1.

INTRODUCTION OF THE TOPIC

In the early 1980s, U.S. companies dramatically increased the outsourcing of
manufacturing, raw materials, components, and services to foreign countries. Around
that time, the term supply chain was coined to recognize the increased importance of a
variety of business disciplines that were now much more challenging to manage as a
result of the new global economy. Prior to that, functions such as purchasing,
transportation, warehousing, and so on were isolated and at fairly low levels in
organizations.
Since that time, weve seen the creation of the Internet and various business
technologies such as enterprise resource planning (ERP) systems, advanced planning
systems (APS), and radio frequency ID (RFID), to name a few, which have helped to
speed up the flow of information and product lifecycles as well as increasing the need
for better communication, collaboration and visibility.
Today, logistics alone accounts for more than 9.5% of U.S. gross domestic product
(GDP). Over $1.3 trillion is spent on transportation, inventory, and related logistics
activities. The concept of the supply chain has now risen in importance to the extent that
commercials on TV extol the virtues of logistics (for example, UPS I Love Logistics
commercials) to the point where it is now part of the common lexicon and very
mainstream. As a result, most universities now offer supply chain and logistics courses,
if not majors, and most organizations have a vice president of supply chain and logistics
management (or similar title).
However, beyond supply chain and logistics employees, not many in business or the
public fully understand the role and importance that the supply chain plays in gaining
and maintaining a competitive advantage in todays world.
We are at the point today where most people are familiar with the terms supply
chain and logistics but dont really know that much about them. In this book, we not only
define the supply chain but also offer insight into its various components, tools, and

technology to help improve your understanding so that you can use it as a competitive
tool in your business.
Because supply chain and logistics costs can range from 50% to 70% of a companys
sales (with trillions spent on it worldwide), organizations of all sizes both perform and
are interested in this function. Therefore, understanding and implementing an efficient
supply chain strategy can prove critical to both an employees and a companys
success.
Supply Chain Defined
The first thing we need to do is get some definitions out of the way. The terms supply
chain and supply chain management (SCM) should be separately defined because they
are sometimes (mistakenly) used interchangeably.
The supply chain itself is a system of organizations, people, activities, information, and
resources involved in the planning, moving, or storage of a product or service from
supplier to customer (actually more like a web than a chain). Supply chain activities
transform natural resources, raw materials, and components into a finished product that
is delivered to the end customer. For example, I once heard a major paper goods
manufacturer describe their supply chain for toilet paper as ranging from stump to
rump.
In contrast, supply chain management, as defined by the Council of Supply Chain
Management Professionals (CSCMP), encompasses the planning and management of
all activities involved in sourcing, procurement, conversion, and logistics management.
It also includes the crucial components of coordination and collaboration with channel
partners, which can be suppliers, intermediaries, third-party service providers, and
customers.
In essence, supply chain management integrates supply and demand management
within and across companies and typically includes all of the logistics management

activities noted above, as well as manufacturing operations, and it drives coordination of

processes and activities with and across marketing, sales, product design, finance and
information technology (Council of Supply Chain Management Professionals [CSCMP],
2014).
Some people take a narrower view of supply chain, and in many cases, they think of it
as focused more on the supply end (that is, purchasing), and so ignore the logistics side
(as defined as the part of the supply chain that plans, implements, and controls the
efficient movement and storage of goods, services, and information from the point of
use or consumption to meet customer requirements). In other cases, many just assume
that logistics is included but dont state it. Still others, while including both areas above,
ignore the planning aspects of supply chain. Personally, I tend to refer to the field as
supply chain and logistics management to make clear what is included.
As you will see in this book, it is important to understand the similarities and differences
between more functional areas like logistics, which includes transportation and
distribution, versus the broader concept of SCM, which is cross-functional and crossorganizational. This can have a major impact on decision making, structure, and staffing
in an organization, so it needs to be understood and examined carefully.
Depending on ones view, some of the functions listed here may be included within the
supply chain and logistics organization:

Procurement: The acquisition of goods or services from an outside external

source

Demand forecasting: Estimating the quantity of a product or service that

customers will purchase

Customer service and order management: Tasks associated with fulfilling an

order for goods or services placed by a customer

Inventory: Planning and management

Transportation: For hire and private

Warehousing: Public and private

Materials handling and packaging: Movement, protection, storage, and control

of materials and products using manual, semi-automated, and automated
equipment

Facility network: Location decision in an organizations supply chain network

Supply chain management is also intertwined with operations management, which

consists of activities that create value by transforming inputs (that is, raw materials) into
outputs (that is, goods and services). Both activities support the manufacturing process.
SCOR Model
Another way to view the supply chain is through the SCOR model, which was
developed by the Supply Chain Council (SCC) (2014) to teach, understand, and
manage supply chains. It is a model to both define and measure the performance of an
organizations supply chain.

