Supply chain costs management models

Supply chain cost management is the task of controlling the operational cost in order to enhance the profit margin of a business. It involves all activities of logistics and supply chain such as stocking, distribution, processing, packaging, procurement, and handling (Silva, Gonçalves, & Leite, 2014). Supply chain cost management has become very crucial for businesses due to the intensifying market competition (Lai & Cheng, 2016).

Walmart and Kmart had started their journey in retailing during the same period. Kmart had offered the products at a fixed price whereas Walmart had provided the products at a daily low range price. Walmart did so by reducing the cost associated with logistics through seamless communication with its suppliers daily. Some of Kmart’s biggest problems included:

  • misalignment of the company’s objectives and supply chain management (SCM),
  • delay in implementing basic cost-reduction logistics strategies,
  • optimization of business network,
  • high inventory purchase costs and,
  • obsolete SCM technology (O’Byrne, 2017).

Eventually, the company filed for bankruptcy in the USA in 2002 and again in 2018. Kmart’s failure has repeatedly been attributed to its incompetent supply chain management, among other reasons (Information Week, 2002; Leinwand & Mainardi, 2010; Schoenberger, 2002).

The aim of this article is to review two major models in supply chain cost management function:

  1. Balanced Measurement Portfolio and,
  2. Supply Chain Operations Reference (SCOR) model.

The balanced measurement portfolio model to optimize supply chain costs

The balanced measurement portfolio in SCM deals with the material flow, information flow, and the time management to optimize inventory. This portfolio focuses on maintaining the balance between the interests of the stakeholders and operational measures (Harrison & van Hoek, 2008). These operational measures are used for examining the performance. This performance is measured through the modern performance management system. This system is developed in the form of balanced scorecard wherein long-term profitability is considered. The goal of long-term profitability is achieved by identifying the business processes, customer benefits, financial perspective and innovation (Callado & Jack, 2015).  Thus, there is a need for the model that links the supply chain management with balanced scorecard performance.

Balanced measurement portfolio model of supply chain cost management
Figure 1: Balanced measurement portfolio model of supply chain cost management (Harrison & van Hoek, 2008)

Elements of the balanced measurement portfolio model

The business process perspective includes taking feedback from the customers.  This feedback helps to improve the business perspective through a flexible response. Thus communication is an important part of the model. Smooth flow of information between the management and the customers can also reduce waste in the form of excess inventory stocks. Additionally, effective communication ensures timely flow of information. Furthermore, financial prospective is considered by ensuring cash flow and growth in revenue. The balanced measurement portfolio also helps to decide whether operational functions are needed to be internationalized or localized. Based on this, decisions can be taken about the level of inventory, handling charges and transportation costs. Thus in this level, the companies forge innovative strategies to maintain supplier relationships and reduce costs while improving quality. The reduction in transportation generates greater efficiency in the supply chain management process (Bhagwat & Sharma, 2007).

Supply Chain Operations Reference (SCOR) model

SCOR is defined as the managerial tool to improve, communicate and address the decisions related to supply chain operations for meeting the customer needs (Ntabe, et al., 2015). The model acts as a process-based approach for evaluation of supply chain performance and cost which directly affects the final pricing of the product. Thus it helps them improve the return on investment. The figure below demonstrates the SCOR model.

SCOR model to manage supply chain costs
Figure 2: SCOR model to manage supply chain costs
(Montgomery, et al., 2018)

A key feature of the SCOR model is that it helps to communicate with the stakeholders about the suppliers’ cost. This helps to make the product or service cost-effective to the consumers.

Plan

In the planning stage, decide the requirements and frames policies related to transportation, assets, inventory and regulatory compliance. It helps to maintain a regular flow of inventory and revenues (Akkucuk, 2016).

Source

Decide further details pertaining to procurement such as supplier network, terms of the agreement, inventory management, and supplier performance management.

Make

This stage makes use of tasks performed in previous stages, i.e. planning and procurement, to produce the finished product strategically.

Deliver

This stage consists of activities related to the movement of finished goods. It involves distribution and logistics, warehousing, transportation and order management. It is the last stage of the model, where finished inventories are delivered to the customer (Lima-Junior & Carpinetti, 2016).

Return

This stage concerns all activities related to the return of goods to the previous stage. For instance, goods purchased by the customer are returned to the company. Also, raw materials are sometimes returned to the supplier. In recent years, recycling has emerged as an important component of this stage. It aims to reduce waste and maintain sustainability in the supply chain (Wibowo, Elizar, & Adiji, 2017).

It is pertinent for businesses to repeat these stages and establish effective communication with suppliers and distributors for the cost-effective delivery of the product.

How Foodpanda optimized its operations to save the supply chain costs

The case of Foodpanda as illustrated by (Ahmed & Ahmed, 2016) shows how the company improved its supply chain performance by integrating the SCOR model. Foodpanda is an online application which enables customers to order food from other vendors. Therefore, it does not manufacture anything on its own. Hence the company modified the five stages in the SCOR model to:

  1. plan,
  2. source,
  3. deliver and,
  4. enable.

