SCM & Logistics: What's the Difference
Are logistics and supply chain management the same thing? How are they alike? How do they differ? IL readers weigh in with their opinion, and Dr. Edward J. Marien tries to make sense of it all.
More to the Story:
Transportation, logistics, supply chain management, materials handling, and inventory control continue to evolve. This evolution has created cross-fertilization among these functions, driven by factors both conceptual—matching demand to supply—and technological—an enhanced ability to communicate and collaborate.
This cross-fertilization has also blurred the definition of some terms. For example, is logistics the same thing as supply chain management?
People working in different functional areas of logistics often define supply chain management (SCM) as it relates to what they do. A recent survey of Inbound Logistics readers supports this. Some respondents say SCM is the same old thing with a new handle, while others note it is more encompassing than logistics.
Many logistics veterans believe we have progressed from transportation to physical distribution to logistics to supply chain management. By contrast, purchasing managers have evolved their thinking from purchasing management to procurement and now to supply management (SM). Some couch supply management as SCM. Others don't want to give up the term purchasing, and now refer to this functional area as purchasing and supply management.
Manufacturing professionals hold yet another perception of SCM: as the task of allocating and committing resources for obtaining necessary supplies and capacity, handling, and positioning products to meet customer demands. MRP and ERP systems now address resource commitments that go beyond manufacturing to include other enterprise and supplier resources, ultimately directed to satisfying customer demands with limited and efficient use of resources.
Other departments in the company also wonder about SCM and its orientation. In marketing—as well as the broader functionality that includes business and consumer research, promotions, and sales—SCM addresses the needs and market potential of not only immediate customers and consumers who buy products and services, but also end users. Naturally, market research analyses of end product usage are extremely important.
Many professionals perceive SCM in terms of a conceptual flow model, with goods flowing from the beginning source of raw materials to their end use. Within this context, my peers and I define SCM as "the integration of processes composed of materials, services, information, and cash within a company and in a network of companies or organizations that manufacture and deliver products and services from initial sources to end users."
By its nature, SCM encapsulates inter-enterprise, cross-functional processes that target end users of products and services. It requires integrated teams who are open and trustful in their value engineering and activities analysis.
Initially, logistics practitioners focus on supply chain applications that interface with immediate customers, suppliers, and intermediaries. Economic functional "activity" tradeoffs are analyzed in terms of who can best perform functions that are for the good of all trading partners. The long-term vision is inter-enterprise teams working seamlessly across all functions and activities to meet end user needs.
Getting to the Core of SCM
How then does SCM differ from logistics processes? Simply, SCM comprises cross-functional and inter-enterprise logistics processes. Here's how these unique processes overlap and intertwine:
Demand planning and sales forecasting. Who is responsible for forecasting the needs of the supply chain? Where does demand/usage begin? These are just two questions supply chain professionals might ask when focusing on the end user or consumer.
Without shared and readily available information on end user sales and demands, all other trading partners—and those within a company not directly related to end user demand—are working off "derived demand" from supply chain individual enterprise sales.
Within each echelon, several forecasts are alive but often without the consensus of all parties in a company, much less the entire supply chain. A company develops business forecasts and goals, as well as product/market forecasts, to achieve broad long-term financial development benchmarks. These forecasts provide a basis for resource planning, which ultimately leads to shorter-term, monthly forecasts aimed at deriving the "numbers" that drive earnings for the year.
Sales and operations planning next addresses resource loading to meet two- to six-month plans for capacity use and supply planning. Finally, short-term production forecasts are needed to set production, operations, and sales schedules.
For most businesses, a key question is whether they have consensus for forecasts to drive the company. Forecasts are often based on different assumptions and metrics—dollars, units, and shipments, for example.
Extend this thinking to supply chain forecasting among trading partners, and a similar question arises. Is there consensus-based communication among trading partners? Often, forecasts and schedules are not shared, leading to the bullwhip effect that Dr. Jay Forrester and his MIT colleagues first discussed in the late 1950s.
SCM manufacturing and operations strategies. Forecasting leads to supply chain manufacturing strategies that go beyond an individual business. Product Life Cycle Management strategies come into play when SCM addresses integrated research and process design targeted at getting products manufactured and to market as fast as possible. Processes dealing with postponement become extremely important in deciding where in the supply chain manufacturing and operations functionality are performed.
Instead of taking 20 years to achieve significant market share globally, companies now establish supply chains that get product from design to key world markets in one year or less. Otherwise, ROI payback is lost.
Purchasing and supply management. Suppliers need to be linked to production schedules and aware of demand throughout the supply chain. Purchasing and supply management occur at all stages of the supply chain. At each level, logisticians exercise their responsibilities to order and replenish products for their businesses from select suppliers to meet demand. Disjointed supply functions can occur anywhere in the supply chain when there is a fracture in communication.
Too often, purchasing professionals order products and supplies when they know there are excessive supplies of product already in the supply chain Purchasing goes well beyond getting the best price for the product from a supplier. It's knowing where and how much inventory already exists.
Supply chain logistics. Rationalizing the nodes in the supply chain and going beyond interpreting a company's assembly, manufacturing, and distribution nodal points is the ultimate vision of supply chain logistics professionals. For example, many businesses now work with their customers to justify the number of nodes for deploying inventories. They find that their customers have as much inventory in their systems as the manufacturing company, its suppliers, and intermediaries. Inventories in transit and at "dwell" points in supply chains need to be analyzed to streamline supply chain logistics. As a result, visibility of orders, supplies, inventories, and shipments is critical to supply chain planning.
Reverse business and supply chain systems. An often-overlooked area in supply chain applications is reverse logistics. The recycling of automobile batteries, for example, illustrates the role of reverse business systems and supply chains that are multi-echelon and inter-enterprise.
An end user orientation for auto batteries has both environmental and economical advantages, increasing reusability of materials while keeping the cost of batteries low. The end result is that approximately 95 percent of the lead used in new batteries is from recycled materials.
End User Metrics
Businesses today need to develop and manage metrics so that they can measure order fill rates and meet managed usage.
A retail store manager, for example, indicated that his inventory performance was +98 percent—meaning that he gets the product he orders nearly 100 percent of the time. Yet, consumers were walking out the door with short fills on needs, returning home empty-handed or with 80 percent fill rates on the items they came to buy.
Why? The store was measuring the wrong metrics.
The retail merchant needs to solve consumer problems, build good relationships, and achieve high customer retention through high fill rates, low prices, and minimal end user supply chain costs. The store also needs easy in-and-out shopping with rapid payment, and fewer returns through more sophisticated consumer profiling.
Supply chain management, in all its varying constructions and perceptions, is made possible by new relationships among business partners, advancements in technology, and value analysis and reengineering. These innovations continually alter the perception of SCM, especially as it relates to different logistics functions and supply chain partners.