Guide to Supply Chain Management Read online

  An east European discount airline, Wizzair, saved 8–9% simply by managing its fuelling strategies in 2006, according to its ground operations director, Tony Colliss. The advantage is important to Wizzair: since it competes on the margin with cars and trains, anything it can do to cut fuel costs can give it an edge. At one American airline 18 staff members are dedicated entirely to managing fuel contracts to achieve the lowest price. Outside the transportation industry, an American sound system retailer consolidated its distribution centres and held more inventory in order to reduce transportation expenses.

  MTR Foods India

  India-based MTR Foods is a pioneer in SCM efficiency, and sees it as essential to increasing its growth from the current 10% to a torrid 20–30% a year. While most of its business has been in India (it serves a traditional domestic market of grocers), the company is developing markets in the United States, the UK and Japan. It is currently wholesaling to companies such as multinational Carrefour to reach a new market of expatriate Indian IT professionals as well as people of other nationalities who would like to eat prepared Indian food in the workplace.

  It is also targeting organisations that provide their employees with lunch, tea and dinner. MTR started its supply chain crusade on the demand side, rationalising unnecessary inventory and intermediaries. Now it is trying to establish itself in new geographies by using strategic supply relationships with large multinational customers.

  MTR is using IT to manage inventories through seasonal peaks. It is the first major Indian food company to fully implement a major enterprise resource planning (ERP) system.

  It swung from a loss to a Rs3m ($60,000) profit by aligning IT and business strategy to better manage inventory. It aims to make 80% of its sales through retail customers that are visible to it, and to plan its production using these customers’ point-of-sale data.

  Security

  Since September 11th 2001, security issues have highlighted the importance of supply chains, and especially global supply chains that involve imports through less-than-perfect security procedures. For example, Tiffany & Co, a global jewellery and gift company, has beefed up its insurance, its vendor compliance guide and its efforts in US security programmes in response to terrorism. It has implemented a four-point programme around the precepts of “protect-detect-respond-recover” for its airfreighted cargo.10 The US Customs and Border Protection Agency now has over 95% advance cargo screening through electronic manifests. China, one of the largest exporters to the United States, and other countries have enacted similar cargo screening methods, often in response to programmes initiated by the United States. This and similar programmes have resulted in the screening of 97% of containers at non-US ports prior to their importation into the United States.11 The CT/PAT (Customs Trade Partnership Against Terrorism) initiative, which pre-certifies companies with safe cargo handling practices, now covers companies that account for 86% of the cargo entering the United States. The next-generation trade-processing systems, Automated Commercial Environment (ACE) and International Trade Data System (ITDS), are scheduled for phase-in around 2010.

  Compliance

  The collapse of Enron and Worldcom and scandals such as those at Ahold in the 2002–05 period resulted in the institution of Sarbanes-Oxley (SOX) legislation and comparable legislation in Europe, the EU 8th Company Law Directive. SOX has raised the profile of SCM by exposing the ways in which it could be misinterpreted, or worse, used to deceive investors. Three sections of SOX legislation address SCM:

  Section 404 governs internal process controls. SCM implications include control over inventory (such as write-offs), risks and exposure to price changes (up and down), and sloppy procedures regarding any type of supplier transaction that does not provide a clear and timely picture of the real situation to investors (such as inadequate information posted to transactions).

  Section 409 governs the timely reporting of material changes affecting supply chain transaction posting, which can be pervasive in some companies, especially if they are implementing a new information system.

  Section 401a governs off-balance-sheet obligations. SCM implications include lease obligations and contingent contractual obligations with suppliers (such as shared investment in tooling or shared risk of input price fluctuations).

  Most companies complain about the additional obligations that SOX has placed on them. Companies in the electronics, IT and transportation industries say that SOX is making it harder for them to compete because of the added burden and decrease in flexibility that SOX imposes. This is particularly challenging for medium-sized companies, which need to be nimble in order to maintain their competitive advantage over their larger rivals.

  Safety

  Western companies adopted low-cost country sourcing nearly universally. Then, in 2008, Mattel recalled 21m Chinese-made toys that it thought might be tainted with lead paint and small parts that could cause children to choke. Consumers started clamouring for the type of oversight that the US Food and Drug Administration (FDA) and the UK’s Medicines and Healthcare Products Regulatory Authority (MHRA, the FDA’S equivalent) provides. Outsourcing became a safety concern in the public conscience.

  Environmental concerns

  The sharp increase in offshoring during the 1990s and early 2000s drew attention to its environmental cost. In 1988, imports of goods represented 17.6% of US manufacturing sector output. In 2008, the proportion of imports rose to 35.4%, doubling over the 20-year period.12 Imports rose in the UK as well, from about 21% to 28% of GDP over the same period.13 Moreover, while the country’s North American free trade agreement resulted in a 55% increase in imports from its largest trading partner, Canada, a nearly equal increase came from China.14 This spike in imports raised environmental concerns about the supply chain, including the lack of emissions controls in low-cost countries (that is why they are low-cost, in part), the pollution involved in shipping items halfway round the world, the costs versus benefits of recycling, and the total supply chain cost of renewable energy, which makes it less attractive than it may otherwise seem.

