The Supply Chain Management Commerce Essay


In recent years, the area of supply chain management has become very popular. This is evidenced by marked increases in practitioner and academic publications, conferences, professional development programs and university courses in the area. While interest in SCM is immense, it is clear that much of the knowledge about SCM resides in narrow functional silos such as purchasing, logistics, IT and marketing. Recently, the Council of SCM Professionals (CSCMP), which is the premier organization of supply chain practitioners, researchers, and academicians, has defined SCM as: "SCM encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all Logistics Management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, SCM integrates supply and demand management within and across companies" (Ballou, 2007). Scott and Westbrook (1991) described SCM as the chain linking each element of the manufacturing and supply process from raw materials to the end user. This management philosophy focused on how firms utilized their suppliers' processes, technology, information, and capability to enhance competitive advantage (Farley, 1997), and the coordination of the manufacturing, materials, logistics, distribution and transportation functions within an organization (Lee and Billington, 1992). SCM is an integrative philosophy to manage the total flow of a distribution channel from supplier to the ultimate user (Cooper et al., 1997).

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A supply chain is a series of units that transforms raw materials into finished products and delivers the products to customers (Mabert and Venkataramanan, 1998). Some of the units in a chain are located inside a single organization's borders while others cross such borders in complex and evolving ways. Effectively managing supply chains is vital to organizational success. Indeed, there is a growing recognition that modern competition is being fought ''supply chain versus supply chain'' rather than ''firm versus firm'' (Boyer et al., 2005). Our contention is that best value supply chains are the chains that are most likely to prosper within today's competitive global landscape. Our paper has three main goals related to best value supply chains. First, we define best value supply chains and explain the overarching differences between these chains and traditional chains. Second, we describe how key organizational theories help to distinguish best value supply chains from traditional supply chains. Third, we lay a foundation for future inquiry by building on these key theories to offer research questions focused on best value supply chains.

The SCM for the service industry is the ability of the company to get closer to the customer by improving its supply chain channels. The services supply chain will include responsiveness, effectiveness, efficiency, and controlling (Kathawala, 2003). One of the primary suppliers of process inputs is customers themselves in service organizations. This concept of customers being suppliers is recognized as 'customer-supplier duality.' The duality implies that service supply chains are bi-directional (Sampson, 2000). The concept may be applicable to the academia as well (Habib, 2010e, and 2010g). Integrated SCM is about going from the external customer and then managing all the processes that are needed to provide the customer with value in a horizontal way (Monczka and Morgan, 1997). Generally, SCM comprises integrated functions from raw materials to final products. It also covers integrated management of every organization throughout the whole chain (Horvath, 2001; Talluri, 2002). An analysis of SCM for manufacturing illustrates the integrated processes required for managing goods from the initial source of supply to point of consumption. It also includes a wide range of activities that material and service suppliers, manufacturers, wholesalers, and retailers have performed for years.

Supply chain management is therefore ensuring that the process employed in the acquisition of goods and services is effective in terms of both contributing to the achievement of related business objectives and that, the maximum commercial advantage is secured in the short and long term.

Supply chain management focuses on managing the flow of goods and service and information through the supply chain in order to attain the level of synchronization that will make more responsive to customer needs while lowering total costs and achieve the maximum competitive benefit. The synchronization requires close coordination, cooperation and communication plus timing among supply chain members in order to be effective. It is important for members within the chain to share information to minimize uncertainty which may arise in the chain. It is the rapid flow of information among customers, suppliers, distributors and procedures that characterizes today's supply chain. Obviously, distorted information, or lack of information, from one end of the chain is one of the main causes of uncertainty, and it can lead to excessive inventory, poor customer services, lost revenues, missed production schedules, wrong capacity plans, and ineffective and high cost transportation. Distorted information throughout the supply chain is a common result of what is known as the bullwhip effect. The bullwhip effect unnecessarily increase inventory upstream in the supply chain. (Russel et al, 2003)

