Supply Chain Management
MKRakeshPh.D scholar
Mahatma Gandhi Kashi Vidyapeeth Varanasi
Through the past decades we have seen an increasing rate of globalization of the economy and thereby also of supply chains. Products are no longer produced and consumed within the same geographical area. Even the different parts of a product may, and often do, come from all over the world. This creates longer and more complex supply chains, and therefore it also changes the requirements within supply chain management. This again affects the effectiveness of computer systems employed in the supply chain. A longer supply chain will often involve longer order to delivery lead times. Flaherty [10] states, in accordance with the discussion in Section, that the consequences of longer lead times will often be less dependable forecasts as these have to be made earlier, reduced production flexibility, i.e. greater difficulties to adjust to order changes, higher levels of inventory. Therese M. Flaherty. Global Operations Management. McGraw-Hill, New-York, 1996.
The evident answer to the problem of longer lead times is to speed up the supply chain. But a limit is often reached beyond which further effort to shorten lead times are futile, especially in international supply chains. Another approach is to restructure the supply chain. This simply means to reconsider the strategic level decisions priorly made. A third approach identified by Flaherty [10] is changing coordination: The order, forecasting, procurement, and information sharing procedures among the members of the supply chain. We will dwell on the issue of coordination in the next section.
Globalization also brings foreign competition into markets that traditionally were local. Local companies are thereby forced to respond by improving their manufacturing practices and supply chain management. Bhatnagar et al. [5] states that attempts have focused, among others, on reduction of inventory levels, and increased flexibility through reduced lead times. Yet again we see how industry focuses on the issues of inventory management and flexibility to maintain high levels of customer satisfaction.
Definitions
Supply chain management (SCM) is the process of planning, implementing and controlling the operations of the supply chain as efficiently as possible. Supply Chain Management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption
Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. Marketing's objective of high customer service and maximum sales dollars conflict with manufacturing and distribution goals. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan for the organization---there were as many plans as businesses. Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such integration can be achieved.
There seems to be a universal agreement on what a supply chain is. Jayashankar et al. [25] defines a supply chain to be
A network of autonomous or semi-autonomous business entities collectively responsible for procurement, manufacturing, and distribution activities associated with one or more families of related products.
Lee and Billington [17] have a similar definition:
A supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products, and deliver the products to customers through a distribution system.
And Ganeshan and Harrison [12] has yet another analogous definition:
A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers.
According to Wikipedia.org
Supply Chain Management (SCM): Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose of satisfying customer requirements as efficiently as possible. Supply chain management spans all movement and storage of raw materials, work–in–process inventory, and finished goods from point–of–origin to point–of–consumption
(http://en.wikipedia.org/wiki/Supply_Chain_Management).
The definition one American professional association put forward is that Supply Chain Management encompasses the planning and management of all activities involved in sourcing, procurement, conversion, and 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, Supply Chain Management integrates supply and demand management within and across companies. More recently, the loosely coupled, self-organizing network of businesses that cooperates to provide product and service offerings has been called the Extended Enterprise.
Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point-of-origin to the point-of-consumption in order to meet customers' requirements.
“Efficient Management of the Supply Chain (source, make and deliver) in order to maximize the value for money to the customer”.
In other words Supply Chain Management means integration and management of Supply Chain organization and activities through coordinated and collaborative strategic alliances, efficient business processes and high levels of information sharing to create a value chain that would provide member organizations a sustainable competitive advantage and in turn provide value for money to the customer. Instead of brand versus brand or store versus store, it is now supply chain versus supply chain. In this emerging highly competitive and dynamic environment, the ultimate success of the Business entity will depend on management's ability to integrate the company's complicated network of business relationships. The graphic will explain the process of Integration in the Supply Chain network.
The broader view of SCM is depicted in the above figure in a simplified supply chain network structure. This would explain the basic difference between Logistics and SCM. Supply Chain is inter-company integration of business process and relationships and where as Logistics is intra-company integration.
A Working Definition of Supply Chain Management:
We can define the supply chain as the flow of information and material to and from suppliers and customers. The objectives of Supply Chain Management (SCM) are to: Maximize supply chain responsiveness and flexibility to customers,
Minimize total supply chain cycle time, costs, inventory, and;
Maximize supply chain capacity, utilization, and Return on Assets (ROA). There are four fundamental operating principles at work in SCM :
Set up the simplest, most direct, flow of information possible to and from those who produce it to those who use it.
Set up the simplest, most direct, flow of material possible to and from those who produce it to those who use it.
Establish the smoothest possible drumbeat or rhythm of production and usage.
Create the ability to react to problems through short lead-times eliminating the need for inventories.
Why Supply Chain Management?
Experience shows that the gains to be made in cost, lead-time and quality through working in partnership with customers and suppliers are significant. In industry after industry one observes that:
50%-70% of total costs are supplier related (material versus direct labor or overhead costs).
Supplier lead times are longer than one's own production lead times.
It goes without saying that the quality of your product depends on the quality of material your supplier provides. With customers awarding more and more business based on total price, quality and delivery, the whole process from one's supplier receiving raw material to one's customer using the product has to be the target for breakthrough improvement. Experience shows that customers use the products we produce in much more predictable ways than then it first appear. We assume that a customer's order pattern is related to his/her usage pattern. Often we do not look beyond the order pattern for information about actual usage. Worse yet we tend to create wide swings and unpredictability in buying patterns that would otherwise be stable and predictable.
The consumer products industry learned that it often incurred more costs than benefits through consumer promotions. They trained consumers to wait for a sale, then buy and stock product until the next sale. Swings in demand were amplified through the supply pipeline adding cost as the bulge worked its way through the system. Retail stores clogged backrooms with inventory or ran out of stock. Distributors added inventory to cover unexpected demand. Manufacturers added finished goods inventory, increased production through over-time, and put pressure on their suppliers to deliver more in shorter lead-times. Wal-Mart broke the cycle with Every-Day-Low prices. A master in logistics, Wal-Mart understood that it was more profitable to always offer the lowest competitive prices to the consumer in return for more stable, predictable demand. The more predictable the demand, the easier it is to synchronize activities to true customer demand throughout the supply chain. The result is better on-time delivery, fewer stock-outs, and higher customer satisfaction with less inventory, reduced administrative work and lower overall costs.
