Operations Management (2) Supply Chain Topic 5 Prof. Upendra Kachru The word „supply‟ means the act of providing something useful or the act of giving something that is required or desired. The word „chain‟ implies a series of things or activities that are linked together or are dependant on each other. When put together, the two words form the term „supply chain‟ which refers to the system or chain of activities from a business to a customer and vice versa. Prof. Upendra Kachru SUPPLY CHAIN MANAGEMENT Operations Management The stages in the supply chain vary from product to product or from service to service. However, all supply chains have one thing in common. The activities in the supply chain begin with an order from a customer and end with the customer‟s need being satisfied or fulfilled. Prof. Upendra Kachru Operations Management This is a supply network. In this network there are vendors and customers. Is this a supply chain? Prof. Upendra Kachru Operations Management A supply chain must have at least a set of three or more companies linked by one or more of the upstream or downstream flows of products, funds, or information. Prof. Upendra Kachru Operations Management Again, even if there are three or more sets of companies involved, it may still not be a supply chain. In order to qualify as a supply chain there has to be flow of at least one of the three: •Value (Goods or Services), •Information, and •Funds These flow must take place from a source to a customer. This is the basic requirement in a supply chain. Prof. Upendra Kachru Operations Management Let us understand, better, the flows that take place across the supply chain: • Flow of Value • Flow of Information • Flow of Funds SUPPLY CHAIN FLOWS The flow of goods/ inventory is in forward direction The direction of money flow is in the backward direction. The flow of information is in both directions in a supply chain. Prof. Upendra Kachru Information SUPPLIER SELLER BUYER Products Funds Operations Management Value in a supply chain flows in the form of goods and services. Consider the example of a popular brand of toys. Here, goods flow would consist of raw materials or ingredients such as plastic, steel, thread, color and all the other materials being transported, the manufacturing process and the final product. It will also include a reverse flow if some lots are returned due to certain defects or rejection, or sent back for rework or recycling. Prof. Upendra Kachru Operations Management Information flows from the vendor to the customer and also from the customer to the vendor. In case of the toy manufacturer, for example, the information could flow to the customer in the form of warranties, quality reports, stock availability details, etc. The information could flow from the customer to the vendor in the form of order details, specifications and feedback. Prof. Upendra Kachru Operations Management It has been seen that when information between parties that do business is insufficient there will be strong fluctuations in order volume, even when there is relatively stable demand. The customer demand makes the retailer place an order on the wholesaler. The wholesaler adds a margin and orders on the manufacturer and the manufacturer places orders on its suppliers. As each firm in the distribution network has incomplete information about the needs of others, therefore it responds with a disproportional increase in inventory levels. The Bullwhip Effect Prof. Upendra Kachru Operations Management The Bullwhip Effect The supply chain avoids situations where: Too Much Stock results in increase in costs, e.g., storage and handling, insurance, interest etc.; loss of productivity due to existing inventory; high opportunity cost; and stockpiling of unsold stock, etc. Too Little Stock which results in the firm‟s inability to cope with demand which results in loss of customers; delays often halt production, which leads to idle labor and machinery; and loss of discounts for bulk buying, etc. As it shares information, the supply chain becomes a more effective network. Prof. Upendra Kachru Operations Management The financial flow involved in the supply chain occurs in the opposite direction. The source of money is the customer. This money is paid in return for delivery of goods or services at all stages in the supply chain. When the supplier of raw material delivers these to the toy factory, he gets paid for the delivery. This is fund flow. Similarly, when the dealer pays some advance for the stock he has ordered, money exchanges hands. Prof. Upendra Kachru Operations Management Supply Chain That means, if there are only two organizations involved, it will not be a supply chain. SUPPLIER SELLER BUYER Products Funds Information Prof. Upendra Kachru Operations Management In traditional Materials Management and Logistics, the interaction between parties is across a single interface. In Supply Chain Management the interaction between parties is across multiple interfaces. Prof. Upendra Kachru Operations Management Supply chain management (SCM) represents one of the most significant paradigm shifts of modern business management by recognizing that individual businesses no longer compete as solely autonomous entities, but rather as supply chains Supply Chain Management - A Paradigm Shift Prof. Upendra Kachru Operations Management The definition of a basic supply chain is: A set of three or more companies directly linked by one or more of the upstream or downstream flows of products, services, finances and information from a source to a customer SUPPLIER SELLER BUYER Products Funds Information Prof. Upendra Kachru Operations Management An extended supply chain is: Suppliers of the immediate supplier and customers of the immediate customer, all linked by one or more of the upstream and downstream flows of products, services, finances, and