5/30/2009
Kiran Afshan, Huma Naz | MBA –ITM 13
Table of Contents
Chapt er Numb er Title P age # 1 Organization Portfolio 3 2 Literature Survey 133 An Introduction to Supply Chain and Supply Chain Management
26
4 Supply Chain of Pepsi Haidri Beverages 80
5 Ideal Features of a Supply Chain Management Software
100 6 Supply Chain Management Systems and the
Current Marketplace
129
7 Proposed System for Pepsi Haidri Beverages 167
Chapter 1
Organization
Portfolio
Chapter 1
Organization Portfolio
Haidiri Beverages Private Limited, Pakistan
The Haidiri Beverages Group was set up in 1979 and is Pepsi's sole selling agent for District Rawalpindi and Islamabad. It is based in the CDA Industrial Triangle, Kahuta Road, Islamabad. It manages the supply for several wholesalers, retailers, restaurants, hotels and other such food outlets. In order to achieve the projected sales targets effectively, the organization ensures a comprehensive strategic alignment with the overall Pepsi Cola’s business strategy. Haidiri Beverages’ primary functions are to conduct a systematic manufacturing and supply of the product without any tactical flaws. Backed by a powerful competitive strategy and empowered by some effective supply chain strategies, the group has been managing an effective supply chain throughout the region. It has set up a sophisticated manufacturing and storage plant in Rawalpindi with multiple production units and huge production capacity. Haidiri Beverages has different management departments dealing with specialized Marketing, Human Resource, Information Technology and Supply Chain Processes. In this section we conduct a brief analysis of the basic supply chain management functions of Haidri beverages.
1.1 History of PepsiCo
PepsiCo is a world leader in convenient snacks, foods and beverages, with revenues of more than $39 billion and over 185,000 employees. The company consists of PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB) and PepsiCo International (PI). PAF includes Frito-Lay North America, Quaker Foods North America and all Latin America food and snack businesses, including Sabritas and Gamesa businesses in Mexico. PAB includes PepsiCo Beverages North America and all Latin American beverage businesses. PI includes all PepsiCo businesses in the United Kingdom, Europe, Asia, Middle East and Africa. PepsiCo brands are available in nearly 200 countries and generate sales at the retail level of more than $98 billion. Some of PepsiCo's brand names are more than 100-years-old, but the corporation is relatively young. PepsiCo was founded in 1965 through the merger of Pepsi-Cola and Frito-Lay. Tropicana was
acquired in 1998 and PepsiCo merged with The Quaker Oats Company, including Gatorade, in 2001.
PepsiCo offers product choices to meet a broad variety of needs and preference -- from fun-for-you items to product choices that contribute to healthier lifestyles. PepsiCo’s mission is: “To be the world's premier consumer “Products Company” focused on convenient foods and beverages. We seek to produce healthy financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity.” (www.pepsico.com)
1.2 PepsiCo Headquarters
PepsiCo World Headquarters is located in Purchase, New York. The seven-building headquarters complex was designed by Edward Durrell Stone, one of America's foremost architects.
1.3 Areas of Operation
Haidri Beverages is one among a number of PepsiCo’s franchisers all around the country. Haidri Beverages, solely, have three branches in Pakistan located in Islamabad/Rawalpindi, Gujranwala and Peshawar. All the franchises in Pakistan have divided their area of distribution and the domain of each franchiser is restricted to their area of operation. Not much of expansion is done since it might violate the domain area of other franchisers. We will be dealing with the area covered by Haidri Beveravges Islamabad.
Haidri Beverages deals with distributors residing in Islamabad/Rawalpindi district, with its boundaries starting from Dina, Mirpur till Attock district.
1.4 Business Cycle of Pepsi Haidri Beverages
Figure 1 Business Cycle of Haidri Beverages [Source: Haidri Beverages Management]
The business cycle starts from forecasting customer demand for each product of PepsiCo individually. According to the demand forecasted by the sales and distribution department, the annual plan is prepared for the running year which is then further divided into quarterly, monthly, weekly and daily basis and production plan is created. For the production, the company needs raw materials, these raw materials include the following: 1. Pepsi Concentrate 2. Sugar 3. Carbonated Water 4. Glass Bottles 5. PET bottles
6. Plastic in Raw Form 7. Packaging material 8. Crates
9. Cans 10. Bottle caps
11. … and many others
Much of the raw materials are acquired by local manufacturers. However, cans, Pepsi concentrate, glass bottles etc. are purchased from manufactures that are:
1. Domestic but at distant location
2. Located in Foreign countries (New York, Dubai)
The purchased raw material is shifted immediately to store (in-house raw material inventory) from where it is periodically issued to the production department for processing in order to convert it into final product. As in company policy, the finished product is immediately shifted to distributors and is stored there. Only safety level finished product inventory is maintained by the company so as to comply with laws enforced by Government to keep minimum level safety inventory.
A Territory Development Manager of the company is designated for each distributor for monitoring further sales to retailers and consumers. This is a place where the exact demand and supply ratio is measured and targets are defined. The distributor produces information of actual sales (supply) to the customer which is an input to the company as demand forecast which completes the business cycle of Haidri Beverages.
1.5 Organizational Workflow
The workflow of Pepsi Haidri Beverages starts from preparing the annual sales and procurement strategy. This sales strategy is then divided into quarters, months, weeks and days. On the basis on monthly sales, a target is defined for each distributor and they are made aware of that target. The distributors accomplishing this target get discounts and bonuses. Haidri Beverages doesn’t need to contact distributors or retailers themselves since they have a predefined number of distributors and the network needs no expansion. Each distributor is responsible for a specific area and the other distributors are not allowed to enter in this domain.
According to the defined sales strategy, the production plan is prepared for the year divided further into quarters, months, weeks and days. The daily or weekly production plan is forwarded to production department. According to the production plan, the production department makes a production schedule which is done on daily basis. The production department makes a complete sketch of products to be produced and the required raw materials and their quantity. These raw materials are requisitioned from the inventory (store). The inventory control department is divided into two areas: store management and warehouse management. The store mainly contains the raw material which is required to produce the product as well as all the other raw materials required for operations management throughout the organization. The warehouse stores the finished product only. The organization keeps only the safety inventory in its warehouse. A daily shipment of product is done to the distributors in order to fulfill consumer demand.
