Supply Chain Management Developments Introduction Supply chain management is emerging as one of the decade’s most powerful business practices. It is transforming the way manufactures operate and work with partners even the way they think about business. Why all the sudden interest? Mere observation of industrial practice brings to light a simple truth; very few materials remain in the constant ownership of one person, persons or company from their source to the time they are sold to the end customer. Almost invariably, material flows through a series of ‘players’ whose role may be to transform (manufacturing plants), store (warehouses) or move (distributors) material. This results in the establishment of complex systems that industry has labeled supply chains or supply networks.
Supply chains are not new; they have been around as long as the market place. Historically, however, each supply chain link tended to regard its role as satisfying the demand of its immediate customer. A more holistic view point suggests that each is just a part of a wider supply chain system whose role is to satisfy end customer demand. This refocusing of the company roles in terms of end customer satisfaction is in line with a systems thinking approach to management. From a conceptual viewpoint, one could view the ideal supply chain as a pipeline with laminar flow.
Traditionally, most supply chains simply evolved rather than being designed. This fact makes supply chains susceptible to turbulence. Companies are discovering that the vast majority of supply chains are logistically inefficient and therefore prone to poor supply chain dynamic behavior. Because of the huge success of a couple of retaliators, the concepts of supply chain design have come to the forefront. Supply chain is one of the big buzzwords, or in this case phrase, in the U.S. industry today.
What does all of this mean for the mom and pop stores? Probably not a whole lot for now. Those who are currently using the Internet may find it easier to order supplies or even distribute. For the middle size company, it could be a blessing or curse. Those who invest and use the new technology may rise to new heights; those who do not may be pushed into bankruptcy. This paper will attempt to touch upon the history, the various new transpirations and developments in supply chain technology and project a direction for the future. Literature review The subject of supply chain has been examined, studied and dissected by great scholars.
Their works have been published and have been around since the 1950s. However, the technology that is now being used, or rather is beginning to be used, is not documented in any text. The industry of supply chain management technology is in such infancy stages, that not a lot of good periodical articles are in circulation. As of February 1998, articles began appearing in magazines like Information Week, Computer World and Info World Magazine. The articles were basic and very vague. No real inside stories as to how any one particular firm’s Supply chain management system worked.
At this point in the development, most of the detailed information is probably regarded as trade secrets. The paper is put together from pieces of new clippings, magazine articles, news wire releases. Hardier sources of information came from Journal writings out of Europe, a few books about how import supply chain management is going to be and a handful of not so up-to-date textbooks. A Brief History As previously stated, the supply chain is not anything new, its been around for centuries. The farmer sold grain to the miller, who sold floor to the backer, how sold bread and pastries to an end customer.
Such chains were based on gentleman’s agreements. Once the good changed hands, the former proprietor of the good, as far as he was concerned, was finished. Such supply chains have very dynamic properties. From the point of view of stocks it may result in alternating periods of high and low stocks with the possibility of obsolescence in the stock out. Alternatively it may manifest as periods of capacity expansion and contraction, with the possibility of increased cost due to over capacity and lost market opportunities through capacity cut-backs.
Much of the pioneering work into aspects of supply chain dynamics was undertaken by Forrester in the late 1950s using a simple but representative simulation model of a production distribution supply chain: Figure 1Based on a series of simulation experiments, Forrester revealed a number of important behavioral features of a supply chain: 1) Demand in the marketplace becomes delayed and distorted moving upstream through a supply chain At any one point in time, processes in various companies in the chain may be moving in different directions to each other and the market, Figure 2 Supply chain designs tend to amplify marketplace variations. The magnitude of the variations in orders placed on the factory is greater than the variation in marketplace demand, Figure 2. Supply chain designs can introduce ‘periodicities’, which can be mis-interpreted as a consequence of seasonal variations in the marketplace, rather than a property of the supply chain dynamic. 2) Attempts to reduce poor supply chain dynamic behavior can exacerbate the problem. Counterintuitive behavior occurs because the causes of the behavior are obscured from the decision makers in the chain. Some industries, e.g.
the semi-conductor industry, exhibit almost characteristic surplus-shortage behavior, as shown in Figure 2. Figure 2 backs up a remark from the President of Intel made approximately 10 years ago, the capacity in my industry has been in balance with demand for 35minutes during the past 10 years. Clearly, there was some way to go back then in overcoming the problems of supply chain dynamics. Much progress has been made since his remark back in 1986. The Supply Chain buildup Reform actually began before the president of Intel made his statements.
Over the past several decades, a number of philosophies that center on decreasing cost and lead-time have been developed and practiced with great success. Most, if not all of these practices play a part in supply chain management. Once the effort in everything else has been exhausted, supply chain management is the only logical step. Before the 1960s, industry looked inward for improvements. Logistics literature offered generally two divergent main approaches to business management: the total cost concept and the customer service concept.
The total cost concept considers logistics as a cost incurring function, which has to be managed by minimizing total logistics costs. According to the total cost concept, the cost of individual factions need not be at their optimum, but attention must be paid to minimizing the delivery cost of the entire firm. It seems to be an easy task to forget the customer when consumed with the task of controlling cost. To avoid excessive attention to cost control, and focus more on the need of the customer, the customer service approach could be adopted. In the customer service approach, logistics customer service is split into components or service elements.
It is possible for a company to differentiate itself from the competitors by offering better logistics services appreciated by the customers. This value-adding logistics strategy is known as differentiation by logistics. After World War II, Japan had to rebuild totally its industrial base. They were then infamous for poor quality and second rate products. In the 1970s, the Japanese began making quality a priority.
