SBP 4a: Supply Chain Linkages

This principle occurs because of the coordinating efforts that occur between stages of a supply chain. Customer information can be a form of process input. When suppliers use customer information to guide their production processes, those processes assume service properties to some degree.

A significant way to look at manufacturing processes is in terms of a “supply chain,” which captures the idea of a link between supplier and customers. Very often, a manufacturer's suppliers have suppliers, and the customers have their own customers. The product or product components “flow” down a chain of suppliers to customers.

The green arrows represent the “downstream” movement of product from suppliers to customers. The blue arrows represent the “upstream” flow of requirement information from customers to suppliers. The other thing that flows upstream is money. For example, a product manufacturing and distribution supply chain may include stages such as the following:

A furniture retailer may sell desks to end consumers. The desks may be supplied by a furniture distributer, who receives desks from a desk assembly plant. The metal parts of a desk may be provided by a steel fabrication company, who gets sheet metal material from a steel mill. (The steel mill possibly gets iron ore from an ore mining company, which is an “extraction” industry-extracting raw materials from the earth.)

In this example, note that the assembler wants to meet the needs of the distributer, who is trying to satisfy retailers, who serve end consumers. The assembler is reliant on parts suppliers, who are reliant on material suppliers, who count on their suppliers. This is like a chain, where each link is important. If a material supplier fails to perform, ultimately the end consumer is likely to suffer.

An example of this supply chain linkage was seen a few years ago when an Asian factory that made resin was destroyed by a fire. That resin was an important material in the production of integrated circuits such as computer memory chips. The memory chips went into new computer systems that were being assembled by various companies. Memory chip prices skyrocketed, which had a dramatic effect on prices down the supply chain. Ultimately, consumers suffered the consequences of higher computer prices.

In this section we will consider three types of supply chains. The first two are manufacturing situations, such as that just described. The third is a service situation.

Traditional Manufacturing Supply Chains

Traditional supply chain management is only concerned with the flows from and to our immediate suppliers and customers. Our firm provides requirements to (i.e. selects the output from) our immediate suppliers. We receive the filled order from our suppliers. We process those inputs to make them more valuable to our customers (a “value-adding process”). Our customers provide product requirements, which hopefully can be met by our output.

Service processes are often found in traditional supply chains at the interfaces between suppliers and their customers. The following are some common examples:

• The responsibility for interfacing with suppliers typically falls under a purchasing department or functional area. Purchasing departments receive requisitions for items from various company departments, locate the “best” suppliers, initiate orders, receive items, and initiate payment. All of this is dependent on requisitions from “customers” within the company (called “internal customers”). Since requisitions can be considered a “customer input,” purchasing can be viewed as a service function.

• Suppliers may hire logistics companies to transport goods and materials to customers. (“Logistics” deals with the movement of items from one location to another.) Logistics companies receive the input (goods or materials) from their customers and transport them to their customers' customers. This reliance on customer-inputs classifies logistics companies a part of the service sector. In fact, logistics companies are a very large part, estimated at about ten percent of GNP in the United States. ¹⁾

• When supplied items fail to perform, customers may require the suppliers to repair or replace the items. Repairing means fixing an item that already belongs to the customer-a customer input to the repair process. Manufacturers may have “Field Service Technicians” whose job it is to work on customers' products at the customer location (the “field”). Field Service Technicians may be a part of a “Customer Service Department,” which department is responsible for acting on customer inputs.

Integrated Supply Chains

A current trend in supply chain management is to create integrated supply chains. Integrated supply chain management involves sharing information throughout the supply chain and using that information to work in sync with all of the other parts of the supply chain.

What types of information might customers share upstream in an integrated supply chain?

• Current sales information.
• Future requirements and forecasts.
• Anticipated timing of future orders.
• Changes in marketing or product promotion which will influence future requirements.
• Anticipated changes in product design that will influence supplied parts and materials.
• Quality control information.

This information may be not only shared with our immediate suppliers but also with our suppliers' suppliers, who are called the “second-tier” suppliers. This implies that as a supplier we may need to interact with out customers' customers (“second-tier” customers) so that we can help assure that their needs are being met by our immediate customers. In fact, the information can be shared across the entire supply chain, as depicted in the following figure:

Working with second-tier (or third-tier, etc.) suppliers and customers is no easy task. Technology can help, such as Electronic Data Interchange (EDI), in which demand requirements are continually communicated up the supply chain. For example, when a customer purchases a can of creamed corn at a grocery store in Maine, the canned-corn distributor, the wholesaler, the packing plant, and even the corn farmer can be informed of the demand. The purchase of one can might not make a big difference, but an aggregate surge in demand for creamed corn in Maine can affect the planning and allocation of product and production capacity throughout the supply chain.

Suppliers can use the customer-provided information to help increase responsiveness. For example, the information may be used to adjust the design and production of a supplied product so that it meets changing customer requirements. The increased presence of customer-information inputs, and the influence of that information on production, causes stages of the integrated supply chain to assume some properties of Services.

