END-TO-END OPTIMIZATION OF SUPPLY CHAIN OPERATIONS
Jan 25 - 31, 2010
There is no right or wrong supply chain viewpoint. In fact, the view in one company probably should differ from the view in another. This is because their situations are surely different, and what makes one successful will not work for another. Also, the right viewpoint is not static. As time moves on and competitive pressures shift, the need to change viewpoints will arise.
The old way of delivering product was to develop relatively inaccurate projections of demand, then manufacture the product and fill up warehouses with finished goods. The old ways are fading fast as management across all industries has come to accept that collaboration with customers and suppliers in the planning and replenishment process can and must be made to work very effectively.
As customers and suppliers band together in mutually beneficial partnerships, the need for better supply chain management processes and systems is more evident and becomes a very high business priority.
For many companies, it has become clear that a supply chain can be a significant differentiator. Improving supply chain management is getting lots of attention because forward-thinking management knows it is the best strategy to increase and maintain market share, reduce costs, minimize inventories and, of course, improve profits. In many industries, market share will be won and lost based on supply chain performance.
Effectively integrating the information and material flows within the demand and supply process is what supply chain management is all about. In most companies, however, two major and very interdependent issues must be simultaneously addressed.
The first deals with delivering products with customer-acceptable quality, with very short lead times, at a customer-acceptable cost, while keeping inventories throughout the supply chain at a minimum. The second issue, which tends to be less understood and accepted, is the need for high quality, relevant and timely information that is provided when it needs to be known.
For many customers and manufacturers, business processes and support systems will not measure up to the task of quickly providing planning and execution information from the marketplace to production and on to vendors so that the customer's objectives are consistently met. The fact is, most information supplied is excessive, often late, and frequently inaccurate.
As always, the challenge for top management is setting the right priorities, allocating appropriate resources and, of course, achieving the required results. Complicating the challenge is the enormous risk of not keeping pace in the marketplace, which can result in driving customers into the waiting, open arms of more aggressive competitors.
Regardless of the industry and customer base, more effective supply chain management will be a prerequisite to the future success. In fact, effective supply chain management must become an integral part of the competitive and survival strategy. But before meaningful action plans can be implemented, be sure to assess the circumstances and develop a strategy that is appropriately aimed at what the customers want, need and value.
CONCEPT OF SUPPLY CHAIN MANAGEMENT
Supply Chain Management is the management of the business supply chain, where the supply chain includes any function that is required to produce and deliver the final product to the customer. More specifically supply chain functions include: managing supply and demand, selecting sources for raw materials or parts, producing/assembling/packaging, warehousing, maintaining and tracking inventory, managing order entry, and providing distribution across all channels including delivery to the customer.
It is a coordinated set of techniques to plan and execute all steps in the global network used to acquire raw materials from vendors, transform them into finished goods, and deliver both goods and services to customers. It includes chain-wide information sharing, planning, resource synchronization and global performance measurements.
The key is to deliver the right product to the right place at the right time and at the right price. And anyone, anything, anywhere that influences a product's time-to-market, price, quality, information exchange or delivery, among other activities, is part of the supply chain.
Supply chain management is the act of integrating any or all activities associated with supply chain flows that occur inside or outside the company. Two important objectives of supply chain management are getting the right supply chain strategy to meet or exceed customer expectations, and providing communication between suppliers and trading partners to enable collaboration.
Supply chains exist in both manufacturing and service industries and they come in two basic formats: single stage and multi-stage. A single stage supply chain is typically found within a company and incorporates every function performed by the firm. Some of the processes involved with the single stage supply chain include the flow of raw materials or sub-assemblies, manufacturing, inventory control, distribution, the handling of funds and working capital, and equipment management. In a multi-stage supply chain, different functions are performed in different companies.
As already mentioned, supply chain management coordinates material, information and financial flows between and among all the participating enterprises. Material flows involve physical product flows from suppliers to customers through the chain, as well as the reverse flows via product returns, servicing, recycling, and disposal. Information flows involve demand forecasts, order transmissions, and delivery status reports. And financial flows involve credit card information, credit terms, payment schedules, and consignment and title ownership arrangements.
Effective supply chain management enables the company to make informed decisions along the entire supply chain, from acquiring raw material to manufacturing products to distributing finished goods to consumers. Fast and effective flow of both information and materials is essential for improving the supply chain.
As the supply chain encompasses all activities associated with the flow and transformation of goods from the raw materials stage, through to the end user as well as the associated information flows, supply chain management is the integration of these activities through improved supply chain relationships, to achieve a competitive advantage.
