What Is Supply Chain Management Information Technology Essay
Supply Chain Management is the combination of art and science that goes into improving the way your company finds the raw components it needs to make a product or service, manufactures that product or service and delivers it to customers” (Koch 2002).
â€œThe reason company’s implement a SCM system is to create a faster, more efficient, and lower costing relationship between business partners. The process begins from the conceptual stage of a product or service and continues until market distribution. The Supply Chain consists of suppliers, customers, and other businesses which all work together to build relationships and meet customer demands. The objective for creating a supply chain is to increase competitiveness. This is because no single company is solely responsible for the competitiveness of its products in the eye of the ultimate customer; rather the supply chain as a whole, takes on shared responsibility. In order to meet consumer demands and improve competitiveness, a supply chain must overcome and eliminate organizational barriers, align strategies with one another, and speed information and financial flowsâ€ (Kidlger 2000).
However, in nutshell we can define supply chain management simply an amalgamation of the three chief components as follows:
The major key issues comprised within supply chain management are as follows:
- Determining the requirements
- Cataloguing, Standardization, and Engineering Data Management.
- Controlling the stock and distributing
- Functions of technical management
Information technology can support internal operations and also collaboration between companies in a supply chain. Using high speed data networks and databases, companies can share data to better manage the supply chain as a whole and their own individual positions within the supply chain. The effective use of this technology is a key aspect of a company’s success. All information systems are composed of technology that performs three main functions: data capture and communication; data storage and retrieval; and data manipulation and reporting. Different information systems have different combinations of capabilities in these functional areas. The specific combination of capabilities is dependent on the demands of the job that a system is designed to perform. Information systems that are employed to support various aspects of supply chain management are created from technologies that perform some combination of these functions.
Software being developed for supply chain management is generally known as enterprise resource planning systems and applications. There increased usage and demand as the chief component in the supply chain shows that they have potentialities enough for materialising them into the profit if properly channelled according to the needs and demands being kept in mind while supply chain operates and executes its core activities and this way the possible and potential losses may be reduced to the extent possible in the area of all the both dependent and independent operational activities and variables therein.
My major concern to this research work is related with the chief dimensions and components of supply chain management and how I.T integrates the core dynamics and elements of SCM with the information system so as to have successful operational feasibility and implementation.
The practice of supply chain management is guided by some basic underlying concepts that have not changed much over the centuries. Several hundred years ago, Napoleon made the remark, â€œAn army marches on its stomach.â€ Napoleon was a master strategist and a skilful general and this remark shows that he clearly understood the importance of what we would now call an efficient supply chain. Unless the soldiers are fed, the army cannot move. Along these same lines, there is another saying that goes, â€œAmateurs talk strategy and professionals talk logistics.â€ People can discuss all sorts of grand strategies and dashing manoeuvres but none of that will be possible without first figuring out how to meet the day-to-day demands of providing an army with fuel, spare parts, food, shelter, and ammunition. It is the seemingly mundane activities of the quartermaster and the supply sergeants that often determine an army’s success. This has many analogies in business.
The term â€œsupply chain managementâ€ arose in the late 1980s and came into widespread use in the 1990s. Prior to that time, businesses used terms such as â€œlogisticsâ€ and â€œoperations managementâ€ instead. Some definitions of a supply chain are offered below:
â€œA supply chain is the alignment of firms that bring products or services to market.â€â€”from Lambert, Stock, and Ellram in their book Fundamentals of Logistics Management.
â€œA 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.â€â€” from Chopra and Meindl in their book Supply Chain Management: Strategy, Planning, and Operations.
â€œA 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.â€â€”from Ganeshan and Harrison at Penn State University in their article â€˜An Introduction to Supply Chain’.
If this is what a supply chain is then we can define supply chain management as the things we do to influence the behavior of the supply chain and get the results we want. Some definitions of supply chain management are:
â€œThe systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.â€â€”from Mentzer, DeWitt, Deebler, Min, Nix, Smith, and Zacharia in their article Defining Supply Chain Management in the Journal of Business Logistics.
â€œSupply 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.â€â€”from Essentials of supply chain management. (John Wiley & Sons)
There is a difference between the concept of supply chain management and the traditional concept of logistics. Logistics typically refers to activities that occur within the boundaries of a single organization and supply chains refer to networks of companies that work together and coordinate their actions to deliver a product to market. Also traditional logistics focuses its attention on activities such as procurement, distribution, maintenance, and inventory management. Supply chain management acknowledges all of traditional logistics and also includes activities such as marketing, new product development, finance, and customer service.
In the wider view of supply chain thinking, these additional activities are now seen as part of the work needed to fulfil customer requests. Supply chain management views the supply chain and the organizations in it as a single entity. It brings a systems approach to understanding and managing the different activities needed to coordinate the flow of products and services to best serve the ultimate customer. This systems approach provides the framework in which to best respond to business requirements that otherwise would seem to be in conflict with each other.
Taken individually, different supply chain requirements often have conflicting needs. For instance, the requirement of maintaining high levels of customer service calls for maintaining high levels of inventory, but then the requirement to operate efficiently calls for reducing inventory levels. It is only when these requirements are seen together as parts of a larger picture that ways can be found to effectively balance their different demands. Effective supply chain management requires simultaneous improvements in both customer service levels and the internal operating efficiencies of the companies in the supply chain. Customer service at its most basic level means consistently high order fill rates, high on-time delivery rates, and a very low rate of products returned by customers for whatever reason. Internal efficiency for organizations in a supply chain means that these organizations get an attractive rate of return on their investments in inventory and other assets and those they find ways to lower their operating and sales expenses.
