Supply chain management can also be described as integrating three of the functions inside an organization: purchasing, logistics, and operations. Each of these functions is critical in any company, and each of them has its own metrics. But these functions are interdependent, so making good decisions in any of these areas requires coordination with the other two.

On the surface, any of the purchasing cost-reduction options looks like a simple, effective way to reduce costs and therefore increase profitability. But each of these options can have negative long-term effects, too. For example, driving a supplier's profit margin too low could make it hard for them to pay their bills — or even force them out of business. While you might save money in the short term, you may have to end up spending even more time and money to find a new supplier in the future. In other words, it would actually increase your total cost. Many purchasing decisions can also have direct effects on the costs for other functions within your company. For example, sourcing lower-quality raw materials might lead to higher costs for quality assurance. Buying in larger quantities might lead to an increase in inventory costs.

You can see an example of the conflicts that can occur between logistics and purchasing: Logistics wants to decrease inventory, which may mean ordering in smaller quantities, but purchasing wants to lower the price of the purchased materials, which may mean buying in larger quantities. Unless purchasing and logistics coordinate their decision-making and align their goals with what is best for the bottom line, the two functions often end up working against each other and against the best interests of your company, your customers, and your suppliers.

Although increasing operations efficiency sounds like a great idea, sometimes it actually creates supply chain problems and does more harm than good. Companies may invest in increasing their capacity only to find out that their suppliers or logistics infrastructure can't support the higher production levels.

Some common goals for operations teams include: reducing the amount of capacity wasted due to changeovers and maintenance; reducing shutdowns for any reason, including those caused by running out of raw materials; aligning production schedules and orders for raw materials with forecasts received from customers.

If you've ever taken a personality test, such as the Myers-Briggs Type Indicator, then you know that these tests can reveal important differences in the way that people approach problems and make decisions. It turns out that groups of people have "personalities," too. These personalities form the culture of a group, and culture matters a lot when it comes to managing a supply chain.

Suppose that one of your customers is a company that really values reliability. That company considers it important for a supplier to deliver exactly what was ordered, exactly the same way, every time. The culture of that group — the things that the company values — determines how it judges its suppliers. Now suppose that this customer has a choice of working with two suppliers: one that's known for consistent quality and another that's known for flexibility and innovation. Naturally, the first supplier would be a better cultural fit for this particular supply chain because of the value that the customer places on reliability.

The impact of culture can also apply to the functions within your organization. Different departments — such as purchasing, logistics, and operations — often develop cultures of their own. If the values of these departments clash, it's difficult for the company to manage its supply chain effectively.

One useful way to think about the culture of a company or a department is to use a framework that was developed by professor and thought leader Dr. John Gattorna in Dynamic Supply Chains: Delivering Value through People, 2nd Edition (FT Press, 2010). Gattorna says that four major behavioral forces determine the culture of a group. These forces are often related to the style of a group's leader and the norms for a particular industry.

The strength of these personality forces lead to differences in the culture for a team or organization. The most accurate way to measure culture is to formally interview people on a team and then analyze their responses. But in many cases, you can get a good sense for a team's culture simply by working with them for a little while.

A useful exercise when analyzing your supply chain is to list the groups that work together, and try to determine the dominant culture for each of them. This can often help you anticipate conflicts that can emerge when these groups interact. And, it can help you find ways to use these differences to your advantage. Here are some common examples that illustrate how this can work:

You can also use an understanding of group personalities to help you choose teams to partner with in your supply chain. If your priority is creativity and innovation, for example, you're likely to work best with supply chain partners that are driven by an entrepreneurial culture, and you're probably going to be disappointed by a supply chain partner with a hierarchical culture.

Gattorna makes the point that supply chains are dynamic, so balancing these forces is an ongoing process. One way to create balance is to build teams of people with each of these tendencies. If the team has a diverse set of personalities, the team is more likely to appreciate the strengths of diverse supply chain partners and to find ways to build effective relationships with other teams that emphasize any one of the forces.

The most complicated way to look at a supply chain is to look at it as a system. Like many other systems that we encounter every day, supply chains are made up of many interconnected components that can behave in unpredictable ways.

