Herbert Kotzab: Tiltrædelsesforelæsning / Inaugural Lecture. 2005, 13. oktober Insights@CBS, nr. 16, november 2005: http://frontpage.cbs.dk/insights/690013.shtml

Supply Chain Management – Development, Current Status, and Potential for Academia and

Business Practice

by Dr. Herbert Kotzab An introduction „This is the course in advanced physics. That means the instructor finds the subject confusing. If s/he didn't, the course would be called elementary physics.“ (according to Luis Alvarez) Welcome to the course in Advanced Supply Chain Management! Although the idea of Supply Chain Management (SCM) has been introduced 20 years ago, there is

still a huge debate on what constitutes SCM. The understanding of the discipline as seen by the

scientific community can be summarized as follows:

• Supply Chain Management (SCM) is a strategic integrated customer and cooperation

oriented management philosophy that ensures an increased sustainable performance and

competitiveness for all partners within organizational arrangements called supply chain.

• SCM refers to the establishment of long-term supplier and customer relationships between

organizations within supply chain networks.

• SCM follows the goal of efficiency of the involved organizations. This can be realized by

synchronizing business processes (e.g. procurement and logistics) as well as organizational

arrangements by considering both costs as well as service structures.

• SCM is the realization of an inter-organizational flow orientation that helps to solve specific

connection problems.

• SCM decisions are operative and strategic. They include typically operational questions

referring to procurement, transport, inventory, handling as well as strategic management

decisions that aim to realize cooperative behavior of a supply chain’s part elements.

• Management decisions are therefore of particular importance (= coordination function of

SCM).

• SCM is a part discipline of business administration, which means that SCM helps to

increase the competitiveness of the firm by lowering costs, increasing profits and customer

satisfaction and certainly SCM is a competitive ‘weapon’ against competition.

Figure 1 presents a SCM model, which is built upon the basic ideas of Cooper et al. (1997),

Mentzer et al. (2001) and Kotzab/Otto (2004). In order to have SCM implemented, organizations

need certain prerequisites that refer mainly to constructs of relationship orientation, such as

independent organizations, willingness to cooperate, trust, etc. The outcome of SCM helps to

increase the efficiency of a channel, as costs are minimized but services are increased. This

efficiency is realized by organizing a chain according to the notions of Cooper et al. (1997) or

Frazier (1999):

• Outlining a supra-organizational structure that ensures a successful configuration of

responsibilities of several independent players.

• Identifying and setting up certain business processes, where the outcomes meet the

customers’ requirements (= customer oriented inter-organizational transformation

capacities)

• Presenting goal oriented directives (= management components) that give directions on how

the processes should be performed.

Is SCM a complex management concept or a problematic one?

The ongoing discussion in the field can be either summarized as that SCM is a very complex

management concept (e.g. Persson 1997), or we just accept that SCM is like “a bottle of Coke, it is

there and we have to accept it and make the best out of it” (Bretzke 2005). This indicates, there is

no consensus on what SCM really is (see e.g. Mouritsen et al. 2003). And in fact we observe a

specific paradigm discussion with an open result. A recent study by Gibson et al. (2005) showed

that the majority of SCM professionals perceive SCM as a combination of strategies and activities

that have very much to do with supplier and customer collaboration – and that is it!

Figure 1: A model of Supply Chain Management – prerequisites, means and outcome

Actually, research in SCM is driven by dilemmas, as doubt and perplexity exist. The following

points will support this dilemma-hypothesis:

Dilemma 1: What is good for theory is good for practice?

“This might be right in theory but it isn’t right for practice” (Kant). Researchers have often been

confronted with statements like this when research ideas had been presented to practitioners.

However, how can it be that after more than 20 years of SCM research e.g. the grocery industry still

has not found a way out of their out-of-stock-problems, which is truly a result of bad channel

coordination? How come that there are no more successful SCM examples known than the

“famous” examples of Dell, Zara, IKEA, Toyota, Wal-Mart and Procter & Gamble? Do these

sobering business results mean that research has to downgrade their efforts?

Dilemma 2: Back to the future?

