Supply chain management (SCM) then includes all the methods, systems, people, and resources that help improve processes and organisations throughout the supply chain.
SCM involves close working together of all companies in the chain. Simchi Levi et al. (2004) classify SCM into two categories: configuration, which is related to basic infrastructure (hardware, software, transport, etc.); and coordination, related to the way the supply chain operates.
Configuration issues include decisions on choosing suppliers, outsourcing activities, and policies for purchasing, decisions on production, site location, capacity; distribution channels, retail locations, and transportation costs and issues.
Coordination issues include decisions on material flows throughout the chain, how information is exchanged, and payment systems. This shows how complex supply chain management is because it involves many functions and geographic areas. Design and execution are therefore difficult and need to be managed for the supply chain to move with efficiency.
An example is shown in Figure 1 (Gereffi, 2002) for retail apparel which links cotton and synthetic fibre manufacturers, textile mills, apparel manufacturers, and retail outlets from all the five continents.
If one link in this chain breaks, e.g., the container ship with the raw material supply of African cotton gets lost at sea, the whole supply chain can break down and thousands of clients of Marks & Spencer will have to party using last season's fashion.
Supply Chain, Meet Bullwhip
What is known as the "bull-whip effect" can be described as follows: the farther away from the customer a supplier is along the supply chain, the higher would be the difference between what is really needed from what is ordered. The term was coined by Lee et al. (1997) based on observations and descriptions made by supply chain professionals at Procter & Gamble (P&G).
They noticed that whilst the number of babies and the demand for nappies were stable, the orders coming from retailers and wholesalers for Pampers deliveries, P&G's best-selling nappies brand, fluctuated dramatically. And as they went further down the supply chain, starting with the orders made by P&G from the suppliers of the components that went into a nappy - plastic, cotton, and so on - they noticed even wilder fluctuations.
On a graph, they noticed that these fluctuations were similar to the way the amplitude of a whiplash increases down the length of the whip once it is cracked. Thus was born the phenomenon known as the Bullwhip Effect. Figure 2 shows this phenomenon in action, using data