Creating an Effective Supply Chain

Creating an Effective Supply Chain Creating an effective supply chain requires linking the market, distribution channel, processing, and suppliers. The design of a supply chain should enable all the participants in the chain to achieve significant gains, hence giving them an incentive to cooperate. It should enable the participants to (1) share forecasts, (2) determine the status of the order in real time, and (3) access inventory data of partners. Keys to effective supply chains Successful supply chain management requires integration of all aspects of the supply chain: suppliers, warehouses, factories, distributors, and retail outlets. This requires cooperation among the supply chain partners in planning, coordination of activities, and information sharing, which in turn, requires partners to agree on common goals (goal sharing). This requires trust and willingness to cooperate to achieve the common goals. Coordination and information sharing are critical to the effective operation of the supply chain. Information exchange must be reciprocal: partners share forecast and sales data, as well as information on inventory quantities, impending shortages, breakdowns, delays, and other problems that could impact the timely flow of products and services through the chain. Information has a time value, and the longer it takes to disseminate information once it materializes, the lower its value. Thus, instead of each organization in a supply chain making plans based on a combination of actual orders plus forecast of demand of a real-time basis, each organization in the chain can develop plans that contribute to synchronization across the chain. STEPS IN CREATING AN EFFECTIVE SUPPLY CHAIN Creation of an effective supply chain entails several key steps. They are: 1. Develop strategic objectives and tactics. These will guide the process. 2. Integrate and coordinate activities in the internal portion of the chain. This require (1) overcoming barriers caused by functional thinking that lead to attempts to optimize a subset of a system rather than the system as a whole, and (2) transferring data and coordinating activities. 3. Coordinate activities with suppliers and customers. This involves addressing supply and demand issues. 4. Coordinate planning and execution across the supply chain. This require a system for transferring data across the supply chain and allowing access to data to those who engage in operations to which it will be useful. 5. Consider the possibilities of forming strategic partnerships. Strategic partnering occurs when two or more business organizations that have complementary products or services that would strategically benefit the others agree to join so that each may realize a strategic benefit. One way this occurs is when a supplier agrees to hold inventory for a customer, thereby reducing the customer’s cost of holding the inventory, in exchange for the customer agreeing to a long- term commitment, thereby relieving the supplier of the cost that would be needed to continually find new customers, negotiate prices and services and so on. Strategic partnering – two or more business organizations that have complementary products or services join so that each may realize a strategic benefit.

In many cases, organization have accomplished much of what is required to achieve the second and third steps in the process, it is the first and last steps that will require attention. In all steps, designers must address the following performance drivers: 1. Quality 2. Cost 3. Flexibility 4. Velocity 5. Customer service Quality, cost and customer service are perhaps obvious. Flexibility refers to the ability to adjust to changes in order quantities but also the ability to adjust in product or service requirements. Velocity refers to the rate of speed of travel through the system. Velocity is important in two areas: materials and information. Inventory velocity refers to the rate at which inventory (material) goes through the system. Faster is better: the quicker material pass through the supply chain, the lower inventory costs will be, and the quicker products and services will be delivered to the customers. Information velocity refers to the speed at which information is transferred within the supply chain. Again, faster is better: the quicker information (two-way flow) is available to decision makers, the better their decisions will be in planning and coordinating their parts in the supply chain. Inventory velocity – the rate at which inventory (material) goes through the supply chain. Information velocity – the rate at which information is communicated in a supply chain. OPTIMIZING THE SUPPLY CHAIN Optimizing the supply chain means maximizing shareholder and customer value. This is achieved by fully integrating all members of the supply chain, collaboratively balancing resources of chain members, and optimizing the flow of goods, services, and information from source to end customer. To do this, it is necessary to maximize the velocity of information transfer and minimize response time. CHALLENGES Barriers to integration of separate organization – Organization, and their functional areas, have traditionally had an inward focus. They set up buffers between them and their suppliers. Changing that attitude can be difficult. The objective of supply chain management is to be efficient across the entire supply chain. One difficulty in achieving this objective is that different components of the supply chain have conflicting objectives. For example, to reduce their inventory holding cost for suppliers, so the cost is merely transferred to suppliers. Similarly, within an organization, functional areas often make decisions with a narrow focus, doing things that “optimize” results under their control: in so doing, however, they may suboptimize results for the overall organization. •To be effective, organizations must adopt a systems approach to both the internal and external portions of their supply

