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Summary Operations and Supply Chain Management - Russel, Taylor - Eighth edition
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Supply Chain ManagementChapter 10 – Designing the Supply Chain
Supply Chains
Supply chain: encompasses all activities associated with the flow and transformation of
goods and services from the raw materials stage to the end user (customer), as well as the
associated information flows.
“Supply” provides all the assets, information, and processes.
The supply chain begins with suppliers, which can be as basic as raw material providers.
These suppliers are referred to as upstream supply chain members, while the distributers,
warehouses, and eventual end-use customers are referred to as downstream supply chain
members.
Supply chains are more typically a series of linked suppliers and customers; every customer
is in turn a supplier to the next, up to the final end user of the product or service.
Demand for a product or service is forecast, and plans and schedules are made to meet
demand within a time frame. The product or service can require multiple suppliers (who have
their own suppliers) who prepare and then ship parts and materials to manufacturing or
service sites. A company can have thousands of suppliers, first-tier suppliers that supply to
second-tier suppliers, and so on. Parts and materials are transformed into final products or
services. These products may then be stored at a distribution center or warehouse. Finally,
these products are transported by carriers to external or internal customers. These
customers can use this product as a material stage and so goes the supply chain on and on.
All of this is part of the supply chain.
The supply chain is an integrated group of business processes and activities with the same
goal, providing customer satisfaction.
Information and information technology tie the processes of the supply chain together. It is
what “integrates” them into a supply chain.
SUPPLY CHAINS FOR SERVICE PROVIDERS
A supply chain for a service is not as easily defined as for manufacturing operations
because a service is not a physical good.
The supply chain for services focuses more on the human resources and support services
necessary to provide its own service. It normally is also more compact than a supply chain
for a tangible product. A supply chain for services can be effectively managed using many of
the same principles. A service company has suppliers (who have suppliers), and they
distribute their products to customers (who may have their own customers)
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,VALUE CHAINS
Value chain: a series of activities from supplier to customer that add value to a product or
service; a more contemporary name for a supply chain.
In this context the ultimate goal of a value chain is the delivery of maximum value to the end
user. A demand driven value chain is considered to be a global supply chain that is
organized according to three overlapping areas of responsibility;
- Supply management – manufacturing, logistics, supply planning, and sourcing
- Demand management – marketing, sales, demand planning, and service
- Product management – R&D, innovation, engineering, and product development.
When these processes work together, are visible to each other, and communicate, then a
company can respond quickly and efficiently to opportunities that arise from customer or
market demand (i.e., it is demand-driven and thus creates value for all parts of the supply
chain).
The objective of supply chain management is to increase value for any part or all in the
chain. In reality, a supply chain is a demand driven value chain, and vice versa.
Value is to the customer good quality, a fair price, and fast and accurate delivery.
Companies not only look for ways to create value internally in their own production
processes, but they also look to their supply chain partners to create value by improving
product design and quality, enhancing supply chain performance and speed, and lowering
costs. To accomplish these value enhancers, supply chain members must collaborate with
each other and integrate their processes.
The Management of Supply Chains
Supply chain management (SCM) focuses on integrating and managing the flow of goods
and services and information through the supply chain in order to make it responsive to
customer needs while lowering total costs.
To complete in today’s global marketplace a company has to count on the combined and
coordinated effort of all members of the supply chain.
Supply chains require close collaboration, cooperation, and communication among members
to be effective.
- Suppliers and their customers need to share information
- Suppliers and customers must have the same goals
- Customers need to be able to count on the quality and timeliness of the products and
services of their suppliers.
- Suppliers and customers must participate together in the design of the supply chain
to achieve their shared goals and to facilitate communication and the flow of
information.
SUPPLY CHAIN UNCERTAINTY AND INVENTORY
One of the company’s main objectives in managing its supply chain is to synchronize the
upstream flow of incoming materials, parts, subassemblies, and services with production
and distribution downstream so that it can respond to uncertainty in customer demand
without creating costly excess inventory.
E.g. Inaccurate demands forecasting, long variable lead times for orders, late deliveries,
incomplete shipments, product changes, batch ordering, price fluctuations, discounts and
inflated orders. The primary negative effects of supply chain uncertainty and variability are
lateness and incomplete orders.
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,Companies can cope with this uncertainty and try to avoid delays with their own form of
“insurance,” inventory.