In 1969, Donald Bowersox presented in the Journal of Marketing a review on “Physical

Distribution Development Current Status and Future Development”. He argued that physical

distribution has been one of the most neglected business functions so far and deserves more

attention. Bowersox suggested to use a holistic/systemic view when analyzing physical distribution,

to focus on relations and to leave an individual firm’s perspective and to realize the advantages of

collaboration, which will help to eliminate duplications of activities and thus costs. Back in 1962,

Peter Drucker presented in the Fortune Magazin his recognized article on “The Economy’s Dark

Continent” where he meant that the only thing what we know about distribution is, that is big, and

that it is important and that is all. In the meantime, physical distribution has undergone a

transformation and in some research cultures, it has turned to the SCM, especially in the US. In

Germany, researchers argue that SCM is another word for logistics. And if we keep this argument,

German researchers have been given credit by Albach (1997), who said that logistics can be

recognized as the discipline that can contribute to a general process based theory of the firm

(Albach 1997).

However, what have been the revolutionary insights we gained through logistics/SCM research?

Why is it that reading ‘the old stuff’ is more profitable than recent work? It seems that researchers

have more or less used much more time to artificially present arguments for making SCM a

strategic management issue instead of developing a methodological and epistemological tool set

that can be used to solve typical problems that occurs in supply chains (see therefore Gudehus

2005). The dilemma refers to the fact, that the only thing that we know is that SCM is important and

that it is big!

Dilemma 3 – Uncritical main stream thinking

There is the overall believe in the discipline that there is something existing that is called a supply

chain. Typically a supply chain is defined as the sum of „all activities associated with the flow and

transformation of goods from raw materials stage (extraction), through the end user, as well as the

associated information flows“ (Handfield/Nichols 1999, p. 2). And accepting this notion, some

prominent researchers have introduced the supply-chain-competition-hypothesis, that can be

summarized by the following quote by Christopher (1999): “It is now no longer the case that

individual companies compete against other individual companies, e.g. BMW against Mercedes, but

rather as supply chains. Thus in the future it will be BMW's supply chain competing against

Mercedes' supply chain. Those organisations with the best co-ordinated chains will be those that

succeed.”

As there is (nearly) overall agreement on this notion, is this then what Kuhn (1970) would call

normal science or a paradigm? There is however doubt about this hypothesis existing, such as

Mouritsen et al. (2003) asked whether a supply chain might be rather a social construct based on the

perceptions of the involved management than a reality. Does this mean that the supply chain

concept is more or less nothing more than the result of how management translates the construct?

One can also perceive a supply chain as a specific network as Otto (2002) demonstrated by

distinguishing a supply chain as the reproduction network, besides four other network types - the

innovation network, the connection network, the multiplication network and the transportation

network.

This dilemma reminds of the very early discussion amongst physicists in the early 20th century,

when the scientific community either believed or doubted on the existence of atoms. The Austrian

physicist and philosopher Ernst Mach always asked: “Have you ever seen one?”, if confronted with

the existence of atoms. Have we ever seen (already) a supply chain? Or is it what has been

presented so far not always only a selective part of something that can be called a supply chain, as

all researchers study small aspects of dyadic relationships, one single product flow, one distribution

channel, etc. (see also Bretzke 2005).

Future fields of research in SCM

Nevertheless these dilemmas exist SCM is an interesting object to study as it is placed between

economics, organization and technology (Gudehus 2005). Figure 2 outlines promising research

areas which are placed within the Gudehus-triangle.

Supply Chain Management

= Flow Management

Sustainable Supply ChainManagement

Widening and broadening

SCM

Behavorial aspects of SCM

The „ROI“ of Supply ChainManagement

Micro- and Macrolevels of

SCM

Figure 2: Future development of SCM research

Research subject 1: Hypercompetition and interorganizational business processes

Traditional hierarchies with their command and obedience structures are going to be more and more

replaced by decentralized, modular built, cooperative-oriented, autonomously and indirectly

coordinated networks. Management of inter-organizational relationships within the realm of SCM

gets more and more attention within research and business practice. Beyond the perspective of

displacement competition, where gains in market shares do only occur by decreasing competitors’

market shares, the installation of inter-organizational relationship and business process management

seems to help companies to gain competitive advantages (= SCM). Today, SCM is recognized as a

necessary strategic weapon for ensuring the firm’s competitive advantages and claims SCM as the

major management-driven competency, whether a company can succeed within its competition

environment or not. The open questions for any decision maker, whose organizations operate more

and more in hyper-competitive markets, are:

• What are the conditions under which inter-organizational relations and business processes

help to overcome hyper-competition’s challenges?