In order to fulfill the demand of production department, the Purchase department needs to procure raw material frequently. The suppliers are already chosen by the company and contracts are given to those suppliers only. The company gives priority to local suppliers so as to complete its business cycle efficiently and effectively.
Start Process 2 Liquidation of SugarStart
Process 2 PEPSI Concentrate Carbonated FilteringPut Into the Filling Syrup Tank
Machine Filing Process Capping and Coding
Process
Put Bottles in Crates through Machine
Filling of crates with 24 bottles
Unfortunately, there are a number of items that are unavailable in local market and it has to purchase these items from remote areas. These materials include cans, Pepsi concentrate, sugar, nitrogen (liquid form), and others.
The purchased items are moved first to the store where the raw material is issued to concerned department according to the requisition done. The finished product is moved to warehouse where the shipment department is responsible for loading product to vehicles for delivery to distributors. A small amount of finished goods inventory is kept by the company as safety inventory.
The peak season when the demand is highest usually starts from May and continues till September. During this period, the demand is fulfilled by making longer shifts and utilizing the production equipment 24 hours a day.
The waste produced during manufacturing process is sold out to concerned parties. The supply chain designed in this research will therefore follow the Lean Supply Chain Management strategy.
The cash is collected by the finance department by hand. The company has not opted for any credit or online credit-card sale as yet.
1.5 Current IT Infrastructure
The company has partially automated its four (4) major business processes: 1. Sales Process
2. Accounting and Finance 3. Human Resource
4. Store and warehouse management
The details of these modules and how they help in the business processes is provided as under:
1. Sales or Shipment Module
The sales module encapsulates all information regarding distributor data management, key accounts management, sale (cash inflow) and shipment etc. The distributor information is captured with regards to the area it is covering in the local market, the location of the distributor, name, contact numbers, contact persons etc. Key accounts are those retailers to which the company distributes the product directly. This happens in the case of fountain fresh Pepsi products which are delivered to the customer using the post-mix cylinders delivered by company owned vehicles. Such customers include KFC, Pizza Hut, Savour Foods and others. Sales are done on cash payments which are deposited in advance by the distributor. The products are then shipped the distributor. Usually, the distributors bring along their own vehicles to load the shipment. At the time of sale, the data is saved in ERP sales module, the finance data (cash inflow) is updated and a receipt is generated by the system called sales invoice.
The system keeps track of which distributor purchased what quantity and the frequency of sales can also be captured. A daily sales report is generated by the system which shows the distributor, units of product purchased, date of purchase, the total amount and other key information. The company defines a target sale for each distributor at the beginning of month. This target is defined on the basis of previous sales history of the distributor which is managed by the Figure 2 Production process of beverages [Source: Pepsi Haidri Beverages Production Department]
software. The reports generated by the system also provide the user with the information of what percentage of the target has been achieved by the distributor as yet. The distributor can be judged on this basis if he will be able o achieve the set target or not.
The ERP system not only keeps track of the primary sales done to the distributor, it also captures the secondary sale data provided by Territory Development Managers (TDMs), the personnel designated by the company to monitor the distributor sales (at distributor end) and to keep a check that a distributor does not enter the domain of another distributor. The secondary sales data contains information regarding distributor’s sale to retailers which is recorded in units per day and does not actually contain information as to which retailer the product was sold.
2. Financial Accounting module
Financial accounting module has a basic and limited functionality. It has two to three main entry forms regarding insertion/deletion of accounts (chart of accounts) and transaction entry. Any transaction taking place in the company will be recorded here. The invoices (payment or receipt) is also created in the same form. The form contained a category field where the category of receipt/transaction is defined. The categories can be cash receipt, bank receipt, payment invoice, sale invoice etc. A notable point is that the transaction is not made automatically when a sales transaction takes place. This could be rightly so as the cash payment is received directly from the distributor by the finance department, but it can create a logical error since the transaction is not done in correspondence to the sales transaction.
The reports generated the system include trial balance, balance sheet, income statement and other basic financial statements.
3. Inventory Management
It is also a limited-functionality module which only records how much items are produced today. This entry is done at the end of the day and still there is confusion about what actually is inserted in the system since the total manufactured amount is reduced at the end of the day due to sales transaction
and the corresponding batch numbers or lot numbers are not recorded in sales module.
The system still supports the inventory control system since it contains up-to-date information regarding the finished product available in the warehouse only and also the store data which contains information of raw materials. The stock-in and stock-out is also updated whenever requisition is made from the production department for the raw material used for production.
4. Human Resource Management module
Human Resource Management module has proved to be very handy when it comes to daily attendance and payroll calculations. The system automatically generates a bar code when a new employee is added in the HRM module. On the basis of this bar code, employee gets a printed card. Whenever an employee comes in or goes out, he scans his card against the bar-code reader placed at the entry gate of the company and the time-in and timeout of instantly updated by the system. A monitory report is also flashed on manager’s screen which is updated every 5 seconds. This shows a complete list of employees coming in and going out. The system contains a descriptive employee record and employee leaves are also managed by the system. It shows how much leaves of which category (casual leave, paid leave, sick leave etc.) has been acquired by each employee as yet.
The payroll of employees are calculated automatically including overtimes, deductions (for late arrivals and extra leaves), bonuses, allowances etc. and a pay slip is generated by the system.
In order to support the ERP system and network as a whole, the following hardware configuration has been adopted by the MIS department:
• Full LAN support, using domain server, switches, boosters and other network equipment
• 1 oracle database server, 1 application server, Linux server (for network management), and a print server
• Requisition for a backup database server has already been placed • The network facilitates almost 50-60 users around the organization
The system, collectively, has proved to be very beneficial for the employees and managers at Haidri Beverages and the employees seem to be satisfied over the system’s performance. Further enhancements are done at frequent basis in order to facilitate the company’s management and human resource to perform their tasks in a much better way.
Chapter 2
Chapter 2
Literature Survey
2.1 Article: How should we define SCM?
Author :Sree Hameed Created on: 11 April 2007
In the early years of SM it is considered to breaking down the walls but now the concept is change it not breaking down the walls but rearranging the walls. SCM helps to achieve CEO agenda. Professional organizations try to provide knowledge of SCM. This figure helps to understand the process of business
Figure 3Business processes in a supply chain [Source: Sree Hameed, 2007]
Through this figure we get overview of business and understand how actually it makes money. The purpose is to see the bigger picture and creating value to enterprise and not stuck into conflicts and debates.
