Answer: A supply chain consists of a series of activities involving many organizations through which the materials move from initial suppliers to final customers. There may be different supply chain for each product. The chain of activities and organizations is named differently as per the situation. If the emphasis is on operations then it is called process; if the emphasis is on marketing then it is called logistics; if the emphasis is on value-addition then it is called value-chain; if the emphasis is on meeting customer demand then it is called demand chain; if the emphasis is on movement of material then we use the most general term i.e., supply chain. A supply chain may be considered as a group of organizations, connected by a series of trading relationships. This group covers the logistics and manufacturing activities from raw materials to the final consumer. Each organization in the chain procures and then transforms materials into intermediate/final products, and distributes these to customers.
The supply chain can be defined as the integral management (within the company and through other companies) of the company’s various logistical stages such as materials procurement, production, storage, distribution and customer service. The Supply Chain concept should be seen as a whole, that is, the entire system from the origin of procurement to the final consumption of goods or services. In supply chain network we must include all the organizations involved in the production of certain goods or services (from the origin of procurement to final consumption), and each of the logistical stages within these organizations. Thus, the supply chain is a network linking and interweaving different supply chains of all the companies involved in a production process. A diagram depicting the typical supply chain is shown in Figure:
The supply chain activity therefore constitutes complex objects, as it involves decision-makers from many different companies, who sometimes have no direct relationship and are place in very different geographical locations; yet the decisions they make are mutually dependent upon each other. Hence, there is a need for an information system capable of linking together the different members of the chain so that there is an open communication between them. The concept of supply chain is not new. Historically we have moved from physical distribution to logistics management and then to supply chain management. This major difference seems to be that supply chain management is the preferred name for the actualization of “integrated logistics”, with it acting as an enabler, it is now possible to have an integrated process view about the logistics and all allied processes related to business. Ideally the supply chain should be a “seamless” chain as shown in Figure:
According to the model of the evolution of supply chain Integration starts with the ‘baseline’ organization (Stage 1) with a reasonably informal approach to management by departments. This level of evolution involves the processing of material requirements and planning routines that are short term in nature. The material inventories simply arise in response to reactive management practices. The key requirement of employees is to react to failure and manage as best that they can.
Stage 2: Organization reflects the traditional form of supplier management. The business departments tend to operate autonomously. The organization is focused on the annual budget allocation and departmental cost management. For the purchasing function this implies seeking out the lowest price provider of material requirements often through a process of tendering, the use of ‘power’ and the constant switching of supply sources to prevent ‘getting too close’ to any individual source.
Stage 3: Organization is internally integrated and has a much greater level of interest in material flow processes from suppliers to customers rather than the ‘grenade over the all’ approach of the earlier two forms. The organization has integrated the aspects of the internal supply chain that it can influence and control. In parallel, planning systems operated throughout the organization are integrated and demand information, production schedules and material requirements are synchronized by teams of individuals that were once subordinates of separate departments. For this company, the demand and material flow drive the entire system in an end-to-end supply chain and the organization makes use of Just in time materials management techniques.
Stage 4: Company has begun to realize the benefits of true supply chain management and the ability to synchronize all activities within the factory and to interface the factory with its suppliers and customers. Under these conditions, the collaborative and participative internal environment is extended upstream and downstream and the planning of supply chain management is recognized formally. The factory is ‘customer oriented’ instead of product oriented and seeks to partner with key customers and suppliers in order to better understand how to provide value and customer service. This form of company has full improvement processes within the organization that are encapsulated in medium term plans for the organization and its supply chain. The organization makes most use of information systems to enhance the responsiveness of the organization and supply chain to deliver products and has also developed a capability in terms of product design that includes customer and supplier involvement. To enhance the nature of collaboration the organization rewards supplier partnerships with sole sourcing agreements in return for a greater level of support to the business and a commitment to on-going improvement of material flow and relationship management.
The model provides a useful means of analyzing the current state of the organization and understanding where the next interventions would be needed in order to improve performance.
Question 2: What is Bullwhip effect? Explain the various permutations and combinations to reduce this effect in SCM.
Answer: According to Burt “Failure to accurately estimate demand and share information among supply chain entities can result in bloated inventory levels due to cumulative effect of poor information cascading up through a supply chain. This is in fact quite natural in a way. If a firm doesn’t have information of the demand it will unnecessary carry a load of additional inventory or even increase the lead-time to cater for the uncertainty. Either ways the inventory gets bloated, if the lead-time increases so will the buyer increase order quantities. This will result in the supplier interpreting this to be growing customer demand, with a cascading effect on the supplier who feels the necessity to increase capacity to meet the trend. To add fuel to the fire, just as supplier has added additional capacity to meet the increase in demand, demand falls off because the buying firm has excessive stock available. The resultant is firing of employees, selling of assets in order to reduce the capacity. This ‘phantom’ demand in SCM is called as bullwhip effect. In other words, ‘the increase in variability as we travel upwards in the supply chain is referred to as the bullwhip effect. Therefore, in order to identify and control the bullwhip effect it’s pertinent to understand the main factors that contribute towards increase in variability in the supply chain.
Demand forecasting: Traditional inventory management techniques practiced at each level in the supply chain lead to the bullwhip effect. As discussed earlier in unit 5, managers generally use standard forecast smoothing techniques to estimate average demand and demand variability. The important characteristics of forecasting are that as more data are observed, the more we modify the estimates of the mean and standard deviation in customer demands. Since safety stocks strongly depend on these estimates, the user is forced to change the order quantities, thereby increasing variables.
Lead Time: Increase in variability is magnified with increase in lead-time. In order to calculate safety stock levels and recorder points, we in effect multiply the estimates of the average and standard deviation of the daily customer demands by the lead-time. Thus, with longer lead-times, a small change in estimate of demand variability implies a significant change in safety stock and recorder level, leading to a significant change in order quantities, which in effect leads to increase in variability.
Batch Ordering: The impact of batch ordering is simple to understand. If batch ordering is used by the retailer, as happens while using min-max inventory policy, then the wholesaler will observe a large order, followed by several period of no orders, followed by another large order, and so on. Therefore, the wholesaler sees a distorted and highly variable pattern of orders.
Price Fluctuation: This can also lead to bullwhip effect. If prices fluctuate the retailers tend to stock up when the prices are lower. That is another reason why stocks vanish from the market prior to budget month. This is accentuated by certain manufacturers and companies of offering promotions and discounts at certain times on certain commodities.
Inflated Orders: Inflated orders placed by the retailers during storage periods increase the bullwhip effect. Such orders are common when retailers and distributors suspect that a product will be in short supply, and therefore anticipate receiving supply proportional to the amount ordered. When the shortage period is over, the retailer goes back to the standard orders, leading to all kinds of distortions and variations in demand estimates.
After having seen the factors leading to the bullwhip effect we now go on to how to reduce the bullwhip effect by centralized information.
Impact of Centralized Demand Information
Centralizing demand information within a supply chain can reduce bullwhip effect considerably. This would entail providing information on customer demand in each stage of the supply chain. How and why? If demand information is centralized, each stage of the supply chain can use the actual customer demand data to create more accurate forecasts, rather than relying on the orders received from the previous stage, which can vary significantly more than the actual customer demand. To determine the impact of centralized demand information on the bullwhip effect, we have to distinguish between two types of supply chains: one with centralized demand information and a second with decentralized demand information, as described below.
Supply Chain with Centralized Demand Information: In this type of supply chain the retailer (who is the first stage) observes customer demands and forecasts his demands with moving average method finds his target inventory level on the forecast mean demand, and places orders to the wholesaler. The wholesaler, who forms the second stage of the supply chain, receives the order along with the retailers forecast mean demand, uses this forecast to determine its target inventory level, and places the order to the distributor. The distributor who finally places the demand to the factory, the fourth stage in the supply chain, follows the same process.
In this particular chain, each stage of the supply chain receives the retailers forecast demand and follows an order-up-to inventory policy based on this demand. Therefore, the demand information, forecast technique and inventory policy in this case has been centralized.
Decentralized Demand Information: the second type of supply chain is the decentralized one. In this case the retailer doesn’t make its forecast mean demand available to the remainder of the supply chain. Instead, the wholesaler must estimate the mean demand depending upon the orders received from the retailer. Here once again the wholesaler uses a moving average with p observations of the orders placed by the retailer in order to forecast the mean demand. Thereafter, it uses this forecast to determine the target inventory level and places an order with the distributor. The distributors target level is utilized to place orders in the fourth stage of the supply chain. Again, in this stage as we move up the supply chain the orders become larger and the variable increase with every stage.
Fig.: Supply Chain with Centralized Demand Information
Actually, in both the types of the supply chain the variance of orders become larger as we go up the chain so that the orders placed by the wholesaler are larger than those placed by the retailer, and so on. The difference in the two types of supply chains is in terms of how much the variability grows as we move from stage to stage. It is seen that the orders move additively in the centralized system and multiplicative in the decentralized one. In other words in the decentralized system where only the retailer knows the customer demand can lead to higher variability than a centralized one, in which the customer demand is available at each stage, particularly when the lead times are large.
Therefore more often than not the centralized system can effectively reduce the bullwhip effect. It’s also important to note that even with the centralized system the bullwhip effect remains, since the complete system is based on demand predictions and this is a variable factor. Therefore, it will be correct to say that it can only reduce the effect but not eliminate it completely.
A NEW PERSPECTIVE TO COUNTER BULLWHIP EFFECT
The bullwhip effect continues to stay in spite of our relentless efforts. Hence, why don’t we put our minds together to find some solution to counter this effect and remove it almost completely? It can be considerably reduced, if we gave it a fair try. Let us take into cognizance of the various environmental factors, consumer behavior, market research and area study into effect to counter this problem. For a moment let us get into a model called direct information system (DIS), in which we allow the manufacturer to get direct information from the consumer bases rather than the retailers and wholesalers or the distributors. It will require the following:
A thorough knowledge on the consumer behavior, to include peculiar habits as available in the Indian context and differs state-to-state, region-to-region.
A detailed market research.
An area study compendium to know about the area per se, this will ease out transportation, warehousing and material handling activities.
Last two to three years consumption report analysis.
Last but not the least, an integration of these factors under one common head the DIS.
Example:
An area ‘X’ has a vibrant population and uses 2 popular brands of toothpaste ‘Y’ & ‘Z’. Say 50% uses ‘Y’ and the other 50% uses ‘Z’. Keeping the trends of our present day advertisements people can sway from Y to Z and vice versa. How do you find that out? Through your retailers/wholesalers who tell you this month people are asking for more number of Y to Z? Can you actually believe them? Since you believe them you aggravate your problems of existing Bullwhip effect. Resultant to this is over stocking and if not sold you land up with a clogged inventory, since the demands were more predictive than actuality. In order to nullify this effect you could get your DIS activated and find out the actual on ground situation and believe your ‘eyes to the ears’. Let us see this mathematically. Out of 1000 customers in an area, 700 under presumed ideal conditions uses ‘Y’ and the balance 300 uses ‘Z’. That has been the trend for the last 3 months plus minus 10% here and there. This month things were different and you find your brand ‘Y’ has dipped to a low of 300, i.e. this month you got 400 toothpastes that never sold. What do you do now? Think of a sale gimmick and rush out your stock? Under ideal conditions, Yes! But how long could you afford to do that? Another 3 months? It’s better you tide over this persistent problem once for all by activating the DTC (direct to consumers) method, wherein your own representatives are on the move continuously taking direct feedback from the consumers, in site. This will give a more realistic figure than a predictive one. These inputs can then be compared with that you received from the retailers/wholesalers/distributors, and you reach a common average of demands from one particular area. Looks simple on paper, requires tremendous coordination to implement. Let us see this with a figure to remove any ambiguity of sorts.
Fig.: DIS model for negating bullwhip effect by DTC link (Direct to Consumer)
Question 3: How do you link goods flow, information flow and cash flow in SC integration? Explain with appropriate diagram.
Answer: David N Burt in his book World Class Supply management says ‘the supply chain extends from the ultimate consumer to the mother earth’ and has explained the same with an illustration, which we shall see later. “The chain is viewed as a whole, a single entity rather than fragmented groups, each performing its own function”. Only when an ultimate customer buys a product does the money enter the supply chain. Transactions help in allocating the customer’s money among the members of the chain. “A firm’s supply system includes all the internal functions plus external suppliers involved in the identification and fulfilment of needs for materials, equipment and services in an optimized fashion”. Supply system plays a key role in helping the firm satisfy its role in supply chain. Professor Charles of MIT writes, “Supply chain design is the meta-core competency for organizations”.
Supply Chain Management (SCM) can be defined as an integrated process of management of acquisition and management of flow of supply by balancing supply and demand with optimal management of resources with the objective of establishing relationships for maximizing value for mutual benefits of stake holders on economically, socially and environmentally sustainable basis. In this definition the focus is on acquisition, management of flow, value addition, integration, balancing supply and demand, optimal management of resources, relationships, maximizing value for mutual benefits and economic, social and environmental sustainability.
Supply chain is a process of flow – there is supply of input which is processed / converted to add value and delivered as output. The flow may be goods or services; information flow; the flow of financial resources, value flow with value addition at each stage or activity and also flow of risk. A supply chain is a network of activities from supply side to demand fulfilment via various channels till the end customers; it is not an isolated process; it is an integrated system – interlinking various activities interwoven with value chain.
In a supply chain the materials shall flow from point of origin to point of consumption in a series of chains – one being a supplier of input to the next level consumer, he in turn after value addition supply to next downstream consumer - and the chain continues till the ultimate consumer. Associated with material flow, there are information, finance, value and risk also flow. Thus supply chain management is a management of flow of supply. Before moving to management of flow, let us discuss how Supply Chain integrates different activities, processes and functions.
SUPPLY CHAIN INTEGRATION:
Traditionally various supply functions have been managed in isolation, often working at cross purposes. However in Supply Chain Management these functions are integrated. There are varying degrees of integration within the company between various activities, processes and functions as well as integration of activities which span the boundaries of organisation. Thus Supply Chain Integration refers to both Internal and External Integration.
INTERNAL INTEGRATION:
Internal integration refers to linking of internal cross-functional integration within the company like integration between purchasing and procurement (buy), production planning and control (make), warehouse management (store), transport management (move) and customer relationship management (sell)
EXTERNAL INTEGRATION:
External integration refers to linkages of external players such as suppliers, distributors, wholesalers, retailers, customers, outsourced logistic supporters and other external stake holders.
FIVE MAJOR FLOWS:
Along this chain (Internal and External), there are Five major flows: product flow, financial flow, information flow, value flow & risk flow.
The product flow includes the movement of goods from a supplier to a customer, as well as any customer returns or service needs. The financial flow consists of credit terms, payment schedules, and consignment and title ownership arrangements. The information flow involves product fact sheet, transmitting orders, schedules, and updating the status of delivery.
THE PRODUCT FLOW:
Product Flow includes movement of goods from supplier to consumer (internal as well as external), as well as dealing with customer service needs such as input materials or consumables or services like housekeeping. Product flow also involves returns / rejections (Reverse Flow).
In a typical industry situation, there will a supplier, manufacturer, distributor, wholesaler, retailer and consumer. The consumer may even be an internal customer in the same organisation. For example in a fabrication shop many kinds of raw steel are fabricated into different building components in cutting, general machining, welding centres and then are assembled to order on a flatbed for shipment to a customer. Flow in such plant is from one process / assembly section to the other having relationship as a supplier and consumer (internal). Acquisition is taking place at each stage from the previous stage along the entire flow in the supply chain.
