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Nevan Wright. Published by Elsevier All rights reserved The right of Ron Basu and J. This page intentionally left blank Contents Preface ix Acknowledgements xi List of Figures xiii List of Tables xvi Part 1 Introduction 1 The role of supply chain as a value driver 1 3 2 Why total supply chain management? Therefore some duplication of content has been inevitable and where applicable some cases and examples are re-visited.

Suppliers can also become part of the information-gathering arm of the organization; often suppliers have a different perspective as to what the competition are up to changes in buying patterns, timetables, new packaging, use The role of supply chain as a value driver 17 of new materials and so on.

Suppliers are also in a good position to offer technical advice regarding new technology and alternative materials. Communication between departments especially marketing, operations and logistics within an organization has to be two-way and has to be aimed to help rather than as a means of apportioning blame or criticizing.

With traditional hierarchical organizations a bunker mentality can develop whereby each function is walled off from the other, and any suggestion, no matter how helpful, is taken as a threat or a challenge. World-class organizations are noted by the manner in which the figurative brick walls that separate functions have been broken down, and by the teamwork that exists between all functions to achieve the common goal.

This requires that everyone in the organization knows what the goals and objectives are and that the culture is conducive to the enthusiastic pursuit of the goals for the common good of the whole, rather than for the specific interests of one department. Information is open to all and there are no secrets. Summary The primary purpose of this introductory chapter was to provide an overview of supply chain management principles and to indicate how an effective supply chain management process adds value to all types of businesses, whether in manufacturing or service sectors, public and not-for-profit organizations.

Introduction In the s and s the manufacturing and supply strategy of multinational companies focused on vertical integration.

One of the earliest, largest and most famous examples of vertical integration was the Carnegie Steel company. In the s the company expanded to have a controlling interest beyond the mills where the steel was manufactured to include the mines from where the iron ore was extracted, the coal mines that supplied the coal, the barges and ships that transported the iron ore, the railroads that transported the coal to the factory, the coke ovens where the coal was coked, etc.

One hundred years on vertical integration was still in vogue, for example in the s Unilever, originally a soap manufacturer, had grown to own businesses and investments in forests, timber milling and refining, paper manufacture, board and plastics manufacture, chemicals, fast-moving consumer products manufacture and packaging, marketing and advertising, computer services, distribution warehouses, shipping and retail outlets.

Vertical integration of a supply chain was not always successful. The New Zealand company, Feltex in the s expanded from making carpet and furniture into owning a national retail chain. The next step in vertical integration was to buy a timber mill and a forest.

At the time the carpet Feltex produced was world famous and exported all round the world. Expansion downstream in the supply chain to owning the retail stores, due to lack of retail experience and management, did not improve profits but resulted in a financial drain on the company. Expansion upstream to own the supply of timber mill and forest for the furniture factory proved to be a disaster. The forest was in remote rugged country and road access was poor.

The cost of logging and transportation to the mill proved to be prohibitive. As a result of falling profits and share prices the company, once the largest manufacturer and exporter of manufactured goods in New Zealand and the darling of the share market, went through a series of ownership changes and downsizing back to the stage where it was only manufacturing carpet.

Feltex finally went into receivership in September Why total supply chain management? The gradual privatization of the public sector also helped to create many supporting service industries. In the beginning of the twenty first century we are witnessing the explosion of outsourcing and the emergence of competent but lower cost manufacture in Eastern Europe, China and other states in South East Asia, India and South America in particular Brazil.

This chapter describes a total supply chain management concept and the analysis of the supply chain process. Management of the activities making up a supply chain are described in later chapters. Trend towards service In the UK statistics show that 78 per cent of the work force are engaged in service industries www. Although a shift back to manufacturing has been identified Basu and Wright, , it is obvious that the greater percentage of the work force of developed nations will continue to be employed in service activities.

There are two reasons for this: Continual advances in technology mean that manufacturing is considerably less labour intensive than previously. Automation, robotics, advanced information technology IT , new materials and improved work methods all have led to the reduction of manual labour.

For larger organizations, manufacturing has become internationalized. For example, a company such as Nike might outsource its manufacturing to overseas contractors or allied companies and itself concentrate on design, marketing and distribution. Additionally, organizations can no longer regard themselves as being purely in manufacturing and hope to survive. The market first and foremost now takes for granted reliability of product and expects good service.

