Supply Chain Management in the Asia-Pacific Extended Enterprise

Introduction

Supply chain complexity and risk have both increased to unprecedented levels in the past few decades. According to Murray et al. (2011), market evolutions and increasing worldwide demand for products and services mean that supply routes will remain complex and ever-changing (2011, p. 2). As trade has become more global, the scope and reach of partnerships in many industries has expanded. Value chain complexity has increased, bringing about a greater need for deeper understanding of the contexts in which these entities carry out their work. Firms have become more specialized and, de facto, more interconnected. In the course of its everyday work, a multinational firm may find that it has swept a wide variety of working conditions, infrastructures, and philosophies into the value chain formula. A new term for this sort of loosely coupled and self-organizing network of independent firms is the extended enterprise.

The firms in an extended enterprise may function cooperatively through contractual arrangements or through market mechanisms. Regardless, the purpose of the network they have formed is to accomplish combined economic output in the form of services or products offered to the market. The term supply chain implies a level of permanence between partners that may not be evident across all connections in the value chain. Conceptually, the term extended enterprise opens up the concept of value chain to include different degrees of permanence and different types of connectivity. The scope of relationships in an extended enterprise includes alliances, trade agreements, partnerships, public tariff arrangements, and open market exchanges.

The term enterprise is particularly applicable to a multinational firm in that it encompasses a conglomerate made up of several organizations — such as a partnership or joint venture — as well as business operations that are multiply outsourced. An enterprise is understood to include the entire socio-technical entity of a firm, including its people, information, technology, and business operations. The complexities of an extended enterprise are expressed in terms of its enterprise architecture. The concept of enterprise architecture goes beyond information technology (IT) architecture to include structural organization, standard operating procedures (SOPs), policies, and the mechanisms used to exchange goods and services, information, and money.

There has been a tremendous push to standardize processes in order to enable supply chain partnerships. Efforts to bring about standardization have been significantly challenged in cases where the supply chain includes agreements and contracts with vendors in developing countries. According to Oakden and Leonaite (2010), "the complexity of planning is heightened because countries are at different levels of development, with very different standards of infrastructure. Having an understanding of the region and its challenges makes for a more knowledgeable and informed logistician" (2010, p. 46).

Key Supply Chain and Logistics Parameters

Yet outsourcing can yield significant savings to a firm and create the opportunity to concentrate resources in support of core competencies — those that define the unique value proposition the firm offers. It is the unique value proposition that generates the best return on investment for the company and its investors.

The Supply Chain Council uses SCOR, a widely recognized model with a unique structure designed to align a critical web of business processes, metrics, best practices, and technology (Murray et al., 2011). The Supply Chain Council is an independent, nonprofit global corporation with a mission to advance the state of the art in supply chain management systems and practices. SCOR specifies parameters for supply chain management and identifies an array of key performance indicators (KPIs) that may be used to track the functioning of a supply chain. These measures include supply chain management costs, order-fulfillment lead time, forecast accuracy, material costs, and delivery performance. A principal advantage of using SCOR is its metrics framework, which unpacks enterprise-level goals into department-level metrics. Using dashboards and benchmarking, business analytics can provide insight into on-time delivery, order processing time, and plant utilization (Murray et al., 2011). The metrics hierarchy used in SCOR supports supply chain logisticians in drilling down to identify root causes and key drivers of performance, such as the cost of express freight, fuel costs, and returns or outstanding invoices (Murray et al., 2011).

As a result, visibility is increased, accountability is enhanced, and performance is improved (Murray et al., 2011). The SCOR model is based on a standardized set of metrics, which facilitates the identification of the most efficacious changes to a supply chain. Because the metrics are standardized, communication is simplified and replication is made possible (Murray et al., 2011). Advocates of the SCOR model argue that it provides, even for the most complex organization, "the ability to better manage an ever-changing supply chain in a highly volatile world" (Murray et al., 2011, p. 1).

In order to manage a supply chain effectively, it is critical to be able to translate high-level business objectives into supply chain performance metrics (Jain, 2004). The goal is naturally to improve the identified performance metrics, but this can generally only be accomplished by balancing conflicting objectives. From a cost-based perspective, the objective is to reduce inventory while maintaining or improving service levels (Jain, 2004). A general rule of thumb is that service levels and inventory levels are intrinsically and inversely related. The cost of holding a large inventory must be weighed against the cost of potential lost sales and lost opportunity. Other competing objectives must also be factored in, such as keeping transportation costs low while maintaining a responsive level of service. The point at which these multiple and conflicting objectives achieve the best balance is the optimum operating point toward which all adjustments in the supply chain are targeted (Jain, 2004).

Selection Rationale for Asia-Pacific Partners

The practical challenges of partnering with companies in the Asia-Pacific region are amplified by sprawling geography, varying levels of economic development, cultural diversity, a spotty regulatory environment, and fractured infrastructure. A continually changing environment means that operations must deliver rapid, flexible responses. In his book Living Supply Chains, John Gattorna (2006) identified four types of supply chains: fully flexible, agile, lean, and continuous replenishment.

The fully flexible supply chain is characterized by low predictability of demand and a loose relationship with customers, making it essentially unforecastable (Gattorna, 2006). It responds opportunistically, focusing on providing creative solutions at premium prices. The agile supply chain is similarly low on predictability of demand but maintains a tight relationship with its customers (Gattorna, 2006). It experiences many unforeseen demands, requires more resources to satisfy them, and focuses on the service-cost equation. The lean supply chain is loose with regard to customer relationships but high on predictability of demand (Gattorna, 2006). It is price sensitive with largely predictable demand and focuses on efficiency. The continuous replenishment supply chain is high on predictability of demand and tight with regard to customer relationships (Gattorna, 2006). It is managed through close collaboration with customers and focuses on maintaining those relationships.

Supply chain strategy must determine how to maximize value while connecting with suppliers and customers (Bolton et al., 2006). Two critical attributes enable supply chains to be responsive: capacity and capability (Bolton et al., 2006). Capacity is inherently flexible and can adjust response; capability is the dynamic that permits a supply chain to manage the unexpected (Bolton et al., 2006).

Even though SCOR and other organizations have worked to establish and standardize supply chain metrics, the evolution of the field continues. The evaluation criteria for service providers is shifting away from a reliance on traditional KPIs — such as error rate, on-time delivery rate, cost reduction rate, and cycle time — toward measures that include total processing time reduction, total cost reduction, and new part development rate. For providers, performance measures include cost, lead time, timely delivery, reliability of delivery, and quality. For buyers, many of the same criteria apply (delivery, cost, and quality), with flexibility also emphasized.

Conclusion

Supply chain costs can account for 60 to 90 percent of a firm's overall expenses. Accordingly, supply chain management is "a significant lever for driving bottom-line performance" (Murray et al., 2011). Experts estimate that income can be increased by over 40 percent through a 5 percent reduction in supply chain costs (Murray et al., 2011). Unless an enterprise can achieve optimal balance among the competing objectives associated with supply chain management, costs will inevitably increase without the business being able to respond adequately to market uncertainties or customer needs and expectations. An optimally functioning supply chain will effectively free up revenue sources and increase the availability of working capital, improve overall profit margins, and help ensure that fiscal stability is reinforced over the long term through sustainably reduced costs — while also strengthening customer loyalty (Murray et al., 2011).