7 Principles of Supply Chain Management Explained

What are the principles of supply chain management? In this article, we will explain the key principles of SCM that you can understand quickly and easily.


In 1997, Supply Chain Management Review published one article called "The Seven Principles of Supply Chain Management" written by David Anderson, Frank Britt and Donavon Favre. At that time, SCM was a pretty new term so this article did the excellent job to explain the important supply chain management principles in one shot. More than 10 years pass and this article is considered the "classic" article and got republished in 2010. As of now, it got more than 160 citations from both scholarly articles and trade publications. The following section will show the summary of 7 principles in an infographic form and I will discuss if the concept from 1997 is still relevant to the current business environment.

7 Principles of Supply Chain Management

1. Adapt Supply Chain to Customer's Needs

Both business people and supply chain professionals are trained to focus on the customer's needs. In order to understand customer better, we divide customers into a different group and we call it "segmentation". The most primitive way to segment customer is ABC analysis that groups customer based on the sales volume or profitability. Segmentation can also be done by product, industry and trade channel.

Back then, Anderson et al suggested that customer be segmented based on the service needs, namely, "sales and merchandising needs" and "order fulfillment needs".

I totally agree that we should focus on the customer's needs but this doesn't seem to be enough these days. The reason is that your customers may not know what they need until your competitors offer something different. For example, in 2011 Amazon initiated a program called Amazon Prime (free 2-day shipping and discounted 1-day shipping). Today, people are still discussing if this program makes sense. But one thing for sure, customer turns to Amazon more and more. The morale of this story is that you should "anticipate" the customer's needs as well.

2. Customize Logistics Network

When you segment a customer based on the service needs, you may have to tailor the different logistics networks to serve different segment. However, this principle doesn't hold true for all situations.

For example, if you were a contract manufacturer in China, you might already have different logistics networks for different customers. Each customer in US or EU might already control the source of raw materials, ask you to provide dedicated production lines, nominate 3pl companies and air/sea carriers. So, logistics network design is a kind of initiative driven mainly by customer.

3. Align Demand Planning Across Supply Chain

Supply chain practitioners are taught to share the demand data with trading partners so nobody has to keep the unnecessary stock. In general, this principle holds true. But in the reality, only Walmart is actively sharing the demand data to trading partners.

There is a very interesting paper "Top-Down Versus Bottom-Up Demand Forecasts: The Value of Shared Point-of-Sale Data in the Retail Supply Chain" by Williams and Waller 2011, the result of research found that,

- If you make the demand forecast based on SKU/Customer level, using your own historical order data is more accurate than using the POS data you get from retailers

- If you make the demand forecast based on SKU/Store level, using the POS data you get from retailers is more accurate than using your own historical order data

The implication is that the absence of demand sharing is not necessary bad. But when you got the demand data from trading partners, you MUST use it the right way.

4. Differentiate Products Close to Customer

Dell keeps components and assemble them only after customer places the order in order to increase the product variety. This principle is still true, but, there is another principle that you should consider.

"Standardization" is in the opposite polarity of "Differentiation". For example, some cosmetics manufacturers formulate products and choose a packaging and labeling that complies with the regulations of multiple countries in Asia. So they only make one SKU that can be sold in 15 countries instead of 1 SKU/Country. By standardizing product appropriately, they can drive the cost down drastically due to the economy of scale. So standardization is something that you should also consider.

5. Outsource Strategically

This is the principle that stands the test of time. In short, don't ever outsource your core competency.

6. Develop IT that Support Multi-Level Decision Making

If you search Google for the term "critical success factor erp", you'll find lots of information about how to implement ERP successfully. My opinion is that an IT project shouldn't be done in the isolation, business process reengineering is something that you have to do before implementing an IT project. This will equip you with the full understanding about process deficiencies then you can determine what kind of technology that you really need.

7. Adopt Both Service and Financial Metrics

Anderson et al suggested that the activity based costing (ABC) be implemented so you can determine customer's profitability. However, there is the interesting twist about the ABC concept.

In 1987, Robert Kaplan and W Bruns defined the activity based costing concept in his book "Accounting and Management: A Field Study Perspective". However, in 2003 Robert Kaplan said that it's difficult to maintain an ABC costing model to reflect the changes in activities, processes, products and customers. Then, he introduced the refined concept called "Time Driven Activity Based Costing".

To my understanding, practitioners are still using the traditional ABC and supply chain researchers are still citing the traditional ABC articles. My question is, does the traditional ABC really work?

Posted by , the editor of SupplyChainOpz.com