In the supply chain the goods and services generally flow downstream (forward) from the source or point of origin to consumer or point of consumption. There is also a backward (or upstream) flow of materials, mainly associated with product returns.
THE FINANCIAL FLOWS:
The financial and economic aspect of supply chain management (SCM) shall be considered from two perspectives. First, from the cost and investment perspective and second aspect based on from flow of funds. Costs and investments add on as moving forward in the supply chain. The optimization of total supply chain cost, therefore, contributes directly (and often very significantly) to overall profitability. Similarly, optimization of supply chain investment contributes to the optimisation of return on the capital employed in a company. In a supply chain, from the ultimate consumer of the product back down through the chain there will be flow of funds. Financial funds (Revenues) flow from the final consumer, who is usually the only source of “real” money in a supply chain, back through the other links in the chain (typically retailers, distributors, processors and suppliers).
In any organization, the supply chain has both Accounts Payable (A/P) and Accounts Receivable (A/R) activities and includes payment schedules, credit, and additional financial arrangements – and funds flow in opposite directions: receivables (funds inflow) and payables (funds outflow). The working capital cycle also provides a useful representation of financial flows in a supply chain. Great opportunities and challenges therefore lie ahead in managing financial flows in supply chains. The integrated management of this flow is a key SCM activity, and one which has a direct impact on the cash flow position and profitability of the company.
THE INFORMATION FLOW:
Supply chain management involves a great deal of diverse information--bills of materials, product data, descriptions and pricing, inventory levels, customer and order information, delivery scheduling, supplier and distributor information, delivery status, commercial documents, title of goods, current cash flow and financial information etc.--and it can require a lot of communication and coordination with suppliers, transportation vendors, subcontractors and other parties. Information flows in the supply chain are bidirectional. Faster and better information flow enhances Supply Chain effectiveness and Information Technology (IT) greatly transformed the performance.
THE VALUE FLOW:
A supply chain has a series of value creating processes spanning over entire chain in order to provide added value to the end consumer. At each stage there are physical flows relating to production, distribution; while at each stage, there is some addition of value to the products or services. Even at retailer stage though the product doesn’t get transformed or altered, he is providing value added services like making the product available at convenient place in small lots.
These can be referred to as value chains because as the product moves from one point to another, it gains value. A value chain is a series of interconnected activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various product services), delivery to final customers, and final disposal after use. That is supply chain is closely interwoven with value chain. Thus value chain and supply chain are complimenting and supplementing each other. In practice supply chain with value flow are more complex involving more than one chain and these channels can be more than one originating supply point and final point of consumption.
In chain at each such activity there are costs, revenues, and asset values are assigned. Either through controlling / regulating cost drivers better than before or better than competitors or by reconfiguring the value chain, sustainable competitive advantage is achieved.
THE FLOW OF RISK:
Risks in supply chain are due to various uncertain elements broadly covered under demand, supply, price, lead time, etc. Supply chain risk is a potential occurrence of an incident or failure to seize opportunities of supplying the customer in which its outcomes result in financial loss for the whole supply chain. Risks therefore can appear as any kind of disruptions, price volatility, and poor perceived quality of the product or service, process / internal quality failures, deficiency of physical infrastructure, natural disaster or any event damaging the reputation of the firm. Risk factors also include cash flow constraints, inventory financing and delayed cash payment. Risks can be external or internal and move either way with product or financial or information or value flow.
External risks can be driven by events either upstream or downstream in the supply chain:
Demand risks - related to unpredictable or misunderstood customer or end-customer demand.
Supply risks - related to any disturbances to the flow of product within your supply chain.
Environment risks - that originate from shocks outside the supply chain.
Business risks - related to factors such as suppliers’ financial or management stability.
Physical risks - related to the condition of a supplier’s physical facilities.
Internal risks are driven by events within company control:
Manufacturing risks - caused by disruptions of internal operations or processes.
Business risks - caused by changes in key personnel, management, reporting structures, or business processes.
Planning and control risks - caused by inadequate assessment and planning, and ineffective management.
Mitigation and contingency risks - caused by not putting in place contingencies.
INTEGRATION OF FLOWS IN SUPPLY CHAIN:
Supply chain management integrates key business processes from end user through original suppliers, manufacturer, trading, and third-party logistics partners in a supply chain. Integration is a critical success factor in a dynamic market environment and is prerequisite for enhancing value in the system and for effective performance of the supply chain by sharing and utilization of resources, assets, facilities, processes; sharing of information, knowledge, systems between different tiers in the chain and is vital for the success of each chain in improving lead-times, process execution efficiencies and costs, quality of the process, inventory costs, and information transfer in a supply chain. Integration leads to better collaboration for synchronized production scheduling, collaborative product development, collaborative demand and logistic planning. Also with increased information visibility and relevant operational knowledge and data exchange, integrated supply chain partners can be more responsive to volatile demand resulting from frequent changes in competition, technology, regulations etc. (capacity for flexibility). Integration is required not only for economic benefits but also for compliances in terms of social and community, diversity, environment, ethics, financial responsibility, human rights, safety, organizational policies, industry code of conduct, various national / international laws, regulations, standards and issues.
The Internet today permits the supply chain managers to manage their supply chains collaboratively and also synchronizes their operations. The net result is:
Reduced cost.
Time management.
Competitiveness.
Profitability.
Success of an organization in the near future will be driven by its ability to compete effectively as a contributing member of a dynamically connected supply chain management and not in isolation. Connectivity with customers, suppliers and other partners and be able to interact quickly is critical to survival. Tomorrow, a tightly connected e-chain will be a necessity.”
Fig.: Supply System’s Role in helping the Firm satisfy its role in its Supply Chain
Supply chains are relatively easier to describe and visualize, but the terminology is already dated. “Traditionally, companies have connected with one another in simple, linear chains, running from raw material producers to distributors to retailers.” But the day is not far off that most companies will be an integral part of the supply networks worldwide. Networks optimize the flow of goods (physical flow) and services, virtual flow (information) and money (cash flow). It focuses on the ultimate customer, who is once again the generator of funds. They are so designed that one member doesn’t benefit at the cost of the other, the networks are therefore:
Adaptive
Speedy
Innovative
Integrated
SCM in essence is based on creation of values. It is a network of business processes used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution and cash flow. It oversees the organizational relationships in order to get the information necessary (virtual flow) to run the business, to get the products delivered (physical flow) and get the finances that generate the business profits(cash flow). This is an integrated and extended enterprise concept and includes not only relationships with internal business functions, but also with those outside the firm. What has been explained above is just the tip of the iceberg, since SCM strategies are changing rapidly with growing involvement of IT and electronic media.
With this as a backdrop we come to bullwhip effect, which happens to be the basic benchmark in understanding the supply, demand and inventory management, and reasons why companies fall pray to this effect and how best can they reduce it if not eliminate.
Question 4: How can you organize your company for global markets? Give relevant examples to elucidate your point.
Answer: Before going global you got to answer the set of six questions, which needs to be addressed as a candidate of global sourcing:
1. Does it qualify as high-volume in your industry?
2. Does it have a long life (two to three years)?
3. Does it lend itself to repetitive manufacturing or assembly?
4. Is demand for the product fairly stable?
5. Are specifications and drawings clear & well defined?
6. Is technology not available domestically at a competitive price and quality?
If the answer to all the six questions is yes, then the supply manager may want to evaluate the support network within his/her firm, asking the following questions:
1. Does sufficient engineering support exist to efficiently facilitate engineering change orders (ECOs) when they occur?
2. Will the buyer be able to allow sufficient time to phase out existing “in the pipeline” inventory?
3. Will the supply managers firm take the responsibility for providing the necessary education and training for those that will have to interact with and support foreign suppliers?
4. Is the firm ready to make a financial commitment for expensive trips to the supplier?
5. Is the management willing to change the approach, in some cases even policy matters of how business and related transactions are conducted?
6. Is the buyer aware of the environment?
If the answer is positive to both sets of these questions, global sourcing is possible.
Stages to Global SCM
Most of the firms today are replacing the term international sourcing by a broader philosophy of “global supply management”.
The three stages of world class wide sourcing is as follows, as suggested by Joseph Carter:
Stage One: International Purchasing: Organizations focus on leveraging volumes, minimizing prices, and managing inventory costs. These areas are the characteristics of an organization first entering the global purchasing arena.
Stage Two: Global Sourcing: Organizations focused on global opportunities will put more emphasis on supplier capability, supporting production strategies, and servicing customer markets. Of those that have sourced offshore for some time, most are at this stage.
Stage Three: Global Supply Management: Organizations optimizes supply networks through effective logistics and capacity management. These organizations have effectively minimized risks in offshore sourcing and have sourced worldwide for technology leadership.
Let us now take a look at the reasons for doing global sourcing.
It requires additional efforts as compared to regional/domestic sourcing; but natural, but yields greater profits in the bargain. The biggest criticality or complexity of purchasing goods from foreign countries is the wide variability available in the open market. The difference comes in quality, services and the dependability factor. Quality could be very high in the products of a particular country and unacceptably low or inferior in another. With this in the backdrop let us now see the reasons for purchasing the goods and services from international sources.
Superior Quality: A key reason to global supply management is to obtain the required level of quality. Although this is loosing its significance, yet the managers worldwide are still looking at international sourcing for the critical quality requirements.
Better Timed: Another good reason for global tendering is to meet the schedule requirements. Lead-time between orders and delivery is lesser as compared to domestic sourcing and more reliable too. This aspect has in fact improved considerably over the years and so has the capability of the suppliers in meeting the growing requirements. Once the initial hiccups are stabled many international sources have proved more dependable than those closer homes, specifically in meeting the time schedule.
Lower Cost: There are a lot of add on expenditures that are involved during international sourcing compared to domestic ones. Communications, transportations, duties and investigation of potential supplier’s add to these expenses, however, cost of material being cheaper compensates these expenses. Yet, it’s very seldom that a company’s total cost of material through global sourcing could be lowered.
Advanced Technology: Globally this is more advanced as compared to domestic products and materials. Advantage will always be of the manufacturer who can identify the right source of the technologically superior material in order to maintain a monopoly in business. An entrepreneur who fails to identify this will loose out on the product competition too soon.
Larger Supply Base: International sourcing increases the number of possible suppliers resulting in a choice among many. Competitiveness will enhance the chances for the firm to get the best deal keeping in mind reliability and low cost options. Broadening the supply base doesn’t increase the quantity of suppliers but increases the options of finding better suppliers, so as to enable the purchaser firm to reduce the number of contracted suppliers and pursue collaborative or alliance relationship at the appropriate time.
Larger Customer Base: Global sourcing can create opportunities to sell in countries where the buyer’s suppliers are based. With minimal trade restrictions sales opportunities could arise just out of interaction itself. Yet, some countries have arrangements like barter, offsets or counter trade, wherein there are tremendous trade restrictions. Here the international suppliers/non-domestic suppliers are required to procure materials in the buying country as part of sales transactions. This kind of tying makes both marketing and supply management far more challenging than when pure money transactions are involved. Such an arrangement of competing and selling in many countries makes it a necessity to enter into some kind of agreement to purchase items from that particular country.
Fig.: Global Tendering
There are however certain criticalities in going global too, it’s not so easy as it seems and one has to keep this at the backdrop before setting out:
Cultural Aspects: These are mostly in relation to beliefs and superstitions that are generally prevailing in Asian and African countries. These are real issues and shouldn’t be ignored. These are generally due to the versatile regions available across the globe; every region has its belief and faith that revolve around their day-to-day dealings.
Longer Timeframe: Longer lead-time in shipping of material and services from international sourcing creates a major problem. Generally through sea, which are prone to storm damage. Hence, there is a requirement to tap the aerial route; a much costlier option although.
Inventory Increase: There could be an increase in inventory in such conditions, and this can never be determined. Therefore to obviate such criticalities inventory-carrying cost must be added to purchase price, the freight costs, and administrative cost to determine the actual cost of buying from global resources.
Inferior Quality: As mentioned earlier, global sourcing is generally resorted to due to high level of quality control, however, there are chances that there is a risk of production outside the control of the domestic firm, resulting in “off-spec” incoming material. Like for example, the United States is the only major non-metric country in a metric world, which frequently leads to manufacturing tolerance problems for buyers of US products and vice versa.
Labor Problems: This is a growing problems world over, mainly in the third world countries. This would entail stringent measures to be adopted by these countries to improve the labor laws to tide over this menace.
Cost Factor: There is a considerable amount of add on costs due to the communication factor, translators cost, and distances involved. These increase the cost of doing business. Moreover, inadequate logistical support complicates communication and product distribution in the long run.
High Opacity: Bankers, investors and supply managers involved in global activities have been aware that the risk of conducting business varies from country to country. Recently, a risk factor called the “opacity index” has been developed to address the risk costs associated with conducting business in a specific country. It addresses the following areas:
Corruption at bureaucratic levels.
Contract & property right laws.
Economic policies.
Accounting standards.
Business regulations.
Fig.: Criticalities in going Global
China for example has a higher opacity in comparison to USA. US have fewer hurdles of types mentioned above and very less corruption.
Supply Channels
After having decided to go global the next step is to infer the supply channels that are to be used. Direct procurement is the easiest and lowest cost option to procure goods globally. It entails dealing with all the associates in procurement by the buying firm along with the facilities. However, limited resources in supply management may make direct procurement infeasible more often than not. Therefore, intermediaries will play a key role in streamlining the efforts of procurement through international sources, in fact, the simplest way to procure globally. Though sourcing through the intermediaries is costly option, yet, in most of the cases it avoids many unforeseen problems. The supply manager venturing into global sourcing is advised to solicit the advice of the contemporaries from the local supply management association. Certain, typical intermediaries are as mentioned below:
Import Merchants: They buy the goods for their own account and sell through their own outlets. They including all intermediary activities carry out all the risks of clearing.
Commission Houses: They generally act for exports abroad, like selling in USA & receiving commission ex foreign exporters. Bills are generally never billed to them, though they handle all clearing of shipping and customs.
Agents: These are representatives or firm that carry out the selling. They handle all the clearing and handling of material but hold no financial responsibility of the principal. They receive their commission from the seller and hence their primary interest is the exporter.
Brokers: Just like the marriage brokers, they mediate between the buyer & the seller from different nations. They receive the commission from both the buyer & the seller, but are not involved in clearance/shipment of the material. They often do act as special purchasing agent against commission, for predesignated material. They don’t have any fiscal responsibility of the seller, just like the import brokers.
Trading Companies: These are large companies that generally perform all functions like the agents/groups listed above. They have an added advantage over the others and are listed in directories and trade publications.
Subsidiaries: They are established by MNCs in countries where a physical presence is required to improve competitive capability and/or meet host government restrictions. Akin to most of the publishing houses that carry out reprint of the popular titles worldwide from established publishing house and also act as their subsidiary in India. Hitachi America is also such an example that was created primarily to look after the interest of North American market. Subsidiaries can increase sales and lower employment costs by the principal of sons of the soil concept. They slowly develop the host managers over a period of time and train them according to their requirements. Most of the MNCs in India are following this principle, like Citibank, HSBC and Alcatel. These subsidiaries offer to set prices in the local currency and deliver material to buyers with all duties paid. However, at times they could block flow of technical information since they are remote from manufacturing and marketing decision.
The above are the intermediaries for global trade and an organization interested in going global should perforce follow the proper channel, lest you fall prey to the upheavals of the host country. Various offices like the IPO (international procurement offices) are set worldwide to tide over these intricacies. These offices facilitate business transactions and interactions in the foreign country and surrounding areas.