2.1.1 Customer (the why)
Customers are those who take the initial step in order to get the product. Company current and future strategies around which product to build, assets to own, which market to enter or serve these all things depend on customer needs and requirement.
2.1.2 Product (the what)
As the product become obsolete more innovation and creativity is required in order to satisfy customer need. But to meet innovation, profitability requires engineering. There is a gap between actual and desired and this gap will lead to the profit leaks.
Figure 4 Product leaks [Source: Sree Hameed, 2007]
Profit leaks also provide the opportunity for product and process innovation.
2.1.3 Process (the how)
Seven core processes are design, source, make, move, store, sell and service. Management takes decision regarding to process. The decision based on three groups i.e. strategic, tactical, execution.
2.1.4 People/Partner (the who)
Customer demanding better, faster and cheaper which increase the product complexity and this leads to complexity in supply chain. Companies try to achieve flexibility and responsiveness. Outsource some process or function to the partners who have more competencies in specific area. Processes are shared and collaborate and coordinate with partners. When environment is very dynamic it is very difficult to go alone. Life cycles of products are shrinking faster as compare to lifecycle of the assets used to produce the product this will lead the organization where they have very little choice and they are less adaptive to assets.
2.2 Article: Supply Chain Management
Author: M. Eric Johnson
SCM is flow of information, funds and material from supplier to producer and then to distributor and ultimately to consumer but it also includes after sale service. SCM involves the coordination of material and information between firms but inventory management coordinates with inventories at different locations.
SCM is famous in recent years for a number of reasons. Action taken by one person of the firm can influence others profitability in the chain. But nowadays firms compete with other supply chain as a part of supply chain. So as a firm successfully streamlines its operation, the next step for improvement is coordination with their suppliers and customers.
In the Italian pasta industry, the demand of consumer was stable throughout the year however because of trade promotions, volume discounts, long lead times and end of quarter sales incentives the order seen at the manufacturers are highly variable(Hammond 1994).So it lead that to a Bull Whip effect.
Some managers are more interested in integration but it is impossible to implement a system oriented approach without information technology. Supply chain should be viewed as an integrated system Forrester (1958); Forrester (1961).Change in management theory and technology set the stage of supply chain management. One of the reasons of change in mgmt theory means the shift of power from manufacturers to retailers.
Information technology and retail power are the key catalysts in SC. E-business is playing an important role and is facilitating the virtual supply chain
Figure 5 Supply Chain Process [Source: M. Eric. Johnson (1999), Supply Chain Management]
2.2.1 Key components of supply chain management
According to the author, there are twelve key components of a supply chain management system:
1. Location
2. Transportation and Logistics 3. Inventory and forecasting
4. Marketing and channel restructuring 5. Sourcing and supplier management
6. Information and electronic mediated environments 7. Product design and new product introduction 8. Service and after sales support
9. Reverse logistics and green issues 10. Outsourcing and strategic alliances
11. Metrics and incentives 12. Global issues
Location includes both qualitative and quantitative facility location. This includes models of facility location, geographic information systems (GIS),country differences, taxes and duties, transportation costs associated with certain locations, and government incentives (Hammond & Kelly (1990)).Transportation and logistics includes all the issues which are related to the flow of goods through the supply chain including transportation, warehousing and material handling. Inventory and forecasting includes traditional inventory and forecasting models. Marketing and restructuring includes the basic thinking on the on SC structure (Fisher 1997) and it includes the interfaces with marketing. Bull whip effect has received many attentions in the research literature. But, increased in consumer demand through the EDI and the internet can decrease the Bull whip effect. Other initiatives can also mitigate the bullwhip effect. For example, changes in pricing and trade promotions (Buzzell, Quelch, &Salmon (1990)) and channel initiatives, such as vendor managed inventory (VMI), coordinated forecasting and replenishment (CFAR), and continuous replenishment (Fites (1996), Verity (1996), Waller, Johnson, & Davis (1999)), can significantly reduce demand variance.
Marketing focuses downstream in the supply chain, whereas sourcing and supply management focuses on upstream to suppliers. Information and electronic mediated environments focuses on application of IT to reduce inventory (Woolley (1997) and the expanding area of e-commerce (Benjamin & Wigand (1997) and Schonfeld (1998)).
The sale and after sale support addresses the critical problem of providing service and service parts (Cohen and Lee (1990). Reverse logistics and green issues are emerging dimensions of supply chain management (Marien (1998)).
Figure 7 Product recovery options [Source: M. Eric Johnson (1999), Supply Chain Management]
Outsourcing and strategic alliances sees the SC impact of outsourcing. With the rapid growth in third party logistics providers, there is a large and expanding group of technologies and services to be examined. These include fascinating initiatives such as supplier hubs managed by third parties. Metrics and incentives include organizational and economic issues. This category includes both measurement within the supply chain (Meyer (1997)) and industry benchmarking ((1994), (1997)).Final one is global issue when a company operates in foreign multiple country. When a company operates in foreign country then tax rate, duties and currency exchange rate and govt. issues matters a lot.
2.3 Article: Artificial Intelligence in Supply Chain Management - Theory
and Applications
Author: Hokey Min 2.3.1 Purpose:
The purpose of this article is to promote the AI for improving human decision-making processes in supply chain management and the organization productivity in various business areas due to its ability for recognizing business potential and pattern, using relevant information, and analyses data accurately.
2.3.2 Design/Methodology/Approach:
This paper covers the explanation of the AI based SCM system .Despite its widespread acceptance as a decision making tool, AI has seen limited application in supply chain management (SCM). To fully explain the potential benefits of AI for SCM, this paper explores various sub-fields of AI that are most suitable for solving practical problems relevant to SCM. This article reviews the past record of success in AI applications to SCM and identifies the most suitable areas of SCM in which to apply AI.
