Even before the concept of integrated logistics had reached its maturity, supply chain management was being advanced as the next innovative and progressive step in the evolution of business practice. For those organizations that have adopted a supply chain viewpoint, the changes have revolutionized the way in which their products and/or services are delivered to customers. For some, the benefits of becoming a highly integrated, externally focused organization have translated to growth and leadership in their markets.

In contrast to the quality movement, which generated much controversy and criticism, there is almost total agreement that world-class companies need supply chain management excellence to make the next quantum leap in creating shareholder value. Yet if the majority of business executives and logistics professionals accede supply chain management has the potential to make a significant difference in performance (both operational and financial), then why aren't more companies urgently moving forward to implement a supply chain strategy?

Because of the complexity and interdependent nature of the activities that comprise the supply chain, the answers to this question will keep academics, consultants, and practitioners engaged for many years to come. The results of the 1997 University of Tennessee and Ernst & Young LLP study on the "Giants of Shipping," however, do offer some important insights into three critical elements that need to be addressed if organizations are to realize any measure of the potential inherent in supply chain management.

This study's intent was to address key issues facing logistics and transportation managers today. By using the broadest definition of logistics, the study team was able to analyze the results for their wider supply chain implications. That is, activities not traditionally within the logistics functional area such as capital budgeting, information systems, and sales forecasting were included for examination in the study. Although logistics cannot claim full credit for conceptualizing the supply chain, this functional area has had a dramatic impact in developing and implementing the enabling practices. For this reason, much can be learned about supply chain opportunities and hurdles by studying logistics and transportation.

During the Spring of 1997, the University of Tennessee's Department of Marketing, Logistics and Transportation invited approximately 2,300 senior managers, directors, and vice presidents of logistics to participate in this year's study. In order to maximize the amount of information that could be gained from these executives, the sample was divided into two groups. One group received a survey relating to outsourcing, the other to technology. A majority of the questions were common across the surveys, allowing for analysis of a broad cross-section of responses on topics such as organizational structure and activities, modal usage, and efforts for productivity gains.

There were 473 usable surveys returned in time for inclusion in the analysis. This translated to a response rate of over 20 percent. Given the complexity of the research instrument and the resulting time needed to complete it, this response rate was considered acceptable. In fact, the number of respondents this year represented a very significant increase over the 1996 survey returns.

Supply chain management sprang out of the movement in the 1980s toward integrated logistics management. The supply chain model in Exhibit 1 depicts how the concept has evolved since then. It illustrates how, in a supply chain environment, goods, information, cash, and process flows move from the supplier's supplier to the customer's customer, and back again. Essentially, those who adopt a supply chain perspective see logistics as one of the company's most important strategic initiatives. In addition, they recognize that supply chain management places a premium on adoption of a cross-functional, externally focused view of logistics.

Although the supply chain viewpoint is still relatively new as business trends go, it already has revolutionized the way some companies move their products or deliver their services. In the process of aggressively implementing supply chain management, these companies took a quantum leap toward leadership in their markets. In some cases, in fact, they actually came back from the brink of extinction.

Upon further examination of the model, we see that while product moves from link to link in the supply chain, flow by definition is continuous from beginning to end. In this way, goods and services move along—sometimes quickly, sometimes slowly—toward their final destination, the end consumer. In today's global and ultra-competitive environment, sustainable competitive advantage created through supply chain management must be based on the continuous flow concept. Because it encompasses all areas of the firm—and in many cases extends beyond those organizational boundaries to include suppliers/vendors and customers—the concept is difficult to implement. In the end, the company's senior management must determine the "rate of flow" for their organization's products and services as they direct functional initiatives and activities for greater effectiveness.

Key findings from the research study are presented within a cross-functional framework that focuses on three key areas: organizational structure, outsourcing, and technology (information and software). Each of these is a critical component of successful supply chain management...and each has impact beyond any one functional area. The following sections present the study findings for each of these components.

The study results point to at least three major opportunity areas centering on organizational structure that would lead to improved supply chain management:

• Organizational structures need to be developed that support capable supply chain management through efficient and effective flow of product, information, and services.
• Further functional integration within the company, coupled with boundary-spanning activities, will lead to more effective flow among supply chain members.
• Selected critical components of the supply chain must be managed by logistics professionals who understand the tradeoffs associated with supply chain management.

In discussing organizational structures that support effective supply chain management, the analogy of a relay race is appropriate. A smooth baton hand-off is a major contributor to the team's success. Both team members are poised, in position, and ready for the hand-off. Each knows what is expected. Each knows when to hold tight, and when to let go. Lack of timing, information, and communication can be costly in terms of winning the race.

In the same way, supply chain partners "pass the baton" each time physical goods, information, or services move between organizations. Dropping the baton or fumbling the hand-off leads to unnecessary and non-value-added costs. Eventually, this adversely affects market share. True supply chain partners need to be positioned to respond to each other's needs in a synchronized way to obtain peak efficiency.

According to this year's study results, information sharing among the functional areas in the supply chain is less than optimal. Participants were asked to indicate the degree to which information and/or operational planning is shared with three broadly defined groups of supply chain partners: suppliers/vendors, transportation providers, and core customers.