Question 5: Discuss in detail about the supply chain performance measurement system. Explain Supply Chain Operations Reference Model (SCOR) method of Performance Measurement?
Answer: In today’s world, Supply Chain Management (SCM) plays a key strategic role in increasing organizational effectiveness and accomplishment of organizational goals such as enhanced competitiveness, better customer service and increased profitability. Today’s management can’t afford to focus only on company’s performance in a vacuum; there is an emerging requirement to focus on the performance of the extended supply chain or network in which company is a partner. An extended supply chain is one that involves not only tier one buyers and suppliers, but also the end supplier (suppliers’ suppliers) to end buyers (buyers’ buyers). The competition is at a chain or network level, i.e. supply chain vs. supply chain, with emphasis on continuous improvement across the extended supply chain.
There is a shift in focus from an intra organizational performance to inter organizational integrated supply chain performance. Firms have now realized the potential of SCM, but many of them still lack in selecting the proper performance measures for a fully integrated supply chain.
In a supply chain the problem lies at the interfaces that is at the boundary of two organizations. The reason for this is the high level of interdependence intermingled with independence and autonomy of the firms in an integrated SC. Every member is fully autonomous but highly dependent on the performance of other members. Supply chain performance measures differ from traditional performance measures as it crosses company boundaries i.e. it includes suppliers and distributors. Supply chain performance also crosses all functional links like procurement, manufacturing, sales and distribution etc. This makes the choice of supply chain performance measure(s) difficult.
Single performance measure for entire supply chain is not adequate for effective supply chain because it will not cover all pertinent aspects of the supply chain. In many companies, the metrics that management refers to, as supply chain metrics are primarily internally focused functional measures like lead-time, inventory levels etc. In many instances, these measures are purely financial (for example return on assets, overall profits etc.), but they do not indicate how well key processes have been performed or how effective the supply chain is in meeting the primary objective like customer satisfaction.
In an increasing number of instances, the organizations have started measuring performance beyond the traditional boundaries of firm, but it is limited to measuring the performance of immediate SC i.e. tier one buyers and suppliers. These measures do not capture how the extended supply chain has performed and fail to identify areas of improvement in competitiveness, stakeholders’ value for each firm in the extended supply chain.
Like in any other case, in order to evolve an efficient and effective supply chain, SCM needs to be assessed for its performance. However, there is often lack of insight for the development of effective performance measures and measurement system needed to achieve a fully integrated extended supply chain. The process of choosing appropriate supply chain performance is difficult due to the complexities of supply chain. This complexity is due to many factors and one of them is the objective of SC itself. The objective of managing the supply chain is to synchronize the needs or demands of the customers with the flow of materials from suppliers to achieve a balance between the conflicting goals of customer service and satisfaction and low supply chain cost. These conflicting goals cannot be accomplished together at a time and hence there is a need to strike a balance between them, which makes the decision of selecting the right performance measures more difficult.
Supply Chain Performance refers to the extended supply chain’s activities in meeting end-customer requirements, including product availability, on-time delivery, and all the necessary inventory and capacity in the supply chain to deliver that performance in a responsive manner.
Supply chain performance crosses organizational boundaries since it include raw material components, subassemblies and finished products and distribution through various channel to the end customer. Supply chain performance also crosses traditional functional linkages such as procurement, manufacturing, distribution, marketing &sales and R&D etc. Figure below shows the evolution of performance measures for SC from single enterprise single measure to multiple enterprises multiple measures.
Fig.: Evolution of performance measures for supply chain
NEED FOR SUPPLY CHAIN PERFORMANCE MEASURES
To excel and win in the today’s competitive environment, supply chain need continuous improvements. To achieve this goal, performance measures that support global supply chain performance measurement and improvement are needed, rather than narrow company-specific or function-specific measures, which inhibit chain wide improvement.
Several factors that contribute to management’s need for new types of measures for managing the supply chain include:
1. The lack of measures that capture performance across the entire supply chain.
2. The requirement to go beyond internal metrics and take a supply chain perspective.
3. The need to determine the interrelationship between corporate and supply chain performance.
4. The complexity of supply chain management.
5. The requirement to align activities and share joint performance measurement information to implement strategy that achieves supply chain objectives.
6. The desire to expand the “line of sight” within the supply chain.
7. The requirement to allocate benefits and burdens resulting from functional shifts within the supply chain.
8. The need to differentiate the supply chain to obtain a competitive advantage.
9. The goal of encouraging cooperative behavior across corporate functions and across firms in the supply chain.
Recent studies indicate that supply chain performance affects more than 85 percent of a manufacturer’s costs and a large percent of its revenues (Supply chain council 1998). Monitoring SC performance through proper measurements is, therefore, necessary and can help the organizations to identify opportunities for optimization. The successful companies are reengineering their supply chains to decrease costs and improve customer satisfaction. Effective reengineering requires an in-depth understanding of the supply chain processes and their linkages. An in-depth understanding can only permit the development of a performance system and the setting of improvement goals against benchmarks.
Supply Chain Operations Reference Model
One way to understand a supply chain is to use a process model. The Supply Chain Council created the SCOR model which is a framework for examining a supply chain in detail, defining and categorizing the processes that make up the supply chain, assigning metrics to the processes, and reviewing comparable benchmarks. Many companies use the SCOR model to understand and improve their supply chains. These companies include aerospace and defense manufacturers, large consumer product manufacturers, and third-party logistics providers. The SCOR model is the only supply chain framework that links performance measures, best practices, and software requirements to a detailed business process model.
SCOR models integrate the well-known concepts of business process reengineering, benchmarking, and process measurement into a cross-functional framework.
SCOR defines supply chain as the integrated process of plan, source, make, deliver and return spanning suppliers’ supplier to customers’ customer, aligned with operational strategy, material, work and information flows.
The heart of the SCOR system is a pyramid of four levels that represent the path a company takes on the road to supply-chain improvement.
SCOR spans:
All customer interactions, from order entry through paid invoice.
All product (physical material and service) transactions, from your supplier’s supplier to your customer’s customer, including equipment, supplies, spare parts, bulk product, software, etc.
All market interactions, from the understanding of aggregate demand to the fulfillment of each order.
Fig.: Levels of SCOR
SCOR does not attempt to describe following business process or activities:
Sales and marketing (demand generation)
Research and technology development
Product development
Some elements of post-delivery customer support
Links can be made to processes not included within the model’s scope, such as product development etc.
SCOR assumes but does not explicitly address:
Training
Quality
Information Technology (IT)
SCOR provide the detailed and exhaustive list of performance measure for each activity and process aligns the detailed performance measures with the strategic objectives and provides the best practices and IT sources for each measurement. It requires a well-defined infrastructure, resources and project based completion approach. Implementation of such an exhaustive system requires fully dedicated managerial resources and continuous business process reengineering to align the business with the best practices.
Question 6: Identify and describe factors influencing supply chain network design decisions.
Answer: The rise of new technologies, new forms of competition and new avenues to add customer value have begun to redefine the basis of supply chain designs and strategies. Product life cycles are being compressed. Services are becoming commodities in ever-shorter time spans. Intellectual capital and proprietary technologies, once protected by layers of patents and enshrouded in corporate secrecy, have become widely available.
Building and sustaining competitive advantage requires firms to learn and adapt at an ever-faster rate in order to distinguish themselves from competitors. Andy Grove, the chairman of Intel, in his popular book “Only the Paranoid Survive” uses the term ‘inflection point’ to characterize the nature of the profound, sudden changes in the environment that often spell a major crisis for the firms.
Inflection points signify the potential for a radical transformation of an industries structure. In view of above, to remain competitive, effective and robust designing of supply chain management gains tremendous importance.
To remain competitive, industrial organizations are continually faced with challenges to reduce product development time, improve product quality, and reduce production costs and lead times. Increasingly, the challenges cannot be effectively met by isolated change to specific organizational units, but instead depend critically on the relationships and interdependencies among different organizations (or organizational units). With the movement toward a global market economy, companies are increasingly inclined toward specific, high-value-adding manufacturing niches. This, in turn, increasingly transforms the above challenges into problems of establishing and maintaining efficient material flows along product supply chains. The ongoing competitiveness of an organization is tied to the dynamics of the supply chain(s) in which it participates, and recognition of this fact is leading to considerable change in the way organizations interact with their supply chain partners. The development of techniques and tools to enable modelling and analysis of emerging supply chain management strategies and practices, and application of these tools to understand critical trade-offs is very important for designing supply chain management.
FACTORS INFLUENCING SUPPLY CHAIN DESIGN DECISIONS
There are many factors that influence the design of supply chain. Some of them are discussed in this section
Rising Importance of Knowledge Work
In many industries knowledge work has become the primary condition that defines how well firms innovate and compete with one another. The shift towards knowledge work places a greater emphasis on how well managers can attract and retain talent. In places such as the Silicon Valley and other hot beds of innovation, the recruitment, training and development of knowledge workers shape a firm’s basis for future technologies and product ideas. Often firms attempt to recruit technical talent from their competitors, and from companies in other industries as well. This growing flow of people promotes rapid flow of ideas, insights and innovation.
Growth of Substitute Products and Services
Firms in related or neighboring industries often produce substitutes. The innovation of substitute products creates opportunities for new entrants and innovators to change the way firms must compete. For example, the rise of Internet based telephony, threatens traditional phone companies such as AT&T corp.; the growth of video on demand threatens the infrastructure of many entertainment and network-based firms.
Rising Information Intensity
The growing information intensive nature of many industries means that the costs of creating and disseminating information are steadily declining over time. The costs of creating and transmitting information on wider scale, appears to be declining as the information content becomes richer. For example, the value of E –mail as a service to the users grows as it becomes more pervasive and easier to use. The costs of transmitting and delivering E-mail to the wider population is declining as new networking technology substantially lower the cost of each message.
Impact of the Shifting Landscape
As companies deal with the numerous changes and challenges posed by epicenters of massive change, it is important that managers broaden the scope of their skills to accommodate and learn new insights that will help them become more effective.
We should expect to see the impact of frequent and massive change on an industry in three ways.
Commoditisation of new technologies: One major trend reshaping a variety of industries is the growing availability of state of the art technology to any one who wants it. Today’s innovations are becoming commodity like products. For example, new technology products like virus-scanning software and fast modems to connect with Internet are rapidly becoming standard features in many of today’s computer and electronics products.
Rapidly declining unit costs: Even some of the most sophisticated forms of knowledge are becoming widely available on the Internet for a very low cost, and in several cases for free.
Burden of strategic commitment: Change often requires new managerial mindsets and a willingness to challenge assumptions about how to add value to emerging customer needs. Often established firms become wedded to ingrained patterns of behavior. Core competencies built and refined from an earlier time become shackles and blinders that constraint learning. It is important for firms to continue monitoring how their products and services are likely to evolve over time.
From Physical to Virtual Value Chains
The perspective can be illustrated by the revolutions shaking the music recording and distribution industry. Traditionally, the industry has been dominated by AOL TIME WARNER, Sony etc., who signed long term royalty contracts with artists and entertainers, managed their own CD’s and controlled marketing programs to ensure steady sales. With the advent of digital media formats and new technical standards, music firms must reconfirm their value chain approaches, by forming an array of alliances with Internet service providers and Internet portals to reach preferred customers, digital retailers etc.
Rise of Virtual Organizations
Emerging organizational designs will increasingly be based on new configurations where information, knowledge, innovation and marketing all converge together along a shared network. This shared network brings together not only different parts of the firm, but also different firms that may be from different industries as well. These networks evolve and complete on the basis of fast innovation, sharing of ideas and rapid product development. The rise of the so-called Virtual Organisation is just one manifestation of this broader trend. As information, knowledge and value flow across many firms, any firm operating within the virtual organization is a potential source for future innovation, learning and inflection point that can dramatically change the skills and competencies needed to compete effectively.
Question 7: What do you understand by Supply Chain Design? What are the characteristics of Efficient, Responsive, Risk Hedging and Agile Supply Chains?
Answer: Successful supply chain design requires several decisions relating to the flow of information, product and funds. These decisions fall into three categories or phases depending on the frequency of each decision and time frame over which a decision phase has an impact.
1. Supply Chain Strategy or Design: A company’s competitive strategy defines the set of customer needs that it seeks to satisfy through its products and services. The supply chain strategy includes supplier’s strategy, operations strategy, and logistics strategy. Decisions regarding inventory, transportation, operating facilities and information flows in supply chain are all parts of supply chain strategy. Various functional strategies cannot be formulated in isolation. They must fit and support each other if a company is to succeed. Achieving a strategic fit between a company’s competitive strategy and supply chain strategy is a key consideration. There are three basic steps to achieve this.
Understanding the customer.
Understanding the supply chain.
Achieving the strategic fit.
During the supply chain strategy design phase a company decides on how to structure the supply chain. It decides what the chains configuration will be and what processes each stage will perform. These decisions include the location and capacities of production and ware housing facilities, products to be manufactured or stored at various locations, modes of transportation and types of information systems to be utilized. Supply chain design decisions are typically made for long term and are very expensive to alter on short notice.
2. Supply Chain Planning: This starts with a forecast for the coming year of demand in different markets – with all the details of markets, supply locations, inventories, sub contracting of manufacturing etc.
3. Supply Chain Operations: The goal is to implement the operating policies in the best possible manner.
SUPPLY CHAIN STRATEGIES
Let us see some supply chain characteristics and strategies.
Demand and supply uncertainty characteristics: Hau Lee points out that in addition to important demand characteristics, there are uncertainties revolving around the supply side that are equally important drivers for the right supply chain strategy. Lee defines a stable supply process as one where the manufacturing process and the underline technology are mature and the supply base is well established. In contrast, an evolving supply process is where the manufacturing process and the underline technology are still under early development and are rapidly changing. As a result the supply base may be limited in both size and experience. In a stable supply process, manufacturing complexity tends to be low or manageable. Stable manufacturing processes tend to be highly automated, and long-term supply contracts are prevalent. In an evolving supply process, the manufacturing process requires a lot of fine-tuning and is often subject to breakdowns and uncertain yields. The supply base may not be reliable, as the suppliers themselves are going through process innovations. Following exhibit summarizes some of the differences between stable and evolving supply processes.
Lee argues that while functional products tend to have a more mature and stable supply process, but that is not always the case. For example, the annual demand for electricity and other utility products in a locality tend to be stable and predictable, but the supply of hydroelectric power, which relies on rainfall in a region, can be erratic year by year. Some food products also have a very stable demand, but the supply (both quality and quantity) of the products depends on yearly weather conditions. Similarly, there are also innovative products with a stable supply process. Fashion apparel products have a short selling season and their demand is highly unpredictable. However, the supply process is very stable, with a reliable supply base and a mature manufacturing process technology.
Table: Demand Uncertainty Characteristics
Table: Supply Uncertainty Characteristics
Types of Supply Chain Strategies
Lee characterizes four types of supply chain strategies as shown in the exhibit below. Information technologies play an important role in shaping such strategies.
1. Efficient Supply Chains: These are supply chains that utilize strategies aimed at creating the highest cost efficiency. For such efficiencies to be achieved, non value added activities should be eliminated, scale economies should be pursued, optimization techniques should be deployed to get the best capacity utilization in production and distribution, and information linkages should be established to ensure the most efficient, accurate, and cost effective transmission of information across the supply chain.