Organizations increasingly find that they must rely on effective supply chains, or networks, to successfully compete in the global market and networked economy. In Peter Drucker's (1998) management's new paradigms, this concept of business relationships extends beyond traditional enterprise boundaries and seeks to organize entire business processes throughout a value chain of multiple companies.
During the past decades, globalization, outsourcing and information technology have enabled many organizations, such as Dell and Hewlett Packard, to successfully operate solid collaborative supply networks in which each specialized business partner focuses on only a few key strategic activities (Scott, 1993).
The concept involved in a supply chain can be well understood by the following list of figured models.
A Generic Supply chain model
Issues in Supply Chain Management
The classic objective of logistics is to be able to have the right products in the right
quantities (at the right place) at the right moment at minimal cost. Figure (from
NEVEM-workgroup [19]) translates this overall objective into four main areas of concern within supply chain management.
Figure: Hierarchy of Objectives.
The two middle boxes in the lower row of Fig. , delivery reliability, and delivery times, is both aspects of customer service, which is highly dependent on the first box, flexibility, and on the last box, inventory.
Improving Supply Chain Management
The above sections describe issues and challenges of supply chain management. It is time to approach solutions. A key to improved supply chain management lies in integration and coordination, look to Section for a discussion. Section introduces important tools of supply chain managers, modeling and simulation.
Goal and Principle of SCM
SCM goal:
Providing enhanced value to customers at the least Total cost Value, Velocity and Visibility
SCM Principles:
Ultimate customer focus
Network of organizations working for common purpose and mutual benefits Process orientation
Total systems thinking Cost Dimensions Inventory Transportation Warehousing Information
Figure below shows us the relation ship between some of the components of supply chain.
Delivery and lead-time.
Inventory Costs
Warehouse cost
SCM Framework
A framework to understand the various issues involved in SCM is provided by the pyramid structure for the SCM paradigm (fig.) the pyramid allows issues to be analysed on four levels:
Strategic: On the strategic, level it is important to know how SCM can contribute to the enterprises’ basic “value proposition” to the customers. Important questions that are addressed at this level include: What are the basic and distinctive services needs of the customers? What can SCM do to meet these needs? Can the SCM capabilities be used to provide unique services to the customers? Etc.
Structural: After the strategic issues are dealt with, the next level question(s) that should be asked are: Should the organization market directly or should it use distributors or other intermediaries to reach the customers? What should the SCM network look like? What products should be sourced from which manufacturing locations? How many warehouses should the company have and where should be located? What is the mission of each facility (full stocking, fast moving items only, cross-docking etc.)?
Functional: This is the level where operational details are decided. Functional excellence requires that the optimal operating practices for transportation management, warehouse operations, and materials management (which includes forecasting, inventory management, production scheduling, and purchasing) be designed. These strategies should keep in view the trade-offs that may need to be made for the overall efficiency of the system. Achieving functional excellence also entails development of a process-oriented perspective on replenishment and order fulfillment so that all activities involved in these functions can be well integrated.
Fig. SCM Framework Pyramid
Source: Based on work done by William C.Capacino.
Implementation: Without successful implementation, the development of SCM strategies and plans is meaningless. Of particular importance are the organizational and information systems issues. Organizational issues centers on the overall structure, individual roles and responsibilities, and measurement systems needed to build an integrated operation. Information systems are “enablers” for supply chain management operations and therefore must be carefully designed to support the SCM strategy. Supply chain managers must consider their information needs relative to decision support tools, application software’s, data capture, and the system’s overall structure.
It is important to note that the decisions made within the SCM strategy pyramid are interdependent. That is, it must be understood what capabilities and limitations affect the functional and implementation decisions and consider those factors while developing a supply chain management strategy and structure.
The SCM models used in practice lie in a continuum between two extreme models: on one end of the spectrum lies the vertically integrated supply chain model in which the organization has direct control over each and every component of the supply chain, while on the other end of the spectrum lies the horizontally diversified supply chain model (ideally) in which the number of participant is as large as the number of distinct parts of the supply chain. In a vertically integrated supply chain system, the organization can control every component of the chain and can make various changes to the system to optimize the chain very easily. But in a horizontally diversified supply chain the tendency will be to optimize only the functions that the organization is involved in, thus conscious efforts must be made by the various participants in the supply chain for the integration of their respective components in the supply chain. If an organization can be identified as the major/dominant partner in the supply chain, then this organization has to take an initiative in seeking the co-operation of the other participants in the supply chain.
The type and structure of the supply chain that is established depends on many factors, some of the major factors are:
Geographical: If the supply chain is stretched across the globe then it may not be possible to incorporate some of the principles of lean production like JIT delivery, flexible manufacturing, and co-ordination among suppliers and customers. It can lead to uncertain transportation schedules, unpredictable lead-time and may need larger inventory carriage.
Cultural: The difference in the “culture” of the participants in the chain (the difference can be due to geographical factors or corporate practices) can lead to friction and distrust. This may hamper the development of close ties.
Government Legislation: The laws of the country may prohibit the sharing of information about some facet of the supply chain and thus, may lead to a restrictive participation by one or more participant in the supply chain.
Decisions on Three Levels
Supply chain management decisions are often said to belong to one of three levels; the
strategic, the tactical, or the operational level. Since there is no well defined and unified
use of these terms, this Section describes the how they are used in this thesis.
Figure: shows the three level of decisions as a pyramid shaped hierarchy. The decisions on a higher level in the pyramid will set the conditions under which lower level decisions are made.
Figure: Hierarchy of Supply Chain Decisions.