As Exhibit 2 shows, the amount of information shared varies from partner to partner. It's evident that significant strides have been made to integrate information sharing between the respondents and their suppliers/vendors. The supplier group clearly benefits from frequent and meaningful interaction with the survey respondents in all but two areas—distribution center/warehousing operations and order management.

Major opportunities still exist for improving information sharing and operational planning with transportation providers and core customers. In fact, the study results show that transportation providers are the most often neglected component of supply chain management. Given the core nature of this activity to most companies—and the fact that it is most often performed by an external entity—this finding is somewhat alarming.

The finding raises even greater concern given the productivity gains many of the respondents expect from their transportation providers. Over 40 percent are looking for productivity gains in excess of 4 percent next year. While carriers may be able to achieve this level, it will be more difficult than it needs to be. The principal reason is that for carriers to be efficient, they need detailed information that will better enable them to schedule and plan. Shippers, for the most part, are not providing this kind of information.

Information sharing and joint operational planning are key ingredients in efficient and effective supply chain management. Collectively, the study results show the symptoms of an organization that is incapable of achieving the benefits of effective supply chain management. The difficulty in analyzing organizational structure, through, is that it continually evolves and changes over time to reflect strategic positioning in the marketplace. In a comprehensive study for the Council of Logistics Management, Bowersox et al. found that competitive pressures in the 1990s led many organizations to structure logistics as a core competency area to lead the firm.¹ In addition to being the lead component for making meaningful decisions, logistics also became accountable for the boundary-spanning nature of the organization's interfaces.

It is difficult, if not impossible, to implement supply chain management if the company has not yet "intragrated" its internal logistics activities and responsibilities. Intragration—the coordination of logistics activities (or functional integration)—is a basic building block of supply chain management. In order to assess the current state of logistics responsibility within the firm, researchers asked the study participants to indicate which activities fell under the purview of this function. The results show that much work remains to be done. Exhibit 3 lists the organizational activities traditionally attributed to a fully intragrated logistics function. The closer these activities are linked together, the more efficient the overall organization.

Unfortunately, only two supply chain activities—transportation and warehousing—were consistently placed under the purview of logistics and transportation. Relatively few respondents placed sourcing and procurement within logistics and transportation. That's surprising given the high degree of information sharing between the respondents and their suppliers as indicated by our study. Moreover, sourcing and procurement are critical to the effectiveness and efficiency of supply chain management.

As noted earlier, those who adopt a supply chain viewpoint position logistics as one of the firm's most important strategic initiatives. One indicator of this would be the span of activities under the logistics umbrella. The study findings suggest, however, that considerable progress still needs to be made. "Intragration" (or functional integration) of basic supply chain activities under the direction and responsibility of a single point of contact within a single firm remains an unrealized opportunity for the great majority of survey respondents.

Though deficiencies in organizational structure are relatively easy to identify, actually remedying those deficiencies proves more difficult. For lasting improvement, organizational change must be driven from the top down by senior management and may require outside expertise to help champion and facilitate that change.

Three key opportunity areas in outsourcing become immediately evident from the survey results:

• Few companies are taking advantage of the benefits, including the savings, of strategic outsourcing.
• Companies are still struggling to develop a true "strategic partnership" with a third-party provider that offers a wide range of supply chain management support.
• More third-party logistics companies must develop breadth of service, along with depth of service, to realize their growth potential in the years to come.

The pursuit of supply chain management has led many firms to reengineer and reorganize the functional areas within their organization. In some cases, this drive for greater operating efficiencies has led to the downsizing or outsourcing of certain activities. It is not always economically correct, or value-creating, for companies to perform certain logistics activities in-house. Outsourcing allows a firm to focus on its primary business areas while the third-party provider handles the logistics tasks that form its core competency. When activities or entire functions are outsourced, integration becomes even more important to the supply chain process.

Companies frequently view logistics as an area that can be outsourced to reduce costs while improving service. This is due in part to the comprehensive set of core and value-added capabilities that third-party providers have developed as well as their ability to integrate more than one logistics activity. Research has indicated that the expected user benefits of third-party services are economies of scale, reliance on their technology, and optimization tools that result in cost reduction in the supply chain.

Similarly, organizations now are focusing on how they perform in the marketplace and identifying those areas where they have core competencies and competitive advantage. In some cases companies are streamlining those activities that do not provide competitive advantage and/or turning them over to a third-party provider. Exhibit 4 indicates the activities most commonly outsourced by the study participants. These findings underscore four important points:

1. Few companies are entrusting a significant level of their supply chain activities to third-party providers.
2. The most commonly outsourced activities have the least strategic impact on the organization.
3. 25 percent of companies outsource only one activity, and of this group nearly two-thirds are outsourcing freight-bill auditing and payment.
4. Only one respondent in the entire sample uses a third-party provider for 10 or more logistics activities.