• And when knowing the conditions, how should the relations and business processes be

designed and managed in order to survive in hyper competition’s environment?

By extending the domain of the supply chain from the organization-chain level to the meta level of

economic setting (e.g. Stern et al, 1996, where distribution systems are discussed relative to their

influence (technological, infrastructural, political, social, economic setting). The objective of this

research is to develop a conceptual framework of the inter-relationship between hyper-competition

and the design and management of inter-organizational relationships (see Figure 3).

STANDARDPROBLEMS

How to reduce supply chain costs?How to increase supply chain values?How to improve the ability to adapt to

network conditions ?

STANDARDSOLUTIONS

optimized network configurationcontinuous network rationlization

improved coordination

E

E

E

E

E

E

E E

E = Effect = Macrolevel of Supply Chain Management

= Microlevel of Supply Chain Management

Figure 3: Macro-, micro- and meta-perspective of SCM

Instead of producing standard solutions for standard problems, research is asked to identify the

influencing factors of certain problems and maybe develop different solutions for different

problems. This means, that research has to discuss SCM from a meta-perspective (= inside-out) in

order to derive specific consequences for the management of supply chains (= outside-in).

What has been suggested for the grocery industry so far is to combine competition with cooperation

into co-opetion and ECR has been recognized as a coopetitive strategy for this industry

(Kotzab/Teller, 2003; see also Figure 4).

Customers

Retailer being aCOMPETITORe. g. provider of

comparable tradefunctions

Retailer being aCOMPLEMENTOR

e. g. provider ofdifferent trade

functions

Producer being aCOMPETITOR

e. g. in the field ofmarketing

Producer being aCOMPLEMENTORe. g. in the field of

logistics

Producer

Retailer

… co-opetitive relationship… traditional relationship

… role-splitting

Figure 4: The coopetitive roles of different supply chain actors

Why is this relevant? The business model of the grocery industry is constantly changing. Retail

margins for retailers in many European markets are below 1 %. All members of the grocery supply

chain have to re-think their competitive strategies. The case of ECR shows, that managers of this

industry are looking for new ways to organize the grocery supply chain.

Research subject 2: Sustainable Supply Chain Management

Economic prosperity, environmental quality and social justice (= triple bottom line) will be more

and more the driving forces for trans-national corporations. However, this issues will not only effect

a single company, but also the management network of suppliers and distributors of companies, the

supply chain. Elkington (1997, p. 2) foresees the importance of the triple bottom line at the supply

chain level as companies “will increasingly be forced to pass the pressure on their supply chains..”,

which gives the management of such chains a new quality. However, SCM refers rather to

economic than environmental or social issues as Figure 5 illustrates.

Sustainable Development

Sus

tain

able

Bus

ines

s Social responsibility

Eco

-effi

cien

y

Economy/Profit

Ecology/Planet

Equity/People

Sustainable Development

Sus

tain

able

Bus

ines

s Social responsibility

Eco

-effi

cien

y

Economy/Profit

Ecology/Planet

Equity/People

Supply Chain Management

Sus

tain

able

Bus

ines

s

Economy/Profit

Ecology/Planet

Equity/People

Supply Chain Management

Sus

tain

able

Bus

ines

s

Economy/Profit

Ecology/Planet

Equity/People

Figure 5: Triple bottom line vs. single bottom line – the case of SCM

As SCM goes beyond the borders of a company and looks at the total flow of goods and

information it can solve the traditional trade-off-dilemma of a logistics manager whether to

concentrate on logistics costs or on logistics service in order to offer value to a customer. SCM

offers techniques and tools that can help to reduce duplication of costs and increase therefore the

use of capacities of all supply chain members. That means that the basic character of SCM is pure

economical as the application of SCM increases the economic profit and that might be due to taking

the risk of having higher social and environmental losses.

