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By optimizing their supply chain operations, managers can optimize customer value and create a lasting competitive advantage. This is known as supply chain management. Forecasting, planning, sourcing, production processes, transportation, warehousing, inventory management, logistics or operations management, promotion, order fulfillment, and customer support are all part of the supply chain. (2002) Chopra
Six eras or periods can be used to outline the history of supply chain. The assembly line's invention at the beginning of the 20th century is considered the beginning of the creation age. During this time, the Japanese automobile industry's practices for re-engineering and cost reduction heavily influenced supply chain management. The era of integration witnessed the development of the Electronic Data Interchange in the early second-half of the last century. This period was also characterized by the introduction of Enterprise Planning systems. The concept of integration involves close alignment of activities in the supply chain. Simply put, supply chain management involves the integration of all the activities that are involved in bringing a product to the market and the satisfaction of customers. Adding value is the fundamental objective of supply chain. Value in a supply chain is added by cutting on production costs and improving customer responsiveness through the integration of activities in the supply chain. (Fredendall 2001) Integration is a three step process. In the initial step of integration, all organizations in a supply chain act independent of each. In the second step however, collaboration by firms within the supply chain results in easier access and sharing of information courtesy of technology. The last step is the vertical integration of all activities of the supply chain downstream as well as upstream.
The third era is the globalization era. This period saw attention shift towards global supply chain development with a view of increasing competitive advantage. Multinationals led this era as they sought resources beyond national boundaries in their pursuit of new markets. The next era was the specialization era. This was a two phase era where the initial phase was characterized by outsourcing of non-core competencies in manufacturing and distribution. In the second phase of the specialization era the supply chain was viewed a lot as a service. This led to rapid changes in the roles of suppliers, customers, providers of logistics as well as locations in the supply chain. The last of these periods is the Supply Chain Management 2.0. As a result of rapid price fluctuation, competition on a global scale, specialization, and talent scarcity the methods, processes, and tools used in the supply chain had to evolve. Supply Chain Management 2.0 leverages technology to achieve agility or flexibility in the face of the ever changing market conditions. (Stack 2002)
There are several functional areas that are critical in the performance of the supply chain. These performance drivers have to be understood individually as well as a unit, the supply chain. (Chopra 2001)
The first driver is Production, the capacity of a supply chain to manufacture and store a finished product. Facilities required for production are plants and warehouses. There are a two ways a company can approach production, through the products focus approach or the functional focus approach. When a company uses the product focus approach, they are involved in all the activities required for fabrication of the product. The company makes all or most of the parts and assembles the final product. When the functional approach is utilized, the company focuses on the core competencies and outsourcing the non-core activities. For this approach the company concentrates with either jus fabrication of parts or assembly of the final product. There are different approaches to warehousing as well. The first approach is known as the Stock Keeping Unit storage where all the product is stored together. It has two merits, not only is it easy to understand, but it is very efficient. The Job Lot Storage approach involves storing products in batches in relation to specific jobs or customers. This approach is also very efficient but requires more space than the traditional approach. Last but not least is the cross-docking approach to warehousing. Cross-docking is the brainchild of Wal-Mart in their pursuit for supply chain excellence. This approach has no warehousing but instead the facility is used for the process of sorting, mixing, blending, and bulk breaking according to the needs of the day. The products are then reloaded and transported where they are needed.
Inventory refers to the raw materials, work-in-progress, and finished goods held in the supply chain by manufactures and the entire distribution channel. Inventory management is always a compromise between efficiency and responsiveness. Efficiency involves keeping the costs low by using minimum inventory but it compromises responsiveness. For a company to be responsive to customer demand, it is bound to hold a significant amount of inventory. More inventory raises cost and compromises efficiency. A company can chose to manage its inventory in one of the following ways. Holding cycle inventory means that the company inventory is sufficient for the demand between orders. (Graham 2007) Purchase of inventory is usually done in bulk for the whole period in order to enjoy economies of scale. This method leads to holding of a lot of inventory and hence high costs. A company can chose to hold safety inventory where only some stock is held to mitigate uncertainties in demand and supply. Holding safety inventory reduces the cost of inventory but reduces a company’s responsiveness to consumer demand. Last but not least, seasonal inventory is held in situation where demand is expected to shift.