Market expectations of the level of quality are driven by perceptions of what technology is promising and by perceptions of what the competition is offering. Organizations now operate in a global market where national barriers, tariffs and customs duties no longer provide protection for a home market.

Any manufacturer, even if the focus has been on supplying a local market, is in reality competing on the world stage. Competition is no longer limited to other local organizations, and the fiercest competition in the home market will be from goods and even services produced overseas or provided by overseas organizations.

This overseas involvement in a home market means that manufacturers and service providers can no longer make products just to suit their engineering strengths, but must now be aware of what the market wants and what global competition is offering.

In manufacturing what the competition is offering, apart from well-engineered products, is service in the form of delivery on time, marketing advice, training, installation, project management, or whatever else is required to provide a total service as well as a reliable product.

Never before has the customer been better travelled, more informed and had higher expectations. Many of these expectations began with the quality movement of the s where it was trumpeted that the customer was king, and these expectations have been kept alive by continuously improved products and services, global advertising and for the last decade the World Wide Web. Service separated from production operations If no serious operation can ignore market demands for service and world class quality, why bother to try and separate manufacturing from service in the study of supply chain management?

Indeed for a manufacturing organization aspiring to world class status we would most emphatically agree that management of such organizations must concern themselves with service and quality if they are to compete on the world stage. But managers in service industries such as health, retail, distribution, education, travel, real estate, consultation, brokering, law, accounting, administration of central and local government, transportation of goods or people — where no direct manufacturing is involved or where the manufacturing is light and simple such as in a restaurant — do not have to know much about manufacturing.

Naturally all the above industries are reliant on manufacturers to varying degrees for the equipment they use, or in the case of a retailer for the goods they sell, but the physical heavy work of making the goods is not their concern. The analogy is that of a driver of a car: Likewise, a retail sales person of washing machines does not need a detailed knowledge of hightech mass production line balancing. For the sales person some knowledge of lead times for deliveries, operating instructions and the capacity of the washing machine will be sufficient as a basis for good service to the customer.

But irrespective of whether a manager is involved primarily in production or service, a total system approach is needed based on the supply or value chain philosophy. A total operations approach to providing a quality product coupled with the service required is essential.

Managers of service industries will benefit from some basic knowledge of production systems and methodologies. The departments within a company were striving for islands of excellence and then with a succession of operational excellence initiatives e.

The organizations started to become customer focused and with established performance metrics in all areas of the business e.

However, it is fair to say that both the business model and the performance metrics were site-centric or at most were confined within the company or enterprise. Today with web-based technologies now accelerating the collaborative supply chain, it is becoming imperative to rethink the selection and implementation of the external metrics. This shift is not only in the measurement criteria, but also in the mind-set of business practices. To maximize the advantages of collaboration, the buy-in and commitment of employees to the new mind-set is essential.

The following are a few reasons for this fundamental shift from a site-centric linear supply chain to a collaborative network or web of supply: Demands for flexibility of partnerships: As a result their expectations are rising and needs constantly changing. Value in this environment is a moving target. Organization must be flexible to be able to adapt to these changes.

It is very difficult for a single organization to possess all the capabilities required to keep up. Organizations now look for suppliers who can provide the skills and capabilities needed as and when they require them.

A firm can easily form partnerships with appropriate 22 Total Supply Chain Management 2. As demand changes so do partnership arrangements.

Advances in technology: The merging of information and communication technologies ICT has supported the growth in supply chain partnerships. These technologies have enabled extensive connectivity. Since information transactions have become so easy, there is less of a need to restrict operations within traditional organizational boundaries. The new capabilities of e-supply chain offer the ability for supply chain partners to share information in real time. This enables the partnering firms to hold lower inventories and incur fewer transactions costs.

These lower costs can in turn be passed on to the customer in the form of lower prices and better value, or alternatively retained as increased profit. Collaborative networks: Companies have now recognized that great improvements in value can be attained by co-ordinating the efforts of partners along the supply chain. When firms focus only on their internal operations they are making decisions in isolation and as a result this can lead to the overall performance of the supply chain deterioration.

As we will see later, firms who work together and share their plans and other information are actually able to improve the overall supply chain performance to their mutual benefit. Recognition of core competencies: Recently, there has been a shift away from focusing on markets and products towards considering what the organizations capabilities are.

A focus on core competencies allows a firm to concentrate on those few skills and areas of knowledge that make the organization distinct and competitive. These competencies are what provide the firm with its competitive advantage. Recognizing what processes they are best at allows the firm to concentrate on these processes. This has led to firms rationalizing what they do and the emergence of supply chains where each of the partnering organizations focuses on what individually they do best.

