March 27, 2013

Understanding the Supply Chain - Review Notes


Supply chain

A supply chain consists of all stages involed directly, or indirectly, in fulfilling a customer request for a product in an economy. Thus it includes customers who give the requests, transporters, retailers, wholesalers, warehoues, manufacturers, and component, service as well as raw material suppliers.
Within an organization there is a supply chain that includes all functions involved a filling a customer request as well as the order. The functions carried out within an organization include marketing, new product development, operations, distribution, finance and customer service.

In a supply chain there is constant flow of information, product and funds between stages. Usually supply chain is imagined as product moving from suppliers to manufacturers and from there to wholesalers and retailers and then further to customers. But supply chains have two way movements and also involve movement of information and fund apart from the product.

Customer is an integral part of the supply chain and the primary purpose of a supply chain is satisfying customer needs and generating profit for itself in the process.

The routine supply chain activities begin with a customer order and end when a satisfied customer has paid for his purchase.

In a supply chain, number of customers are there, number of retailers are there, number of transporters are there and number of manufacturing plants can be there. Hence a supply chain is actually a network or a web. Hence supply network and supply web also describe a supply chain.

The objective of every supply chain is to maximize the overall value generated. Supply chain management involves the management of flows between and among stages in a supply chain to maximize total profitability.

Decision Phases in a Supply Chain

Supply Chain Design, Plan and Operation are identified as three significant decision phases by Chopra and Meindl.

Supply Chain Design: Supply chain strategy is another word used for this phase. Supply chain design decisions or strategy decisions include products to be manufactured, location and capacities of manufacturing plants and warehouses, modes of trasport to be utilized and information system to be utilized.

Supply Chain Planning: Planning, typically done for an year, establishes parameters within which a supply chain will function over a specified period of time.

Supply Chain Operation: In this phase the time horizons are small, monthly, weekly and daily. The decisions driven by customer order and are related to invidual customer orders. There are also decision related to individual production facilities, warehouses and transporters.

Process Views of a Supply Chain

There are two views.

1. Cycle view

In cycle view, the supply chain processes are divided into cycles that are performed at the interface between two successive stages of a supply chain and one describes the following cycles.

Customer order cycle
Replenishment cycle
Manufacturing cycle
Procurement cycle

A. Customer order cycle

Normally occurs at the retailer place between the customer and the retailer.

Activities involved
Customer arrival, Customer order entry, Customer order fulfilment, Customer order receiving, Customer funds payment

B. Replenishment cycles

Normally thought to occur at the retailer/wholesaler or distributor interface.

Activities involved
Retai order trigger, Retail order entry, Retail order fulfilment, Retail order receiving, Funds payment

C. Manufacturing cycle

Normally thought to occur at the wholer/manufacturer interface. Depending on the number of channels in the distribution channel it can occur at customer - manufacturer, or retailer - manufacturer also.

Activities involved

Order arrival, Production scheduling, Manufacturign and shipping, Receiving by the person ordered, Funds payment

D. Procurement cycle

Occurs at the manufacturer/supplier interface

2. Push/Pull View

In this view, pull processes and push processes are categorized and identified in the supply chain. Each supply chain will have some pull processes and push processes. The activities initiated by customers' orders form pull process activities. The activities initiated and carried out in anticipation of customer demand are push process activities.

Importance of Supply Chain Flows

Flow of information, material and product and cash are important for supply chain functioning and fulfilment of its objectives.

Information is key to produce as per customers' order and also to forecast in case of made-to-stock supply chains.

Supply Design, Planning and Operation Related Questions. One will find answers to these questions in various chapters of the Supply Chain Management Book which we are summarising chapter-wise.

1. Why a company outsources some assembly activities and does some within its assembly plant? What characteristics of the product or order characterize outsourced activities?
2. When does a company have only one manufacturing location for the entire country or world? When does it have multiple plants?
3. Why certain orders are despatched via couriers for overnight delivery or one day delivery and why certain other orders are sent via trucks on full load or part load basis?
4. How inventories are determined for components and finished goods?

