Lecture –11
Supply Chain Management
Topics Covered:
·
Meaning
of Supply Chain Management
·
Measuring
supply chain performance
·
Structural
improvement of Supply Chain
·
Improvement
in Infrastructure of Supply Chain
·
Virtual
Supply Chain
·
Model Questions
MEANING OF SUPPLY CHAIN MANAGEMENT
Supply chain: The sequence of business processes and information
that provides a product or service from suppliers through manufacturing and
distribution to the ultimate consumer.
Supply chain
management: Planning, design, and
control of the flow of information and materials along the supply chain in
order to meet customer requirements in an efficient manner, now and in the
future.
Also, supply chain management is defined here as
something different from the supply chain itself. It is important to note that
supply chain management requires attention to both information and materials
flow. The information feedback loop is critical to effective management of the
supply chain. Delays in information can lead to fluctuations in orders and in
ineffective movement of materials.
A typical supply chain is shown below:
MEASURING SUPPLY CHAIN PERFORMANCE
Measuring Supply Chain Performance is the first
step toward improvement. There are generally four measures of Supply Chain
performance, which compare closely to the cost, quality, flexibility, and
delivery measures for operations. The specific measures for supply chain
performance are as follows:
Delivery. This actually refers to on‑time delivery: the percentage
of orders delivered complete and on the date requested by the customer. Note
that orders are not counted as delivered on time when only part of the order is
filled or when the customer does not get the delivery on the requested date.
This is a stringent definition, but it measures performance in getting the
entire order to the customer when he or she wanted it.
Quality. A direct measure of quality is customer
satisfaction, which can be measured
in several ways. First, it can be measured relative to what the customer
expected. For example, one company asks its customers, How well did we do in
meeting your expectations? Responses are given on a five‑point scale: (5)
greatly exceeded expectations, (4) exceeded expectations, (3) met expectations,
(2) didn't meet expectations, (1) greatly disappointed. The company wants a
high percentage of responses of 4 or 5, indicating that it is exceeding
customer expectations. This is, of course, a tough standard.
A measure closely related to quality is customer
loyalty. This can be measured by the
percentage of customers who are still purchasing the product after having
purchased it at least once. Customer loyalty is something that companies are
very interested in achieving since it is much more expensive to find a new
customer than to keep an existing one. Companies should compare both loyalty
and customer satisfaction to that of their competitors; they should also
monitor improvement made over time.
Time. The total replenishment time can be computed directly from inventory levels. If we assume there
is a constant usage rate from the inventory, then the time in inventory is just
the level of inventory divided by the usage rate. For example, if the inventory
level is $10 million and we sell (or withdraw) $100,000 per day out of
inventory, we have 100 days of inventory. In other words, a product spends 100
days on average from the time it enters inventory until it is withdrawn. The
time spent in inventory should be computed for each part of the supply chain
(supplier, manufacturer, wholesaler, and retailer) and added to get the total
replenishment lead time.
Cost. There are two ways to measure cost. First, a
company can measure total delivered cost,
including manufacturing, distribution, inventory carrying costs, and accounts
receivable carrying costs. Often these separate costs are the responsibility of
different managers and are therefore not minimized from a total cost
standpoint.
The second way to measure cost along the supply
chain is to measure efficiency in value added or productivity. One measure of
efficiency is as follows:
Efficiency = sales ‑ cost of materials / labor +
overhead
It is important for management to set goals for
these four separate areas of measurement. After constructing these measures,
the company must then set goals for those it can control. By doing so, the
supply chain can be improved by considerable amounts in most organizations.
STRUCTURAL IMPROVEMENT OF SUPPLY CHAIN
There are five forms of structural change of the
supply chain:
·
Forward and
backward integration.
·
Major process
simplification.
·
Changing the
configuration of factories, warehouses, or retail locations.
·
Major product
redesign.
·
Outsourcing
logistics to a third party.
Forward and
backward integration refers to
ownership within the supply chain. If a manufacturer, for example, decides to
buy a wholesale firm and distribute its products only through that wholesaler,
then the integration is forward toward the market. On the other hand, if the
manufacturer buys a supplier company, the integration is backward in the supply
chain. If one firm owns the entire supply chain, there is total vertical
integration.
Major process
simplification is used to improve supply chains when the processes are so
complex, or hopelessly out of date, that a major change is required. In this
case, a clean slate approach is used, where the processes are designed from
scratch without regard for the existing processes. This could include major
conceptual changes in how business is conducted and major information systems
changes.
The third way to restructure supply chains is to
change the number and configuration of
suppliers, factories, warehouses, or retail sites. Sometimes the distribution
system is just no longer configured in the right way. For example, many
companies have determined that they have too many suppliers and are reducing
the number of suppliers by one‑half or more. This is being done to partner with
the best suppliers to ensure JIT deliveries and certified sources of material.
Another structural change of this type is occurring in
Major product
design is often needed to
make improvements in the supply chain. Some companies have found that they have
too many different product variations and types, some with extremely low sales.
As a result, product lines are trimmed and redesigned to be more modular in
nature. For example, Hewlett‑Packard found that it had to make many different
models of laser printers because of the different power requirements in
different countries. To get around this problem, the company decided to have a
common laser printer design with a power supply module that could be inserted
at the last minute to configure the printer for the particular country where it
would be used. This postponement strategy
saved the company millions of dollars.
