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CHAPTER 1
INTRODUCTION TO SUPPLY CHAINS AND ENTREPRENEURSHIP
LEARNING OBJECTIVES
1. Be able to articulate a broad understanding of supply chains and supply chain management.
2. Understand why companies have multiple supply chains, a supply network, or a value web, and why different expressions are used with slightly different meanings.
3. Comprehend the meaning of entrepreneurial supply chains and why they are useful for companies.
4. Understand how you know when you are thinking entrepreneurially, and what to do with entrepreneurial thinking when you get it.
"Investment must be rational. If you can't understand it, don't do it."
— Warren Buffett
"Be who you are and say what you mean. Those who matter don't mind, and those who mind don't matter."
— Dr. Seuss
Warren Buffett's quote is one of the best ones on investing, and by extension, on entrepreneurship. Simply put, entrepreneurial supply chain activities must make sense. If we cannot understand why we're considering an entrepreneurial venture, why we're doing something, or how we can explain it, then we should not do it. It's as simple as that.
Dr. Seuss's quote is also relevant. Some who read the book will disagree with some of what the author has to say. But, this book can be viewed as an opportunity to hear someone else's viewpoint.
Supply chains and supply networks, demand chains and demand networks, value chains and value networks, and the list goes on. This list goes on and on, too: entrepreneurs, entrepreneurship, intrapreneuring, corporate entrepreneurship, entrepreneurial, etc. So it goes with terms and terminology about where we are and where we are going. Can terminology help to point the way?
Not to clog this book with buzzwords, but:
At the end of the day, it's important to achieve a win-win solution. Be sure to think outside the box to demonstrate thought leadership. And harness key learning to change the game on that mission-critical project.
Huh?
This book will be clear and straightforward, trying not to get hung up on terminology, nor using too many clichés or buzzwords.
This is not a book on "what supply chains are" or "how to manage supply chains." It also is not a book on "entrepreneurship." There are enough books on those subjects already. However, there appears to be no other book dedicated to the subject of entrepreneurial supply chains. That's a pity, except that means there is a huge need for this one!
This book recognizes the state of many companies' supply chains that are in dire need of transformation to make them more entrepreneurial and more innovative. The book recognizes the lack of entrepreneurship within too many companies. It focuses on supply chains that present unexplored opportunities for competitive advantage. It also discusses how supply chains can be used to enable and encourage entrepreneurial activity. The book's subtitle, A Guide to Innovation and Growth, tells almost as much as the main title: companies' entrepreneurial supply chains can drive innovation and growth, and vice-versa.
Why do companies find it so hard to grow? If you want some evidence, just go to Fortune magazine's annual list of the world's largest companies. Compare the latest list with the list of 20 years ago — they're not the same! Many companies that were on the list then are not on the list now, or they are much further down the list. New companies have arisen. Why? Well, hopefully you can find some of the answers in this book as you struggle with supply chain issues of entrepreneurship, innovation, and growth.
A LITTLE HISTORY OF MANAGEMENT THOUGHT
So, where did supply chain management come from, and how did it get to its present state? Supply chain management has been around for millennia, but not by that name, of course. Let's examine a little bit of history as a way of setting the stage for the present.
Many of today's ideas about supply chains can be traced back to the ancient Egyptians and the pyramids. The pyramids were massive supply chain undertakings, especially in the era of 3000–2000 B.C. Quarrying large pieces of stone, shaping the stone, transporting it to the location of the pyramid, constructing the pyramid, and so forth, took enormous skill and massive resources. The best known Egyptian pyramids are those found at Giza, on the outskirts of Cairo. Several of the Giza pyramids are counted among the largest structures ever built. The great pyramid of Cheops, for example, covers 13 acres, contains about 2,300,000 stone blocks, and is estimated to have taken over 100,000 men more than 20 years to construct — quite a supply chain project.
According to Mark Lehner (2010), the earliest known Egyptian pyramid is the Pyramid of Djoser, which was built during the third dynasty, about 2600–2500 B.C. This pyramid and its surrounding complex were designed by the architect Imhotep, and generally are considered to be the world's oldest monumental structures constructed of dressed masonry. According to Professor Claude George (1968), the ancient Egyptians also added to our knowledge of supply chains in other ways. Circa 4000 B.C., they recognized the need for planning, organizing, and controlling. Around 2600 B.C., they developed the concept of decentralization in organizations. The concept of centralized organizations was developed about 1000 years later.