Figure 1.1 SCOR model

The SCOR model is organized around the five major management processes
(see Figure 1.1 ):

Plan: Alignment of resources to demand

Make: Conversion or value-added activities within a supply chain operation

Source: Buying or acquiring materials or services

Deliver: All customer interaction, from receiving order to final delivery and
installation

Return: All processes that reverse material or service flows from the customer
backward through the supply chain

This provides a broad definition for the supply chain, which highlights its importance to
the organization and how it helps create metrics to measure performance.
SCOR Metrics
To this aim, the SCOR model is also a hierarchical framework that combines business
activities, metrics, and practices that can be looked at from a high or very detailed level.
The levels, from broadest to narrowest, are defined as follows:

Level 1: Scope: Defines business lines, business strategy and complete supply
chains.

Level 2: Configuration: Defines specific planning models such as make to

order (MTO) or make to stock (MTS), which are basically process strategies.

Level 3: Activity: Specifies tasks within the supply chain, describing what people
actually do.

Level 4: Workflow: Includes best practices, job details, or workflow of an activity.

Level 5: Transaction: Specific detail transactions to perform a job step.

All SCOR metrics have five key strategic performance attributes. A performance
attribute is a group of metrics used to express a strategy. An attribute itself cannot be
measured; it is used to set strategic direction.
The five strategic attributes are as follows:

Reliability: The ability to deliver, on time, complete, in the right condition,

packaging, and documentation to the right customer

Responsiveness: The speed at which products and services are provided

Agility: The ability to change (the supply chain) to support changing (market)
conditions

Cost: The cost associated with operating the supply chain

Assets: The effectiveness in managing assets in support of demand satisfaction

The SCOR model contains more than 150 key indicators, such as inventory days of
supply and forecast accuracy, that measure the performance of supply chain operations
and are grouped within the previously listed strategic attribute categories.

2. INTRODUCTION OF THE COMPANY

About Setco
To be the preferred clutch of choice in 1 out of 3 commercial vehicles and 1
out

of

farm

tractors

globally

Incorporated in May 1982, and listed on the BSE, Setco is the largest manufacturer of Premium
Quality Lipe brand clutches for commercial vehicles in India. The company employs more than
1200 people globally. It is a Tier I supplier of clutches to all the prominent Indian commercial vehicle
manufacturers such as Tata Motors, Bharat Benz, Ashok Leyland, Man India, Mahindra & Mahindra,
Volvo Eicher Commercial Vehicles and Asia Motor Works amongst others. Setco has all the
required global quality certifications such as TS 16949, ISO 14001, OSHAS 18001 and VDA 6.3.

Setco has a strategic global footprint with 4 manufacturing facilities, 2 in India, and 1 each in the UK
and USA, with its corporate base in Mumbai, India. While Setcos major manufacturing is in Kalol,
Gujarat, it has a fast expanding facility in Sitarganj, Uttarakhand. Setco has set up a state of the art
R&D centre at Kalol certified by the Department of Scientific and Industrial Research, Government of
India to design, develop and validate full clutch systems. It also has a research and development
centre in UK.
In addition Setco also manufactures clutches for hydraulic products for the construction equipement
industry and precision engineering components like complex and deep drawn pressings forgings and
castings that are machined and heat treated.
Setco Automotive is the flagship company of The Setco Group which also includes Lavacast Pvt
Ltd, TransStadia Pvt Ltd and its CSR wing, the Setco Foundation.

Commitment
Growth and change are a constant in any organization. As we strive to become bigger we would like
to emphasize on excellence and tradition in the organization and build a synergistic work ethic.
Harnessing the passion of an employee is critical towards value addition. Employee satisfaction
through training and investments in better facilities is a focus area.
Our commitment lies towards :

Excellence

Growth

Innovation

Integrity

Community Support

Tradition

Training and Support

Technology

Value Addition

Environment, Health & Safety Policy

Setco Automotive is engaged in the manufacture and service of automotive products.
Setco

Automotive emphasizes its commitment towards the development and

manufacturing of products and services in a manner that minimally impacts the

Environment, Health and Safety, directly or indirectly.
To ensure this we will strive to

Draft and comply with an exemplary Environment, Health & Safety Policy.

Protect the environment by prevention of pollution: conservation of resources:

careful handling & disposal of hazardous wastes in a eco friendly manner and re-use
recycle material wherever possible.

Provide continual training to employees & associates for up-gradation of

awareness and skills for a better environment.

Build an environment where there is consciousness towards using and making

products manufactured & distributed strictly adhere to the local and international
standards & regulations as specified.

Adhere to all legal and other requirements concerning the Environment and
Occupational Health & Safety.

Continually improve performance by aiming for clearer & better, objectives &
targets.

