Chapter 10: The Lengua Franca of Supply Chain Management - Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance نسخه متنی

Chapter 10: The Lengua Franca of Supply Chain Management

Overview

As international trade continues to burgeon, the lexicon of terms, acronyms and buzzwords associated with its myriad activities will grow in kind. Developments in manufacturing planning and control, lean manufacturing and other disciplines have spawned a language unique to each area of expertise, creating an eclectic and oftentimes confusing business jargon. While each school of thought has made valuable contributions to the evolution of supply chain management (SCM), global business requires a mother tongue capable of forging a common theme across industry, geography and culture. On an operational level, it seems that the trait most commonly shared among business models lies in inventory management. Although a true statement, the multi-faceted nature of international business demands a much more vigorous approach to successfully manage global enterprises. Although inventory management is an area of both strategic and tactical interest to managers, the complexities of contemporary SCM are much more robust.

Historically, the greatest operational challenge for management teams has been creating a balance between customer service and inventory investment. Although present-day SCM has grown to encompass activities ranging from product concept to market delivery, the service versus inventory-level dilemma still remains at its core. In pure inventory management terms, the service side of this equilibrium is interpreted as filling a product need in the right place, at the specified time, in the quantities desired and at the price originally quoted. Whether working with raw materials, work in process or finished goods, the goal of the supply side of the equation is to meet customer needs without committing excessive amounts of company funds to inventories.

In addition to the classic customer service challenge, SCM must now contemplate the rationalization of cumulative lead times and the reduction of landed costs. In the case of the former, bloated lead times can result in down production lines, lost sales, damaged customer goodwill or worse. An absence of landed cost controls, on the other hand, can create unstable product costing scenarios, wreak havoc on target pricing models and, ultimately, consume profits.

This three-faceted approach considers not only the importance of inventory management but also the commercial significance of executing on business models in a timely and profitable fashion. Taken from this vantage point, both the goals and trade-offs inherent to SCM can be made clear to most companies. What is less obvious, however, is the functional relationship of these activities with the financial success of an organization.

Without question, quantitative results should be the goal of any supply chain initiative. Regardless of a company's corporate culture, business model or theater of operation, the effectiveness of SCM must be translated into monetary terms and manifested in an organization's financial statements. The inability to trace operational activities to their first- and second-order impact on financial results hobbles an organization, leaving it blindly seeking solutions to the challenges of maneuvering in a global setting. As previously stated, although the tenets of SCM are understood and accepted, the links that must be established between operational execution and financial improvements have been more elusive.

Given this paradox, the next step in the evolution of the SCM philosophy is to identify the implicit ties between operating activities and financial performance. On a tactical level, the effect of initiatives in the areas of inventory management, lead time rationalization and landed cost reductions must be traced through the financial statements of an organization, specifically the balance sheet, income statement and cash flow statement.

The physiology of the relationships between this "supply chain triumvirate" and corresponding financial reports is the true nexus of global SCM and the foundation upon which all supply chain efforts should be built. The remainder of this book is dedicated to identifying the aforementioned links and demonstrating their impact on financial outcomes. Most importantly, the intention is to create a fresh perspective on business model execution that can be used by managers to improve profitability at their companies.