There is a basic pattern to the practice of supply chain management. Each supply chain has its own unique set of market demands and operating challenges and yet the issues remain essentially the same in every case.
The sum of these decisions will define the capabilities and effectiveness of a company’s supply chain. The things a company can do and the ways that it can compete in its markets are all very much dependent on the effectiveness of its supply chain. If a company’s strategy is to serve a mass market and compete on the basis of price, it had better have a supply chain that is optimized for low cost. If a company’s strategy is to serve a market segment and compete on the basis of customer service and convenience, it had better have a supply chain optimized for responsiveness. Who a company is and what it can do is shaped by its supply chain and by the markets it serves.
Supply Chain Working
Production refers to the capacity of a supply chain to make and store products. The facilities of production are factories and warehouses. The fundamental decision that managers face when making production decisions is how to resolve the trade-off between responsiveness and efficiency. If factories and warehouses are built with a lot of excess capacity, they can be very flexible and respond quickly to wide swings in product demand. Facilities where all or almost all capacity is being used are not capable of responding easily to fluctuations in demand. On the other hand, capacity costs money and excess capacity is idle capacity not in use and not generating revenue. So the more excess capacity that exists, the less efficient the operation becomes. Factories can be built to accommodate one of two approaches to manufacturing:
- A Product focus â€”A factory that takes a product focus performs the range of different operations required to make a given product line from fabrication of different product parts to assembly of these parts.
- A Functional focus â€”a functional approach concentrates on performing just a few operations such as only making a select group of parts or only doing assembly. These functions can be applied to making many different kinds of products. A product approach tends to result in developing expertise about a given set of products at the expense of expertise about any particular function. A functional approach results in expertise about particular functions instead of expertise in a given product. Companies need to decide which approach or what mix of these two approaches will give them the capability and expertise they need to best respond to customer demands. As with factories, warehouses too can be built to accommodate different approaches. There are three main approaches to use in warehousing:
- aStock keeping unit (SKU) storageâ€”in this traditional approach, all of a given type of product is stored together. This is an efficient and easy to understand way to store products.
- A Job lot storage â€”in this approach, all the different products related to the needs of a certain type of customer or related to the needs of a particular job are stored together. This allows for an efficient picking and packing operation but usually requires more storage space than the traditional SKU storage approach.
- A Cross adocking â€”an approach that was pioneered by Wal-Mart in its drive to increase efficiencies in its supply chain. In this approach, product is not actually warehoused in the facility. Instead the facility is used to house a process where trucks from suppliers arrive and unload large quantities of different products. These large lots are then broken down into smaller lots. Smaller lots of different products are recombined according to the needs of the day and quickly loaded onto outbound trucks that deliver the products to their final destination.
Inventory is spread throughout the supply chain and includes everything from raw material to work in process to finished goods that are held by the manufacturers, distributors, and retailers in a supply chain. Again, managers must decide where they want to position themselves in the trade-off between responsiveness and efficiency. Holding large amounts of inventory allows a company or an entire supply chain to be very responsive to fluctuations in customer demand. However, the creation and storage of inventory is a cost and to achieve high levels of efficiency, the cost of inventory should be kept as low as possible. There are three basic decisions to make regarding the creation and holding of inventory:
- A Cycle Inventoryâ€”this is the amount of inventory needed to satisfy demand for the product in the period between purchases of the product. Companies tend to produce and to purchase in large lots in order to gain the advantages that economies of scale can bring. However, with large lots also comes with increased carrying costs. Carrying costs come from the cost to store, handle, and insure the inventory. Managers face the trade-off between the reduced cost of ordering and better prices offered by purchasing product in large lots and the increased carrying cost of the cycle inventory that comes with purchasing in large lots.
- aSafety Inventoryâ€”Inventory that is held as a buffer against uncertainty. If demand forecasting could be done with perfect accuracy, then the only inventory that would be needed would be cycle inventory. But since every forecast has some degree of uncertainty in it, we cover that uncertainty to a greater or lesser degree by holding additional inventory in case demand is suddenly greater than anticipated. The trade-off here is to weigh the costs of carrying extra inventory against the costs of losing sales due to insufficient inventory.
- A Seasonal Inventoryâ€”this is inventory that is built up in anticipation of predictable increases in demand that occur at certain times of the year. For example, it is predictable that demand for anti-freeze will increase in the winter. If a company that makes anti-freeze has a fixed production rate that is expensive to change, then it will try to manufacture product at a steady rate all year long and build up inventory during periods of low demand to cover for periods of high demand that will exceed its production rate. The alternative to building up seasonal inventory is to invest in flexible manufacturing facilities that can quickly change their rate of production of different products to respond to increases in demand. In this case, the trade-off is between the cost of carrying seasonal inventory and the cost of having more flexible production capabilities.
