Guide to Supply Chain Management Page 2

  Objectivity means the book draws on experiences in all the functional areas that touch SCM, without bias towards one function. This author’s experience represents a variety of functional areas, including transportation, logistics, procurement, manufacturing and customer service, which provides a unique platform for formulating SCM strategies.

  Relevance means addressing service industries as well as manufacturing and materials-based industries, new economy as well as old economy. It also means integrating examples, case studies and data analysis from around the globe, so this book attempts to give equal emphasis to the experiences, successes and failures of companies worldwide based on primary and secondary research, analysis and four passports’ worth of management consulting experience. It is important to reiterate to some readers that in its search for relevance to corporate strategy the book does not contain information on operational topics that might typically be found in a book on SCM; concepts such as, for example, barcode symbologies, EDI transaction sets, replenishment mechanisms (lot-for-lot compared with EOQ), detailed forecasting methods (historical, heuristic, causal, and so on), or logistical processes such as picking and packing. Furthermore, the definitions provided in the text and in Appendix 4 are written to be easy to understand rather than technically accurate; therefore they may be shorter and simpler than those found in texts for operational managers.

  Effectiveness means being able to measure results and compare them with benchmarks and standards. Many authors have focused on the soft side of operations management, emphasising that the right people and the right team dynamics are the secret to supply chain success.7 While people are a necessary condition for the success of any business initiative, that is not enough to assure supply chain success. This book provides specific supply chain strategies and methods to financial results and targets. As W. Edwards Deming, the guru of the lean movement, is widely credited to have said, “In God we trust; all others must bring data.”

  To be effective, strategies must be able to be reduced to essential guideposts. Therefore, this book explains SCM in the context of discrete strategies. While supply chain management is frequently used to describe internal improvements to existing processes within the context of current, actual situations and constraints, the supply chain strategy realises the intent to create a sustainable competitive advantage by wisely using those operational resources and tactics. Whereas supply chain management is about constraints, the corresponding strategy is about realising opportunities. While supply chain management is often about highly structured tangible processes and information management systems at the middle and lower levels of companies, the supply chain strategy is about results-focused activities at the highest levels of companies.

  Overall, this book provides an accurate and durable roadmap to help executives leading ambitious, cross-functional SCM initiatives. It blends operational experience with the perspective of a financial decision-maker, so as to show the way to lead with precision and confidence, even under adverse conditions, such as extreme time demands and resistance from diverse functional areas that so often act in unco-ordinated silos. It is the executive’s guide to SCM.

  1 A historical perspective on industry, trade and transport

  Before the Industrial Revolution, production scheduling was typically done manually. Since volumes were low and lead times were long by today’s standards, there was little need for formal planning, scheduling, or information management systems. Shop foremen made most production-related decisions by intuition, and most products were consumed close to where they were produced.

  The Industrial Revolution

  The Industrial Revolution changed the medieval model by introducing repetitive manufacturing. With repetitive manufacturing, foremen gave way to production managers who needed to make decisions on complex variables such as production runs, lot sizes and inventory levels. Henry Gantt, creator of the Gantt chart that maps the critical path in a set of project activities, introduced the concept of formal scheduling in 1916.

  Early tools for determining the optimal solutions for mathematical decisions such as production runs, lot sizes and inventory levels were based on trigonometric equations and graphs. Figure 1.1 on the previous page shows a graphical representation of the economic order quantity (EOQ) algorithm – a formula that was used to determine the optimal reorder amount for about 100 years, and is still in widespread use today By showing the relationship between each of the key variables (R = annual usage, Cp is the cost of preparing an order, Ci is the interest rate, plotted on three different axes and connected each to the other via a line), the square root formula Qo = EOQ = square root of ((2 × annual usage × ordering cost ÷ order) ÷ (carrying cost % × unit cost)) was plotted on the fourth axis and connected to the annual usage. The EOQ was approximated by estimating proportional distances on the chart, cross-multiplying the ratios, and solving the resulting equation.

  Figure 1.1 The “sundial” of operations management

  Source: Based on a proportional monograph presented in Greene, James H., Production and Inventory Control Handbook, McGraw-Hill, 1970

  Mass production

  Initially, visual scheduling tools (“loading boards”) became common in factory environments to assist in co-ordinating labour and machinery to the optimal production lot sizes and inventory levels determined by the algebraic methods.

  As factories became larger and factor inputs (labour, capital and methods) became more sophisticated, it was natural for operations managers to turn to the computer to automate hitherto manual processes. According to James H. Greene’s Production and Inventory Control Handbook1 roughly 60% of most production control activities were manual in 1970, including: order entry; customer delivery, quantity and timing of production orders; preparation of detailed schedules for manufacturing; follow-up reporting; inventory records for finished, work in process, raw materials; and machine loading. By 1966, over half of companies processed order entry and inventory management manually. About a quarter used punch cards, and only 5–10% used desk calculators.

