Introduction:
Globalization and its effects in terms of new business opportunities and risks resulted in shifting from decoupled decision making processes towards more coordinated and integrated processes among different entities which share a common goal of offering goods and services at appropriate cost while achieving customer satisfaction level. Network of these entities used to deliver goods and services from raw materials to end customers through an engineered flow of information, physical distribution and cash is termed as supply chain[1]. Management of the supply chain refers to the design, planning execution, control and monitoring of supply chain activities with the objective of creating the net value for the each member of the chain while building competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, adopting sustainable business practices and measuring performance in a holistic way.
No doubt, thought the term supply chain is relatively new, there are huge amount of literature and normative tools have been developed from 1960’s (often referred to as materials logistics management at that time)[2]. This paper will focus on best practices in supply chain management across industries, sighting specific examples taken from current business scenarios across the globe.
Best Practices in Supply Chain Management across Industries
1. Adopting Process View of SCM: The SCOR Model
A supply chain can be viewed as linked organizations – suppliers, producer and customer linked by product (and/or) service, cash and information. But collaborative planning across these organizations needs to view the chain as a set of linked processes, carried out by various functional areas within the organizations that constitute the supply chain. The Supply-Chain Council has endorsed a process reference model named Supply-Chain Operations Reference (SCOR). There are five decision areas provided in SCOR Model Version 4.0 (PLAN, SOURCE, MAKE, DELIVER and RETURN) and nine key supply-chain management planning practices derived from supply-chain management experts and practitioners.[3] Supply-Chain Council members can enhance their understanding of their supply chains and associated processes and improve their performance. Business problems commonly solved by applying SCOR model are:
- Supply optimization and Re-engineering - improving individual, clusters, or networks of supply chains
- Streamlining - improve operational control and cost by standardizing core processes, management tools, reporting and organizational structures
- New venture - create and deploy supply chains
- Benchmarking - competitive assessment of qualitative and quantitative performance
- Process Outsourcing - identifying and outsourcing non-value adding processes
An exploratory study[4] on linking SCOR planning practices to supply chain performance shows that: for the Plan decision area, demand planning, including forecast development activities has a significant impact on supply chain performance. Collaborative planning processes including defining product and customer priorities; establishing customer and supplier relationships; analyzing customer behavior and demand variability information; reviewing product and customer profitability information and establishing supply chain performance metrics also can have an impact. The Source area includes the documentation of procurement processes and establishment of supporting technology and the management of supplier inter-relationships including strategic partnership. Make decision area includes collaboration tasks among the sales, manufacturing, and distribution organizations during the planning and scheduling process; a joint appraisal of the needs of the business among these entities; and the establishment of performance metrics for the monitoring of schedule adherence. For Deliver decision area, key integration features include the formation of inventory control mechanisms and metrics for each hub in the distribution network, along with the use of automatic replenishment throughout the network. Indicators of delivery process credibility include the extent to which customers are satisfied with current on-time delivery performance, the ability to meet short-term customer demands, and the customer's confidence level in projected delivery commitments. The Return decision area recognizes the growing importance of the reverse supply chain which involves replacement, warranty repairs, recycling or disposal of used items.
SCOR provides numerical values for performance attributes (namely, supply chain reliability, responsiveness, flexibility, costs and asset management) for the decision taken in the above mentioned areas, which can be used to compare the performance in industry best or best in class level.
Adopting the process view of supply chain (SCOR model was an example) provides useful guidance in developing cross functional, cross company approaches to manage these processes, while managing silos tends to focus attention on increasing speed and cost efficiency in one area of the whole chain without regard to other area. The process view also helps continuous refining of the processes that flow along the chain among the partners.