Service Supply Chains

With integrated supply chains the customer inputs to the production process are customer information. The customers would typically not provide any physical self or belonging inputs into the production process. Processes involving customer-self and customer-belonging inputs are Service processes in a more pronounced way.

Do supply chains exist in service processes where the major inputs come from customers? The supply chain is a little different in these service situations, since the customer is a supplier of physical items and information. The customer is a supplier of inputs to the service supplier, then receives those transformed inputs back from that supplier. In other words, the customer is their own second-tier supplier! This is depicted as follows:

For example, a customer supplies a broken television to the television repair shop. The shop also receives replacement parts inputs from other suppliers. After repairing the shop returns the television to the customer. In this process the television was supplied by the repair shop, who got it from the customer.

Things get even more complicated when the service provider employs another service provider to assist with the processing of customer inputs. For example, a photographer may not process exposed film herself, but may send the film to a film processing company. The major input to the film processing company process is the film from the photographer which is from the photographs of the end customer. Therefore the end customer is a second-tier supplier to the film processing company. The film processing company supplies completed prints back to the photographer, who makes them available to the end customer. Therefore, the film processor is a second-tier supplier to the end customer. By providing the subjects to be photographed, and by receiving the finished prints, the end customers are in fact fourth-tier suppliers to themselves!

In this example, the initial service provider is an interface between the service customer and the service supplier, as depicted in the following figure:

These types of service supply chains are circular in that inputs flow first in one direction-from customers to service suppliers-then in the other direction-from the service suppliers back to the customers. The initial service provider functions as a value-adding go-between in the process.

How does one integrate a supply chain that is circular in this manner? For one thing, communication needs to occur between customers and suppliers to prevent inadequate fulfilling of unrealistic expectations.

The concept of “garbage-in, garbage-out” implies that a company can only produce output that is as good as the supplied inputs. If a customer supplies lousy inputs, and that customer is subsequently upset with the shoddy outputs, who is to blame? In an integrated service supply chain everyone must take some responsibility, including the service provider and the customer. As appropriate, service providers need to inform customers about process capabilities and limitations. With the photography example, customers may need to be informed that certain color combinations will look bad, regardless of how well the photo processing is done. This implies that service providers need to understand the capabilities of their service suppliers, so that relevant conditions can be communicated to customers up front.

Customers do not want to hear a service provider blame a service failure on their supplier, even if it is that supplier's fault. For example, a photographer who blames the film processor for shoddy prints is like an auto dealer blaming the steel mill if a metal auto part breaks prematurely. Service providers are responsible for the work of chosen suppliers, and for choosing other suppliers when necessary.

Great advantage can be had by choosing suppliers and partnering with them as a team to meet customer needs, which helps integrate the service supply chain. However, the ability to integrate service supply chains is sometimes limited by the huge numbers of customer-supplier linkages. With the example above, a film processing company may serve hundreds of photographers, who each serve hundreds of end customers. It can be difficult or impractical to form partnering relationships of those magnitudes. (see Mass Alliances SBP)

Companies must decide when and to what extent it is appropriate to partner with various suppliers. Partnering implies communicating more information than just the current requirements. Usually, establishing a partnering relationship with a suppliers is only practical when purchase volumes justify the effort. (see Mass Alliances SBP)

As appropriate, get to know your suppliers. Recognize that if your suppliers do a better job, it can enable you to do a better job.

Also, seek to know what the needs and concerns of your customers are. If your customers have customers, it is valuable to know the needs of those second-tier customers as well. You will be more successful if you are able to help your customers meet the needs of their customers.

An often-cited example of an integrated supply chain involves Wal-Mart, who has extensive communication with suppliers. Wal-Mart has a satellite system in which store sales data is transmitted to central locations. From there, vendors (suppliers) and manufacturers can access the data and use it to be more responsive to Wal-Mart customer demand.

A large auto repair chain was receiving complaints from customers that newly installed brakes were squeaking. At first, the company responded by reporting that brakes can squeak even when properly installed. This was little consolation to customers who did not want squeaky breaks. The company response could easily be perceived to be passing blame to the brake shoe suppliers. When the company realized their response was inadequate, they decided to change to a supplier of brake shoes that did not squeak.

Likewise, other service companies of necessity rely on suppliers for whom they are accountable. Bug exterminators rely on chemical companies for various sprays and poisons that may have harmful effects on customers' landscaping. Dentists rely on suppliers of teeth x-ray films that have been known to be quite painful in patients' mouths. Shoe repair shops rely on suppliers of replacement soles that may be uncomfortable to wear. Motel chains rely on suppliers of in-wall air conditioning units that have been known to operate loudly on warm summer nights. In each case, the customer blames problems with the supplied items on the service provider, not on the supplier of those items. Service providers need to be aware of problems with supplied materials, and communicate that information up the supply chain as appropriate. It can also be useful to communicate positive information about supplied products up the supply chain.

A major supplier to law firms is law schools, who supply graduates. Law firms want high quality graduates. If the admissions process at a law school is inadequate, the quality of students will likely suffer. Also, if there is a gap in the curriculum, and graduates are inadequately trained in a certain area, it can be detrimental to hiring firms. Thus it is advantageous for a law firm that frequently recruits at a particular law school to partner with that school in the specification of curriculum and other requirements of students.