  Environmental legislation is affecting supply chain management practices. First, the establishment of stricter environmental and social standards in developing economies is affecting low-cost country sourcing, and an acceleration of the trend could mean a reversal of global sourcing. Second, recycling and green treatment of returned and end-of-life items is increasingly important, given how much packaging is generated by modern supply chains. Toxic end-products (such as used toner cartridges) and end-of-life disposals (such as the disposal of plastic toys in landfills) are getting more attention. Third, renewable energy sources are an important element of the green car movement, which also includes fully recyclable cars that are gentle to the environment. However, renewable fuels such as hydrogen take so much energy to produce and distribute that the cost of production and distribution outweighs the consumption by the vehicles that use it, at least for now.

  3 What supply chain management is and where it is going

  The range of cost, security, compliance, safety and environmental issues that catalysed the rise in popularity of SCM brought a broad expansion of its scope far beyond the original problems of the bullwhip effect. Consequently, practitioners and academics have struggled to clearly define it. The profession, if it is indeed a profession, has evolved from a multitude of functions, and as John Dischinger of IBM1 points out:

  A more formalized characterization of the SCM profession is obviously needed. Continued progress requires a more broadly accepted definition of SCM.

  A fashionable buzz word for logistics?

  The difficulty in defining SCM is that, while each of the functional areas under its umbrella used to be defined by a central dilemma (its raison d’être), SCM has so far had no clear overarching central dilemma that defines its purpose. Transportation used to be about minimising the cost of routing and scheduling; logistics used to be about finding the least-cost network design; purchasing used to be about min
imising purchased costs; manufacturing used to be about scheduling production to achieve the greatest fill rates at the least cost; and customer service used to be about minimising customer complaints. Although each function has evolved to be more complex in purpose, they each retain a strong historical legacy of their original purpose. So while it is clear that individual functions may have optimised their own performance at the expense of the end-to-end system, to date there has not been a simple explanation of the core problem that SCM solves.

  Despite the absence of a clear scope – or in some cases perhaps because its ambiguity attracted a broader audience – many professional groups affiliated with SCM. Many professional magazines covering logistics, procurement, etc, have rebranded themselves as supply chain magazines with little change in their content. For example, eProcure was renamed Supply and Demand Chain Executive and Global Sites and Logistics was renamed Global Logistics and Supply Chain Strategies. CHAINA, the largest association for supply chain professionals in China, says it attracts “a highly targeted group of supply chain, procurement and logistics executives”,2 implying that the supply chain is a separate but equal function like procurement and logistics. There is even disagreement about whether SCM is a profession. Michael Quayle of the Welsh Development Agency says:3

  Supply chain management is not a profession, and it should not seek to become one. However, supply chain managers should certainly be professional.

  Supply chain management in enterprise resource planning systems

  A major enterprise resource planning (ERP) provider offers a set of solutions, including SCM, customer relationship management (CRM), supplier relationship management (SRM) and product life-cycle management (PLM).

  The scope of its SCM solution is largely based on the boundaries of the logistics function. It includes strategic planning and network design and advanced demand planning. Demand planning, which is focused on execution, includes manufacturing (making), warehousing (storing) and transportation (moving). Although SCM includes collaboration with external parties (customers for on-demand ordering, contract manufacturers for supply, product development for new product launches and suppliers for advance shipping notices), it is distinct from the capabilities of its sister modules like CRM (focused on buying), ERP (finance and accounting) and PLM (manufacturing).

  Its executive dashboard regroups the data from these modules into industry-specific key performance indicators. For example, it measures plant utilisation (which is critical for asset-intensive industries like oil and gas), inventory management and cash-to-cash cycle times (which are critical for fast-moving consumer goods, or FMCG, industries like retail and consumer packaged goods, or CPG).

  Is supply chain management just a perspective?

  The ambiguity caused by the emergence of global manufacturing and distribution was difficult to sort out. David Simchi-Levi, a professor of engineering systems at MIT who has done extensive work in logistics, says:4

  Supply chain management is a very broad area and it would be impossible for a single book to cover all the relevant areas in depth. Indeed, there is considerable disagreement in academia and in industry about what those relevant areas are.

  APICS, trying to shed its high reputation as a manufacturing association, branded itself as the Educational Society for Resource Management, and when few people could figure out exactly what that meant, it changed its name again.5 In teaching lean manufacturing, many manufacturing experts insist that “lean” needs to be experienced; that studying a body of knowledge cannot teach the essence of it. Some have even claimed that lean manufacturing is a cult or a religion that can be best learned experientially and must permeate parts of one’s personal and professional life in order for it to sink in.