On the strategic level long term decisions are made. According to Ganeshan and Harrison [12], these are related to location, production, inventory, and transportation. Location decisions are concerned with the size, number, and geographic location of the supply chain entities, such as plants, inventories, or distribution centers. The production decisions are meant to determine which products to produce, where to produce them, which suppliers to use, from which plants to supply distribution centers, and so on. Inventory decisions are concerned with the way of managing inventories throughout the supply chain. Transport decisions are made on the modes of transport to use.
Decisions made on the strategic level are of course interrelated. For example decisions on mode of transport are influenced by decisions on geographical placement of plants and warehouses, and inventory policies are influenced by choice of suppliers and production locations. Modeling and simulation is frequently used for analyzing these interrelations, and the impact of making strategic level changes in the supply chain.
On the tactical level medium term decisions are made, such as weekly demand forecasts, distribution and transportation planning, production planning, and materials requirement planning. The operational level of supply chain management is concerned with the very short term decisions made from day to day. The border between the tactical and operational levels is vague. Often no distinction is made.
Major Network Design Decisions
Number & locations of facilities (plants, warehouses & stores) Capacities (size) of facilities
Product mix at plants
Allocation of plants to warehouses Allocation of warehouses to stores
SUPPLY CHAIN - NETWORK & MEMBERS
Supply Chain Network Structure:
All participate in a supply chain from the raw materials suppliers to the ultimate consumer. How much of this supply chain needs to be managed will depend on several factors, such as the complexity of the product, the number of acceptable suppliers, and the availability of raw materials. Dimensions to consider include the complexity of supply chain network, length of the supply chain and the number of suppliers and customers at each level. It is obvious that one firm will be participating in several supply chains. For most manufacturers, the supply chain looks like a chain of relationships and processes. One wonders how many such relations and processes needs hand holding. The closeness of the relationship at different points in the supply chain will differ. Management will need to choose the level of partnership appropriate for particular supply chain links. Not all links throughout the supply chain should be closely coordinated and integrated. The most appropriate relationship is the one that best fits the specific set of circumstances. Determining which parts of the supply chain deserve management attention must be weighed against firm capabilities and the importance to the firm.
In order to understand these relationships well and to focus on the appropriate ones, one should have explicit knowledge about the following:
Members of the Chain; Network Structure; and Flows (Information, Product and Cash). Supply Chain Members:
While determining the network structure, it is necessary to identify the members of the supply chain who will operate within the network structure. Including all types of members may cause the total network to become highly complex, since it may explode in the number of members added from tier level to tier level. To integrate and manage all process links with all members across the supply chain would, in most cases, be counter-productive, if not impossible. The key is to sort out some basis for determining which members are critical to the success of the company and the supply chain, and thus should be allocated managerial attention and resources. The members of a supply chain include all companies/organizations with whom the focal company interacts directly or indirectly through its suppliers or customers, from point of origin to point of consumption. However, to make a very complex network more manageable it would be appropriate to classify members into two categories. One which deals with primary members who carry-out value adding activities in an independent environment are considered as Front enders and the group of companies which support these front enders can be considered as Support group or back-room boys.
In contrast, support group members are companies that simply provide resources, knowledge, utilities or assets for the primary members of the supply chain. For example, supporting companies include 3PL Companies, Integrators, Freight Forwarders, Banks and IT networking companies and all others who participate in the chain to support the Front enders or Focal companies. The same company can perform both primary and supportive activities. Likewise, the same company can be performing primary activities related to one process and supportive activities related to another process. An example
from one of the case studies is IT Company, which manufactures Hard Disk Drives (IBM), is a member of Support group when their finished product is HDD. IBM is considered as a Front ender when they are supplying their Computers. If we review the case of Intel, it plays both the roles. They work with PC manufacturing companies closely when designing the processors and also play the role of support function while supplying the processors as a supplier. At the time of design development of the processor Intel is adding value to the process and when they turn into supplier, they become support group of the Supply Chain network of a PC manufacturing company. It should be noted that the distinction between primary and supporting supply chain members is not obvious in all cases. Nevertheless, this distinction provides a reasonable managerial simplification and yet captures the essential aspects of who should be considered as key members of the supply chain and make the job all the more easier. The definitions of primary and supporting members make it possible to define the point-of-origin and the point-of-consumption of the supply chain. The point-point-of-origin of the supply chain occurs where no previous primary suppliers exist. All suppliers to the point-of-origin members are solely supporting members. The point-of-consumption is where no further value is added, and the product and/or service is consumed.
Network Structure:
Two structural dimensions of the network are essential when describing, understanding, analyzing, and managing the supply chain. These dimensions are the horizontal structure, the vertical structure. The horizontal structure refers to the number of tiers across the supply chain. The supply chain may be long, with numerous tiers, or short, with few tiers. As an example, the network structure for bulk cement is relatively short. Raw materials are taken from the ground, combined with other materials, moved a short distance, and used to construct buildings. Where as the Supply Chain of a detergent product is different and lengthy. Consider a customer walking into any one of our departmental stores looking for a detergent. The Supply Chain begins with the customer and his or her need for detergent. The next stage of this supply chain is the Departmental store retail store that the customer visits to purchase the detergent. These departmental stores must be storing their products in their replenishment warehouses or warehouse managed by the third parties or VMI warehouses provided by the supplier. This is the last stage of phase-1 of the detergent supply chain. In the next stage we have the detergent manufacturer (say, Proctor & Gamble (P&G)). P&G supply chain includes the raw material supply, packing material suppliers, and service support suppliers.
The vertical structure refers to the number of suppliers/customers represented within each tier. A company can have a narrow vertical structure, with few companies at each tier level, or a wide vertical structure with many suppliers and/or customers at each tier level. In the companies studied different combinations of these structural variables were found. In one example, a narrow and long network structure on the supplier side was combined with a wide and short structure on the customer side. Increasing or reducing the number of suppliers and/or customers will influence the structure of the supply chain. For example, as some companies move from multiple to single source suppliers, the supply
chain may become narrower. Outsourcing logistics, manufacturing, marketing or product development activities is another example of decision making that likely will change the supply chain structure. It may increase the length and width of the supply chain, and likewise influence the horizontal position of the focal company in the supply chain network. In the companies studied, the supply chains looked different from each company's perspective. The reason for this is that the integration and management of business processes across company boundaries will be successful only if it makes sense from each company’s perspective.