Sustainable SCM can be therefore suggested to be a collaboration between supply chain members

within all those activities, that are connected/associated with bringing/delivering environmentally

and socially responsible products and services to the end customer, as well as attaining acceptable

profit and information in the supply chain. The research’s goal has to be to develop a triple-bottom-

line SCM-model that allows supply chain decision makers to perform SCM in a sustainable manner.

Why is this relevant? The key word for many managers is nowadays “corporate social

responsibility”, which is only one part of the triple-bottom-line. Novozymes (former Novo Nordisk)

is one of the few companies that publish an annual report in a triple-bottom-line manner. In that

sense can the triple-bottom-line is seen as a way to guarantee qualitative growth, which is also for

SCM a central issue. A special focus should given to third party logistics (3PL), which could have –

if recognizing their role as facilitators - the power to put the triple-bottom-line into SCM action.

Research subject 3: The ROI on Supply Chain Integration

SCM is mostly defined as the management of the entire set of business processes that produces and

delivers products/services to the final customer. The quest for integration is an explicit or implicit

assumption in most literature within Supply Chain Management. The basic hypothesis is "the more

integration - the better the management of the chain". Appearing in academic journals and

textbooks at the beginning of the 1980’s, SCM was an attempt to make the flows of products and

information between firms a strategic matter.

Whether this was an attempt to elevate logistics/procurement professionals to the central offices of

corporate management in as a piece of inter-professional competition with other professional groups

in the firm, or whether it was an attempt from a top management perspective to enlarge the space of

the firm – to extend its boundaries – are two obvious possibilities.

SCM can be seen as an integrative philosophy to manage the total flow of a distribution channel

from the supplier to the ultimate user. It can also be seen as the integration of business processes

from end user through original suppliers that provides products, services and information that add

value for customers. Such definitions emphasize on integration. Integration is a one-best-way recipe

that transfers power to the management of the chain rather than to the firms that populate it. It

presents itself as a justification, which is very difficult to be against it.

However, from a decision maker’s point of view, academic research still not provides satisfactory

results on the return of investment into supply chain integration. Does a network create value?

Assuming that any engagement into SCM can be seen as an investment into integration, it would be

interesting to know the expected value of this investment. Research should combine the notions of

SCM with the notions of investment analysis.

Why is this relevant? Although much is said about the positive effects of supply chain integration,

there is no result published that shows the financial benefits of such integration. SCM researchers

tend to forget the idea of the balance sheet! It is assumed that the question of what is the return on

any investment into supply chain integration is an interesting question for top management.

Research subject 4: Broadening the concept of Logistics and Supply Chain Management

Logistics has changed over the past four decades. In the 1960’s logistics was a synonym for

physical distribution. In the 1970’s German professors of business administration developed the

concept of “Betriebswirtschaftliche Logistik” that defines logistics as integrated management of the

flow of goods and related information. Integration aimed at inside and outside flows (= suppliers,

customers). In 1985, Jones and Riley introduced the term Supply Chain Management as a tool to

manage inventory for gaining competitive advantage. Since then, many proposals on definitions,

models and related theories had been presented. Still, there is no consensus of what a supply chain

or Supply Chain Management is.

Recently, the Council of Supply Chain Management Professionals launched following definition on

SCM: “Supply Chain Management encompasses the planning and management of all activities

involved in sourcing and procurement, conversion and all Logistics Management activities.

Importantly, it also includes coordination and collaboration with channel partners, which can be

suppliers, intermediaries, third party suppliers and customers. In essence, Supply Chain

Management integrates supply and demand management within and across companies.