2.3.3 Findings /Objectives:
The main objectives of this article are to identify the sub-fields of AI that are most suitable for SCM applications and their usefulness for improving SC efficiency, analyzing the existing literature dealing with the applications of AI to SCM ,to develop a taxonomy for the existing AI literature and categories it according to its SCM application areas, problem scope, and methodology, to identify the potential SCM application areas that have not been explored and discuss the future trends for AI in SCM.
2.3.4 Review:
Hokey Min (2009) described about the role of artificial intelligence in supply chain management system. AI use computers for reasoning, identifying business pattern, use past experience for forecasting and making decision for present problems. Hockey Min use existing literature for explaining AI and its applications that are used in many fields. Although AI is used in many fields of decision making but SCM is not fully used the benefits of AI. He categorized the existing literature into three classes’ problem
scope, methodology and the implementation status. He described the role of AI in sub units of supply chain like Inventory control and planning, transportation network design, Purchasing and supply management, Demand planning and forecasting, Order-picking problems, Customer relationship management and e-synchronized SCM. So it is concluded that AI tools has great potential for solving many strategic issues involving CRM, outsourcing relationships, strategic alliances among SC partners, SC coordination, collaborative demand planning, and business-to-business negotiations. Another finding is that an agent-based system has emerged as one of the most popular AI tools for tackling various aspects of SC problems. However AI has some limitations like AI does not have free will and depends on the computer software which may be programmed incorrectly and AI solutions may not be easy to implement.
2.3.5 Reference: Author: Hokey Min
Affiliation: Management, College of Business Administration, Bowling Green State
University, Bowling Green, OH, USA
Publication Frequency: 6 issues per year
Published in: International Journal of Logistics Research and Applications First Published on: 24 March 2009
2.4 Article: A Collaborative Supply Chain Management
Part 2 – the hybrid KB/gap analysis system for planning stage
The Authors
Zulkifli Mohamed Udin, Faculty of Technology Management, Universitiy Utara Malaysia,
Kedah Darul Aman, Malaysia
Mohammad K. Khan, School of Engineering, Design and Technology, University of Bradford,
Bradford, UK
Mohamed Zairi, School of Management, University of Bradford, Bradford, UK
2.4.1 Purpose – The purpose of this paper is to promote the model of knowledge-based
collaborative supply chain management (KBCSCM) system as an alternative strategy for organizations to resolve the problems in their current supply chain management (SCM) in the era of collaborative commerce.
2.4.2 Design/methodology/approach – This paper covers the explanation of the
in the knowledge-based system (KBS). Through this technique, the current position of organizations’ can be identified before implementation of some improvement programs.
2.4.3 Findings – This paper has described a hybrid KB/GAP analysis CSCM system for
application in organizations, specifically for manufacturing environment. The valid, practical and consistent solutions that are provided by KBCSCM system would assist organizations in implementing CSCM as a strategy.
2.4.4 Originality/value – This paper describe the use of KB approach in the SCM
environment. A systematic planning of CSCM has not been developed before and the development of the KBCSCM system is believed to be crucial in order to improve the competitiveness of the organization’s SCM. So that users can be able to easily understand the position of their organization.
2.4.5 Review
Udin, khan & Zairi describes in this paper the hybrid KB/GAP analysis Collaborative Supply chain management system for manufacturing organization. Knowledge base system is the information system application those support organization in decision making. The use of KBS application in the SCM is mostly use in area of procurement; purchasing, supplier selection and evaluating supplier performance. The use of knowledge base approach in SCM and systemic planning and design of CSCM improve the competitiveness of organization. This paper presents the idea to develop collaborative supply chain management. This paper promotes CSCM as a strategy and eliminates disintegration in Supply chain. CSCM based on GAP analysis enable management to identify firm performance. In this paper the production rule based type of KBS is used to structure the information that is gathered from literature and from users. All modules are developed separately and integrated using phase technique. Trust among parties in SCM, communication, resources sharing, responsibility, profit and risk sharing, technology, business processes adjustment and other issues are taken as a basic guideline to develop CSCM system in this paper. This system enables users to use the knowledge that reside in the system. The GAP analysis technique used in rule based structure show the organization position.
In this paper the prototype of KBCSCM system for the planning stage has been developed and tested using artificial data. Three modules of planning are organization environment perspective module, Collaborative business perceptive module and
external-internal chain perspective module. In organization environment perceptive module gather the general information like company background, number of employees, type of industry, SCM investment activities etc. Purpose of this module is to identify the current condition of organization and its environment. The purpose of collaborative supply chain perspective module is to show current market position and it has tree sub modules: financial performance, market analysis and product development. Product development phase measure the interest of suppliers and customers in product development activities. Internal-external chain perspective module consist two sub modules internal function strategy and supplier customer strategy. The function of this module is to understand the current market position based on internal-external relationship based on some variables such as commitment, integration, trust development, relationship management, information and communication and etc.
Udin Z.M, Khan .M.k & Zairi. M (2006). A collaborative supply chain management. The hybrid KB/GAP analysis system for planning stage, Business Process Management journal, Vol. 12, No. 5, 671-687
2.5 Article: The Internet-Enabled Supply Chain: From the “First Click”
to the “Last Mile”
Author: Dr. David L. Anderson, Anderson Consulting Dr. Hau L. Lee, Stanford University
2.5.1 Purpose:
The purpose of this article is to study how the internet has changed the way in which supply chains are managed, planned and controlled. The authors state that the web offers the supply chain enormous potential and entirely new methods for streamlined coordination between business partners, including third and even fourth-party providers. The authors further state that companies who want to succeed in the new economy need to enhance communications with their partners and providers.
2.5.2 Review
The internet has provided companies a wide range of opportunities to create value. Using the internet to connect the supply chain systems to all the other supply chain
participants becomes the medium through which the essential processes of managing and synchronizing supply chains are carried out. The reason why the change in supply chains, by shifting them over to internet, is so certain is, firstly, that the customers are looking beyond cost as the sole arbiter of value. They demand innovation and personalization of not only the products but of the associated velocity of the supply chain issues exponentially and yet at the same time requires greater flexibility.