2. Deciding No. of Supply Chains According to Product Line and Market Segmentation: SCM at Zara (Spanish Clothing Retailer)
Generally, products can be categorized in two types:[5] functional products tend to have longer life cycle, staple-type goods with predictable demand and typically low margins. Innovative products are having short life cycle, new-concept goods with unpredictable and volatile demand and typically high margins. The unpredictability of demand also creates overstocks for some Stock-Keeping Units (SKUs) and shortages for others, so that for innovative products we would expect to see both higher markdowns (at end-of-season) and higher out-of-stock situations. For example, these two costs are particularly high in the apparel industry; they have been estimated to be as high as 30% of all costs for apparel companies and apparel supply chains[6].Zara, the renowned fashion chain, makes its most fashionable items (half of all its merchandise) at a dozen company-owned factories in Spain and Portugal, particularly in Galicia and northern Portugal where labor is cheaper than most of Western Europe. Thus, it gets the fastest response time for its innovative and trendy products. Clothes with a longer shelf life, such as basic T-shirts, are outsourced to low-cost suppliers, mainly in Asia and Turkey.[7] Practically, it has two supply chains according to the market it serves. With more than one supply chain, it can move its products from one chain to another in response to changing variables, such as type of channel or lifecycle stage of the product. Zara successfully aligned its supply chain strategy with its business goal of serving different product lines by instituting different sourcing alternatives.
3. Change in Supply Chain Strategy in Response to the Change in Business Direction: Toyota Distribution System for Prius
Toyota Motors faced the problem of complete recasting of the supply chain when it brought the hybrid car Prius[8]. As there was no demand history was available for forecasting sales or segmenting market, Toyota changed its logistics network from dealer based sales outlet to reflect the uncertainty about the location wise demand. It sent the vehicles to central distribution centers (DC), as the larger pool at DCs would reduce the probability of stock-outs due to unexpected surge in demand in any one region. It also adopted postponement facility at DCs to allow customizations. Though the system became more expensive, it was able to offer more flexibility in delivery. Vehicles were shipped only in response to customer orders forwarded over internet. Actually, the demand was far exceeded compared to normal Toyota vehicles in northern Carolina, and the opposite things experienced in the Southeast. Toyota’s initial order-based strategy allowed it to accumulate excellent data on geographic and demographic distribution of sales. With respect to the Prius, Toyota found that the average consumer is geographically diverse, middle-aged and environmentally friendly, has a desire to stretch the dollar, is committed to reducing oil dependency, well-educated, affluent, and helps to shape the buying decisions of America. For Toyota, that appeared to cover a lot of potentially profitable bases, so it has since placed a far greater focus on its hybrid initiatives.
This example establishes the fact the chain should be re-engineered in response to the inevitable change in the competitive environment. The company needs to be innovative, not only in terms of product design but also in organizational design and supply chain processes.
4. Reducing Bullwhip Effect through Collaboration: VMI System in Grocery Industry
While demand fluctuations mostly happen at the retail end of the supply chain, variability ripple up mostly at the supply end of the chain, with the amount of variation growing up at each link, a condition defined as bullwhip effect.
Vendor Managed Inventory (VMI) is a process in which a supplier generates orders for its distributor based on demand information sent by the distributor. With VMI, suppliers generate orders based on mutually agreed upon objectives for inventory levels, fill rates and transaction costs, and demand information sent by their distributor customers. In this process, the buying function moves from the distributor back to the supplier, who takes over responsibility for placing orders. The distributor sends sales and inventory data to the supplier on a pre-arranged schedule---typically, daily---and the VMI system determines what should be ordered based on the criteria the supplier and distributor have established. The supplier monitors the inventory status information to make sure that the distributor always has the appropriate amount of stock on hand when needed. The distributor can override the system when necessary, for example, if they anticipate an increased demand in the market.
VMI was first applied to the grocery industry, between companies like Procter & Gamble (supplier) and Wal-Mart (distributor).[9] The first relationship was built for the diaper supply chain. P&G, by using Wal -Mart sales data, would determine the appropriate retail inventory levels of its products. VMI became one of the key programs in the grocery industry’s “quick response.” Successful VMI initiatives have been promulgated by other companies in the United States, including Campbell Soup and Johnson & Johnson and by European firms such as Barilla, the pasta manufacturer.[10] The benefits of VMI result from better information flow to both parties. The retailer and supplier are better able to track demand in the market. Lower inventories, better in-stock positions and increased sales are the significant benefits associated with VMI for the distributor. Suppliers benefit from the increase in sales as well as smoother demand and consistent orders. Both parties benefit from reduced administrative costs, better information flow and a superior ability to place, manage or follow-up on orders.