Some companies have simply thrown up their hands
and decided that the best approach is to outsource
all inventory management, distribution, and logistics to a third party. For
example, National Semiconductor concentrates on making semiconductors. When the
product is produced it is given to Federal Express for inventory or
distribution. Fed Ex then warehouses the product, takes incoming orders, and
ships the product to the customer.
IMPROVEMENT IN INFRASTRUCTURE OF SUPPLY CHAIN
The objective of infrastructure change is the same
as structural change: to remove sources of uncertainty or time from the supply
chain. There are five ways this can be done.
- Cross‑functional
teams
- Partnerships
- Set‑up
time reduction
- Information
systems
- Cross‑docking
The use of cross‑functional
teams is pervasive in many businesses today. Their purpose is to provide
coordination that is lacking across the various departments and functions of a
business. For example, a cross‑functional team is often used to plan and
control the master schedule for manufacturing. The team consists of
representatives from marketing/ sales, production, human resources, and
accounting/ finance. The team develops a forecast of future expected orders,
plans the capacity of manufacturing, and schedules customer orders. Everyone
then agrees to work toward executing this plan. Without a cross‑functional team
of this type, marketing makes a forecast, production uses a different forecast
to plan production, and the capital is not made available to provide the
capacity needed. Without a crossfunctional team, the functional silos are very
effective in destroying any semblance of a master schedule that everyone can
implement.
Partnerships with suppliers and customers provide coordination
across businesses just like cross‑functional teams provide coordination within
the business. Partnerships start with a commitment by both firms to establish a
long‑term business relationship that will be mutually beneficial. The partners
must develop trust for each other to make this work. Also, the partners will
probably establish teams of employees from the two different firms to work
together on important improvement projects. For example, a new product was
developed over several months by a team of engineers from an appliance company
and its key customer's site. This team worked very effectively together and
made a final presentation to the senior executives from both firms. One
executive turned to the other and said, "Which employees are yours and
which ones are ours?" The team had become so integrated that it was
difficult to tell the members apart.
In supply chain improvement it is often necessary
to dramatically reduce the setup time of
equipment so that smaller lots of the product can be economically produced.
Once the lot size is reduced, inventory will also be reduced; the inventory
will turn over more quickly, thereby more closely meeting the market need.
Reducing setup time requires imagination and can be done for any piece of
production equipment by simply getting ready for changeover before the machine
is stopped and then making changes quickly once the machine is no longer
running so that it can be put back into production as soon as possible.
Watching the pit crews work during a road race gives a good idea of how quickly
tires can be changed and cars refueled and put back on the track. A similar
type of thinking can drastically reduce setup times in manufacturing and
service from hours to a matter of minutes. Reducing setup time is one of the
changes that can take many days out of the supply chain.
Changes to information
systems are important in supply chains. One of the changes occurring in
industry is obtaining sales data from the final customer and feeding this
information back through the supply chain. Suppliers no longer just get orders
from their customers; they also know the sales and inventory positions of the
customers as well. This gives the supplier a basis for forecasting future
orders and planning capacity. Sharing this kind of information is easy once partnerships
have been established. However, using the downstream demand information will
require improved information systems and new decision rules for capacity
planning. These can be integrated into a revised information system.
Cross‑docking is an innovation in
transportation attributed to Wal‑Mart. The basic idea is that a supplier's
shipments are taken from various docks at the warehouse when they arrive and
transferred directly to a Wal‑Mart truck at another dock. The items do not
spend time in the warehouse inventory; they are simply moved from one dock to
another. This provides the economy of full truckload shipments while also
drastically reducing warehouse inventory. Cross‑docking is now being widely
used wherever there is sufficient volume to make it possible.
VIRTUAL SUPPLY CHAINS
A virtual corporation produces a
product or a service without employees or buildings. It exists to coordinate
other companies that do the design, production, and distribution work. The
virtual company can quickly form partnerships and then dissolve them when the
need no longer exists. It is a very flexible form of organization that responds
quickly to changing conditions.
Suppose that you wish to form a
virtual corporation. The first thing you would do is to rent space for your
offices, not buy the space. Then you would rent computers and phones to
communicate with other companies, and you may hire a few contract employees
from an employment firm to assist you. To design the product that you plan to
produce, you would contract with a design engineering firm, which would suggest
alternative product designs and carry the product design through to
specifications. You would also hire a contract market research firm to assess
the market and make marketing and distribution plans for you. Once the design
was finished, you would contract out the manufacturing to one or more of the
many firms that do this type of work. Then you would line up manufacturers'
representatives to sell your product along with other products that they
already handle. Finally, you would contract for the transportation,
distribution, and warehousing through third‑party distribution firms. Now you
have a virtual company. It produces a product or service without facilities or
people; it has no fixed assets on the balance sheet. If the company is
successful, the return on net assets (RONA), a common measure of financial
performance, will be phenomenal.
But is this a good idea? When markets
are rapidly changing and the company must adapt quickly, the virtual firm works
well. On the other extreme, in a stable market the virtual firm may be too
expensive to operate and unable to compete with traditional companies. We have
described the extreme case; however, many firms only contract out a portion of
their businesses and use traditional employees and assets for their core
competencies. Using this approach, they protect their intellectual property
and their knowledge of technology only in those areas where they plan to create
a competitive advantage‑core competency areas.
Model
Questions:
1.
What is the meaning of Supply Chain Management?
2.
How would you measure performance of supply chain?
3.
Describe the forms of structural improvement of Supply Chain.
4.
What are the ways of Improving Infrastructure of Supply Chain? Discuss.
5.
How could you form a Virtual Supply Chain?
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