Location refers to the geographical setting of supply chain facilities. It also includes the decisions related to which activities should be performed in each facility. The responsiveness versus efficiency trade-off here is the decision whether to centralize activities in fewer locations to gain economies of scale and efficiency, or to decentralize activities in many locations close to customers and suppliers in order for operations to be more responsive. When making location decisions, managers need to consider a range of factors that relate to a given location including the cost of facilities, the cost of labour, skills available in the workforce, infrastructure conditions, taxes and tariffs, and proximity to suppliers and customers. Location decisions tend to be very strategic decisions because they commit large amounts of money to long-term plans. Location decisions have strong impacts on the cost and performance characteristics of a supply chain. Once the size, number, and location of facilities are determined, that also defines the number of possible paths through which products can flow on the way to the final customer. Location decisions reflect a company’s basic strategy for building and delivering its products to market.
This refers to the movement of everything from raw material to finished goods between different facilities in a supply chain. In transportation the trade-off between responsiveness and efficiency is manifested in the choice of transport mode. Fast modes of transport such as airplanes are very responsive but also more costly. Slower modes such as ship and rail are very cost efficient but not as responsive. Since transportation costs can be as much as a third of the operating cost of a supply chain, decisions made here are very important. There are six basic modes of transport that a company can choose from:
- A Ship which is very cost efficient but also the slowest mode of transport. It is limited to use between locations that are situated next to navigable waterways and facilities such as harbours and canals.
- A Rail which is also very cost efficient but can be slow. This mode is also restricted to use between locations that are served by rail lines.
- A Pipelines can be very efficient but are restricted to commodities that are liquids or gases such as water, oil, and natural gas.
- A Trucks are a relatively quick and very flexible mode of transport. Trucks can go almost anywhere. The cost of this mode is prone to fluctuations though, as the cost of fuel fluctuates and the condition of roads varies.
- A Airplanes are a very fast mode of transport and are very responsive. This is also the most expensive mode and it is somewhat limited by the availability of appropriate airport facilities.
- Electronic Transport is the fastest mode of transport and it is very flexible and cost efficient. However, it can only be used for movement of certain types of products such as electric energy, data, and products composed of data such as music, pictures, and text.
Someday technology that allows us to convert matter to energy and back to matter again may completely rewrite the theory and practice of supply chain management.
Given these different modes of transportation and the location of the facilities in a supply chain, managers need to design routes and networks for moving products. A route is the path through which products move and networks are composed of the collection of the paths and facilities connected by those paths. As a general rule, the higher the value of a product (such as electronic components or pharmaceuticals), the more its transport network should emphasize responsiveness and the lower the value of a product (such as bulk commodities like grain or lumber), the more its network should emphasize efficiency.
Information is the basis upon which to make decisions regarding the other four supply chain drivers. It is the connection between all of the activities and operations in a supply chain. To the extent that this connection is a strong one, (i.e., the data is accurate, timely, and complete), the companies in a supply chain will each be able to make good decisions for their own operations. This will also tend to maximize the profitability of the supply chain as a whole. That is the way that stock markets or other free markets work and supply chains has many of the same dynamics as markets.
- Coordinating daily activities related to the functioning of the other four supply chain drivers: production; inventory; location; and transportation. The companies in a supply chain use available data on product supply and demand to decide on weekly production schedules, inventory levels, transportation routes, and stocking locations.
- Forecasting and planning to anticipate and meet future demands. Available information is used to make tactical forecasts to guide the setting of monthly and quarterly production schedules and timetables. Information is also used for strategic forecasts to guide decisions about whether to build new facilities, enter a new market, or exit an existing market.
Within an individual company the trade-off between responsiveness and efficiency involves weighing the benefits that good information can provide against the cost of acquiring that information. Abundant, accurate information can enable very efficient operating decisions and better forecasts but the cost of building and installing systems to deliver this information can be very high. Within the supply chain as a whole, the responsiveness versus efficiency trade-off that companies make is one of deciding how much information to share with the other companies and how much information to keep private. The more information about product supply, customer demand, market forecasts, and production schedules that companies share with each other, the more responsive everyone can be. Balancing this openness however, are the concerns that each company has about revealing information that could be used against it by a competitor. The potential costs associated with increased competition can hurt the profitability of a company.
The Evolving Structure of Supply Chains
The participants in a supply chain are continuously making decisions that affect how they manage the five supply chain drivers. Each organization tries to maximize its performance in dealing with these drivers through a combination of outsourcing, partnering, and in-house expertise. In the fast-moving markets of our present economy a company usually will focus on what it considers to be its core competencies in supply chain management and outsource the rest. This was not always the case though. In the slower moving mass markets of the industrial age it was common for successful companies to attempt to own much of their supply chain. That was known as vertical integration. The aim of vertical integration was to gain maximum efficiency through economies of scale.
In the first half of the 1900s Ford Motor Company owned much of what it needed to feed its car factories. It owned and operated iron mines that extracted iron ore, steel mills that turned the ore into steel products, plants that made component car parts and assembly plants that turned out finished cars. In addition, they owned farms where they grew flax to make into linen car tops and forests that they logged and sawmills where they cut the timber into lumber for making wooden car parts. Ford’s famous River Rouge Plant was a monument to vertical integrationâ€”iron ore went in at one end and cars came out at the other end. Henry Ford in his 1926 autobiography, Today and Tomorrow, boasted that his company could take in iron ore from the mine and put out a car 81 hours later.
