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Global contact details

continued from page 43.

nMalaysia DivisionLots 1.03b and 1.05,Level 1, KPMG Tower,First Avenue,Bandar Utama,47800 Petaling Jaya,Selangor Darul EhsanE: kualalumpur@cimaglobal.comT: +60 (0)3 7723 0230F: +60 (0)3 7723 0231

nPoland contact pointWarsaw Financial Centre,ul E Plater 53,Warsaw 00-113T: +48 (0)22 528 6890F: +48 (0)22 528 6701E: thierry.lovane@cimaglobal.com

nRepublic ofIreland Division45-47 Pembroke Road,

Ballsbridge, Dublin 4E: dublin@cimaglobal.comT: +353 (0)1 6430400F: +353 (0)1 6430401

nSingapore office16 Raffles Quay,Unit 33-03 B,Hong Leong Building,Singapore 048581E: singapore@cimaglobal.comT: +65 6535 6822F: +65 6534 3992

nCIMASouth AfricaPhysical: Second Floor,South Block, ThruppsCentre, 204 Oxford Road,Illovo, JohannesburgPostal: PO Box 745Northlands 2116E: johannesburg@cimaglobal.comT: +27 (0)11 268 2555or: 0861 CIMASA/0861 246272F: +27 (0)11 268 2556

nSri Lanka Division356 Elvitigala Mawatha,Colombo 05E: colombo@cimaglobal.comT: + 94 (0)11 250 3880F: + 94 (0)11 250 3881

nCIMA ZambiaPhysical: Plot No 6053,Sibweni Road,Northmead, LusakaPostal: Box 30640, Lusaka

E: lusaka@cimaglobal.comT: +260 (0)1 290 219F: +260 (0)1 290 548

nCIMA ZimbabwePhysical: Sixth Floor,Michael House,62 Nelson MandelaAvenue, HararePostal: PO Box 3831, HarareE: harare@cimaglobal.comT: +263 (0)4 708600/250475 CIMAZIMF: +263 (0)4 708600/250475

FINANCIALJuly/August 2007 MANAGEMENT

Supply chain management (SCM) is a concept that involves theco-ordination of operations from the supplier of raw materialsat one end of the supply chain all the way down to theconsumer at the other end. The object is to achieve synergiesthat benefit every player along that chain. SCM is a logicalprogression from internal management practices such asmaterial requirements planning, enterprise resource planning andcustomer relationship management.

The idea behind SCM is that co-ordinating the activities ofthe different businesses on the supply chain can save costs whilealso adding value. The simplest form of chain is where a series offirms supply each other along a continuous pipeline runningfrom the point where raw materials are extracted to the point atwhich customers are supplied, but the situation is usually morecomplex than this. Most businesses have several suppliers andseveral customers. Some businesses may compete forcustomers and have common suppliers. There may be severalsupply chains serving one market and they may form complexwebs (see panel 1).

Supply chain simplification may be a requirement of effective

SCM. In a case where there is a single raw material supplier andmany downstream customers with similar purchasing power,SCM may be hard to achieve. Where there is a single customerand a limited number of suppliers ofdifferentiated products, it may be possibleto apply SCM.

Common SCM practices include:n Consolidating the supplier base. SCM

requires that suppliers are few innumber and engaged in long-termrelationships. SCM is inconsistent withthe efficient market concept, whereinlarge numbers of continuallycompeting suppliers are encouraged by

the market to minimise costs.n Co-ordinating production and

inventory policies. By adopting linkedproduction schedules, differentbusinesses can minimise their stockholdings and promote just-in-timemanufacturing while shorteningresponse times.

n Linking IT systems. Data generated atretail level by electronic point of sale(Epos) systems can be transferred

immediately to manufacturers ordering systems. Goods cbe delivered by a manufacturer directly to the retail storewhere they are needed, without the need for intermediatwarehousing and the aggregating of orders. Electronic datinterchange (EDI) is a common feature of SCM.

n Participation in product development where all membersthe supply chain are given some input into design decisio

n Embedded representation. A component supplier may beinvited to place a representative at a customers plant.This individual may have full access to the customers facand be able to use its IT systems. He or she will organise delivery of components and advise on technical issues.SCM, therefore, provides a form of virtual integration ie

many of the advantages of traditional vertical integration buwithout the problems associated with formal business mergeand acquisitions. The benefits claimed for SCM include reductransaction costs resulting from more stable relationships;reduced demand variability resulting from the improvedcommunication of information; economies of scale throughsupplier consolidation; reduced administrative costs; reduced

logistics costs; a shorter time to market; and improvedresponsiveness to customers requirements. It has been claimthat SCM facilitates mass customisation by allowing an

PAPER P1 (ALSO OF INTEREST TO P6 CANDIDATES)

Management Accounting

Performance EvaluationBob Scarlett reviews the theories and practices ofsupply chain management andexplains the effects of virtual integration on relationships among linked companies.

