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Supply Chain Management

Fierce competition in today's global markets, the introduction of products with shorter life cycles, and the heightened expectations of customers have forced business enterprises to invest in, and focus attention on, their supply chains. This, together with continuing advances in communications and transportation technologies (e.g., mobile communication, Internet, and overnight delivery), has motivated the continuous evolution of the supply chain and of the techniques to manage it effectively. In a typical supply chain, raw materials are procured and items are produced at one or more factories, shipped to warehouses for intermediate storage, and then shipped to retailers or customers. Consequently, to reduce cost and improve service levels, effective supply chain strategies must take into account the interactions at the various levels in the supply chain. The supply chain, which is also referred to as the logistics network, consists of suppliers, manufacturing centers, warehouses, distribution centers, and retail outlets, as well as raw materials, work-in-process inventory, and finished products that flow between the facilities.

"Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements."

This definition leads to several observations. First, supply chain management takes into consideration every facility that has an impact on cost and plays a role in making the product conform to customer requirements: from supplier and manufacturing facilities through warehouses and distribution centers to retailers and stores. Indeed, in some supply chain analysis, it is necessary to account for the suppliers' suppliers and the customers' customers because they have an impact on supply chain performance. Second, the objective of supply chain management is to be efficient and cost-effective across the entire system; total system wide costs, from transportation and distribution to inventories of raw materials, work in process, and finished goods, are to be minimized. Thus, the emphasis is not on simply minimizing transportation cost or reducing inventories but, rather, on taking a systems approach to supply chain management. Finally, because supply chain management revolves around efficient integration of suppliers, manufacturers, warehouses, and stores, it encompasses the firm's activities at many levels, from the strategic level through the tactical to the operational level. What about logistics management, or value chain management, or demand chain management? Various companies, consultants, and academics have developed a variety of terms and concepts to stress what they believe are the salient issues in supply chain management.

What makes supply chain management difficult?
  1. Supply chain strategies cannot be determined in isolation. They are directly affected by another chain that most organizations have, the development chain that includes the set of activities associated with new product introduction. At the same time, supply chain strategies also should be aligned with the specific goals of the organization, such as maximizing market share or increasing profit.
  2. It is challenging to design and operate a supply chain so that total system wide costs are minimized, and system wide service levels are maintained. Indeed, it is frequently difficult to operate a single facility so that costs are minimized and service level is maintained. The difficulty increases exponentially when an entire system is being considered. The process of finding the best system wide strategy is known as global optimization.
  3. Uncertainty and risk are inherent in every supply chain; customer demand can never be forecast exactly, travel times will never be certain, and machines and vehicles will break down. Similarly, recent industry trends, including outsourcing, offshoring, and lean manufacturing that focus on reducing supply chain costs, significantly increase the level of risk in the supply chain. Thus, supply chains need to be designed and managed to eliminate as much uncertainty and risk as possible as well as deal effectively with the uncertainty and risk that remain.

KEY ISSUES IN SUPPLY CHAIN MANAGEMENT

The following issues span a large spectrum of a firm's activities, from the strategic through the tactical to the operational level:

  • The strategic level deals with decisions that have a long-lasting effect on the firm. This includes decisions regarding product design, what to make internally and what to outsource, supplier selection, and strategic partnering as well as decisions on the number, location, and capacity of warehouses and manufacturing plants and the flow of material through the logistics network.
  • The tactical level includes decisions that are typically updated anywhere between once every quarter and once every year. These include purchasing and production decisions, inventory policies, and transportation strategies, including the frequency with which customers are visited.
  • The operational level refers to day-to-day decisions such as scheduling, lead time quotations, routing, and truck loading.

Distribution Network Configuration- Consider several plants producing products to serve a set of geographically dispersed retailers. The current set of warehouses is deemed inappropriate, and management wants to reorganize or redesign the distribution network. This may be due, for example, to changing demand patterns or the termination of a leasing contract for a number of existing warehouses. In addition, changing demand patterns may require a change in plant production levels, a selection of new suppliers, and a new flow pattern of goods throughout the distribution network. How should management select a set of warehouse locations and capacities, determine production levels for each product at each plant, and set transportation flows between facilities, either from plant to warehouse or warehouse to retailer, in such a way as to minimize total production, inventory, and transportation costs and satisfy service level requirements? This is a complex optimization problem, and advanced technology and approaches are required to find a solution.

Inventory Control-Consider a retailer that maintains an inventory of a particular product. Since customer demand changes over time, the retailer can use only historical data to predict demand. The retailer's objective is to decide at what point to reorder a new batch of the product, and how much to order so as to minimize inventory ordering and holding costs. More fundamentally, why should the retailer hold inventory in the first place? Is it due to uncertainty in customer demand, uncertainty in the supply process, or some other reasons? If it is due to uncertainty in customer demand, is there anything that can be done to reduce it? What is the impact of the forecasting tool used to predict customer demand? Should the retailer order more than, less than, or exactly the demand forecast? And, finally, what inventory turnover ratio should be used? Does it change from industry to industry?