Reference
Sunil Chopra and Peter Meindl, Supply Chain Management: Strategy, Planning and Operations, Prentice Hall, 2001.



Full Chapter - WSC Book - Supply Chain Management - An Evolutionary View

Originally posted at
http://knol.google.com/k/narayana-rao/supply-chain-management-basic/2utb2lsm2k7a/1348#
Updated on 27.3.2013


Related Article
Supply chain management - Detailed Introduction

Supply Chain Performance: Achieving Strategic Fit and Scope - Review Notes


Chaper one is concerned with the question what is a supply chain?

Competitive Strategy and Supply Chain Strategy


A company's competitive strategy clearly spells out the set of customer needs that it seeks to satisfy through its products and services having a defined set of attributes.

The supply chain design or supply chain strategy must be in alignment with competitive strategy. A supply chain design can be taken up only after the competitive strategy is finalised and a supply chain needs to be redesigned or modified whenever there is a change in competitive strategy.

Chopra and Meindl use the concept of strategy to refer to what each function will try to do particularly well. They indicate that product strategy specifies  the portfolio of products that will be offered for sale by the company and product development strategy specifies the portfolio of new products that the company will develop. A marketing and sales strategy specifies how the market will be segmented and the products of the company are positioned, priced and promoted. The supply chain strategy determines the procurement process of the raw materials, transportation of materials, manufacture of the product,  distribution channels, warehousing and transportation of the products, and the follow-up services.

The supply chain strategy includes supplier strategy, operations strategy, and logistics strategy. Design decisions regarding inventory, transportation, operating facilities, and information flows in the supply chain of a company are all part of supply chain strategy.

The Process of Achieving Strategic Fit


Strategic fit between competitive strategy and supply chain strategy refers to the consistency between the customer needs that the competitive strategy aims to satisfy and the supply chain capabilities that the supply chain strategy aims to build. Chopra and Meindl stated an important point: no one function can ensure the chain's success. However, failure at one function may lead to failure of the overall chain.

Three steps are involved.

1. Understanding the customer needs regarding attributes of supply.
2. Understanding the supply chain attributes (alternatives available).
3. Achieving strategic fit. Making decision on the supply chain to best serve the needs of the target segment customers.

Understanding the Needs of the Customer Regarding Supply Attributes


Some of the attributes or dimensions of the supply are as follows:


The quantity of the product needed in each lot purchased. Preferred purchase quanity of the customer.
The response time from customer's enquiry.
The variety of products needed (applicable in case of a retail store, restaurant etc.).
The service level required (shortage of items)
The price of the product or service.
The desired rate of innovation.


Chopra and Meindl argued that while there are many attributes of the supply system which are to be understood from customer point of view and built into the supply chain, one key measure captures the variation for many of these attributes. That measure according to them is implied demand uncertainty. It is different from demand uncertainty. Demand uncertainty reflects the uncertainty of customer demand for a product. Implied demand uncertainty is uncertainty for a specific supply chain for the portion of the demand (target market) it caters to.

Implied demand uncertainty is defined in the context of multiple supply chains supplying the same product. Multiple supply chains come due to different attributes that they satisfy. An example is a firm supplying a product, say medicines, 24 hours versus a firm that supplies during normal day hours. The implied demand uncertainty for the 24 hour firm can be high as on some days there is heavy demand and some days very less demand and also the demand for specific medicines can be high on some days and can be even zero on some days.

A spectrum can be visualized in terms of implied demand uncertainty from low uncertainty to high uncertainty and a firm can be placed on this line or spectrum at some point.


Understanding the Supply Chain (Characteristics)

A supply chain can be described initially by two characteristics responsiveness and efficiency.

Various supply chain characteristics contribute to responsiveness and efficiency.

Supply chain responsiveness is measured by the abilities of the chain to do the following:


Ability to respond to fluctuations in demand
Ability to provide short lead times
Ability to handle large variety of products
Ability to come out with innovations and highly innovative products
Ability to provide a very high service level


Supply chain efficiency is the cost of making and delivering a product to the customer. Increase in costs lower efficiency.