information. What are tiers? This will be made clear in the next section. Prof. Upendra Kachru Operations Management Supply Chain Structure In the supply chain discussed earlier let us look the structural relationships between organizations. First the shoes need to be made. It is made by Bahrain Footwear. The shoes need leather for their manufacture. The leather is supplied by Alibaba Leathers. But to make the leather, Alibaba Leathers needs hides. They get the hides from Rahim Brothers, who raise cattle. The hide is shipped to Alibaba Leathers, who convert the hides into processed leather. Alibaba Leathers supplies the leather to Bahrain Footwear who make shoes to be sold to the customer. Prof. Upendra Kachru Operations Management Supply Chain Structure Though Rahim Brothers and Alibaba Leathers are part of the supply chain, their structural relationship with Bahrain Footwear are different. These variations in the structural relationship are described as tiers. Tiers reflect the distance between the different firms. Prof. Upendra Kachru Operations Management Supply Chain Structure Alibaba Leathers supplies directly to Bahrain Footwear, it is a first-tier supplier in the supply chain. Using the same logic, Rahim Brothers is a second-tier supplier. It does not directly supply to Bahrain Footwear, it is the supplier of a supplier, as it supplies to Alibaba Leathers, who uses the inputs from Rahim Brothers to supply leather to Bahrain Footwear. Prof. Upendra Kachru Operations Management Supply Chain Structure Bahrain Footwear then packages the shoes and sells it to Alireza Group of Companies, the distributor, who is again in a first tier relationship with Bahrain Footwear. Alireza Group of Companies, in turn, sells the finished good to retailers like Awazi Stores. Awazi Stores has a second tier relationship in the supply chain with Bahrain Footwear, as Bahrain Footwear does not supply directly to Awazi Stores. These are all different tiers in the supply chain. Prof. Upendra Kachru Operations Management A basic supply chain is when all the structural relationships are first tier relationships. SUPPLIER SELLER SUPPLIER BUYER BUYER Products Funds Information An extended supply chain is when there is more than one tier in the supply chain. Prof. Upendra Kachru Operations Management Supply Chain Structure Another way to look at the relationships between different organizations within a supply chain is based on how the product or service flows between the members of the supply chain. Consider the case of the retailer, Awazi Stores. As he is the last link in the chain, all his physical transactions will move backwards. So a retail organization, in order to be a member of a supply chain will only have backward linkages. This also means that has the role of a customer or buyer in the supply chain. Prof. Upendra Kachru Operations Management Supply Chain Structure At the other end, you have a supplier of raw materials. In this case Rahim Brothers. Rahim Brothers is faced with the opposite of the situation faced by Awazi Stores. As he supplies the raw materials, he has no backward linkages for his physical transactions. He is not a buyer. All his linkages will be forward linkages, so that the role is limited to that of a seller. This also means that the firm has the relationship of a supplier in the supply chain. This arrangement is shown in the figure below. Prof. Upendra Kachru Operations Management Supply Chain Structure Most organizations have a supply chain that has both forward as well as backward linkages to physical transactions. The organization is a buyer or materials from a supplier and it converts this material into products and services that it provides to a buyer. In other words, the supply chain has both buyers and suppliers as an integral part of it. This is shown in the figure below. This variation of the supply chain has both backward as well as forward linkages. SUPPLIER SELLER BUYER Products Funds Information Prof. Upendra Kachru Operations Management These activities can be downstream, upstream or both. Upstream and downstream is generally used in the case of goods. ‘Upstream’ means a forward linkage i.e. the firm is a supplier to the supply chain. By, „buy side‟, we mean that the demand is generated by organizations that are upstream. Similarly ‘downstream’ is a backward linkage i.e. the firm is a seller to the supply chain. By „sell-side‟, we mean that a downstream linkage reacts to the demand that is generated by the „upstream linkage‟. Prof. Upendra Kachru Operations Management Internal Supply Chains The internal supply chain is that portion of a given supply chain that occurs within an individual organization. The first step in moving towards supply chain management is to develop these internal chains. Internal supply chains can be quite complex. Given the multidivisional, international organizational structures found in many businesses, it is not uncommon for the internal part of a supply chain to have multiple “links” that span the globe. Developing an understanding of the organization‟s internal supply chain is often an appropriate starting point for firms considering an SCM initiative. Prof. Upendra Kachru Operations Management External Supply Chains Once one understands the internal supply chain, one must extend the analysis to the external portion of the supply chain (i.e., key suppliers and customers). This is an important step, as significant opportunities for improvement often lie at the interfaces between the various supply chain member organizations. This step also adds a greater level of complexity, given that multiple organizations and their representatives are now participating in the analysis. SUPPLIER SELLER SUPPLIER BUYER BUYER Products Funds Information Prof. Upendra Kachru Operations Management Cycle View in the Supply Chain According to the