Inventory: a stock of items kept by an organization to meet internal or external customer
demand; insurance against supply chain uncertainty held between supply chain stages.
Supply chain members carry buffer inventory at various stages of the chain to minimize the
negative effects of uncertainty. Companies also use inventory because they may order in
large batches in order to keep down transportation costs or special prices.
However, inventory is very costly.
THE BULLWHIP EFFECT
Distorted information or the lack of information, from the customer end can ripple back
upstream through the supply chain and magnify demand variability at each stage. This can
result in high buffer inventories, poor customer service, missed production schedules, wrong
capacity plans, inefficient shipping, and high costs. This is called the bullwhip effect.
Bullwhip effect: occurs when slight to moderate demand variability becomes magnified as
demand information is transmitted back upstream in the supply chain.
The bullwhip effect is created when supply chain members make ordering decisions with an
eye to their own self-interest and/or they do not have accurate demand information from the
adjacent supply chain members. It will stockpile extra inventory to compensate for the
uncertainty.
One way to cope with the bullwhip effect is to share information, especially demand
forecasts.
RISK MANAGEMENT
In “lean” supply chains, there is a little redundancy and slack (i.e., inventory), so when
disruptions occur, the effects can cascade through the supply chain, slowing or stopping
normal operations and eventual customer order fulfillment.
As said before inventory is costly, instead a number of innovative companies have begun to
engage in formal “risk management” to cope with supply chain uncertainty.
Risk management requires due diligence to evaluate and anticipate the likelihood and
possible impact of unexpected supply chain disruptions, which can be economic,
marketplace, or natural, and plan ahead of them. Many companies have altered their
approach to supply chain management to incorporate formal ongoing risk management
processes to identify and plan for possible disruption. This is referred to as building
resiliency. These processes include:
- Identifying circumstances in advance that could cause disruptions
- Monitoring events worldwide to anticipate disruptions
- Developing contingency plans for the occurrence of disruptions, including a pool of
alternative suppliers, logistics providers, and energy sources to fall back on.
Risk pooling: an approach to managing risks in which an attempt is made to aggregate risks
to reduce the impact of individual risks.
- One pool is to risks is to combine inventories from multiple at-risk locations into a
few, or one, location, like a warehouse or distribution center in a more risk-free
environment.
- Another way to pool risks is to add a distribution center between a supplier and a
customer.
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, Another way to manage risks is to build risk tradeoffs into product and service designs to
include fewer parts and product variability. Reducing the number of product components
allows a company to meet demand with fewer products and fewer suppliers.
Supply Chain Sustainability
Sustainability: meeting present needs without compromising the ability of future generations
to meet their needs.
Achieving sustainability has become one of the most visible recent trends in operations and
supply management.
Many western companies have difficulties using green practices especially in developing
countries. They don’t have the same governmental, cultural and social pressures and green
manufacturing means new equipment and this costs money.
There is a growing realization among many companies that the social and environmental
benefits of developing sustainable products do not have to coma at the expense of reduced
profits and competitiveness. Going green can cause more costs but can also be cost-
effective.
The impetus for, and commitment to, sustainability generally comes from downstream in the
supply chain and moves back upstream to include suppliers.
SUSTAINABILITY AND QUALITY MANAGEMENT
Many companies already have quality improvement programs in place that require suppliers
to adhere to continuous improvement goals of eliminating returned products, thus reducing
waste; poor quality translates to wasted resources. The same quality management focus on
reducing waste can work to achieve sustainability goals. The costs of poor quality have an
impact on the profitability and competitiveness.
Information Technology: A Supply Chain Enabler
As said before information is important in the supply chain. Computer and information
technology allow real-time, online communications throughout the supply chain.
Technologies that enable the efficient flow of products and services through the supply chain
are referred as “enables,” and information technology has become the most important
enabler of effective supply chain management.
ELECTRONIC BUSINESS
E-business: the replacement of physical business processes with electronic ones.
E-business replaces physical processes with electric ones. Supply chain transactions are
conducted via a variety of electronic media. Companies are able to automate the process of
moving information electronically between suppliers and customers.
ELECTRONIC DATA INTERCHANGE
Electronic data interchange (EDI): a computer-to-computer business-to-business activities.
Electronic data interchange creates a data exchange that allows trading partners to use
Internet transactions instead of paper when performing purchasing, shipping and other
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