We ensure that this policy is communicated to every employee and is available

for the viewing of the public / stakeholders and that it will be reviewed periodically.
Harish K Sheth
Chairman & Managing Director

Key Milestones
1982
Year of incorporation
1984
Commercial production
1995-96
Commenced exports
1999-2000
Crossed Rs.100 million turnover mark
2000-01
Signed a technical collaboration with LIPE UK, a division of Dana Corporation, USA
Pioneered ceramic metallic clutch technology and offered to Tata Motors as an import
substitute
2002-03
Commenced commercial supplies to Eicher Motors

2003-04
Developed the National field service network
2004-05
Crossed Rs. 500 million turnover mark
Started commercial supplies of new age clutches to Ashok Leyland
2005-06

American Private Equity New Vernon Private Equity Limited invests in Setco

Automotive
Acquires LIPE Clutch Division (UK) from Dana Corporation (USA) and establishes Setco
Automotive

(UK)

Ltd.

Name changed to Setco Automotive Ltd. from Gujarat Setco Clutch Limited
Crossed Rs.1 billion turnover mark
Establishes a wholly owned subsidiary Setco Automotive NA Inc. (SANAI) in Paris,
Tennessee

for

distribution

Acquires US facility from Haldex AB Sweden for $4.9 million through SANAI

Established SETCO Foundation

2007-08
Set up Assembly operations in Uttarakhand (India)
2009-10
Crossed Rs. 2 billion turnover mark
Commenced state-of-the-art Press Shop in Kalol, Gujarat for developing clutches
suitable to international vehicle manufacturers such as Volvo and Mercedes

Invested in robust MIS SAP

2010-11
Crossed Rs. 3 billion turnover mark

 Forayed into newer markets in Central Asia, MENA Region, Africa, Latin America and
South Asia
Extended SAP to global subsidiaries
2011-12
Crossed Rs. 4 billion turnover mark
Invested heavily in upgrading R & D capabilities

2012-13
Inauguration of state-of-the-art R&D centre
Department of Scientific and Industrial Research (DSIR) in India recognized R & D
centre

2013-14
Launched Independent Aftermarket in India
Launched LCV clutches
Started doubling capacities in Uttarakhand
Invested in backward integration

Quality Objective

Improving customer Quality Rating by reducing customers line rejections.

Improving customer delivery rating.

Reduction in warranty level.

Maintain & improve In house process capabilities through improved

process audit results.

Improving suppliers process capabilities.

Reduction in cost.

Implementing continual improvement projects on

Productivity- Quality

Cost

Delivery

Morale

Safety

Vision, Mission & Values

Vision
To be a market leading brand in our chosen sphere of work with quality products and
services, cost effective manufacturing, state of the art technology and environment
friendly practices, creating value for our stakeholders.

Mission
To be the preferred clutch of choice in 1 out of 3 commercial vehicles and 1 out of 5
farm tractors globally

Values
Excellence
Integrity
Team Spirit
Customer Focus
Environmental Consciousness

Clients
Setco manufactures clutches and precision components for commercial and military
trucks, the Heavy-medium commercial vehicle sector, the marine industry and off
highway and agricultural equipment sector.
Setco is a Tier I supplier of clutches to prominent Indian commercial vehicle
manufacturers such as Tata Motors, Bharat Benz, Ashok Leyland, Man India, Volvo
Eicher Commercial Vehicles and Asia Motor Works amongst others.

3. LITERATURE REVIEW.

During the 1990s, many manufacturers and service providers sought to collaborate
with their suppliers and upgrade their purchasing and supply management
functions from a clerical role to an integral part of a new phenomenon known as
supply chain management. Since this aspect of supply chain management primarily
focuses on the purchasing and supply management functions of industrial buyers,
we have classi"ed it elsewhere as the purchasing and supply perspective of supply
chain management (Tan et al., 1999, 1998b). Correspondingly, many wholesalers
and retailers have also integrated their physical distribution and logistics functions
into the transportation and logistics perspective of supply chain management to
enhance competitive advantage. Over the last 10 years, these two traditional
supporting functions of corporate strategy evolved along separate paths and
eventually merged into a holistic and strategic approach to operations, materials
and logistics management, commonly referred to as supply chain management
(SCM). This article reviews the literature base and development of supply chain
management along these two separate paths and integrates the two bodies of
literature in the uni"cation of supply chain management into a commonly accepted
terminology that includes all the value creating activities along the value chain. In
addition, this article attempts to describe supply chain management clearly, since
the term has been used very liberally in the literature. This article also discusses
various supply chain strategies and the conditions conducive to supply chain
management.