This priority was not just invoked at the management level, it descended into the very depths of the manufacturing industry. They had received help from a few American consultants during their rebuilding phase after the war. In just a short 30 years, they were able to raise their quality standards to that of Benchmark proportions. By the 1980s U.S. manufacturers, particularly auto manufactures, awoke and realized that they, too, would have to adopt such quality standards. Total Quality Management (TQM) became the focus of most manufactures during the 70s and early 80s. The advent of just-in-time supply systems motivated people even more to develop new, better and more streamlined systems.
The idea behind JIT, sometimes called zero inventory system, is to have materials arrive on site, as they are needed. This requires a unique relationship between suppliers, stockpilers and distributors as well as good, reliable technology. JIT was originally developed in Japan by Taiichi Okno, a vice-president of Toyota. Originally, the system was called the kanban system, named after the cards that were placed in the parts bins that were used to call for a new supply. JIT may seem like just and inventory control system, but it is more of a production and management system.
Not only is inventory cut down to a minimum, but the time and physical distance between the various production operations are also reduced. Inn addition, management is willing to trade off cost to develop close relationships with suppliers and promote speedy replenishment of inventory in return for the ability to hold less safety stock. JIT fucus on reducing inefficiency and unproductive time in the production process to improve continuously the process and the quality of the product or service. The relationship that exist between manufacturers, distributors and all the people in between has been expanded into the broader concept of supply chain management. Supply chain management starts earlier than physical distribution, attempting to procure the right inputs (raw materials, components and capital equipment); convert them efficiently into finished products: and dispatch them to the final destinations. An even broader perspective calls for studying how the company’s suppliers themselves obtain their inputs all the way back to the raw materials.
The Pioneer In industrial and retail circles, when supply chain management is mentioned, the word Wal-Mart has to come to mind. Wal-Mart was one of the first retailers to make heavy investments in supply chain technology. Computerized scanning equipment at the checkout line enables Wal-Mart to know what customers are buying and where they are buying it. They, or rather the system, then tells manufactures what to produce and where to ship the goods. A recent statement made in jest by a student of Radford University is not far off the mark. If women in Roanoke, Virginia, start buying bobby pins, stores in Atlanta, Georgia know about it within five minutes and manufactures start shipping truckloads of bobby pins to all the Wal-Mart stores in the U.S.
As humorous as this may sound, the statement is accurate. Wal-Mart insists on linking their computers directly to those of its suppliers. If a manufacturer wants to supply goods to Wal-Mart, they have to use EDI. Once connected, Wal-Mart puts the responsibility of making resupply decisions in the hands of the manufacture, not the retailer. To discourage oversupply, Wal-Mart does not pay its suppliers until their products are sold. Wal-Mart requires its suppliers to ship their goods tagged and hung, so that they can be moved directly into the store’s selling space, thus reducing warehousing and data processing cost.
As a result, Wal-Mart stores use only 10% of their space for goods storage, compared to the 25% average non-selling space in competitor stores. Another result of Wal-Mart’s computerized ordering system is the use of EDI. Industry Interest peak In the last two years, it seems the rest of American industry is ready to stop watching Wal-Mart and ready to jump on the bandwagon. Most available literature trumpets supply chain management applications as revolutionary vehicles that can save businesses millions of dollars and optimize business and customer relations. A recent Pittiglio Rabin Todd & McGrath study of 225 large manufactures reveals that good supply chains have up to 60% less inventory days than their counter parts.
The study also shows, that for a $600 million company, solid supply chains facilitate savings of up to $42 million per year. There is only one little problem, there is not a package on the market. There is not a well-known vendor of supply chain management software. The Reynolds company, for example, bought a $500,000 package from Logility, a forerunner in supply chain management software. Logility wanted to offer its product as a turnkey package, but Reynolds wanted the vendor to tailor the software. Reynolds purchased the software in February and received it in June. The tailoring added another 10% to the cost.
The software wasn’t easy to learn, its not user friendly, and it took several weeks to get familiar with it. Along with little inconvenience is the fact there are no standards for such software. Many people and groups realize the lack of organization in the supply chain management field. This is, as best, an oxymoron. There is an old saying, necessity is the mother of invention.
When searching for information on the Internet, it does not take long to realize how many new business have recently come into existence because of the new, vogue trend known as supply chain management. Advanced Manufacturing Research reports that supply chain software and service are likely to increase to $1.6 billion in the year 2000 from $350 million in 1996. Periodical after periodical is full of well-known industry names that are announcing investments in new supply chain software packages. The question remains, why now? Why not 10 years ago or even sooner? The answer is technology. Up until recently, the technology that make good supply chain management possible and reliable was not really available. There have been major gains in logistical efficiency and this is directly related to advancements in information technology. Gains have been made in recent years particularly in the area of computers, terminals, uniform product codes, electronic data interchange (EDI), electronic funds transfer (EDF), and asynchronous transfer mode (ATM), video conferencing and so on. Most high-powered packages have only been available since the early 1990s.
These software packages along with other developments have made it possible for companies to have fingertip like access to information and people, even in a global environment. Another key factor, says John Bermudez, an AMR analyst, is that many companies have spent the last 10 years perfecting their processes inside the plant. ‘ There is not a lot of room left for improvement,’ he says. ‘The way to drive down cost now is to go outside the factory and look at your supply chain.’ One last, critical reason for the sudd …