast demand The team determines which forecasting approaches to use The forecasts are communicated to the other process teams that are affected by them including customer service management, order fulfillment, manufacturing flow, and product development and commercialization There are synchronization procedures to match the demand forecast to the company's production, sourcing and distribution capabilities. There are contingency plans in the event of even internal or external events that disrupt the balance of supply and demand The team reviews and adjust the forecasts periodically The team works with the manufacturing flow team to gain flexibility The team works with customer relationship management team to reduce demand variability The team evaluates periodically differences between forecasts and actual demand The team evaluates periodically the level of production capacity utilization

Table 4 - Requirements of the analysis referential axis related to order fulfillment business process Process: Order fulfillment Requirements Company has a cross-functional team for order fulfillment management The team defines requirements for order fulfillment The team defines the specific steps from order entry to product delivery The team verifies customer credit The inventory is checked to verify if it is possible to fulfill the customer order The team communicates Customer Service Management team when customer order is delivered The team communicates with the customer relationship management process team to make sure that all customer expectations are met. Order cycle time is measured The team monitors quantity of complete orders delivered on time and compares to order fulfillment policy The team provides information about the order to Customer Service Management, Manufacturing Flow Management and Demand Management teams

Table 5 - Requirements of the analysis referential axis related to manufacturing flow management business process Process: Manufacturing Flow Management Requirements: Company has a cross-functional team for manufacturing flow management The team develops and implements a master production schedule The team produces a detailed capacity plan and a time-phased requirement plan The team identify manufacturing constraints and determines manufacturing capabilities The team synchronizes capacity and demand The team discusses the product and service agreement with customer relationship management team The team communicates manufacturing capabilities to the demand management, order fulfillment, and returns process teams The company has make or buy strategies clearly defined The company develops programs and implements actions to augment manufacturing flexibility The team measures manufacturing cycle time The team measures work in process level The team measures the quality levels There are procedures to identify non conformity causes There are procedures to define manufacturing priorities

Table 6 - Requirements of the analysis referential axis related to supplier relationship management business process Process: Supplier Relationship Management Requirements: Company differentiates suppliers identifying key suppliers Company has a cross-functional team for supplier relationship management Company provides the framework for managing relationships with suppliers Develops and implements customized product/service agreement for key suppliers Develops and implements product/service agreement for suppliers segments Develops process improvement programs with suppliers There are procedures to quantify processes improvements benefits Identify opportunities with key suppliers Develops guidelines for sharing process improvement benefits with suppliers Designs performance reports to measure the costs/profitability of individual supply orders There are procedures for suppliers evaluation and development There are procedures to periodically evaluate supplier, based on bought products, relationship and position on its market segment

Table 7 - Requirements of the analysis referential axis related to product development and commercialization business process Process: Product Development and Commercialization Requirements: Company has a cross-functional team for product development and commercialization process management The team includes customers and suppliers members Company has methodology to create new products and services There are defined guidelines for new product development Product development project determines product profitability levels Product development project determines time-to-market expectations Company designs and builds prototypes The team analyses make or buy decision The team determines marketing and distribution channels The team interacts with manufacturing flow management and supplier relationship management processes teams to product rollout The team works together marketing function for new products development The team evaluates new product sales performance

Table 8 - Requirements of the analysis referential axis related to returns management business process (from customers) Process: Returns Management (from customers) Requirements: Company has a cross-functional team for returns (from customers) management process There are defined procedures for returns management process There are defined procedures for returns disposition There are defined plans for transporting and holding returned products until they reach their final disposition There is an analysis plan to identify returns causes There are rules for credit/debt customer/supplier There is a program for returnable packaging There are procedures for evaluating financial impact of the returns The returns are recorded The returns records are used for implement improvements in process and product