2. Supply chain management defined

The literature is replete with buzzwords such as: integrated purchasing strategy,
integrated logistics, supplier integration, buyer}supplier partnerships, supply base
management, strategic supplier alliances, supply chain synchronization and supply
chain management, to address elements or stages of this new management
philosophy (Tan et al., 1998a; New, 1997; La Londe and Masters, 1994). While each
terminology addresses elements of the phenomenon, typically focusing on
immediate suppliers of an organization, supply chain management is the most
widely used (but abused) term to describe this philosophy. Unfortunately, there is no
explicit description of supply chain management or its activities in the literature
(New, 1997). For example, Harland (1996) describes supply chain management as
managing business activities and relationships (1) internally within an organization,
(2) with immediate suppliers, (3) with "rst and second-tier suppliers and customers
along the supply chain, and (4) with the entire supply chain. Scott and Westbrook
(1991) and New and Payne (1995) describe supply chain management as the chain
linking each element of the manufacturing and supply process from raw materials
through to the end user, encompassing several organizational boundaries.
According to this broad de"nition, supply chain management encompasses the
entire value chain and addresses materials and supply management from the
extraction of raw materials to its end of useful life. Baatz (1995) further expands
supply chain management to include recycling or re-use. Supply chain management
focuses on how "rms utilize their suppliers' processes, technology, and capability to
enhance competitive advantage (Farley, 1997), and the coordination of the
manufacturing,

logistics,

and

materials

management

functions

within

an

organization (Lee and Billington, 1992). When all strategic organizations in the value

chain &integrate' and act as a single uni"ed entity, performance is enhanced

throughout the system of suppliers. Fig. 1 shows the activities and "rms involve in
such a value chain as portrayed by New and Payne (1995). It begins with the
extraction of raw materials or minerals from the earth, through the manufacturers,
wholesalers, retailers, and the "nal users. Where appropriate, supply chain
management also encompasses recycling or re-use of the products or materials.
Supply chain management appears to treat all organizations within the value chain
as a uni"ed &virtual business' entity. It includes activities such as planning, product
design

and

development,

sourcing,

manufacturing,

fabrication,

assembly,

transportation, warehousing, distribution, and post delivery customer support. In a

truly &integrated'supply chain, the "nal consumers pull the inventory through the
value chain instead of the manufacturer pushing the items to the end users. While
in principle this de"nition of supply chain management addresses the supply
process throughout the value chain, a practical approach to supply chain
management is to consider only strategically important suppliers in the value chain
(Tan et al., 1998a, b). Technically, the value chain is too complex to achieve a full
integration of all business entities within it in order to reap the bene"ts o!ered by
supply chain management. This leads to a second narrower de"nition of supply
chain management: the integration of the various functional areas within an
organization to enhance the #ow of goods from immediate strategic suppliers
through manufacturing and distribution chain to the end user (Houlihan, 1987,
1988). Research in this area generally focuses on improving the e$ciency and
competitive advantage of manufacturers by taking advantage of the immediate
supplier's capability and technology, particularly during the product design stage
through early supplier involvement. A third de"nition of supply chain management

emerges from the transportation and logistics literature of the wholesaling and
retailing industry, emphasizing the importance of physical distribution and
integrated logistics. There is no doubt that logistics is an important function of
business and is evolving into strategic supply chain management (New and Payne,
1995). Physical transformation of the products is not a critical component of this
de"nition of supply chain management. This is probably where the term supply
chain management was originally used (Lamming, 1996). Its primary focus is the
e$cient physical distribution of "nal products from the manufacturers to the end
users in an attempt to replace inventories with information. This is also consistent
with those marketing related literature in supply chain management (Christopher et
al., 1998; Christopher, 1996).

3. Evolution of supply chain management.

In the 1950s and 1960s, most manufacturers emphasized mass production to
minimize unit production cost as the primary operations strategy, with little product
or process #exibility. New product development was slow and relied exclusively on
in-house technology and capacity. &Bottleneck' operations were cushioned with
inventory to maintain a balanced line #ow, resulting in huge investment in work in
process (WIP) inventory. Sharing technology and expertise with customers or
suppliers was considered too risky and unacceptable and little emphasis appears to
have been placed on cooperative and strategic buyer}supplier partnership. The
purchasing function was generally regarded as being a service to production, and
managers paid limited attention to issues concerned with purchasing (Farmer,
1997). In the 1970s, Manufacturing Resource Planning was introduced and
managers realized the impact of huge WIP on manufacturing cost, quality, new

product development and delivery lead-time. Manufacturers resorted to new

materials management concepts to improve performance within the &four walls' of
the company. The intense global competition in the 1980s forced world-class
organizations to o!er low cost, high quality and reliable products with greater design
#exibility. Manufacturers utilized just-in-time (JIT) and other management initiatives
to improve manufacturing e$ciency and cycle time. In the fast-paced JIT
manufacturing environment with little inventory to cushion production or scheduling
problems, manufacturers began to realize the potential bene"t and importance of
strategic and cooperative buyer-supplier relationship. The concept of supply chain
management emerged as manufacturers experimented with strategic partnerships
with their immediate suppliers. In addition to the procurement professionals,
experts in transportation and logistics carried the concept of materials management
a step further to incorporate the physical distribution and transportation functions,
resulting in the integrated logistics concept, also known as supply chain
management. The evolution of supply chain management continued into the 1990s
as organizations further extended best practice in managing corporate resources to
include strategic suppliers and the logistics function in the value chain. Supplier
e$ciency was broadened to include more sophisticated reconciliation of cost and
quality considerations. Instead of duplicating non-value-adding activities, such as
receiving inspection, manufacturers trusted suppliers' quality control by purchasing
only from a handful of quali"ed or certi"ed suppliers (Inman and Hubler, 1992). More
recently, many manufacturers and retailers have embraced the concept of supply
chain management to improve e$ciency across the value chain. Manufacturers now
commonly exploit supplier strengths and technology in support of new product
development (Ragatz et al., 1997; Morgan and Monczka, 1995), and retailers