5. Educating and Integrating the Supply Side: Sourcing Strategy of McDonalds’ India.
Consolidation has greatly affected both the side of supply chain, but it is more prominent on the supply side. MNCs across the globe now want their chosen supplier to be responsible for a larger component system; they want them to achieve continuous quality and performance improvement. They seek suggestions from suppliers during product design phase and collaborate for strategic growth and strengthened operations. Consider the initiative taken by McDonalds’ India to develop their supply source to meet its quality standards[11]. McDonald's is built upon the values of QSC & V (Quality, Service, Cleanliness & Value) and to deliver these values consistently, one of the biggest hurdles was the limited availability of an effective cold chain network in India. Additionally, there were no processing facilities as well as limited availability of high standard raw products. To overcome these barriers, six years prior to the opening of its first restaurant, it worked very closely with Indian farmers and processing facilities to bring in the latest technology in farming, processing and cold chain through technology transfer arrangement between its international suppliers and Indian businessmen. Like for the supply of cheese, it chooses Dynamix Dairy and introduced Dynamix to two of its global supplier. This resulted in a joint venture with company and succeeded by yearly exports worth $12mn. McDonald's benefited by availability of products matching global standard and the supplier got access to latest technology and exposure to new markets.
McDonalds’ has established a scientific centralized supply and logistics system starting from the farmer level and the onwards to the factory, distribution centre and finally to their restaurants by educating/ training farmers, suppliers, distribution centers and employees in restaurants to maintain standards. The biggest change that McDonald's brought about in food processing in India is introducing the concept of HACCP and GMP to its supplier's way back in 1995-96.[12] All McDonald's suppliers adhere to Indian Government regulations on food, health and hygiene while continuously maintaining their own recognized standards.
6. Enabling Processes with Information Technology (IT): The e-Supply Chain of a Manufacturing Company
Role of IT in SCM was generalized as smoothing transaction processes while keeping the cost low. But nowadays, IT is viewed as the facilitator of information sharing, coordination and decision making across the supply chain. It has changed the way of doing business, helped to achieve operational benefits like reduced cycle time or level of inventory. From strategic point of view, it created new opportunities along with competitive advantages. Common technologies used in present business scenarios are ERP, EDI, XML (system to system integration), internet, extranet, B2B marketplaces (web portals), and 3rd-party transaction hubs that provide B2B integration services. Here is a brief analysis of how supplier web solution has enhanced the efficiency of SCM of Rocla, maker of automated guided vehicles and electronic warehouse trucks. Implementing the supplier web resulted in savings of 2.5 man-years in ordering and checking invoices, as suppliers have real-time visibility to Rocla's order (item, quantity, price, and delivery date) and they are asked to keep the track daily.[13] The system also improved the quality of data through consistency mapping.
Conclusion:
Before deploying best practices across supply chain processes we should understand that a right supply chain strategy exists only for a given competitive strategy.[14]Achieving the strategic fit is not possible when all the functions contributing to a company’s value chain acts in isolation. Thus, before taking any improvement measure for a particular functional area, its impact on the other supply chain areas must be identified. For example in the Toyota case discussed above, moving to a centralized distribution system would reduce stock out risk for a particular zone, but transportation cost of this supply chain would increase. Organizations need to be cautious while making the trade-offs between supply chain efficiency and responsiveness. Also, without proper communication among affected functional areas and coordination by higher management, desired level of strategic fit is not likely to achieve.
[1] APICS Dictionary 12th Ed.
[2] http://www.ism-journal.com
[3] http://supply-chain.org
[5] Fisher M, "What is the Right Supply Chain for your Product", HBR, March-April ’97
[6] http://www.allbusiness.com
[7] http://www.businessweek.com/magazine /content/06_36/b3999063.htm
[8] SCM Fundamentals, APICS CSCP Learning System, ‘09 Ed.
[10] Waller, Mat and Johnson, M.E., VENDOR-MANAGED INVENTORY IN THE RETAIL SUPPLY CHAIN, Journal of Business Logistics, ‘01
[11] Kotler, Philip, Marketing Management, 13th Ed.
[12] Source: Interview of Mr. Arvind Singhal, Director- Marketing, McDonalds’ India. (Madazine, Annual Marketing Magazine of VGSoM)
[13] Auramo, Kauremaa & Tanskanen, International Journal of Physical Distribution & Logistics Management, Volume: 35, Number: 2, Year:’05 pp: 82-100
[14] Chopra S & Meindl P, Supply Chain Management, PHI, 2nd Ed.
No comments:
Post a Comment