Cost-Responsiveness Efficient Frontier

It is a chart or graph with cost on the X-axis (origin is high cost) and Responsiveness on the Y axis (origin is low responsiveness). See Example

The frontier shows the minimum cost for a given responsiveness. If a company is operating within the frontier,  at a higher cost, it can decrease the cost by appropriate actions but keep the responsiveness same. When it is operating on the efficient frontier, any increase in responsiveness can only come by incurring extra cost.

The frontier curve is a short-run phenomena and companies continually try to improve their supply chain by reducing cost further and increasing responsiveness and thus change the frontier over each period.

Achieving strategic fit

The greater the implied demand uncertainty, the more responsive a supply chain has to be. More responsive supply chains are more costly supply chains. When compared directly with less responsive but more efficient supply chains, their costs may look excessive. But the fit demands that for target markets with greater implied demand uncertainty, more responsive supply chain is to be employed.

Therefore it is to be emphasized that there is no right supply chain strategy independent of the competitive strategy. For a given competitive, a right supply chain can be specified.

Other Issues affecting the Strategic Fit Decision

Multiple Target Markets: Most companies may serve two or more target markets and the supply chain has to serve them both. In this case some tailoring has to be done by having common facilities and in some supply chain activities and dedicated facilities in some supply chain activities so that economies of scale where exist can be utitlized without deterioration in service for either target markets.

Product Life Cycle: As the product is new, implied demand uncertainty is high and as it matures, implied demand uncertainty is low. Hence supply chain design has to change over the life cycle of the product.

Competitive situation: As the product matures, more competitors emerge and implied demand uncertainty keeps chaging.

Expanding the Supply Chain Optimization and Strategic Fit Scope

Intracompany Intraoperation scope: The most limited scope over which strategic fit and optimization can be attempted is one with one operation within a functional area in a company. For example each warehouse of the company has its own goal.

Intracompany Intrafunctional scope:  If the competitive strategy and supply chain strategy are aligned across all the supply chain activities (supplier strategy, operations strategy, and logistics strategy   ) or functions of the company and optimization is attempted in an integral manner including the raw material inventory, manufacturing operations, finished goods inventory and warehouse, and transportation, the scope is extended to intracompany intrafuctional level.

Intracompany Interfunctional scope: At this level of scope, the entire company's activities are viewed and modeled as one single system, and optimization is done and company profit is maximized.

Intercompany Interfunctional scope: The Maximum Supply Chain Surplus view: At this level of optimization and fit making, the entire supply chain (including various different organizations) is modeled as a system and optimization and fit is designed so that supply chain surplus is maximized.

Flexible Intercompany interfunctional scope: The flexibility refers to dynamic situation. Physically, the participants in the supply chain keep changing, products keep changing, technologies keep changing, facilities keep changing. Mathematically, there are changes in number of variables and variable values. A supply chain capable of optimizing and fit making dynamically over time is a flexible intercompany interfuctional scope supply chain.






References


Sunil Chopra and Peter Meindl, Supply Chain Management: Strategy, Planning and Operations, Prentice Hall, 2001.

Fisher, Marshall L. "What is the Right Supply Chain for Your Product?" Harvard Business Review, March-April 1997, pp. 83-93.



_________________________________________________________________________________

For Further Reading

The Strategic Fit of Supply Chain Integration in TFL-LCD Industry
http://web.cc.chu.edu.tw/sha/files/honor/SCMAIJ.pdf

Sustaining Strategic Fit across Culturally Diverse Supply Chain Relationships
http://geconsult.blogspot.com/2010/05/corporate-strategy-sustaining-strategic.html

Relating Structure of Supply Chain Organization to Objectives: Few Propositions and a Pilot Study
http://www.iitk.ac.in/infocell/announce/convention/papers/Strategy-02-RRK%20Sharma,%20Rahul%20Sharma,H%20Hazaria%20final.pdf



__________________________________________________________________

Slides

http://www.slideserve.com/presentation/6980/Supply-Chain-Performance-Achieving-Strategic-Fit-and-Scope





Article originally posted at
http://knol.google.com/k/narayana-rao/aligning-competitive-strategy-and/2utb2lsm2k7a/1350

Updated 27.3.2013

March 26, 2013

Supply Chain Drivers and Obstacles - Review Notes


The supply chain strategic fit concept requires that a company achieve the desired responsiveness and efficiency in its supply chain that best meets the needs of the company's competitive strategy.