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The three primary components of SCM are information, logistics and finance (Lysons and Farrington, 2006). According to Lambert and Cooper (2000), operating an integrated supply chain requires continuous information flow. The success of the individual supply chain partners depends upon the overall success of the supply chain(s) in which the partners participate. The theoretical proposition is that success at the supply chain level will result in success at the organizational level (Green et al., 2008). Gardner and Cooper (2003) argue that a well-executed strategic supply chain map can enhance the strategic planning process, distribution of key information, facilitate supply chain redesign or modification, clarify channel dynamics, provide a common perspective, enhance communications, and enable monitoring of supply chain strategy and provide a basis for supply chain analysis. The map or chart can, therefore, be used to identify where savings can be made or value-added (Hines and Rich, 1997; Lysons and Farrington, 2006).

SCM coordinates inbound logistics, factory processes, materials handling and outbound logistics. In bound logistics brings raw materials, packaging, other goods and services, and information from suppliers to producers. Factory processes change raw materials and parts and other inputs into output such as finished goods. Outbound logistics manages the flow of finished products and information to business buyers and consumers like you and me. SCM is the process of managing the movement of raw materials parts; work in progress, finishes goods and related information through integration.

2.4 Pharmaceutical supply chain

The pharmaceutical supply chain is the means through which prescribed medicines are delivered to patients. Pharmaceuticals originate in manufacturing sites are transferred to wholesale distributors; stocked at retail, mail-order and other types of pharmacies; subject to price negotiations and processed through quality and utilization management screens by pharmacy benefit management companies; dispensed by pharmacies and ultimately delivered to and taken by patients. There are many variations on this basic structure, as the players in the supply chain are constantly evolving, and commercial relationships vary considerably by geography, type of medication and other factors (The Health Strategies Consultancy (LLC), 2008). The unique nature of the supply chain for pharmaceuticals makes managing complex

information for supply chain effectiveness challenging, but clearly the rewards for doing so are significant. Lack of proper information mechanism may lead to poor inventory control methods, which tend to affect transportation costs (Mustaffa and Potter, 2009). Pharmaceutical manufacturers are the source of the prescription drugs in the pharmaceutical supply chain. The pharmaceutical manufacturing industry is composed of two distinct business models: manufacturers of brand-name drugs (e.g. Pfizer, Merck, and Novartis) and manufacturers of generic drugs (e.g. Mylan, Roxane and Barr). Most brand manufacturers devote a portion of their expenses to the scientific research and development of new drug therapies. Generic drug manufacturers typically do not develop new drug therapies, but instead manufacture generic compounds that compete directly with the original-branded version of a drug once the brand product's patent protection has expired. Manufacturers manage the actual distribution of drugs

from manufacturing facilities to drug wholesalers, and in some cases, directly to retail pharmacy chains, mail order and specialty pharmacies, and hospital chains.

Manufacturers may also distribute products directly to government purchasers and wholesale distributors who are the manufacturers' largest purchasers. Very few drugs are distributed directly to consumers. Manufacturers also play an important role in ensuring the safety of the pharmaceutical supply chain by producing informational labeling for prescribers and consumers that is consistent with the terms and conditions of a drug's approval. Wholesale distributors purchase drugs from manufacturers. For branded products, the purchase price is fairly uniform, with little negotiation on the part of the wholesale distributor. The distributor typically purchases branded products for a discounted rate, off the wholesale acquisition cost (WAC). Examples of discounts for branded products include volume discounts, prompt pay discounts, and discounts related to the sale of short-dated products (because the wholesaler is assuming a risk that the product will expire before it can be resold). The wholesale distributor then sells the product to its end consumer, typically a pharmacy, at WAC plus some negotiated percentage. For generic

products, the purchase price is highly variable, largely depending upon competition in the class and the ability of the wholesale distributor to drive market share or increase the volume sold. In this case, wholesale distributors play a larger role in the negotiation of the price of the product. The price to the end consumer is also highly elastic depending upon the negotiated contracts with the retail pharmacies. Pharmaceutical retail business is mostly privatized and is conducted by:

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Pharmacies that employ registered pharmacists and which can Prescribe only Medicines (PoMs); and

Chemist shops; managed by pharmacy technicians and which dispense over-the-counter products solely.

