Operation and Project Management
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Chapter6-Supplychainmanagementasastrategicprocess.pptTopic 6
The Supply Chain and Supply Networks
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Introduction
- The supply chain includes the entire process from extracting raw materials to delivering the finished product to the end customer. The supply chain will involve a number of separate companies that will all play a part in satisfying the needs of the end customer.
- A virtual supply chain is a supply chain that is enabled through e-business links, e.g. the internet.
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Strategic Supply Chain Management
- Supply chain management is the management of all the activities aimed at satisfying the end customer in a way that maximises the effectiveness of the process.
- Supply chain management has a strategic role within the organisation and can help the company to achieve competitive advantage.
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- The supply chain for wooden furniture begins with the timber grower, moves on to the saw mill and the timber yard, then to the furniture manufacturer, then retailer and finally to the end customer.
- The furniture manufacturer is in the middle of the supply chain. Improvements in the management of the supply chain can help the manufacturer to achieve its strategic objective of achieving and maintaining competitive advantage. For example:
By reducing supplier lead times from its suppliers, the saw mills.
By improving the administrative procedures for purchasing wood from suppliers.
By persuading suppliers to improve their quality.
By persuading suppliers to provide timber in a form that is better suited to the production of furniture.
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Supply Chain Network
- A supply chain network is a group of organisation which relate to each other through the linkages between the different processes involved in producing the finished product.
- Traditionally, businesses within the supply chain operated independently.
- However, organisations are recognising that there are benefits associated with establishing links between the different companies in the supply chain.
- Co-ordination of the different firms within the supply chain should lead better planned production and distribution which may cut costs and give a more attractive final product leading to increased sales and profit for all of the businesses involved.
- Competition is on longer on a company versus company basis but rather takes on a supply chain versus supply chain form.
- A demand network is the evolution of a supply chain network and involves the collaboration between buyers to influence what goods are supplied.
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The Strategic Positioning Tool- Reck and Long
- The extent to which supply chain management is a strategic issue can be considered through Reck and Long’s strategic positioning tool.
- There are four stages of development that the purchasing function should pass through in order to attain a strategic status:
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| Stage 1 = The passive stage | Purchasing is seen as an administrative task. Emphasis is on processing transactions efficiently, in a similar way to , say, payroll processing. |
| Stage 2 = The independent stage | Greater awareness of the financial importance of purchasing. Emphasis is on price negotiations. |
| Stage 3 = The supportive stage | Greater awareness that purchasing can affect the firm’s strategic goals. Emphasis is on better co-ordination between department involving timely communication about changes in price and availability of materials. |
| Stage 4 = The integrative stage | Purchasing is seen as a key part of strategic planning. The emphasis is on developing relationships with supplier, who are seen as vital partners. |
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The strategic Supply wheel - Cousins
- Cousins’ strategic supply wheel depicts the corporate supply strategy at hub of the wheel and underlines the need for an integrated approach to supply strategy involving a balancing of all of the spokes of the wheel.
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| Spoke of wheel | Explaination |
| Organisation Structure | Centralised/decentralised structure impacts control and interaction. |
| Relationships | Can be opportunistic or collaborative relationships with suppliers. |
| Cost/benefit | The cost of the strategic approach chosen must be less than the benefit. |
| Competences | Do the skills exits to achieve the strategy? E.g. the development of long term supplier relations may require staff training. |
| Performance measures | Necessary for monitoring and controlling the strategy chosen. |
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Relationships
Cousins’ strategic supply wheel depicts the corporate supply strategy at the hub of the wheel since the purchasing director should set goals and policies that are connected to those of the overall firm. For example:
A firm that a cost focused will expect supply activity to deliver savings. Opportunistic relationships with suppliers will help to achieve short-term price reductions. The firm will not be interested in forming close working relationships with suppliers or implementing complex sourcing strategies.
A firm that differentiation focused, e.g. differentiates itself on quality or design, will review supply as strategic to their business. The firm will form close, collaborative relationships with suppliers.
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5 Relationship-based Supply Chains
Competitive or collaborative partnerships?
- Competitive
- In the past the supply was typically defined by competitive relationships.
- The purchasing function sought out lowest-price suppliers, often through a process of tendering, the use of ‘power’ and the constant switching of supply source to prevent getting too close to any individual source.
- Supplier contracts featured heavy penalty clauses and were drawn up in a spirit of general mistrust of all external providers.
- The knowledge and skills of the supplier could not be exploited effectively: information was deliberately withheld in case the supplier used it to gain power during price negotiations.
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Collaborative
- It is now recognised that successful management of supplier is based upon collaboration and offers benefits to an organisation’s supplier as well as to the organisation itself. By working together organisation can make a much better job of satisfying the requirement of their end market, and thus both can increase their market share.
- Organisations seek to enter into partnerships with key customers and suppliers so as to better understand how to provide value and customer service.
- Organisations’ product design processes include discussions that involve both customers and suppliers. By opening up design department and supply problem to selected suppliers a synergy result, generating new ideas, solutions, and new innovative products.
- To enhance the nature of collaboration the organisation may reward supplier with long-term sole souring agreements in return for a greater level of support to the business and a commitment to on-going improvement of materials, deliveries and relationships.
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Supply Networks
- A supply network is a term used to describe the arrangements made by the organisation to obtain its supplies.
- There are four main sourcing strategies available:
| Strategy | Explanation |
| Single sourcing | The organisation choose one source of supply. |
| Multiple sourcing | The organisation choose several sources of supply. |
| Delegated sourcing | The organisation choose one supplier (1st tier). This supplier then co-ordinates and works with other suppliers (2nd tier) to ensure the supply requirement are fulfilled. |
| Parallel sourcing | The organisation uses a mix of the three approaches. |
Kyoryoko kai
- The most countries, suppliers’ associations are organised and run by the suppliers themselves. In japan, there are supplier associations known as Kyoryoku Kai, which are organised by a major buyer/customer in the industry.