A whole book on the history of supply chains could follow, but you get the point. Supply chains have been around for awhile! Instead, this chapter will provide an introduction and an overview of supply chains and entrepreneurship.
SUPPLY CHAINS AND SUPPLY CHAIN MANAGEMENT EXPLAINED?
What are supply chains, and what is supply chain management? The Council of Supply Chain Management Professionals (CSCMP) defines supply chain management as follows: Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, logistics and all management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers.
In essence, supply chain management (SCM) integrates supply and demand within and across organizations. SCM is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the product flow activities including suppliers and suppliers' suppliers, manufacturing operations, and distribution to customers and customers' customers — from the original source of raw materials to the ultimate user as well as return/recycle of the product. It drives coordination of processes and activities with and across marketing, sales, product design, finance, information technology, and other functional activities.
You already know a lot about supply chain management if you are reading this book, and some familiar material is included intentionally. The simple reason to use a very broad description of supply chain management is not to get hung up on narrow definitions about what's in and what's not in the supply chain.
The Value Chain
Today's notions of supply chains are derived at least in part from Michael Porter's concept of the value chain. An adaptation of his generic value chain is shown in Figure 1.1. Porter (1985) defines the value chain as follows:
A value chain is a collection of activities performed to design, produce, and market, deliver, and support its product [which] can be represented using a value chain. ... A firm's value chain ... [is] a reflection of its history, its strategy ... and the underlying economics of the activities themselves.
Porter distinguishes the firm value chain, business unit value chain, channel value chain, buyer value chain, and supplier value chain, as shown in Figure 1.2. Later, his structure will lead us into how an entrepreneurial supply chain works.
Porter's framework is designed primarily for established companies and not generally for startup entrepreneurial companies. However, recognize that even the smallest start-ups will have to perform most or all of the activities described, even though they typically will not have an organizational structure for them.
Porter focuses on the business unit level of the firm and distinguishes between primary activities and support activities. The five primary activities include those which are generally attributed to companies with products: inbound logistics, operations, outbound logistics, marketing and sales, and after-the-sale service. This is the product life cycle, which is easy for most people to visualize. It is generally thought of applying to manufacturing companies, but it also could apply to wholesale, distribution, or retail firms.
Each primary activity can be disaggregated into a number of discrete entities that may be unique to the firm or its industry. Clearly, every company configures its activities differently. Each primary activity typically presents opportunities for entrepreneurial supply chain ventures, for example:
• Inbound logistics involves obtaining the product inputs from suppliers and the physical process of getting them from the supplier to where the operation is being conducted. Some companies obtain their inputs from a relatively few suppliers, while others use many suppliers. Some companies use trucking for their inbound transportation, while others use rail or ocean freight. Some companies use only domestic suppliers, while others use global sourcing. They are all different.
• Operations usually are defined as conversions. These could be physical conversions in the case of manufacturing companies or conversions of time and/or location in the case of distribution companies. Some companies have product designs that use few components, while others use many components. Some companies outsource most of their manufacturing, while others outsource little, if any. Some companies use a few large facilities, while others use more and smaller facilities. Some companies manufacture globally, while others keep their operations domestic. Again, they are all different.
• Outbound logistics are associated with physically moving the products from the operations locations to the customers' locations. This could include physically assembling a customer's order, scheduling a carrier, and offloading the products at the customer's location. Some companies ship directly from manufacturing plants to customers, while others use distribution centers to store inventory and get it closer to the customers. Some companies ship via air freight, while others use trucking. Some companies use third-party logistics providers, while others operate their own trucking fleets. Some companies, such as IKEA, have their customers physically take the products home from the retail store and even have them assemble the products. They are all different.
• Marketing and Sales usually include developing and implementing a strategy for marketing and selling the products along with the marketing activities of setting the price, promoting the product, packaging and branding, forecasting sales in different target markets, actually selling the product, and so forth. Some companies have their own sales force, while others use manufacturers' representatives that sell their products as well as products of other companies. Some companies aggressively use trade shows to exhibit their products, while others promote their products over the Internet. They are all different.
