Supply Chain Management
Overview
Part I
1.1 Introduction
Business enterprises and organisations are realising that they must make their supply of material more effective. These enterprises increasingly depend on the supplies to compete successfully in global markets as well as in the domestic markets. This presupposes the existence of a highly networked economy in the country and a very effective network of organisations and governments all across the world. Peter Drucker1 states that “This concept of business relationships extends beyond traditional enterprise boundaries, and seeks to organise entire business processes throughout a value chain of multiple companies.”
Companies such as Dell, HP and Wal-Mart have fully supplemented globalisation, outsourcing and Information Technology, (IT) to operate successfully. The highly collaborative supply networks help each specialised business partner to focus only on few key strategic activities. Such an inter-organisational supply network can be deemed as a new form of Supply Chain Management organisation. However, it is not clear how different supply network structures impact firms and even less is known about the ambience of co-ordination conditions and trade-offs that exist among the Supply Chain members.
In recent years, the subject and practice of Supply Chain Management (SCM) has generated tremendous focus from organisations all over the world. Companies have discovered and realised that the initiatives of any one member of a Supply Chain impacts the former functioning and profitability, as well as those of other Supply Chain partners. Hence, the competition amongst the companies in an industry has taken a different dimension altogether. It is no more company vs company, rather, the companies compete as a part of their Supply Chain against other companies.
Supply chain management is a vital function which has become strategic for any business organisation in the present times. This unit gives an overview to the function and briefly explains the history and evolution of the function.
1.2 The Meaning of Supply Chain
Supply Chain is an overall system which covers the flow of material and information from a business to its customer. Generally, in a manufacturing organisation, raw material enters its premises through a „supply system‟ and is transformed into finished goods with the help of its „operations system‟. The finished goods are provided to the final customers or users through a „distribution system‟. A similar situation exists in case of companies involved in manufacturing and marketing of “service products”, i.e., where the products are not merely tangible items, but are in the nature of services or Supply Chain Management experiences. Normally, several companies are involved with each other in this process, wherein, each company adds “value” to the raw material that is progressively processed into the finished product, and being delivered to the customer in time, to the place and in preferred manner.
1.2.1 Supply Chain Elements
With the help of Supply Chain we can understand the various elements that form a part of it, that are linked by the movement of the concerned product.
The various Supply Chain Elements are:
Ø Customer
Ø Planning
Ø Purchase
Ø Inventory
Ø Production
Ø Transportations
Customer
A Supply Chain „starts‟ and „ends‟ with the customer. The customer sets the ball rolling by deciding to buy a product that is being offered for sale by a company. This is followed by his action in contacting either the sales department of the company or its representative in the form of an agent, dealer, sales person, and so on.
The sales department records the customer‟s requirement, and commits to a date or time of supply to the customer. Internally, the sales department generates a sales order, that is directed either to the finished goods store for dispatch and delivery (if the product required is available in stock) or to the production planning department for taking up the order.
Planning
The planning department collates all information received from various customers, in order to draw up a production schedule. This generally, indicates the quantities and time frames of requirements of finished products. The production department works out the requirements of various inputs (men, materials and services) to meet the schedule given to them. Mainly, it sets in the motion for procurement of materials and services required. Supply Chain Management
Purchase
The purchase department receives a list of raw materials, other items, services, etc., required by the production department. Depending on the availability (in stock) of different materials required for production, the purchase department places orders on external sources of supply, for those materials that are not available in stock, and also for services.
The purchase department then receives invoices from the suppliers for having received the materials ordered by the company, and the same are processed for payment based on the terms agreed with the supplier.
Inventory
Inventory is nothing but the value of a firm's current assets including raw materials, work in progress and finished goods. The raw materials, other materials, components and parts (been ordered) are received, checked for quality and accuracy, and moved to the warehouse or storeroom in a systematic manner. The corresponding quantities of items that are stored in stock (called the „Inventory‟ of raw materials or spares) are decided by the purchase department. The decision depends on the frequency of requirements by the production department, availability from external supply-market and other factors like price, discounts. Etc.
Production
The production department undertakes the production/manufacturing of the products as per the schedule already drawn up (that is periodically updated depending on fresh inputs from the market). Then the production department moves the raw materials and other items from the stores/warehouses to the production area as per the latter‟s indents.
The production department prepares to complete the manufacture of finished goods as required. These goods are then inspected and tested to be certified as „fit for dispatch‟. Such finished goods are mostly stored again (normally in a finished goods store or warehouse) until their actual delivery to the customer.
Transportation
Depending on the specific requirements of each customer and the logistics involved, the shipping department decides on the best mode of transportation (sometimes, a combination of different modes – road, rail and Supply Chain Management
air are used). The shipping department loads the finished goods onto the vehicle so that the goods reaches individual customer as per delivery dates committed by the company to the customer.