This was a profitable way of doing business in the more predictable, one-size-fits-all industrial economy that existed in the early 1900s. Ford and other businesses churned out mass amounts of basic products. But as the markets grew and customers became more particular about the kind of products they wanted, this model began to break down. It could not be responsive enough or produce the variety of products that were being demanded. For instance, when Henry Ford was asked about the number of different colours a customer could request, he said, â€œthey can have any colour they want as long as it’s black.â€ In the 1920s Ford’s market share was over 50 percent but by the 1940s it had fallen to below 20 percent. Focusing on efficiency at the expense of being responsive to customer desires was no longer a successful business model.
Globalization, highly competitive markets, and the rapid pace of technological change are now driving the development of supply chains where multiple companies work together, each company focusing on the activities that it does best. Mining companies focus on mining, timber companies’ focus on logging and making lumber and manufacturing companies focus on different types of manufacturing from making component parts to doing final assembly. This way people in each company can keep up with rapid rates of change and keep learning the new skills needed to compete in their particular business. Where companies once routinely ran their own warehouses or operated their own fleet of trucks, they now have to consider whether those operations are really a core competency or whether it is more cost effective to outsource those operations to other companies that make logistics the centre of their business. To achieve high levels of operating efficiency and to keep up with continuing changes in technology, companies need to focus on their core competencies. It requires this kind of focus to stay competitive.
Instead of vertical integration, companies now practice â€œvirtual integration.â€ Companies find other companies who they can work with to perform the activities called for in their supply chains. How a company defines its core competencies and how it positions itself in the supply-chains it serves is one of the most important decisions it can make.
Participants in the Supply Chain
In its simplest form, a supply chain is composed of a company and the suppliers and customers of that company. This is the basic group of participants that creates a simple supply chain. Extended supply chains contain three additional types of participants. First there is the supplier’s supplier or the ultimate supplier at the beginning of an extended supply chain. Then there is the customer’s customer or ultimate customer at the end of an extended supply chain. Finally there is a whole category of companies who are service providers to other companies in the supply chain. These are companies who supply services in logistics, finance, marketing, and information technology.
In any given supply chain there is some combination of companies who perform different functions. There are companies that are producers, distributors or wholesalers, retailers, and companies or individuals who are the customers, the final consumers of a product. Supporting these companies there will be other companies that are service providers that provide a range of needed services.
Producers or manufacturers are organizations that make a product. This includes companies that are producers of raw materials and companies that are producers of finished goods. Producers of raw materials are organizations that mine for minerals, drill for oil and gas, and cut timber. It also includes organizations that farm the land, raise animals, or catch seafood. Producers of finished goods use the raw materials and subassemblies made by other producers to create their products.
Producers can create products that are intangible items such as music, entertainment, software, or designs. A product can also be a service such as mowing a lawn, cleaning an office, performing surgery, or teaching a skill. In many instances the producers of tangible, industrial products are moving to areas of the world where labour is less costly. Producers in the developed world of North America, Europe, and parts of Asia are increasingly producers of intangible items and services.
Distributors are companies that take inventory in bulk from producers and deliver a bundle of related product lines to customers. Distributors are also known as wholesalers. They typically sell to other businesses and they sell products in larger quantities than an individual consumer would usually buy. Distributors buffer the producers from fluctuations in product demand by stocking inventory and doing much of the sales work to find and service customers. For the customer, distributors fulfil the â€œTime and Placeâ€ functionâ€”they deliver products when and where the customer wants them.
A distributor is typically an organization that takes ownership of significant inventories of products that they buy from producers and sell to consumers. In addition to product promotion and sales, other functions the distributor performs are inventory management, warehouse operations, and product transportation as well as customer support and post-sales service. A distributor can also be an organization that only brokers a product between the producer and the customer and never takes ownership of that product. This kind of distributor performs mainly the functions of product promotion and sales. In both these cases, as the needs of customers evolve and the range of available products changes, the distributor is the agent that continually tracks customer needs and matches them with products available.
Retailers stock inventory and sell in smaller quantities to the general public. This organization also closely tracks the preferences and demands of the customers that it sells to. It advertises to its customers and often uses some combination of price, product selection, service, and convenience as the primary draw to attract customers for the products it sells. Discount department stores attract customers using price and wide product selection. Upscale specialty stores offer a unique line of products and high levels of service. Fast food restaurants use convenience and low prices as their draw.
Customers or consumers are any organization that purchases and uses a product. A customer organization may purchase a product in order to incorporate it into another product that they in turn sell to other customers. Or a customer may be the final end user of a product who buys the product in order to consume it.
These are organizations that provide services to producers, distributors, retailers, and customers. Service providers have developed special expertise and skills that focus on a particular activity needed by a supply chain. Because of this, they are able to perform these services more effectively and at a better price than producers, distributors, retailers, or consumers could do on their own.
Some common service providers in any supply chain are providers of transportation services and warehousing services. These are trucking companies and public warehouse companies and they are known as logistics providers. Financial service providers deliver services such as making loans, doing credit analysis, and collecting on past due invoices. These are banks, credit rating companies, and collection agencies. Some service providers deliver market research and advertising, while others provide product design, engineering services, legal services, and management advice. Still other service providers offer information technology and data collection services. All these service providers are integrated to a greater or lesser degree into the ongoing operations of the producers, distributors, retailers, and consumers in the supply chain.
