Guide to Supply Chain Management Read online

  Unfortunately, SCM is not as easy as running supply chain execution software, and it is crucial to understand why important challenges have not been addressed through software applications. Donald Rumsfeld, a former US Secretary of Defence, said about military intelligence:9

  There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.

  “What we know” generally constitutes a small subset of the spectrum of operating decisions that managers make. It includes, for example, firm orders (which are usually a small set of total orders) and production capacity.

  “What we know that we don’t know” includes a certain number of operational uncertainties that can often be forecast based on past history. Historical data or quotes from supply chain partners can help to estimate some important variables, as follows:

  The amount of raw material and components that are needed can change in the time between when these materials are ordered and when they are received at the factory. For example, if a manufacturer is building television sets and screen displays take four weeks for delivery, the number of displays needed is likely to vary in the four weeks lead time, especially preceding a seasonal peak like Christmas.

  The order lead time for incoming raw materials and components can vary substantially, aggravating the problem above, especially if deliveries are made to order or if they are being delivered via ocean and rail transport. Furthermore, the lead time can fluctuate as backlogs expand and contract.

  The demand may fluctuate during the delivery cycle time from the factory to the customer. To extend the example above of a television manufacturer, if the delivery lead time varies between three and five weeks, the manufacturer’s ability to match supply with demand at week three may be different from the manufacturer’s ability to meet lead times at week five.

  The transportation delivery time to the customer can vary substantially, especially if deliveries are made via ocean or rail transport.

  The cost of bad forecasts is usually unsold product or services. The cost is especially high in industries with perishable capacity. For example, unsold hotel rooms and unsold airline seats cannot be resold later. Once the flight takes off, the airline pays directly for all seats on the flight, whether they have been sold or not. To complicate matters, the number and class of hotel rooms or airline seats changes until the cut-off time, or if there is no cut-off time, until the moment of consumption. Meanwhile, the airline has to decide how many aircraft to operate, and how many seats to offer in first class, business class or economy class.

  “What we don’t know that we don’t know” includes factors that are very difficult to forecast because they have no history. These can cause the biggest headaches in balancing supply with demand. These include factors such as the sales volume of new products and promotions and the configuration of products or services that would delight the customer. Most customers want more tailored products or services than mass-production or even mass-customisation methods have produced, but the supplier and often the customer cannot articulate exactly the attributes of those ideal products or services.

  Few software applications exist to respond to the strategic and marketing dimensions of SCM involving variables that have no historical data series. Some advanced software suites with embedded forecasting and risk management modules can provide best solutions for making operational decisions under conditions of operational uncertainty. However, these have achieved limited penetration and managers still usually trust risk-based decisions and their own judgment rather than let a black-box system make decisions for them.

  Moreover, implementing a solution in one company is hard enough; implementing it across multiple companies in a global supply chain has generally been found to be extraordinarily difficult.

  Essential definitions

  Because of the broad bodies of thought that have influenced SCM and the wide range of interpretations of what it is, a taxonomy and some definitions are helpful (see Figure 3.1 overleaf). The glossary in Appendix 4 provides more definitions. Note that all definitions in this book are deliberately simplified in order to clarify interrelationships between subjects that are often confused, and to focus on how to generate value through SCM. For more complete definitions, the reader may wish to consult the APICS Dictionary or the CSCMP Glossary.

  Figure 3.1 Relationship between operations management disciplines

  Source: Author

  Operations management

  Operations management (OM) is the process of adjusting demand and capacity at work centres throughout a constrained system to generate output that satisfies customer goals such as cost, quality and speed.

  OM is broader than SCM. It applies to both product and service flows, whereas the latter applies primarily to physical flows. It also encompasses qualitative topics such as manufacturing strategy, quality and project management, which are essential to successful execution but are not normally covered in operations research.

  Supply chain

  A supply chain is the set of activities involved in moving a product (such as a machine tool) and its ancillary services (such as installation, maintenance or repair) from the ultimate supplier to the ultimate customer.

  The contemporary literature offers slight variations on this definition. Some consider the supply chain to be a supply network, meaning that it is non-linear and the actors interact among each other. For example, Dan Reid says in his book (with Nada R. Sanders) Operations Management: An Integrated Approach:10 “A supply chain is the network of activities that deliver a finished product or service to the customer.”

  Some include products and services, whereas others include just products. Some include manufacturing in the scope, for instance Poirier, who referred to “those core business processes that create and deliver a product or service, from concept through development and manufacturing or conversion, into a market for consumption”.11 Others consider the term “supply chain” to include just the movement or flow through the chain, and not the actual manufacture.