Growth in outsourcing: The dynamic growth in the large emerging economies, especially China and India, especially of manufacturing, supply and service capabilities has provided opportunities for new outsourcing partners.

For over years Coca Cola has been producing syrup but the actual production of Coca Cola is the responsibility of its global network of business partners. A recent study by IBM IBM Global Services, demonstrates that companies engaged in IT outsourcing realize improved financial health and performance in comparison to their sector peers.

In a preferred condition, high volume and low variety of products and low variation in manufacturing processes will deliver products at a lower cost in comparison to a situation with low volume, high variety and high variation.

Increase in customer contacts and choice has led to the need for complex supply chains with many variables.

The impact of this increased complexity is challenging the stability of supply chains. This challenge is compounded by the multiple stages and stakeholders in the supply chain from the demand point to the source of supply. The variability in demand increases as it moves along the supply chain away from the retail consumer. Small changes in consumer demand can result in large variations in orders placed upstream.

This variation can oscillate further in larger swings as each stakeholder in the supply chain attempts to solve the problem from its own point of view. The bullwhip effect is discussed in greater detail in Chapter Case example: Collaborative forecasting The case example involves three individual companies representing a brand owner manufacturer , a first tier supplier and a second tier supplier.

The target is to build a lean and transparent business model in a three-entity demand chain. The challenges of the implementation come from forecasting capabilities, openness and trust.

The utilization of modern ICT technology also creates both challenges and advantages. A selected starting point for this example is that the collaborative forecasting model exists already between two parties and this model is extended one step further. In a two-entity chain the forecast of the customer affects the supplier. In this example, where the second tier supplier is included the initial forecast of the brand owner affects another step higher in the upstream.

A general description of the model is shown in Figure 2. The production processes in all three parties involved are different — it varies from process industry to manufacturing. The process industry is capital intensive and the profitability depends more on capacity utilization.

In manufacturing the production cycles are shorter and the working capital tied to the process has higher impact on the profitability. Hence, the key drivers for effective planning in each party are not the same. As the collaborative forecasting between the manufacturer and the first tier supplier is already in place, the key metrics between them is treated as the best practice when defining the targets for the second tier supplier with the first tier supplier.

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Other expected benefits are less out-of-stocksituation, less non-optimal transports, better planning and production efficiency at the second tier supplier and increased customer satisfaction. In order to sustain these results, a thorough commitment based on trust is expected from each partner. In practice, it also means implementing new ICT tools to share data and monitor the supply chain. Adapted from Lukka and Viskari Supplier partnership Reviewing the impact of new technologies on supply chain provides an interesting development of partnering with suppliers.

In the past many manufacturers Why total supply chain management? Little loyalty was shown to the suppliers and consequently the supplier was never certain as to their future relationship with an organization.

Often the purchasing or procurement department would see their role as screwing the best deal possible from a supplier. The huge growth in outsourcing and more importantly the online access to information by Internet have changed that. Companies have realized that achieving world class excellence in their own sites is not enough.

It is important to raise the standards of suppliers as well as learn from them by working in partnership with them. The tightly controlled service level agreements are being replaced by joint service agreements with free exchange of data and knowledge.

However, the success of the benefits will depend on mutual trust, a highly developed commercial relationship and an efficient system of data exchange. For example, EDI enables companies to communicate with each other.

Total supply chain management? Our above analysis of the key factors and new developments in supply chain management clearly indicates that focusing on the conventional practices of supply chain management within the organization, such as forecasting, capacity planning, inventory management, scheduling and distribution management, may achieve operational excellence within the confines of an individual business organization but will offer only a partial solution to optimizing customer service.

It can be compared to sitting in a high-performance motorcar in a traffic jam, the sound system and air conditioning might be state of the art but the overall travel experience is not great. Likewise, what is the point of having a perfect stainless steel link in a rusty chain? Unless the whole process is efficient the individual unit cannot achieve its potential. It is therefore vital for any organization, being more and more dependent on both local and global outside resources and information, to work in harmony with all stakeholders of the supply chain including customers and suppliers.

We need a holistic value stream approach to supply chain or a total supply chain management approach. The method of analysis which in effect determined strengths, weaknesses and gaps in performance was developed around questions designed for self-benchmarking against world class standards.

The structure of the benchmarking was to measure the performance of the business against 20 defined areas of the business which were described as foundation stones.

