Development of the Supply Chain

Supply chain management and its development is a strategic issue: how supply chain logistics is built and what it requires in the long run. On the other hand, the supply chain also has a tactical and operational nature, in which decisions on, among other things, procurement, production and distribution are made. Today, service business is increasingly being created in physical product supply chains.

The supply chain must ensure the best possible availability of products with the lowest possible logistics costs. The supply chain should be managed as a whole and sub-optimization should be avoided and not just focus on one or a few functions.

The following are some of the key principles of supply chain management and development:

  • Simplification of processes
  • Reducing lead times
  • As real-time communication as possible
  • Joint planning
  • Eliminate waste and errors
  • System integrations between chain parties
  • Customer orientation
  • Transparency
  • Reliability
  • Flexibility

It must be possible to meet the customer’s needs with ever shorter delivery times. At the same time, customers demand customized solutions. This requires flexibility and the ability of supply chain parties to respond to needs and demand quickly. A flexible company is able to respond to disruptions or unexpected changes quickly and in a controlled manner. Reliability can be improved through open cooperation between the actors in the chain.

There are therefore several opportunities to improve supply chain management. Cooperation between different actors is key. Good partnerships create value for customers and on the other hand they reduce costs. However, implementing collaboration is often a major challenge for organizations.

The importance of customer service and time

Supply chain development must consider strategies from the perspectives of customer service, demand flow and logistics. From the customer service perspective, it is decided how to meet the customer’s needs and what level of service each customer group expects. In addition, the cost of customer service must be calculated.

The demand flow strategy examines which level of production and inventory best meets demand and through which distribution channel customers’ expectations are best met. The number, role and location of the parties in the supply chain are also very important decisions. Possible outsourcing is one of the key issues to consider. The locations of production facilities and suppliers, as well as capacity issues in production facilities, also need to be addressed in this context.

In supply chain management, value and cost are considered in relation to time. The reduction is based on:

  • holistic view of the supply chain
  • technologies
  • to remove non-value-added activities
  • speed of suppliers
  • product design
  • shortening the forecast period
  • redesign of production processes and
  • re-evaluation of distribution options.

As a result of better supply chain management, product lead times can be significantly accelerated. As a result, customer service will improve and in turn guarantee a more satisfied customer. Shortening the lead time also reduces the imbalance between supply and demand, which in turn causes costs, including buffer storage.

All logistics functions must provide added value in the supply chain. For example, good distribution management brings a competitive advantage. Distribution tasks include warehousing, providing value-added services, combining products and handling returns. Distribution methods include, for example, terminal operations, tactics of continuous replenishment or the fact that stocks are, so to speak, on wheels, ie transported at all times. Distributors include manufacturers, retailers and wholesalers and so-called third parties.

Business Process Reengineering (BPR)

Supply chain management and logistics can be developed by developing the business process. In this context, the term Business Process Reengineering (BPR) is often referred to. If the development of the business process is carried out in an exemplary manner, it will improve the quality of products and services and thus customer satisfaction.

The objectives of BPR are:

  • simplification of processes
  • elimination of waste
  • shortening lead times
  • elimination of duplication of work
  • cost reduction
  • automation
  • adding value to the customer

Efficient Consumer Response (ECR)

In retail, the aim is to coordinate the supply chain through ECR (Efficient Consumer Response). The ECR can be said to be the retail equivalent of JIT guidance. In the ECR, retail suppliers and members of the distribution chain work closely together to meet consumer demand and needs. The benefits of ECR include range optimization, joint forecasting and demand-driven product complementarity.

ECR includes, among other things, delivery management, product group management, traceability, packaging, shelf availability, marketing cooperation and the launch of new products. Central to the implementation of the ECR is the networking of information systems between organizations and the definition of clear operating routines and incentives and sanctions for ordering and warehousing. The ECR operating model is being developed in Finland by the trade and supplier co-operation organization ECR Finland ry.

Collaborative Planning, Forecasting and Replenishment (CPFR)

Closely related to ECR is the Collaborative Planning, Forecasting and Replenishment (CPFR) approach, which aims to improve supply chain efficiency through joint planning, forecasting and complementarity. The pioneers of the model are trade and the food industry. CPFR aims to reduce inventories, increase sales and improve availability.


Outsourcing refers to the transfer of an activity outside the organization to another company. Therefore, before deciding to outsource, it is necessary to consider whether the function is a core issue or not. In addition, it is important to look at whether the company has the best know-how in the function or someone else. Commonly outsourced functions include financial and human resources tasks as well as IT services and transportation. Procurement is also increasingly being outsourced. The trend of outsourcing organizations has led to talk of levels of outsourcing. These levels are presented in the forwarding section.

Outsourcing usually chosen to achieve cost savings. Therefore, it must first be determined how much the potential outsourced activity will cost as a separate activity. The cost information obtained is compared with the cost that would be incurred by outsourcing the function. With outsourcing, fixed costs related to the company’s operations are transformed into variable costs. It is good to realize that external service providers are often cost-effective because they focus on their own core competencies, manage large entities, and thus achieve economies of scale. Outsourcing also aims at production flexibility.

An outsourcing decision may not always be the best solution. It may be that an outside service provider turns out to be a bad choice. When outsourcing functions, the company’s own competence in that function usually weakens. This should be taken into account when making an outsourcing decision. A decline in the level of competence may further lead to a situation where one’s own organization does not have the opportunity to assess the costs of the outsourced service or the level of competence of the personnel implementing it. The possibility of data leaks must also be taken into account.

So an outsourced function is always a risk. It is therefore important that at least the following issues are assessed for the external service provider:

  • cooperation and communication abilities
  • interaction
  • competence
  • experience
  • reliability
  • quality
  • speed
  • flexibility
  • capacity
  • price
  • reputation

The outsourcing company and the service provider should have similar goals and values. It is important for companies to regularly monitor the costs and desired benefits of outsourcing in order for the collaboration to be worthwhile. If outsourcing proves to be a bad solution, the function must, of course, be restored to its own function. Such an insourcing decision requires that the outsourced function can be handled as one’s own work. However, there is a risk that the outsourcing decision resulted in a loss of know-how. Therefore, the competence of the staff must be carefully ensured and, if necessary, staff must be trained or recruited from outside their own organization.