Your car is a good example of a system that you depend on every day. You expect your car to move you from Point A to Point B. In fact, you probably take for granted that your car will take you to Point B any time you want to go. Your car is actually a system, though, and it can perform the way you expect it to only if all the components are operating correctly. A dead battery, a broken fuel pump, or worn-out brakes could bring the whole system to a halt (or, in the case of the worn-out brakes, not bring the system to a halt!).

Supply chains are systems, too. The components that make up supply chains are people, processes, and technologies. Each of these components needs to be organized and managed correctly for the system to operate as expected.

When you look at them as systems, you begin to see that supply chains have underlying rules and patterns that are key to understanding how they work. A good example of one of these patterns is when a company experiences wild swings in inventory levels. It can be hard for people in the company to understand why these swings occur until you look at the supply chain as a system. Then you can recognize a pattern called the Bullwhip Effect, in which inventory peaks and valleys are amplified as they move upstream from one step to the next in a supply chain. The Bullwhip Effect is a problem that frequently occurs in supply chain systems, and it is a normal, predictable result of everyone in the supply chain making decisions that seem logical. To fix the problem, you need to change the system, and that means you need to understand what is really happening. Here's a scenario that explains how a Bullwhip Effect can occur:

How many widgets did the factory sell? 10,000. How many did the wholesaler sell? 100. And how many did the customer buy? Yep. . . just 1. A small demand signal at the end of the supply chain became amplified at every step, creating a Bullwhip Effect on inventory. The store may never sell another widget, so it would still be stuck with 99 widgets in inventory. The wholesaler may never sell another case of widgets, so it may be stuck with 99 cases of widgets. All that extra inventory costs money for everyone in the supply chain without adding any value.

Here are three ways that you can change the system that can reduce and even eliminate the Bullwhip Effect:

An important point to notice is that some of the things you should do to reduce the Bullwhip Effect might seem odd to a functional manager. In fact, they might even interfere with the objectives of your functional teams. For example, smaller batch sizes are likely to increase costs for both purchasing and logistics. To understand many of the challenges that occur every day, your team needs to recognize that supply chains are systems, and that the people, processes, and technologies interact in ways that aren't always obvious.

In some cases, it helps to build a model of your supply chain to show how the parts of the system interact. These models can show cause and effect relationships — how one thing affects another, which then causes something to happen, which causes something else to happen, and so forth. In other words, these models can show causal relationships. Very often, systems models reveal reinforcing loops, where a series of events repeats over and over, getting stronger each time. Or, they can show balancing loops that have the opposite effect in which a series of events gets weaker over time.

You can look at a supply chain in terms of flows, functions, communities, or systems. But in order to manage a supply chain, you need to be able to measure what's happening. Virtually every process in a supply chain can be measured with quantitative metrics or qualitative metrics.

Quantitative metrics are objective, numerical indicators. Qualitative metrics describe intangible characteristics. For example, quantitative metrics might include things like current inventory levels or the amount of money spent on transportation. Qualitative metrics could describe the level of engagement of your employees or how satisfied your customers are with your service.

Collecting measurements costs money and takes time, so it is important to decide which metrics you really need. The key is to identify the steps in each supply chain process that will be most useful in understanding how things are working and what decisions you need to make. The metrics that give you this insight are called key performance indicators (KPIs). The KPIs in one business or facility can be very different from the KPIs in another — it just depends on which processes are most important in each.

A good way to look for improvement opportunities in any process is by comparing your own performance to that of someone else. For example, you can compare the KPIs from one facility to the KPIs at another facility. Comparing KPIs between facilities, and even between companies, is an example of benchmarking. Companies can benchmark their supply chain KPIs using the SCOR Model, which is covered in Chapter 5. Benchmarking has become so popular that there are many companies whose entire business is built on collecting supply chain KPIs from each of the firms in an industry and then providing all the companies with benchmarking reports.

There are lots of different ways to look at a supply chain. In order to manage a supply chain well, you need to understand each of these perspectives, and use them to select the KPIs that give you visibility into how your supply chain is performing. Benchmarking those KPIs against other facilities, and other companies, can reveal both the areas where you are doing well and opportunities for improvement.