There were 10 questions for each foundation stone. The aim being to get the right balance of foundation stones to support the pillars of the business. Over a period of 8 years we refined the six pillars and the 20 foundation stones of Total Manufacturing Solutions to give a greater emphasis on service and relationships with suppliers, and customers.

In Total Operations Solutions Basu and Wright, , we continued to provide a process of self-assessment to systematically measure all aspects of an organization, be it manufacturing or service. This includes both internal functions and external relationships. Fit Sigma was developed by Ron Basu to build on strengths and to understand where weaknesses are so that corrective action can be taken to gain a competitive advantage.

Building upon the experience of the holistic models for Total Manufacturing Solutions and Total Operations Solutions we have now developed a model for Total Supply Chain Management comprising six building blocks, viz.: Customer focus and demand Resources and capacity management Procurement and supplier focus Inventory management Operations management Distribution management These building block are integrated by three cross-functional process, viz.: Sales and operations planning 2.

Systems and procedures 3. Performance management The importance of total supply chain approach can be evaluated by value stream mapping VSM Basu, , p. VSM is a visual illustration of all activities required to bring a product through the main flow, from raw material to the stage of reaching the customer.

According to Womack and Jones , the initial objective of creating a VSM is to identify every action required to make a specific product.

The value stream of a cola can Consider a cardboard case containing eight cans of cola chosen at random in the beverages aisle at a Tesco store.

Figure 2. Bauxite ore is mined in Australia and then transferred in trucks to a nearby chemical reduction mill to produce powdery alumina. Bulk alumina is then shipped by boat to Norway with cheap hydroelectric power for smelting. The molten aluminium is cast into ingots which are then shipped by trucks, boat and trucks to Germany.

The coils are then transferred by trucks to a cold rolling mill where the aluminium sheets are reduced from 3 millimetres to a thickness of 0.

Cans are manufactured and then stored. They are then de-palletized and loaded into the can filling line where they are washed and filled with cola. At the end of the filling line cans are then unitized in stretch wrapper and stored in the warehouse on pallets. When cola is taken home it is typically stored again and chilled and finally consumed. Empty cans are then recycled to reintroduce it into the production process at the smelting stage. It is evident from the details in Table 2.

This proportion is surprisingly small when one considers the alarmingly lengthy overall duration of the process. Adapted from Womack and Jones , pp. We believe that the above example of the value stream for a carton of cola firmly establishes the need for a total supply chain management approach.

It is important to note that most of the 40, other items in a typical supermarket would produce similar results. The impact of the value stream or total supply chain approach in the service sector is not so dramatic as fast-moving consumer goods FMCGs , but highly significant all the same.

Summary The key issues of supply chain as discussed in this chapter emphasizes a need for a total supply chain management approach. With the expansion of outsourcing and Internet driven e-supply chain, it is essential that key players and stakeholders understand the importance of the accuracy and transparency of data for collaborative management for mutual benefits.

We have also discussed the trend towards the service-based economy and the Why total supply chain management? The building blocks of the supply chain underpinned by the total supply chain management approach as explained further in this book will assist in the improved understanding and management of a collaborative supply chain.

The importance of each building block is explained in this chapter. No block stands alone, each is a component of the whole.

In combination the blocks show activities, stages and processes of the extended supply chain. The processes of making things happen within a supply chain can be viewed as a sequence of progressive cycles e. There are debates between supporters of make to order policy and make to forecast policy as if one policy is better than the other regardless of customers, demand patterns, products or organizations.

Therefore, we aim to explain in this chapter: What are the building blocks of a supply chain? Are all the building blocks suited to all organizations? What are the process views of a supply chain? Chopra and Meindl describe the two views, viz.: Cycle view: The processes in a supply chain consist of a series of cycles, each performed at the interface between two successive stages.

Pull processes are initiated by a customer order and push processes are initiated and performed on the forecast of customer orders. Understanding total supply chain management and its building blocks 31 Cycle view The cycle view of a supply chain consists of several stages of process cycles and form the components of MRPII manufacturing resource planning or ERP enterprise resource planning systems and are shown in a simplified form as three process cycles as shown in Figure 3. Demand cycle Planning and procurement cycle Supply cycle Figure 3.

The demand cycle is the cycle of time covering from when a customer buys or orders from a retailer or wholesaler. The demand cycle can also be based on the forecast of demand. If the retailer holds the product in stock then the demand cycle will comprise of order request, order fulfilment and order receiving. However, if the product is not readily available then the customer order request will form a part of demand forecast which also includes predicted demand, market intelligence and promotion of the product.

