From Logistics to SCM

Introduction

It will not be less than correct to mention that marketing starts with customers and also ends with
customers only. So to say, customer and marketing are inseparable from each other. Customer is
considered king in the market who dictates the market and makes the enterprise run. Today, what
customer wants is better products, lower prices and faster supplies of goods and services. These
enhance the customer delight and enterprise plight. Meeting customers wants have never been
simple especially in a competitive market. Marketeers have been engaged in evolving devices to
gain competitive advantage that enables them to satisfy the customers wants and stay and survive
in market. In fact, innovate and invent have become, of late, the new mantras in modern marketing
to possess competitive advantage especially in a highly competitive market. Earlier logistics was
used as one of the devices to gain competitive advantage in the market. Of late, there has been a
paradigm shift from logistics to its modem day avatar, better known as Supply Chain Management
(SCM) which has been discovered as a source of competitive advantage. It is against this backdrop,
the present paper aims to address certain vital issues :

Why is there the need for SCM? What are the forces that drove logistics to SCM? Also discussed
towards the end of the paper are the key thrust areas in SCM.

Let us first understand what these two terms, namely, logistics and SCM mean. Simply stating,
logistics is a logical extension of transportation and its related areas to achieve an efficient and
effective goods distribution system. Thus, logistics encompasses the activities of inventory
management, order processing, warehouse and materials handling and physical distribution. SCM is
the design and operation of the physical and managerial systems needed to transfer goods and
services from vendor to customer in an effective and efficient manner.

The Council of Logistics Management defines SCM as the process of planning, implementing and
controlling efficient flow of raw materials, in-process inventory, finished goods and related
information from point of origin to point of consumption for the purpose of conforming to customer
requirements (Cavale & Rajani 2000,24). Thus, SCM integrates various links involved in the
customer order fulfilment, viz., supplier, transporter, manufacturer, wholesaler, retailer and
consumer and transforms the business processes that bring products and services to the market
place. In this way, SCM includes all those business process involved in the value chain of an
organisation that transform a concept into product and take it to the market.

Figure 1 shows how SCM integrates all cross functional elements of a customer service focused
organisation.

Now, SCM can easily be differentiated from logistics. While logistics is a function, SCM is a process
involving entire business activity.
Need for SCM

Before we appreciate the need for SCM, let us first trace out the evolution of the concept of SCM.
The concept of SCM has only recently stepped into the marketing world. It rooted three decades
back and has passed through three phases (Evans and Danks 1998):

Phase 1: Physical distribution management: This phase is better characterised as inventory

push phase when manufacturing was handled in isolation and output was pushed down to the
finished goods warehouses.

Phase II : Integrated logistics management : This phase recognised the importance of integrating
operations within the organisation like sales, procurement, manufacturing, warehousing, distribution
and transportation to achieve an efficient and effective goods distribution system.

Phase ffl : SCM : The graduation of logistics management to its modern day avatar is better known
as SCM. SCM extends the scope to link external partners like suppliers, vendors, distributors and
customers with a view to deliver enhanced customer and economic value through synchronized
management of the flow of physical goods and associated information from source to consumption.

In fact, the need for supply chain management is felt to benefit both customer and enterprise. While
it enhances customer delight by satisfying the customer need for better products, lower costs and
fastest supply, it improves enterprise plight by improving its productivity. In a nutshell, the benefits
derived by applying SCM (Jha 2000 : 66-70) are :

Reduced operational costs.

Improved flow of supplies.
Reduction of delays in distribution and increased customer satisfaction.
Brings compelling bottomline benefits to enterprise.

The corporate profitability can be linked to the deliverables of a supply chain with the help of
following equation :
Profit = Revenue + Customer service / Cost + Capital employed

Use of Internet, has enabled companies to realize several supply chain related benefits (Coppe and
Duffy 1998, 521-534). These are :

More Collaborative, timely product development through enhanced communication among

functional departments, suppliers, customers and even regulatory agencies.

Reduction of channel inventory and product obsolescence owing to closer linkage across the
supply chain and better insights into demand signals to drive products schedule and ultimately
achieve build-to-order capability.