seamlessly integrate their physical distribution function with transportation partners

to achieve direct store delivery or cross docking without the need for receiving
inspection (St. Onge, 1996). A key facilitating mechanism in the evolution of supply
chain management is a customer-focus corporate vision, which drives change
throughout a "rm's internal and external linkages.
4. Two alternative perspectives on supply chain management
Fig. 3 presents a summary framework of the evolution of supply chain management
along two separate paths that eventually merged into a common body of literature.
While it is not an exclusive nor distinctive classi"cation of literature, Fig. 3 illustrates
the evolution of supply chain management from the purchasing and supply
activities, as well as the transportation and logistics functions, with a focus on
integration, visibility, cycle time reduction, and streamlined channels (Tan et al.,
1998b). The purchasing and supply perspective literature relates to the previously
disparate functions of purchasing and supply management functions of the
industrial buyers, whereas the transportation and logistics perspective of supply
chain management literature evolves from the transportation and physical
distribution functions of the wholesalers and retailers. However, there are other
means of classifying supply chain management literature. For example, Harland et
al. (1999) and Harland (1996) classify research in this area according to the levels of
integration (i.e., internal chain, dyadic relationship, external chain and network of
suppliers and customers) among supply chain members.

4.1. Purchasing and supply perspective of the industrial buyers In general, most of
the recent literature on supply chain management addresses the purchasing and
supply perspective (e.g., Farmer, 1997; Morgan and Monczka, 1996; Lamming and

Hampson, 1996; Kraljic, 1983). This perspective of supply chain management is

synonymous with supplier base integration that evolves from the traditional
purchasing and supply management functions. It emphasizes that purchasing and
materials management represents a basic strategic business process, rather than a
narrow specialized supporting function to overall business strategy (Reck et al.,
1992). It is a management philosophy that extends traditional internal activities by
embracing an inter-enterprise scope, bringing trading partners together with the
common goal of optimization and e$ciency (Harwick, 1997). Supply chain
management creates a virtual organization composed of several independent
entities with the common goal of e$ciently and e!ectively managing all its entities
and operations, including the integration of purchasing, demand management, new
product design and development, and manufacturing planning and control. This
perspective on supply chain management focuses on the manufacturing industry
and has little to do with the wholesaling or retailing industry. Its short-term objective
is primarily to increase productivity and reduce inventory and cycle time, while the
long-term strategic goal is to increase customer satisfaction, market share and
pro"ts for all members of the virtual organization. To realize these objectives, all
strategic partners must recognize that the purchasing function is the crucial link
between the sources of supply and the organization itself, with support coming from
overlapping activities to enhance manufacturability for both the customer and
supplier. The involvement of purchasing in concurrent engineering is essential for
selecting components that assure the requisite quality is designed into the product
and to aid in collapsing design-to-production cycle time. Suppliers participate at the
earliest stage of product design to render cost-e!ective design choices, often
leading to innovation in process and material technology to compete in the global

market (Monczka et al., 1994). By involving suppliers early in the design stage,
manufacturers may be able to develop alternative conceptual solutions, select the
best components and technologies, and solicit help in design assessment (Ragatz et
al., 1997; Burt and Soukup, 1985). An emphasis on internal competencies requires
greater reliance on external suppliers to support directly non-core requirements,
particularly in design and engineering support (Prahalad and Hamel, 1990).
Elsewhere (Tan et al., 1998b), we have empirically examined the impact of the
purchasing and supply perspective of supply chain management on contemporary
business practices, and concluded that the factors cited in the literature as being
elements of e!ective supply chain management (for example, customer relations
and purchasing practices) positively a!ect corporate performance. In general, supply
chain management seeks improved performance through elimination of waste and
better use of internal and external supplier capabilities and technology to create a
seamlessly coordinated supply chain. Thus, elevating inter-company competition to
inter-supply chain competition (Anderson and Katz, 1998; Birou et al., 1998;
Lummus et al., 1998; Morgan and Monczka, 1996; Christopher, 1996).