  For our purposes, the supply chain includes services only in so far as they relate to product flows. Otherwise, the chain would be a service chain, as described below.

  Supply chain management

  SCM is the co-ordination of the set of activities involved in moving a product (such as a machine tool) and its ancillary services (such as installation, maintenance or repair) from the ultimate supplier to the ultimate customer so as to maximise economic value added (EVA).

  SCM includes manufacturing value added as it accrues along the chain, but excludes the initial manufacturing or conversion activity, so an initial basic activity such as extraction or farming would be considered a manufacturing activity (a node), not an SCM activity.

  Service chain management and supply chain management

  Service chain management is the engineering and management of a flow of services and funds in order to maximise customer loyalty. No goods are involved. The underlying concepts and principles are the same as in OM. They apply to SCM and to services management, for example in claims management processes in insurance, loan approvals in banking and the closing process in real-estate (property) transactions.

  Supply management and supply chain management

  Supply management is the process of getting goods and services from the supplier to the point of production on time and within budget in order to minimise the total life-cycle cost to the organisation. Supply management is a subset of SCM when it addresses the sourcing of products, but it is also a subset of service chain management when it addresses the procurement of services.

  Logistics and supply chain management

  Logistics is the co-ordination of flows of goods, information and funds from a supplier to a customer to maximise availability while minimising operating costs. Logistics includes transportation, warehousing and inventory
management, and the transactional activities of customer service, forecasting, assembly and production control. Unlike SCM, logistics does not address the entire span from the ultimate supplier to the ultimate customer, nor does it address the interfaces between transport, marketing, product development, sales, maintenance, production, quality, engineering, R&D, new product development and procurement.

  Demand management

  Demand management (also called yield pricing) is the process of adjusting pricing to influence demand and thereby increase sales and margins. See Chapter 8 for more details.

  Demand chain management or supply chain management

  Demand chain management is an alternative form of the phrase “supply chain management” that emphasises the importance of customer requirements in triggering replenishment. Demand chain effectiveness is a goal of many of the techniques within the synchronisation and customisation strategies discussed in this book. All the concepts and tools of demand chain management are the same as for SCM. “Demand chain” is a more appropriate expression since it connotes the primacy of customer requirements, while SCM implies that the process starts with suppliers. This book uses the term “supply chain management”, since that is more commonly understood.

  The four principles of supply chain management

  From the customer’s point of view, benefits result from increased efficiency, reliability, flexibility and innovation, and these are the underlying principles of SCM.

  Many authors and practitioners include collaboration as a guiding principle. Actually, collaboration in itself delivers no value to the end-customer – it is necessary but not sufficient. Collaboration and its pal, visibility, are both needed to achieve the end-goal, since sharing forecast information between trading partners is of prime importance in reducing the bullwhip effect. Collaborative planning, forecasting and replenishment are covered in Chapter 8.

  Efficiency

  Lean, no-waste, supply chains are not only less costly. Driving out waste also enforces clear-headed thinking that improves other processes as well. Kate Vitasek12 analysed lean supply chains and identified waste and cost reduction as one of six core competencies. Eli Schragenheim extends the list of waste reduction and lean concepts to include the drum-buffer-rope concept in Carol Ptak’s compilation ERP Tools for Integrating the Supply Chain.13 Popularised by Eliyahu Goldratt,14 the drum represents a production rhythm; the buffer represents the time between units of production; and the rope represents the pulling of production through the system. If all are synchronised, then there is no inventory. In order for this system to work, experts usually prescribe just-in-time (JIT), total productive maintenance (TPM), an extremely rapid production changeover called single-minute exchange of die (SMED), standardised work, mistake proofing, a visual workplace, standard container sizes and collaborative supplier agreements.

  Reliability

  Most companies achieve consistency of quality in the product and services by engaging in process improvement programmes to synchronise demand and supply at every link in the supply chain. Like efficiency, reliability has associated benefits: improvements in service usually bring process simplicity, lower costs and higher levels of customer satisfaction.

  Flexibility

  Flexibility, or agility as it sometimes called, means not only having the ability to ramp up production volume, but also having adaptable supply relationships, customisable transactions processes, and streamlined and rapid data flow.

  Sometimes becoming efficient and reliable also provides flexibility, especially if the improvement is generated by eliminating waste. For example, rapid replenishment and postponement, whereby finishing touches are put on products or services close to the customer and often only after orders are received, in order to keep inventories low, are not only less costly but also permit change to be absorbed into the system more quickly than in a fixed supply chain.

  However, organisations often generate efficiency and reliability by establishing rigid parameters and rules, which presents a problem when customers’ requirements change or when both demand and supply fluctuate at the same time.