1.2.2 Supply-Chain Characteristics
Most Supply Chains exhibit the following characteristics:
Ø Includes all activities and processes that are involved in generating and supplying products to the customer.
Ø Comprises mutually linked companies and Supplier-Customer relationships as a “Customer” in a Supply Chain can become a “Supplier” to another entity or vice-versa.
Ø Gathers products from supplier to customer along the Supply Chain and the design requirements and demand information from the final customer to supplier, i.e. while the first-mentioned flow is „downstream‟, the latter flow is “upstream”
Therefore, a Supply Chain is “a network of facilities and distribution options that executes the functions of procurement of materials, transformation of these materials into intermediate and finished products and the distribution of these finished products to customers”. All organisations have Supply Chains of varying degrees, depending on the size of the organisation and the type of products manufactured.
1.3 Supply Chain Management
Supply chain management (SCM) is the management of a network of interconnected businesses involved in the provision of product and service packages required by the end customers in a supply chain.[2] Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption.
Another definition is provided by the APICS Dictionary when it defines SCM as the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally."
SCM draws heavily from the areas of operations management, logistics, procurement, information technology and strives for an integrated approach.
Supply chain management managing complex and dynamic supply and demand networks (cf. Wieland/Wallenburg, 2011)
Thus, we see that different organisations in the Supply Chain look to maximising the „returns‟ for their own companies, which can normally be achieved at the cost of the interfacing supplier or customer. This results in a cascading effect on the final customer (either in the form of higher „price‟ or a lower quality-level product offering, or sometimes both).
Clearly, there is a need for a mechanism through which the purposes, activities and performance of various players in the Supply Chain are integrated in the background of the primary aim of maximising the value for the final customer. Supply Chain Management effectively offers a solution to the above scenario.
1.4 Evolution of Supply Chain Management
The concept of Supply Chain is as old as that of trade and can be traced back to 5000 years BC in India. All across the world, there are several indications of the concept of Supply Chain having existed for thousands of years. However, the chronicled record of the practice of certain basic concepts of Supply Chain Management can be traced back to the industrial revolution in eighteenth century.
On the other hand, the above period is characterised by individual company‟s attempts to maximise the efficiency of their own businesses, at which many companies excelled. Therefore, the relationships between different organisations that were interfacing with each other as supplier-customer were very hostile, and genuine to what every organisation sought for turned out to be a WIN-LOSE situation, i.e. a customer would benefit at the cost of his supplier, or the supplier would gain at the cost of the customer.
1.5 Major Issues Involved in Supply Chain Management
Due to the ever-changing dynamics of today's global market place, it is necessary to examine upcoming future trends that may affect business. Supply Chains are a valuable component of all business planning, and hence, they have to be monitored constantly. Following topics are addressed in order to solve the Supply Chain Management issue:
Relationship Quality: To improve customer satisfaction, greater emphasis is given to the aspect of quality in the Supply Chain. These operations within an organization should be constantly reviewed to identify where improvements can be made or deficiencies can be eliminated.
Performance: To help ensure superior service delivery and excellent customer experiences, IT teams need real-time intelligence about application performance that will have the ability to quickly find the causes of incidents when they arise.
Integration: Integration of processes through the Supply Chain to share valuable information, including demand signals, forecasts, inventory, transportation, potential collaboration and so on.
Responsiveness: A key component in responsive Supply Chain management is the ability to effectively “sense and response” in order to maximize responsiveness and flexibility and avoid system disruptions.
Risk Management: In general forecasts are always inaccurate. In order to resolve this risk, there should be Collaboration between customers and suppliers to improve the accuracy of the forecast and a quicker response to demand changes should be practised.
Agility: Supply Chain business practices must be designed for the dynamics of the operating environment not for some steady-state idyllic set of conditions that can not be maintained in order to maintain agility.
Incentive Systems: Create an incentive-based Supply Chain program in which members work cooperatively to create a complete picture of their own supply chain as input to the whole.
Different models, such as, Just In Time (JIT) JIT inventory model, Vendor-managed Inventory (VMI) model, Zero Inventory (ZI) model, Total Quality Management (TQM), etc. emerged in the 1970s and 1980s treated different components of Supply Chain in isolation of each other. The limitation of this Supply Chain Management was that it led to “sub-optimisation‟, i.e., the optimisation of a sub-part of the overall Supply Chain, whereas the basic concept of SCM relates to the optimisation of the complete chain. It is well known that the sub-optimisation leads to trade-offs between the different components of the chain, or between the different functional areas. For example, JIT would warrant that only the minimum inventories are maintained, whereas the operations would prefer larger levels of inventories either to cover unexpected hold-ups in manufacturing, or disruption in availability of raw materials, or even to meet sudden surges in demand. Alternatively, in order to optimise the transportation costs, the logistics department may prefer to accumulate stocks and dispatch full loads to the customers.