- The first such association was set up by Toyota in 1943. its original purpose was to provide an assurance of business to suppliers who were suffering from the consequances of the war effort in Japan. Over time, the main focus of interest in these supplier associations has been:
- Improving quality
- Reducing costs by means of efficiency improvement throughout the industry.
- Health and safety standards.
- The benefit of having a supplier association organised by a major buyer is that the buyer is able to exert strong influence over its suppliers, and encourage the open exchange of ideas and information between suppliers.
Process Maps
- Process maps can be to visualise the flow of material and information as the product makes its way through the supply chain.
- It build a flowchart of the process being analysed in order to:
- Standardise the process
- Find areas of improvement, e.g. eliminate unnecessary steps or duplicated steps.
- Assist understanding of the process due to the visual representation
- To link the supply chain strategy to the corporate strategy.
Example of a process map
Enter
Payment
Details
Request
Delivery
Date
Place
Confirmed
Order
Test
Computer
consider
details
Agree
Delivery
Date
Payment
Confirmed
Construct
Computer
Delivery
and Costs
Details
Arrange
Delivery
Deliver
Computer
Perform
Credit
Check
specify
Require-
ment
Provide
Delivery
Date
Receive
Computer
Process is
Terminated
Customer
Sales
company
Manu-
facturer
Credit
checker
Logistics
accept
reject
not place
order
place
order
Method of Managing Inventory
- The control of inventory is important for a number of reasons.
- Holing costs of inventory may be high
- Production may be delayed if the company runs of raw materials
- Loss of customer goodwill if demand can’t be fulfilled
- Obsolescence if inventory with a short shelf life is not used or sold
- There are four main types of system available:
Each system will be reviewed in turn.
Continuous inventory system
- A continuous inventory system keeps the level of inventory under continual review. Each new addition and withdrawal is recorded as it occurs. A pre-determined quantity of inventory is ordered when the inventory level falls to a re-order level.
- The economic order quantity (EOQ) model can be used establish the re-order quantity:
- The model will minimise the total inventory costs.
- It is assumed that there are no price discounts available for larger-sized order, and the total annual inventory costs therefore consist of:
- Ordering costs, e.g delivery cost, administration cost of placing and monitoring orders.
- Holding costs. E.g. finance cost of holding inventory, storage costs.
EOQ Model
- Imagine that a firm sells A units a year and sales are constant. If it retails the product at a price p its turnover will be pA. The firm purchases stock at a wholesale price of w, sells it and, when stock has fallen to zero, obtains more stock. If the firm orders an amount Q, the stock level of the firm will follow the profile shown in the diagram below, where Q has been assumed to be 10 and stock usage is one unit a period. From the diagram it follows that the average stock level will be Q/2, in this case five units.
Stock level
period
Average stock level
Actual stock level
14
12
10
8
6
4
2
0
- Total inventory costs are minimised when the combined cost of ordering inventory each period (each year) is minimised. To decide what to do, we must look at the demand and costs:
- C = ordering cost per order event (fixed cost to place and order, not per unit)
- H = holding cost per unit per unit of time e.g, per year
- Q = is the reorder quantity
- A total sales per annum.
- The equation below, which you will not need to derive or use, is the so called economic order quantity or EOQ
Periodic inventory system
- The periodic inventory system does not keep inventory levels under continual review. Instead, inventory is checked on a regular basis and a variable order is placed depending on the usage during the period.
ABC system
- The ABC system is based on Pareto’s law. This law states that 80% of inventory usage can be accounted for by 20% of inventory items. By dividing a company’s inventory into different classifications – A, B or C, managers can focus on items that account for the majority of the inventory.
Category A - items of high value in term of usage rate. Close monitoring of these items is vital. A stock-out would result in disappointed customers.
Category B – items of medium value in term of usage rate. Less important than category A and therefore require less control.
Category C – the least used inventory items and require little management control.
Just-in-time
- JIT is a system whose objective it is to produce or procure products or components as they are required by the customer or for use, rather than for inventory. This means that inventory levels of raw materials, work-in-progress and finished goods can be kept to a minimum.
- JIT applies to both production within an organisation and to purchasing from external suppliers:
- JIT purchasing is a method of purchasing that involve ordering materials only when customer place an order. When the goods are received they go straight into production.
- JIT production is a production system that is driven by demand for the finished products (a ‘pull’ system), whereby each component on a production line is produced only when needed for next stage.
Requirement for successful operation of a JIT system
- High quality and reliability
- Elimination of non-value added activities
- Speed of throughput
- Flexibility
- Lower costs
Kanban
- ‘kanban’ is a Japanese word meaning both ‘card’ and ‘signal’. Within a production system where output moves from one process to another, a system of coloured cards or kanbans can be used to give signals between one stage in the process and the next stage. For example, a card can be used one by one stage in the process to give a signal to the previous stage that more output is now required from the previous stage.
- Variations in the signaling system might be used.
- Colour-coded cards might be used for giving different signals.
- When output is transferred from one satge production to the next in standard batch sized or container sizes, one card might represent a requirement for one container and two cards might represent a demand for two container.
- A system might use ‘kanban squares’. A kanban square is a physical space marked out on the factory floor. When the space is empty, this act as a signal to the previous process to produce more output for the next process. When the square contains any items, this act as a signal that no output from the previous process is required at the moment.
Supplier relationship and JIT
- The advantages to a JIT company of developing close supplier relationships are as follows:
No rejects/returns
On-time deliveries
Low inventory
Close proximity
EOQ
H
AC
Q
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