How will the Internet-enabled supply chain be different from the traditional supply chain? The authors believe there are some key areas that distinguish the new Internet-enabled supply chain from the traditional supply chain. These areas and issues are discussed by the authors as follows:
2.5.2.1 e-Design – Product Innovation on the Web
The authors have identified the following key benefits of an eSCM:-• Shorter time-to-market, enabled by collaborative design
• Internet-enabled technology provides real-time linkages between key suppliers, manufacturers, engineers and marketers
• The ability to conduct collaborative design means that companies can iterate many more design alternatives with suppliers
• Product upgrades can also be achieved more effortlessly and in a timely manner, enabling companies to stay ahead of their competition
• The revenue and profit impacts are enormous
• Enhanced communication and collaborative processes overcome many of the organization silo issues faced in traditional sequentially oriented design activity
• Products can be rolled out faster
• The risks of customer needs shifting during development are mitigated
• Increased collaboration throughout the design process can minimize product complexities that later drive supply chain inefficiencies and costs in production, logistics and service parts.
Figure 8 E-Design of SCM [Source: D.L. Anderson, 2000]
2.5.2.2 e-Mediaries and Exchanges – Using Online Markets to Revolutionize Buying and Selling
The marketplace, according to the authors, is being reinvented. Companies can now buy and sell across a wide spectrum of emerging Internet-enabled marketplaces. Like traditional marketplaces, trading networks may take many forms. In the supplier-centric model, like W.W. Grainger, sellers provide their catalogs online for all buyers to access. Global companies like BP Amoco are utilizing the buyer-centric model to display their needs online and allow vendors to make bids.
The latest development is online marketplaces – the business-to-business equivalent of eBay. These marketplaces are like online bazaars, where anyone can buy or sell all types of goods and services. Each of these various exchanges provides companies with unique opportunities to tap into performance and cost benefits unavailable prior to the Internet. Regardless of the type of marketplace, the benefits are many: lower product acquisition costs, lower procurement transaction costs, the ability to tap into almost unlimited supply sources to respond to changing market needs, and a means to profitably dispose of unused excess inventory.
References:
Anderson D.L., Lee H.L. (2000), Internet-Enabled Supply Chain: From the “First Click” to the “Last Mile”, Acset, vol. 2 [online] Available at:
Chapter 3
An Introduction to
Supply Chain &
Supply Chain
Management
Chapter 3
An Introduction to Supply Chain
&
Supply Chain Management
Up till recently, companies did not think in terms of supply chains, but viewed themselves and their trading partners as independent islands. Sellers at times struggled to keep up with demand, while buyers purchased goods for which they could pay, barter or obtain credit. Economic and competitive pressures eventually forced companies to think in terms of supply chains for the production and delivery of goods. For this reason, the material or physical supply chain was born.
With the advancement of business processes, supply chain gained more and more importance for each member of business community including manufacturers, retailers, suppliers, suppliers’ suppliers and even consumer. Strategies were developed in order to accelerate product sales and distribution. With the expansion of sales from areas to cities and cities to countries, the need arose for proper tracking of demand and supply as well as forecasting of materials, supplies, sales and distribution schemas. After the emergence of Information Technology and business globalization, the concept of integrated supply chain management was revolutionized. Information technology consists of the tools used to gain awareness of information, analyze this information, and execute on it to increase the performance of the supply chain.
3.1 What Is a Supply Chain?
A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. The supply chain includes not only the manufacturer and suppliers, but also transporters, warehouses, retailers and even customers themselves. Within each organization, such a manufacturer, the supply chain includes all functions involved in receiving and fulfilling a customer request. These functions include, but are not limited to, new product development, marketing, operations, distribution, finance and customer service.
Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to the end customer. In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual value is recyclable. A typical supply chain begins with ecological and biological regulation of natural resources, followed by the human extraction of raw material and includes several production links, for instance; component construction, assembly and merging before moving onto several layers of storage facilities of ever decreasing size and ever more remote geographical locations, and finally reaching the consumer.
Figure 9 Information, Funds, and Product flow in SCM [Source:
http://dspace.mit.edu/bitstream/handle/1721.1/39816/ESD-260JFall2003/OcwWeb/Engineering-Systems-Division/ESD-260JFall2003/CourseHome/index.htm]
Consider a customer walking into a Wal-Mart store to purchase detergent. The supply chain begins with the customer and his or her need for detergent. The next stage of this supply chain is the Wal-Mart retail store that the customer visits. Wal-Mart stocks its shelves using inventory that may have been supplied from a finished-goods warehouse or a distributor using trucks supplied by a third party. The distributor in turn is stocked by the manufacturer (say Proctor & Gamble [P&G] in this case). The P&G manufacturing plant receives raw material from a variety of suppliers, who may themselves have been supplied by lower-tier suppliers. For example, packaging material may come from Tenneco packaging, while Tenneco receives raw material to
manufacture the packaging from other supplier. This supply chain is illustrated as
follows:-Figure 10 Wal-Mart SCM Process [Source: Supply Chain Management System by Sunil Chopra &Pete Meindl]
A supply chain is dynamic and involves the constant flow of information, product and funds between different stages. In the above example, Wal-Mart provides the product, as well as pricing and availability information, to the customer. The customer transfers funds to Wal-Mart. Wal-Mart conveys point-of-sales data as well as replenishment orders to the warehouse or distributor, who transfers the replenishment order via trucks back to the store. Wal-Mart transfers funds to the distributor after the replenishment. The distributor also provides pricing information and sends delivery schedule to Wal-Mart. Wal-Mart may send back packaging material to be recycled. Similar information, material, and fund flows take place across the entire supply chain.
A typical supply chain may involve a variety of stages. These supply chain stages include:
Customers Retailers
Manufacturers
Component/raw material suppliers
Each stage in a supply chain is connected through the flow of products, information, and funds. These flows often occur in both directions and may be managed by one of the stages or an intermediary. Each stage need not be present in a supply chain. The appropriate design of supply chain depends on the customer’s needs and the roles played by stages involved.
3.2 The Objective of a Supply Chain
The objective of every supply chain should be to maximize the overall value generated. The value a supply chain generated is the difference between what the final product is worth to the customer and the costs the supply chain incurs in filling the customer’s request. For most commercial supply chains, value will be strongly correlated with supply chain profitability (also known as supply chain surplus), the difference between the revenue generated from the customer and the overall cost across the supply chain. Supply chain profitability or surplus is the total profit to be shared across all supply chain stages and intermediaries. The higher the supply chain profitability, the more successful is the supply chain. Supply chain success should be measured in terms of supply chain profitability and not in terms of profits at an individual stage.