Knowing that integration is difficult to accomplish, why would the companies want to spend the resources to synchronize their business processes?
The following study shows why there are big rewards for the successful partnerships like:
delivery performance improvement 16%-28%; inventory reduction improvement 25%-60%; fulfillment cycle time improvement 30%-50%; forecast accuracy improvement 25%-80%; overall productivity improvement 10%-16%; lower supply-chain improvement 25%-50%; costs improvement 25%-30%; and fill rates improvement 10%-20%.
One of the easiest improvements to make is to share demand data. Most retailers today offer to share the point of sale data and forecasts with their suppliers. Everyone is seeing the same view of demand at the same time. This improves forecasting and planning for all the partners, which will increase responsiveness and decrease just in case inventory.
Collaborative supply chains will not be successfully implemented overnight. It will require changes in business practices and implementation of systems to support the collaborative environment. Small-scale pilots will be necessary to ensure the synchronization and integration of technology with new processes before large-scale implementations are attempted.
FOUR CATEGORIES OF SUPPLY CHAIN OPERATIONS BASED ON SCOR MODEL
The functional supply chain viewpoint is what exists in most companies today, where companies do not think in supply chain terms. In this view, companies are composed of individual departments. Manufacturing company examples include procurement, operations, engineering, and distribution. Each department has, to a large degree, its own agenda. Oversight of links between departments is weak within the company, and between companies in the supply chain, it's practically non-existent.
Performance evaluation in these companies is typically cost-dominated. Procurement is measured on the purchase cost of material and material overhead rates. Manufacturing has measures such as direct labor productivity. Distribution effectiveness is measured on the percentage of selling price represented by distribution cost.
Seamless collaboration with complete information sharing between all supply chain participants is still in the future. But there are strategies to deal with the current transitional state to help to come out on top today.
The vision of supply chain management evolved with the aim of integrating separate functions like forecasting, purchasing, manufacturing, distribution, sales and marketing into a harmonious ecosystem that would envelop the company's suppliers and customers. Supply chain management promised to align all participants to act in unison to serve the end customer.
To better understand these operations and how they relate to each other, I will use the supply chain operations reference or SCOR model developed by the Supply-Chain Council. The SCOR model is based on four distinct management processes: plan, source, make, and deliver. The SCOR spans all customer interactions, from order entry to paid invoice. It includes all product transactions and all market transactions. I will use these four categories to organize and discuss supply chain operations in next paragraphs.
Under this process the company should assess supply resources, aggregate and prioritize demand requirements, plan inventory, distribution requirements, production, material and rough-cut capacity of all products and all channels. Make-buy decisions are evaluated under this heading. Decision related to long term capacity and resource planning, product phase in/phase out are undertaken in this phase.
Supply chain management decisions are based on forecasts that define which products will be required, what amount of these products will be called for, and when they will be needed. The demand forecast becomes the basis for companies to plan their internal operations and to cooperate among each other to meet market demand.
Inventory management is a set of techniques that are used to manage the inventory levels within different companies in a supply chain. The aim is to reduce the cost of inventory as much as possible while still maintaining the service levels that customers require. Inventory management takes its major inputs from the demand forecasts for products and the prices of products.
Given the cost structure of a company, there is an order quantity that is the most cost effective amount to purchase at a time. This is called the economic order quantity (EOQ) and it is calculated as: EOQ = (square root of 2UO / hC), where U = annual usage rate, O = ordering cost, C = cost per unit, and h = holding cost per year as a percentage of unit cost.
The EOQ formula works to calculate an order quantity that results in the most efficient investment of money in inventory. Efficiency here is defined as the lowest total unit cost for each inventory item.
If a certain inventory item has a high usage rate and it is expensive, the EOQ formula recommends a low order quantity, which results in more orders per year, but less money invested in each order.
If another inventory item has a low usage rate and it is inexpensive, the EOQ formula recommends a high order quantity. This means fewer orders per year, but since the unit cost is low, it still results in the most efficient amount of money to invest in that item.
Operations in this category include the activities necessary to acquire the inputs to create products and services. Under this process, sourcing infrastructure is managed. Various activities like vendor selection, certification, and feedback, sourcing quality monitoring, and vendor contracts are conducted. Also, activities involved with receiving of material like obtain, receive, inspect, hold and issue material are undertaken here.
Also identifying and selecting supply sources when not predetermined, assessing supplier performance and maintaining data, manage supplier network and import/export requirements fall under this operation in supply chain management view. To be continued.
(The author of this article is a qualified procurement & supply chain professional & researcher, and can be reached at firstname.lastname@example.org.)