cycle view, the processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain. Prof. Upendra Kachru Operations Management Cycle View in the Supply Chain In the Customer Order Cycle, the customer is the interface, and in the Replenishment Cycle the retailer is the interface. The respective cycles are triggered by a customer order, replenishment orders from the distributor, or by the forecast of customer demand and current product availability in the manufacturer‟s finished-goods warehouse, etc. Prof. Upendra Kachru Operations Management Cycle View in the Supply Chain Performance cycles reflect the input/output requirements. Process cycle time is the total elapsed time required to complete a business process. Increasingly, as organizations realize that they are competing on the basis of time they find time can be used more effectively by identifying, improving and/or eliminating a wide range of counterproductive, activities and events. Supply Chain Management is ultimately concerned with the effectiveness and efficiency of performance cycles. Prof. Upendra Kachru Operations Management Cycle Time Reduction Reducing supply chain cycle time means decreasing the days of inventory held and reducing the cash conversion cycle. The savings mean that capital is available for other uses. By focusing on key processes, the supply chain can significantly improve its performance and become a source of competitive advantage for the organization. Opportunities for cycle-time reduction exist on both an intra-organizational and inter-organizational basis. Prof. Upendra Kachru Operations Management Cycle View in the Supply Chain The performance cycle may be under the control of a single firm or may involve multiple firms, depending upon the objectives. For example, manufacturing support cycles are typically under complete control of a single enterprise. In contrast, performance cycles related to physical distribution and procurement normally involve customer or supplier par-ticipation. To the extent that operational requirements are satisfied, the performance-cycle structure is effective. The use of resources required to achieve supply chain effectiveness is reflected in the efficiency of the performance cycle. Prof. Upendra Kachru Operations Management Cycle View in the Supply Chain These processes can also be divided into two categories, pull and push. Pull processes are initiated by a customer order. Push process are initiated and performed in anticipation of customer orders. Difference between PUSH and PULL processes: Prof. Upendra Kachru Operations Management Cycle View in the Supply Chain Pull processes are referred to as „reactive processes‟ because they react to customer demand. Push processes are referred to as „speculative processes‟ because they respond to forecasted rather than actual demand. Therefore, a supply chain that has more pull processes is easier to manage and coordinate. As the number of pull processes increase, its impact on improved supply chain performance becomes significant. Prof. Upendra Kachru Operations Management Supply Chain Management Supply chain management is significantly different from traditional materials management. The difference lies in the coordination and commitment of the all firms in the supply chain required to implement the specific strategic objectives of each firm. The relationships are not win-lose. Supply chain management requires partners to provide support for each to reach their objectives. Firms voluntarily agree to integrate human, financial, or technical resources in order to create a better business model. They all have something to gain. Prof. Upendra Kachru Operations Management 36 Managing Relationships The profitability of the supply chain is based on the nature of the flows between the stages in a supply chain. If the quality of the flow is good, the supply chain adds value. In a supply chain, this is ensured by managing relationships effectively. Information is one of the key elements in building relationships. When there is insufficient information it is often difficult to build trust, which is critical to relationship building. Prof. Upendra Kachru Operations Management Relationship Management Based on this evaluation, there are three types of supply chain relationships: • • • Transactional Collaborative, and Alliances Prof. Upendra Kachru Operations Management 38 Suppliers Relationship Management Type of relationship is often governed by the duration of the trading relationship Short-term Oftentimes involves competitive bidding Minimal interaction, transactional mode Often involves an ongoing relationship or collaboration Often involves greater cooperation that evolves into an alliance Medium-term Long-term Prof. Upendra Kachru Operations Management As the reciprocal interdependence in the allocation of operational roles and decision rights becomes greater, it increases the chances of an effective relationship. Relationship Management Prof. Upendra Kachru Operations Management 40 Relationship Management Supply chain relationships are based on the mutual benefit that the relationship provides. In most supply chains, each member of the partnership brings distinct skills, all of which are needed to supply customer order. The key steps in designing effective supply chain partnerships are follows: • • • • Assessing the value of the relationship Identifying operational roles and decision rights for each party. Creating effective contracts, and Designing effective conflict resolution mechanisms Operations Management 41 Prof. Upendra Kachru Relationship Management Of all the activities operations and supply chain managers perform, relationship management is perhaps the most difficult, and is therefore the most susceptible to break down. Relationship management focuses on improving operations and supply chain performance by eliciting