Production Sourcing- In many industries, there is a need to carefully balance transportation and manufacturing costs. In particular, reducing production costs typically implies that each manufacturing facility is responsible for a small set of products so that large batches are produced, hence reducing production costs. Unfortunately, this may lead to higher transportation costs. Similarly, reducing transportation costs typically implies that each facility is flexible and has the ability to produce most or all products, but this leads to small batches and hence increases production costs. Finding the right balance between the two cost components is difficult but needs to be done monthly or quarterly.

Supply Contracts- In traditional supply chain strategies, each party in the chain focuses on its own profit and hence makes decisions with little regard to their impact on other supply chain partners. Relationships between suppliers and buyers are established by means of supply contracts that specify pricing and volume discounts, delivery lead times, quality, returns, and so forth. The question, of course, is whether supply contracts also can be used to replace the traditional supply chain strategy with one that optimizes the entire supply chain performance. In particular, what is the impact of volume discount and revenue-sharing contracts on supply chain performance? Are there pricing strategies that can be applied by suppliers to provide incentives for buyers to order more products while at the same time increasing the supplier profit?

Distribution Strategies - An important challenge faced by many organizations is how much should they centralize (or decentralize) their distribution system. What is the impact of each strategy on inventory levels and transportation costs? What about the impact on service levels? And, finally, when products should be transported by air from centralized locations to the various demand points? These questions are not only important for a single firm determining its distribution strategy, but also for competing retailers that need to decide how much they can collaborate with each other. For example, should competing dealers selling the same brand share inventory? If so, what is their competitive advantage?

Supply Chain Integration and Strategic Partnering- As observed earlier, designing and implementing a globally optimal supply chain is quite difficult because of its dynamics and the conflicting objectives employed by different facilities and partners. Nevertheless, Dell, Wal-Mart, and Procter & Gamble success stories demonstrate not only that an integrated, globally optimal supply chain is possible, but that it can have a huge impact on the company's performance and market share. Of course, one can argue that these three examples are associated with companies that are among the biggest companies in their respective industries; these companies can implement technologies and strategies that very few others can afford. However, in today's competitive markets, most companies have no choice; they are forced to integrate their supply chain and engage in strategic partnering. This pressure stems from both their customers and their supply chain partners. How can integration be achieved successfully? Clearly, information sharing and operational planning are the keys to a successfully integrated supply chain. But what information should be shared? How should it be used? How does information affect the design and operation of the supply chain? What level of integration is needed within the organization and with external partners? Finally, what types of partnerships can be implemented, and which type should be implemented for a given situation?

Outsourcing and Offshoring Strategies- Rethinking your supply chain strategy not only involves coordinating the different activities in the supply chain, but also deciding what to make internally and what to buy from outside sources. How can a firm identify what manufacturing activities lie in its set of core competencies, and thus should be completed internally, and what product and components should be purchased from outside suppliers, because these manufacturing activities are not core competencies? Is there any relationship between the answer to that question and product architecture? What are the risks associated with outsourcing and how can these risks be minimized? When you do outsource, how can you ensure a timely supply of products? And when should the firm keep dual sources for the same component? Finally, even if the firm decides not to outsource activities, when does it make sense to move facilities to the Far East? What is the impact of offshoring on inventory levels and the cost of capital? What are the risks?

Product Design- Effective design plays several critical roles in the supply chain. Most obviously, certain product designs may increase inventory holding or transportation costs relative to other designs, while other designs may facilitate a shorter manufacturing lead time. Unfortunately, product redesign is often expensive. When is it worthwhile to redesign products so as to reduce logistics costs or supply chain lead times? Is it possible to leverage product design to compensate for uncertainty in customer demand? Can one quantify the amount of savings resulting from such a strategy? What changes should be made in the supply chain to take advantage of the new product design? Finally, new concepts such as mass customization are increasingly popular.

Information Technology and Decision-Support Systems- Information technology is a critical enabler of effective supply chain management. Indeed, much of the current interest in supply chain management is motivated by the opportunities that appeared due to the abundance of data and the savings that can be achieved by sophisticated analysis of these data. The primary issue in supply chain management is not whether data can be received, but what data should be transferred; that is, which data are significant for supply chain management and which data can safely be ignored? How frequently should data be transferred and analyzed? What is the impact of the Internet? What is the role of electronic commerce? What infrastructure is required both internally and between supply chain partners? Finally, since information technology and decision-support systems are both available, can these technologies be viewed as the main tools used to achieve competitive advantage in the market? If they can, then what is preventing others from using the same technology?

Technologies

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