Process and Flows
A Supply chain is dynamic and involves the constant flow of information, product and funds between different stages as explained in the graphic given above. Each stage of the supply chain performs different processes and interacts with other stages of the supply chain. Successful supply chain management requires a change in the mindset from managing individual functions within an organization to integrating activities among supply chain partners into key supply chain processes as explained in the below given graphic. Traditionally, both upstream and downstream portions of the supply chain have interacted as disconnected entitles receiving sporadic flows of information over time. The sourcing department placed orders as projected by the PSI (Production, Sales and Inventory Planning) team and marketing, responding to customer demand, interfaced with various distributors and retailers and attempted to satisfy this demand. Orders were periodically given to suppliers and their suppliers had no visibility at the point of sale or use. Satisfying the customer often translated into demands for expedited operations throughout the supply chain as member firms reacted to unexpected changes in demand. Operating a supply chain requires continuous information flows among the supply chain partners/participants, which in turn help to create the best product flows. The customer remains the primary focus of the process. Achieving a good customer focused system requires processing information both accurately and in a timely manner for quick response systems that require frequent changes in response to fluctuations in customer demand. Controlling uncertainty in customer demand, manufacturing processes, and supplier performances are paramount to effective supply chain management.
The sharing of information among supply chain members with in the supply chain network is a fundamental requirement for effective supply chain management. Decision makers at all levels within the supply chain network are provided with timely and quality information they need, in the desired format, regardless of where within the supply chain this information originates. Fulfilling this requirement is a formidable challenge in front of any organization. Most of the supply chains fail due to lack of quality information at the right time. Differed decisions always lead to unacceptable results. Decisions are differed due to lack of appropriate information. Recent developments in technology have brought information to the forefront of resources from which forward-thinking firms can cultivate genuine competitive advantage to meet the challenges at the market place. These technologies provide the means for multiple organizations to coordinate their activities in an effort to truly manage a supply chain. As the rate of these technological advances increases, the cost associated with this information has decreased.
Simultaneously the speed with which this vital information can be made useful and applicable in a variety of business situations continues to increase.
Supply Chain Enablers:
The below mentioned four Supply Chain enablers need to be in place if Supply Chain optimization initiatives are to succeed.
Organizational Infrastructure Technology
Strategic Alliances
Human Resources Partnership
Organizational Infrastructure: It is all about organizing the functional areas and
coordinating the Change Management to achieve the corporate objective of retaining the customer and making profits to sustain in the business.
Technology: All forms of technology to improve the efficiency of the Supply Chain. Strategic Alliances: One cannot be good at every thing and physically be everywhere –
One has to relay on your partners and focus only on your core competencies to achieve the corporate goal.
Human Resources Partnership: It is about respecting the contributions made by the
employees in achieving the corporate goals and encouraging them by compensating adequately to continue their good work.
The above-mentioned enablers have to be successfully deployed in the organization to improve performance of the Supply Chain Drivers. The following are the four Supply Chain Drivers:
Inventory Transportation Facilities and Information.
Having identified the Supply Chain Drivers, we have to identify the Obstacles also and they are:
Product Proliferation;
Decreasing Product Life Cycles; Demand variability;
Supply Chain fragmentation; Globalization and;
Many obstacles, such as growing product variety and shorter life cycles, use and through concepts and ever demanding customers have made it increasingly difficult for Supply Chains to achieve strategic fit. Overcoming these obstacles offers a tremendous opportunity for firms to use SCM to gain competitive advantage.
SCM encompasses a wide variety of interdisciplinary topics, such as supplier selection, quality management across the supply chain, scheduling, logistics, information flows, distribution channels, and customer satisfaction. It is vital to note that the SCM activities should be integrated into a firm’s operations and corporate strategies so that firms can gain competitive advantage and improve their performance in their respective industries. Strategic importance of SCM:
Several reasons are contributing to the increased attention to supply chain management by the industry and the academia.
First, globalization has created more alternatives for companies regarding the supplier and distributor decisions. Global supply chain management can be a source of competitive advantage for organizations.
Second, there has been an increase in the partnership relationships between supplier-manufacturer and supplier-manufacturer-distributor pairs in several industries. Furthermore, a move from power-based relationships between suppliers and buyers towards more of a network model necessitates a higher level of integration and coordination.
Third, the perception of effective purchasing and distribution as a strategic issue has added to the concern for effective supply chain management. Firms are trying to create competitive advantages by coordinating the flow of materials and information with their suppliers and distributors.
Finally, trends such as outsourcing of non-core operations and reduction of the supplier base not only forces firms to cooperate with other companies down or up their supply chains but also requires a high level of integration of these complex form of operations for mutual benefits.
As a result of globalization, the choices that are available to a company regarding the suppliers, processes, transportation modes, and distributors are becoming numerous which, in turn, creates a complex environment and uncertainty in supply chains. Unlike the traditional approach to materials management, SCM views the chain as a single entity and emphasizes full integration of its elements, most specifically of the customers into the chain. Developments in information, communication, and transportation technologies facilitate this integration.
SCM role in operations and corporate strategies:
As a result of the importance of supply chain management, as discussed in academic and popular press, companies should develop a supply chain strategy. More importantly, the supply chain strategy must be integrated with the overall business strategy. A challenge to formulating successful supply chain strategies is the fact that the supply chain management is a collaborative effort among companies in the entire supply chain. However, functional integration is necessary first within the organization before integration can be extended to the entire supply chain. Following figure illustrates this integration and its possible impacts on company and supply chain performance.
