Strategic Supply Chain Management

SCM & Lean Management Concepts

Vincent Law, 2011 BSC(1999), EMBM(2012) mylawcs@gmail.com

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EXECUTIVE SUMMARY One of the most significant paradigm shifts of modern business management is that individual businesses no longer compete as solely autonomous entities, but rather within supply chains. In this emerging competitive environment, the ultimate success of the business will depend on managements ability to integrate the companys intricate network of business relationships. Successful supply chain management requires cross-functional integration within the firm and across the network of firms that comprise the supply chain. It is focused on relationship management and the improvements in performance that result from better management of key relationships. By understanding the supply chain management processes and how they should be implemented, firms will be able to create more integrated supply chains which will lead to higher revenues and increased profitability for all member firms.

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TABLE OF CONTENTS No. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Introduction The Concept of Supply Chain Management Logistics Integration SCOR Modeling Inventory Chain and Lean Management Strategy Inventory Control Modeling Conclusion References DETAILS PAGE # 4 5 6 10 12 14 15 16

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1.0 INTRODUCTION

Supply chain management encompasses the companies and the business activities needed to design, make, deliver, and use a product or service. Businesses depend on their supply chains to provide them with what they need to survive and thrive. Every business fits into one or more supply chains and has a role to play in each of them. The pace of change and the uncertainty about how markets will evolve has made it increasingly important for companies to be aware of the supply chains they participate in and to understand the roles that they play. Those companies that learn how to build and participate in strong supply chains will have a substantial competitive advantage in their markets.

A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer request. The supply chain not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves. It is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers.

Supply chain is network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer. Managing these linkages and delivering the product/service to the customer in a cost effective way is SCM. Supply chain management encompasses materials and supply management from the supply of basic raw materials to final product. Supply chain management focuses on how firms utilize their suppliers processes, technology and capability to enhance competitive advantage. It is a management philosophy that extends traditional intra-enterprise activities by bringing trading partners together with the common goal of optimization and efficiency. Supply Chain Management is a set of approaches utilized to efficiently integrate supplier, manufacturer, warehouse and stores so that merchandise is produced and distributed at the right quantities, to the right location and at the right time, in order to minimize system under costs while satisfying service level requirements (Tilak Raj, 2004).

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Supply chain management, then, is the active management of supply chain activities to maximize customer value and achieve a sustainable competitive advantage. It represents a conscious effort by the supply chain firms to develop and run supply chains in the most effective & efficient ways possible. Supply chain activities cover everything from product development, sourcing, production, and logistics, as well as the information systems needed to coordinate these activities. The organizations that make up the supply chain are linked together through physical flows and information flows. Physical flows involve the transformation, movement, and storage of goods and materials. They are the most visible piece of the supply chain. But just as important are information flows. Information flows allow the various supply chain partners to coordinate their long-term plans, and to control the day-to-day flow of goods and material up and down the supply chain.

2.0 THE CONCEPT OF SUPPLY CHAIN MANAGEMENT Supply chain management, just-in-time (JIT), quick response, vendor management, and other terms all share the goal of improving vendor response to customer demand. All of these concepts share the same core values. They attempt to improve customer service by eliminating waste from the system in all of its forms including wasted time. Supply chain management embraces the other concepts and extends their scope from one function to all the functions in a supply chain.

There are two forces driving supply chain management. First, is that there is the new communications technology available now that allows to actively manage a supply chain. Second, customers are demanding lower prices and better products and services. To meet customers demands, all functions are optimizing the entire supply chain. Supply chain management allows all the functions in a supply chain to look beyond their own objectives to the objective of maximizing the final customers satisfaction. The payoff for supply chain members that can do this is increased profits for their shareholders (Richard B. Chase, Nicholas J. Aquilano and F. Robert Jacobs, 1998).

The largest barrier to successfully managing a supply chain is perhaps the human element. Failure to correctly manage the issues of trust and communication will abort any attempt to manage the

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supply chain. When there is a lack of trust and communication, the supply chains functions will soon succumb to greed or suspicion that other functions of the supply chain are profiting at their expense. When the communication is not adequate, the supply chain will not improve its response enough to increase profits for its functions.

Without an increase in profits, the efforts to manage the supply chain will be reduced, because there will be no reward for actively managing it. Supply chain management requires an unprecedented level of cooperation between the functions of the supply chain. It requires an open sharing of information so that all functions know they are receiving their full share of the profits. Since many of the companies in a supply chain do not have a history of cooperation, achieving the trust necessary for supply chain management is a time-intensive task.