Pharmacies are regulated by Pharmacy Councils. Many countries in the sub-region have a problem with street peddling of pharmaceuticals. According to the Ghana Food and Drugs Board, Ghana has a relatively safe retail pharmaceutical supply chain and does not have a major problem with street trading of pharmaceuticals, although this does occur to some extent in rural and urban areas.

2.4.1 Changes in Pharmaceutical Industry

The pharmaceutical industry is experiencing tremendous changes. These changes are being driven by the following factors: Expiring patents, Government regulations, technological advances, market pressures, mergers and consolidation. (Pittiglio et al, 1999). There is a shift from high priced branded pharmaceutical to low cost generic drugs. The influx of the generic drugs will have an effect on the market sales of drugs. The implication is that in one case, the pharmacists wholesale cost of a branded product was $85 per hundred tablets. The "generic" equivalent was less than $8 per hundred (MSN Money central) as cited in (Pittiglio et al, 1999). As governments come out with regulations and controls, it causes changes in price and profit within the pharmaceuticals. Among the regulations & controls include Health care reform initiatives, threats of increased regulations, demand for lower cost delivery of drugs and service by managed care organizations. As governments suggested caps on drugs price increases, pharmaceutical manufacturers adopt self-imposed price constraints. Internationally, Mail-order distribution alternatives are beginning to dominate the reorder business of patients with chronic illness. The mail-order firms can disperse medications at an estimated 25% savings to the patient. The mail-order technology has become a popular and low cost means of getting prescriptions to consumers. The technological advances allowed wholesalers to cut their distribution costs from over 8% of sales to 4.2%. (Pittglio et al, 1999)

Among other technological advances include; increased use of robotics, computerized order entry, electronic data interchange (EDI) automates activities with pharmaceutical manufactures, JIT/VMI and multiple one-day deliveries between manufactures and wholesalers.

Pharmaceutical companies are facing increasing market pressures as customers are becoming more knowledgeable about drug cost. Customers are now becoming more price-sensitive while retirees and pro-poor customers continue to seek for low cost prescriptions. Also, the popularity of drug therapy is driving competitiveness thereby shifting primary material care out of the hospital. This happens through; Health maintenance organization, Point-of service, preferred provider organizations.

2.4.2 Manufacturers' strategic alliances

Another significant change in pharmaceutical is the merger and acquisitions which is taking place globally. These strategic alliances tend to expand market coverage. Example; Astra Zeneca, America Home product & America Cyanamid, Upjohn & Pharmacia, Alza & Sequus Warner, Lambert & Agouron Pharmaceuticals (Pittiglio et al, 1999).

2.4.3 Wholesaler's strategic alliance

Wholesalers have also consolidated with one of the consolidations seeing four (4) wholesalers currently controlling 80% of the market. E.g. Cardinal's acquisition of Allegiance, FoxMeyer's acquisition of Harris - Bergen Brunwings acquisition of Durr-Fillauer, McKesson's acquisition of General Medical. The effect is that, there will be Regional market penetration, establishment of automated 'mega' warehouses to reduce distribution cost to wholesalers. (Pittiglio et al, 1999)

2.4.4 Pharmacies strategic alliances

Again, these merger and acquisition is taking place among the pharmacies with National and Regional Drug chain acquiring independence. The pharmacies are being challenged to join wholesales' voluntary retail drug store programmes. Consequently, the purchasing power of National pharmacies and Health Maintenance Organizations will force wholesalers to squeeze profits in order to maintain customer bases. California Management Review as sited in (Pittiglio et al, 1999)

Figure 1: Forces driving the pharmaceutical industry to alter their strategic directions in attempt to become more efficient

Pharmaceutical manufacturing: Pricing pressures drive rapid shift to generics and over-the-counter pharmaceutical as patent expires

Pharmaceutical Wholesalers: Rapid consolidation generates economics of scale and greater market penetration

Sellers: Purchasing power of the pharmacies is increasing with expansion Pharmacies prescription of national chain