Supply chains are composed of repeating sets of participants that fall into one or more of these categories. Over time the needs of the supply chain as a whole remain fairly stable. What changes is the mix of participants in the supply chain and the roles that each participant plays. In some supply chains, there are few service providers because the other participants perform these services on their own. In other supply chains very efficient providers of specialized services have evolved and the other participants outsource work to these service providers instead of doing it themselves.
Examples of supply chain structure are shown in diagram below.
Supply Chain Management
Aligning the Supply Chain with Business Strategy
A company’s supply chain is an integral part of its approach to the markets it serves. The supply chain needs to respond to market requirements and do so in a way that supports the company’s business strategy. The business strategy a company employs starts with the needs of the customers that the company serves or will serve. Depending on the needs of its customers, a company’s supply chain must deliver the appropriate mix of responsiveness and efficiency. A company whose supply chain allows it to more efficiently meet the needs of its customers will gain market share at the expense of other companies in that market and also will be more profitable.
For example, let’s consider two companies and the needs that their supply chains must respond to. The two companies are 7-Eleven and Sam’s Club, which is a part of Wal-Mart. The customers who shop at convenience stores like 7-Eleven have a different set of needs and preferences from those who shop at a discount warehouse like Sam’s Club. The 7-Eleven customers are looking for convenience and not the lowest price. That customer is often in a hurry and prefers that the store be close by and has enough variety of products so that they can pick up small amounts of common household or food items that they need immediately. Sam’s Club customers are looking for the lowest price. They are not in a hurry and are willing to drive some distance and buy large quantities of limited numbers of items in order to get the lowest price possible.
Clearly the supply chain for 7-Eleven needs to emphasize responsiveness. That group of customers expects convenience and will pay for it. On the other hand, the Sam’s Club supply chain needs to focus tightly on efficiency. The Sam’s Club customer is very price conscious and the supply chain needs to find every opportunity to reduce costs so that these savings can be passed on to the customers. Both of these companies’ supply chains are well aligned with their business strategies and because of this they are each successful in their markets.
There are three steps to use in aligning your supply chain with your business strategy. The first step is to understand the markets that your company serves. The second step is to define the strengths or core competencies of your company and the role the company can or could play in serving its markets. The last step is to develop the needed supply chain capabilities to support the roles your company has chosen.
Understand the Markets in Company Serves
Begin by asking questions about your customers. What kind of customer does your company serve? What kind of customer does your customer sell to? What kind of supply chain is your company a part of? The answers to these questions will tell you what supply chains your company serves and whether your supply chain needs to emphasize responsiveness or efficiency. The following attributes help to clarify requirements for the customers you serve. These attributes are:
- The quantity of the product needed in each lotâ€”Do your customers want small amounts of products or will they buy large quantities? A customer at a convenience store or a drug store buys in small quantities. A customer of a discount warehouse club, such as Sam’s Club, buys in large quantities.
- The response time that customers are willing to tolerateâ€”Do your customers buy on short notice and expect quick service or is a longer lead time acceptable? Customers of a fast food restaurant certainly buy on short notice and expect quick service. Customers buying custom machinery would plan the purchase in advance and expect some lead time before the product could be delivered.
- The variety of products neededâ€”Are customers looking for a narrow and well-defined bundle of products or are they looking for a wide selection of different kinds of products? Customers of a fashion boutique expect a narrowly defined group of products. Customers of a â€œbig boxâ€ discount store like Wal-Mart expect a wide variety of products to be available.
- The service level requiredâ€”do customers expect all products to be available for immediate delivery or will they accept partial deliveries of products and longer lead times? Customers of a music store expect to get the CD they are looking for immediately or they will go elsewhere. Customers who order a custom-built new machine tool expect to wait a while before delivery.
- The price of the productâ€”how much are customers willing to pay? Some customers will pay more for convenience or high levels of service and other customers look to buy based on the lowest price they can get.
- The desired rate of innovation in the productâ€”how fast are new products introduced and how long before existing products become obsolete? In products such as electronics and computers, customers expect a high rate of innovation. In other products, such as house paint, customers do not desire such a high rate of innovation.
Define Core Competencies of our Company
The next step is to define the role that your company plays or wants to play in these supply chains. What kind of supply chain participant is your company? Is your company a producer, a distributor, a retailer, or a service provider? What does your company do to enable the supply chains that it is part of? What are the core competencies of your company? How does your company make money? The answers to these questions tell you what roles in a supply chain will be the best fit for your company.
Be aware that your company can serve multiple markets and participate in multiple supply chains. A company like W.W. Grainger serves several different markets. It sells maintenance, repair, and operating (MRO) supplies to large national account customers such as Ford and Boeing and it also sells these supplies to small businesses and building contractors. These two different markets have different requirements as measured by the above customer attributes.
When you are serving multiple market segments, your company will need to look for ways to leverage its core competencies. Parts of these supply chains may be unique to the market segment they serve while other parts can be combined to achieve economies of scale. For example, if manufacturing is a core competency for a company, it can build a range of different products in common production facilities. Then different inventory and transportation options can be used to deliver the products to customers in different market segments.
Develop Needed Supply Chain Capabilities
Once we know what kind of markets your company serves and the role your company does or will play in the supply chains of these markets, then you can take this last step, which is to develop the supply chain capabilities needed to support the roles your company plays. This development is guided by the decisions made about the five supply chain drivers. Each of these drivers can be developed and managed to emphasize responsiveness or efficiency depending on the business requirements.