2. Risk Hedging Supply Chains: These are supply chains that utilize the strategies aimed at pooling and sharing resources in a supply chain so that the risks in supply disruption can be shared. A single entity in a supply chain can be vulnerable to supply disruptions, but if there is more than one supply source or if alternative supply resources are available, then the risk of disruption is reduced.
3. Responsive Supply Chains: These are supply chains that utilize strategies aimed at being responsive and flexible to the changing and diverse needs of the customers. To be responsive, companies’ use build to order and mass customization processes as a means to meet the specific requirements of customers.
4. Agile Supply Chains: These are supply chains that utilize strategies aimed at being responsive and flexible to customer needs, while the risk of supply shortages or disruptions are hedged by pooling inventory and other capacity resources. These supply chains have strategies in place that combine the strengths of “hedged” and “responsive” supply chains. They are Agile because they have the ability to be responsive to the changing, diverse, and unpredictable demands of customers on the front end, while minimizing the back end risks of supply disruptions.
Question 8: Why is transportation important in a firm’s supply chain? What are the stages for selection the appropriate transport mode and why?
Answer: Transportation happens to be the most fundamental part of strategic logistic management. Transport costs include all costs associated with movement of products from one location to another. The average transport costs ranges from 5 to 6% of the recommended retail price of the product. Transportation is the movement of products, materials and services from one area to another, both inbound and outbound. It can also be said as movement from one node of the supply chain to the other. As Deshmukh and Mohanty (2004) say, “by providing for the swift and uninterrupted flow of products back and forth through the chain, transportation provides a sort of lubrication to run the chain smoothly. It also permits deeper penetration of newer markets far from the point of production.”1 Therefore, in order to effectively manage this transportation system the first step would be to establish a cost effective transportation mode. In other words highest customer service in lowest price, leads to company growth as per the figure given below:
Fig.: Transportation Cost Factor and it’s bearing on the Company and Customer
Where, numerical 40 is a variable factor representing the optimum level in terms of costs & growth in X & Y axis. With the transportation costs coming down from 40 to 30 the product costs lowers to even between 10 and 5, which is directly proportional to the customer satisfaction, which rises to 30 to 35 and affects company growth to 40. Transportation system has a strategic bearing on operation of a company. Therefore, failure to identify the best transportation mode can directly affect the growth of a company. Higher transport costs will raise prices, which will directly affect the customer satisfaction in a negative way. The three factors as mentioned by Gattoma & Walters required to consider are:
Customer
Environment
Product & company.
Organization, which involves physical movement of goods require transport services that varies from mode to mode. The best suitable mode is required to be identified depending upon the nature of product that has to be moved. Therefore, in order to identify the right transport system the following have to be considered:
Impact of the transport system on the supply chain.
Factors that determine the choice of transport mode.
Who are the customers to your product per se?
What are the environmental factors?
What is the product?
What is your company profile?
Feedback and reporting both from within and the environment on the choice of transport, and rectify in case you went wrong the first time.
Your foresight, flexibility & integration of available resources in planning stage will be one of the crucial factors that will dictate the choice of transport.
Next we have to see as to what are the considerations that influence transportation? Considerations Influencing Transportation
Customer Communications: in order to obviate delays in transportation and handling of logistics both the suppliers and distributors are relying more and more on electronic transfer systems, IT & the internet. This will help in considerable reduction in time delays and effect better cooperation between the chains.
Market Coverage: transportation costs influence the size of markets covered in a big way. The characteristics are: costs, flexibility, reliability and availability. The product per se will influence the economics of the decision. A low volume and high value product will be able to support higher costs, which means extended delivery distances and increase in delivery frequency.
Sourcing Decisions: the geographical dimension of the source markets can be influenced by low cost transportation system, i.e. ‘reliable bulk freight services could extend the source markets,’ says Mohanty & Deshmukh. Companies therefore have to consider a trade off between price & quality and the costs involved in delivering to the processing point, i.e. volume & cost of transportation.
Manufacturing Operations: cost of transporting has a direct bearing on the location of the manufacturing market center. That is why, extraction based units are close to the source of raw materials and the products related to customer satisfaction are closer home, i.e. near to the customer hub center.
Pricing Decision: transportation happens to be the important component of product costs. Therefore, selection of the appropriate transportation mode will have a direct bearing on the product costs per se, with more relevance to exports. Increase in transportation costs increases the product pricing.
Customer Service Decisions: both customer service policy and transportation decisions go hand in hand and hence one cannot be considered in isolation of the other. Moreover, the type of market will also dictate the decision and will vary considerably. Therefore, its pertinent to overrule the cost factor while servicing the medical customers, since speed is more important than cost in selecting the transport mode.
An Effective Selection System
Transport selection can effectively be resolved by adhering to the five stages of selection framework:
Stage I: identification of those factors affecting the choice of transport selection.
Stage II: categorize the significant factors and identify the potential risks.
Stage III: determination of the distribution network depending upon the number and size of the depots.
Stage IV: application of matrix analysis for selecting the right transport.
Stage V: measure and monitor costs continuously.
A Decision Framework
Determining an organization’s transport requirement will be based on the following underlying considerations:
The available depots, their sizes including movement requirements of raw materials to manufacturing units and finished products to the warehouses and on to the consumers.
The best choice of mode available depending on the distance involved.
Product characteristics that will further dictate the type of transport mode to be employed.
The choice of equipment in terms of type of transport for each requirement.
The financial option that could be employed in terms of individual type of equipment.
The operation needs in terms of usage of the equipment for maximum utilization and minimum operational costs.
From the above it’s evident that transportation is one of the important facets of logistics and equally important in the process of SCM, because they impact the customer services and other areas of cost. These decisions are prominent within the purview of company logistics decisions due to the factor of trade off potential that exists between alternative modes of transportation and other logistics functions within the firm. Therefore, an understanding of costs and benefits of alternative transport modes, together with an in-depth evaluation of overall corporate implications is mandatory. Transportation costs will always have a direct bearing on the product costs, i.e. increased transport costs will have risen prices and vice versa. Therefore, appropriate selection of the right transport mode is necessary for optimum customer satisfaction and for a balanced logistics system of the firm.
Question 9: Write short notes on any three of the following:
1. Warehousing
2. Method of Transport Mode Selection
3. Transportation Decision
Answer: Warehousing: This is an important facet of logistics chain and works side-by-side with transportation. It is that segment of logistics function that deals with storage and handling of inventories starting from supplier receipt to consumption point. The management of this includes the maintenance of accurate and timely information relating to inventory status, location and disbursement. Factors influencing the warehousing decisions are:
Type of distribution
Value of the firm
Quantity and potential for obsolescence
Competitiveness
Economic condition
Warehousing performs a variety of roles as mentioned below:
Material handling: It consists of receiving, storing and shipping.
Storage: This maximizes customer services by improving product and location positioning.
Transfer of information: This ensures timely and accurate information on inventory status, space utilization, equipment and manpower availability and transport capacity.
In order to develop an effective warehousing strategy the following has to be addressed:
Documentation of existing warehouses operations.
Documentation of the storage facilities and put forth requirements over the planning horizon.
Identify the shortfalls within the warehouses that are available including the deficiencies.
Alternate warehousing plans to meet contingencies in strategy.
Selection of the best recommendation.
Update the warehouse strategic plan.
With that as a backdrop to our study let us see the design and management of Supply Chain Management, since logistics happens to be the key of SCM.
2. Method of Transport Mode Selection
The selection procedure for the transport mode could vary from the simple decision either to identify one feasible method of distribution or to follow the competitor’s procedures, to the complex decision that calculates the cost incurred and produces an optimum solution. The three potential methods are:
Judgment: Identification of the important factors affecting the transport problem by the transport manager, and the transport mode from a list of alternatives available, so that the important features of the transport requirements are met. The shortcomings are tremendous in such a process, since; transport is considered as a service rather than a distribution system.
Cost trade-off: It is where the impact of transport is calculated in relation to immediate terminal objectives and activities, and the total cost of distribution system is optimized. This particular approach acknowledges the existence of trade-off within the numerous alternative approaches in an attempt to assess the situation to minimize total costs.
Distribution models: This identifies and explains the interrelationships between the components of the distribution system at various levels of daily, weekly or monthly demands. These models could be built to examine the impact of alternative transport modes and methods, as either the demand changes or the components in the system change. Therefore, in order to carry out a systematic selection of the transporter a framework consisting of the following stages is recommended:
Fig.: The Selection System
Stage 1: identifying the factors affecting the choice of transport selection
Stage 2: categorizing the significant factors and identifying the potential risks
Stage 3: determining the distribution network in terms of number and size of depots
Stage 4: applying the matrix analysis to select the most appropriate transport method
Stage 5: measuring and monitoring cost factors.
3. Transportation Decision
Determining an organization’s transport requirement will be based on the following underlying considerations,
The available depots, their sizes including movement requirements of raw materials to manufacturing units and finished products to the warehouses and on to the consumers.
The best choice of mode available depending on the distance involved.
Product characteristics that will further dictate the type of transport mode to be employed.
The choice of equipment in terms of type of transport for each requirement.
The financial option that could be employed in terms of individual type of equipment.
The operation needs in terms of usage of the equipment for maximum utilization and minimum operational costs.
Fig.: Decision Framework
We have to understand that transportation operations cannot be seen in isolation and hence warehousing and depot locations are equally important to understand the choice of transport selection process. The total number and sizes of depots and warehouses will also have a direct bearing on transport operations of all companies across the board.
Question 10: Identify and describe factors influencing supply chain network design decisions.
Answer: In today’s dynamic business environment, manufacturing and distribution companies are revisiting supply chain network design decisions to ensure that they optimally balance the various costs involved in providing the level of customer service required by the overall business strategy. Analysts claim that 80% of supply chain cost is predetermined in the design of the product and supply chain network. Given the significant business impact driven by such a fundamental decision as how a supply chain is designed, Spinnaker’s client experience has found that the ROI of such analysis is often many, many times the cost and effort involved. Supply chain network design is the practice of locating and rationalizing the facilities within the supply chain, determining the capacity of these facilities, determining how to source demand through the network and selecting modes of transportation in a manner that provides the required level of customer service at the lowest cost. In the supply chain model depicted below, a product may be sourced from either of two plants and flow through three different distribution centers to reach any given customer. Even in this fairly simple model, the complexity grows quickly when one considers any meaningful number of products on top of the various sourcing options, transportation modes, capacity constraints, leads times and costs that must be considered. Supply chain network design models provide the most effective and efficient way to solve such problems. These models provide powerful decision support functionality to understand and evaluate complex supply chain relationships.
Supply Chain Network Design Approach
The approach to executing a supply chain network design assessment is to understand the strategic business objectives, define and analyze the multiple strategies to achieve these objectives, evaluate the options and trade-offs involved and develop the implementation plans required to translate decisions into reality. The graphic below illustrates the different steps in this process.
Fig.: Supply Chain Network Design Methodology
Phase 1: Strategy Development
The development and communication of an overall supply chain strategy is the responsibility of corporate management. The role of the project team is to research and suggest potential strategies, and assist in the evaluation and detailed analysis of the strategic alternatives presented. Models help to visualize and communicate ideas, capture complex relationships and study the impact of various decisions, but they do not create strategy. With this in mind, there are several key issues to keep in mind when developing a corporate supply chain strategy. Strategy development is both an art and a science. “Art” is required in the evaluation of market trends, forecasting competitive drivers and creating an effective organizational structure. Science is applied in the effective use of modelling tools to develop and evaluate potential strategies (though the effective and creative use of models is often an art itself). During the initial phase of strategy development, it is important to remove oneself from the numbers and think conceptually. There will be adequate time later to get into detailed analysis.
The primary focus at this point should be to develop a list of critical issues and identify how each will change over next 3-5 years. Some questions to guide the process are:
Who are our customers? What do they expect from us? How well do we meet their Z expectations?
What are our deficiencies?
What do our competitors have and/or do that we don’t?
What do we have and/or do that our competitors don’t?
What functions/roles/services are crucial to our business and should be kept in-house?
What functions/roles/services could potentially be outsourced?
A good template for discussion starts with a review of the current market trends, competitive and financial pressures and operating environment. Then develop a vision of estimated future market needs and the operating environment necessary to meet those needs. The strategy to be developed must close the “gap” between current and future operating environments. Issues identified at this stage drive the development of an integrated strategy. Note that this strategy is not carved in stone. It must be updated annually as current events re-shape the future. A good strategy evolves over time. The most important goal is to lay a foundation of processes and culture so that strategic planning becomes an integral part of the business.
Phase 2: Scenario Evaluation
Once a set of potential strategies has been developed; these alternatives must be evaluated according to an objective and measurable set of key factors. These values will be used to determine the relative “goodness” of each solution. Since one alternative is to do nothing, the first step is to collect operational and costs data on the current network. These baseline costs and service measures will be used as the benchmark against which all other options will be compared. It is important to closely evaluate the use of averages within the model. Markets, product mixes and logistics costs change over time and from region to region. Averages may bias the models for or against a particular solution. However, high-level averages are still useful for comparing one solution to another. Typical data requirements for a modelling effort will include:
Demand (as indicated by customer demand for each particular product group).
Supply (as indicated by supplier and/or manufacturing capabilities and capacities).
Facility capacity (maximum units of production/flow per day).
Costs (fixed and variable manufacturing, material handling and transportation costs).
The next step is to build and validate high-level models that will be used to test each alternative and calculate the appropriate cost and service measures. Focusing first on the baseline solution, we create a network model, verify that the model behaves as we expect it to and validate the model output against known cost and flow measurements. Note that the more precise a model must be, the greater the amount of data that must be collected, the greater the accuracy required of that data and the more difficult it will be to solve the model. We make every effort to create flexible, reusable models that may be re-applied for future studies and strategic planning.
Because we are evaluating long-term strategy, the models typically focus on annual demand, not short-term figures. Depending on the complexity of the network, it may be necessary to partition or regionalize the network along natural geographic or business divisions. Each long-term strategy being evaluated may potentially be accomplished through millions of possible combinations of facility locations, transportation plans and stocking policies. The goal of network optimization is to rapidly evaluate this multitude of alternatives and select a few top contenders for further analysis.
After the baseline model has been approved, we then can build and evaluate alternative strategies using the same core assumptions used to build the baseline. Our goal at this stage is to optimize a given network to meet market needs. The primary components of a solution are the number, location, size and inventory stocking policies of each facility and the associated transportation plan. The primary measure of each solution is its net operating cost.
For each contender selected, it is important to adjust key assumptions to determine the sensitivity of the solution. This sensitivity analysis is useful for evaluating the robustness of the solution to changing market forces, as well as for identifying key factors that must be tightly controlled.
The total cost of a supply chain strategy is not completely captured within a high-level network model. After a solution has been identified as a contender, it must be evaluated within the broader environment of information systems, inventory policies, personnel and operating procedures. This involves a more detailed look at routing and transportation assumptions, inventory stocking policies, facility operating procedures, enabling technologies and changing roles for the workforce. Furthermore, regulatory, tax and other economics factors outside of the model’s purview are often relevant. A complete evaluation must also incorporate the costs to transition from the current state to the new solution, such as closing or moving facilities, retraining the workforce and updating computer systems.
Phase 3: Operational Planning
Once a strategy has been selected; it is time to move into detailed planning. Because this stage is very time consuming, it is crucial that only the best strategy (or perhaps 1-2 alternatives that are seriously being considered) be evaluated during this time. Since the network models were solved at an aggregate level of planning, we now must determine how to run the solution on a day-today basis. This includes defining specific operating procedures, material flow policies, inventory stocking policies and load plans.