• Service is after-the-sale support of the product, and is considered part of the supply chains. This could include providing maintenance, repair, and operations (MRO) support, along with training of customers' personnel and providing a reliable service parts supply. In fact, the service parts supply chain is an important and distinct activity in many companies. For example, this is a big deal in aircraft manufacturers such as Cessna, Lear, and Boeing. An aircraft on the ground (AOG) is an occasion for "pulling out all the stops" to get service parts and maintenance personnel to repair the aircraft as correctly and quickly as possible. They recognize that AOGs can be very costly to their customers, keeping customers' airplanes up and running is a very high priority for them. Some companies outsource service while others provide their own service and see it as an important component of their business. Service is different among industries and companies.
Porter also describes four support activities: firm infrastructure, human resource management, technology development, and procurement. These frequently are described as overhead activities. Unfortunately, the word "overhead" has negative connotations as something that weighs down the organization, is bureaucratic, or costs too much. Porter prefers (as does your author) using the term "support activities" to imply activities that keep the organization running effectively and efficiently.
Porter points out that support activities can be a powerful source of competitive advantage. In a large company such as Wal-Mart, for example, information technology (IT) is critical to success. IT captures store-level, point-of-sale data on products, customers, purchases, and so forth, down to the time of day at which purchases are made. Thus, they can provide Procter & Gamble (P&G) with data on how many boxes of Pampers are sold in any store at particular times and days of the week. For P&G, this is very important data for their marketing and product resupply purposes.
As with primary activities, Porter disaggregates support activities into their value-adding components:
• Firm infrastructure is a catch-all category of activities such as general management, accounting and finance, government and regulatory affairs, and legal. Sometimes there may be confusion about which level in the corporate hierarchy an activity should be performed. For example, general accounting may be performed at the business unit or facility level, while other, specialized accounting (such as taxes) may be performed at the corporate level. Financing activities likely will take place at the corporate level, and it is fair to say that most legal work takes place at the corporate level; however, these certainly are not universal. Companies may all be different.
• Human resource (HR) management typically is responsible for recruiting, selecting, hiring, training and developing, evaluating, compensating, providing benefits, and other activities for all personnel, from front-line employees to the CEO and chair of the board. HR functions typically occur at different levels of the organization. The overall compensation plan and the benefits programs typically are handled at the corporate level. Whereas, recruiting, selecting, training, and so forth of first-line personnel are usually handled at the local level.
• Technology development usually is focused on both products and processes. Porter points out that the traditional research and development (R&D) is too narrow of a term for these purposes, although it would be included as an activity under the broader term of technology development. IT development would be included in this category, although the actual operation of IT likely would be included as part of firm infrastructure.
• Procurement includes the acts of determining short- and long-term needs for purchased inputs, sourcing of suppliers, and development and management of suppliers. Actual operation of the purchasing function (placing purchase orders, receiving the inputs, and so forth) likely would be included in the operations portion of the firm's primary activities.
Porter implies that everything the firm does should be considered as either a primary or supporting activity. The labels are somewhat arbitrary and should be chosen to provide the best insights into the business. Furthermore, all linkages both internally and externally should be captured in the value chain definition.
A few thoughts about value chains are important to mention:
• Companies will define their value chain structure and activities in different ways, and the same function can be performed in different ways.
• Improving support activities frequently can make a significant difference in how the primary activities perform. For example, improving the sourcing activity within procurement likely will improve the finished product, either in cost or quality.
• The value chain really is a value web or a value network because of multiple linkages both inside and outside the firm.
• Most companies have multiple value chains. For example, different product lines likely will have different value chains, and the differences between product value chains and MRO value chains will likely be quite different as well.
• Opportunities for entrepreneurial supply chains abound within and among these activities.
Supply Chain Operations Reference (SCOR(r)) Model
The Supply Chain Council (www.supply-chain.org) was formed in the mid- 1990s, building on Porter's value chain which was proposed about ten years earlier. The work of the Supply Chain Council is more pragmatic than Porter's work. It also has been implemented more widely; however, Porter's conceptualization provides the underlying theoretical basis for the supply chain operations reference (SCOR) model.
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Excerpted from "Creating Entrepreneurial Supply Chains"
by .
Copyright © 2012 William B. Lee.
Excerpted by permission of J. Ross Publishing, Inc..
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