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7 Principles of Supply Chain Management Explained

Would you like to understand supply chain management concepts Latest News & Press
but don't have time to study from a textbook? This article will explain What Black Friday Means for
Warehouse Workers
to you the key principles of supply chain management in 5 minutes. Industry-wide wages
By SupplyChainOpz are far higher than
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actually make,
40 39 22 0 1 according to Juan De
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Tw eet Share Like can be attributed to the fact that many
warehouse workers

September 04, 2013 The 7 Principals of The Questionable State of Global Supply
There is scarcely anything that has not been covered in Supply Chain Chain Hiring Practices
this amazing article, illustrating the brilliance of Anderson, IHS and Procurement Executives Group
Britt and Favre. Introduce Engineering and

Its a must-read for anyone associated with Supply Chain View this slideshow
Amazon and the United States Postal
Management and certainly warrants archiving as a Service Now Delivering Packages

reference point to stimulate and refresh thinking in this Incorporating Quality in Logistics
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Background SupplyChainOpz
In 1997, Supply Chain Management Review published The Intermec CN51 Mobile Computer
one article called The Seven Principles of Supply Chain Company Quicklook
Starbucks Chief Financial Officer Picks
Management written by David Anderson, Frank Britt and up Tech, Supply-Chain
Donavon Favre. Related Download All News
At that time, Supply Chain Management (SCM) was a In the Belly of the Beast:
pretty new term so this article did the excellent job to Samsung Electronics Supply Resources
explain important supply chain management principles in Chain Warehouse Work: Path to the Middle
one shot. This paper discusses Samsung Class or Road to Economic
Electronics importance to the Before claiming that warehouse jobs
More than 10 years pass and this article is considered the South Korea economy, its provide a pathway to the middle class,
ownership structure and its
classic article and got republished in 2010, and again in system of supply and
we need to assess
2013. production. It centres on an in-
depth analysis
As of now, it got more than 160 citations from both 1/5
11/28/13 7 Principles of Supply Chain Management Explained - Supply Chain 24/7
scholarly articles and trade publications.
The following section will show the summary of 7 principles in infographic form and I will
discuss if the concept from 1997 is still relevant to current business environment.

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Analytics for Supply Chain and


All Resources 2/5
11/28/13 7 Principles of Supply Chain Management Explained - Supply Chain 24/7
1) Adapt Supply Chain to Customers Needs
Both business people and supply chain professionals are trained to focus on customers
needs. In order to understand customer better, we divide customers into different groups
and we call it segmentation. The most primitive way to segment customer is ABC analysis
that groups customer based on sales volume or profitability. Segmentation can also be done
by product, industry and trade channel.
Back then, Anderson et al suggested that customer be segmented based on service needs,
namely, sales and merchandising needs and order fulfillment needs.
I totally agree that we should focus on customers needs but this doesnt seem to be enough
these days. The reason is that your customers may not know what they need until your
competitors offer something different.
For example, in 2011 Amazon initiated a program called Amazon Prime (free 2-day shipping
and discounted 1-day shipping). Today, people are still discussing if this program makes
But one thing for sure, customer turns to Amazon more and more. The morale of this story is
that you should anticipate customers needs as well.
2) Customize Logistics Network
When you segment customer based on service needs, you may have to tailor different
logistics networks to serve different segment. However, this principle doesnt hold true for all
For example, if you were contract manufacturer in China, you might already have different
logistics networks for different customers. Each customer in US or EU might already control
source of raw materials, ask you to provide dedicated production lines, nominate 3pl
companies and air/sea carriers. So, logistics network design is kind of initiative driven mainly
by customer.
3) Align Demand Planning Across Supply Chain
Supply chain practitioners are taught to share demand data with trading partners so nobody
has to keep unnecessary stock. In general, this principle holds true. But in reality, only
Walmart is actively sharing demand data to trading partners.
There is a very interesting paper by Williams and Waller 2011, the result of research found
If you make demand forecast based on SKU/Customer level, using your own historical order data
is more accurate than using POS data you get from retailers
If you make demand forecast based on SKU/Store level, using POS data you get from retailers is
more accurate than using your own historical order data
The implication is that the absence of demand sharing is not necessary bad. But when you
got demand data from trading partners, you MUST use it the right way.
4) Differentiate Products Close to Customer
The is something that Dell is very famous for, keeping components and assemble them only
after customer places the order in order to increase product variety. This principle is still true,
but, there is another principle that you should consider.
Standardization is in the opposite polarity of Differentiation. For example, some
cosmetics manufacturers formulate products and choose packaging and labelling that
comply with regulations of multiple countries in Asia. So they only make one SKU that can be
sold in 15 countries instead of 1 SKU/Country. By standardizing product appropriately, they
can drive cost down drastically due to economy of scale. So standardization is something
that you should also consider.
5) Outsource Strategically
This is the principle that stands the test of time. In short, dont ever outsource your core
competency. More information about outsourcing can be found from the infographic named
7 Pitfalls of Outsourcing and How to Avoid Them.
6) Develop IT that Support Multi-Level Decision Making
If you search Google for the term critical success factor erp, youll find lots of information
about how to implement Enterprise Resource Planning (ERP) successfully. 3/5
11/28/13 7 Principles of Supply Chain Management Explained - Supply Chain 24/7
My opinion is that IT project shouldnt be done in isolation, business process reengineering
is something that you have to do before IT project. This will equip you with full understanding
about process deficiencies then you can determine what kind of technology that you really
7) Adopt Both Service and Financial Metrics
Anderson et al suggested that activity based costing (ABC) be implemented so you can
determine customers profitability. However, there is the interesting twist about ABC concept.
In 1987, Robert Kaplan and W Bruns defined the activity based costing concept in his book
Accounting and Management: A Field Study Perspective. However, in 2003 Robert
Kaplan said that its difficult to maintain ABC costing model to reflect changes in activities,
processes, products and customers. Then, he introduced the refined concept called Time
Driven Activity Based Costing.
To my understanding, practitioners are still using traditional ABC and supply chain
researchers are still citing traditional ABC articles. My question is, does traditional ABC really
work? Register, and comment below.
Editors Note: Original article posted on SupplyChainOpz

Download the original Supply Chain M anagement Review (PDF) article: The 7
Principles of Supply Chain Management

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7 Principles of Supply Chain Management Explained

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