Prescription purchase: Customers are seeking cost prescription alternative

Distribution Channel innovation


SOURCE: Pittiglio et al, 1999 (Supply chain council conference in Chicago, April)

2.5 Information system and supply chain management

Information technology (IT) plays a critical role in supply chain management activities as it permits the sharing of large amounts of information between firms. With the boom of computers, optical fiber networks, explosive of the intenet and the World Wide Web. Business processes and information is now managed through the information super high way. The availability of this information path allows easy leakages an intergration of function and process within an organization. This ensures visibility of network within an organization since coordination is enhanced through this way of information flow. (Haag et al, 2002). All department, unit, and ancillary unit enjoy real time information. This, to some extent reduces the phenomenon known as "bullwhip effect" in any supply chain network. This means organizations are now moving through a concept known electronic commerce, where transactions are completed through a variety of media protocols. Example, fax, automated voice mail, CD-Rom catalogs, electronic data interchange (EDI), bar codes, enterprise resource planning (ERP).

The use of IT systems in inter-firm integration is supported by transaction costs economics, which generally posits that IT reduces transaction costs. (Coase, 1937). However, in practice, new IT may result in higher transaction costs, caused by the higher cost of processing the information costs. If these coordination costs exceed the benefits of IT, the implementation of IT becomes expensive (Cordella, 2006).

Consequently, leading- edge organizations no more require and use manuel requisition, purchase orders, invoice, account payable. All these processes are done electronically with little human intervention. With the application of the appropriate and adequate information system, constant monitoring of inventory level, placing orders, and expedite orders would be a thing of the past.

The proliferation of telecommunication and different technological protocols has provided real time information, online communication through the entire supply chain a reality. This system now provides a link between suppliers, manufacturers, distributors, customers, irrespective of their geographical location. These technological protocols can now be term as "enablers" since they help to reduce paper work, improve communication, improve lead time, and reduce waste in the system if implemented and managed properly.

It is therefore imperative for managers who develop information systems not to consider information this way as a repetitive transaction between actors like suppliers, distributors, customers, but as a way of coordinating the function, processes and organization within the entire supply chain. (Handfield et al, 1999)

Past empirical studies have evaluated the link between IT supply chain applications and integration. Logistics Management Information Systems has showed that it provides benefits to companies by providing speed of information flow and fostering value-added partnerships between supply chain organizations. IT has a direct impact on coordination and leads to supply chain innovation. Furthermore, emerging manufacturing technologies (EMT) have an influence on supply chain activities and supply chain structures and that emerging web-based manufacturing technologies make information transmission among the supply chain partners easier. Standardized systems embedded in the processes result in buyer-supplier relationship going beyond passive information exchange by engaging in proactive collaboration. Finally, if IT supply chain applications are well implemented, transaction costs will reduce drastically. In summary, all these studies point to a positive link between the IT supply chain applications and performance.

Saunders (2007) points out that inter-firm integration requires shared planning, coordination and sharing of integrated databases between firms. She categorized information sharing support systems as supply chain planning systems, information exchange systems and database collaboration systems. These technologies are supply chain 'enablers', in that they can substantially reduce paperwork, improve communication and reduce supply chain cycle times if properly implemented. A primary requirement for efficient information flow integration is that the relationship is characterized by a willingness to share and receive information and work in a collaborative manner (Handfield and Bechtel, 2002).

2.6 Risk

Risk is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable. Clearly, risk management now goes far beyond the protection of individuals, businesses, and nonprofit organization from known risk. (Nickel et al, 2000).

Lysons and Farrington (2006) suggest that supply chains are vulnerable due to internal and external risks. Internal risks are those attributable to interactions between organisations in the supply chain. External risks are those attributed to environmental, economic, political and social causes, such as storms, earthquakes, terrorism, strikes, wars, embargoes and computer viruses. Researchers have identified that many of the key risks factors have developed from a pressure to enhance productivity, eliminate waste, remove supply chain duplication and drive for cost improvement (Stauffer, 2003). Supply chain vulnerability is due to factors such as counterfeiting, delays, disruptions, price increases, operations and legislation.