The planning and procurement cycle covers short- and longer-term requirements. The demand of the product and its components bill of materials are compared with the inventory and capacity and the replenishment requirements are planned. Planners will decide what to buy and what to make.

This make or buy decision process also applies to a service organization leading to either inhouse or outsourced services. The supply cycle typically occurs with a production schedule if the product is to be manufactured, or a purchase schedule if the product is to be procured from an external supplier. Once finished goods are manufactured or received the next stage of the supply cycle is direct delivery to customers or storage in the warehouse and subsequent distribution to customers.

As shown in Figure 3. Both raw and packaging materials are stored before production and products are manufactured to stock. The order fulfilment is achieved from the inventory of finished products. A pull process is activated in response to a confirmed order from a customer. This includes make to order or a just-in-time JIT manufacturing process.

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Customer order arrives Demand cycle Planning and procurement cycle Supply cycle Materials stock Figure 3. The orders arrive at or after the planning cycle as if bypassing a few steps of the traditional ERP process.

A pull process is also associated with Kanban1 and Lean Thinking or Lean Manufacturing which are covered in more detail in Chapter Originally developed by Toyota in the s, a Kanban was usually a printed card in a transparent plastic cover that contained details of specific information such as part number and quantity.

Most Kanban systems are now computerized. Kanban is fully explained in Chapter Understanding total supply chain management and its building blocks 33 when required and no buffer stocks of inwards or outwards stocks of materials are held. The lean approach is also referred to as JIT.

Pull processes control the flow of resources in the production process by replacing only what has been consumed. Production schedules are based on actual demand and consumption rather than forecasts. With lean manufacturing there is no room for errors in specification, production or late delivery. A pull system implementation A heating and ventilation company in Canada employs people and supplies products to new homes and for property renovation. The declining Canadian dollar was increasing costs and competition was getting tougher.

Customers were more demanding and margins were eroding. Customer requirements were met by scheduling production based on a forecast using an MRP materials requirement planning system. Although the finished goods warehouse was full and storage was becoming a problem, on time deliveries to customers were under 80 per cent.

Lead time was 3 weeks from quote to shipment to customer. Part of the warehouse was set aside for returned goods for when a unit or units were returned because they did not meet customer specification.

Led by their manufacturing team the company started an improvement strategy based on Lean principles and shared it with all the employees including administration office staff. All employees were then trained in the principles of Lean and they started to change by thinking about the improvement strategy. The results were remarkable.

For example: On time delivery was increased to Stocks of finished goods were reduced by 60 per cent. Daily production meetings were reduced from 1. Employees were more involved and empowered. Despite the dollar continuing to decline and customers becoming more demanding, margins started to improve. From the pull system used in the Canadian company one might be tempted to believe that forecasting and making to stock is inefficient and old fashioned.

These are good examples but are isolated approaches to suit particular circumstances and products. For example, some products are best processed in batches and stocked in bulk e. In the course of this book we aim to establish the appropriateness of each model in the context of a big picture approach.

The synergy that results from the benefits contributed by all elements as a whole far exceeds the aggregate of benefits achieved for an individual elements. The integrated approach is truly more than the sum of its elements.

If one concentrates exclusively on isolated areas, a false impression may be inevitable and inappropriate action taken. This maxim can be illustrated by the Indian folk tale of four blind men who were confronted with a new phenomenon, an elephant!

The first man, by touching its ear, thought that the elephant was a fan. The third man bumped into a leg and thought it was a column, while the fourth on holding the trunk decided that it was an over-sized hose. Each man, on the evidence he had, came to a logical conclusion, but all had made an erroneous judgement by failing to deduce that the total object was an elephant.

As with all feedback devices where a basic message is given, inferences and decisions may be drawn from isolated data which will be false and misleading. A story in the business context will further underline the limitation of tackling only a part of a total problem. The technical director of a multinational company, having been to a conference, decided that line performance improvement must be the best thing in manufacturing.

So he organized his technical team, called in experts from the corporate headquarters, and set up a line efficiency exercise.

The team did an excellent job on two production lines by systematically eliminating all machine-related downtime problems with the aid of video recording analysis. As a result the production efficiency of the lines increased by 20 per cent. However, it soon transpired that the product for one of the lines was going to be discontinued and the other line, despite its excellent standard of reliability and efficiency, encountered a severe long-term shortage of materials due to planning and procurement problems.

