ABOUT SUPPLY CHAIN MANAGEMENT

Introduction

The supply chain is the network of organization that are involved through upstream and downstream linkages in the different process and activities that produce value in the term of product and services in service hand of ultimate consumer. For example a shirt manufacturer is a part of supply chain that extends upstream through the weavers of fabric to manufacturer of fibres, and downstream through distributors ad retailers to the final consumer. Each of these organizations in the chain are dependent upon other by definition yet paradoxically by tradition do not closely co-operate with each other.

Supply chain management is not the same as a “Vertical integration”. Vertical integration normally implies ownership of upstream suppliers and downstream customers. This was once ought to be a desirable strategy but increasingly organizations are now focussing on their “core business-in other words the things they do really well and where they have a differential advantage. Every thing else is “out-sourced’ in other words it is procured outside the firm. So, for example, companies that perhaps once made their own components now only assemble the finished product, e.g. automobile manufacturers.

Clearly this trend has many implication for logistics management, not the least being the challenge of integrating an coordinating the flow of material from a multitude of suppliers, often offshore, and similarly managing the distribution of the finished product by way of multiple intermediaries.

In the past it was often the case that relationship with suppliers and downstream customers (such as distributions or retailors) were adversarial rather than co-operative. It is still the case today that some companies will seek to achieve cost reduction or profit improvement at the expense of their supply chain partners. Companies such as these o not realize that simply transferring costs upstream or downstream does not make them any more competitive. The reason for this is that ultimately all costs will make their way to the final marketplace to be reflected in the price paid by the end user. The leading edge companies recognize the fallacy of this conventional approach and instead seek to make the supply chain as a whole more competitive through the value it adds and the costs that company but rather supply chain against supply chain.

It must be recognized that the concept of supply chain management whilst relatively new, is in fact no more than an extension of the logic of logistics. Logistics management is primarily concerned with optimizing flows within the organization whilst supply chain management recognizes that internal by itself is not sufficient. It suggest that there is in effect an evolution of integration from the SCM.

Logistics is essentially a planning orientation and frame work that seeks to create a single plan for the flow of product and information through a business, supply chain management builds upon this frame work and seeks to achieve linkage and co-ordination between processes of other entities in the pipeline, i.e. suppliers and customers, and the organization itself. Thus for example one goal of supply chain management might be to reduce or eliminate the buffers of inventory that exist between organization in a chain through the sharing of information on demand and current stock levels. This is the concept of “co-managed inventory” (CMI).

It will be apparent that supply chain management involves a significant change from the traditional arms length, even adversarial, relationship that so often typified buyer! supplier relationship in the past. The focus of supply chain management is on co-operation and trust and the recognition that properly managed the whole can be greater than the sum of its parts”.

Definition:

SCM is the management of a nature of interconnected business involved in the ultimate provision of product or service package required by end customers.

The management of upstream and downstream relationship with suppliers and customer’s to deliver superior customer value at less cost of the supply chain as a whole.

Thus the focus of supply chain management is upon the management of relationship in order to achieve a more profitable outcome for all parties in the chain. This brings with it significant challenges since there may be occasions when the narrow self interest of one party has to be. subsumed for the benefit of the chain as a whole.

Whilst the phrase “supply chain management” is now widely used. it could be argued that it should really be termed “demand chain management” to reflect the fact that the chain should be driven by the market, not by suppliers. Equally the word “chain” should be replaced “‘network” since there will normally be multiple suppliers and reed, suppliers to suppliers as well as multiple customers and customers customer to be included in the total system.

Logistics Management:

Introduction:

Logistics can be viewed as a logical extension of Transportation and related areas to achieve an efficient and effective goods distribution system. A formal definition of logistics management can be design and operation of physical, managerial, and information system needed to allows goods to over come time and space (from producer to consumer). The definition implies that an integrated view of a number of different activities or function may be required.