SCM Philosophies:
The integration at the business level with the suppliers, distributors, and customers requires commitment of all the organizations within the supply chain at the top management level. In addition, as it is presented on Total quality management (TQM) is a crucial part of SCM. In a supply chain, activities are coordinated among the constituents based on the information gathered from the end customers regarding the products and services. In addition, each part of the chain is dependent on the others in the areas of customer satisfaction and quick response. Many have highlighted the
Supply Chain Management External invironment Opportuniti es and Threats Internal invironment
Strengt
hs and
Weakne
sses
Corporate-Level Strategies Business-Level Strategies Functional-Level Strategies Operation s Marketin g Research and Develop ment Informati on Systems Finance Human Resource s Suppliers Distributor s and Customer simportance of a shared strategy for the development of TQM and continuous improvement in a supply chain.
Inventory management is a crucial activity under supply chain management. Excess inventories within the supply chain are an indication of poor inventory management and may be a call for the implementation of SCM. The companies within the supply chain can follow an integrated inventory management approach and coordinate their activities based on the demand from the end customers to reduce the channel inventories. Such a joint effort may lead to a reduction in the channel inventories.
Vertical disintegration is another common approach undertaken in supply chain management practices. It is said that supply chain management is a move away from fully-vertically-integrated systems. However, the channel members do not operate completely independently but the activities are coordinated among the independent members. SCM is not only coordination of material flows but also of information flows. Therefore, information sharing is a key element for the success of SCM implementation. Logistics has a very broad scope including purchasing, transportation, warehousing, and customer service activities. It is pointed out that transportation cost is the single largest component of logistics cost. Therefore a joint effort by the members of the supply chain can reduce costs and increase the efficiency of the chain as a whole and its pieces. SCM can be viewed as the strategic management of an inter-business network. Toyota is a good example of a firm that strategically manages the supply chain and gains competitive advantages from this type of behavior.
SCM Challenge:
The challenge of supply chain management is to constrain plans with multiple constraints such as materials, capacity (production and distribution), time and locations, transportation, holding capacity, line and product sequencing, lot sizing of production quantities, production changeovers and down times, ramp up curves when switching between schedules or machines, campaign planning, multi-staging of production and distribution, and bills of materials. The end result of all these constraints is "combinatorial explosion”.
Key questions to be addressed in implementing SCM is:
What are the true demand patterns? Behind those patterns, what are the forces at work i.e., the drivers?
How can I get control over information that is there but hidden or getting to me late and/or distorted? How can I get access to up-to-date information, as close to real time and on-demand, as possible?
What are the new rules of engagement in a more cooperative rather than adversarial customer supplier relationship? To whom do the benefits of SCM accrue?
The potential benefits of implementing SCM are significant. Analysis shows that time after time, industries after industry, the breakthrough improvement possible through SCM are as follows:
Improvements % Manufacturing throughput time 75-95
Supplier lead time 75-95
Cost of poor quality 50-75
Productivity 20-50
Inventory 50-90
Equipment changeover time 75-90
Space 40-80
Administrative process time 75-95
A Supply Chain Management Road Map
The full benefits of SCM come in taking an integrated approach to implementation. In our experience the elements of a successful implementation strategy include:
Leadership - Setting clear strategic goals and a tone of cooperation. Customers - Identifying, measuring and improving on the dimensions of Product/service that drive loyalty in the marketplace
Culture - Learning by getting concrete results, acquiring the skills to Replicate and sustain improvements by involving employees.
Process - Building new capabilities through process re- design. Suppliers - Working with fewer suppliers as partners.
Every organization combines the elements of a successful SCM strategy in ways that are appropriate to its business structure and organization culture.
4. SUPPLY CHAIN IMPLEMENTATION
Whether one is implementing SCM as a Fortune 200 global enterprise, or a medium sized family company, the first steps are to:
1. Clarify strategic imperatives.
Nothing sparks the imagination like a compelling need. Create a vision of where the business could be in three to five years. Break the vision down into stretch goals attainable in 12 to 18 months.
2. Get input from the marketplace to identify opportunities. Validate senior management's view of where the business needs to be with input from the marketplace, direct high level contact with customers and non-customers. Use that Contact to start measuring what is important to the marketplace. Look for potential SCM partners among existing key accounts.
3. Design in the capability to replicate and sustain results. Pick a cadre of high potential managers, appoint them full- time to developing and Implementing the SCM strategy. They should participate in the market contact as well as first process re-design pilots that involve customers and/or suppliers. Position this group of managers as internal consultants whose mission is to teach others to replicate the success of the pilots.
4. Pilot with a customer or supplier. Clear about strategic imperatives; pick a supplier or customer with whom you can Work to develop new capabilities. A key selection criterion is that the customer or supplier you chose shares similar strategic objectives (e.g., wants to compete on the basis of service) and believes that more is to be gained by cooperating than taking the traditional adversarial instance.
FUNCTIONALITIES & BENEFITS OF SCM
Functionalities/Areas of SCM
Areas of SCM Description
Demand Planning
Demand planning aims to reduce forecast errors and to suggest buffers considering demand variability. In order to improve accuracy of forecasting, collaborative forecasting is essential.
Master Planning
Provide multi-site planning. Master planning based on material, capacity, transportation, and other constraints, simultaneously.
Procurement Constraints such as Vendor capacities, costs and lead-time can be modelled as part of supply chain resulting in superior plans.
Transportation Considering dynamic transportation requirement and generate Optimizing transportation plan.
Manufacturing Plan considering material, capacity and other constraints which impact on manufacturing.
Expected benefits from SCM can be described as follows:
Throughput improvements: Better co-ordination of material and capacity prevents loss of utilization waiting for parts.
Cycle time reductions: By considering constraints as well as its alternatives in the supply chain, it helps to reduce cycle time.
Inventory costs reductions: Demand and supply visibility lowers the requirements of inventory levels against uncertainty. Ability to know when to buy materials based on the customer demand, logistics, capacity and other materials needed to build together.
Optimized transportation: By optimizing logistics and vehicle loads.
Increase order fill rate: Real-time visibility across the supply chain (alternate routing, alternate capacity) enables to increase order fill rate. Analysis of the supply chain management can help to predict propagation of disturbances to downstream.
Increase customer responsiveness:Understanding the capability to deliver based on material, capacity, and logistics.