Following the notions of Weber (2002) and Albach (1997), we see Supply Chain Management as a

management philosophy that can be used to manage independent organizations in a process (=

flow) oriented manner and allows all members of the supply chain to gain competitiveness. In that

sense, we see SCM as a possible development of logistics. In prior work, Kotzab (2000) has defined

SCM as a metalogistical phenomena, a view that has been shared by Ihde (2001). Kotzab and

Schnedlitz (1999) and recently Kotzab/Bjerre (2005) have already put SCM into a retail context

(see Figure 6).

InformationInformationInformationInformationInformationInformationInformationInformation FlowFlowFlowFlowFlowFlowFlowFlow

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R & R & R & R & R & R & R & R & Marketing Marketing Marketing,Marketing,Marketing,Marketing,Marketing Marketing salessalessalessalessalessalessalessales

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Figure 6: A retail specific SCM model

Most SCM-models focus on the flow of goods and describe product flow related network structures.

There is also a lack of research discussing different network layers of SCM (e.g. information, e.g.

organizational), which would be needed in order to present a general theory of inter organizational

network management. Following Normann/Ramirez (1994), supply chains could be defined as the

results of the interaction between inter-connected actors with co-productive relationships and

interactive combination of the basic supply chain management processes creates value not in a

sequential, but in a multi-directional level, which is called value constellation.

Why is this relevant? In 1969, Kotler and Levy presented their article on broadening the scope of

marketing. Broadening the concept of SCM means thereby that we take the typical differentiation of

the business administration of functions and institutions and try to develop institutional aspects of

SCM. The goal of SCM research is then to identify the institutional particularities of SCM for

service companies (especially 3PL-companies) and functional developments (especially the

management of information flow related processes such as planning and forecasting).

Research subject 5: the behavioural aspects of SCM

Logistics and SCM offer a lot of opportunities to think in machine-terms. Systems and networks

have to function after certain rules. However, who initiates those rules, who implements after which

logic SCM arrangements. It is a management that is responsible for that, wherewith a behavioural

ground is ensured. This is why Mentzer et al. (2001) introduced the concept of Supply Chain

Orientation that leads to an integration of different organizational logistics and supply chain settings

or as introduced in Figure 1 – a relationship orientation is needed to have SCM work. SCO or

relationship orientation includes latent variables of trust, mutual understanding and commitment,

which means that organizational issues should be in the focus when it is about the management and

control of supply chains.

However, not much work is presented so far that deals with these issues, especially if it is about the

analysis of the meaning of such organizational arrangements as suggested by SCM. In accordance

to Ouchi (1980) it is necessary to explore the meaning and the essence of different organizational

SCM settings and compare this to traditional management styles (= hierarchical management). Why

and how are SCM organizations built, a question that has been examined by Marguerre/Kotzab

(2003), where the concept of Supply Chain Communities has been introduced which is built upon

the basic notions of Ouchi’s (1980) clan approach. The community should help to incorporate SCM

within the different involved independent business organizations.

Why is this relevant? Figure 7 shows the results of an implementation study which has been

conducted in Denmark (Friis et al. 2004).

Figure 7: Results of the SCM-implementation Performance index for Danish business organizations It shows that the overall performance level of SCM implementation within Danish business

organizations can be evaluated as being medium as all performance indices are in a range between

39 and 57. There is still room for improvement when it comes to SCM putting into place.

What – so what – now what?

What should we think about these issues? So what have we learned about SCM so far? Now what

does this mean for research and business practice?

SCM offers a lot of research opportunities and can be analyzed from very different research views.

SCM includes ideas that are relevant for strategic management, organizational science, operations

management and operations research, computer science or marketing. Accepting this, SCM can be

studied from these angles and provides therefore an interesting research object. And attentive

researchers can already observe such a tendency that SCM is incorporated in these areas. However,

there is also a need for establishing a self-contained theory of SCM that presents in a self-confident

manner views and thoughts on the phenomena, identifies typical problems and suggests methods in

order to solve these problems. Right now, there is a tendency that SCM rather borrows from other

disciplines which gives the impression that SCM is an eclectic research subject.

30 years ago, Esso launched in Germany a commercial with the slogan “Es gibt viel zu tun – packen

wir es an” – that is certainly true for research in the field of SCM.

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