- Productionâ€”this driver can be made very responsive by building factories that have a lot of excess capacity and that use flexible manufacturing techniques to produce a wide range of items. To be even more responsive, a company could do their production in many smaller plants that are close to major groups of customers so that delivery times would be shorter. If efficiency is desirable, then a company can build factories with very little excess capacity and have the factories optimized for producing a limited range of items. Further efficiency could be gained by centralizing production in large central plants to get better economies of scale.
- Inventoryâ€”Responsiveness here can be had by stocking high levels of inventory for a wide range of products. Additional responsiveness can be gained by stocking products at many locations so as to have the inventory close to customers and available to them immediately. Efficiency in inventory management would call for reducing inventory levels of all items and especially of items that do not sell as frequently. Also, economies of scale and cost savings could be gotten by stocking inventory in only a few central locations.
- Locationâ€”a location approach that emphasizes responsiveness would be one where a company opens up many locations to be physically close to its customer base. For example, McDonald’s has used location to be very responsive to its customers by opening up lots of stores in its high volume markets. Efficiency can be achieved by operating from only a few locations and centralizing activities in common locations. An example of this is the way Dell serves large geographical markets from only a few central locations that perform a wide range of activities.
- Transportationâ€”Responsiveness can be achieved by a transportation mode that is fast and flexible. Many companies that sell products through catalogs or over the Internet are able to provide high levels of responsiveness by using transportation to deliver their products, often within 24 hours. FedEx and UPS are two companies who can provide very responsive transportation services. Efficiency can be emphasized by transporting products in larger batches and doing it less often. The use of transportation modes such as ship, rail, and pipelines can be very efficient. Transportation can be made more efficient if it is originated out of a central hub facility instead of from many branch locations.
- Informationâ€”The power of this driver grows stronger each year as the technology for collecting and sharing information becomes more widespread, easier to use, and less expensive. Information, much like money, is a very useful commodity because it can be applied directly to enhance the performance of the other four supply chain drivers. High levels of responsiveness can be achieved when companies collect and share accurate and timely data generated by the operations of the other four drivers. The supply chains that serve the electronics markets are some of the most responsive in the world. Companies in these supply chains from manufacturers, to distributors, to the big retail stores collect and share data about customer demand, production schedules, and inventory levels.
Where efficiency is more the focus, less information about fewer activities can be collected. Companies may also elect to share less information among them so as not to risk having that information used against them. Please note, however, that these information efficiencies are only efficiencies in the short term and they become less efficient over time because the cost of information continues to drop and the cost of the other four drivers usually continues to rise. Over the longer term, those companies and supply chains that learn how to maximize the use of information to get optimal performance from the other drivers will gain the most market share and be the most profitable.
Supply Chain Operations: Planning and Sourcing
As the saying goes, â€œIt’s not what you know, but what you can remember when you need it.â€ Since there is an infinite amount of detail in any situation, the trick is to find useful models that capture the salient facts and provide a framework to organize the rest of the relevant details. Here some useful models of the business operations are provided that make up the supply chain.
A Useful Model of Supply Chain Operations
Before we saw that there are five drivers of supply chain performance. These drivers can be thought of as the design parameters or policy decisions that define the shape and capabilities of any supply chain. Within the context created by these policy decisions, a supply chain goes about doing its job by performing regular, ongoing operations. These are the â€œnuts and boltsâ€ operations at the core of every supply chain. As a way to get a high level understanding of these operations and how they relate to each other, we can use the supply chain operations research or SCOR model developed by the Supply-Chain Council.
This model identifies four categories of operations. We will use these following four categories to organize and discuss supply chain operations:
This refers to all the operations needed to plan and organize the operations in the other three categories. We will investigate three operations in this category in some detail: demand forecasting; product pricing; and inventory management.
Operations in this category include the activities necessary to acquire the inputs to create products or services. We will look at two operations here. The first, procurement, is the acquisition of materials and services. The second operation, credit and collections, is not traditionally seen as a sourcing activity but it can be thought of as, literally, the acquisition of cash. Both these operations have a big impact on the efficiency of a supply chain.
This category includes the operations required to develop and build the products and services that a supply chain provides. Operations that we will discuss in this category are: product design; production management; and facility and management.
These operations encompass the activities that are part of receiving customer orders and delivering products to customers. The two main operations we will review are order entry/order fulfilment and product delivery. These two operations constitute the core connections between companies in a supply chain.
There is an executive level overview of three main operations that constitute the Planning process and two operations that comprise the Sourcing process.
Demand Forecasting (Plan)
Supply chain management decisions are based on forecasts that define which products will be required, what amount of these products will be called for, and when they will be needed. The demand forecast becomes the basis for companies to plan their internal operations and to cooperate among each other to meet market demand.
All forecasts deal with four major variables that combine to determine what market conditions will be like. Those variables are:
- Product Characteristics
- Competitive Environment
Demand refers to the overall market demand for a group of related products or services. Is the market growing or declining? If so, what is the yearly or quarterly rate of growth or decline? Or maybe the market is relatively mature and demand is steady at a level that has been predictable for some period of years. Also, many products have a seasonal demand pattern. For example, snow skis and heating oil are more in demand in the winter and tennis rackets and sun screen are more in demand in the summer. Perhaps the market is a developing marketâ€”the products or services are new and there is not much historical data on demand or the demand varies widely because new customers are just being introduced to the products. Markets where there is little historical data and lots of variability are the most difficult when it comes to demand forecasting.