Many of the exchanges encountered in the supply chain will therefore be between different companies who will seek to maximize their revenue within their sphere of interest, but may have little or no knowledge or interest in the remaining players in the supply chain. More recently, the loosely coupled, self-organizing network of businesses that cooperates to provide product and service offerings has been called the Extended
Enterprise.
3.3 Supply Chain Management (SCM)
Supply Chain Management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers. Supply Chain Management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from of-origin to point-of-consumption. In other words, SCM is a cross-functional inter-enterprise system that
uses information technology to help support and manage links between some of a company’s key business processes and those of its suppliers, customers, and business partners.
Supply chain management has generated much interest in recent years for a number of reasons. Many managers now realize that actions taken by one member of the chain can influence the profitability of all others in the chain. Firms are increasingly thinking in terms of competing as part of a supply chain against other supply chains, rather than a single firm against other individual firms. Also, as firms successfully streamline their operations, the next opportunity for improvement is through better coordination with their suppliers and customers. The cost of poor coordination can be really high. The figure below illustrates an example of a supply chain network and how closely each partner is linked to one another in order to fulfill the demand and supply
process:-Figure 11 An example of SCM Process
3.4 Goal of Supply Chain Management
Goal of SCM is to efficiently manage process bifurcating demand, controlling inventory, enhancing the network of business relationships a company has with customer, suppliers, distributors and others, and receiving feedback on the status of every link in the supply chain. The goal of SCM is to create a fast, efficient, and low cost network of business relationships, or supply chain, to get a company’s products from concept to market.
Supply Chain Management is one of the most important strategic aspects of any business enterprise. Decisions must be made about how to coordinate the production of goods and services, how and where to store inventory, whom to buy materials from, and how to distribute them in the most cost-effective, timely manner.
3.5 The Bullwhip Effect
In the Italian pasta industry, consumer demand is quite steady throughout the year. However, because of trade promotions, volume discounts, long lead times, fully-truckload discounts, and end-of-quarter sales incentives the orders seen at the manufacturers are highly variable. In fact, the variability increases in moving up the supply chain from consumer to grocery store to distribution center to central warehouse to factory, a phenomenon that is often called bullwhip effect.
Figure 12Bullwhip Effect in Supply Chain [Source: http://knowscm.blogspot.com/2008/02/bullwhip-effect-in-supply-chain.html]
The costs of this variability are high – inefficient use of production and warehouse resources, high transportation costs, high inventory costs, to name a few. Acer Inc.
sacrificed $20 million in profits by paying $10 million for air freight to keep up with surging demand, and then paying $10 million more later when that inventory became obsolete. The bullwhip effect phenomenon has been observed in many different industries and occurs whenever demand uncertainties and variability become magnified at each link in the supply chain. It’s one of the most important causes of inefficiency in a supply chain.
Figure 13 Bullwhip Effect in supply chain [Source: http://knowscm.blogspot.com/2008/02/bullwhip-effect-in-supply-chain.html]
3.6 Supply Chain Infrastructure
The supply chain involves both internal and external supply chain operations. The suppliers and customers both are inter-linked to the manufacturing organization. The internal supply chain involves sequential links of the purchasing, production and distribution department. The purchases department of a company is directly linked to the suppliers of that company to purchase materials is raw, semi-finished or finished form. After these materials are purchased, they are passed on to the production department to covert this material into finished product. This finished product is forwarded to distribution department for the distribution of finished goods to retailers and ultimately, to the customers.
Order Quantity Manufacturer’s Orders to Supplier Wholesaler’s Orders to Manufacturer Retailer’s Orders to Wholesaler
Figure 14 Supply Chain Process [Source:
http://en.wikipedia.org/wiki/File:A_company%27s_supply_chain_(en).png]
3.7 Extended Supply Chain
The extended supply chain is a clever way of describing everyone who contributes to a product. So if you make text books, then your extended supply chain would include the factories where the books are printed and bound, but also the company that sells you the paper, the mill where that supplier buys their stock, and so on. It is important to keep track of what is happening in your extended supply chain because with a supplier or a supplier’s supplier could end up having an impact on you (as the old saying goes, a chain is only a strong as its weakest link). For example, a fire in a paper mill might cause the text book manufacturer’s paper supplier to run out of inventory. If the text book company knows what is happening in its extended supply chain it can find another paper vendor.
Consider a typical manufacturer. The supply chain is made up of many interrelated firms as shown in the figure below. There are part suppliers, component suppliers and subassembly suppliers. Further up the chain are the suppliers’ suppliers, finally reaching raw materials suppliers at the top of the chain. Going downstream, back through the producing firm, the supply chain continues through the warehousing and distribution channels, and then through the retail channels, ending with the consumer.
Raw Material Suppliers Raw Material Suppliers Raw Material Suppliers
Component Suppliers Subassembly Suppliers
Distribution Channels Manufacturers Retail Channels Warehousing Channels Part Suppliers Consumer Retail Channels Retail Channels
Figure 15 A Systematic diagram of extended supply chain
The supply chain encompasses all activities associated with the flow and transformation of goods and services from the raw material stage (at one end of the supply chain) through to the consumer (at the other end of the chain), including all associated information flows.
3.8 Basic Components of Supply Chain Management
SCM:-1. Plan – This is the strategic portion of SCM. You need a strategy for managing all the resources that go toward meeting customer demand for your product or service. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less and delivers high quality and value to customers.
2. Source – Choose the suppliers that will deliver the goods and services you need to create your product. Develop a set of pricing, delivery and payment processes with suppliers and create metrics for monitoring and improving the relationships. And put together processes for managing the inventory of goods and services you receive from suppliers, including receiving shipments, verifying them, transferring them to your manufacturing facilities and authorizing supplier payments.
Figure 16 The Five Components of Supply Chain Process
3. Make – This is the manufacturing step. Schedule the activities necessary for production, testing, packaging and preparation for delivery. As the most metric-intensive portion of the supply chain, measure quality levels, production output and worker productivity.