Therefore, in isolation the line efficiency programmes did not improve the overall business performance. As we mentioned in Chapter 2 our model for total supply chain management comprises six building block configurations, viz.: Customer focus and demand Resource and capacity management Procurement and supplier focus Inventory management Understanding total supply chain management and its building blocks 35 5. Operations management 6. Distribution management And three cross-functional integrating processes, viz.: Systems and procedures 2.

Sales and operations planning 3. Performance management This model is illustrated in Figure 3.

The composition of building blocks by supply chain configuration and supply chain integration is shown in Figure 3. Each of the supply chain configurations will be covered in more detail in Part 2 and the integrating processes in Part 4. Customer focus and demand Customers are both at the start and the end of the supply chain. A customer is the one who is paying for the goods or services or is most affected by the outcome of the process. In a supply chain a customer could be a consumer, wholesaler, distributor or retailer.

The demand for a product or service is created by customers. The basis of all supply chain planning and decisions is underpinned by the forecast of future demand. A supply chain process cannot exist without the knowledge and planning for future. All push processes are executed in anticipation of customer demand and all pull processes are carried out in response to customer demand. It is a misconception that demand forecast is not required in a pull or JIT process. Without a forecast of future demand in a pull system a manager cannot plan the capacity and have the resources required to respond to a customer order.

For a traditional push process a manager plans the level of production and capacity based on the forecast of future demand. Even in a service industry, where the demand is not discrete, business planning will be unsatisfactory without an estimate of future demand.

In a not-for-profit organization demand is unpredictable but it has customers and it has a core budget based on demand forecast. In all instances of a supply chain the first step is to forecast what the customer demand will be in the future. It is important to note that is not possible to produce a perfect forecast as there are so many variables affecting a future demand, such as past demand, promotion and advertising of the product, market share, state of the economy, price discounts, competition and new products introduction.

There are also some recognized characteristics of forecasts, for example, there will always be a forecast error, longer-term forecasts are less accurate than short-term forecasts and aggregate forecasts are usually more accurate than individual forecasts.

This building block of customer focus and demand including forecasting methods is covered in more detail in Chapter 4. In the real-world resources are not infinite.

Satisfying customers on time can be crucial. An increase in capacity, be it machines and equipment, warehouse space, transport, stocks of input materials and finished product, and of course people, is expensive. Therefore, a supply chain manager must make decisions regarding capacity levels and buffer it to meet the variation in demand either by adjusting capacity or producing to hold output stocks of goods. An organization may provide excess capacity to satisfy demands for peak period or set an upper limit of the capacity based on the average demand and balance the cost of holding excess inventory on one hand or losing sales on the other.

There are a few options of capacity optimization open to a manager and there are proven processes to assist him or her. One such process is aggregate planning where an organization determines levels of capacity, production and inventory over a planning horizon to maximize the profit. The optimization can be attempted either in theory by a mathematical model e.

The success of ERP depends on the structured review process by planners, managers and users. This building block of resource and capacity management including ERP is covered in more detail in Chapter 5. Procurement and supplier focus The optimization of internal capacity can be supplemented by buying in external capacity and resources. As Reid and Sanders , p. Often this is called outsourcing.

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For the supply chain procurement of external capacity and resource could include packaging materials, part built-up assemblies, contracting out utilities and maintenance, hiring contract or casual labour, selecting approved suppliers and outsourcing.

An example of part built-up assemblies is where an American car typically consists of 25, components to be assembled on the manufacturing line, a Japanese car of a similar class might only consist of 12, In a typical manufacturing organization the cost of bought in resources accounts for 60—90 percent of the cost of goods sold COGS. Thus, a powerful Understanding total supply chain management and its building blocks 37 way to improve shareholder returns is to address reduction of purchasing costs.

A proper purchasing and supply management can give a network of suppliers capable of delivering service quality beating competitors at the same time securing cost reduction over time. In a market driven competitive world, businesses are continuously seeking new suppliers and partners, including outsourcing. The Internet has provided new challenges and potential solutions and has enabled extensive connectivity. As Wright and Race , p. Since information transactions have become so easy, there is less of a need to restrict operations within the traditional organizational boundaries.

These new capabilities offer the ability for supply chain partners to share information in real time. This enables the partnering firms to hold lower inventories and incur fewer transaction costs. These lower costs can be passed onto the customer in the form of lower prices and better value.

