Supply Chain Operations Management

"Works management" was used in 1886 by Henry Towne. The importance of buying function was highlighted by him in his paper on "Gain Sharing" presented by him in 1889. For a significant part of time purchasing emphasized arms-length relations between a buyer companies and supplier companies to enhance competition and thus increase the benefit. But the supply chain concept emerged as collaboration between limited number of suppliers for each component or raw material a buying company was found to give benefits of quality as well as low costs. Such practices were developed by Japanese companies to deliver better results compared to arms-length buying system. Supply chain management became a full fledged subject. Its development is linked to supermarket systems and national retailers like Walmart. Hence supply chain management literature describes a supply chain as retailer, manufacturer, suppliers. In the case of manufacturing companies it is the works or factories and the suppliers are the basic components of the supply chain. Hence the issue in this operations management focused article is how to manage supply chain operations.

Chapter outline of Chase - Aquilano

Measuring Supply Chain Performance

Inventory Turnover Defined

Cost of Goods Sold Defined

Average Aggregate Inventory Value Defined

Weeks of Supply Defined

Supply Chain Design Strategy

Bullwhip Effect Defined

Functional Products Defined

Innovative Products Defined

Outsourcing

Outsourcing Defined

Logistics Defined

Design For Logistics

Design for Logistics Defined

Value Density (Value per Unit of Weight)

Transportation Mode Defined

Value Density Defined

Global Sourcing

Mass Customization

Mass Customization Defined

Process Postponement Defined

The idea of supply-chain management is to apply a total systems approach to managing the entire flow of information, materials, and services from raw-materials suppliers through factories and warehouses to the end customer. The term supply chain comes from a picture of how organizations are linked together as viewed from a particular company.

The focus is on those core activities that a business must operate each day to meet demand. The topic is popular because many companies are achieving competitive advantage by the way they configure and manage their supply chain operations. 

Measuring Supply Chain Performance

Because inventory at each stage of an operation ties up money, it is important that the operations at each stage are synchronized to minimize the size of buffer inventories. The efficiency of the supply chain can be measured based on the size of the inventory investment in the supply chain. Key measures to evaluate supply chain efficiency are inventory turnover and weeks-of-supply. Other measures include the cost of goods sold and the average aggregate inventory value.

Inventory Turnover Defined

Inventory turnover =  Cost of goods sold/Average aggregate inventory value

Supply Chain Design Strategy

Variability within the supply chain magnifies as we move from the customer to the producer in the supply chain. This bullwhip effect indicates a lack of synchronization among supply chain members. Programs like continuous replenishment smooth the flow of materials through the supply chain.

Other supply chain issues occur because of the length of the product life cycle, demand predictability, product variety, and market standards for lead times and service.

Four supply chain management strategies

Functional Products - Innovative Products 

Products may be either functional staples or primarily innovative and require different management methods.

Functional products are staples that people buy in a wide range of retail outlets.  Typically, they do not change much over time, have low profit margins, stable predictable demand and long life cycles. 

Innovative products, on the other hand, give customers new benefits and hence provide additional reasons to buy.  Fashionable clothes is one example of innovative products. Smart phone and tablet computers are examples of innovative products of the recent period.  Innovative products have short life cycles, high profit margins, and volatile demand.

Stable supply processes - Evolving supply processes

Lee argued that on the supply side also there are stable supply processes and evolving supply processes. 

Based on these two classifications (Functional Products - Innovative Products  and Stable supply processes - Evolving supply processes)   four supply chain management strategies were identified.

Efficient supply chains

Risk-hedging supply chains

Responsive supply chains

Agile supply chains

Efficient supply chains are designed to minimize cost that requires high utilization, minimizing inventory, and selecting vendors based primarily on cost and quality, and designing products that are produced at minimum cost.

Market-responsive supply chains are designed to minimize lead time to respond to unpredictable demand, thus minimizing stockout costs and obsolete inventory costs.

Risk sharing supply chains are those that share resources so that risks in the supply chain can be shared.

Agile are those supply chains that are flexible while still sharing risks of shortages across the supply chain.  Generally, these supply chains carry excess capacity and higher buffer stocks.  Vendor in responsive supply chains would be selected for speed, flexibility, and quality.

Outsourcing

Outsourcing is moving some of a firm's internal activities and decision responsibility to outside providers. Companies have a variety of reasons for outsourcing but primarily the reasons are to reduce costs and create a competitive advantage. Full list adopted from the book Strategic Outsourcing by Maurice F. Greaver II. was provided in the book (Chase et al.)  One popular area to outsource is logistics. In determining the shipping mode for an item a key variable is the value density or value per unit of weight.

Design for Logistics

Given the emphasis on minimizing inventory and handling in efficient supply chains, design of the components and materials can be evaluated from their each of storing, picking and handling. Hence design for logistics is also to be incorporated in design process.

Global Sourcing

With the communist bloc of countries now into free trade system, a truly global supply chain system can be created.

Mass Customization

Three principles of mass customization are given in the book.

1. A product should be designed so it consists of independent modules that can be assembled into different forms of the product easily and inexpensively.

2. Manufacturing and service processes should be designed so that they consist of independent modules that can be moved or rearranged easily to support different distribution network designs.

3. The supply network - the positioning of inventory and the location, number, and structure of service, manufacturing, and distribution facilities - should be designed to provide two capabilities. First, it must be able to supply the basic product to the facilities performing customization in a cost-effective manner. Second, it must have the flexibility and the responsiveness to take individual customers' orders and deliver the finished, customized good quickly.

Resilience of Supply Chains

During disasters supply chain get disrupted and operations get affected badly. Supply chains supporting operations is clearly understood during these disasters.

A key first step to resilience or bring back operations to life is  mapping critical supply chains and critical infrastructure to understand where critical goods (and their essential ingredients) come from and how they might move down the chain to an area affected by disaster. Foreknowledge of the fragile facilities and vulnerable connections, as well as possible alternatives, can accelerate both the assessment of and implications of a disaster and the recovery. Moreover, part of this mapping entails measuring the system’s conveyance capacity such as tractors, trailers, containers (of various sizes), and compatible chassis. Baseline measurements of logistics activity during normal times provide both a benchmark for recovery and an approximate indicator of likely capacity in a crisis.

Some companies map their supply chains as part of their risk management and resilience efforts. These companies use the bill-of-materials (BOMs) for products and corporate accounting records regarding procurement of these materials to understand the implications of supplier disruptions. Thus, the company can determine which products and customers would be disrupted if a given supplier were disrupted. Companies can use third-party supply chain risk management services that help gather information on suppliers’ geographic locations. These services can also utilize real-time news

feeds for impactful events to alert companies how a given distant event might affect them. Using the BOM and data on the revenues or profits from each product, companies can even estimate the potential financial magnitude of a disrupted supplier.

https://ctl.mit.edu/sites/ctl.mit.edu/files/attachments/Supply%20Chain%20Resilience-%20Restoring%20Business%20Operations%20After%20a%20Hurricane.pdf


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