Supply Chain Management - An Integrated Approach


By

A. Duraikannan
Asst. Professor
B.L. Sairam Subramaniam
Asst. Professor
S. Baskaran
Lecturer
SSM School of Management
SSM College of Engineering
Komarapalayam
 


Supply Chain Management:

A supply chain 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 chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm.

The term "supply chain" first appeared in literature as an inventory management approach. Commercial businesses had been encountering a demand for greater levels of responsiveness and shorter cycle times for delivery and inventory of goods and services—placing, preparing, storing, and fulfilling orders. The notion of "the perfect order" required that the supply chain provide non standardized, quality products quickly and efficiently every time. Since holding of inventories can cost as much as 40% of their value, their efficient management is crucial.

Heart of Functional areas of Management

"Delivering the right product to the right place at the right time and at the right price."

Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. Marketing's objective of high customer service and maximum sales dollars conflict with manufacturing and distribution goals. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan for the organization---there were as many plans as businesses.

Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such an integration can be achieved.

Common supply chain performance areas:

* Products and services
* Sales
* Cost
* Responsiveness
* Customer service
* Quality
* Delivery
* Cycle times
* Assets utilized
* Warehousing

Benefits of Supply Chain Management

"Today's information-driven, integrated supply chains are strategic assets that support innovative warfighting capabilities— enabling organizations to reduce inventory, add product value, extend resources, accelerate time to market, and retain customers"

Effective supply chain management can impact and improve upon virtually all business processes, such as data accuracy, operational complexity reduction, supplier selection, purchasing, and warehousing and distribution. Other benefits include:

* quicker customer response and fulfillment rates,
* greater productivity and lower costs,
* reduced inventory throughout the chain,
* improved forecasting precision,
* fewer suppliers and shorter planning cycles,
* improved quality and products that are more technologically advanced,
* enhanced inter-operational communications and cooperation,
* shortened repair times and enhanced equipment readiness, and
* more reliable financial information

Supply Chain Decisions

We classify the decisions for supply chain management into two broad categories -- strategic and operational. As the term implies, strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy (they sometimes {\it are} the corporate strategy), and guide supply chain policies from a design perspective. On the other hand, operational decisions are short term, and focus on activities over a day-to-day basis. The effort in these type of decisions is to effectively and efficiently manage the product flow in the "strategically" planned supply chain.

There are four major decision areas in supply chain management: 1) location, 2) production, 3) inventory, and 4) transportation (distribution), and there are both strategic and operational elements in each of these decision areas. The effort in these type of decisions is to effectively and efficiently manage the product flow in the "strategically" planned supply chain.

1. Location Decisions

The geographic placement of production facilities, stocking points, and sourcing points is the natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows through to the final customer. These decisions are of great significance to a firm since they represent the basic strategy for accessing customer markets, and will have a considerable impact on revenue, cost, and level of service. These decisions should be determined by an optimization routine that considers production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs, production limitations, etc. (See Arntzen, Brown, Harrison and Trafton [1995] for a thorough discussion of these aspects.) Although location decisions are primarily strategic, they also have implications on an operational level.

2. Production Decisions

The strategic decisions include what products to produce, and which plants to produce them in, allocation of suppliers to plants, plants to DC's, and DC's to customer markets. As before, these decisions have a big impact on the revenues, costs and customer service levels of the firm. These decisions assume the existence of the facilities, but determine the exact path(s) through which a product flows to and from these facilities. Another critical issue is the capacity of the manufacturing facilities--and this largely depends the degree of vertical integration within the firm. Operational decisions focus on detailed production scheduling. These decisions include the construction of the master production schedules, scheduling production on machines, and equipment maintenance. Other considerations include workload balancing, and quality control measures at a production facility.

3. Inventory Decisions

These refer to means by which inventories are managed. Inventories exist at every stage of the supply chain as either raw materials, semi-finished or finished goods. They can also be in-process between locations. Their primary purpose to buffer against any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. It is strategic in the sense that top management sets goals. However, most researchers have approached the management of inventory from an operational perspective. These include deployment strategies (push versus pull), control policies --- the determination of the optimal levels of order quantities and reorder points, and setting safety stock levels, at each stocking location. These levels are critical, since they are primary determinants of customer service levels.

4.Transportation Decisions

The mode choice aspect of these decisions are the more strategic ones. These are closely linked to the inventory decisions, since the best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. While air shipments may be fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper, but they necessitate holding relatively large amounts of inventory to buffer against the inherent uncertainty associated with them. Therefore customer service levels, and geographic location play vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment are key in effective management of the firm's transport strategy.

Supply chain management is typically viewed to lie between fully vertically integrated firms, where the entire material flow is owned by a single firm, and those where each channel member operates independently. Therefore coordination between the various players in the chain is key in its effective management.
 


A. Duraikannan
Asst. Professor
B.L. Sairam Subramaniam
Asst. Professor
S. Baskaran
Lecturer
SSM School of Management
SSM College of Engineering
Komarapalayam
 

Source: E-mail May 19, 2007

       

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