The Eight Essential Supply Chain Management Processes

By Douglas M. Lambert

Adapted from Supply Chain Management Review, September 1, 2004

Successful supply chain management requires cross-functional integration of key

business processes within the firm and across the network of firms that comprise
the supply chain. It is focused on relationship management and the performance
improvements that result. In many companies, however, executives struggle to
achieve the necessary integration and, consequently, the resulting
improvements. The problem is that they don't fully understand the supply chain
business processes—and the linkages necessary to integrate those processes.

Drawing from work done by The Global Supply Chain Forum, this article
identifies the eight processes that need to be managed and integrated for
successful supply chain management. Two of these processes provide the
linkages required to facilitate integration among the supply chain members to
coordinate the other processes. These two key linkages are customer
relationship management (CRM) and supplier relationship management (SRM).

By understanding the key supply chain management processes—and

recognizing why and how they should be integrated—supply chain managers can
successfully position their companies for higher revenues and profitability.

Just What Is Supply Chain Management?

Before proceeding, it's important to define supply chain management because

there's still a great deal of confusion over the term. Many people consider it to be
synonymous with logistics or with logistics that also includes customers and
suppliers. Others view supply chain management (SCM) as the new name for
purchasing or operations—or the combination of purchasing, operations, and
logistics. Increasingly, however, executives in leading companies are recognizing
supply chain management as the management of relationships across the supply
chain. They view SCM in terms of business process excellence and as a new
way of managing the business and the relationships with other members of the
supply chain.

In this article, we adopt the following definition of SCM developed by the Global
Supply Chain Forum: Supply chain management is the integration of key
business processes from end user through original suppliers that provides
products, services, and information that add value for customers and other
stakeholders.

This view of supply chain management is as follows: a simplified supply chain

network structure of a manufacturer with two tiers of customers and two tiers of
suppliers; the related information and product flows; and the eight supply chain
management processes that must be implemented within organizations across
the supply chain. All of the processes are cross-functional and cross-
organizational in nature. Further, every organization in the supply chain needs to
be involved in the implementation of those processes. But at the same time the
corporate silos at the top, which can work against this integration.

In reality, of course, a supply chain is much more complex than the row of silos.
For a company in the middle of the supply chain, the supply chain looks more like
an uprooted tree where the roots represent the supplier network and the
branches represent the customer network. Moreover, the supply chain will look
differently depending on a company's position in it. For example, in the case of a
retailer, like Wal-Mart, the end consumers would also be the "tier-1 customers".

Managing the entire supply chain—that is, managing all suppliers back to the
point of origin and all products/services out to the point of consumption—can be
a daunting task. So most executives tend to focus on managing their supply
chains to the point of consumption. The reasoning here is that whoever has the
relationship with the end user has the power in the supply chain. Intel, for
example, created a relationship with the end user by having computer
manufacturers place an "Intel inside" label on their computers. This positioning
also affects the computer manufacturer's ability to switch microprocessor
suppliers. Yet while most of the focus to date has been downstream,
opportunities exist to significantly improve profits by managing the upstream
supplier network as well.

At the end of the day, a supply chain is managed link by link, relationship by
relationship. And the key linkages in all of these activities are formed by the
customer relationship management (CRM) process of the seller organization and
the supplier relationship management (SRM) process of the buyer organization.
CRM and SRM are the tools the supply chain manager uses to bring the eight
key processes together.

The Eight Key SCM Processes

Successful supply chain management requires a change from managing

individual functions to managing a set of integrated processes. In many leading
corporations, management has concluded that they cannot optimize product
flows without first implementing a process approach to the business. Yet while
several authors have suggested implementing business processes in the context
of supply chain management, there is not yet an "industry standard" on what
these processes should be. The value of having standard business processes in
place is that managers from organizations across the supply chain can use a
common language and can link up their companies' processes with those of the
other supply chain members.
The eight key supply chain management processes identified by members of The
Global Supply Chain Forum are:

 Customer relationship management.

 Customer service management.
 Demand management.
 Order fulfillment.
 Manufacturing flow management.
 Supplier relationship management.
 Product development and commercialization.
 Returns management.