The performance of a supply chain (responsiveness and efficiency) is determined by decisions in the areas of inventory, transportation, facilities and information. Hence these four areas are identified as drivers of supply chain performance.

A Framework for Structuring Supply Chain Drivers


Supply chain managers have to take research and development efforts to improve both responsiveness and efficiency of their supply chains on a continuous basis. In the past there were technological and managerial breakthroughs which improve one of them without any deterioration in the other and also improvement in both dimensions simulataneously. Actual economic theory tells, new technologies (capital investments) are adopted for capital productivity. Capital productivity in the context of supply chains comes through improvement in responsiveness and efficiency.

But at a certain point in time, there can be tradeoffs between responsiveness and efficiency.  Hence supply chain designers come with supply chains that give various combinations of responsiveness and efficiency (responsiveness - efficiency frontier) and the optimal combination is chosen based on the competitive strategy considerations.

Definition/Explanation of Four Drivers



Inventory: It consists of all raw material, work in process, and finished goods within a supply chain.

Transportation: It involves moving inventory from one point in the supply chain to another point.

Facilities: A facility is a place where inventory is stored, manufactured or assembled. Hence facilities can be categorised into production facilities and storage facilities.

Information: It consists of data and results of analysis regarding inventory, transportation, facilities, customer orders, customers, and funds.



Inventory


Inventory is maintained in the supply chain because of mismatches between supply and demand.

Types of inventory based on reasons for keeping them:


Cycle inventory: This results due to producing or buying larger lots to minimize acquisition costs related to processing each purchase order or production order.

Safety Inventory: It is held to counter against uncertainty or variability of demand.

Seasonal Inventory: It is inventory maintained to satisfy higher demands in a period compared to production capacity. It arises due to the decision to service predicted variability in demand through extra production during slack period or low demand periods.

Increasing inventory gives higher responsiveness but results in higher inventory carrying cost.

Transportation


Number of decisions have to be taken in designing a supply chain regarding transportation.

Decisions

Mode of Transportation

Six basic modes exist

Air
Truck (Road)
Rail
Ship
Pipeline
Electronic transportation (the newest mode for music, documents etc)


Route and Network Selection

Network is a set of facilities or destinations which can be used for transportation of goods. Route is a specific selection of facilities or destinations through which goods move.

Own Transport or Outsourced Transport


Facilities


Within a facility, inventory is either transformed into another state or stored.

Facilities Related Decisions

Location
Capacity
Manufacturing Methodology or Technology
Warehousing methodology


Information

Information does not have a physical presence. It is likely to be overlooked. But it deeply affects every part of supply chain. Information is the connection between various stages in a supply chain and allows them to coordinate actions and increase the maximum supply chain profitability. It is also essential in daily operations. The stocks available in warehouses must have visibility so that when a customer wants an item, it can be delivered to him.




Decisions related to Information


Push Process Information and Pull Process Information
Coordination and information sharing across various facilities in the supply chain.
Forecasting
Aggregate Planning
Enabling technologies

Obstacles to Achieving Strategic Fit


Increasing Variety of Products:In the era of mass customization production variety is increasing.

The customers becoming increasingly demanding. Today's customers are demanding faster fulfillment, better quality, and better performing products for the same price that they are paying today.

The supply chain is getting fragmented. At one time vertical integration was the order of the day. But the present trend is to concentrate on core competence and outsource more activities. Thus the supply chain is more fragmented now.