Another way that the companies in the supply chain can save money is by ensuring that their marketing strategies correspond to the supply chains capabilitiesi.e., from their position in the supply chain they can actually provide what the customer wants. They are also able to gain money by improving the supply chains capabilities to match the market demand with a decreased level of inventory. Companies are able to do this because they have additional information to forecast needs and as the lead time is reduced, their need to forecast is reduced. This reduced need to forecast reduces the need to carry inventory stocks for the just-in-case scenario.

3.0 LOGISTICS INTEGRATION Logistics is a collection of functional activities that are repeated many times throughout the supply chain through which raw materials are converted into finished products and value is added in the eyes of customers. Because raw material sources, plants, and selling points are not typically located at the same places and the chain represents a sequence of manufacturing steps, logistics activities recur many times before a product arrives in the marketplace.

Logistics refers to the movement of material goods, people or energy from a point of origin to the consumer. Logistics involves optimizing every link in the supply chain to ensure goods reach

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consumers in an efficient and timely manner. It begins at the production facility or warehouse and ends at the point of sale.

The term logistics has evolved to cover the organized movement, often of materials, in the business world. There are several components to logistics management, because it covers a businesss entire supply chain.

Transportation logistics is the most commonly addressed component in supply chain management. How a company transports goods from one location to another can have a strong impact on the businesss overall performance. In many cases, this part of the supply chain is contracted to a third party that specializes in transportation. This helps a business to manage seasonal and market demand changes, minimizing the need to hire and lay off workers based on business cycles (Ronald H. Ballou, 1999).

However, transportation is only one piece of logistics. There are five main areas in the supply chain governed by logistics management. They are supply, transportation, warehousing, order fulfillment and customer service.

Supply deals with the ability to secure the goods or raw materials that will eventually be sold to the customer as a finished product. Maintaining appropriate supply requires demand forecasting and understanding the minimum production requirements to turn a profit. Buyers in a purchasing department are responsible for locating the appropriate goods or raw materials for the best price available and having those goods on hand when they are needed.

Companies must be aware of seasonal and market trends to predict the supply that will be needed and to then manage raw materials for production or goods from vendors to meet the demand. For manufacturers, this part of the supply chain can be complex. They may have several vendors on hand to ensure they are always able to locate the raw materials needed. They must be aware of lag times for the raw materials to reach them. If a raw material takes three months to secure from the date of order, then the business must have at least a three-month supply on hand. Supplies must be regularly counted and monitored, especially for vital or difficult to procure materials.

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Transportation in logistics applies not only to getting raw materials and goods to the warehouse, but also to supply retail locations. In some cases, the sales force carries the goods with them in a route to different retail outlets, as with snacks and beverages. In other cases, major retailers receive shipments of goods from the warehouse.

Where transportation takes freight across state lines or country borders, logistics management must address compliance with regulations local, federal and international. Improperly registered vehicles or failure to meet regulations can seriously hamper a businesss ability to transport goods when they are needed. Such delays create additional expenses as third parties must be hired to get goods where they are needed on time. This is another reason why companies often outsource transportation logistics.

There are many different ways to manage storage of goods and raw materials. Manufacturers will often have a plant with raw materials on hand and a warehouse nearby where additional materials can be secured when needed. Some businesses have central warehouses that feed smaller local warehouses. These are often placed strategically throughout the country to take advantage of shipping routes from major cities. In some cases, companies even bypass warehousing altogether by using cross docking (John J. Coyle, Edward J. Bardi and C. John Langley Jr., 2003).

Cross docking is a method of moving products from the point of origin or manufacture directly to the consumer. There may be some minor handling or packaging in between, but warehousing is eliminated. This method reduces the cost of shipping and handling for businesses while eliminating storage costs.

Efficient picking and packaging rely heavily on the logistics management of the warehouse. The slotting profile, or arrangement of stored goods, can have a great impact on how safely and how quickly workers can pick orders and pack them. Items that frequently come in and out of the warehouse should be easy to access and have sufficient space to store a large quantity. Less frequently ordered goods are best stored in less accessible locations.

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How and when stock is received, unloaded and replenished will influence the speed and efficiency of order fulfillment. This is where technology plays to greatest role. By using software and communications technology, warehouses can pick orders more quickly with few errors.

The final component in logistics management has to do with keeping the customer satisfied. Order must be processed swiftly and delivered on time, in good condition. Systems must be in place to ensure customers can get information about the status of the order while it is in transit. The shipping system used by the business plays a major role in ensuring timely and accurate information to customers about their orders (Ronald H. Ballou, 1999).

In addition, logistics management must have methods in place to handle returns and defective merchandise. Such problems in the supply chain must be investigated and resolved to ensure customer satisfaction and a reduced level of return merchandise in the future.