  SCM is not a cult, a religion or a philosophy.6 Companies like APL (see below) have come far in developing integrated thoughts that have improved operations in a variety of situations.

  APL’s multiple custom supply chains

  A supply chain design should be based on the manufacturing situation, the customer situation and the value of the product, according to David Noe, vice-president of sales and marketing for APL Logistics. For a high-end fashion retailer, transit time is the most critical since retail sales are heavily dependent on availability and changes in styles. However, bulk and heavy industries should have supply chains that are designed around cost management rather than demand flexibility. There is a lot of commonality within industries, he states. Electronics, fashion and retail should each have a different supply chain set-up. Noe says:7

  In the past, supply chains were managed around cutting costs. Today, it’s the exact opposite. You need to customize the supply chain in line with the customers’ needs. Retailers need multiple supply chains to address different situations. A mid-market apparel retailer might have three different supply chains.

  The first supply chain design is for the initial load that delivers the summer, winter and autumn set-up. In this supply chain, APL loads containers with different products in Asia and bypasses distribution centres where possible to deliver boxes direct to the retail stores four times a year. For example, a Christmas tree supplier loads trees for delivery to a major home improvement retailer once a year. It packs the containers in Asia and APL ships the trees direct to the retailer’s stores. The key success factors for this supply chain design are capacity, visibility and flexibility. Since the APL group owns the ships that handle the ocean leg of the journey, it can guarantee the capacity at the right time. Since it has good information capability, it can provide the visibility that allows the retailer to know when the order is coming. And since it has agreements for shipment consolidation and deconsolidation at the ports, it can offer the flexibility to change the store of delivery while en route.

  The second supply chain design is for consistent replenishment once the initial seasonal load has been delivered. This supply chain design must provide reliability and consistency of service. To achieve the former, APL Logistics has negotiated capacity with the railways and it uses a proprietary computer program that calculates a metric representing buffer capacity to ensure that it does not have any service failures. The program considers lifts, empty lifts and time in port, and spits out a contingency figure. A figure of 91% means there is a 9% buffer. The contingency model helps APL manage a consistent service as conditions around it change, for example through storms, port delays and surges in volume.

  The third type of supply chain design is for rapid replenishment. It replenishes the items that are selling faster than the others during the first ten days of store operation. It focuses on rapid response to get production and deliveries up to the levels dictated by the initial demand within a 90-day timeframe. This type of supply chain requires flexibility at the manufacturing level, for instance the ability to change production quickly (within 90–120 days). APL has had to extend its organisation in order to provide this level of responsiveness, since ocean carriers have traditionally been in the business of operating heavy assets on a fixed and infrequent time schedule. It set up combined air and sea freight links from India to Dubai and from Dubai to New York and Chicago. These links are a joint service operated with a trucking company, Con Way. The service is a date-definite guaranteed service, in which the customer’s container is the first one unloaded from the ship, flowing straight into the domestic trucking network.

  Balancing demand with supply amid uncertainty

  The central dilemma that SCM addresses is that supply and demand are imbalanced because they are separated by time, distance and a host of uncertainties between the source and the point of consumption. Since the variables change over time, any approach to balancing supply and demand in the supply chain must address risk and uncertainty.

  Transactions over short timeframes and distances involve little risk and uncertainty, and represent the more operational dimension of SCM. In contrast, global supply lines and strategic agreements over long time-frames involve substantial risk and uncertainty, an
d represent a more complex and challenging dimension.

  So the central, defining issue in SCM is how to balance demand with supply, with the least risk and cost of over- or under-fulfilment. The same is true of how to eliminate bullwhip.

  Why software alone cannot solve the problem

  Many of the variables in the supply-demand matching are known, and many of them have now been codified in software. The essential elements of any modern SCM system include the following software modules:

  Materials requirements planning (MRP) systems, invented in the 1970s,8 take independent order streams and, using a bill of materials, generate detailed order requirements for every component and sub-component needed to make it. They also time the order placement to account for typical delivery times.

  Warehouse management systems (or WMS) calculate how much inventory companies need to hold in order to meet expected demand, and in some cases deal with the unreliability of incoming supplies of raw materials and components. They also tell where to place inventory of each stock-keeping unit (SKU) in warehouses to minimise the time required to gather orders.

  Transportation management systems (or TMS) figure out the set of carriers and/or routes that minimises the total miles travelled, and sometimes the total cost incurred, by a fleet of delivery vehicles.

  Advanced planning and scheduling (APS) systems calculate the production schedules that can meet demand with the highest fill rates and the lowest cost, given finite capacity that usually needs to be allocated across multiple products and conflicting due dates.

  The fact that such automation has already occurred to a large extent leaves the possible misperception that SCM has been addressed and can now be delegated to the IT department for any follow-up. If all the information were known, planners would just need to push the button and the software would produce all the answers.