Customer Relationship Management. The CRM process provides the structure

for how relationships with customers are developed and maintained. Through this
process, management identifies key customers and customer groups to be
targeted as part of the firm's business mission. The goal is to segment customers
based on their value over time and to increase customer loyalty by providing
customized products and services appropriate to the particular value proposition.
Leaders in this process create cross-functional customer teams to tailor product
and service agreements (PSA) that meet the needs of key accounts and
customer segments and document how the two firms will engage in business.
The PSAs specify levels of performance for the firm. They also provide the basis
for performance reports that measure the profitability of individual customers as
well as the firm's financial impact on the customer's financial performance. 1 CRM
teams will then work with key customers to improve processes and eliminate
demand variability and nonvalue-added activities.

Customer Service Management. The customer service management process

represents the company's face to the customer. It is the key point of contact for
administering the PSAs developed by customer teams during the customer
relationship management process. Customer service provides the customer with
real-time information on promised shipping dates and product availability through
interfaces with such functional areas as manufacturing and logistics. The
customer service process may also include assisting the customer with product
applications.

Demand Management. Demand management is the process that balances

customer requirements with supply chain capabilities. With the right process in
place, management can match supply with demand proactively and execute the
plan with minimal disruptions. It is important to note that this process is not
limited to forecasting. It also includes synchronizing supply and demand,
increasing flexibility, and reducing variability. Demand management entails
controlling all of those practices that increase demand variability, including end-
of-quarter loading and terms of sale that encourage volume buys. A good
demand management system uses point-of-sale and key customer data to
reduce uncertainty and provide efficient flows throughout the supply chain. It also
effectively coordinates marketing requirements and production plans.

Order Fulfillment. This supply chain process involves more than just filling
orders. It also encompasses all activities necessary to define customer
requirements, design a network, and enable a firm to meet customer requests
while minimizing the total delivered cost. While much of the actual order
fulfillment work will be performed by the logistics function, the process needs to
be implemented cross-functionally and coordinated with key suppliers and
customers. The objective is to develop a seamless system from the supplier to
the firm, and then on to the various customer segments.

Manufacturing Flow Management. Manufacturing flow management includes

all activities necessary to obtain, implement, and manage manufacturing
flexibility in the supply chain and to move products through the plants. The ability
to make a wide variety of products in a timely manner at the lowest possible cost
is a reflection of this process. To achieve the desired manufacturing flexibility
level, planning and execution must extend beyond the four walls of the
manufacturer and out to the supply chain partners.

Supplier Relationship Management. The SRM process provides the structure

for how relationships with suppliers are developed and maintained. As the name
suggests, this process is a mirror image of customer relationship management.
And as is the case for CRM, it involves developing close relationships with a
small subset of suppliers based on the value that these suppliers bring to the firm
over time. Note that these are long-term relationships that provide win-win
outcomes for both parties. For each key supplier, the firm should negotiate a
product and service agreement that defines the terms of the relationship. For less
critical suppliers, the firm should follow the more traditional approach of simply
providing the PSA, which in most cases would be non-negotiable. In short,
supplier relationship management is about defining and managing these PSAs.

Product Development and Commercialization. This supply chain management

process provides the structure for working with customers and suppliers to
develop products and bring them to market. Effective implementation of this
process not only enables management to coordinate the efficient flow of new
products across the supply chain but also helps other members of the supply
chain to ramp up manufacturing, logistics, marketing, and other activities
necessary to support product commercialization. A product development and
commercialization process team would work with CRM process teams to identify
customer needs (both articulated and unarticulated), with the SRM process
teams to select materials and suppliers, and with the manufacturing flow
management process team to develop production technology appropriate to the
product/market combination.
Returns Management. Returns management is the process by which activities
associated with returns, reverse logistics, "gatekeeping," and return avoidance
are managed within the firm and across key members of the supply chain.
Avoidance, which is a key part of this process, involves finding ways to minimize
the number of return requests. It can include ensuring that the product's quality
and user friendliness are at the highest attainable level before the product is sold
and shipped. Avoidance could also entail changing promotional programs that
load the pipeline when there is no realistic chance that the product shipped will
be sold. Properly implemented, then, the returns management process enables
firms not only to manage the reverse product flow efficiently but also to identify
opportunities to reduce unwanted returns and to control reusable assets such as
containers. Effective returns management is an important part of SCM and
provides an opportunity to achieve a sustainable competitive advantage.