An example of a service business employing a service supplier is a doctor's office. When blood tests are required, the doctor or nurse may draw the blood from the patient, but it is often an outside laboratory that conducts the tests. Then when the tests are complete, the test results are returned to the doctor or nurse, who reports the findings to the patient. The doctor's office is an intermediary between the patient and the laboratory, and is thus responsible for assuring that the various inputs are adequate for production capabilities. For example, some blood tests may be invalidated if the patient has eaten a sugary food just prior to the time blood is drawn. Someone at the doctor's office needs to relay that information to the patient in a timely manner.

Various types of retailers employ process-suppliers. For example, customers can purchase home improvement materials at Home Depot types of stores and at the same place arrange to have them installed. Home improvement stores generally do not employ all of the various types of installation workers themselves, but have arrangements with subcontractors from the local community. It is good for home improvement stores to communicate customer requirements to installation subcontractors, and to communicate installation subcontractor requirements to customers. For example, customers should be informed if there are certain types of materials that installers are unable to install effectively, such as odd-thickness drywall, so that the customers will not purchase them and then be disappointed with the installation results.

Architectural firms often call on engineering firms to supply the engineering process of building design. The architectural firm may become aware of client requirement information that will help the engineering firm more fully provide a quality service. In addition, the architectural firm may become aware of engineering firm requirement information that would help the customer more fully contribute to the quality of engineering. For example, engineers may require a certain type of geological report regarding the building site (called a geotechnical or soils report) in order to minimize the likelihood of structural damage due to soil shifts. Architectural firms need to manage product flows and requirements communications in both directions of the supply chain.

Who supplies the so-called “food” to airlines? How is it that a passenger can order the beef on one flight and the chicken on the next, and find it hard to tell the difference? Some airlines may produce the food in their own kitchens, while others may subcontract it to outside suppliers. In either case, there is a need to communicate customer reactions back to food suppliers.

Airlines often employ service-suppliers. For example, major airlines often do not service small towns, but have commuter airline partners that feed into the major airline routes. When I call a major airline to request a flight from Appleton, Wisconsin to Charlottesville, Virginia, they will likely book me on a commuter airline flight at each end connected by a major airline flight in the middle. Those commuter airline partners are process suppliers who act on the major airlines customer input, the physical passenger and baggage. Good supply chain management dictates that we communicate to our suppliers what our customers' requirements are. Obviously, this includes communicating to the commuter airline partners what our passengers need, such as flights at certain times of the day. Less obvious is the need for communicating to the passengers what the commuter airline partners' requirements are, so that those partners can then more effectively serve the customer.

For example, some commuter airlines have planes that are so small that it is impossible to hang garment bags or have more than one tiny carry-on bag in the plane. (On one commuter flight I flew on, the passengers had to bend over to make their way to their seats-and every passenger got a window and an aisle seat at the same time.) Think how upset passengers would be if their baggage inputs were not well-received by a commuter airline partner-if their soft-sided garment bag could not be hung up but had to be stuffed in a tiny compartment. Further, think of the awkward position that the commuter airline partner would be in when the booking airline fails to inform customers of the restriction, and the passenger shows up with baggage problems.

Supply chain management for airlines includes assuring that relevant requirement and process restriction information are communicated across the supply chain.

With manufacturing, the supply chain management trend is to increase responsiveness to customer needs by closer coordination throughout the supply chain. Since this usually implies that suppliers act on customer information, we might say that the trend is for manufacturing supply chains to behave more like services in some respects.

1. Besides customers, who are the major suppliers to your service process? Who supplies equipment? materials and supplies? energy? knowledge and technology?
2. Who are the major suppliers to those suppliers from question ?
3. In what ways does your service business rely on the supplier's suppliers? What happens if a supplier's supplier fails to perform as required?
4. Does your service business employ external service-suppliers as part of the service process? Who?
5. What communication and/or partnering does or should occur with these various suppliers?

Identify a major non-customer input to your service process and diagram the supply chain for that process: List the type of company that supplies that input, and what type of company supplies to that supplier. Proceed backward to the “raw materials.” For each step in the supply chain, identify a potential process problem that impacts the end customer, such as poor quality or delayed production, and list how that failure would impact the end service process. Identify what information might be shared up the supply chain to help prevent that problem from repeating.

If submitting this Application Exercise electronically, you may choose to use the FlowViewer language. The following is an example using that language: #imply eol #begin flowchart #heading Steps of the Airline Meal Supply Chain [cattle ranchers];problem if supply is well below demand. !cows [meat packing plant];problem if excessive use of fillers. !packaged meat [meat distributor];problem if meat spends too long in inventory. !delivered meat [food preparation kitchen];problem if ignores passenger dietary restrictions. !packaged meals [meal preparation on plane];problem if food not heated properly. !prepared meals [delivery of food to passenger] #end flowchart Information that airlines can share upstream in this process includes…