Some may look at these findings and conclude that the use of third parties has done little to facilitate the development of supply chain management. That may not be entirely accurate, however. Third-party logistics companies are a phenomenon of the last decade. Robert Delaney of Cass Logistics in his 8th Annual "State of Logistics Report" suggests that third-party companies have captured only 6 percent of a $421 billion market potential. As a relatively new industry, then, third-party providers are still working on many of the same integration issues as shippers.

Exhibit 4 provides insight into a potential development that could impact the growth of third-party logistics providers. Many companies seem to view outsourcing as a means of learning more about how to manage a process more efficiently. They then bring the activity back in house once the skill has been internalized. This development, if it continues, could be a troubling one for third-party providers. Yet given the costs and efforts typically associated with successfully implementing such a change, it is not considered one of the more viable methods of developing supply chain expertise.

Finally, what criteria should be used to determine the best third-party providers? And what factors are the most important when it comes to selecting a long-term partner? Respondents suggest that quality of services and the value/cost relationship are critical (see Exhibit 5). Clearly, the mandate for forward-thinking third-party providers is to review how they best provide services to their customers. Teaming with a supply chain management partner is one way to lower costs and increase efficiencies. At the very least, companies should assess their strategic position and determine what benefits can be derived from outsourcing.

The study findings yielded important lessons learned and opportunity areas for supply chain technology. Among the most significant are these:

• Software developed in house has less impact than off-the-shelf, commercial software packages.
• Technology, in and of itself, will not distinguish a company from its competitors and provide sustainable competitive advantage. Instead, technology should be viewed as a means to improve supply chain flow across all dimensions.
• Companies need to develop a methodology for correlating the impact of a specific technology on either revenues or costs.

Just as logistics professionals must grapple with the decision over what supply chain activities are best outsourced, they need to determine what information systems and technical software packages will best facilitate their work. Because of the high investment cost of the majority of these systems, this decision will have implications well into the next decade.

The nature and importance of technology in supply chain management led to its inclusion in the research study. Technology represents the firm's ability (or, in some cases, inability) to effectively communicate within and between supply chain members. It also directly impacts integration and intragration. Respondents were asked to rank the impact on their companies of six types of supply chain software packages (Exhibit 6). In all instances, commercial software packages exerted a higher impact than those developed in house.

Interestingly, the commercial software packages that had the greatest impact on the organization (compared to their in-house counterparts) were more strategic than operational in nature. This could be a function not only of the superiority of the purchased software, but also of top management's commitment—communicated across the organization—to purchase and implement the package. These software packages also have been commercially available for many years. Industry knowledge and use of these packages is quite high, as reflected by the high-impact ranking of routing and scheduling (see Exhibit 7).

What is more difficult for firms to assess is the impact of technology on market competitiveness, costs, and revenues. Our survey findings are mixed at best. A majority of the software solutions listed were viewed by most companies as "necessary to compete," as shown in Exhibit 8. This finding suggests that larger customers are demanding that these types of technological tools be in place to help streamline the flow of information and products across the supply chain.

Yet, the same table indicates that in only one case—bar coding—a majority of individuals agree that the technology helped reduce costs or increase revenues.

Software solutions in and of themselves should not be viewed as the secret weapon in gaining sustainable market advantage. Any advantage is lost as soon as a competitor implements the same type of information system or technology in its supply chain. In order to be price competitive, both companies may reduce their price on their product or service, thereby further reducing the margins that were used to calculate the savings anticipated from the information system. While returns may fall short of expectations, in today's rapidly changing and highly competitive marketplace, no company can afford to be technology poor.

Supply chain management is emerging as one of the decade's most powerful sets of technologies and business practices. It's transforming the way manufacturers operate and work with partners—even the way they think about their business.

Supply chain management is also saving companies millions a year and helping them forge airtight relationships with partners and customers.

—Information Week, June 23, 1997

This quote is a strong indicator that supply chain management clearly has moved into the mainstream of business topics. As more and more professionals outside logistics learn about the supply chain viewpoint, the wider implications become clear. Members of corporate senior management will begin to champion these initiatives as methods for deriving maximum efficiency and cost savings from their operations. And as they do this, logistics professionals have the opportunity to become rising stars in the corporate hierarchy.

Maintaining the early momentum from supply chain initiatives will not be easy. Supply chain professionals must make use of high-quality information tools to speed up decision making. They must obtain the specialized services of knowledgeable people and providers to maximize benefits. And they must align their operations so that change occurs as rapidly as possible throughout the operation. As they await the baton of challenge to be passed from the corporate boardroom, they must be ready for the "moment of glory."

Successful and capable supply chain management—the ability to smoothly handle that baton—depends on the state of several critical elements including:

1. Sharing of information and operational planning with supply chain partners.
2. The scope and span of logistics responsibility for managing key activities in the supply chain.
3. Level of integration of activities both within the firm and with external partners in the supply chain.
4. Development of "true" strategic third-party partners.
5. Existence of methods to determine the cost/revenue impact of technology on product flow in the supply chain.

In addition to identifying the critical missing elements, a determination must be made as to how, when, and where implementation should occur. In other words, there will be enough to keep everyone in the supply chain community busy until the next innovative concept arrives.