Each of the eight supply chain management processes has both strategic and
operational elements—that is, a strategic element in which the firm establishes
and strategically manages the process and an operational element in which the
firm executes the process. The strategic elements should be led by a
management team comprised of representatives from multiple functions including
marketing and sales, finance, production, purchasing, logistics, and research and
development. This team is responsible for developing the procedures at the
strategic level and seeing that they are implemented. The strategic team also
identifies how the external partners will be integrated into the supply chain. The
operational component of each process, where the day-to-day activities take
place, is executed by the managers within each functional area.

The business functions within the organization provide input to the eight supply
chain management processes. In the customer relationship management
process, for example, marketing and sales provides the account management
expertise, engineering provides the specifications, logistics provides knowledge
of logistics and customer service capabilities, manufacturing provides the
manufacturing capabilities, purchasing provides knowledge of supplier
capabilities, and finance provides customer profitability reports. Customer service
requirements must be factored into the manufacturing, sourcing, and logistics
inputs. For each of these processes, to be properly implemented, requires the
involvement of customers and suppliers.

CRM and SRM: The Critical Linkages

Customer relationship management and supplier relationship management

provide the critical linkages throughout the supply chain. For each supplier in the
supply chain the ultimate measure of success of the CRM process is the change
in profitability of an individual customer or segment of customers. For each
customer, the true measure of success of the SRM process is the impact that a
supplier or supplier segment makes on that customer's profitability. (Note that in
cases where commodities or undifferentiated components are being bought for
inclusion in another product, it makes more sense to do a total cost report than a
specific profit-and-loss statement for each commodity/component.) The goal is to
increase the joint profitability by developing the relationship. Accordingly, the
overall performance of the supply chain is determined by the combined
improvement in profitability of all members from one year to the next.

Let's begin by considering the CRM linkage. Companies typically spend large
sums of money to attract new customers. Yet these same companies often are
complacent when it comes to nurturing and strengthening relationships with
existing customers.2 In most cases, however, existing customers represent the
best opportunities for profitable growth. In fact, studies show strong, direct
relationships between profit growth and customer loyalty, customer satisfaction,
and the value of goods delivered to customers. 3 CRM provides the structure for
leveraging these qualities and evaluating the profitability—and potential
profitability—of individual customers. Acting on this evaluation, cross-functional
customer teams can tailor product and service agreements to meet the needs of
key accounts and customer segments.4

PSAs document how the two firms will engage in business. For key customers,
the PSAs are customized; for segments of other customers, standard values are
used for each element of the agreement. PSAs come in many forms, both formal
and informal, and may be referred to by different names from company to
company. To achieve the desired results, however, they need to be formalized as
written documents. 3M, for example, has comprehensive, written PSAs that
include the following: contact information including name, title, telephone number,
and e-mail address for both 3M and the customer representatives; all of the
details related to transportation including deliveries, order minimums, driver
instructions, will-calls, and appointments; bill-of-lading instructions; pallets to be
used; purchase-order confirmations; order-status information; details related to
pricing inquires; availability of market-development funds; marketing promotional
allowances; acceptability of back orders and how they will be handled; and
contract terms.

Supplier relationship management is the mirror image of customer relationship

management. Remember that all suppliers are not the same. Some contribute
more to a firm's profitability than others. It's important to have cross-functional
teams that interact closely with these high contributors. The strategic relationship
should be led by a management team responsible for developing strategies and
seeing that they are implemented. At the operational level, teams are established
for each key supplier and for each segment of nonkey, or less critical, suppliers.
These teams are comprised of managers from several functions, including
marketing, finance, R&D, production, purchasing, and logistics. While employees
who are not members of the SRM teams may be involved in executing the
activities, the teams maintain overall managerial control of the process. (The
same holds true for the CRM process.)
Given the current emphasis on business ethics, both the CRM and SRM teams
need to have an agreement up front on what types of data will be shared. Teams
need to be mindful of the fine line between using process knowledge vs. using
specific competitive marketing knowledge gained from a customer or supplier. In
a similar vein, individuals should not be put in a position where they are working
on teams involving competing suppliers or customers. The reason: It's just too
difficult to keep the two sets of relationships and PSA discussions separate and
distinct.