Such an approach may render the organisation not being able to precisely analyse the trade-offs, recognise the full significance of the inter-dependability of the operations functions with other important functional areas such as marketing and finance. Effectively, the decisions of production (operations), finance and marketing needs to be made concurrent since decisions in each area are influenced by and affect the decisions in other functional areas.
Another major factor in the present environment is the „globalisation‟ of the supply-chain. The Supply Chain players or members comprise of organisations from different parts of the world involving large distances among them, different cultural backgrounds and different mind-sets as to how to deliver value to the customers. To add to the complexity, laws in some countries may prevent organisations from sharing key information with other country‟s organisations which form part of the same Supply Chain.
The Supply Chain Management model should also perform the task of managing and co-ordinating activities upstream and downstream in the Supply Chain. Such an all-enveloping model is bound to become very complex, and cannot be used without a sufficient computational infrastructure.
1.6 Information Technology (IT) in Supply Chain Management
Over the last few decades, the managements of companies have shifted their focus from „mass production‟ (in order to meet demand at lowest cost) to achieve high levels of Quality and Customer satisfaction. Conducting business has become increasingly complex because of the variety of products, their shorter life cycles, stiffer competition and increasing demands from customers. Managing this complexity on „real-time‟ basis calls for ability to communicate efficiently, effectively and to be flexible and responsive to customer‟s changing demands. Thus, Information Technology (IT), with its tremendous computing capabilities and virtually instant communication means has become a very crucial aspect of managing Supply Chains.
IT essentially improves the capability of organisations to deliver customer satisfaction in different aspects like flexibility, variety, quality, responsiveness, and agility. Through Automation and Computerisation, IT plays an important role in achieving quantum improvement in an organisation‟s efficiency & effectiveness. For example, easy availability of computers at inexpensive cost has decentralised availability of information, enabling faster and more effective decision-making even at ground level.
1.6.1 Role of SCM Software
SCM software is perhaps the most fractured group of software applications in this world. The five major steps in the Supply Chain process compose scores of specific tasks and their own specific software assists many of it. Some big vendors have tried to consolidate these individual softwares into a single „whole‟, but till date no single package of software has been developed. Integrating the different software pieces can be a herculean task. Perhaps the most effective way of visualising Supply Chain software is to divide it into programs that help in planning the Supply Chain that assists in executing the Supply Chain steps themselves. Supply Chain Planning (SCP) software uses fancy algorithms to help improve the flow and efficiency of the Supply Chain and reduce inventory. It is however, completely dependent upon information for its accuracy. On the other hand, Supply Chain Execution (SCE) software aims to automate the different steps of the Supply Chain. This could be just a case of electronically routing orders from manufacturing units to the suppliers of raw materials, components, and other supplies.
SCM software solutions are not the same as ERP (Enterprise Resource Planning) software solutions (such as SAP, Baan, etc). The primary aim of an ERP system is to control the flow and execution of transactional information across the Supply Chain, the SCM systems provides the decision support for such decisions that need to be taken prior to the implementation.
In reality, the SCM system provides the “planning‟ required to enable ERP systems to do the job. For achieving superior „competitive advantage‟, companies must implement a closed-loop SCM system that closely interacts with its ERP system. Thus, we can say that SCM is focused on planning, while ERP is focused on execution.
1.7 Benefits of Supply Chain Management
Effective Supply Chain Management is essential for an organisation to develop a sustained competitive advantage in business.
Some major benefits of Supply Chain Management are that, it:
Ø Delivers the right product to the customer on date, to the place and at a acceptable price.
Ø Facilitates efficient management of working capital for all supply-chain partners and reduces cost across the Supply Chain.
Ø Facilitates efficient management of Raw Materials, Work-In-Process and Finished Goods Inventory.
Ø Improves efficiency in the transactions between Supply Chain partners.
Ø Improves the management of resources.
Ø Manages manufacturing schedules in an optimised manner.
Ø Delivers enhanced “Value‟ to the customer – in terms of form, place and time utilities as well as at the most competitive prices.
1.8 Summary
With customers becoming more demanding in their requirement of services from the suppliers, the construction of an efficient and integrated supply chain has assumed paramount importance. Supply Chain Management is an essential strategy which needs to be implied by each and every company.
IT plays a major role in the formation of the Supply Chain. The decision support provided by IT products (MRPs, ERPs) may help the decision makers in the development of the Supply Chain‟s process and in implementation. The quantitative models embedded in the Decision Support Systems for Supply Chain Management are still at a very elementary stage (in comparison to the theoretical development). For decision support in the construction of an integrated demand-Supply Chain, use of advanced techniques must be resorted. The SCM paradigm can provide the mechanism for the survival of public sector enterprises in the global environment, where globalisation of international economy and liberalisation of the Indian economy is no longer just rhetoric, but is in actual practice. The failure of these organisations can be traced back to their not having applied efficient managerial practices. Under no circumstances can we even think that these organisations have lost their relevance in present times. Such companies have to change their management mind-set and their style of functioning.
No comments:
Post a Comment