  A clear definition of customers’ needs and standardised processes for fulfilling them, as well as industry standards, are crucial for ensuring the ability to flex.

  Innovation

  Efficiency, reliability and flexibility will go stale over time, as more creative competitors overtake. Therefore, supply chain processes, including product and service introduction and development, need to be innovative and self-regenerating to be truly capable of creating sustainable advantage for the company.

  The four supply chain strategies

  The principles of efficiency, reliability, flexibility and innovation serve as important pillars for defining supply chain strategies (see Figure 3.2). The myriad methods, techniques and methods under the umbrella of SCM can be regrouped into four corresponding supply chain strategies: rationalisation, synchronisation, customisation and innovation. Rationalisation is aimed at containing operating costs. Synchronisation is aimed at balancing supply with demand. Customisation aims to enhance the customer interface. And innovation is focused on achieving rapid new product development and introduction. These strategies flow from the principles above, which explains why the linkage between supply chain and business strategies such as cost, quality, service and innovation has been identified previously, notably by Shoshanah Cohen and Joseph Roussel.15

  Figure 3.2 The supply chain strategy framework

  Source: Author

  Importantly, the strategies operate in an environment of shared infrastructure. Infrastructure is often assumed to be adequate to support all four strategies, but this is not always the case, as public investment sometimes trails growth.

  Five SCM techniques are essential to making all four strategies work:

  Supply chain network design that allows rapid response and low cost. This includes the site location and order terms and conditions.

  Capacity planning that makes enough capacity available at the right time, including long-range decision modelling.

  Risk management that balances risk and reward to achieve high performance without undesirable risk.

  Organisational change management that sets the pace of human change to align with corporate supply chain objectives.

  Performance monitoring and measurement that focus on the important metrics needed to track performance against the strategy.

  Project management, training and an understanding of organisational dynamics are essential to any SCM initiative. Project management is critical to all SCM approaches, since most initiatives need to be implemented in the form of a project. Training is imperative since the field is evolving, so even seasoned professionals in any of the functions need to stay abreast of current thinking.

  Beneath the framework as a whole lies inter-organisational psychology and game theory. Inter-organisational psychology, organisational development (OD) and related fields of organisational behaviour will set the pace at which the field can advance. Game theory explains why organisations choose to co-operate or behave defensively and independently, which in turn determines how much of the collective benefit can be attained.

  In each strategy there are SCM techniques and traditional functional processes (see Table 3.1 overleaf). The distinction is important; while the literature has usually considered both to be SCM, this framework distinguishes between what has always been the domain of the function, and what is uniquely SCM. The litmus test of whether an activity is a value-adding SCM activity is whether it can consistently be used to generate quantifiable success in one of the following four strategies:

  Rationalisation includes basic processes that have always occurred under procurement, such as: auctions/events, collections, contracting, sourcing (including global sourcing, negotiation, purchase order processing, requests for quotation, supplier performance management, supplier selection, supplier conferences, sourcing and vendor management), production (including manufacturing
planning, lot sizes, production and production control, and quality) and facilities management. But it also includes important SCM activities such as SKU rationalisation, value engineering and supplier kaizen (continuous improvement). (Table 3.1 provides a complete list.)

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  Table 3.1 Value-adding supply chain activities compared with traditional functional responsibilities

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  Source: Author

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  Synchronisation includes basic processes that have always occurred under assembly, inventory management, maintenance, materials management, operations, production, production control, and quality such as APS, fixed-cost accounting, enterprise asset management, inventory and order status, order fulfilment, returns, repairs, recycling, maintenance, routing and scheduling, demand planning (including sales and operations planning or S&OP, sales forecasts and customer order handling) and distribution centre management (including warehouse design, receiving, inspection, materials management, stocking policies, rack specifications, facilities maintenance, picking, packing and packaging). But it also includes important SCM activities such as constraints management, cross-docking, lean distribution, product life-cycle management (PLM), postponement, Six Sigma (a form of statistical process control designed to ensure the ability of a process to repeatedly deliver output within a prescribed range of tolerance), design for assembly/modularisation, standardisation and collaborative inventory management. (Table 3.1 provides a complete list.)

  Customisation includes basic processes that have always occurred under customer service, forecasting, marketing, product development, sales, customer analytics, customer segmentation, data mining, distribution resource planning (DRP), new product introduction (NPI), pricing and trade finance. But it also includes important SCM activities such as channel design, pull (ECR, JIT, etc), yield pricing, value analysis, and design for maintainability and operability. (Table 3.1 provides a complete list.)