At this point it is important to perform a complete needs analysis covering all components of the supply chain: systems, staffing, facilities, transportation, communication, processes, etc. A fundamental question which must be addressed is the degree to which certain activities or operations will be outsourced to third parties versus being executed in-house. Also occurring at this time is the development of a detailed implementation plan. This plan must define all tasks, dependencies and resources required to transition from the current state to the proposed solution.
Question 11: Define ERP. Give its tangible and intangible benefits. Why a company pursues a new ERP solution?
Answer: In the past, most of the planning covered only limited routine operational requirements, with focus on historical record keeping and accounting. The business functions in the enterprise were using information technology to automate the departmental activities, to fulfill only individual and departmental needs and objectives, not realizing the effect on other functions.
However, the enterprise is the group of people with a common goal, which has certain resources at its disposal to achieve this. The group has some key functions to perform inline with the goals. Resources are anything, which cost money. Resources include raw materials, purchased parts, and produced parts, personnel, processing machine capacity, material handling capacity, tools, fixtures, and such others as needed to produce the end items. Planning is to ensure that nothing goes wrong and also putting necessary functions in place. ERP is the method of effective planning of all resources in an organization.
Every organization committed to making and selling goods and services has three major objectives:
To provide maximum customer service
To minimize inventory carrying cost
To optimize plant operation
Unfortunately, these objectives are basically conflicting in nature and represent certain trade-offs. Sales department requires all the inventory necessary to service their customers and at the same time production flexibility to meet changing demands. Factory desires a constant production schedule with long runs and less overtime. Finance insists on keeping the capital investments to a minimum. More often they end up with the manager’s nightmare:
More was bought than required
More was used than essential
More was produced than sold
ERP is an attempt to bridge the gap. It is defined to be a company wide planning system which works around core activities of business and has all logical interfaces to achieve seamless flow of information within the supply chain and value stream. Such systems can optimally plan and manage all the resources of enterprise to run the business with high level of customer service at lower cost and improved productivity.
The evolution of ERP took over three decades, during which the continuous improvement for integration and planning with creative thinking by innovators developed this comprehensive planning and control framework. Three ancestors of ERP serve as milestones:
1960’s Material Requirement Planning (MRP)
1970’s Closed Loop MRP
1980’s Manufacturing Resource Planning.
During this it also absorbed the new techniques proven to produce business benefits from Just-in-Time (JIT) and Business Process Reengineering (BPR).
In 1960’s the computerized production and inventory control systems began to provide better methods of ordering materials and control inventory. It uses master production schedules (What are we going to make?), bills of material (What does it take to make it?), and inventory records (What do we have?) to determine future requirements (What do we have to get?), which is called as Material Requirement Planning (MRP). In the changing conditions of manufacturing environment, the priority planning and capacity planning were tied in with MRP to accommodate the variations in demand and supply using feedback from tactical plans and execution levels. This closed structure is called as closed loop MRP. The next generation, Manufacturing Resource Planning (MRP-II), plans to forecast sales, to set production rates and resources levels integrated with investments decisions before translating the business plans to Master Production Plans (MPS).
In the new generation ERP, the whole supply chain management concept is incorporated extending the planning concept to trading partners where the complete visibility throughout the enterprise is possible and the concept of virtual enterprise is supported using electronic commerce.
This incorporates the techniques, Just-in-Time (JIT) and Business Process Reengineering (BPR), particularly in the areas of work empowerment, human engineering and waste reduction. The benefits of JIT are never fully realized unless it is being applied within the rational framework without which one could easily make wrong part at wrong time with utmost efficiency. The drawback of MRP II was the planning based on lead times, which never asked for improvement and taken as it is. The BPR is becoming an essential tool before and while ERP implementation concentrating on reduction in non-value adding activities and work simplification causing reduction in cycle time.
ERP consists of different modules integrated into one system. The modules are:
1. Distribution and transportation which serves day-to-day logistics using forecasting tools, extensive planning, comprehensive sales, purchasing, warehousing, packaging, inventory management and electronic commerce.
2. Order management integrates customer order processing into master production schedule, supports multiple sites and currencies, electronic commerce for real time information.
3. Manufacturing module supports master production schedule, material requirement planning, capacity planning, supplier scheduling and shop floor control.
4. Finance module delivers high level of visibility of financial transactions, supports accounts payable, accounts receivable, different costing methodologies, general ledger and electronic commerce.
5. Human resource module integrated with pay-roll track skills, capabilities, experience and training needs of an organization, prepares and maintains organization structure.
6. Quality management lets user tap collect, distribute and analyze critical quality information and uses powerful statistical tools to monitor and control products and processes.
7. Maintenance management calls for optimal schedules for personnel, availability of spares, and effective maintenance tasks. It handles all types of maintenance, keeps details of equipments, generates spare parts and maintenance requirements automatically.
8. Project module supports cost management of projects includes estimates, bids, scheduling, planning, budgeting, purchasing, tracking, billing, and integration with finance, manufacturing and distribution operations.
Why a Company Pursues a New ERP Solution
1. The company wants to achieve performance improvements, such as reducing operational costs, gaining competitive advantage, improving customer service, and improving or reengineering business processes.
2. The existing system in the company is not able to support its needs and requires significant information system resources for maintenance and support.
3. The system uses multiple points of input, often with duplication of effort.
4. Staff members are unable to answer questions easily or respond to information requests by key customers or suppliers.
5. The enterprise has grown through mergers and acquisitions and contains a variety of incompatible systems.
6. Key information is updated on a batch basis instead of in real time.
Question 12: Define MRP and its major inputs. Identify the sources through which these inputs are obtained. Give your answer for both Make to Stock (Make to Forecast) and Make to Order situations.
Answer: The materials requirement planning system is a major element in a manufacturing company and is also the heart of MRPII (Manufacturing Resource Planning). MRP is a computer-based information system designed to order and schedule ‘dependent’ demand inventories (raw materials, component parts, and subassemblies) in a coordinated manner. MRP is as much a philosophy as it is a technique, and as much as an approach to scheduling as it is an approach to inventory control. It views inventory from the vantage point of the stock-room, trying to insure that there will always be “just enough” on hand to meet projected demand.
Until the 1970s, the materials planning process in manufacturing environment suffered from two problems. The first was the enormous task of setting up schedules, keeping track of large numbers of parts and components, and coping with schedule and order changes. The second was the perception that a company had to choose between investing in high quantities of inventory or having excessive stock-outs. Practitioners used inventory-planning techniques that were designed for independent demand items, resulting in high inventories and frequent stock outs. Starting in the late 1960s and early 1970s, manufacturers recognized that planning dependent items differently from independent items (using MRP) could produce lower inventories and lower stock-out rates. Additionally, they enlisted the power of the computer to handle much of the burden of keeping records and determining material requirements.
The main purposes of an MRP system are to control inventory levels and assign operating priorities for ordered items. These may be briefly expanded as follows:
1. Inventory
Order the right part
Order in the right quantity
Order at the right time (start data)
2. Priorities
Order with the right due date
Keep the due date valid
The motto of MRP is getting the right materials to the right place at the right time. The operating philosophy of MRP is that materials should be expedited when their unavailability would delay the overall production schedule, and deexpedited when a schedule change postpones their need. To this end, MRP logic will always plan inventory to the lowest possible amount, unless instructed otherwise by order modifiers. Order modifiers, including safety stock and lot sizes are discussed later in this unit.
Material Requirements Planning Inputs
Figure given below illustrates the five major sources of information required for MRP to operate:
Fig.: MRP Inputs and Outputs
Fig.: Inputs to Master Production Schedule
Master Production schedule states which end items (items that are sold to customers) are needed, in what quantities, on which specific dates, and when these items will be produced. The MPS has five major inputs, as shown in figure above.
The production plan provides a set of constraints on the MPS. The MPS must take into account all types of demand data for the items being scheduled including: sales forecasts, customer orders, distribution warehouse requirements, interplant requirements, service demand forecasts, and safety stocks. The MPS must know how much is available to accurately determine how much to orders. This requires the inventory status information on hand inventory, allocated stock, released production and purchase orders, and firm planned orders. The item master file provides planning data on each item to guide the MPS planning process, such as: lot-sizing rule to be used, shrinkage factor, safety stock, and lead-time. Rough cut capacity planning determines the capacity requirements to implement the Master Production Schedule, verifying the schedule’s feasibility or causing the master schedules to revise the schedule.
1. The Bill of Materials (BoM), also called a product structure or parts list, is a list of all the materials, and the quantity of each, required to produce one unitof a manufactured product, or parent. MRP uses the bill of materials, as the basis for calculating the amount of each raw material required for each time period. The engineering Bill of materials (often called the parts list) for a simple product (ball-point pen) is as shown in Table below.
Table: Engineering Bill of Materials (Parts List) for ball-point pen
2. In an MRP system, a Bill of Materials (BOMs) file is an up-to-date computerized file that contains a single record for each individual parent component relationship. The BOMs represent the actual sequence of fabrication and assembly.
Item Master in an MRP system is a computerized file with a complete record for each item, or part. Because MRP systems are part-oriented, the Item Master File is the heart of the system. Each item, no matter at how many levels it is used in a product, or in how many products, and no matter whether it is currently stock-on-hand or not, has one and only one record. The item master record for a part contains many types of information, including: static data, such as part description, unit of measure, and MRP planning factors (lot sizes, lead times, safety stock, and scrap rates); plus dynamic data, such as various costs, current quantities on hand and on order.
3. Requirement is a computerized record of a future stockroom issue that will diminish stock-on-hand. There are two types of requirements: Internal (which will be used within the plant to make other products), and External (which will be sent outside the plant, such as customer orders and service parts.
A typical requirements record contains the item number of the part required, the quantity required, the date on which it is needed, and the quantity already issued from the stock room. Customer orders also contain such additional information as the customer name and ship to address, the date on which the customer wants delivery, and the date we promised to ship.
4. Orders are computerized record of a future stockroom issue receipt that will increase stock-on-hand. Just as there are two types of requirements, there are two types of orders:
a. Shop orders (or work orders or manufacturing orders), which will be manufactured within our own plant. These are similar to our internal requirements, because they will be procured internally.
b. Purchase orders, which will be procured from outside our plant. These are similar to our external requirements, because they will come into our plant from external sources.
We can also categorize the incoming orders (both shop orders and purchase orders) in a different manner, which tells whether the order has been released, or whether it is still planned. The categories are:
a. Scheduled receipts (or open order, or released order), which is an order that has been officially released, either in the shop or to a supplier. A scheduled receipt commits our company to take action and spend money.
b. Planned order, which exists only in the computer and perhaps some printouts at this point. Our company has not yet been authorized to spend money; no supplier or shop has been authorized to start work on this order.
Planned order can become scheduled receipts only when a human expressly takes action, this is one of the primary responsibilities of a materials planner. An MRP order record contains considerable data, including item number being ordered, order quantity, original due date, actual received quantity, revised due date, quantities in MRB (Material Review Board) and scrap, supplier (if purchase order), and other information.
Question 13: Define Inventory. Explain its functions and objectives?
Answer: Inventory is a part and parcel of every facet of business. Without it, no business activity can be performed, whether; it is a service organisation like hospital, bank etc., or a manufacturing or trading organisation. Irrespective of the specific organisational setting, inventories are required in a conversion process of inputs to outputs. In fact, inventory is maintained for flow of operations in the production process.
Fig.: The Materials Conversion Process
It would be seen that in a material conversion process, there are stock-points at the input (raw material), conversion (work-in-process), and output (product) stages. Looking at the conversion process where inputs and outputs are based on market uncertainty, it becomes physically impossible and economically impractical for each stock item to arrive exactly where it is needed and when it is needed. Even if it is physically possible to deliver the stock when it is needed, it may be prohibitively expensive. This is the fundamental reason for carrying the inventories. Thus, inventories play an essential and pervasive role in any organisation because they make it possible:
To get right amount of stock at exact time of need to ensure continuous and smooth production.
To avoid the physical impossibility and economical impracticability of getting right amount of stock at exact time of need.
To order larger quantities of goods, materials or components from the suppliers at advantageous prices.
To provide reasonable customer service by supplying most of the requirements from stock without delay.
To maintain more stable operating or work force levels.
To take advantage of shipping economies.
To plan overall operation strategy through decoupling of successive stages in the chain of acquiring goods, preparing products, shipping to branch warehouses and finally serving customers.
To facilitate economic production runs.
To facilitate the intermittent production of several products on the same facility.
To provide means for hedging against future price and delivery uncertainties.
To make effective use of available capital and/or storage space.
OBJECTIVES OF INVENTORY
As inventory is an essential part of any organisation, it consists of many items running into thousands. Systematic management and control of inventory for all the items is a challenging job. Main objectives of inventory control are:
to maintain the overall investment in inventory at the lowest level, consistent with operating requirements;
to supply the product, raw material, sub-assemblies, semi-finished goods, etc. to its users as per their requirements at right time and at right price;
to keep inactive, waste, surplus, scrap and obsolete items at the minimum level;
to minimize holding, replacement and shortage costs of inventories and maximise the efficiency in production and distribution;
to reduce the risk inherent in treating inventory as an investment which is risky. For some items, investment may lead to higher returns and for others less returns.
FUNCTIONS OF INVENTORY
The basic function of inventory is to increase profitability through manufacturing and marketing support. Since zero inventory manufacturing-distribution system is not practical, it is important to remember that each rupee invested in inventory should be committed to achieve a specific objective. Other basic functions of inventory are geographical specialization, decoupling, balancing supply and demand, and safety stock.
Inventory Investment Alternative
Inventory is a major area of asset deployment which should be required to provide a minimum return on investment. The marginal efficiency of capital (MEC) concept holds that a firm should invest in those alternatives that provide a greater return than capital cost to borrow. Figure shows that investment alternative A on the MEC curve is acceptable.
The MEC curve shows that about 20 per cent of the inventory investment alternatives will give a return on investment above the cost of capital. Every organisation is interested in return-on-investment or return on assets employed. Return on assets is profits divided by assets. In other words,
Return on Capital (Assets) = Profit/Capital (Assets)
= (Profits/Sales) × (Sales/Capital) = (Profits/Sales) × (Sales/Assets) Profits over sales is the profit margin. It depends upon many factors including uncertainties of change. Sales over capital is capital turnover. One way to improve return-on-investment is to increase turnover or keep the assets in inventory low.
Fig.: Typical Marginal Efficiency of Capital Curve (MEC)
Geographical Specialization
Another function of inventory is to allow geographical specialization of individual operating units. Due to factors of production such as power, raw materials, water and labour the economical location for manufacturing is often a considerable distance from areas of demand. The manufactured goods from various locations are collected at a simple warehouse/plant to assemble the final product or to offer customers a single mixed product shipment. This also provides economic specialization between manufacturing and distribution units of an enterprise.
Decoupling
This function of inventory is to provide maximum efficiency of operations within a single facility. Decoupling is done by breaking operations apart so that one operation's requirement is independent of another's. This decoupling function serves two purposes. First, inventories are needed to reduce the dependencies among successive stages of operations so that break-downs, material shortages, or other production fluctuations at one stage do not need later stages to shut down. Figure below illustrates this concept in an engineering firm. Since it is possible to continue deburring packing from inventories, even when diecasting and drilling is shut down these operations can be decoupled from the production processes which precede them.
