What Is the Supply Chain?

What Is the Supply Chain?

Before we can spend time talking about how XML facilitates commerce of all types, we first need to identify the ecosystem about which we are speaking. Commercial activity occurs within a well-defined system known as the supply chain, which consists of partic-ipants that are interrelated in much the same way that different species are related in a food chain. The supply chain, in effect, is comprised of the interactions between parties that are required to produce products or services and deliver them to customers. Figure 20.1 illustrates a supply chain that may be used for a manufacturing organization. For individual companies and industries, various portions of the supply chain may exist that may not exist for other companies and industries.

The supply chain has evolved to become a focal point for automation and electronically enabled processes. Because so many parties are involved in the process of getting a prod-uct from a company to its customers, optimizing the efficiency, lowering the cost, and increasing the return on investment (ROI) for each of the portions of the supply chain is a major goal of most supply chain management (SCM) techniques and technologies. SCM preceded the development of the Internet and XML by many years—and in some cases decades. As such, supply chain management concepts are not tied directly to Internet-centric modes of thought. In fact, the classical definition of SCM (as detailed on http://www.stanford.edu/~jlmayer/Article-Webpage.htm) is a “set of approaches utilized to efficiently integrate suppliers and clients (comprised of stores, retailers, wholesalers, warehouses, and manufacturers) so merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system-wide costs while satisfying service level requests.”

The concept of the supply chain rapidly evolved shortly after the beginning of World War II. Prior to then, manufacturing and supply processes were mostly paper-based processes that linearly connected manufacturers, warehouses, wholesalers, retailers, and consumers. Some manufacturing processes were relatively straightforward, whereas others were hopelessly complex nightmares involving up to two dozen tiers of interaction. Each of these layers of interaction required people and paper trails. Compounding this problem, the linear nature of these processes made communication between arbitrary points on the network a time- and cost-intensive process. It was obvious that for the economy to be mobilized from a Depression-era inefficient system to a highly organized, efficient wartime manufacturing machine, vast changes needed to occur.

Old-style, multitier, linear supply chains had obvious inefficiencies that masked inven-tory, supply, and other production problems in independent layers of operation. An effi-cient supply chain would have to simplify and enable the flow of critical supply information between different points on the chain. World War II introduced a concept known as operations research and management science that helped to provide conceptual solutions to these problems. Originally, operations research was targeted at moving mili-tary goods and material to war fronts from supply factories at home. Obviously, effi-ciency was a primary concern.

Prior to the widespread use of computing and networking power to solve these problems, an interim solution known as cross-docking became a predominant method for optimiz-ing efficiency. This method involved the manufacturing of products from multiple plants and shipping them to multiple distribution centers. These centers, in turn, distributed the products to multiple retail and outlet stores. This process reduced the dependency on warehousing and reduced the time in which manufactured goods reached their end desti-nations. Cross-docking results in the invention of a number of techniques and technolo-gies still in use today, such as the stock keeping unit (SKU), which provides a numerical identifier for produced goods. The use of the SKU in combination with the newly devel-oped barcode helped to enable electronic sorting and management of stock within a cross-docking facility.

This increasing automation of the portions of the supply chain allowed suppliers and consumers to gain increasing levels of awareness of the efficiencies in the supply chain process. Products could be tracked, via their SKU, from the time they’re produced at numerous suppliers to the time they arrive at end-user locations. This increase in automa-tion also allowed the chain to become less linear in nature. With a unifying means for identifying and sorting goods, multiple suppliers, distribution centers, and retail outlets could be used to reach the customer. The use of computers also reduced the need for paper to be the means for tracking these movements of goods and services.

Reducing supply costs has dramatic impact on the profitability of a business. In particu-lar, supply chain efficiencies enable the following:

   Improved product margins (the profit per unit produced)

   Increased manufacturing throughput and productivity

   Better return on assets (net income after expenses)

   Shorter time to market for developed goods

   Better customer and supply chain relationships

The development of a supply chain is a fluid and constantly changing process. Supply chains are established upon the production of new products and services. Contracts are negotiated and put in place to arrange the supply of parts and materials. Management forecasts of demand and customer orders drive the creation of production plans. As parts are manufactured by various suppliers, inventory is managed. Agreements are signed with various sales and marketing channels, such as retail stores, to deliver these goods to the end customers. As sales are made, these channels deliver their forecasts and actual sales to help further streamline the product manufacturing and supply process.

These days, most products are complex in nature. Each finished product is assembled from parts and materials, which in turn are made of parts and materials, and so on, down to the most basic of parts and materials. Airplanes, automobiles, computers, and even tennis shoes are composed of dozens to millions of parts. Optimizing the supply chain to make sure that the right parts arrive in the right quantities at the right time is of extreme importance. The core unit of this aggregation of products into a final product is known as a bill of materials (BOM). The BOM identifies the constituent parts in a finished prod-uct. Any delays, production difficulties, or quality issues in constituent parts will delay production of the whole product.

Nowadays, the supply chain is more of a “web.” Each manufacturer of finished goods has relationships with dozens or hundreds of suppliers, each of which have relationships with dozens or hundreds of manufacturing customers. These interrelationships have enabled the use of dynamic supply agreements that allow companies to constantly be on the lookout for better relationships and deals. The increasing globalization of business has resulted in suppliers existing anywhere in the world, covering many different coun-tries, languages, and time zones. This globalization has added challenges and pressures in the effort to optimize supply chains.

The supply chain itself applies to two different ways of conducting business:

   Business to Consumer (B2C)

   Business to Business (B2B)

Business to Consumer (B2C)

All products have to get to customers at one point or another. In some cases, the con-sumers are actual individual consumers rather than business entities. Individual cus-tomers are a well-defined group of buyers that have long been the objects of marketing, advertising, and other targeted selling activities. Many of the early developments on the Internet were focused at helping businesses directly sell their goods to customers. This model of selling directly to individual end users of goods is known as Business to Consumer (B2C) sales processes.

The promise of B2C commerce is that it eliminates the “middlemen” and expenses of going through multiple distribution and sales channels before reaching the end customer. Of course, with the greater direct connection to the customer comes increased marketing, sales, and support costs that would otherwise be borne by various other elements in the channel. The most well-known B2C companies include Amazon.com, Buy.com, and other such direct-to-customer companies that provide services such as online banking, travel, online auctions, health information, and real estate.

Other than the increased complexity and potential cost in dealing with customers on a direct basis using B2C (or dot-com), a company implementing B2C techniques faces the danger of channel conflict, or disintermediation. This occurs when a manufacturer or ser-vice provider bypasses a reseller or salesperson and starts selling directly to the cus-tomer. This has been increasingly the case in such commodity industries as travel, banking, and electronic goods. However, disintermediation of the channel can seriously backfire, upsetting long-term relationships with dealers, distributors, and retailers.

Business to Business (B2B)

The other main source of customers for a business is other businesses. Transacting with other businesses as customers is a comparably much larger market than selling directly to end users. The Business to Business (B2B) market is estimated at over 10 times the size of comparable B2C markets. However, selling to businesses involves many differences and complexities that are not present in traditional B2C sales environments.