Supply Chain Management: Where Today''s Businesses Compete

For a complete Overview of SCOR and information on the Supply-Chain Council, visit http://www.supply-chain.org

INTRODUCTION
The phrase "supply chain management" (SCM) conjures up different meanings to different people but one fact is clear: businesses have been striving to achieve efficiency in their "sourcing," "making" and "delivering" for nearly 20 years. Recently, a top down, common sense approach to analyzing a supply chain has been made publicly available by a new organization called the Supply-Chain Council and it is called SCOR (Supply-Chain Operations Reference-model). This article will introduce you to SCOR and help you understand how it may improve your company's supply chain.

What is Supply-Chain Management?
Let's begin with a couple of definitions:
Supply Chain ­ all inter-linked resources and activities needed to create and deliver products and services to customers. In the truest sense, the supply-chain spans from the point where natural resources are removed from the earth to the point where they are replaced in the earth: "from dirt to dirt."

Figure 1.	SCOR spans from the supplier's supplier to the customer's customer.

Supply Chain Management - coordinating, scheduling and controlling procurement, production, inventories and deliveries of products and services to customers. Supply Chain Management includes all the steps you do everyday in your administration, operations, logistics department(s). Processing information from your customers to suppliers.

Why Do People Care About Supply Chain Efficiency?
There may be slightly different reasons for different companies, but in study after study, a few reasons always come to the fore including:

1.Improved Customer Service ­ this often means the difference between success and failure for companies. If a "customer" is seeking your product and it is not available when he/she wants it, the customer will purchase someone else's. So, having the right product at the right place at the right time is one way to define "customer service."

2.Save Money/Reduce Costs ­ this can be defined in many ways, but in its broadest sense, it includes reducing the cost of getting the product to market. In other words, containing all costs associated with moving the product through the supply-chain. And this usually results in a more time-efficient supply chain as well. According to a recent benchmarking study conducted by Pittiglio Rabin Todd & McGrath (PRTM), one of the founders of the Supply-Chain Council, best in class companies have an advantage in total supply chain management cost of 3 to 6 percent of revenue. (Total supply chain management cost is the sum of Order Management, Material Acquisition, Inventory Carrying, and Supply-Chain Finance, Planning, and MIS Costs.

3.Cash Utilization ­ How soon after you deliver your product do you get paid? Again, from the PRTM study referenced above, we learned companies leading in supply chain efficiency have a 40 to 65 advantage in cash-to-cash cycle time over average companies. Leading companies have cash available 2 to 3 months faster. (Cash-to-cash cycle time is calculated as inventory days of supply + days sales outstanding - average payment period for materials.) The quicker you get it, the quicker you can reinvest it in raw materials and/or plant/operations improvements.

Figure 2.	SCOR Level 1

Figure 3.	SCOR Level 1 Processes

How SCOR Can Improve Your Supply Chain Efficiency
The idea of developing a standard approach to analyzing, and then describing all aspects of a supply chain arose in the first quarter of 1996 by two Boston-based consulting firms: Pittiglio Rabin Todd & McGrath and AMR Research while working with many of their Fortune 100 clients. In 1996, several meetings were held which included PRTM and AMR and approximately 70 major manufacturers. The result was Version 1 of the Supply-Chain Operations Reference-model (SCOR) which was released in the fall of 1996.

SCOR is a standard supply-chain process reference model designed to embrace all industries (see Figures 1 and 2). SCOR enables companies to communicate supply chain issues, measure their performance objectively, identify performance improvement objectives, and influence future SCM software development. SCOR includes all the metrics that might exist in a supply chain; the formulae associated with the metrics, a reference to best practice vis-a-vis the metrics, and SCOR indicates which technology can contribute to achieving best practice.

Figure 4.	SCOR Level 2 Process Elements

SCOR is composed of three levels, which are used to analyze a company's supply chain operation. There are more granular levels below level 3, i.e., levels 4, 5, & 6, but they are company specific and are not included in this public model.

At level 1, the company using SCOR makes basic strategic decisions regarding its operation in the following areas:

• Delivery performance
• Order fulfillment performance
• Fill rate (Make-to-stock)
• Order fulfillment lead time
• Perfect order fulfillment
• Supply-chain response time
• Production flexibility
• Total supply-chain management cost
• Value-added productivity
• Warranty cost or returns processing cost
• Cash-to-cash cycle time
• Inventory days of supply
• Asset turns

Figure 5.	Supply Chain Physical Layout

Companies can not be best-in-class in all of these areas, so they will want to choose which of the above are most important to their success. Figure 3 is a representation of SCOR Level 1.

SCOR level 2 enables companies to configure their supply chain(s). Each product or product type may have its own supply chain. An illustration of the 17 "process elements" at SCOR level 2 appears in Figure 4.

To use this "tool kit," a company begins with a physical layout of its supply-chain as illustrated in Figure 5.

The next step is to choose the appropriate SCOR level 2 process element and depict the supply-chain using SCOR as seen in Figure 6.

It is at this point where a company using SCOR will learn what information Inputs are needed for each of the Process Elements, and what Outputs to expect. An example of Process Element S1 ­ Source Stocked Product appears in Figure 7.

Figure 6.	The Appropriate SCOR Level 2 Process Elements

Accompanying all Process Elements in SCOR is the overall definition of the Process Element, Performance Attributes in Cycle Time, Cost, Service/Quality, and Assets; the Metrics associated with each of the Performance Attributes, the Best Practices, and the Software Features Required. Keep in mind, SCOR is not a software guide, it is a business process guide that references software features if they contribute to supply chain success. In many cases, changes to management process will enable companies to achieve best practice without the deployment of software.

CONCLUSION
SCOR is a new tool; however, it is having a dramatic effect on the companies that are using it. Most companies begin at Level 2 where they configure their supply chain(s). At this point, inefficiencies are usually revealed and a process of reengineering the supply-chain occurs. This takes time as it typically includes a reduction in the number of suppliers, factories and distribution centers. In some cases, companies learn they can eliminate links in their supply-chains. Once the supply-chain has been reengineered, the measurement of metrics and the work to achieve best practice begins.

Figure 7.	Need Inputs and Likely Outputs

Striving to achieve efficiency in supply-chain management should last as long as the company is in business. And while it is working to achieve efficiency in its own operation, the company can begin working with suppliers and customers to develop what has been called an "extended enterprise" ­ a set of partnerships between members of the supply chain.

We are already seeing companies that are shutting down foreign, "cheap labor" situations because they have improved the efficiency of their domestic operations to the point where the cost of shipping is more than the labor cost savings. This trend will continue with the help of SCOR and the Supply-Chain Council.

For a complete Overview of SCOR and information on the Supply-Chain Council, visit http://www.supply-chain.org.

About The Author
Bill Hakanson, CAE
Executive Director, Supply-Chain Council

Mr. Hakanson has served as executive director of trade associations in the manufacturing, material handling, and automatic data collection industries. In 1997, he worked with an advisory committee to incorporate the Supply-Chain Council from an informal interest group to a not-for-profit trade association.

Mr. Hakanson has created associations and federations throughout the world, having served as chief staff executive of over a dozen organizations during his career. He has launched trade shows in a variety of technologies, the most successful of which grew to a 12,000 attendee event with over 150 speakers on the conference program and 300 exhibiting companies.

Concurrent with serving as Executive Director of the Supply-Chain Council, Mr. Hakanson is CEO of his own association management firm: Hakanson & Company, Inc. The Supply-Chain Council and three other associations are clients of Mr. Hakanson's firm.