Decisions:

The various decision in logistics management that needs examination for an integrated system are

1. Product Design.

2. Plant Location.

3. Choice of Markets? Sources.

4. Production Structure.

5. Distribution I Dealer Network Design.

6. Location of Warehouses.

7. Plant Layout and Logistics.

8. Allocation Decisions.

9. Production Planning.

10. Inventory Management Stocking Levels.

11. Transportation mode.

12. Packaging.

13. Materials Handling.

14. Warehouse Operations.

The challenging logistics environment

As the competitive context of business continues to change, bringing with it new complexities and concerns for management generally, it also has to be recognized that the impact of these changes on logistics can be considerable. Indeed, of the many strategic issues that confront the business organization today, perhaps the most challenging are in the area of logistics.

These are:

The customer service explosion.

Time compression

Globalization of industry.

Organizational integration.

The customer service explosion

So much has been written and talked about service, quality and excellence that there is not escaping the fact that the customer in today’s market place is more demanding, not just of product quality, but also of service.

As more and more markets become in effect ‘commodity’ markets, where the customer perceives little technical difference between competing offers, the need is for the creation of differential advantage through added value. Increasingly a prime source of this added value is through customer service.

Customer service may be defined as the consistent provision of time and place utility. In other words products don’t have value until they are in the hands of the customer at the time and place required. There are clearly many facts of customer service, ranging from on time delivery through to after sales support. Essentially the role of customer service should be to enhance ‘value in us&, meaning that the product becomes worth more in the eyes of the customer because service has added value to the core product. In this way significant differentiation of the total offer (that is the core product plus the service package) can be achieved.

Those companies that have achieved recognition for service excellence, and thus have been able to establish a differential advantage over their competition are typically those companies where logistics management is a high priority. Companies like Xerox, BMW, Benetton and Dell Computers are typical of such organizations. The achievement of competitive advantage through service comes not from slogans or expensive so called customer care programmes, but development of appropriate delivery systems an commitment from people, from the Chief Executive down.

In the case of new product introduction there are many implications for management resulting from this reduction of the time ‘window’ in which profits may be made. Many commentators have focussed upon the need to seek out novel forms of managing the new product development process.

All of the initiatives are indeed necessary if the business is to stay alive. However, amidst all the concern with the process of creating and managing innovation, there is one issue which perhaps is only now being given the attention it demands. That issue is the problem of extended logistics lead times.

Time compression

One of the most visible features of recent years has been the way in which time has become a critical issue in management. Product life cycles are shorter than ever, industrial customer and distributors require just — in —time deliveries, and end users are ever more willing to accept a substitute process to the final distribution and after market support, there are a myriad of complex activities that must be managed if customer are to be gained and retained. This is the true scope of logistics lead time management.

As we have noted, one of the basic functions of logistics is the provision of ‘availability’. However, in practice what is so often the case is that the integration of marketing and manufacturing planning that is necessary to achieve this competitive requirement is lacking. Further problems are caused by limited co-ordination of supply decisions with the changing requirements of the market place and the restricted visibility that purchasing and manufacturing have of final demand, because of extended supply and distribution ‘pipelines’.

To over come these problems and to establish enduring competitive advantage by ensuring timely response to volatile demand, a new and fundamentally different approach to the management of lead times is required,

Globalization of industry:

The third of the strategic issues that provide challenge for logistic management is the trend towards globalization.

A global company is more than a multinational company. in the global business materials and components are sourced worldwide, manufactured offshore and sold in many different countries perhaps with local customization.

For global companies like Hewlett Packard, Philips and Caterpillar, the management of the logistics process has become an issue of central concern. The difference between profit and loss on an individual product can hinge upon the extent to which the global pipeline can be optimized, because the costs involved are so great. The global company seeks to achieve competitive advantage by identifying world markets for its products and then developing a manufacturing and logistics strategy to support its marketing strategy. So a company like Caterpillar, for example, has dispersed assembly operations to key overseas markets. Where appropriate, Caterpillar with use third party companies to manage distribution and even final finishing. So for example in the united States a third party company, in addition to providing parts inspection and warehousing, actually attaches options to fork lift trucks. Wheels, counterweights, forks and masts are installed as specified by Caterpillar. Thus local market needs can be catered for from a standardized production process.