Fig.: Decoupling of Operations by Using Inventory
A second purpose of decoupling is to let one organisation unit schedule its operations independently of another. For example, in an automobile organisation, engine built up can be scheduled separately from seat assembly and can be decoupled from final automobile assembly operations through in process inventories.
Balancing Supply and Demand
Balancing function concerns elapsed time between consumption and manufacturing. Balancing inventories exist to reconcile supply of sugar-cane with demand. The most notable examples of balancing is seasonal production and year round consumption of sugar. Another example of year round production and consumption is woollen textiles. Inventories in a balancing capacity link the seasonal economies of manufacturing with variations of consumption. The balancing function of inventory requires investment-in seasonal stocks which are expected to be fully liquidated within the season.
Safety Stock
The safety stock or buffer stock concerns short range variation in either demand or replacement. A great deal of inventory planning is devoted in determining the size of safety stocks. Safety stock provides protection against two types of uncertainty. The first type of uncertainty is sales in excess of forecast during the replenishment period. The second type of uncertainty concerns delays in replenishment. The inventories committed to safety stocks represent the greatest potential for improved performance. A variety of techniques are available to develop safety stocks which can be adjusted rapidly in the event of error or a change in policy.
Question 14: Explain Economic Order Quantity (Basic) with suitable example?
Answer: In a continuous, or fixed-order-quantity, system when inventory reaches a specific level, referred to as the reorder point, a fixed amount is ordered. The most widely used and traditional means for determining how much to order in a continuous system is the economic order quantity (EOQ) model, also referred to as the economic lot size model. The earliest published derivation of the basic EOQ model formula in 1915 is credited to Ford Harris, an employee at Westinghouse.
The function of the EOQ model is to determine the optimal order size that minimizes total inventory costs. There are several variations of the EOQ model, depending on the assumptions made about the inventory system. We will describe two model versions, including the basic EOQ model and the EOQ model with non-instantaneous receipt.
The Basic EOQ Model
The basic EOQ model is a formula for determining the optimal order size that minimizes the sum of carrying costs and ordering costs. The model formula is derived under a set of simplifying and restrictive assumptions, as follows:
Demand is known with certainty and is constant over time.
No shortages are allowed.
Lead time for the receipt of orders is constant.
The order quantity is received all at once.
These basic model assumptions are reflected in the figure given below, which describes the continuous-inventory order cycle system inherent in the EOQ model. An order quantity, Q, is received and is used up over time at a constant rate. When the inventory level decreases to the recorder point, R, a new order is placed; a period of time, referred to as the lead time, is required for delivery. The order is received all at once just at the moment when demand depletes the entire stock of inventory--the inventory level reaches 0--so there will be no shortages. This cycle is repeated continuously for the same order quantity, reorder point, and lead time.
Fig.: The Inventory Order Cycle
As we mentioned, the economic order quantity is the order size that minimizes the sum of carrying costs and ordering costs. These two costs react inversely to each other. As the order size increases, fewer orders are required, causing the ordering cost to decline, whereas the average amount of inventory on hand will increase, resulting in an increase in carrying costs. Thus, in effect, the optimal order quantity represents a compromise between these two inversely related costs.
The total annual ordering cost is computed by multiplying the cost per order, designated as Co, times the number of orders per year. Since annual demand, D, is assumed to be known and to be constant, the number of orders will be D/Q, where Q is the order size and
The only variable in this equation is Q; both Co and D are constant parameters. Thus, the relative magnitude of the ordering cost is dependent upon the order size.
Total annual carrying cost is computed by multiplying the annual per-unit carrying cost, designated as Cc, times the average inventory level, determined by dividing the order size, Q, by 2: Q/2;
The total annual inventory cost is the sum of the ordering and carrying costs:
The graph in figure shows the inverse relationship between ordering cost and carrying cost, resulting in a convex total cost curve.
Fig.: The EOQ Cost Model
The optimal order quantity occurs at the point in Figure 12.2 where the total cost curve is at a minimum, which coincides exactly with the point where the carrying cost curve intersects the ordering cost curve. This enables us to determine the optimal value of Q by equating the two cost functions and solving for Q:
Alternatively, the optimal value of Q can be determined by differentiating the total cost curve with respect to Q, setting the resulting function equal to zero (the slope at the minimum point on the total cost curve), and solving for Q:
The total minimum cost is determined by substituting the value for the optimal order size, Qopt, into the total cost equation:
The optimal order quantity, determined in this example, and in general, is an approximate value, since it is based on estimates of carrying and ordering costs as well as uncertain demand (although all of these parameters are treated as known, certain values in the EOQ model). In practice it is acceptable to round the Q values off to the nearest whole number. The precision of a decimal place is generally not necessary. In addition, because the optimal order quantity is computed from a square root, errors or variations in the cost parameters and demand tend to be dampened.
Example
The I-75 Carpet Discount Store in North Georgia stocks carpet in its warehouse and sells it through an adjoining showroom. The store keeps several brands and styles of carpet in stock; however, its biggest seller is Super Shag carpet. The store wants to determine the optimal order size and total inventory cost for this brand of carpet given an estimated annual demand of 10,000 yards of carpet, an annual carrying cost of $0.75 per yard, and an ordering cost of $150. The store would also like to know the number of orders that will be made annually and the time between orders (i.e., the order cycle) given that the store is open every day except Sunday, Thanksgiving Day, and Christmas Day (which is not on a Sunday).
SOLUTION:
Cc = $0.75 per yard
Co = $150
D = 10,000 yards
The optimal order size is
The total annual inventory cost is determined by substituting Qopt into the total cost formula:
The number of orders per year is computed as follows:
Given that the store is open 311 days annually (365 days minus 52 Sundays, Thanksgiving, and Christmas), the order cycle is
Question 15: Briefly describe Just-in–Time along with its advantages and disadvantages?
Answer: `Just-in-time' is a management philosophy and not a technique. It originally referred to the production of goods to meet customer demand exactly, in time, quality and quantity, whether the `customer' is the final purchaser of the product or another process further along the production line.
It has now come to mean producing with minimum waste. "Waste" is taken in its most general sense and includes time and resources as well as materials. Elements of JIT include:
1. Continuous improvement.
Attacking fundamental problems - anything that does not add value to the product.
Devising systems to identify problems.
Striving for simplicity - simpler systems may be easier to understand, easier to manage and less likely to go wrong.
A product oriented layout - produces less time spent moving of materials and parts.
Quality control at source - each worker is responsible for the quality of their own output.
Poka-yoke - `foolproof' tools, methods, jigs etc. prevent mistakes
Preventative maintenance, Total productive maintenance - ensuring machinery and equipment functions perfectly when it is required, and continually improving it.
2. Eliminating waste. There are seven types of waste:
Waste from overproduction.
Waste of waiting time.
Transportation waste.
Processing waste.
Inventory waste.
Waste of motion.
Waste from product defects.
3. Good housekeeping - workplace cleanliness and organisation.
4. Set-up time reduction - increases flexibility and allows smaller batches. Ideal batch size is 1item. Multi-process handling - a multi-skilled workforce has greater productivity, flexibility and job satisfaction.
5. Levelled / mixed production - to smooth the flow of products through the factory.
6. Kanbans - simple tools to `pull' products and components through the process.
7. Jidoka (Autonomation) - providing machines with the autonomous capability to use judgement, so workers can do more useful things than standing watching them work.
8. Andon (trouble lights) - to signal problems to initiate corrective action.
JIT - Background and History
JIT is a Japanese management philosophy which has been applied in practice since the early 1970s in many Japanese manufacturing organisations. It was first developed and perfected within the Toyota manufacturing plants by Taiichi Ohno as a means of meeting consumer demands with minimum delays. Taiichi Ohno is frequently referred to as the father of JIT.
Toyota was able to meet the increasing challenges for survival through an approach that focused on people, plants and systems. Toyota realised that JIT would only be successful if every individual within the organisation was involved and committed to it, if the plant and processes were arranged for maximum output and efficiency, and if quality and production programs were scheduled to meet demands exactly.
JIT manufacturing has the capacity, when properly adapted to the organisation, to strengthen the organisation's competitiveness in the marketplace substantially by reducing wastes and improving product quality and efficiency of production.
There are strong cultural aspects associated with the emergence of JIT in Japan. The Japanese work ethic involves the following concepts.
Workers are highly motivated to seek constant improvement upon that which already exists. Although high standards are currently being met, there exist even higher standards to achieve.
Companies focus on group effort which involves the combining of talents and sharing knowledge, problem-solving skills, ideas and the achievement of a common goal.
Work itself takes precedence over leisure. It is not unusual for a Japanese employee to work 14-hour days.
Employees tend to remain with one company throughout the course of their career span. This allows the opportunity for them to hone their skills and abilities at a constant rate while offering numerous benefits to the company.
These benefits manifest themselves in employee loyalty, low turnover costs and fulfilment of company goals.
Advantages Just-In-Time Systems
Following are the advantages of Adopting Just-In-Time Manufacturing Systems.
1. Just-in-time manufacturing keeps stock holding costs to a bare minimum. The release of storage space results in better utilization of space and thereby bears a favorable impact on the rent paid and on any insurance premiums that would otherwise need to be made.
2. Just-in-time manufacturing eliminates waste, as out-of-date or expired products; do not enter into this equation at all.
3. As under this technique, only essential stocks are obtained, less working capital is required to finance procurement. Here, a minimum re-order level is set, and only once that mark is reached, fresh stocks are ordered making this a boon to inventory management too.
4. Due to the aforementioned low level of stocks held, the organizations return on investment (referred to as ROI, in management parlance) would generally be high.
5. As just-in-time production works on a demand-pull basis, all goods made would be sold, and thus it incorporates changes in demand with surprising ease. This makes it especially appealing today, where the market demand is volatile and somewhat unpredictable.
6. Just-in-time manufacturing encourages the 'right first time' concept, so that inspection costs and cost of rework is minimized.
7. High quality products and greater efficiency can be derived from following a just-in-time production system.
8. Close relationships are fostered along the production chain under a just-in-time manufacturing system.
9. Constant communication with the customer results in high customer satisfaction.
10. Overproduction is eliminated when just-in-time manufacturing is adopted.
Disadvantages
Following are the disadvantages of Adopting Just-In-Time Manufacturing Systems.
1. Just-in-time manufacturing provides zero tolerance for mistakes, as it makes re-working very difficult in practice, as inventory is kept to a bare minimum.
2. There is a high reliance on suppliers, whose performance is generally outside the purview of the manufacturer.
3. Due to there being no buffers for delays, production downtime and line idling can occur which would bear a detrimental effect on finances and on the equilibrium of the production process.
4. The organization would not be able to meet an unexpected increase in orders due to the fact that there are no excess finish goods.
5. Transaction costs would be relatively high as frequent transactions would be made.
6. Just-in-time manufacturing may have certain detrimental effects on the environment due to the frequent deliveries that would result in increased use of transportation, which in turn would consume more fossil fuels.
Precautions
1. Following are the things to remember when implementing a Just-In-Time Manufacturing System.
2. Management buy-in and support at all levels of the organization are required; if a just-in-time manufacturing system is to be successfully adopted.
3. Adequate resources should be allocated, so as to obtain technologically advanced software that is generally required if a just-in-time system is to be a success.
4. Building a close, trusting relationship with reputed and time-tested suppliers will minimize unexpected delays in the receipt of inventory.
5. Just-in-time manufacturing cannot be adopted overnight. It requires commitment in terms of time and adjustments to corporate culture would be required, as it is starkly different to traditional production processes.
6. The design flow process needs to be redesigned and layouts need to be re-formatted, so as to incorporate just-in-time manufacturing.
7. Lot sizes need to be minimized.
8. Workstation capacity should be balanced whenever possible.
9. Preventive maintenance should be carried out, so as to minimize machine breakdowns.
10. Set-up times should be reduced wherever possible.
11. Quality enhancement programs should be adopted, so that total quality control practices can be adopted.
12. Reduction in lead times and frequent deliveries should be incorporated.
13. Motion waste should be minimized, so the incorporation of conveyor belts might prove to be a good idea when implementing a just-in-time manufacturing system.
Question 16: Define Information Technology. Explain the role of Information and Technology in the Integrated Supply Chain.?
OR
Define Information Technology. Explain the importance of Information in Integrated Business?
Answer: To survive, thrive and beat the competition in today’s brutally competitive world, one has to manage the future. Managing the future means managing information. In order to deliver quality information to the decision-maker at the right time and in order to automate the process of data collection, collation and refinement, organizations have to make Information Technology an ally, harness its full potential and use it in the best possible way.
Information technology is revolutionizing the way, in which we live and work. It is changing all aspects of our life style. The digital revolution has given mankind the ability to treat information with mathematical precision, to transmit it with high accuracy and to manipulate it at will. These capabilities are bringing into being, a whole world within and around the physical world. The amount of calculation power that is available to mankind is increasing at an exceptional rate. Computers and communication are becoming integral parts of our lives.
IT has a major role to play in any organization. All organizations have certain objectives and goals to achieve. For any organization to succeed, all business units should work towards this common goal. But each department or business function in the organization will have its own goals and procedures. The success of an organization rests in resolving the conflicts between the various business functions and making them do what is good for the organization as a whole. For this, information is critical. Everybody should know what is happening in other parts of the organization.
IT has a major role to play both at the organizational level and at the departmental level. At the organizational level, IT should assist in specifying the objectives and strategies of the organization. IT should also aid in developing and supporting, and procedures to achieve them. At the departmental level, IT must ensure a smooth flow of information across departments, and should guide organization to adopt the most viable business practices. At this level, IT ensures seamless flow of information across the different departments and develops and maintains an enterprise – wide database. This database will eliminate the need of the isolated data islands that existed and in each department and make the organization’s data accessible across the departmental boundaries. This enterprise– wide sharing has many benefits likes automation of procedures, availability of high quality information for better decision-making and faster response times.
INFORMATION AND TECHNOLOGY IN THE INTEGRATED SUPPLY CHAIN
The supply chain management is concerned with the flow of products and information between the supply chain members that encompasses all of those organizations such as suppliers, producers, service providers and customers (See Figure below). These organizations linked together to acquire, purchase, convert/manufacture, assemble, and distribute goods and services, from suppliers to the ultimate and users.
Fig.: The Supply Chain Network
By 1980, the information revolution was well accepted in the world’s advanced economics. During this period, many standard business processes and functions such as customer order processing, inventory management, and purchasing were altered through the use of computer technology. These technologies and capabilities began to grow exponentially since 1985, providing means for multiple organizations to coordinate their activities in an effort to truly manage a supply chain.
Today, information and technology must be conceived of broadly to encompass the information that businesses create and use as well as a wide spectrum of increasingly convergent and linked technologies that process the information with the emergence of the personal computer, optical fiber networks, the explosion of the Internet and the World Wide Web. The cost and availability of information resources allow easy linkages and eliminate information-related time delays in any supply chain network. This means that organizations are moving toward a concept known as Electronic Commerce, where transactions are completed via a variety of electronic media, including electronic data interchange (EDI), electronic funds transfer (EFT), bar codes, fax, automated voice mail, CD-ROM catalogs, and a variety of others. The old “paper” type transactions are becoming increasingly obsolete. Leading-edge organizations no longer require paper purchase requisitions; purchase orders, invoices, receiving forms, and manual accounts payable “matching” process. All required information is recorded electronically, and associated transactions are performed with the minimum amount of human intervention. Recent developments in database structures allowed part numbers to be accumulated, coded, and stored in databases, and electronically ordered. With the application of the appropriate information systems, the need to constantly monitor inventory levels, place orders, and expedite orders will soon become a thing of the past.