  Labour and unionisation

  As production and shipment volume increased faster than the pace of technology, transportation became more labour-intensive and operations management became synonymous with union issues. Labour management and collective bargaining became staples of the distribution, logistics and materials management professions. Robert Lieb, a professor at Northeastern University, chronicled the advent of labour-intensive transportation and logistics operations in his book Labor in the Transportation Industries,2 in which he cited numerous work stoppages at rail companies, airlines and ports.

  Figure 1.2 Increasing productivity from competition and deregulation: productivity in the US air transportation industry

  Source: Boston Strategies International analysis of data from the US Bureau of Labor Statistics

  Deregulation

  After the Staggers Act deregulated the US rail and trucking industries in the 1970s, freight rates became much more competitive. This allowed shippers to ship freight much longer distances at the same cost, which increased the output per person (see Figure 1.2). Waves of privatisation spread around the world, increasing productivity and making transportation and logistics more of a profession than a trade.

  The science of logistics gained prominence as distribution became a source of cost savings and a dimension for service level differentiation. Publications in 19933 showed logistics as including transportation, warehousing, packaging, inventory and customer service.

  Globalisation and long supply chains

  Perhaps the most significant catalyst to the growth of SCM was the growth of long supply chains as a result of globalisation. For thousands of years, world trade was minimal compared with today’s levels. Between the 1950s and 2000, world trade grew at an average of 5–6% per year.4 Then between 1990 and 2000, the rate of growth accelerated to 8–9%, and from 2000 to 2008 it doubled again to 17–18%.5

  Trade between Asia and the rest of the
world has been the biggest change. Exports through the port of Shanghai grew by 20–30% a year between 1994 and 2006, except in 2001 when it was 13%.6 Trade between the Middle East and the rest of the world also expanded rapidly (Figure 1.3), even when adjusted for the price of oil, since oil has been decreasing as a share of exports from countries like the United Arab Emirates (UAE) as the local and international economies have grown. Trade between the UAE and other countries more than doubled between 2002 and 2007, and in anticipation of a continued trade boom the country is investing $300 billion in infrastructure between 2007 and 2012, almost five times as much as the Marshall Plan cost, and more than twice what it cost to put a man on the moon.

  Figure 1.3 Explosion of world trade, 2003–08

  Note: GCC is Gulf Co-operation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates).

  Source: Boston Strategies International analysis of International Monetary Fund (IMF) data

  The number of parties involved in buying or selling goods increased dramatically as world trade grew. Whereas in the historically insular world, most transactions took place between two regionally proximate parties, the explosion of world trade triggered not only a boom in international transportation, but also a proliferation of agents, brokers and forwarders connecting the original shipper with the overseas consignee. Before the growth of global third-party logistics companies, there were sometimes close to a dozen parties taking title to, or in some other way handling, international multi-modal shipments.

  The advent of shipping in standard containerised units accelerated global trade, and in the opinion of some it was singlehandedly responsible for the growth of globalisation. Malcolm McLean, the chairman of an American shipping company US Lines, created a revolution when he started taking what had traditionally been shipped via break-bulk (loose cargo loaded and unloaded by manual labour) and packed it into containers that could be loaded and unloaded from ships to trucks almost totally mechanically. Containerisation increased dramatically, to the point where today 108m cargo containers move worldwide each year and 90% of manufactured goods move by container.7 Areas where containerisation is not prevalent, such as Africa, are on track to catch up with the rest of the world in the early 2010s.

  The growing length of supply chains and the increased number of parties in the transaction created the perfect recipe for a bullwhip effect: the amplification of changes in order volume as one progresses from the origin of the variation towards the ultimate source (see Chapter 2 for more details). The large number of intermediaries and intermediary stocking locations created surplus inventories in some places and shortages in others. The large number of actors in the journey from the source to the customer created divergences and time lags between each party’s knowledge and estimates of what product was coming and when it would be there. People had to anticipate what was going to happen and plan in advance. Without good tools to do that, many, even most, estimates were wrong. Frequently, by the time products got to where they were supposed to be, they were not needed any more. The global nature of the interactions added language, cultural and time-zone barriers that exacerbated these problems. The result was excess inventory, shortages, overordering and obsolete inventory. Costs ballooned and sales prices fluctuated while inventory was in transit. Jay Forrester, a professor at MIT, cleverly expressed these problems in an interactive game in the 1950s.8 The so-called “beer game” simulates beer distribution in a multi-echelon distribution system. Participants play the roles of manufacturers, wholesalers, distributors and retailers of beer. Invariably, most participants overorder and lose money, thereby learning the challenges of managing the flow of goods through a long and multitier supply chain.

  Information shifts power to the customer

  The dynamics of making supply meet demand changed dramatically in recent years. Thanks to technology – specifically the ability of retailers to capture point-of-sale data – customers began to dictate which product should move through the chain and when it should start its journey. Consumers’ purchases of bottles of shampoo began triggering the manufacture and shipment of replacement bottles all the way from the source.