Improving the Supply Chain
We all understand the importance of improving our supply chain, but very few people have accurately defined the critical success drivers needed to achieve improvements. Mary Lou Fox, senior vice president of consulting at Manugistics, suggests that success depends on the several primary drivers, including the following:
Well-defined processes with well-defined guidelines for decision-making; Removal of organizational and functional barriers;
Early visibility to changes in demand all along the supply chain;
A single set of plans that drives the supply chain operations and integrates information across the supply chain.
While the first driver in this list is a given in most organizations, the importance of the remaining drivers is very high. Organizations that promote the formations of "functional silos" are less likely to achieve coordination within the various components of the supply chain than organizations that work without functional barriers. This also necessitates the integration of data across the enterprise so that, common information is shared by all planners in the supply chain. The task of improving the supply chain can be extremely complex and difficult. Various decisions integral to making improvements are forecasting, purchasing, production, storage, and distribution. Forecasting initiates the entire process of supply chain management in all environments of Assemble to Order (ATO), Make to Stock (MTS) and Make to Order (MTO). One needs to know how much to make and what to make before any of the other decisions can be triggered. A good
system will offer modules tailored to the decision being made, and will provide an end-to-end solution starting with forecasting, planning, and scheduling, and ending up with transportation planning.
It's important for organizations to have horizontal and vertical visibility into their supply chains. Every decision involved in purchasing, producing, storing, and distributing goods are interlinked. A change in any one dimension initiates a trickledown effect on the remaining components in the supply chain. For example, planning for upcoming seasonal builds impacts production, distribution, and materials. Matching a competitor's 20 percent price cut impacts the entire supply chain of an organization. If a single production line in a facility is down for a day, production must be rescheduled or moved across the enterprise to avoid delays in meeting customer demands, etc. As a result, good supply chain management systems need to be able to reconcile changes both horizontally and vertically in a computationally efficient manner.
Generally, constraints can be categorized under three groups: material-related constraints, production-related constraints, and distribution-related constraints. In the past, software companies have specialized in materials (MRP vendors), capacity (finite-capacity schedulers), and some have crossed into both material and capacity but with limitations on volumes or locations. In an age of rapid improvements in computing technology and better solution methodology, however, it's possible to take a broader perspective of the entire supply chain and solve for very large SKU counts--provided you don't try to solve the entire business problem as one computational problem. The trick is to solve the business problem and, yet, avoid the black hole of "combinatorial explosion."
Reengineering improvement into the supply chain:
The success of any supply chain mainly depends on the capability to reengineer the process in order to improve the productivity and look for cost innovations and reduced lead times. A critical part of streamlining supply chains involves reengineering the firm’s key processes to meet customer needs. Reengineering is a process aimed at producing dramatic changes quickly. Hammer and Champy define it as the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance such as cost, quality service, and speed. Improvement through reengineering cannot be accomplished in a haphazard manner. These changes must be supported at the top and driven through an overall management plan. A typical reengineering process proceeds through four stages as explained in the below given graphic:
Understanding the present condition and design the strategy keeping in view of the of business objective;
Plan the process, Operate the system,
Armed with the facts collected in the first stage, reengineering teams identify areas for improvement keeping in mind the business objective. This stage is very crucial and very critical stage in the whole process. One should clearly understand and analyze the present situation as well as the business objective in order to design the Supply Chain strategy. Organizational energy needs to focus on the firm's mission statement, which defines the business objective. The mission statement drives the business requirements in the organization. A complete assessment is made of the firm's culture, strategies, business practices, and processes. They analyze where value was added for the final customer with particular emphasis on customer contact points and product information transfers, which are currently ineffective or inefficient. After identifying improvement points the creative phase of redesigning business process and information flow begins. The outcomes of the creative phase will fundamentally change both the nature of the work and how it is performed.
If this analysis provides meaningful information and indications towards improvements, the management will review the situation and implements its business solution across the supply chain. Typically, improvements are required in one of the areas to enhance supply chain performance. An example of this reengineering is the new Mercedes-Benz micro car, which is based on the principle of systems supply. This reengineering of the process results in delegating more design activities to suppliers reducing the amount of engineering and labor at the primary manufacturer. The result is passing the savings of these efficiencies along to the customer in the form of increased value.
The operations will provide the vital information in the form of feed back about the improvements and the performance should be measured against the benchmark established at the time of strategy design to understand the progress and innovations. If necessary, one should not hesitate to re-invent the wheel in order to improve the process
Measure the Performance
(How are we doing?)
(How are we doing?)
Design Supply Chains & Strategies
(What do we do?)
Design Supply Chains & Strategies
(What do we do?)
Operate the Systems
(Do it!)
(Do it!)
Plan the Processes
(How do we do it?)
(How do we do it?)
Measure the Performance
(How are we doing?)
(How are we doing?)
Measure the Performance
(How are we doing?)
(How are we doing?)
Design Supply Chains & Strategies
(What do we do?)
Design Supply Chains & Strategies
(What do we do?)
Design Supply Chains & Strategies
(What do we do?)
Design Supply Chains & Strategies
(What do we do?)
Operate the Systems
(Do it!)
(Do it!)
Operate the Systems
(Do it!)
(Do it!)
Plan the Processes
(How do we do it?)
(How do we do it?)
Plan the Processes
(How do we do it?)
(How do we do it?)
and in turn to achieve customer’s delight. This is a never-ending activity as long as there is a buyer and a seller in the market place. Business community is becoming aware of the emerging paradigm of supply chain competition. The successful integration and management of key business processes across participating members of the supply chain will determine the ultimate success of the single enterprise. Managing the supply chain cannot be left to chance. For this reason, professionals are striving to interpret and determine how to manage the company's supply chain network, and achieve the potential of SCM.