Organizational integration:

Whilst the theoretical logic of taking a system view of the business might be apparent, the reality of practical implementation is something else. The classical business organization is based upon strict functional division and hierarchies. It is difficult to achieve a closely integrated, customer focused materials flow whilst the traditional territorial boundaries are jealously guarded by entrenched management with its outmoded priorities.

The challenges that face the business organization in to days environment are quite different from those of past. To achieve a position of sustainable competitive advantages, tomorrows organization will be faced with the need of dispense with outmoded labels like marketing manager, manufacturing manager or purchasing manager. Instead we will need broad based integrators who are oriented towards the achievement of marketplace success based upon managing processes and people that deliver service. Generalist rather than narrow specialist will increasingly be required to integrate materials management with operations management and delivery. Knowledge of systems theory and behaviour will become a prerequisite for this new type manager. As important will be the orientation of these managers : they will be market oriented with a sharp focus upon customer service as the primary source of competitive advantage.

The new rules of Competition

We are now entering the ere of ‘supply chain competition’. The fundamental difference from the previous model of competition is that an organization can no longer act as an isolated and independent entity in competition with other similarly ‘stand-along’ organization. Instead, the need to create value delivery system that are more responsive to fast changing markets and that are much more consistent are reliable in the delivery of that value requires that the supply chain as a whole be focussed on the achievement of those these goals.

In the pas the ground rules for marketing success were obvious: strong, brands, backed up by large advertising budgets and aggressive selling. This formula now appears to have lost its power. Instead, the argument is heard, companies must recognize that increasingly it is through their capabilities and competencies that they compete.

Essentially, this means that organization create superior value for customers and consumers by managing their core processes better than competitors manage theirs. These core processes encompass such activities as new product development, supplier development, order fulfilment and customer management. By performing these fundamental activities in a more cost effective way than competitors, it is argued, organizations will gain the advantage in the market place.

One capability that is now regarded by many companies as fundamental to success in the marketplace is the management of inbound and outbound logistics. As product life cycles shorten, as customers adopt just in time practices and as sellers, markets become buyers’ markets then the ability of the organization to respond rapidly and flexibly to demand can provide a powerful competitive edge.

A parallel development in many markets is the trend towards a consolidation of demand. In other words customers as against consumer are tending to grow in size whilst becoming fewer in number. The retail grocery industry is a good example in that in most Northern European countries a handful of large retailers account for over 50 per cent of all sales in any one country. This tendency to the concentration of buying power is being accelerated as a result of global competition and the fact that in most industries there is a worldwide over capacity. The impact of these trends is that these more powerful customers are becoming more demanding in terms of their services requirements from suppliers.

At the same time as the power in the distribution channel continues to shift from supplier to buyer, there is a trend for customer to reduce their supplier base. In other words they want to do business with fewer suppliers and often on a longer term basis. The successful companies in the coming years will be those that recognize these trends and seek to establish strategies which are based upon establishing closer relationships with key accounts. Such strategies will focus upon seeking innovative ways to create more value for these customers. These strategies will be ‘vertical’ rather than ‘horizontal’ in that the organization will seek to do more for fewer customers rather than looking for more customers to whom to sell the same product. The car industry provides a good example of this phenomenon with ‘lead’ suppliers taking on much greater responsibility for the delivery of entire systems or modules to the assembly line.

Such a transition from volume based growth to value based growth will require a much greater focus on managing the core processes that we referred to earlier. Whereas the competitive model of the past relied heavily on product innovation this will have to be increasingly supplemented by process innovation. The basis for competing in this new era will be:

Competitive advantage = product excellence * process excellence

Figure suggest that for many companies the investment has mainly concentrated on product excellence and less on process excellence.

This is not to suggest that product innovation should be given less emphasis far form it-but rather that more emphasis needs to be placed on developing and managing processes that deliver greater value for key customers.