4.2. Transportation and logistics perspective of the merchants The transportation

and logistics functions of the wholesaling and retailing industry focus on a di!erent
aspect of supply chain management, that is, one of location and logistics issues
more often than transformation. Its origin can be traced to an e!ort for better
management of the transportation and logistics functions (Christopher et al., 1998;
Christopher, 1992, 1996; Fisher, 1997; Lamb, 1995; Turner, 1993; Bowersox et al.,
1992; MacDonald, 1991). While Lamming (1996) primarily addresses the purchasing
and supply perspective of supply chain management, he concludes that supply

chain management is a theory grounded in the "eld of logistics. Interestingly,

Eloranta and Hameri (1991) note that research in logistics tend to be separated into
inbound and outbound logistics, with a primary focus on inbound logistics.
According to this perspective, supply chain management incorporates logistics
focus into the strategic decisions of the business (Hale, 1999; Houlihan, 1988). The
once narrow focus of logistics becomes a comprehensive topic that spans the entire
value chain from suppliers to customers (Shapiro et al., 1993; Langley and Holcomb,
1992). It enables channel members to compete as a uni- "ed logistics entity instead
of simply pushing inventory back along the value chain. In such a setup, La Londe
and Masters (1994) suggest that most of the bene"ts of forward and backward
vertical integration can be obtained by coordinating the logistics operations of
independent "rms in the value chain. In this respect, supply chain management is
synonymous with integrated logistics systems, and the literature base is extensive
(Johnson et al., 1999; Lambert et al., 1998; Bowersox and Closs, 1996; Coyle et al.,
1996). Broadly de"ned, an integrated logistics system encompasses the integration
of processes, systems and organizations that control the movement of goods from
the suppliers to a satis"ed customer without waste (Ellram, 1991). Where logistics
once meant saturating warehouses with inventory, an integrated logistics system
includes inventory management, vendor relationships, transportation, distribution,
warehousing and delivery services. The role of e!ective physical distribution is a
critical component of the logistics process. Merchandise must be replenished quickly
and arrived where and when it is needed in smaller lot sizes, especially in a JIT
system (Hand"eld, 1994). The goal is to replace inventory with perfect information.
E!ective coordination of logistics activities, by means of excellent information
technology processes, is essential to organizational performance (Lewis and

Talalayevsky, 1997). The advancement of electronic interchange, bar coding and

radio frequency scanning technologies has greatly aided the evolution of the
integrated logistics concept. Evidence of work in this area includes Whiteoak (1994),
who traces the evolution of the retail grocery distribution practice in the 1970s into
the current supply chain management concept. The current research extends the
supply chain management concept beyond the con"nes of one company to include
other organizations in the value chain, including the carrier, which plays a crucial
role in an e$cient supply chain (Carter and Ferrin, 1995). However the literature
suggests that internal organization cultures prevent a truly integrated logistics
concept (Gattorna et al., 1991) although there is empirical evidence that
transaction-speci"c investment has a strong positive e!ect on the commitments of
such a relationship (Anderson and Weitz, 1992). Organizations in the retail industry
resort to supply chain management to counter the increasing uncertainty and
complexity of the marketplace and competitive situation to reduce inventory in the
entire value chain (Houlihan, 1987, 1988). It is a strategic tool and di!ers from
classical transportation and logistics management in that the value chain is a single
uni"ed entity. Jones and Riley (1987) also echo this single entity concept, where
inventories are used only as a last resort to bu!er uncertainty in business pattern.
Davis (1993) and Scott and Westbrook (1991) suggest that a supply chain can
reduce its overall inventory simply by e$ciently redistributing stock within the
supply chain. In the integrated logistics concept, short and reliable order cycle and
the ability to "ll entire orders are critical customer service elements (Ellram et al.,
1989). However, it is important to recognize that the geographical spreads of
channel members and cost structures determine the structure of logistical support
(Fernie, 1995; Taylor and Probert, 1993).

When supply chain management was integrated from the two perspectives into a
common body of knowledge that encompasses all the value-adding activities on the
value chain, researchers realized the importance of incorporating supply chain
management in overall business planning process (Harland et al., 1999). However,
Carter and Narasimhan (1994) note that it is not widely practised. Business process
reengineering literature (Burgess, 1998; Fliedner and Vokurka, 1997) supports the
notion of closely integrating the operations across functional areas between
manufacturers, suppliers and customer. In an empirical survey, Ellram and Pearson
(1994) also discover that despite the increased emphasis of integrating purchasing
into overall corporate strategy, the primary function of purchasing remained a
clerical role of negotiating price/items. While many strategic models have been
proposed (for example, Reck and Long, 1988) to link the crucial role of supply chain
management in overall strategic corporate planning, they failed to suggest any
action model that is useful to practitioners. More recently, Frohlich et al. (1997)
have utilized rigorous statistical analyses of survey data and suggested that there
are three di!erent types of supply chain strategies, and the process of ful"lling
customer's orders is of paramount importance to all three types. The three supply
chain strategies are &innovator', &marketeer' and &caretaker' strategies. While
&innovators' emphasize rapid new product introduction and design changes,
&marketeers' o!er broad product lines and &caretakers' focus on o!ering the lowest
price. The goal of the integrated supply chain strategy is to create manufacturing
processes and logistics functions seamlessly across the supply chain as an e!ective
competitive weapon that cannot be easily duplicated by competitors (Anderson and
Katz, 1998; Birou et al., 1998; Lummus et al., 1998; Lee and Billington, 1995). A
wellintegrated supply chain involves coordinating the #ows of materials and

information between suppliers, manufacturers and customers (White et al., 1999;