Modern businesses are learning to integrate logistics so that considerations for all aspects are considered in an overall strategy. Traditionally, logistics management focused on production, operating independently from marketing and sales. The production department focused primarily on efficiency and high output without regard to distribution chains or market trends. Sales departments did what they could to sell as much product as possible, without consideration of the raw materials supply or time lag for manufacturing. Marketers sought to maximize customer service and profit without considering transportation logistics or distribution chains.

By integrating logistics along every point in the supply chain, businesses leverage the efficiencies of all aspects of its business to maximize profits and customer satisfaction.

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4.0 SCOR MODELING

Sales Order

Order Entry

Order Delivery

Delivery (Transportation)

Distribution (Order Filling)

Storage (Warehouse)

Figure 1.1 Order Management Systems

Figure 1.1 is refers to the activities of order management system which is contains of order entry, storage, distribution and delivery. At the order step, the distribution center clerks enter customer ordering information into the system. At the distribution step, the order is picked and staged for shipment to the customer. At the delivery step, the order is picked up by transporter and transported to the customer.

The time required to move order information in the order management system can vary significantly, depending on the methods chosen. Sales personnel collection and drop-off orders and mail transmission are perhaps the slowest methods. Electronic information transfer in its various forms, such as telephoning, electronic data interchange, is the fastest. Speed, reliability, and accuracy are performance characteristics that should be balanced against the cost of any equipment and its operation. Determining the effects of performance on revenue remains the challenge here.

Time has traditionally been accorded attention as an important metric of order management performance, especially with regard to measuring effectiveness. The metrics capture two elements of time the elapsed time for the activity and the reliability or variability. For example, it may be possible to have a five-day cycle time, but does the company achieve this 100 percent of the time or 50 percent of the time? If the latter is true and customers are told to expect a five-day order cycle,

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they will be disappointed half of the time. They will have to hold safety stock to protect against stock outs.

The second category indicated measurement for efficiency. Most companies focus on cost since it is so crucial to their ability to compete in the market. For example, total delivered cost or landed cost will have direct impact on the prices that will have to be charged in the market. Total delivered cost is multi-dimensional and includes the cost of the goods, transportation, inventory, material handling and inventory turns.

By using Supply Chain Operations Reference model (SCOR), it is open to company in applying the model to supply chain and advancing supply chain management best practices. The SCOR model focuses primarily on customer interactions, starting from when the order is placed and following through until the invoice has been paid. In addition, the SCOR model focuses on product transactions, whether that product is a service or a physical object. This includes all equipment used to create the product, as well as all materials that have been purchased from another company in order to create the product. With the SCOR model, even the supplier of a supplier is monitored for efficiency and quality. With this model, the conventional order management system is benefited with five management processes within the model: plan, source, make, deliver, and return.

The plan component of the SCOR model focuses on those processes that are designed to balance the demand and supply. During this step of the SCOR model, the company must create a plan to meet their sales order, sourcing, and delivery requirements and expectations.

The next step of the SCOR model, source, involves determining those processes needed to obtain the goods and services in order to successfully support the plan portion of the model or to meet the current demand. The make step of the SCOR model involves determining the processes necessary to create the final product.

The deliver step of the SCOR model involves the processes necessary to provide the goods to the consumer. This portion of the model typically involves management of transportation, order, and distribution.

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The final step of the SCOR model, return, deals with those processes involved with both returning and receiving products that need to be returned. In order to properly plan for this step, the company must establish adequate customer support.

5.0 INVENTORY CHAIN & LEAN MANAGEMENT STRATEGY Inventory is stored capacity. From this perspective every organization has inventory in the form of materials and labour. In inventory context, inventory is in the perspective of raw materials, work-inprocess (WIP), finished goods, and supplies inventory. Raw materials are purchased from outside the company and eventually converted by the manufacturing process.

Inventories are extremely important to companies since most companies do not have enough capacity to provide goods or service on demand. Inventories exist because, from an investment perspective, it is less costly to invest in them than to expand system capacity for the time period under consideration.

Inventory chain must be measured because inventory is an asset. Because supply chains are complex systems, of which inventory chain are a subcomponent, errors can occur throughout the process. The supply chain process at a high level includes customer ordering, receipt of materials to build products, storage of materials, manufacturing the products, warehousing the products and picking the customer order in the warehouse, shipment of the order, and receipt of the order by the customer. Lean inventory management strategy shall build in supply chain concepts as well as the analytical tools necessary to build and simplify the inventory chain (James W. Martin, 2007).