Supply is determined by the number of producers of a product and by the lead times that are associated with a product. The more producers there are of a product and the shorter the lead times, the more predictable this variable is. When there are only a few suppliers or when lead times are longer, there is more potential uncertainty in a market. Like variability in demand, uncertainty in supply makes forecasting more difficult. Also, longer lead times associated with a product require a longer time horizon over which forecasts must be done. Supply chain forecasts must cover a time period that encompasses the combined lead times of all the components that go into the creation of a final product.
Product characteristics include the features of a product that influence customer demand for the product. Is the product new and developing quickly like many electronic products or is the product mature and changing slowly or not at all, as is the case with many commodity products? Forecasts for mature products can cover longer timeframes than forecasts for products that are developing quickly. It is also important to know whether a product will steal demand away from another product. Can it be substituted for another product? Or will the use of a product drive the complementary use of a related product? Products that either compete with or complement each other should be forecasted together.
Competitive environment refers to the actions of a company and its competitors. What is the market share of a company? Regardless of whether the total size of a market is growing or shrinking, what is the trend in an individual company’s market share? Is it growing or declining? What is the market share trend of competitors? Market share trends can be influenced by product promotions and price wars, so forecasts should take into account such events that are planned for the upcoming period. Forecasts should also account for anticipated promotions and price wars that will be initiated by competitors.
There are four basic methods to use when doing forecasts. Most forecasts are done using various combinations of these four methods. The methods are defined as follows:
- Time Series
Qualitative methods rely upon a person’s intuition or subjective opinions about a market. These methods are most appropriate when there is little historical data to work with. When a new line of products is introduced, people can make forecasts based on comparisons with other products or situations that they consider similar. People can forecast using production adoption curves that they feel reflect what will happen in the market.
Causal methods of forecasting assume that demand is strongly related to particular environmental or market factors. For instance, demand for commercial loans is often closely correlated to interest rates. So if interest rate cuts are expected in the next period of time, then loan forecasts can be derived using a causal relationship with interest rates. Another strong causal relationship exists between price and demand. If prices are lowered, demand can be expected to increase and if prices are raised, demand can be expected to fall.
Time series methods are the most common form of forecasting. They are based on the assumption that historical patterns of demand are a good indicator of future demand. These methods are best when there is a reliable body of historical data and the markets being forecast are stable and have demand patterns that do not vary much from one year to the next. Mathematical techniques such as moving averages and exponential smoothing are used to create forecasts based on time series data. These techniques are employed by most forecasting software packages.
Simulation methods use combinations of causal and time series methods to imitate the behaviour of consumers under different circumstances. This method can be used to answer questions such as what will happen to revenue if prices on a line of products are lowered or what will happen to market share if a competitor introduces a competing product or opens a store nearby.
Few companies use only one of these methods to do forecasts. Most companies do several forecasts using several methods and then combine the results of these different forecasts into the actual forecast that they use to plan their business. Studies have shown that this process of creating forecasts using different methods and then combining the results into a final forecast usually produces better accuracy than the output of any one method alone.
Regardless of the forecasting methods used, when doing forecasts and evaluating their results it is important to keep several things in mind. First of all, short-term forecasts are inherently more accurate than long-term forecasts. The effect of business trends and conditions can be much more accurately calculated over short periods than over longer periods. When Wal-Mart began restocking its stores twice a week instead of twice a month, the store managers were able to significantly increase the accuracy of their forecasts because the time periods involved dropped from two or three weeks to three or four days. Most long range, multi-year forecasts are highly speculative.
Aggregate forecasts are more accurate than forecasts for individual products or for small market segments. For example, annual forecasts for soft drink sales in a given metropolitan area are fairly accurate but when these forecasts are broken down to sales by districts within the metropolitan area, they become less accurate. Aggregate forecasts are made using a broad base of data that provides good forecasting accuracy. As a rule, the more narrowly focused or specific a forecast is, the less data is available and the more variability there is in the data, so the accuracy is diminished.
Finally, forecasts are always wrong to a greater or lesser degree. There are no perfect forecasts and businesses need to assign some expected degree of error to every forecast. An accurate forecast may have a degree of error that is plus or minus 5 percent. A more speculative forecast may have a plus or minus 20 percent degree of error. It is important to know the degree of error because a business must have contingency plans to cover those outcomes. What would a company do if raw material prices were 5 percent higher than expected? What would it do if demand was 20 percent higher than expected?
Once demand forecasts have been created, the next step is to create a plan for the company to meet the expected demand. This is called aggregate planning and its purpose is to satisfy demand in a way that maximizes profit for the company. The planning is done at the aggregate level and not at the level of individual stock keeping units (SKUs). It sets the optimum levels of production and inventory that will be followed over the next 3 to 18 months.
The aggregate plan becomes the framework within which short-term decisions are made about production, inventory, and distribution. Production decisions involve setting parameters such as the rate of production and the amount of production capacity to use, the size of the workforce, and how much overtime and subcontracting to use. Inventory decisions include how much demand will be met immediately by inventory on hand and how much demand can be satisfied later and turned into backlogged orders. Distribution decisions define how and when product will be moved from the place of production to the place where it will be used or purchased by customers.