Table 9 - Requirements of the analysis referential axis related to returns management business process (to suppliers) Process: Returns Management (to suppliers) Requirements: Company has a cross-functional team for returns (to suppliers) management process There are defined procedures for returns management process There are defined plans for transporting and holding returned products until they reach their final disposition There are rules for credit/debt supplier There is a program for returnable packaging There is an analysis plan to identify returns causes There are procedures for evaluating financial impact of the returns The team informs supplier relationship management process team about the returns There are procedures to eliminate returns causes

Requirements associated to the analysis referential axis related to horizontal supply chain structure For horizontal supply chain structure, which identify weather the company monitors the management of key business processes beyond first tier key suppliers and first tier key customers, were defined four requirements:

Table 10 - Requirements of the analysis referential axis related to horizontal supply chain structure Analysis referential axis related to horizontal supply chain structure: Requirement: Company monitors key business processes management with second tier of key customers Company monitors key business processes management beyond second tier of key customers Company monitors key business processes management with second tier of key suppliers Company monitors key business processes management beyond second tier of key suppliers

Requirements associated to analysis referential axis related to SCM initiative & practices For initiatives & practices, which identify if the company uses or intend to use SCM initiatives & practices to support business processes management, were defined eight requirements. Table 11 - Requirements of analysis referential axis related to SCM initiatives & practices Analysis referential axis related to SCM initiatives & practices Requirement: Supplier and Customer base Reduction and Consolidation Postponed manufacturing; In plant representatives; Early supplier involvement; Electronic Data Interchange; Vendor Managed Inventory; Efficient consumer response, and Collaborative planning, forecasting and replenishment.

Categories and measurement scale A set of categories is associated to each requirement of each analysis referential axis. So, each requirement is classified in five categories, and each category reflects the situation of the company related to that specific requirement. The categories combine amplitude and depth characteristics. Amplitude is related to the quantity of items to which the requirement is applied and is expressed in two levels: (1) for the majority of the items, and (2) not for the majority of the items. Depth is related to the way the requirement is applied: in a documented manner (formally) and in a nondocumented manner (not formally). Considering these situations, the following categories were established: -

Category 5 - company satisfies the requirement for the majority of the items related to it and makes it formally.

Note: The items related to the requirement refers, for example, to "customers", "orders", "events", "teams", "suppliers", "functional areas", "departments", and so on. -

Category 4 - company satisfies the requirement not for the majority of the items related to it but makes it formally;

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Category 3 - company satisfies the requirement for the majority of the items related to it but does not make it formally;

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Category 2 - company satisfies the requirement not for the majority of the items related to it and does not make it formally;

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Category 1 - company does not satisfy the requirement.

As result, category 5 reflects the best situation concerning the parameters toward the high adherence degree of the company to the conceptual model of SCM. On the contrary, Category 1 reflects the worst situation. Considering that it is not possible to measure the necessary effort to take one requirement from a defined category to a higher one, it is adopted an ordinal scale as the measurement scale. So it provides information about the ordination of categories, not about the magnitude of the differences among them (REA & PARKER, 2000). Analysis of the results Normally companies applies many of the requirements of the business processes what does not mean that they have a successful SCM. What really matters is the integration and management of all business processes, and to make this, companies must apply all the requirements of all processes, for the majority of the items related to each requirement and in a documented manner, i.e., formally. This is called the highest ordination and this is the situation that can lead companies to the highest adherence degree to the conceptual model of SCM. So, company adherence degree is obtained in dependence of the frequency of requirements occurring in the highest ordination, taking into account all the referential analysis axis. Table 12 helps organize the data and Table 13 provides the adherence degree.

Table 12 - Formulary for presenting the results of the methodology application, and determining adherence (A) Ordination

E1

E2

E3

E4

E5

E6

E7

E8

E9

E10

E11

Frequency

5 4 3 2 1 Total

(%)

A Y Z V W

The percentage value obtained in ordination 5, on Table12, represents the adherence (A). From this value, on Table 13, it is obtained the adherence degree of the company to the conceptual model of SCM. Table 13 - Adherence degree of the company in dependence of adherence (A)

Adherence A (%) 94