(Supply chain managers should note that CRM and SRM themselves have seven
subprocesses, which are not addressed in this article. These subprocesses are
differentiating customers/suppliers; preparing the account/segment management
team; internally reviewing details related to the business conducted; identifying
opportunities for sales growth, cost reduction, and service improvements;
developing the product and service agreements; implementing the product and
service agreements; and measuring performance and generating profitability
reports and total cost reports as appropriate.)

In addition to linking partners across the supply chain, the CRM and SRM
processes coordinate each of the other six processes. Any improvements made
in these processes are reflected in customer and supplier profitability reports. For
example, if the CRM and SRM teams identify an opportunity to improve
performance by focusing on demand management, they inform the demand
management process teams from the two companies. If those teams do improve
the demand management process, then product availability improves—which
increases revenue for the customer and the supplier. In addition, better demand
planning could reduce inventories, thereby lowering the inventory carrying cost
charged to the customer's profitability report. There also may be fewer last-
minute production changes and less expediting of inbound materials, which will
decrease the costs assigned to each customer. For these improvements to be
realized, measurements must be in place to motivate and compensate team
members.

Having accurate customer profitability reports is the key to tracking these kinds of
process improvements. These reports enable the CRM process teams to track
performance over time across all of the supply chain processes. Good
profitability reports reflect all of the cost and revenue implications of the
relationship. Variable manufacturing costs are deducted from net sales to
calculate a manufacturing contribution. Next, variable marketing and logistics
costs, such as sales commissions, transportation, warehouse handling, special
packaging, order processing, and account receivable charges, are deducted to
calculate a contribution margin. Assignable nonvariable costs, such as salaries,
customer-related advertising expenditures, slotting allowances, and inventory
carrying costs, are subtracted to obtain a segment-controllable margin. The net
margin is obtained after deducting a charge for dedicated assets. These
statements contain opportunity costs for investment in receivables and inventory
as well as a charge for dedicated assets. In this sense, they are much closer to
cash-flow statements than a traditional profit-and-loss (P&L) statement.

Sysco, a $23.4 billion food distributor, began implementing profitability reports by

customer in 1999 with great success. These reports have enabled management
to make strategic decisions about the allocation of resources to accounts. The
five-year cumulative annual growth rate (CAGR) for the period 1999 to 2003 was
11.3 percent for sales and 19.1 percent for net earnings. Net earnings growth
improved sharply after the profitability reports were implemented.

One Success Story

Management should work to implement process improvements that increase the

profitability of the total supply chain, not just that of a single firm. This means
encouraging actions that benefit the entire supply chain while, at the same time,
equitably sharing the risks and the rewards. It's especially important to develop
clear guidelines for sharing the rewards. If any one of the parties perceives that
it's not gaining anything from the process improvement efforts, it will be difficult to
obtain that party's full commitment.

The CRM and SRM teams must quantify the benefits of process improvements in
financial terms. Cargill, a participating member of the Global Supply Chain
Forum, offers a good example of how this can be done effectively. This
international provider of food and agricultural products worked with a key
customer to develop a method for sharing supply chain benefits that incorporated
these elements:

 An agreement in principle on a fair allocation of benefits. (Should it be

50/50, 60/40, or some other breakdown?)
 A timeframe for benefit sharing. (Should it be for the life of the agreement,
for five years, or re-assessed annually?)
 A decision on what benefits/costs to include.
 A fair approach to handling capital expenditure costs.
 An accurate baseline to use as a starting point for measuring savings.
 A common process to measure value captured.
 A benefit review and approval procedures.
 A mechanism to accrue and transfer value (where, how, how often, and so
forth).
 A methodology review.

The process improvement teams from both companies agreed that benefits
derived from supply chain initiatives must be explicitly recognized in supply chain
project outcomes (for example, reduced freight, lower inventory-carrying costs,
and reduced transaction costs). Additionally, these benefits must be in excess of
a predetermined baseline for each area. They further agreed that the costs to be
considered should (1) directly relate to recommended supply chain initiatives
(capital costs, transaction costs, system-related costs, and so forth); (2) the
addition or deletion of full-time employees (not the increase or decrease in the
workload of existing employees); (3) be greater than an agreed-upon minimum
dollar amount; and (4) be fully documented. The two companies decided that a
50/50 split of benefits was in keeping with the overall partnership. Plus, they felt
that this arrangement would motivate both parties to maximize the opportunities
while acknowledging that neither party could have achieved the savings without
the other.