4. Deliver – This is the part that many insiders refer to as logistics. Coordinate the receipt of orders from customers, develop a network of warehouses, pick carriers to get products to customers and set up an invoicing system to receive payments. 5. Return – The problem part of the supply chain. Create a network for receiving
defective and excess products back from customers and supporting customers who have problems with delivered products.
3.9 SCM Flows
Supply chain management flows can be divided into three main flows:
1. The Product Flow
It includes the movement of goods from a supplier to a customer, as well as any customer returns or service needs.
2. The Information Flow
It involves transmitting orders and updating the status of delivery.
3. The Finances Flow
It consists of credit terms, payment schedules, and consignment and title ownership arrangements.
If the goal of SCM is to provide high product availability through efficient and timely fulfillment of customer demand, then how is the goal accomplished?
Figure 17 A view of different flows in a supply chain [Source: http://www.careersinsupplychain.org/what-is-scm/flows.asp]
Obviously, you need effective flows of products from the point of origin to the point of consumption. But there’s more to it. Consider the diagram of the fresh food supply chain. A two-way flow of information and data between the supply chain participants creates visibility of demand and fast detection of problems. Both are needed by supply chain managers to make good decisions regarding what to buy, make, and move.
Other flows are also important. In their roles as suppliers, companies have a vested interest in financial flows. As you can understand, suppliers want to get paid for their products and services as soon as possible and with minimal hassle. Sometimes, it is also necessary to move products back through the supply chain for returns, repairs, recycling, or disposal.
3.10 The Importance of Supply Chain Decisions
There is a close connection between the design and management of supply chain flows (product, information, and funds) and the success of a supply chain. Wal-Mart, Dell Computer, and Seven-Eleven Japan are examples of companies that have built their success on superior design, planning, and operation of their supply chain. In contrast, the failure of many e-businesses such as Webvan can be attributed in weaknesses in their supply chain design and planning.
Wal-Mart has been a leader at using supply chain design, planning and operation to achieve success. From its beginning, the company invested heavily in transportation and information infrastructure to facilitate the effective flow of goods and information. Wal-Mart designed its supply chain with clusters of stores around distribution centers to facilitate frequent replenishment at its retail stores in a cost-effective manner. Frequent replenishment allows stores to match supply and demand more effectively than the competition. Wal-Mart has been a leader in sharing information and collaborating with suppliers to bring down costs and improve product availability. The results are impressive. In their annual 2004 report, the company reported a net income of more than $9 billion on revenues of about $250 billion. These are dramatic results for a company that reached annual sales of only $1 billion in 1980. The growth in sales represents an annual compounded growth rate of 26 percent.
3.11 Decision Phases in a Supply Chain
Successful supply chain management requires many decisions relating to the flow of information, product, and funds. Each decision should be made to raise the supply chain profitability. These decisions fall into three categories of phases, depending on the frequency of each decision and the time frame during which a decision phase has an impact. As a result, each category of decisions must consider uncertainty over the decision horizon.
1. Supply Chain Strategy or Design
During this phase, given the marketing and pricing plans for a product, a company decides how to structure the supply chain over the next several years. It decides what the chain’s configuration will be, how resources will be allocated, and what processes each stage will perform.
Strategic decisions made by companies include whether to outsource or perform a supply chain function in-house the location and capacities of production and warehousing facilities, the products to be manufactured or stored at various locations, and the modes of transportation to be made available along different shipping legs, and the type of information system to be utilized.
A firm must ensure that the supply chain configuration supports its strategic objectives and increases supply chain profitability during this phase. For example, a company’s decisions regarding its choice of supply sources for components, contract manufacturers for manufacturing, and the location and capacity of its warehouses , are all supply chain design or strategic decisions. Supply chain design decisions are typically made for long-term and are very expensive to alter on short notice. Consequently, when companies made these decisions, they must take into account the uncertainty in anticipated market conditions over the next few years.
Decisions made during this phase include:
Strategic network optimization, including the number, location, and size of warehouses, distribution centers and facilities
Strategic partnership with suppliers, distributors, and customers, creating communication channels for critical information and operational improvements such as cross docking, direct shipping, and third-party logistics
Product design coordination, so that new and existing products can be optimally integrated into the supply chain, load management
Information Technology infrastructure, to support supply chain operations. Where-to-make and what-to-make-or-buy decisions
Aligning overall organizational strategy with supply strategy
Figure 18 Hierarchy of Supply Chain Decisions [Source: http://www.eil.utoronto.ca/profiles/rune/node5.html]
2. Supply Chain Planning
For decisions made during this phase, the time frame considered is a quarter to a year. Therefore, the supply chain’s configuration determined in the strategic phase is fixed. This configuration establishes constraints within which planning must be done. The goal of planning is to maximize the supply chain profitability that can be generated over the planning horizon given the constraints establishes during the strategic or design phase. Companies start the planning phase with a
forecast for the coming year (or a comparable time frame) of demand in different markets.
Planning includes making decisions regarding which markets will be supplied from which locations, the subcontracting of manufacturing, the inventory policies to be followed, and the timing and size of marketing and price promotions. Planning establishes parameters within which a supply chain will function over a specified period of tie.
In the planning phase, companies must include uncertainty in demand, exchange rates, and competition over this time horizon in their decisions. Given a shorter time frame and better forecasts than the design phase, companies in the planning phase try to incorporate any flexibility built into the supply chain in the design phase and exploit it to optimize performance. As a result of the planning phase, companies define a set of operating policies that govern short-term operations. Decisions made during this phase include:
Sourcing contracts and other purchasing decisions.
Production decisions, including contracting, scheduling, and planning process definition.
Inventory decisions, including quantity, location, and quality of inventory. Transportation strategy, including frequency, routes, and contracting.
Benchmarking of all operations against competitors and implementation of best practices throughout the enterprise.
Milestone payments
Focus on customer demand.
3. Supply Chain Operations
The time horizon here is weekly or daily, and during this phase companies make decisions regarding customer orders. At the operational level, supply chain configuration is considered fixed, and planning policies are already defined. The goal of supply chain operations is to handle incoming customer orders in the best possible manner. During this phase, firms allocate inventory or production to
individual customer orders, set a date that an order is to be filled, generate pick lists at a warehouse, allocate an order to a particular shipping mode and shipment, set delivery schedules of trucks, and place replenishment orders. Because operational decisions are being made in the short term (minutes, hours, or days), there is a less uncertainty about demand information. given the constraints established by the configuration and planning policies, the goal during the operational phase is to exploit the reduction of uncertainty and optimize performance.