1 A SUPPLY CHAIN WEB

Suppliers Manufacturers Distributors Custom

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individual end-customers requirements to be accommodatedmore readily by action taken along the whole supply chain.

The SCM concept might seem to diminish the role ofcompetition in achieving efficiency. The idea that twocompeting suppliers will bid against each other for sales to aparticular customer along a supply chain may not be relevant toan SCM environment. But the incentive to be efficient ismaintained by competition among supply chains. This reinforcesthe need for businesses along a given supply chain to co-operatewith each other.

The relationships among businesses on a supply chain can bepitched at varying levels of engagement. One model indicatesthat the appropriate level of engagement depends on thecompetencies that the businesses on the chain share. Thesemay be classified as follows:n Distinctive competencies. These are the features that give a

business its unique competitive characteristics that provide itwith an advantage over the opposition. They may betechnical, organisational or marketing related.

n Essential competencies. These are features that a firm needs

in order to perform in a particular market but which areroutine requirements lacking distinctiveness. Examples mightinclude a safety certification or the capacity to producecomponents to a particular engineering tolerance.

n Ordinary competencies. These are typically routine featuresthat allow a supplier to deliver usable components ormaterials along the chain.Where two businesses on a supply chain are linked by

distinctive competencies, they are more likely to engage in SCMpractices and enter partnerships. A chain containing a number oflinked partners can become a virtual business unit, which maystart to work as a single operation. Industrial Networks: A NewView of Reality,by Bjrn Axelsson and Geoffrey Easton(Routledge, 1992), cites several high-profile examples of

business partnerships. In the eighties and nineties Mercedes-Benzcars were distinguished by their superior electrical systems,which were supplied by Bosch. In effect, Bosch had become apartner in Mercedes-Benzs design and manufacturing processes.And Procter & Gamble was long associated with the Wal-Martgroup through their integrated stock and distribution systems the distinctive competency in this case being an effectivewarehousing and distribution capability.

Where two businesses are linked only by ordinarycompetencies, SCM is likely to be less of an issue. If a businesscustomer can buy undifferentiated materials or components

on the open market from a large number of potential suppliers,there may be little scope for SCM.

SCM and business partnerships can give rise to risks in certainsituations. If it starts to lose competitiveness, a partner canbecome a liability to your organisation. Where technology ormarkets change suddenly, a partnership may find it harder torespond than a stand-alone business.

More crucially, virtual integration involves powerrelationships. The whole supply chain may gain from integration,but its unlikely that all members will gain equally. Individualfirms benefit according to their relative position and the natureof the competencies they contribute. A downstream position inthe chain will normally be stronger than an upstream position,since the former allows final decisions to be made about sourcing,product design and delivery to market. The more a firm relies onthe chain for its business, the weaker its bargaining position, whilethe partner that contributes the most distinctive competencieswill generally be in the strongest position. Ultimately, such apartner is best placed to enforce changes in membership of thechain or to take its competencies to another chain.

Virtual integration is distinguished from traditional verticalintegration by the profile of power relationships. Ideally, thepartners on a supply chain should agree an equitable distributionof profit among themselves using an accepted model. But thingsdo not always work that way. For more than 90 per cent of theUK population, supermarkets are the main place to shop, whichgives them tremendous bargaining power. There is a massivechain between the producer and the consumer. The farmer is theweakest link and supermarkets are not always sensitive in theway that they wield this power. Partnerships imply a degree ofequality between the parties involved, but they can easilybecome oppressive when one partner is stronger. FM

Bob Scarlettis an accountant and consultant.

P1 Internet resources

How Tesco achieves SCM using radio barcodeswww.tesco.com/radiobarcodesCreating a customer-driven supply chain

http://tinyurl.com/36k5ljThe plight of farmers in supermarket supply chains

http://tinyurl.com/32njvs

FINANCIAL46 MANAGEMENT July/August 2007

Paper P1