In the planning stage, Foodpanda used its previous data on several elements like:

  • past sales,
  • the number of orders placed by a customer,
  • successful deals, commission per restaurant,
  • inventory levels for popular restaurants,
  • customer satisfaction and,
  • delivery service.

It uses the data to forecast its sales for the future. These figures are then used by the company for discounts, sales promotions.

In the sourcing stage, the company sets the selection criteria for vendors. It does so on the basis of its brand image, presence in the country, brand equity, food quality, customer perception, and offerings. In this stage, Foodpanda emphasizes on quality of food and timely delivery. They continuously monitor customer feedback through their app and website.

In the delivery stage, Foodpanda has to make sure the product reaches the customer on time and in good condition. It does so by dividing its restaurants into different categories for better management of its fleet.

In the final stage, i.e. ‘enable’, Foodpanda reviews how to integrate the latest technology in each stage of its supply chain. They have online systems called ‘Backend’ and ‘V-Work’ for management of planning, sourcing, delivery, and returns.

References

  • Ahmed, B., & Ahmed, R. (2016). Evaluation of Supply Chain Based on SCOR Model Theory: A Case Study of FOODPANDA. International Conference on Innovation and Emerging Trends in Business Management (ICIEBM-2016). Karachi: IQRA University.
  • Akkucuk, U., 2016. SCOR model and the green supply chain. In: Handbook of research on waste management techniques for sustainability. London: IGI Global, pp. 108-124.
  • Bhagwat, R., & Sharma, M. K. (2007). Performance measurement of supply chain management: A balanced scorecard approach. Computers and Industrial Engineering, 53(1), 43–62. https://doi.org/10.1016/j.cie.2007.04.001
  • Callado, A. A. C., & Jack, L. (2015). Balanced scorecard metrics and specific supply chain roles. International Journal of Productivity and Performance Management, 64(2), 288–300. https://doi.org/10.1108/IJPPM-05-2014-0071
  • Christopher, M., 2016. Logistics & supply chain management. 1 ed. London: Pearson UK.
  • Ghanbarizadeh, A., Heydari, J., Razmi, J. & Bozorgi-Amiri, A., 2019. A purchasing portfolio model for the commercial construction industry: a case study in a mega mall. Production Planning & Control, 1(1), pp. 1-22.
  • Harrison, A., & van Hoek, R. (2008). Logistics Management and Strategy Competing through the supply chain Logistics Management and Strategy Competing through the supply chain 3rd edition.
  • Heckmann, I., Comes, T. & Nickel, S., 2015. A critical review on supply chain risk–Definition, measure, and modeling. Omega, 1(52), pp. 119-132.
  • Ilgin, M. & Gupta, S., 2016. Remanufacturing modeling and analysis. 1 ed. London: CRC Press.
  • Information Week. (2002, January). Now In Bankruptcy, Kmart Struggled With Supply Chain. Information Week.
  • Lai, K. & Cheng, T., 2016. Just-in-time logistics. 1 ed. London: Routledge.
  • Leinwand, P., & Mainardi, C. (2010, December). Why Can’t Kmart Be Successful While Target and Walmart Thrive? Harvard Business Review.
  • Lima-Junior, F. & Carpinetti, L., 2016. Combining the SCOR® model and fuzzy TOPSIS for supplier evaluation and management. International Journal of Production Economics, 1(174), pp. 128-141.
  • Montgomery, R., Ogden, J. & Boehmke, B., 2018. A quantified Kraljic Portfolio Matrix: Using decision analysis for strategic purchasing. Journal of Purchasing and Supply Management, 3(24), pp. 192-203.
  • Ntabe, E., LeBel, L., Munson, A. & Santa-Eulalia, L., 2015. A systematic literature review of the supply chain operations reference (SCOR) model application with special attention to environmental issues. International Journal of Production Economics, 1(169), pp. 310-332.
  • O’Byrne, R. (2017). How Supply Chain Strategy Misalignment is Killing Kmart USA.
  • Sainsbury’s, 2018. making-a-difference. [Online]  Available at: https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/making-a-difference/SP003%20Supplier%20Policy%20on%20Ethical%20Trade_External.pdf [Accessed 20 July 2019].
  • Schoenberger, C. R. (2002, January). How Kmart Blew It. Forbes.
  • Silva, T. F. G., Gonçalves, A. T. P., & Leite, M. S. A. (2014). Logistics cost management: insights on tools and operations. Int. J. Logistics Systems and Management, 19(3), 329–346.
  • Wibowo, M., Elizar, M. N. S., & Adiji, H. (2017). Supply Chain Management Strategy for Recycled Materials to Support Sustainable Construction. Procedia Engineering, 171, 185–190.

Sayan Mitra

Research consultant at Project Guru
Sayan has pursued Mechanical Engineering and was a 3-months’ apprentices trainee in Indian Railways. Having a strong base in mathematics, he is also good with strategic management, human resource management and change management. He also has his expertise in literature review and research methodology which indicates his strength in research analysis. Apart from his technical interest, he pursues his hobby in sports.

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