Cargill's management believed that it was important to identify the range of the
expectations that each team brought to the project. This would help both parties
reach agreement on realistic and mutually beneficial objectives in such areas as
process efficiency, growth/profit stability, costs savings, improved customer
service, organizational alignment, and metrics.

The key lessons learned from Cargill's experience can be summarized as

follows:

 Gain sharing agreements need to be determined at the outset so that it

doesn't undermine the accomplishment of the joint objectives.
 Working between internal business units is challenging enough. When you
add into the mix external trading partners, the challenge intensifies
because of issues of trust, culture, process, and systems capability.
 Skeptics abound; success requires focused leadership and management
support.
 Partnerships work; they may take a while to develop, but they work. Once
trust is established, both parties will find many opportunities to learn from
each other.
 Everyone involved in this initiative enhanced their knowledge and
capabilities, which will prove advantageous in future initiatives.

As reflected in the Cargill example, the customer relationship management and

supplier relationship management processes do a number of important things at
the strategic level. Specifically, they identify customer and supplier segments,
provide criteria for categorizing customers and suppliers, provide teams with
guidelines for customizing product and service offerings, develop a framework for
metrics, and offer guidelines for sharing process improvement benefits. At the
operational level, these processes mainly focus on writing and implementing the
product and service agreements.

How Are You Doing?

Research among the participants of the Global Supply Chain Forum shows that
successful supply chain management requires the integration of eight key
business processes—both internally and externally with key members of the
supply chain. When that necessary integration is nonexistent or insufficient,
resources are wasted and supply chain performance suffers.

Failure to implement those cross-functional business processes can also result in

missed opportunities and poor decisions. The following real-life example
illustrates the point. A manufacturer of consumer durable goods implemented a
rapid delivery system that provided retailers with deliveries in 24 to 48 hours
anywhere in the United States. The system was designed to enable the retailers
to improve service to their consumers while holding less inventory and thus
improving per-unit profitability. Six years later, the manufacturer had not seen the
anticipated inventory reductions and reduced the service promise to 48 to 72
hours. Yet the reason that the rapid delivery system never achieved its full
potential was that the manufacturer's sales and marketing organization was still
providing customers with incentives to buy in large volumes. 5 Obviously, the
business processes of this company were not integrated and coordinated.

This example should make it clear that failure to manage all the touches between
supply chain partners will diminish the impact of any supply chain initiative.
Conversely, implementing the eight supply chain management processes
increases the likelihood of success because all functions—as well as all key
customers and suppliers—will be involved in the initiative's planning and
implementation. This was corroborated at the Spring 2004 meeting of The Global
Supply Chain Forum, which featured a series of breakout sessions devoted to
the topic, "The Supply Chain of the Future." At the end of the day, the group
concluded that if an organization can successfully implement all eight of the
processes, it will have reached that supply chain of the future and be able to
respond to whatever challenges the business might face.

Has your company successfully integrated the cross-functional business

processes described in this article? If the answer is anything less than an
unqualified yes, then you're not creating the most value for your shareholders
and your supply chain partners. The time for action is now.

Douglas M. Lambert is the Raymond E. Mason Chair in Transportation and Logistics and Director
of The Global Supply Chain Forum at the Fisher College of Business, The Ohio State University.
This article is adapted from his new book Supply Chain Management: Processes, Partnerships,
Performance (Supply Chain Management Institute, 2004).

Footnotes
1
Lambert, Douglas M., and Terrance L. Pohlen. "Supply Chain Metrics." The
International Journal of Logistics Management Vol. 12, No. 1 (2001): pp. 1–19.
2
Barry, Leonard L., and A. Parasuraman, "Marketing to Existing Customers,"
Marketing Services: Competing Through Quality. New York, NY: The Free Press,
1991, p 11.
3
Heskett, James L., W. Earl Sassser, and Leonard A. Schlesinger. The Service
Profit Chain, New York, NY: The Free Press, 1997, p.11.
4
Seybold, Patricia B. "Get Inside the Lives of Your Customers." Harvard Business
Review Vol. 78, No. 5 (2001): pp.1–17.
5
Lambert, Douglas M. and Renan Burduroglu. "Measuring and Selling the Value
of Logistics." The International Journal of Logistics Management Vol. 11, No. 1,
(2000): pp. 1–17.