Decisions made during this phase include:
Daily production and distribution planning, including all nodes in the supply chain
Production scheduling for each manufacturing facility in the supply chain (minute by minute).
Demand planning and forecasting, coordinating the demand forecast of all customers and sharing the forecast with all suppliers
Sourcing planning, including current inventory and forecast demand, in collaboration with all suppliers
Inbound operations, including transportation from suppliers and receiving inventory
Production operations, including the consumption of materials and flow of finished goods
Outbound operations, including all fulfillment activities and transportation to customers
Order promising, accounting for all constraints in the supply chain, including all suppliers, manufacturing facilities, distribution centers, and other customers...
The design, planning, and operation of a supply chain have a strong impact on overall profitability and success. It is fair that a large part of the success of a firm can be attributed to their effective supply chain design, planning, and operation.
Manufacturing Cycle Replenishment CycleProcurement Cycle Customer Order Cycle Customer
Retailer Distributor Manufacturer Supplier
A supply chain is a sequence of processes and flows that take place within and between different stages and combine to fill a customer need for a product. There are five different stages which are the participants of a supply chain, that is, customer, retailer, distributor, manufacturer and supplier. There are two different ways to view the processes performed in a supply chain.
1. Cycle View: The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain. Given the five stages of a supply chain, all supply chain processes can be broken down into the following four process
cycles:-a. Customer order cycle b. Replenishment cycle c. Manufacturing cycle d. Procurement cycle
Each cycle occurs at the interface between two successive stages of the supply chain. The five stages thus result in four supply chain process cycles. For example, when customers shop online at Amazon, they are part of the customer order cycle – with the customer as the buyer and Amazon as the supplier. In contrast, when Amazon orders books from a distributor to replenish its inventory, it is part of the replenishment cycle – with Amazon as the buyer and the distributor as the supplier.
Within each cycle, the goal of the buyer is to ensure product availability and to achieve economies of scale in ordering. The supplier attempts to forecast customer orders and reduce the cost of receiving the order. The supplier then works to fill the order on time and improve efficiency and accuracy of the order fulfillment process. The buyer then works to reduce the cost of the receiving process. Reverse flows are managed to reduce cost and meet environmental objectives.
A cycle view of the supply chain clearly defines the processes involved and owners of each process. This view is very useful when considering operational
decisions because it specifies the roles and responsibilities of each member of the supply chain and the desired outcome for each process.
2. Push/Pull View
All processes in a supply chain fall into one of the two categories depending upon the timing of their execution relative to end customer demand. With pull processes, execution is initiated in response to a customer order. With push processes, execution is initiated in anticipation of customer orders. Therefore, at the time of execution of pull process, customer demand is known with certainty, whereas at the time of execution of a push process, demand is not known and must be forecasted. Pull processes may also be referred to as reactive processes because they react to customer demand. Push processes may also be referred to as speculative processes because they respond to speculated (forecasted) rather than actual demand. The push/pull view is very important when considering strategic decisions relating to supply chain design.
3.13 Supply Chain Macro Processes in a Firm
All supply chain processes discussed in the two process views can be classified into the following three macro processes:
1. Customer Relationship Management (CRM): All processes that focus on the interface between the firm and its customers
2. Internal Supply Chain Management (ISCM): All processes that are internal to the firm
3. Supplier Relationship Management (SRM): All processes that focus on the interface between the firm and its suppliers
The three macro processes manage the flow of information, product, and funds required to generate, receive, and fulfill a customer request.
3.13.1 CRM Macro Process
The CRM macro process aims to generate customer demand and facilitate the placement and tracking of orders. It includes processes such as marketing, pricing, sales, order management, and call center management. At an industrial distributor,
CRM processes include the preparation of catalogs and other marketing materials, management of the Web site, and management of the call center that takes order and provides services.
3.13.2 ISCM Macro process
The ISCM macro process aims to fulfill demand generated by the CRM process in a timely manner and at lowest possible cost. ISCM processes include the planning of internal production and storage capacity, preparation of demand and supply plans, and fulfillment of actual orders.
3.13.3 SRM Macro Process
The SRM macro process aim to arrange and manage supply sources for various goods and services. SRM processes include the evaluation and selection of suppliers, negotiation of supply terms, and communication regarding new products and orders with suppliers.
All three supply chain macro processes and their component processes are shown in the figure below:
Figure 19 SCM Macro Processes [Source: Copra S., Meindl P., Supply Chain Management]
For a supply chain to be successful, it is crucial that the three macro processes are well integrated. The organizational structure of the firm has a strong influence on the success or failure of the integration effort. In many firms, marketing is in charge of the CRM macro process, manufacturing handles the ISCM macro process, and purchasing oversees the SRM macro process – with very little communication among them. It is not unusual for marketing and manufacturing to have two different forecasts when making their plans. This lack of integration hurts the supply chain’s ability to match supply and demand effectively, leading to dissatisfied customers and high costs. Firms should structure a supply chain organization that mirrors the macro processes and ensures good communication and coordination among the owners of processes that interact with each other.
3.14 Drivers of Supply Chain performance
Success and profitability in a supply chain requires that a company’s supply chain achieve the balance between responsiveness and efficiency that best meets the needs of the company’s competitive strategy. To understand how a company can improve supply chain performance in terms of responsiveness and efficiency, we must examine the logistical and cross-functional drivers of supply chain performance: facilities, inventory, transportation, information, sourcing, and pricing. These drivers interact with eachother to determine the supply chain performance in terms of responsiveness and efficiency. As a result, the structure of these drivers determines if and how strategic fit is achieved across the supply chain.
3.14.1 Facilities
Facilities are the actual physical location in the supply chain network where product is stored, assembled, or fabricated. The two major types of facilities are production sites and storage sites. Decision regarding the roles, location, capacity and flexibility of facilities have a significant impact on the supply chain performance. For instance, an auto parts distributor striving for responsiveness could have many warehousing facilities located close to customers even though this practice reduces efficiency alternatively a high efficiency distributor would have fewer warehouses to increase efficiency despite the fact that this practice will reduce responsiveness.