Or, alternatively retained as increased profits. Companies have now recognized that great improvements in value can be attained by co-ordinating the efforts along the supply chain.

In short firms that collaborate, share plans and information are able to improve the overall supply chain performance to their mutual benefit. The development of a professional service industry has also in recent years increased considerably; however, as observed by Mitchell purchasing teams appear to have made less effort to reduce costs by outsourcing services.

Nonetheless the importance of service level agreements and supplier partnerships are growing in the global supply chain. A survey by Wade showed that 31 per cent of total procurement cost is for bought in services. The selection of appropriate or preferred suppliers should involve alternative and complementary attributes between the suppliers and the receiving organization.

Slack et al. Technical capability: The product or service knowledge to deliver sustainable quality. Operations capability: The process knowledge to ensure effective supply. Financial capability: The financial strength to fund the business. Managerial capability: The management talent to develop future business. Tightly controlled service level agreements are being replaced by joint service agreements with free exchange of data and knowledge.

Success will depend on mutual trust, a highly developed commercial relationship and an efficient system of data exchange. This building block of procurement and supplier focus including outsourcing is covered in more detail in Chapter 6.

Inventories usually reside in three stages of a process, viz. Wild introduced the concept of consumed and non-consumed stocks. Consumed items e. Non-consumed items e. Inventories could be allocated either by design or can accumulate as a result of poor planning and scheduling. Generally, inventory is viewed as a negative impact on business incurring costs of capital interest paid or interest foregone , storage space, handling, insurance, increased risk of damage and theft, and obsolescence.

On the other hand, lack of inventory leads to lost production in the factory and lost sales at the end of the supply chain.

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Holding inventory of materials and finished products can be seen as an insurance against uncertainty of supply and to overcome unforeseen variations in demand. Inventory management is a good indicator of the effectiveness of supply chain management. It is relatively easy to achieve higher levels of customer service by accumulating excessive stocks.

It will also obscure short-term operational problems. But this is a costly and risky option in terms of cash flow. Obsolete inventory, be it for changes in technology, fashion or in foodstuffs past the use by date has little salvage value. It is vital to optimize the inventory level. In optimizing inventory levels two types of stocks are considered: Cycle stock depends on costs associated with ordering, transportation, quantity discount, lead times from suppliers and customer demand.

Safety stock is the buffer against the variation of demand during the lead time and depends on forecast accuracy, reliability of suppliers and customer service level. In service industries operations managers might have a nonchalant attitude towards inventories but not so the accountants. Differences between services and physical goods are addressed both from operations and marketing. It is perceived that services are one-off and cannot be stored. There are of course consumed stocks e. However, in the service sector more emphasis should be focused on managing non-consumed stock viz.

This building block of inventory management is covered in more detail in Chapter 7. Operations management In a supply chain operations management is the building block that makes things happen. This is where plans are executed in factories and facilities to produce Understanding total supply chain management and its building blocks 39 goods or services for customers. Operations management is the activity of managing resources and processes that produce goods and services.

Input resources viz. Along with distribution management, operations management accounts for the physical flow of the supply chain. Most texts on operations management give scant coverage of supply chain management. Operations exist in all types of supply chain whether it is for delivering a product or a service. A popular perception of an operation is where physical activities or transformations are involved e.

If you think, that you do not have an operation if you are in sales and marketing, or banking or insurance, or health service or charity organizations, you are incorrect. You will always have an operation as long as you use resources to produces products, services or a mixture of both. In other words if you have input, process and output you have an operation.

During s and earlier operations management was exclusively the domain of manufacturing industries. Since s operations management is used in both manufacturing and service sectors, and it also implies a service operation can be decoupled as repetitive and non-repetitive operations and manufacturing principles and techniques can be applied to repetitive service operations.

More recently the term operations and process management has been used to cover all parts of the organization. In this book, operations management will include all types or parts of organizations. This building block of operations management will be covered in more detail in Chapter 8.

Distribution management There is no doubt that supply chain order fulfilment is the Achilles heel of the e-business economy. At the end of every e-commerce, on-line trading and virtual supply chain there is a factory, a warehouse and a transport.

Internet has elevated the performance of information accessibility, currency transactions and data accuracy, but the real effectiveness of supply chain from the source to customer cannot be achieved without the physical efficiency of the supply chain. Web-based software and e-market places are increasing the alternatives available to e-supply chain managers in all operations including the service industry.