In combination, the SCM definition and the new framework move SCM philosophy to its next evolutionary stage. The process of implementing the SCM in any organization involves identifying the supply chain members, with whom it is critical to link, what processes need to be linked with each of these key members, and what type/level of integration applies to each process link. The objective of SCM is not simply maximizing the return on investment to the stakeholders of the company but the whole supply chain network including the end-customers. Consequently, supply chain process integration and reengineering initiatives should be aimed at boosting total process efficiency and effectiveness across members of the supply chain.
This is considered as the next stage to Logistics Management. In order to conclude if the Logistics Management is integrating various value adding activities with in the organization, then the Supply Chain Management is integrating processes, flows and activities with in the Supply Chain network, which includes various other companies who participate in the network. The objective of Supply Chain Management is a cut above Logistics Management.
Tools to Support Effective Planning
For an extended period of time in the late 1970s and 1980s, the concept of Distribution Requirements Planning (DRP) was offered as a complete supply chain management solution. DRP provides the capability to model distribution bills, and translates time-phased demand into supply requirements. It also obeys calendaring requirements for shutdowns and closings. By itself, DRP does not solve the supply-planning problem. It does, however, enhance the capabilities of the logistics network of an organization. There is no one computation that will solve the entire planning and scheduling problem. It's not possible to scale up a detail-driven solution to extend it across the enterprise in a computationally efficient manner since the problem of planning and scheduling is inherently intractable. Therefore, different computations exist for different zones of planning. While designing scalable algorithms for the various planning and scheduling levels, it's essential to apply a best of breed approach. This approach might be a hybrid of mathematical programming techniques, goal driven heuristics, and rules based logic. But be sure to apply the right tool at the right time, however, and keep abreast of the latest in new search methodologies being researched in artificial intelligence and optimization.
With regard to the three-level planning areas, efficient algorithms are designed by allowing for true mathematical optimality in the Level One area. In the Level Two area, feasibility for all constraints is of primary importance given the extremely dynamic nature of businesses over the shorter time horizon. Mathematical optimality can be provided, but at a cost of computational time--which most users aren't willing to give up. In the third level, certain problems are best solved by heuristic (line scheduling) approaches. Developers of supply chain software cannot and should not be committed to providing only one solution methodology, as this will not allow for best of breed algorithmic approaches to solving the large enterprise-wide supply chain problem.
SUPPLY CHAIN DECISIONS & MODELING APPROACHES
Decisions for supply chain management are classified into two broad categories -- strategic and operational. As the term implies, strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy (they sometimes are the corporate strategy), and guide supply chain policies from a design perspective. On the other hand, operational decisions are short term, and focus on activities over a day-to-day basis. The effort in these types of decisions is to effectively and efficiently manage the product flow in the "strategically" planned supply chain.
There are four major decision areas in supply chain management:
1) Location, 2) production, 3) inventory, and 4) transportation (distribution), and there are both strategic and operational elements in each of these decision areas.
Location Decisions:
The geographic placement of production facilities, stocking points, and sourcing points is the natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows through to the final customer. These decisions are of great significance to a firm since they represent the basic strategy for accessing customer markets, and will have a considerable impact on revenue, cost, and level of service. These decisions should be determined by an optimization routine that considers production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs, production limitations, etc. Although location decisions are primarily strategic, they also have implications on an operational level. Production Decisions:
The strategic decisions include what products to produce, and which plants to produce them in, allocation of suppliers to plants, plants to DC's, and DC's to customer markets. As before, these decisions have a big impact on the revenues, costs and customer service levels of the firm. These decisions assume the existence of the facilities, but determine the exact path(s) through which a product flows to and from these facilities. Another critical issue is the capacity of the manufacturing facilities--and this largely depends the degree of vertical integration within the firm. Operational decisions focus on detailed production scheduling. These decisions include the construction of the master production
schedules, scheduling production on machines, and equipment maintenance. Other considerations include workload balancing, and quality control measures at a production facility.
Inventory Decisions:
These refer to means by which inventories are managed. Inventories exist at every stage of the supply chain as either raw material, semi-finished or finished goods. They can also be in process between locations. Their primary purpose to buffer against any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. It is strategic in the sense that top management sets goals. However, most researchers have approached the management of inventory from an operational perspective. These include deployment strategies (push versus pull), control policies --- the determination of the optimal levels of order quantities and reorder points, and setting safety stock levels, at each stocking location. These levels are critical, since they are primary determinants of customer service levels.
Transportation Decisions:
The mode choice aspect of these decisions is the more strategic ones. These are closely linked to the inventory decisions, since the best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. While air shipments may be fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper, but they necessitate holding relatively large amounts of inventory to buffer against the inherent uncertainty associated with them. Therefore customer service levels and geographic location play vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment are key in effective management of the firm's transport strategy.
Supply chain modeling approaches
Clearly, each of the above two levels of decisions require a different perspective. The strategic decisions are, for the most part, global or "all encompassing" in that they try to integrate various aspects of the supply chain. Consequently, the models that describe these decisions are huge, and require a considerable amount of data. Often due to the enormity of data requirements, and the broad scope of decisions, these models provide approximate solutions to the decisions they describe. The operational decisions, meanwhile, address the day-to-day operation of the supply chain. Therefore the models that describe them are often very specific in nature. Due to their narrow perspective, these models often consider great detail and provide very good, if not optimal, solutions to the operational decisions.
To facilitate a concise review of the literature, and at the same time attempting to accommodate the above polarity in modeling, we divide the modeling approaches into three areas --- Network Design, Rough Cut methods, and simulation based methods. The network design methods, for the most part, provide normative models for the more strategic decisions. These models typically cover the four major decision areas described earlier, and focus more on the design aspect of the supply chain; the establishment of the network and the associated flows on them. "Rough cut" methods, on the other hand, give guiding policies for the operational decisions. These models typically assume a "single site" (i.e., ignore the network) and add supply chain characteristics to it, such as explicitly considering the site's relation to the others in the network. Simulation methods are a method by which a comprehensive supply chain model can be analyzed, considering both strategic and operational elements. However, as with all simulation models, one can only evaluate the effectiveness of a pre-specified policy rather than develop new ones. It is the traditional question of "What If?" versus "What's Best?”