Globalization is creating global supply chains and hence physical distance is increasing between a company and its suppliers and a company and its customers.

While creating a strategy is difficult, executing it is much more difficult. Many companies understand  Toyota Production System now, but still find it difficult to implement and operate.


References

Sunil Chopra and Peter Meindl, Supply Chain Management: Strategy, Planning and Operations, Prentice Hall, 2001.

Marien, Edward J. "The Four Supply Chain Enablers," Supply Chain Management Review, March/April 2000, pp. 60-68

Presentation slides on the topic
Presentation - Supply chain drivers and metrics

Article originally posted at
http://knol.google.com/k/narayana-rao/drivers-of-supply-chain-performance/2utb2lsm2k7a/1351#

March 25, 2013

Aggregate Planning in the Supply Chain - Review Notes

Chopra and Meindl's book, Supply Chain Management: Strategy, Planning, and Operation, is a comprehensive introduction on supply chain management.

In this chapter, the author only described the general nature of the aggregate planning problem and the details involved in aggregrate planning are to be learned from books in production planning and control or operations planning and control.

Aggregate Planning



The objective of aggregate plan is to satisfy demand in a way that maximizes profit for the firm over the planning horizon. The time period for the aggregate planning  is not sufficient for building a new set of facilities to increase production to meet the increase in demand.  So in some periods, inventory may need to be accumulated.

 Aggregate planning is done for a given supply chain design. This means that capacity of the various facilities in the supply chain are constraints now. There may be scope to do multiple shifts or to stop using multiple shits by recruiting extra manpower or laying off them.  But demand has predictable or predicted variability for period to period in the planning horizon. Also there is a demand variation which cannot be predicted. Aggregate plan is made to get maximize profit from the estimated demand and given supply chain constraints.


The definition of aggregate planning problem



Given the demand forecast for each period in the planning horizon, determine the production level, inventory level and the capacity level (to extent variation is possible like number of shifts, overtime etc.) for each period that maximizes the firm's profit over the planning horizon (Chopra and Meindl).

Data Required for Aggregate Planning



Demand forecast in units for each period in the planning horizon

Cost data:

Labor cost - for regular time and overtime

cost of subcontracting

cost of changing capacity by hiring and firing workforce

Cost of adding or reducing machine capacity

Inventory carrying cost or holding cost

Stockout or backlog cost or backfilling cost


Manhours and machine hours required per unit

Constraints

overtime

layoffs

capital available for inventory financing

stockouts

To get the cost data required for the decision making model, supply chain managers, production managers, and production planners have to design and develop systems in management accounting system to get the past data and have to get the help of executives involved in economic forecasting and various operating activities like purchasing/sub contracting, human resource management etc.


Aggregate Planning Strategies



1. Chase strategy: Capacity is the lever. Capacity is changed as per the demand. Capacity includes both machine capacity and man power capacity.

2. Workforce time flexibility based capacity strategy: Workforce works for more or less time depending on the demand. The machine capacity is not varied. Workforce size is also not varied but the working time is made flexible.

3. Level Strategy: Production levels are kept uniform and inventory is accumulated during slack periods and used during peak demand periods. In this case in some months excess production is there and it is carried as inventory and in some month, some orders will not be fulfilled. It can be used when inventory and backorder costs are relatively low.

Aggregate planning problems can be formulated as linear programming problems and solved. The book has given more explanation for the L.P. formulation of the problem. It also has material on using excel for solving the problem.

Some Suggestions for Effective Aggregate Planning:



Do sensitivity analysis and be flexible with aggregate plans.

Be ready to rerun the aggregate plan when conditions warrant.

As capacity utilization increases more attention is required on capacity planning.


References


Sunil Chopra and Peter Meindl, Supply Chain Management: Strategy, Planning and Operations, Prentice Hall, 2001.

Originally posted at
http://knol.google.com/k/narayana-rao/supply-chain-planning-aggregate-planning/2utb2lsm2k7a/1357#

Updated   29.3.2012, 23.1.2012