More opportunities may also mean more options and complexity. Therefore, it is vital that a process is in place to ensure the performance of e-supply chain for both virtual and physical activities.

Many organizations outsource distribution activities to third parties and do not employ in-house expertise to manage distribution which directly affects the customer service. If there is a failure in order fulfilment whether it is due to quality, quantity or time or even the attitude of distributor then the organization, not the distributor, bears the consequence.

The problems or returned goods or reverse logistics are becoming a growing concern in supply chain management. Physical distribution 2. Strategic alliances In the same way that ERP is concerned with information flow, suppliers and inbound logistics, distribution management is likewise concerned with materials flow, customers and outbound logistics.

With the management of distribution, that is the physical transportation of goods from the factory to the customer, invariably some stock is held to buffer the variability of demand and supply lead times.

The focus on outbound logistics is to balance customer service level against cost. Cost of distribution is not just transportation costs but also includes warehousing including special requirements such as refrigeration, insurance and financing of stock, and stock slippage deterioration, damage, pilfering and obsolescence. The more stock that is held the greater the cost of storage and the greater the chances of losses. The main components of distribution management are: The four most important types of distribution management strategic alliances are third-party logistics 3PL , retailer—supplier partnerships RSP , distributor integration DI and customer relationships management CRM.

This building block of distribution management is covered in more detail in Chapter 9. Systems and procedures Systems and procedures are essential components to integrate the building block configurations of the total supply chain. There are three major categories of systems and procedures: External regulatory and internal quality standards 2.

Financial and accounting procedures 3. Information and communication technology ICT The activities of a supply chain is affected by both national and international regulatory requirements on packaging, storage, pallets, vehicles, working hours, tariffs and many other issues. In addition an organization maintains its own quality standards and service level agreements with suppliers and partners.

Understanding total supply chain management and its building blocks 41 Another important issue is improving the financial performance of the company. Under pressure to participate in fashionable improvement activities, or to become involved with the newest business wisdom, management may lose sight of the real issue — improving profitability. In response to pressures from stakeholders there is a risk of overemphasis on short-term financial performance.

Consequently, this myopic approach results in over investment in short-term fixers and under investment in longer-term development plans. There is a need for a balanced approach. The Internet, now taken for granted, has seen the use of technologies to create electronic communication networks within and between organizations and individuals. In this ICT domain we consider two broad areas: Information technology and systems 2. This building block of systems and procedures is covered in more detail in Chapter In recent years the pace of change in technology and marketplace dynamics have been so rapid that the traditional methodology of monitoring the actual performance against pre-determined budgets set at the beginning of the year is generally no longer valid.

It is fundamental that businesses are managed on current conditions and up-to-date assumptions. There is also a vital need to establish an effective communication link, both horizontally across functional divisions and vertically across the management hierarchy to share common data and decision processes.

It starts with the sales and marketing departments comparing actual demand to the sales plan, assessing the marketplace potential and projecting 42 Total Supply Chain Management future demand. The updated demand plan is then communicated to the manufacturing, engineering and finance departments, which offer to support it.

Any difficulties in supporting the sales plan are worked out … with a formal meeting chaired by the general manager. Performance management Performance management acts both as a driving force of improvement and a fact-based integrating agent to support the planning, operations and review processes.

The foundation of performance management is rooted to quality management principles supported by key performance indicators. There are many different definitions and dimensions of quality to be found in books and academic literature. Basu defines quality with three dimensions, such as design quality specification , process quality conformance and organization quality sustainability.

When an organization develops and defines its quality strategy, it is important to share a common definition of quality and each department within a company can work towards a common objective. The product quality should contain defined attributes of both numeric specifications and perceived dimensions. The process quality, whether it relates to manufacturing or service operations, should also contain some defined criteria of acceptable service level so that the conformity of the output can be validated against these Performance management Inventory management Supplier Procurement and supplier focus Operations management Sales and operations planning Resource and capacity management Systems and procedures Figure 3.

Perhaps the most important determinant of how we perceive sustainable quality is the functional and holistic role we fulfil within the organization. The Balanced Scorecard retains traditional financial measures, customer services and resource utilization internal business process and includes additional measures for learning people and growth innovation.

Resources are defined as all available resources, whether owned or borrowed along the complete supply chain, from the supplier's supplier, through to the customer's customer. Specific supply chain issues and opportunities related to service industries, e-Supply Chain and emerging markets like India are key features of this book.

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