Location is another performance driver in the supply chain. This is the geographical configuration of facilities in a supply chain. Location decision are on either to centralize operations or decentralize. Centralization of facilities increases efficiency as well as the economies of scale. Decentralization of operations on the other hand, guarantees that a company is responsive due to proximity to the market. Location decisions are strategic because they involve a lot of sunk costs and affects the company in the long run. Several factors have to be considered when choosing locations. The cost of facilities, labor, and overheads as well the infrastructure available. Proximity to the market or the source of raw materials is also key in making location decisions.
This function is concerned with the movement of finished goods, work-in-progress and raw materials between locations. The most common modes of transport are road and rail because they are cheap and relatively fast. The choice of transportation mostly depends on the products. Fast means are usually expensive while cheap means tend to compromise a company’s responsiveness. Transportation is a tradeoff between cost and customer responsiveness.
Information is the basis upon which the first four drivers make decisions hence it is very important. Information serves two purposes, it aids the coordination of daily activities such as transportation, inventory, production and location. It also helps to forecast and plan for future demand. Information is key to the integration of the supply chain because free flow of information among organizations in the supply increases responsiveness which is key in gaining competitive advantage. (Johnson 2010)
Supply Chain Management Strategies
There are several strategies that can be employed in the management of the supply chain. The Lean Strategy focuses on cost cutting and reducing waste across the supply chain. This strategy results in an efficient as well as streamlined operation. This strategy utilizes a pro-active approach where customer demand is forecasted and goods produced at the lowest price with as little wastage as possible. The aim of this strategy is to add value. Non-value adding activities are eliminated, minimal inventory is kept, waste is kept at a minimal level, and costs are reduced. The Agile Strategy focuses on responding to dynamic market conditions. In the information age, companies are required to be able to handle the unpredictability of the market by staying innovative. Emphasis of this strategy is on the speed and flexibility of responding to customer demands. This strategy takes a reactive approach by waiting for the customer to initiate demand. A Hybrid Strategy combines the lean strategy with the agile strategy. This way the company not only seeks to cuts cost and reduce wastage, but it also aims to be responsive to market demands. Using the hybrid strategy, a company can achieve customer responsiveness on one hand and reduce its costs on the other. A streamlined and efficient supply chain is necessary for this strategy to work.
As a tool in the accomplishment of the overall corporate strategy, supply chain management achieves several objectives including the reduction in working capital, the acceleration of cash-to-cash cycle, sale of unnecessary assets, and increased inventory turns among others. Supply chain management is geared towards ensuring that flow within the supply chain is streamlined and effective. This includes the flow of raw materials, work-in-progress, finished products, finances, and information. (Chopra 2001)
Logistics is one of the key components on the supply chain. It deals with the effective and efficient management of activities in an organization driven by customer satisfaction. There are seven principles of logistics. The Right Product, the Right Price, the Right Source, at the Right Time, the Right Place, the Right quantity, and the right quality. Effective logistics is key to the success of supply chain management. This because it integrates every aspect of the organization from sourcing to customer service.
There are several types of logistics. Inbound logistics or the supplier-facing functions are associated with raw materials and inputs from the source. Outbound logistics on the other hand, are concerned with the movement of finished goods from the company to its final consumers. They are also known as customer facing functions. (Fredendall 2001) Reverse logistics originate on the customer side of the supply chain and include repairs, return of defective goods, recycling, and any other post-purchase behavior exhibited by the consumers.
The management of the supply chain is key to gaining competitive advantage. Companies that perform proper supply chain management are able to cut their operational costs through lean operations and respond more to customer demands through agile systems.
Chopra, Sunil & Meindl, Peter. (2001) Supply Chain Management: Strategy, Planning, and Operations, Upper Saddle River, NJ: Prentice-Hall, Inc.
Fredendall, Lawrence D., and Ed Hill (2001) Basics of Supply Chain Management, Boca Raton, FL: St. Lucie Press.
Goldratt, Eliyahu M. (2004) The Goal, Great Barrington, MA: The North River Press Publishing Corporation.
Graham, Gordon. (2007) Distribution Inventory Management, Richardson, TX: Inventory Management Press.
Johnson, Steven. (2010) Emergence: The Connected Lives of Ants, Brains, Cities, and Software, New York, NY: Scribner.
Roman, Eugene R. (1996) Reengineering the Distributor, South Holland, IL: Systems Design, Inc.
Senge, Peter M. (1990) The Fifth Discipline: The Art and Practice of the Learning Organization, New York, NY: Doubleday/Currency.
Stack, Jack. (2002) The Great Game of Business, New York, NY: Currency/Doubleday.
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