We have already commented that product life cycles are getting shorter. What we have witnessed in many markets is the effect of changes in technology and consumer demand combining to produce more volatile markets where a product can be obsolete almost as soon as it reaches the market. There are many current examples of shortening life cycles but perhaps the personal computer symbolizes them all. In this particular case we have seen rapid development in technoLogy which have firstly created markets where none existed before and then almost as quickly have rendered themselves obsolete as the next generation of product is announced.

Such shortening of life cycles create substantial problem for logistics management. In particular, shorter life cycles demand shorter lead times indeed our definition of lead time may well need to change. Lead times are traditionally defined as the elapsed period from receipt of customer order to delivery. However, in today’s environment there is a wider perspective that needs to be taken. The real lead time is the time taken from the drawing board, through procurement, manufacture and assembly to the end market. This is the concept of strategic lead time and the management of this time span is the key to success in managing logistics operations.

There are already situations arising where the life cycle is shorter than the strategic lead time. In other words the life of product on the market is less than the time it takes to design, procure manufacture and distribute that same product. The implications of this are considerable both for planning and operations. In a global context the problem is exacerbated by the longer transportation time involved.

Ultimately, therefore, the means of achieving success in such markets is to accelerate movement through the supply chain and to make the entire logistics systems for more flexible and thus responsive to these fast changing markets.

Whilst there are many implications of these pressures for the way we manage logistics there are key issues which will be recurring themes, Responsiveness, Reliability and Relationship.

Responsiveness

In today’s just in time world the ability to respond to customers requirement in ever shorter time frames has become critical. Not only do customers want shorter lead times, they are also looking for flexibility, and increasingly solutions to their problems. In other words the supplier has to be able to meet the precise needs of customers in less time than ever before. The key word in this changed environment is agility. Agility implies the ability to move quickly and to meet customer demand sooner. In fast changing market place agility is actually more important than long term strategy in a traditional business planning sense. Because future demand patters are uncertain by definition this makes planning more difficult and in a sense, hazardous.

Reliability

One of the main reasons why any company carries safety stock is because of uncertainty. It may be uncertainty about future demand or uncertainty about a supplier’s ability to meet a delivery promise, or about the quality of materials or components. Significant improvements in reliability can only be achieved through reengineering the processes that impact performance. Manufacturing managers long ago realized that the best way to improve product quality is not by quality control through inspection but rather to focus on process control. The same is true for logistics reliability.

Relationships

The trend towards customers seeking to reduce their supplier base has already been commented upon. In many industries the practice of ‘single sourcing’ is widespread. It is suggested that the benefits of such practices include improved quality, innovation sharing, reduced costs and integrated scheduling of production and deliveries.

Underlying all of this is the idea that buyer/ supplier relationship should be based upon partnership. More and more companies are discovering the advantages that can be gained by seeking mutually beneficial, long term relationship with suppliers. From the supplies’ point of view such partnership can prove a formidable barrier to entry for competitors. The more processes are lined between the supplier and the customer the more the mutual dependencies and hence the more difficult it is for competitors to break in.

Supply chain management by definition is about the management of relationships across complex networks of companies that whilst legally independent are in reality interdependent. Successful supply chains will be those, which re governed by a constant search for win- win solutions based upon mutuality and trust. This is not a model of relationship that as typically prevailed in the past. It is one that will have to prevail in the future, as supply chain competition becomes the norm.

These three themes of responsiveness, reliability and relationship provide the basis for successful logistics and supply chain management. As we enter the 21st century the need for a greater focus on the logistics processes that underpin supply chain effectiveness becomes ever more apparent.

Setting service standards

Obviously if service performance is to be controlled then it must be against pre determined standards.

Ultimately the only standard to be achieved is 100 per cent conformity to customer expectation. This requires a clear and objective understanding of the customers requirements and at the same time places an obligation upon the supplier to shape those expectations. In other words there must be a complete match between what the customer expects and what we willing and able to provide. This may require negotiation of service standers since clearly it is in neither parts interest to provide service levels which would lead to a long term deterioration in profitability either for the supplier or the customer.

What are the customer service elements for which standards should be set?