chains, being careful to make decisions that are consistent with optimizing the supply chain. Another difficulty is that for supply chain management to be successful, organizations in the chain must allow other organizations access to their data. There is a natural reluctance to do this in many cases. One reason can be lack of trust: another can be unwillingness to share proprietary information in general: and another can be that an organization, as a member of multiple chains, fears exposure of proprietary information to competitors. Getting CEO’s, Boards of Directors, Managers and Employees “Onboard.” – CEOs and board of directors need to be convicted of the potential payoffs from supply chain management. And because much of supply chain management involves a change in the way business has been practiced for an extended period of time, getting manager and workers to adopt new attitudes and practices that are consistent with effective supply chain operations poses a real challenge. Dealing with trade-offs. The article “managing supply chain inventory: pitfalls and opportunities” lists a number of trade-offs that must be taken into account in structuring a supply chain: 1. Lot size-inventory trade-off. Producing or ordering large lot sizes yields benefits in terms of quantity discounts and lower annual setup costs, but it increases the amount of safety stock carried by suppliers and, hence, the carrying cost. It also can create what is known as the bullwhip effect. If you were to examine the quantities of inventory at each stage of supply chains, starting at the customer end of the chain and working back toward the initial suppliers, you would find progressively larger inventories of some item. The phenomenon is known as the bullwhip effect. It is caused by the way inventories are replenished at various points along a supply chain. For a variety of reasons, organization tends to periodically order batches of an item from their suppliers. This creates “lumpy” demand for suppliers and, hence, high-variability demand, which causes suppliers to carry relatively large amounts of safety stock. Starting with the final customer and moving backward through the supply chain, batch sizes tend to increase, thereby increasing the level of safety stock carried. What is so striking about this phenomenon is that any demand variations that exist at the customer end of the supply chain got magnified as orders are generated back through the supply chain. Techniques such as setup time reduction and CONWIP (constant work in process) system can alleviate some of the desire to do this because they make lot sizes economical. 2. Inventory-transportation cost trade-off. Suppliers prefer to ship full truckloads instead of partial loads in order to spread shipping costs over as many units as possible. This leads to higher holding costs for customers. Solutions include combining orders to resize full truckloads, downsizing truck capacity and shipping late in the process along with cross – docking. Cross docking is a technique whereby goods arriving at a warehouse from a supplier are unloaded from the supplier’s truck and immediately loaded on one or more outbound trucks, thereby avoiding storage at the warehouse completely. Wal-mart is among the companies that have used this technique successfully to reduce inventory holding costs and to reduce lead times. 3. Lead time-transportation cost trade-off. Suppliers usually prefer to ship in full loads, as mentioned previously. But waiting for sufficient orders and/or productions to achieve a full load increases lead time. In addition to the preceding

suggestions, improved forecasting information to suppliers might improve the timing of their production and orders to their suppliers. 4. Product variety -inventory trade-off. Higher product variety generally means smaller lot sizes, which results in higher setup cost. One possible means of reducing some costs is delayed differentiation, which means producing standard components and subassemblies, then waiting until late in the process to add differentiating features. For example, an automobile producer may produce and ship cars without radios, allowing customers to select from range of radios which can be installed by the dealer, thereby eliminating that variety from much of the supply chain. 5. cost-customer service trade-off. Producing and shipping in large lots reduces costs but it increases lead times, as previously noted. One approach to reducing lead time is to ship directly from a warehouse to a customer bypassing a retail outlet. Reducing one or more steps in a supply chain by cutting one or more intermediaries is referred to as disintermediation. Although transportation costs are higher, storage costs are lower. Small business - Small business may be reluctant it embrace management because it can involve specialized, complicated software as well as sharing sensitive information with outside companies. Nonetheless, in order for them to survive, they may have to do so. Variability and Uncertainty – variations create uncertainty, thereby causing inefficiencies in a supply chain. Variations occur in incoming shipments from suppliers, internal operations, and deliveries of products or services to customers, and customer demands. Increases in product and service variety add to uncertainty, because organizations have to deal with a broader range and frequent changes in operations. Hence, when deciding to increase variety, organizations should consider this trade-off. Although variations exist throughout most supply chains, decisions makers often treat the uncertainties as if they were certainties and make decisions on that basis. In fact, systems are often designed on that basis of certainty, so they may not be able to cope with uncertainty. •Unfortunately uncertainties are detrimental to scheduling, leading to various undesirable occurrences including inventory buildups, bottleneck delays, missed delivery dates, and frustration for employees and customers at all stages of a supply chain. Long Lead Times – response time is an important issue in a supply chain management. Long lead times impair the ability of a supply chain to quickly respond to changing conditions, such as changes in the quantity or timing of demand, changes in product or service design, and quality or logistics problems. Therefore, it is important to work to reduce long product lead times and long collaborative lead times, and a plan should be in place to deal with problems when they arise. SUPPLY CHAINS BENEFITS AND DRAWBACKS

Problem

Benefits

Large inventories

Potential Improvement Smaller, more frequent deliveries

Long lead times

Delayed differentiation Disintermediation

Quick response

Large number of parts Cost Quality Variability

Modular

Fewer parts Simpler ordering

Outsourcing

Reduced cost, higher quality Able to match supply and demand

Shorter lead times, better forecasts

Reduced holding costs

Possible Drawbacks Traffic congestion Increased costs May not be feasible May need absorb functions Less variety

Loss of control Less variety