the cooperation of others. SRM (Supplier Focus) ISCM (Firm Focus) CRM (Customer Focus) Source Negotiate Buy Design Collaboration Supply Collaboration Prof. Upendra Kachru Strategic Planning Demand Planning Supply Planning Fulfillment Field Service Market Trends Sales and Marketing Information on Customers Order Management Call Center Management Operations Management 42 Collaborative forecasting, planning, and replenishment (CFPR) CFPR is a supply chain initiative that focuses on information sharing among supply chain trading partners in planning, forecasting, and inventory Focuses on information sharing among trading partners Forecasts can be frozen and then converted into shipping plans Eliminates typical order processing Operations Management Supply Chain Design Supply chain management involves the planning, implementation and control of all activities, processes and operations that help to serve customers efficiently. Each of these functions has its own goals and strategies, called functional strategies. For a business to be successful, the functional goals have to match the company‟s competitive strategy. The supply chain design must support the competitive strategy of the enterprise Prof. Upendra Kachru Operations Management 44 Types of Supply Chains are Efficient Supply Chains Risk-Hedging Supply Chains Responsive Supply Chains Agile Supply Chains Types of Supply Chains Demand Uncertainty Low (Functional products) High (Innovative products) Efficient SC Responsive SC The approach to supply chain is one of aligning the supply chain with the uncertainties revolving around the supply process side of the SC Ex.: Grocery Risk-Hedging SC Ex.: Hydro-electric power Ex.: Computers Agile SC Ex.: Telecom Operations Management 45 Efficient: Minimizing costs through achieving economies of scale by eliminating waste and optimizing techniques Risk-hedging: Identifying configurations to provide optimal service by streamlining the configuration process i.e. eliminate supply disruption by pooling and sharing resources Responsive: Ability to respond rapidly to changes in demand, both in terms of volume and mix of products through being flexible Agility: Responding in less predictable environments when demand is volatile and the requirement for variety is high through flexibility, adaptability as well as risk-hedging capabilities Operations Management 46 The curve on the right shows the dilemma. High responsiveness means high cost. The lower the cost, the higher the efficiency. The cost-responsiveness efficient frontier is the curve that represents the benchmark for cost-responsiveness performance. A firm that is not on the efficient frontier can improve both its responsiveness and its cost performance by moving toward the efficient frontier. Prof. Upendra Kachru Operations Management Supply Chain Design L.L. Bean is an American mail-order retail company. It offers clothing, footwear and outdoor recreation equipment. Wal-Mart is another American company that runs a chain of retail departmental stores. These stores offer consumer durables as well as various fast moving consumer goods (FMCG). These are goods that are purchased by customers frequently, usually in large quantities and also consumed/used very fast. Prof. Upendra Kachru Operations Management 48 Supply Chain Design Both Wal-Mart and L.L. Bean are in the retail business but their competitive strategies are different. Wal-Mart offers its customers a wide variety of products at a low price. L.L. Bean has a limited product range. But unlike Wal-Mart, its customers don‟t have to visit the stores to buy what they need. They can sit right at their home or place of work, browse through the catalogue and order online. And the product will be delivered to them at their doorstep Prof. Upendra Kachru Operations Management 49 But Wal-Mart and L.L Bean can‟t use the same supply chain model to achieve their business objectives. Wal-Mart‟s business objectives require an efficient supply chain L.L. Bean needs a flexible and responsive supply chain. Supply Chain Design Prof. Upendra Kachru Operations Management The goal of SCM is to match supply to demand as effectively and efficiently as possible Key issues: Determining appropriate levels of outsourcing Managing procurement Managing suppliers Managing customer relationships Being able to quickly identify problems and respond to them Managing risk Key SCM Issues Prof. Upendra Kachru Operations Management Key Supply Chain Activities Prof. Upendra Kachru Operations Management Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty Benefits of Supply Chain Management Operations Management Supply Chain Benefits and Drawbacks Problem Large inventories Long lead times Large number of parts Cost Quality Variability Potential Improvement Benefits Possible Drawbacks Traffic congestion Increased costs May not be feasible May need absorb functions Less variety Loss of control Less variety Smaller, more frequent Reduced holding deliveries costs Delayed differentiation Disintermediation Modular Outsourcing Shorter lead times, better forecasts Quick response Fewer parts Simpler ordering Reduced cost, higher quality Able to match supply and demand Operations Management Supply chain management is as much a philosophical approach as it is a body of tools and techniques, and typically requires a great deal of interaction and trust between companies to work. The supply chain holds benefits of great magnitude to those who are willing to integrate with their partners with a common objective to serve the customer better. Prof. Upendra Kachru Operations Management Forecast control Read the SCOR model. This is in the Chapter on Supply Chain in the text book. Read at Home Prof. Upendra Kachru Operations Management Operations Management (2) Click to edit company slogan .
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