2.6.1 Counterfeiting

This phenomenon floods the market with cheap drugs but fake and sub standard. This robs the pharmaceuticals with their huge investments in production, research and development. Industry concern about counterfeiting, diversion, mishandle, mishandling, and unintended or mistaken administration prescription drugs is mounting out an unprecedented pace. Counterfeit incidents have increased sharply and now seriously comprise patient safety. In response, the pharmaceutical industry is adopting a more comprehensive approach to brand security via the new "Safe and secure supply chain" model. The safe and secure model will define a more comprehensive approach to protect patient safety than has happened before. A safe secured pharmaceutical supply chain provides effective protection against products that are fake, tampered with or unit for use by focusing on the integrity of both product and its transaction history. The world health organization has estimated that perhaps 10 or 8 percent drugs worldwide are counterfeit and reports from some countries suggest that as much as one - half of those countries drugs are counterfeits (WHO, 2006). Industry groups representing manufacturers, distributors, retailers and pharmacies are active in efforts to prevent pharmaceutical counterfeiting and diversion. The interest and adoption of, automated track - and- trace systems like bar-coding and radio frequency identification (rfid) has grown swiftly. Modifying pharmaceutical distribution process that already use bar coding to capture expiration dates in product packaging can produce meaningful improvement. For instance two improvements may be compliances with first -in-first out (FIFO) handling practices and reduced losses from expired products (ZIH Corp, 2008).

Securing the transaction in the open supply chain is achieved using electronic pedigree records which verify the full custodial history of each product, from manufacturer through wholesale distributers to pharmacy or healthcare practitioner. The transaction can be authentically and certified before subsequent trading partners receive the product into inventor. (ZIH Corp, 2008). In supporting the safe and secure supply chain model, specific technologies could be applied to secure the drug product and its transactions. Hence, to supply the drug in the open supply chain, a pharmaceutical manufacturer chain model would likely provide.

Physical anti counterfeiting techniques

Serial number: Uniquely identifies every drug product

RFID tag and / or barcode: contains serial number

Electronic pedigree documents: manufacturers to ensure transaction integrity throughout the supply chain

Authentication technologies: Enable verification of product integrity and pedigree transaction integrity

Product information repository: enable authorize partners to verify the drug product ID and Marking. (ZIH Corp, 2008)

2.6.2 Delays

Delays in the supply chain have a direct impact on a company's profit. Product discontinuity, product shortages, poor performance, patient safety/dispensing and technological errors (causing stock shortages in pharmacies) are identified as risks associated with pharmaceutical supply chain at the basic level and these risks cause delays in the system and eventually dissatisfy the final consumers or patients. All these incur risk through disruption to the supply chain system (Breen, 2008).

2.6.3 Price increases

In terms of price increases, Kotler et al. (2002) explain that a considerable factor in price increase is cost inflation. Rising cost squeeze profit margins and lead companies to make regular rounds of price increases. Companies often raise their prices by more than the cost increase in anticipation of further inflation. Another factor leading to price increases is over-demand: when a company cannot supply all its customers' needs, it can raise its prices, ration products to customers or both.

2.6.4 Disruption

Supply chain disruptions are a major source of risk and include unplanned and unanticipated events like natural catastrophes, strikes, political instability, fires or terrorism that disrupt the normal flow of goods, information and materials within a supply chain and as a consequence, expose firms within the supply chain to some degree of vulnerability (Pochard, 2003). Disruption within the supply chain could also be seen in the form of availability of raw materials, transportation, disaster recovery and lack of knowledge regarding the source of supply, rationalisation of product, range and theft. Any of these could restrict or stop the flow of product through the supply chain, increasing the risk to the patient (Breen, 2008).

2.6.5 Operational risk

It is the risk of loss arising from human errors, management failure and fraud; or from shortcomings in systems or controls (Schwartz and Smith, 1997). Operational risk affects the supply chain and this is the risk of loss occurring as a result of inadequate systems and control. It also involves risk associated with logistical functions like storage, transportation etc. Most pharmaceutical drugs are produced and stored in a certain temperature which must be maintained to secure the quality and quantity of the drug before it get to the final user within the chain.