  Technology played a key role in facilitating this transfer of power to the customer. Point-of-sale information provided instantaneous knowledge of product or service sales. Global positioning systems (GPS) on delivery trucks provided real-time access to the status of in-transit inventory, which allowed goods to be diverted to where consumption was greatest. Electronic data interchange (EDI) replaced fax machines as the primary ordering mechanism, which made ordering instantaneous and reduced ordering errors. Internet ordering allowed consumers to bypass the entire set of traditional wholesalers and distributors, thereby reducing the delivery time and the cost of the product.

  Companies’ knowledge of their customers and of potential customers expanded exponentially. Retailers used data warehousing and other database technologies to gather information on their customers’ buying history by recording their purchases and enriching the transaction data with data that could be gleaned from other databases about those customers. Customer relationship management (CRM) and sales force automation (SFA) software provided tools that could query that information and provide useful information to facilitate up-selling and cross-selling. SCM applications allowed them to match incoming orders with available inventory, and compensate for gaps before the store shelves ran empty. One technology built on another to accelerate the trend. Over less than a decade, retailers increased their power in the supply chain by exploiting information. Retailers that applied these technologies and customer management strategies gained market share and had healthy cash flows. The information advantage allowed some retailers to strengthen their positions in the overall supply chain by developing and marketing their own private labels, which increased their profit margins and allowed them to compete with the companies that supplied them high-volume, relatively inexpensive packaged goods, called consumer packaged goods, or CPG. Those that did it poorly lost ground and got bought by the others, fuelling a consolidation trend in retail.

  Knowledge of customers has allowed, and to some extent forced, CPG companies and retailers to customise, differentiate and personalise their offering. Mass customisation, the idea of running small lots of customised product through a relatively high-volume production or assembly process, and even the idea of making each product to order within bands of commonness, became popular in the early 2000s under the name of flexible manufacturing. While many companies have begun to customise their offering, finer differentiation within narrow customer groups has become the new marketing goal.

  Natural extensions of customisation are personalisation and individual auto-replenishment:

  Personalisation. If companies could develop and deliver individually tailored products and services, they would increase the chances of sale as well as the value to the customer. Personalisation, as it is called, allows the user to customise the product in a way that satisfies his or her unique needs. For example, Tesco, a large UK retailer, allows its customers who choose home delivery to specify the day and time they want the items delivered.

  Individual auto-replenishment. For over a decade, retail grocers have viewed home delivery as a vision. It seems to have all the right ingredients. It allows individual customer service and data collection, thereby increasing customer retention and loyalty, and is hopefully a way to simultaneously increase their razor-thin margins. It avoids the need to stock shelves in the store, thereby cutting out one of the most costly components of the grocery value chain. So far, grocery home delivery has had more failures (for example, Webvan, Streamline and Netgrocer) than successes, but ultimately may succeed as retailers refine the delivery model.

  Four modern supply chains

  To help clarify what supply chains are, below are examples of four supply chains. They describe the flows from the first supplier, which is usually a farmer or extractor of some kind, to the end-customer, which is often t
he consumer.9

  Beer and wine supply chain

  For thousands of years beer was manufactured, sold and drunk in the same city, primarily because the taste of the beer degraded during the transit and storage time required to ship it. Beer and wine are still brewed and sold locally in some markets. French wine may make only one stop on its way from the vineyard to the dinner table, and the increasingly popularity of microbreweries, where the beer is brewed at the pub itself, has kept beer and wine distribution local in some areas. However, consider this global supply chain for one major US brewer. The company buys its malted barley from Canada and its hops from Germany to make its lagers. It trucks the barley and airfreights the hops to its brewery in the United States. It then mixes the hops and barley with water and yeast at the brewery, and trucks kegs and six-packs to regional distributors in full-truckload quantities. The regional distributors maintain the right amounts of stock to serve local needs. The regional distributors make local deliveries to retail outlets in less-than-truckload quantities. The retailers stock the right amount of each variety of beer to serve local tastes and to meet needs.

  Cereal supply chain

  Breakfast cereal originates from grain grown in rural areas. Grain is trucked from the grower to storage facilities, then it is shipped by rail to the cereal plant. For example, in North America spring wheat grown in rural Kansas and red winter wheat grown in rural Arkansas and Canada are shipped to grain-storage elevators in trade centres in Topeka or Kansas City (cereal processing plants consume intense amounts of energy, so they are usually located near waterways to cool the machinery needed for grinding). The cereal plants process and mix the grains with other ingredients such as sugar, nuts and dried fruit. The mixture is then shaped or assembled into its final form and packaged. The processor shapes the grains into flakes or chunks. The packaged cereal is trucked to distribution centres, where it is sorted by type of cereal and ultimate destination. From the distribution centres, it is trucked to retail stores.