There are three basic approaches to take in creating the aggregate plan. They involve trade-offs among three variables. Those variables are:
- Amount of production capacity;
- The level of utilization of the production capacity;
- The amount of inventory to carry.
We will look briefly at each of these three approaches. In actual practice, most companies create aggregate plans that are a combination of these three approaches.
- Use production capacity to match demand. In this approach the total amount of production capacity is matched to the level of demand. The objective here is to use 100 percent of capacity at all times. This is achieved by adding or eliminating plant capacity as needed and hiring and lying off employees as needed. This approach results in low levels of inventory but it can be very expensive to implement if the cost of adding or reducing plant capacity is high. It is also often disruptive and demoralizing to the workforce if people are constantly being hired or fired as demand rises and falls. This approach works best when the cost of carrying inventory is high and the cost of changing capacityâ€”plant and workforceâ€”is low.
- Utilize varying levels of total capacity to match demand. This approach can be used if there is excess production capacity available. If existing plants are not used 24 hours a day and 7 days a week then there is an opportunity to meet changing demand by increasing or decreasing utilization of production capacity. The size of the workforce can be maintained at a steady rate and overtime and flexible work scheduling used to match production rates. The result is low levels of inventory and also lower average levels of capacity utilization. The approach makes sense when the cost of carrying inventory is high and the cost of excess capacity is relatively low.
- Use inventory and backlogs to match demand. Using this approach provides for stability in the plant capacity and workforce and enables a constant rate of output. Production is not matched with demand. Instead inventory is either built up during periods of low demand in anticipation of future demand or inventory is allowed to run low and backlogs are built up in one period to be filled in a following period. This approach results in higher capacity utilization and lower costs of changing capacity but it does generate large inventories and backlogs over time as demand fluctuates. It should be used when the cost of capacity and changing capacity is high and the cost of carrying inventory and backlogs is relatively low.
Product Pricing (Plan)
Companies and entire supply chains can influence demand over time by using price. Depending on how price is used, it will tend to either maximize revenue or gross profit. Typically marketing and sales people want to make pricing decisions that will stimulate demand during peak seasons. The aim here is to maximize total revenue. Often financial or production people want to make pricing decisions that stimulate demand during low periods. Their aim is to maximize gross profit in peak demand periods and generate revenue to cover costs during low demand periods.
Relationship of Cost Structure to Pricing
The question for each company to ask is, â€œIs it better to do price promotion during peak periods to increase revenue or during low periods to cover costs?â€ The answer depends on the company’s cost structure. If a company has flexibility to vary the size of its workforce and productive capacity and the cost of carrying inventory is high, then it is best to create more demand in peak seasons. If there is less flexibility to vary workforce and capacity and if cost to carry inventory is low, it is best to create demand in low periods.
An example of a company that can quickly ramp up production would be an electronics components manufacturer. Such companies have invested in plant and equipment that can be quickly reconfigured to produce different final products from an inventory of standard component parts. The finished goods inventory is expensive to carry because it soon becomes obsolete and must be written off.
These companies are generally motivated to run promotions in peak periods to stimulate demand even further. Since they can quickly increase production levels, a reduction in the profit margin can be made up for by an increase in total sales if they are able to sell all the products that they manufacture.
A company that cannot quickly ramp up production levels is a paper mill. The plant and equipment involved in making paper is very expensive and requires a long lead time to build. Once in place, a paper mill operates most efficiently if it is able to run at a steady rate all year long. The cost of carrying an inventory of paper products is less expensive than carrying an inventory of electronic components because paper products are commodity items that will not become obsolete. These products also can be stored in less expensive warehouse facilities and are less likely to be stolen.
A paper mill is motivated to do price promotions in periods of low demand. In periods of high demand the focus is on maintaining a good profit margin. Since production levels cannot be increased anyway, there is no way to respond to or profit from an increase in demand. In periods where demand is below the available production level, then there is value in increased demand. The fixed cost of the plant and equipment is constant so it is best to try to balance demand with available production capacity. This way the plant can be run steadily at full capacity.
RESEARCH OBJECTIVE AND METHODOLOGY
RESEARCH METHODOLOGY OF PROJECT
To have the successful completion of this research study and the chief goal, for that this one has been taken, the below cited end goals required to be attained hence it must lead us as well with the clear vision and idea about how well designed and structured conceptual management of information system and integration of SCM operations help easing in the processes and operations at large so that the end objectives of the organisations are achieved efficiently and effectively and the implications of the interrelated components in the operational cycle are reflected through its strategic designing and implementation. Through this research I am going to find out the answers of the below mentioned research questions.
The research questions are as follows:
- How we can have analytical overview of the concept of SCM?
- How can the functionality of SCM may be explained while analysing its chief elements as the prime objective of the study and process analysis weaving in the operational web of SCM.
- How the business strategies are aligned and integrated with the SCM?
- How co-ordinated use of I.T takes place in SCM?
- Which are the major, adaptable, operational and flexible information systems, playing chief role in the SCM and their developmental phases and aspects?
- Why system development and information dissemination are the most important aspects in SCM?
RESEACH METHODOLOGY: Research Methodology is a systematic way of conducting a project. It is a series of steps, which are undertaken in order to reach at the final conclusion. The methodology adopted for study is as follows:
The research design in this study is Analytical.
Nature of Data
The data fOrder Now