IMPORTANCE OF INFORMATION IN INTEGRATED BUSINESS
Information is the key to the decision making in Business. Prior to the 1980s, a significant portion of the information used to flow between functional areas within an organization, and between supply chain member organizations, were paper based. In many instances, these paper-based transactions and communications were slow, unreliable, and error prone. Conducting business in this manner was costly because it decreased firms’ effectiveness in being able to design, develop, procure, manufacture, and distribute their products. During this period, information was often overlooked as a critical competitive resource because its value to supply chain members was not clearly understood. However, firms that are embarking upon supply chain management initiatives now recognize the vital importance of information and the technologies that make this information available.
In a sense, the information systems and the technologies utilized in the supply chain represent one of the fundamental elements that link the organizations into a unified and coordinated system. In the current competitive climate, little doubt remains about the importance of information and information technology to the ultimate success, and perhaps even the survival, of any supply chain management initiative. Cycle time reduction, implementing redesigned cross-functional processes, utilizing cross-selling opportunities and capturing the channel to the customer underpin the competitive positioning of business.
Timely and accurate information is more critical now than at anytime. Three factors have strongly impacted this change in the importance of information.
1. Satisfying, in fact pleasing, customers have become something of a corporate obsession. Serving the customer in the best, most efficient, and effective manner has become critical, and information about issues such as order status, product availability, delivery schedules, and invoices has become a necessary part of the total customer service experience.
2. Information is a crucial factor in the managers’ abilities to reduce inventory and human resources requirements to a competitive level.
3. Information flows play an essential role in the strategic planning for and deployment of resources.
The need for virtually seamless bonds within and between organizations is a key notion in the essential nature of information systems in the development and maintenance of successful supply chain. That is, creating inter-organizational processes and link to facilitate delivery of seamless information between marketing, sales, purchasing, finance, manufacturing, distribution and transportation internally, as well as inter organizationally, to customers, suppliers, carriers, and retailers across the supply chain will improve fill rates of the customers service, increase forecast accuracy, reduction in the total inventory and savings in the company’s’ transportation costs - goals which need to be achieved.
Clearly, the need to share information across the supply chain is of paramount importance. In fact, inaccurate or distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies such as excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, ineffective transportation, and missed production schedules. This is termed to be bullwhip effect, which is commonly being experienced by the consumer goods industries. Suitable technologies such as bar codes and scanners have been developed and applied in the portions of supply chain and remove inaccurate or distorted information.
Question 17: How can customer service be improved by proper implementation of SCM? Do you see any difference between a functional and an innovative product? How these differences influence the supply chain design and its performance objectives?
Answer: A customer-focused strategy needs to accommodate and develop a combination of products and services that satisfies customers. One of the key factors for successful marketing is the availability of products and services to the customers, when and where desired by them.
Basic customer service is defined in terms of availability, performance and reliability.
Availability is the capacity to offer inventory when demanded by a customer.
Normally this is achieved by stocking adequate inventory in anticipation of demand from customers.
Inventory stocking plans take into consideration forecasted demand, sales popularity, importance of a product in the product line, profitability and the value of the merchandise.
Safety stock is kept to take care of demand forecast error and any unanticipated operational or delivery problems. The availability depends on three performance measures: stock out frequency, fill rate and orders shipped.
Operational Performance can be measured in terms of speed, consistency, flexibility and malfunction/recovery.
Speed is the time taken for executing an order. With the level of development in information, communication and transportation technology/ systems, the lead-time will continue to be shorter.
Consistency is reflected by execution of large number of orders in expected delivery time.
Organization’s ability to respond to unexpected situation or request for unique customer service shows the flexibility.
Preventing malfunction and having contingency plans for prompt recovery can add value to customer service programme.
Reliability is one of the most important dimensions of customer service quality. Customers’ confidence can be built by providing advanced accurate information on the status of their orders, rather than giving surprises.
A customer-focused firm will do well to state the level of basic service commitment in terms of availability, operational performance and reliability to all customers. The common interpretations for customer service are easy to do business with and sensitive to customer needs. LaLonde and Zinszer suggested three dimensions of customer service:
I. As an activity – that can be managed.
II. In terms of performance levels – can be accurately measured
III. As a philosophy of management – showing the importance of customer focused marketing.
They defined: “Customer service is a process for providing significant value-added benefits to the supply chain in a cost effective way.” Excellent customer service performance is likely to add value for members of the supply chain. A customer service programme needs to be evaluated of its performance through measures like goal attainment and relevancy.
A primary reason for SCM becoming an important managerial issue in the nineties stems from increased national and international competition. Customers have multiple sources from which to choose to satisfy demand; locating product throughout the distribution channel for maximum customer accessibility at a minimum cost becomes crucial. The dynamic nature of the market place makes holding inventory a risky and potentially unprofitable business. Customer’s buying habits are constantly changing and competitors are continually adding and deleting products. Demand changes only make it almost sure that the company will have the wrong inventory.
FUNCTIONAL V/S INNOVATIVE PRODUCTS: SCM ISSUES
Marshall L. Fisher observed that in some cases, costs have risen to unprecedented levels because of adversarial relations between SC partners as well as dysfunctional industry practices such as an over reliance on price promotions. A framework was devised for deciding which SC is the best for a particular company’s situation. Products can be classified into two categories, either primarily functional or primarily innovative based on their demand patterns. It helps a manager to understand the nature of demand for their products and devise the SC that can best satisfy that demand. The root cause of the problems faced by many SCs is a mismatch between the type of product and the type of SC.
Functional products are the staples, which satisfy basic needs, don’t change much over time, have stable, predictable demand, long life cycles and available at a wide range of retail outlets/grocery stores. Their stability invites competition and leads to lower profit margins. (See Table below)
Fashion apparel and personal computer manufacturers introduce innovations to avoid low margins and to give customers reason to buy their products. But, the demands for these products are unpredictable, life cycle is short and profit margin is high. They also require a fundamentally different SC than functional products. (See Table below)
SC performs two distinct types of functions: a physical function and a market mediation function. Physical function includes converting raw materials into parts, components and finished goods, and transporting all of them from one point to the next in the SC. Market mediation function is less visible but equally important and ensures matching of offerings with customer’s preferences.
Each of these two functions incurs physical costs (costs of production, transportation, inventory storage) and market mediation costs arising out of marked down or lost sales opportunities and dissatisfied customers.
Table: Functional Versus Innovative Products: Differences in Demand
Table: Physically Efficient Versus Market-Responsive Supply Chains
A global brand can be greatly benefited by having gathered knowledge of customers and their choices, through channel partners; and can create global products, which may need to be adapted as per local preferences.
Question 18: Define Benchmarking. Define its role in improvement of organizational efficiencies. What are various kinds of challenges faced during the process of benchmarking?
Answer: David T Kearns, CEO: Xerox Corporation once said, “Benchmarking is the continuous process of measuring product, services and practices against the toughest competitors, or those companies recognized as industry leaders”. Benchmarking is an external focus on internal activities, functions or operations in order to achieve continuous improvement. Starting from an analysis of existing activities and practices within an organization, the objectives are to understand existing processes or activities and then to identify an external point of reference, or standard, by which each activity can be measured or judged. A benchmark can be established at any level of the organization, in any functional area. The ultimate goal is to be better than the best i.e. to attain a competitive edge.
Organization that introduces benchmarking correctly can use it to make a quantum leap in their performance, and develop a culture in which managers and staff constantly searches for improvements. Within logistics and supply management, benchmarking can be used for a number of different purposes, from assessing the performance of the entire operation, through prioritizing improvements, to searching for the off-the-shelf improvement strategies in a specific area of a logistics or supply chain activity. In some senses, benchmarking is imitation and stealing – “creative swiping”! At its best it is skillful appropriation and adaptation requiring imagination and innovation; at its worst it can be an expensive and time – consuming piece of corporate tourism. It is a long-term process, requiring senior management’s commitment, with the emphasis upon continuous improvement and organizational learning. The focus is primarily upon the role, strategic issues, processes and practices, rather than on the bottom line and numeric measure of performance. The mere comparison of operations and costs is not sufficient; considerable attention must be paid to how the activities are organized and performed. This will provide good understanding of how superior performance has been achieved, rather than just the magnitude of the performance gap.
Benchmarking targets the critical success factors (CSF’s) of a specific organization. What needs to be done to ensure long-term success? Where do management see the potential for competitive advantage? Benchmarking helps to identify those features critical to ongoing success, as well as those parts of the organization that are less important and from which resources may be diverted. In Benchmarking, a “role” describes in essence what a person or function does for an organization. What responsibilities, services and tasks are offered to a customer or client by the organization? How do these compare with other organizations in terms of process architecture, structure or capability? Roles, in this instance are bundles of services provided either to external customer or to an internal customer. Questioning the roles within an organization leads to the question, “Are we doing the right things?” – in other words, the question of effectiveness – while assessing processes raises concerns about whether things are being done right – in other words, the question of efficiency. Every process within any organization consumes resources. To leverage the most value from processes, an organization must eliminate Non-Value Adding Activities (NVA) in the process itself. Benchmarking supports the targeting of processes or process elements that are of high importance to the business, but are perceived to be operating sub-optimally. While every process can be improved, an often-overlooked issue is getting the most value out of every rupee spent on process improvement. Only through the process of continuous benchmarking a process against itself, and with other external sources, can this be truly assessed.
The identification and the setting of new goals, projects or ventures are fundamental to the long-term success of any business. The environment within which any organization operates changes rapidly; cost reduction targets that were deemed aggressive months ago can quickly become the Industry norm. Benchmarking then can be used to target strategic issues, gain enough information to prioritize competing projects and establish an overall program of events geared towards achieving optimum economic value added.
IMPORTANCE AND ROLE OF BENCHMARKING
Benchmarking provides the basis for meeting and exceeding stakeholder expectations. Understanding its potential benefits requires understanding the type of benchmarking to be deployed and the purpose of conducting such an exercise. While benchmarking can be performed at any time, it is often undertaken as a response to an information need associated with a project or issue within the organization. The situations that may trigger the benchmarking process are:
Operations / Logistics and Supply Chain improvement efforts.
Management / Organizational changes
Merger & Acquisitions
Competitive Threats
Cost Reduction Initiatives
Benchmarking in any of these situations is a logical step in developing new objectives, setting new performance standards and metrics and redesigning process and procedures.
A company benchmarks because it wants to be the best. To this end, benchmarking should not be considered as an optional activity. It is more so a call of the day for companies to maintain their competitive advantages.
Internal Benchmarking is the analysis of existing processes and practices within various departments or divisions of an organization. The objective is to identify and analyze best performance within the confines of the organization’s own boundary, and drive performance to this level or beyond. The process will facilitate an understanding of the basic activities that constitute the processes within the organization and the drivers associated with these. Drivers are the causes of work, the triggers that set in motion a series of activities. In conducting Internal Benchmarking, the management is looking at itself first before thinking about comparisons outside. Significant improvements are often made through Internal Benchmarks and these are often the first steps in a benchmarking process.
While Internal Benchmarking focuses on specific functions or processes, Competitive Benchmarking looks outwards in order to understand how direct competitors are performing. Knowing the strengths and weaknesses of competitors is important to strategic decision-making. Competitive benchmarking helps to level the playing field, but it is less likely to provide that innovative, step-out improvement that so many organizations are searching for today. Industry Benchmarking looks beyond the competitive relationship and looks for trends.
The technique of benchmarking can be focused on specific processes, activities or functions, but this is only part of the answer. An associated issue is the depth to which the analysis is to be performed. Studies can be focused vertically upon functions and department, or horizontally upon specific processes or activities. While early forays into the world of benchmarking might be constrained to functional or departmental performance, the goal has to be a cross-functional view of the value chain needed to meet customer expectations in an efficient and effective manner.
A well-planned, systematic and structured benchmarking program can provide organizations with a number of important benefits. In essence, the search for industry best practices and subsequent efforts to maintain competitive superiority effectively provide the basis for superior performance. Almost any study that requires detailed examination of the organization’s operations results in a greater understanding of how the business works; it’s critical success factors (CSF’s) and the key performance indicators (KPI’s). But here again it is important to bear in mind that any form of continuous improvement in one part of the business does not just push to another area of operation – a phenomenon known as the “waterbed effect”.
Most organizations can learn from the experience of others, even though they may have very different customer requirements and competitive environments. Much can be gained by making comparisons with organizations that have to adopt a fundamentally different approach to the same or a similar task.
CHALLENGES FACED IN IMPLEMENTATION OF BENCHMARKING
Irrespective of the type and scope of benchmarking, the critical factors that are needed to be ensured are as follows:
Senior management supports the process of benchmarking and are committed to continuous improvement.
The objectives are clearly defined at the outset.
The scope of the work is appropriate in the light of the objectives, resources and time available and the experience levels of those involved.
Sufficient resources are available to complete projects within a given timeframe and that projects are selected based upon a prioritization linked to the achievement of competitive advantage.
Benchmarking teams have a clear picture of their organizations performance before approaching others for comparisons.
Stakeholders, particularly staff and their representatives are kept informed of the reasons for benchmarking and the progress made throughout the course of projects. Wherever practical, staff should be involved in undertaking benchmarking to make most of the opportunities for learning from other initiatives.
As with many management techniques and processes, benchmarking provides organizations with problems as well as benefits. These occur as consequence of:
The existing organizational culture
Incorrect application of the techniques
The nature of the process
Benchmarking applications may be limited by the management culture. Benchmarking takes a normative approach to the management – there are industry best practices that can be generalized between sectors and organizations. As with most programs that require major organizational change, considerable inertia may be experienced from individuals and departments, especially those with the most to loose. These are inevitable issues around the identification of best practices and the adoption of processes that are not valued by that particular organization’s customers. There is however difficult judgment calls to make around the introduction of new practices where quantum jump is required. Incorrect benchmarking can often lead to wrong conclusions. Benchmarking may lead to a culture of imitation rather than innovation; to adopt rather than adapt and to achieve parity rather than superiority. This type of approach will never result in competitive advantage.
When the process is approached for the first time, it is worthwhile learning from others who have built up experience of applying benchmarking within their own operations. This is where membership of benchmarking clubs and network proves invaluable.
In general it is important to avoid:
Benchmarking for benchmarking sake.
Focusing entirely on comparisons of ‘hard’ performance measures rather than the ‘softer’ processes and activities that enable the attainment of good practice
Spending too long on one part of the process at the expense of others
Expecting that benchmarking would be quick or easy
Expecting to find benchmarking partners comparable in all respects to your own organization
Asking for information and adapt without being prepared to share it with others at conversely expecting organizations to share information that is commercially sensitive
Question 19: Write short notes on any three of the following:
1. Collaborative Strategies
2. Vendor Managed Inventory
3. World Class Supply Chain
Answer: COLLABORATIVE STRATEGIES
In the future, supply chains must embark upon a collaborative strategy to manage demand flow and customer satisfaction through technology integration. Collaboration enables channel partners to jointly gain a better understanding of product demand flow and implement effective programs to satisfy customers through collaborative product development, synchronized production scheduling, collaborative demand planning and logistic solutions.
Effective collaboration among channel partners can help in aligning them to enhance the value of the integrated activities in the supply chain. This can contribute to faster product development through shared design development and modification documents. It can also contribute to synchronization of production and delivery schedules and smoothen the material flow process obviating inventory management problems. This can result in better capacity utilization, order fulfilment and customer satisfaction.