Narasimhan and Carter, 1998; Trent and Monczka, 1998), and implementing product
postponement and mass customization in the supply chain (Lee and Tang, 1998;
Pagh and Cooper, 1998; Van Hoek et al., 1998). Higher level of integration with
suppliers and customers in the supply chain is expected to result in more e!ective
competitive advantage (Johnson, 1999; Hines et al., 1998; Lummus et al., 1998;
Narasimhan and Jayaram, 1998). Most recent research that addresses supply chain
management strategy emphasizes the critical role of purchasing in formulating
corporate level strategies. For example, Freeman and Cavinato (1990) propose a
fourstage

supply

chain

management

model

and

describe

the

purchasing

characteristics necessary in each stage. This conceptual work is useful in matching

purchasing with the strategic process of the "rm, but it does not provide a
framework for strategically linking purchasing to the other functional areas.
Subsequently, Watts et al. (1992) develop a conceptual framework for linking
purchasing to corporate competitive strategy and to functional level strategies. This
framework is a crucial step in stimulating more active purchasing involvement in
developing and implementing corporate competitive strategy that will improve an
organization's performance.

5. Conditions conducive to supply chain management Supply chain management

may allow organizations to realize the advantages of backward vertical integration
while overcoming its disadvantages. However, certain conditions must be present
for a successful supply chain management adoption. Farley (1997) concludes that
the single most important prerequisite is a change in the corporate cultures of all
members in the value chain to make it conducive to supply chain management. A

traditional culture that emphasizes seeking good, short-term, company-focused

performance appears to be in con#ict with the objectives of supply chain
management. Supply chain management focuses on positioning the virtual
organization in such a way that all contributors in the value chain bene"t. E!ective
supply chain management rests on the twin pillars of trust and communication
(Grieco, 1989), and procurement and logistics professionals must be equipped with
the necessary expertise in the critical functions of their own enterprise and fully
understand how it a!ects the entire value chain. A buyers' market is an ideal
situation in which to develop long-term strategies with key suppliers because
buyers have leverage in negotiating cost, quality, certi- "cation of processes,
acquisition and sharing of new technology and production competence, especially
for recurrent transactions that require specialized processes (Ellram, 1994). In
response to the intense global competition, mergers and acquisition that create
redundant logistics capability, and new information technology, "rms may adopt
supply chain management to move beyond mere cost reduction into the domain of
real manufacturing e$ciency (La Londe and Masters, 1994; Porter, 1994). In recent
years, the rapid development of client/server supply chain management software
that includes a completely integrated supply chain management and electronic
commerce component also aids in the evolution of supply chain management (King,
1996; Semich, 1994). Sharing information with supply chain partners through
Electronic Data Interchange (EDI) is also a critical component of supply chain
management (Ellram et al., 1989). EDI is not just an electronic ordering system; it
can integrate stocking, logistics, materials acquisition, shipping and other functions
to create a more proactive and e!ective style of business management and
customer responsiveness (Mische, 1992). The direct transfer of information between

retailers and vendors aids in improving logistics e$ciency and supporting increased
customer service levels. Besides the ability to increase accuracy and timeliness of
information transferred, EDI may improve cycle reliability and help to decrease cycle
time. Superior logistics management aids in successful supply chain management
adoption. When coupled with an information system such as EDI, the transportation
system becomes the warehouse. Orders can be consolidated in the computer and
carriers can be coordinated for JIT delivery. Successful application of JIT principles in
supply chain management requires agreements that strengthen buyer}supplier
cooperation so that supply strategy is directly links to the "rm's overall strategy
(Polako!, 1992; Romero, 1991). As discussed above, JIT purchasing emphasizes
reduction in inventory levels throughout the value chain (Adair-Heeley, 1988),
instead

of

simply

pushing

back

inventories

on

suppliers.

The

traditional

buyer}supplier relationship that emphasizes multiple sourcing, competitive bidding

and use of short-term contracts has been characterized as adversarial (Hahn et al.,
1986). It tends to focus on the shortterm view of the purchase price and quality of a
product instead of the long-term capabilities of the suppliers. However, there is a
shift to developing long-term supplier capabilities in response to escalating
competition, shorter product life cycles, and rapidly changing customer demands
(Watts and Hahn, 1993, Shepherd, 1994). Although much has been written on
buyer-supplier relationships (Heide and John, 1990; Ellram, 1991), there, is a lack of
empirical models for establishing a successful buyer-supplier partnership.