Companies are constantly trying to find ways to improve inventory management performance is area where supply chain managers can focus to gain maximum efficiency for minimum cost. To get the most out of the operation, a number of best practices can be adopted to improve productivity and overall customer satisfaction. Although best practices vary from industry to industry and by the products shipped there are a number of best practices that can be applied to most companies.

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When considering the level of effort involved in inventory management, the greatest expenditure of effort is in the picking process in warehouse. To gain efficiencies in picking the labor time to pick orders needs to be reduced and this can achieved in a number of ways. Companies with the most efficient warehouses have the most frequently picked items closest to the shipping areas to minimize picking time. These companies achieve their competitive advantage by constantly reviewing their sales data to ensure that the items are stored close to the shipping area are still the most frequently picked.

Warehouse layout is also important in achieve greater efficiencies and lower inventory. Minimizing travel time between picking locations can greatly improve productivity. However, to achieve this increase in efficiency, companies must develop processes to regularly monitor picking travel times and storage locations.

Warehouse operations that still use hard copy pick tickets find that it is not very efficient and prone to human errors. To combat this and to maximize efficiency, world class warehouse operations had adopted technology that is some of todays most advanced systems. In addition to hand-held RF readers and printers, companies are introducing pick-to-light and voice recognition technology.

In a pick-to-light system, an operator will scan a bar-coded label attached to a box. A digital display located in front of the pick bin will inform the operator of the item and quantity that they need to pick. By introducing this system companies can gain significant efficiencies as it is totally paperless and eliminates the errors caused by pick tickets.

Voice picking systems inform the operator of pick instructions through a headset. The pick instructions are sent via RF from the companys ERP or order management software. The system allows operators to perform pick operations without looking at a computer screen or deals with paper pick tickets. Many world class warehouse operations have adopted voice picking to complement the pick-to-light systems in place for their fast moving products (James W. Martin, 2007).

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With the computerized system and advanced technology equipments, the inventory management process is optimized to align with lean management strategy.

6.0 INVENTORY CONTROL MODELING Control of inventories means that to recognize demand and lead time cannot be known for sure. Therefore, plan for the situation where not enough stock may be on hand to fill customer requests. In addition to the regular stock that is maintained for the purpose of meeting average demand and average lead time, an increment of inventory is added.

The amount of this safety or buffer stock sets the level of stock availability provided to customers of the inventory by controlling ordering cost and inventory holding cost. In order for the company to keep lowest inventory with lean concept, Economic Order Quantity (EOQ) system or fixed-order quantity models shall applied. In lean inventory management strategy, two major wastes in the existing inventory system high ordering cost and high inventory holding cost shall be eliminated or to minimum level. It identifies the optimal order quantity by minimizing the sum of annual costs that vary with order size.

ABC inventory classification method is an important aspect of inventory management in measuring of importance and allocates control effort accordingly. Typically, three classes items are used, A (very important), B (moderately important), and C (least important).

A items should receive close attention through frequent reviews of amounts on hand and control over withdrawals, where possible, to make sure that customer service levels are attained. The C items should receive only loose control (two-bin system, bulk orders), and the B items should have controls that lie between the two extremes (William J. Stevenson, 2005).

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7.0 CONCLUSION A supply chain is composed of all the companies involved in the design, production, and delivery of a product to market. Supply chain management is the coordination of production, inventory, location, and transportation among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served. The goal of supply chain management is to increase sales of goods and services to the final, end use customer while at the same time reducing both inventory and operating expenses. The business model of vertical integration that came out of the industrial economy has given way to virtual integration of companies in a supply chain. Each company now focuses on its core competencies and partners with other companies that have complementary capabilities for the design and delivery of products to market. Companies must focus on improvements in their core competencies in order to keep up with the fast pace of market and technological change in todays economy. With the supply chain management concepts, integrations management, value stream mapping, management modeling and lean management strategy in placed, it shall fulfill the objective of supply chain management and to be efficient across the entire supply chain.

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8.0 REFERENCES James W. Martin. (2007), Lean Six Sigma for Supply Chain Management, The McGraw-Hill Companies, Inc, New York.

Ronald H. Ballou. (1999), Business Logistics Management, Prentice-Hall, Inc, New Jersey.

William J. Stevenson. (2005), Operations Management, The McGraw-Hill Companies, Inc, New York.

Richard B. Chase, Nicholas J. Aquilano and F. Robert Jacobs. (1998), Production and Operations Management, The McGraw-Hill Companies, Inc, New York.

John J. Coyle, Edward J. Bardi and C. John Langley Jr. (2003), The Management of Business Logistics, South-Western, Canada.

Tilak Raj. (2004), Logistics and Supply Chain Management, Indira Gandhi National Open University School of Management Studies, India.

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