Rough Cut Methods:
These models form the bulk of the supply chain literature, and typically deal with the more operational or tactical decisions. Most of the integrative research (from a supply chain context) in the literature seems to take on an inventory management perspective. In fact, the term "Supply Chain" first appears in the literature as an inventory management approach. The thrust of the rough-cut models is the development of inventory control policies, considering several levels or echelons together. These models have come to be known as "multi-level" or "multi-echelon" inventory control models. Multi-echelon inventory theory has been very successfully used in industry. "OPTIMIZER" is one of the most complex models to date --- to manage IBM's spare parts inventory. They develop efficient algorithms and sophisticated data structures to achieve large-scale systems integration.
Although current research in multi-echelon based supply chain inventory problems shows considerable promise in reducing inventories with increased customer service, the studies have several notable limitations. First, these studies largely ignore the production side of the supply chain. Their starting point in most cases is a finished goods stockpile, and policies are given to manage these effectively. Since production is a natural part of the supply chain, there seems to be a need with models that include the production component in them. Second, even on the distribution side, almost all published research assumes an arborescence structure, i. e. each site receives re-supply from only one higher level site but can distribute to several lower levels. Third, researchers have largely focused on the inventory system only. In logistics-system theory, transportation and inventory are primary components of the order fulfillment process in terms of cost and service levels. Therefore, companies must consider important interrelationships among transportation, inventory and customer service in determining their policies. Fourth, most of the models under the "inventory theoretic" paradigm are very restrictive in nature, i.e., mostly they restrict themselves to certain well-known forms of demand or lead-time or both, often quite contrary to what is observed.
There are four options available to combat the "explosion" effectively. They include the following:
Throw up your hands in despair and do nothing. This is the easiest option, but will result in the continued escalation of supply chain costs.
Use the coin toss principle. Some organizations use this principle to make every decision arbitrarily. This process obviates the need for any planning or scheduling software, but can be detrimental to the well being of the organization.
Boil the ocean. Some supply chain solutions are built by aggregating detail-oriented solutions from the manufacturing realm. This implies solving for every decision at all times. Every time there is a change in any one data point in the system, one needs to resolve for the entire problem. This reasoning makes little sense from the perspective of the decision-making cycles that exist in all businesses. While this process will lead to generating optimal solutions at all times, there are still some problems. You will need more economical, faster computers; otherwise you will be memory-bound, and you won't be able to generate rapidly entire supply chain solutions that can scale large volumes in real time.
Decision scope based planning. The supply chain problem is mainly a "calendaring" game, intimately tied to the time-phased nature of decision-making cycles in the business world. Be sure to examine the scope of the decision being made, as well as the authority of the decision maker. This means solving the problem by providing tools to support various levels of decision-making, namely those that are strategic, tactical, and operational in nature. Since decisions made at each of these levels differ significantly, the solution procedures embedded in these tools vary. These tools also should be configured so that they are fully integrated, which will reduce implementation costs as well as time-to-benefit.
The system must meet the need:
We live in a dynamic environment. Prices change, machines break down, trucks fail to show up at agreed upon destinations, customers generate sudden orders, and on and on. But we still plan even under uncertainty. This doesn't imply that planning is futile, but that care should be taken to make the right decisions at the right time. For example, don't commit a priority order that is three months out since the demand profile may change significantly over the next few planning periods. This order commitment process shouldn't be within the scope of a strategic tool, but should be used as a guideline for other supply chain decisions, such as resource planning. A decision to invest in a new piece of machinery, however, needs to be made with a time horizon that is even longer due to the lead-time for delivery. This can even be accomplished by using historical data or incomplete information.
A multi-level approach:
Therefore, we can conclude that in order to build an effective supply chain management system that solves the entire business problem, scales for volumes, and
doesn't require high maintenance; a company needs to adopt a multi-level planning approach.
An example of a multi-level approach would be a three level planner. At each level, a series of decisions are
made based on the decision's scope and the associated timeline. That information is passed on to the subsequent levels. The levels can be tied together at the data level, at the algorithm level, or it can be a hybrid of both. Listed below are the decision levels that might be found in an example of a three-level planner:
Level-One Decisions: These decisions are in the area of business planning, and they have a long-term effect on the supply chain. Very often, detailed information is not available or reliable. Senior management is frequently the decision maker and user of this information. Quick response is not a requirement at this level since these decisions are not made or revisited every day Examples of Level One decisions are dynamic sourcing, capacity planning, and prebuilt planning.
Level Two Decisions: These decisions are in the area of tactical planning, and they have a shorter life than Level One decisions. Detailed information is available, and the data probably is very reliable. These decisions are constrained by Level One decisions with some leeway to account for sudden changes in data. At this level, quick response is nice to have, and occasionally is something you must have. An example of a Level Two decision is one that needs to commit priority orders and obey commitments made in Level One.
Level Three Decisions: These decisions are in the area of operational planning and scheduling. The effect of these decisions reverberates throughout the next couple of days or shifts, and they are constrained by Level One and Level Two decisions. Quick response is an absolute necessity, and the concepts of Available to Promise (ATP) and Capable to Promise (CTP) need to be designed to work upstream with the other levels. Examples of Level Three Decisions are prevalent in the area of line scheduling, material and inventory allocation, and transportation planning.
This three-level approach emphasizes the fact that supply chain management is a series of business decisions characterized by distinct business models, which are largely influenced by location topology, product granularity, and elapsed cycle time. The challenge in building a layered system is to avoid the problem of the "deadly embrace," which occurs when a decision made at a higher level is completely redone at a lower level and the upstream data isn't updated. When the data isn't updated, it causes reconciliation errors both upstream and downstream. As a result, the trickle-down effect should be observed and effective loop back mechanisms should be provided to navigate between levels. A strong loop back mechanism also allows for complete integration of the entire suite, which reduces the number of interfaces to maintain while implementing the entire suite of supply chain tools. The fewer the number of interfaces, the easier a system will be to maintain in the long term. It will also reduce the chances of a failed batch or interactive runs.