Firstly there are the internal service standards. In many respects these mirror the standards that our external customers place upon us. As far as these external standards are concerned they must be defined by the customers themselves. This requires customer research and competitive bench marking studies to be conducted so that an objective definition of customer service for each market segment may be identified.

However for the moment we can indicate some of the key areas where standards are essential

Order cycle

Stock availability

Order size constraints.

Ordering convenience

Frequency of delivery

Delivery reliability

Documentation quality

Claims procedure

Order completeness

Technical support

Order status information

Let us examine each of these in turn:

Order cycle time:

This is the elapsed time form customer order to delivery. Standards should be defined against customer’s stated requirements.

Stock availability

This relates to the percentage of demand for a given line item (stock keeping unit, or SKU) that can be met from available inventory,

Order size constraints

More and more customers seek just in time deliveries of small quantities. Do we have the flexibility to cope with the range of customer demands likely to be placed upon us?

Ordering convenience:

Are we accessible and easy to do business with ? How are we seen from the customers’ viewpoint ? Do our systems talk to their systems?

Frequency of delivery:

A further manifestation of the move to just in time is that customers require more frequent deliveries within closely specified time windows. Again it is flexibility of response that should be the basis for the performance standard.

Delivery reliability:

What proportion of total orders are delivered on time 2 It is a reflection not just of delivery performance but also of stock availability and order processing performance.

Documentation quality

What is the error rate on invoices, delivery notes and other customer communications ? Is the documentation ‘user friendly’ ? A surprisingly large number of service failures are from this source.

Claims procedure:

What is the trend in claims ? What are their causes 7 How quickly do we deal with complaints the claims ? Do we procedures for ‘service recovery’?

Order completeness:

What proportion of orders do we deliver complete, i.e. no back orders or part shipments?

Technical support:

What support do we provide customers with after the sale 7 If appropriate do we have standards for call out time and first time fix rate on repairs?

Order Status information

Can we inform customers at any item on the status of their order? Do we have ‘hot lines’ or their equivalent? Do we have procedures informing customers of potential problems on stock availability or delivery?

All of these issues are capable of quantification and measurement against customer requirements. Similarly they are all capable of comparison against competitive performance.

It must be recognized that from the customer’s perspective there are only two levels of service-either 100 per cent. In other words either the customer gets exactly what he? she ordered at the item and place required or they don’t. it must also be remembered that 100 percent order fill rates are extremely difficult to achieve the laws of probability see to that. If there are ten items on a particular order and each item is carried in stock at the 95 percent level of availability then the probability that the complete order can be filled is (0.95) which is 0.599. In other words, just over a 50/50 chance that we can satisfy the complete order.

Shows how the probability of order fill diminishes as the number of items on the customer order increases:

Ideally organizations should establish standards and monitor performance across a range of customer service measures. For example, using the pre-transaction, transaction and post transaction frame work, the following measures provide valuable indicators of performance.

Pre- transaction

Stock availability

Target delivery dates

Response time to queries

Transaction

• Order fill rate

• On time delivery

• Back orders by age

• Shipment delays

• Product substitutions

• Cost — transaction

• First call fix rate

• Customer complaints

• Returns /Claims

• Invoice errors.

• Service parts availability

It is possible to produce a composite index based upon multiple service measures and this can be a useful management tool particularly for communicating service performance internally. Such an index is shown in Table where the weight attached to each service element reflects the importance that the customers attach to those elements.

Service element	Importance Weight (i)	Performance level (ii)	Weighted score (i) * (ii)
Order fill rate	30%	70%	0.21
On time delivery	25%	60%	0.15
Order accuracy	25%	80%	0.20
Invoice accuracy	10%	90%	0.09
Returns	10%	95%	0.095
		Index	0.745

Customer service is one of the most powerful elements available to the organization in its search for competitive advantage and yet it is often the least well managed. The key message of this chapter has been that the qualify of customer service performance depends in the main upon the skill with which the logistics system is designed and managed. Put very simply, the output of all logistics activity is customer service.