Reduction in communication costs and customer support costs with more interactive, tailored
support capability inherent with Internet technologies.

New channel capability to reach different customer segments and further exploit current market.

Ability to enhance traditional products and customer relationships through customization driven by
Internet connectivity and interactivity.

Drivers of SCM

What drove logistics to SCM? One can identify a number of drivers for a paradigm shift from
logistics to SCM (Dubey 1999). The major ones are :

First, the expectations of customer for increased value addition, response time sensitivity, need for
reliability, cost consciousness and information sensitivity.

Second, the nature of competition favouring firms that have been in a position to decrease lead
times as well as operational costs.
Third, the recent revolution taken place in the field of information technology has enabled and
encouraged the firms to initiate newer means in the field of distribution management.

Fourth, managers have realized and recognised the need for continuous improvement of process
involved in marketing activity. The attitude of managers has changed in favour of integrating all
activities in the chain from sourcing to consumption.

Fifth, perception of firms to have inventories has changed to JIT philosophy. While money locked up
in inventories leads to poor use of working capital, higher inventories lead to higher lead times for
procurement, manufacture and distribution.

Thrust areas of SCM

The drivers listed above help identify the key thrust areas of SCM which would lead to specific
decision areas. These are :

Minimising uncertainty Reducing lead times Improving flexibility Improving process quality
Minimising variety Kitting of supplies

Planning for multiple supply chain Modifying performance measures Integration of processes

SCM needs to be compatible with the prevailing business environment.

Business challanges in the future

Given the growing information age competition, the business is to face some unique challanges in
future (Luftman 1996). The major ones are described below :

Managing uncertainty : Business environment is becoming uncertain and complex day by day. In
the face of such uncertainty, companies are finding it difficult to predict likely changes that take
place in their competitive environment. In fact, an altogether new but unconventional competition is
emerging as customers are turning into competitors, the erstwhile competitors are becoming
partners and alike. Nonetheless, business are bound to cope up with future uncertainty.
Understanding complex customer : Customer requirements are becoming more and more complex,
understanding his taste, preferences, likings and distlikings, is a must for a company to delight its
customers though unique value added business mission.

Understanding globalisation of business: With continuous globalisation of business, world is

shrinking day-by-day (Hall etal 1992). In the globalisation of business, the distinction between large
and small companies is breaking down with the information technology breaking down the barries of
time and location. Added to this is the emergence of Internet as aprowerful global communication
vehicle having its profound impact on business process. E-Commerce, the buzzword of the day, is
perhaps the most striking example of the changes occuring in business - be it globalised one or
within national boundaries.

Conclusion

Though customer has been dictated in the market for long, of late, customer has become supreme
in the context of global competitiveness intensifying on an unabated manner. Obviously, only those
companies are going to be successful that are able to provide goods and services to customer in
time and in a cost effective manner to provide customer delight. This requires to have competitive
advantage. Evidences indicate that every link in supply chain adds to competitive advantage. The
new developments such as the proliferation of Internet technology. World Wide Web, Electronic
Commerce, etc., will change the way a company is required to do business and, for that matter,
adapt an appropriate supply chain to acquire competitive advantage in future.

References

Quoted by Cavale, Vasant and Rajani, Renu L: Supply Chain Management: A New Paradigm for
Customer Centric Organisation, In B. S. Sahay (Ed.) : Supply Chain Management (in the twenty -
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Coppe, G. and Duffy, S. Internet logistics : Creating New Customers and Matching New
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Chain Management, Gower, Hampshire, 1998.

Dubey, Rajeev : The New Supply Chain 2000, Business Today, Dec 7-21, 1999.

Evans, R. and Danks, A : Strategic Supply Chain Management: Creating Shareholder Value by
Aligning Supply Chain Strategy with Business Strategy, Strategic Supply Chain Management,
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Hall, S. Held, D. and McGrew, T : Modernity and Its Futures, The Open University and Policy Press,
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Jha, Vidhu Shekar : Building an India Specific SCM, Indian Management, September 2000.
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