6. Supplier certi5cation Another issue that has often been discussed in the supply
chain

management literature

is supplier certi"cation,

primarily focused

on

purchased raw materials, components and "nal goods, and in a few cases, on

service suppliers (Schneider et al., 1995, Jancsurak, 1992). Operating a supplier

certi"cation programme appears is inevitable for a JIT manufacturer that operates
with no excess inventory and needs to deliver to the point of use (Maass, 1988;
Burgess, 1987). The ultimate goal of supplier certi"- cation is quality at the source
and to reduce inventory, non-conformance, communication errors, duplicate testing,
receiving inspection, deliver to point of use, cycle time, and the ability to shift focus
from process input to output. An early work in supplier certi"cation is by Grieco
(1989) who proposes a "ve-phase supplier certi"- cation process. Eventually,
supplier certi"cation extends to include the logistics function, Gibson et al. (1995)
describe the utilization of supplier certi"cation to certify carriers and its bene"ts.
Inman and Hubler (1992) carry the concept of supplier certi"cation further by
suggesting that manufacturers should consider certi"cation of supplier's product as
well as its processes to avoid the situation where the supplier's product falls well
within customer speci"cations but fails to perform as required. The literature base
reveals three basic approaches to certify suppliers. Most US "rms develop their own
certi- "cation systems. A growing number are adopting standardized systems,
primarily based on ISO 9000 or Baldrige Award criteria in an e!ort to streamline the
certi"cation process. However, a small group of organizations encourage suppliers
to pursue self-certi"cation (Maass et al., 1990). Proprietary systems allow the
organization to customize the certi"cation criteria and process, but require
extensive development time and investment. Utilizing ISO 9000 removes the
redundant elements of proprietary programs and reduces the need for preliminary
quali"cation and site visits. Unfortunately, it is costly for suppliers to go through the
ISO 9000 process with no guarantee of continuous product improvement, only the
assurance that a documented quality system process is in place. As a result, some

organizations develop in-house certi"cation programmes that combine certain ISO

9000 criteria with their own. A related issue in supply chain management literature
is supplier development, which can be de"ned as any e!ort of a buying "rm with its
supplier to increase the capabilities of the supplier (Krause and Ellram, 1997). It
involves a long-term cooperative e!ort between a buying "rm and its suppliers to
upgrade the suppliers' technical, quality, delivery and cost capabilities and to foster
ongoing improvements. Hahn et al. (1990) propose a conceptual model to describe
the organizational decision process associated with a supplier development
programme to serve as a guideline for designing such a program that can link
purchasing

strategy

with

"rm's

overall

corporate

competitive

strategy.

Subsequently, Watts and Hahn (1993) have concluded that formal supplier
evaluation is crucial to the supplier development process.

7. Conclusion The development and evolution of supply chain management owes

much to the purchasing and supply management, and transportation and logistics
literature. As such, the term &supply chain management' is used in many ways, but
three

distinct

descriptions

dominate

prior

literature.

Firstly,

supply

chain

management may be used as a handy synonym to describe the purchasing K.C.

Tan / European Journal of Purchasing & Supply Management 7 (2001) 39}48 45 and
supply activities of manufacturers. Secondly, it may be used to describe the
transportation and logistics functions of the merchants and retailers. Finally, it may
be used to describe all the value-adding activities from the raw materials extractor
to the end users, and including recycling. However, it should be no surprise that the
various descriptions overlap in some cases. Genuinely integrated supply chain
management requires a massive commitment by all members of the value chain.

For example, the buyer may have to overhaul its purchasing process and integrate a
supplier's engineering teams and product designers directly into its own decisionmaking process. Since the cost of changing a partner can be huge, the purchasing
"rm can become a captive of its suppliers. Poor supplier performance is not the only
risk; the purchaser needs to worry about the possibility of a supplier passing trade
secrets to competitors or with its new-found abilities, venturing out on its own.
Trusting suppliers may be good business sense, but for many "rms hostility may still
be more pro"table, even in the long run. There are many other pitfalls of supply
chain management, such as con#icting objectives and mission, inadequate
de"nition of customer service, and separation of supply chain design from
operational decisions (Lee and Billington, 1992). Integrating the purchasing and
logistics functions with other key corporate functions can create a closely linked set
of manufacturing and distribution processes. It allows organizations to deliver
products and services to both internal and external customers in a more timely and
e!ective manner. To further exploit the competitive advantage associated with
integrated processes, some leading organizations adopt a strategic approach to
managing the value chain, such as forming strategic alliances with suppliers and
distributors instead of vertical integrating; inter-company competition is elevated to
inter-supply chain competition. Although supply chain management developed
along two separate paths, it has eventually merged into a uni"ed body of literature
with a common goal of waste elimination and increased efficiency.