Down-stream collaboration with distributors, wholesalers and retailers can result in real-time flow of point-of-sales (POS) data across the supply chain. This can help in jointly formulating effective forecasting and replenishment schemes and smoothen demand variations along the supply chain. One of the crucial objectives of manufacturers is to meet in orders to reduce losses on account of inventory excesses or shortages. Collaborative forecasting strategy involving all channel partners can contribute to effective demand planning. Each partner in the supply chain should be able to plan demand based on a single, reliable source of demand data. However, this can be possible through seamless data interchange among channel partners.
Reducing channel inventory pileups by reducing demand irregularities in the supply chain is an issue of primary concern as it can lead to improved efficiencies and lower cost. This can be tackled through collaborative efforts made through strategic partnerships (SP) or strategic alliances (SA). Retailer-Supplier Partnerships (RSP), Vendor Managed Inventory (VMI) and Distributor Integration (DI) are examples of strategic alliances that can prosper through collaborative efforts. Such strategic alliances can help both partners by:
Adding value to products through collaborative efforts.
Improving market access.
Strengthening operations by lowering costs and cycle times.
Increasing technological strength and flexibility
Enhancing strategic growth by pooling the combined expertise of partners
Enhancing organizational competencies through mutual learning.
Building financial strength by sharing costs and eliminating non-value added activities among partners.
Collaboration can also enhance the logistics function in the supply chain. Transporters can better organize inbound, inter-facility and outbound transportation to optimize capacity utilization. Collaboration with third party (3PL) and fourth party (4PL) logistics organizations can also enhance supply chain effectiveness. Sustainable supply chain configurations can be established by trading off cost, revenues, profits, market share and adaptability to new products and technologies through a collaborative approach.
2. VENDOR MANAGED INVENTORY (VMI)
VMI has been recognized as an effective strategy for combating irregularities in the supply chain caused due to demand variability. In this system, the vendor plays an intermediate role between the manufacturer and the wholesaler/retailer. The vendor collects point-of-sales (POS) data from the wholesaler/retailer and accordingly plans their demand from manufacturers in order to manage the wholesaler’s inventory. This eliminates the wholesaler’s/retailer’s need for dual buffering against customer demands on one hand and supply disruptions on the other. In fact, by adopting a process of just-in-time or continuous replenishment, the inventory can be reduced to a bare minimum, thereby lowering both risks and costs.
Vendors are in an excellent position to manage inventory for the wholesaler/retailer because they are a middle link in the supply chain and can track the needs both from the supplier’s and the customer’s ends. Since the supplier/vendor understands his/her own product better than anyone else, they can handle the replenishment needs of the retailer who has to otherwise keep track of numerous products. The buyers’ role of creating purchase orders from sales and supply forecasts is eliminated as the vendor does handle this on behalf of the wholesaler/retailer. The buyers’ role becomes one of assessing the recommendations made by the supplier and providing adequate aggregate data and insightful information while collaborating on sales/demand forecasts. Once VMI has been implemented, customers can benefit from 30 to 40 per cent reductions in inventory and 75 percent forecast accuracy.
When the supplier plays the role of a vendor, this strategy is called Supplier Managed Inventory (SMI). This is an offshoot of the Retailer-Supplier Partnership (RSP) that can be used to synergise the flow inventory between the retailer and the supplier. Accordingly, suppliers like Shell, a company manufacturing automotive lubricants etc., integrate customer’s forecast, consumption data and inventory information to its own production and shipping capabilities for creating rolling production schedules. This reduces inventory-carrying costs in the supply chain. This way, besides managing the inventory, Shell does not need to pad its own inventory in anticipation of varying demands from its customers. This technique can in-turn be carried upstream to Shell’s suppliers. Similarly, Shell’s customers can now emulate the strategy and reap benefits accruing out of reduced inventory in the supply chain.
Implementing VMI or SMI can be difficult when the supplier starts accounting for the time and cost involved in managing the inventory. Some customers may not be using computers and may be reluctant to allow suppliers to manage their inventory, if it is a crucial business secret. Moreover, plant managers may be forced to stop production if they stock out and suppliers are not able to replenish them just in time.
However, these problems can be overcome with some patience in understanding customer’s and supplier’s inventory movement trends and building mutual trust. Since buyers are often trained not to disclose information related to their inventory, enough trust must be built to enable vendors and buyers to share inventory related information. Once inventory flows are understood, the initial implementation cost is well offset by recurring savings in inventory carrying costs and gains through optimum capacity utilization. For instance, Shell has reported returns of 10:1 on its investment on SMIs.
Since data must be available on-line and is difficult to process manually, it is necessary to use computers if this strategy has to be successfully implemented. Often, suppliers can provide customers with computer hardware and easy-to-use software in order to obtain real-time customer’s inventory status that is crucial for preparing rolling production forecasts and schedules. VMI or SMI can also be offered to customers as a value added service and can help in locking-in customers. Once this cost-effective strategy is in place, all channel partners are able to reap rich dividends and extend the strategy to other parts of the supply chain. Third party and fourth partly logistics form some of the other collaborative efforts being evolved towards effective management of supply chains.
3. WORLD CLASS SUPPLY CHAIN
World-class supply chains are capable of providing better value to customers than the competition while remaining financially healthy and environment friendly. They would be differentiated by the excellent quality of service that they provide to the customers. Their activities would be value driven, they would be responsive to customers and continuous learning, improvement and innovation would be their hallmark. Their employees would be empowered to think and act like owners and would go to any extent to keep their customers delighted. They would be provided with the right environment, management support and training to ensure excellent performance. They would be fully involved and happy to meet organizational objectives.
World-class supply chain service providers would have a proactive management that is balanced and consistent. Their management would be based on facts and analyzed data. Activities and processes across the supply chain would be seamlessly integrated with the help of IT, which would also be employed to assist decision-making, reducing waste and remaining flexible. They would undertake a systems approach to management. The leadership would establish unity of purpose and provide direction to the organization. They would create an environment that provides continuous challenge and rewards tied to performance and fair opportunities for growth.
They would collaborate and maintain strategic alliances with suppliers based on ethics, honesty, professionalism and a win-win philosophy that can lead towards combined growth of all the players involved in the supply chain.
Examples of some companies providing world-class services in the supply chain are Federal Express (Inventory Control), British Telecom (Billing and Collection), Xerox (Customer Service), Caterpillar (Information Systems), Wall-Mart (Logistics), Honda (Purchasing), 3M (Supplier Management) and L. Bean (Warehousing and Distribution). Managers and researchers agree that providing world-class services can prove to be a sustainable strategy in the long run.
Question 20: Write short notes on any three of the following:
1. Third Party Logistics
2. Fourth Party Logistics
3. Green Supply Chain
Answer: THIRD PARTY LOGISTICS
Third-party logistics (3 PLs) is the use of an outside company to perform all or part of the company’s materials management and product distribution functions. The competitive advantage for any company is to focus on their core competencies, and let the 3PL firm handle those supply chain functions in which they specialize. In order to provide truly value-added services, 3PL firms must interact with customers to understand their needs and then adjust their offerings to meet them.
It is obvious that companies can parcel out numerous supply chain processes to entities that specialize in the efficient performance of those processes. Outsourcing a wide array of supply chain processes can generate greater value across the entire supply chain because specialized firms performing the selected processes enjoy a level of expertise and leverage, that would not be available to manufacturers, wholesalers or retailers. Transportation, warehousing, order processing and fulfilment, packaging, labelling, and bill payment are some of the key processes that can be outsourced to specialist firms called third-party logistics firms, or 3PLs. If these firms are efficient and effective, then the entire supply chain can benefit from improved capacity utilization, enhanced service levels and lower costs.
3PLs can provide technological and other flexibility to client companies. For instance, channel partners may need to change their technology for implementing quicker systems. Similarly, they may have changing needs for warehousing and transportation facilities. Such changing demands can be easily taken care of by third-party logistics companies.
Customers of 3PL companies look for four dimensions of value to be derived from outsourcing a process to a 3PL firm. These values include trust, information, capital utilization and cost control. The 3PL’s customer orientation, level of specialization, asset ownership status and the price at which the service is offered form some of the main issues that a client will consider while selecting an appropriate service provider.
3PL companies must provide reliable services and solve channel problems so that smooth flow of goods and information can take place. This helps customers to trust 3PL companies.
3PLs can create value for their customers in the accuracy, quality and timeliness of the information that they provide their clients, different channel partners and to ultimate customers. This information can be electronically integrated into the customer’s MIS for direct access.
3PLs can help customers reduce inventory and fixed assets, such as buildings and equipment. This leads to better utilization and financial returns on both working and fixed capital. Although capital utilization is important to 3PL customers, reduction of supply chain costs and sharing the savings with customers is probably the most visible (though not the most important) value.
Each supply chain will have firms with different levels of expertise and 3PL must customize their services according to their clients’ expectations. Firms using 3PL services are seeking performance levels where the overall net benefits exceed the amount paid to the 3PL. Improving service-related benefits also produces value, particularly when combined with the reduction of logistics costs. Many CEOs now see this value as critical to business survival.
An important contribution of the 3PL is providing the leverage that its customers cannot generate by themselves via the provision of information, cost reduction activities, service enhancements, or better asset utilization. In addition, by becoming more integrated into its customer’s operations, the 3PL will be able to recognize and understand changes in the logistic needs of the customers.
An important disadvantage of third party logistics for companies is the loss of control faced by the company due to out sourcing a particular function. Engaging reliable 3PL service providers can offset this problem. Moreover, 3PL companies can assure their clients of their reliability by integrating their activities seamlessly with latter’s operations. Painting clients’ logos on transport vehicles etc. can signify close integration between the client and the 3PL service provider.
All channel partners must be successful if meaningful and lasting value is to be achieved. This requires open communication and collaboration. If any element in this supply chain relationship is neglected, the chain is broken and the value is lost.
2. FOURTH PARTY LOGISTICS
The term “fourth-party logistics provider” is a trademarked term owned by Andersen Consulting. It refers to the evolution in logistics from suppliers focused on warehousing and transportation (third-party logistics providers) to suppliers offering a more integrated and value added solution. Among other services, fourth-party logistics providers include supply chain management and solutions, change management capabilities, and value added services as part of their offering. A 4PL company delivers a comprehensive supply chain solution and adds value by influencing the entire supply chain.
A 4PL leverages a full range of service providers (3PLs, IT providers, contract logistics providers, call centers, etc.) along with the capabilities of the client and its supply chain partners. The 4PL acts as a single point of interface with the client organization and provides the management of multiple service providers through a teaming partnership or an alliance. A 4PL adds value to the entire supply chain, through reinvention, transformation, and execution.
Reinvention implies synchronization of supply chain planning and execution activities across all supply chain participants. This is achieved by:
Leveraging traditional supply chain management skills,
Aligning business strategy with supply chain strategy,
Creatively redesigning and integrating the supply chains of the participants.
Transformation efforts focus on specific supply chain functions including sales and operations planning, distribution management, procurement strategy, customer support, and supply chain technology. This is done by:
Leveraging strategic thinking and analysis,
Process redesign, organizational change management,
Technology to integrate the client’s supply chain activities and processes.
Execution of the supply chain integration strategy leads to increased revenue, operating cost reduction, working capital reduction, and fixed capital reduction while traditional approaches tend to focus only on operating cost reduction and asset transfer.
Revenue growth and customer satisfaction are driven by enhanced product quality and product availability due to the elimination of stock-outs and ‘ship-complete’. Dramatic customer service improvements can be attained as the 4PL focuses on the entire supply chain and is not limited to increasing efficiencies associated with warehousing and lowest-cost transportation. Operating-cost reductions are driven through operational efficiencies, process enhancements and procurement savings. Savings are achieved through the complete outsourcing of the supply chain function instead of only a few components as in the case of a 3PL solution. Savings are also achieved due to the economies of scale that accrue due to the large size of the operations involved in the entire service chain.
Synchronization of supply chain activities by channel partners leads to operating-cost reductions and a lower cost of goods sold, due to integration of processes, and improved planning and execution of supply chain activities.
Technology is proactively used to manage order and inventory movement throughout the pipeline, thereby minimizing the amount of inventory required, and increases item availability to reduce cycle times. Thus, working-capital reductions can be realized through inventory reductions and reduced “order to cash” cycle times. Fixed-capital reductions result from capital asset transfer and enhanced asset utilization. 4PL’s can undertake the ownership of physical assets, thus freeing up assets held by various companies that form part of the supply chain. This allows the client organization to invest in its core competencies like research and design, product development, marketing and sales, etc.
A 4PL can use any of the three operating models to deliver supply chain solutions.
1. A partnership can be forged between the 4PL organization and a third-party service provider to market supply-chain solutions that capitalize on the capabilities and market reach of both organizations. The 4PL provides a broad range of services to the 3PL including technology, supply chain strategy skills, capability to go to market, and program management expertise.
2. The 4PL can operate and manage a comprehensive supply chain solution for a single client. This arrangement encompasses the resources, capabilities, and technology of the 4PL and complementary service providers to provide a comprehensive integrated supply chain solution that delivers value throughout a single client organization’s supply chain components.
3. As a supply chain innovator, a 4PL organization can develop and run a supply chain solution for multiple industry players with a focus on synchronization and collaboration. The formation of industry solutions provides the greatest benefits; however, this model is complex and can challenge even the most competent organizations.
The 4PL service provider needs to possess a comprehensive set of skills to effectively deliver an integrated supply-chain solution. These include:
Availability of a large body of trained supply chain professionals, global capabilities, reach and resources.
Ability to manage multiple service providers.
Ability to transition clients’ employees and other assets smoothly to the new 4PL environment.
Strong relationship and teaming skills.
Delivery of world-class supply chain strategy formulation and business process redesign.
Strength in integrating supply chain technologies and outsourcing capabilities.
Understanding of organizational change issues.
Fourth Party Logistics is the next generation of supply chain outsourcing. Supply chain activities are information-rich, complex and increasingly global. At the same time, technology and e-enabled capabilities are racing ahead. To enable a firm to capture all the benefits of supply chain collaboration and synchronization, a new generation of integration must be deployed, which is currently beyond the capabilities of traditional outsourcing methods.
3. GREEN SUPPLY CHAIN
Green supply chain involves the management of materials and resources from suppliers to manufacturers, service providers to customers and back while protecting and conserving the natural environment.
A green supply chain involves the implementation of appropriate strategies to reconcile the supply chain to environmental protection and conservation on a sustainable basis. Waste minimization and elimination of inessential non-value added activities is one of the most important strategies towards a green supply chain. Process wastage decreases efficiency and lowers productivity. Reduced output and blocked inventory decreases profitability and growth thereby making the business process unsustainable in the end. Such business processes ultimately end up firing fuel and energy without delivering value to the society.
Another important green strategy is to automate processes by using the electronic media as far as possible. This reduces paper work, and eliminates non-value added activities involved in filing, storing, maintaining and retrieving documents. Usage of materials must be limited to the extent required. Excessive trimming and disposal of partially filled containers of materials is both wasteful and environmentally harmful. Wastage can take place when materials or goods are unnecessarily stored before they can be used. Just-in-time delivery and usage of materials can reduce the wastage that can occur during multiple storage and handling.
While preventing and eliminating waste would be the best policy, some waste is inevitable at the customer’s end in the form of used containers, packaging etc. Recycling these materials helps to use them once again thereby reducing their role in environmental pollution. The process of recycling, renovating and reusing materials can be undertaken through a separate supply-chain channel, collectively termed as reverse logistics.
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