The science of supply chain management has evolved over the years from the original core disciplines of operations and logistics and is now a fairly rigorous discipline in its own right. Optimisation of global and local supply chains use some fairly advanced and complex methodologies to create value for the members of the supply chain. These are captured below in the succeeding paragraphs.
At its most basic, the Supply Chain consists of an amalgamation of the purchasing and procurement operations upstream of the company’s core operations, distribution operations downstream of the core operations and the functions of logistics and transportation that support the company in all its activities.
Modern supply chains go much further. The modern supply chain of the firm comprises all operations involved with the efficient and effective creation and delivery of a product or service from its birth all the way to its death and disposal. This extends the supply chain upstream to the firm’s suppliers-suppliers and downstream to its distributors-distributors, and so on.
The impact of globalisation, the continuous and inexorable development of information and technology and the spatial advantages of labour and expertise, have created the need for networked commerce in all aspects of business. Volatility in fuel prices in the last ten years has changed the dynamic between the holding cost and ordering cost of inventory (including transportation costs).
Transportation costs are now estimated to be nearly twice that of the holding cost of inventory. This upends the traditional model of holding fewer inventories and only ordering it in when necessary. The cost of transporting inventory caused by the hike and volatility in fuel prices is now a huge burden in its own right.
Mindless ideologies that drive the zero inventory model therefore need to be revisited. Where low cost is the only criterion, the traditional ‘lean model’ remains the operations model of choice. Increasingly however, high fulfilment coupled with low lead times and the use of information- sharing as a proxy for inventory have begun to play out in almost all industries.
The entire operations theory of how companies tended to ‘push’ or ‘pull’ in their manufacturing strategies have begun to change as well. The traditional trade-off between cost versus quality, or cost versus high service fulfilment, or cost versus variety, or even cost versus speed of response has given way to a range of new dynamics. Customers in a 21st century market place want both to happen i.e. low cost and high quality, low cost and wide variety, low cost and short lead times and so on. This challenges the very construct and architecture of modern supply chains.
Most modern supply chains are now hybrids of push-pull manufacturing or service and a strategic combination of being lean or agile (and often both!!). They adopt push strategies upstream (manufacture in large quantities) to effectively allow upstream suppliers to achieve economies of scale and scope when producing the key parts/components and elements of a product or value added service. Conversely downstream companies that are nearer the customer, tend to adopt pull strategies to achieve higher fulfilment and higher service levels. This requires the conflict between push (high inventories) and pull (low inventories) to be managed innovatively along the supply chain.
To achieve this a range of supply chain techniques are used. The risks of pushing high inventories down the supply chain are mitigated through supply contracts that focus on ‘Global Optimisation’ strategies that include buy back strategies, revenue sharing, risk sharing, reward sharing methods that optimise the system (not individual) profits and those that minimise the risk of the entire supply chain.
Techniques like ‘delay manufacturing’, ‘delay fulfilment’, vendor managed inventory (VMI), rapid replacement logistics (RRL), continuous replacement logistics (CRL), Cross Docking, Break Bulk Warehousing (BBW), consolidation warehousing, and risk pooling (RP) are typical examples of these modern approaches to supply chain management.
Technology and business information systems that facilitate the seamless transfer of information and even tacit knowledge are used to maximum effect in modern supply chains. Information replaces the need to hold inventory. The ability to garner information and delay fulfilment allows supply chain to be agile and low cost by reducing wastage and yet increasing quality of service.
This way of rethinking the supply chain plays out in a number of ways, as organisations try and nullify the cost/quality trade off to achieve high quality as well as high service fulfilment at the lowest possible cost. The concept of ‘agility’ no longer refers to quick response. Agile companies are actually lean companies that are able to ramp up and achieve high service levels, at short notice. This is the philosophical approach that drives the basic construct of the supply chain of the 21st century.
The tools and techniques that they use to achieve these two conflicting requirements (low cost with high service levels) have to be considered in respect of where the company operates on its supply chain. Lean operations are critical when the core business is manufacturing parts and sub parts. These activities therefore tend to migrate to countries that are able to provide the spatial advantages of labour or expertise or both. Value added resellers on the other hand are nearer the customers and tend to be agile, particularly when the clock speed of an industry or product/service is high. Being lean upstream and agile downstream requires innovation in how the product/service offering is created and delivered.
This approach also forces companies to cherry pick their product service offering on the supply chain. Instead of carrying out all the core operations of the company in-house, most global organisations including original brand manufacturers (OBMs), original equipment manufacturers (OEMs) and even service providers tend to outsource and even offshore operations that are seen as non strategic. These operations are undertaken by specialists who ‘design for manufacture’ and act as specialist contract manufacturers (CMs) or original design manufacturers (ODMs) of key parts and components. Another technique is to design for assembly and using delay manufacturing techniques to delay fulfilment. This reduces wastage in finished goods inventories.
The erstwhile disciplines of procurement and even logistics and transportation tend to be outsourced to third and fourth party logistics providers (3PLs and 4PLs). Companies in this part of the supply chain design for logistics and design for fulfilment. Downstream companies acting as ‘value added resellers’ (VARs) create increasingly complex business models and supply chains. In fact a typical company can be part of a supply chain and outsource some (or all) of its operations to other providers, retaining only design or brand management. It may also (and simultaneously) provide out sourced services to other and sometimes competing supply chains, or even be a part of multiple supply chains for different classes of products that operate at different clock speeds.
The consequence of these complexities has been a change in the business models of many businesses. Supply chains have moved away from merely monitoring or managing the flow of material and even information or both. Modern supply chains now need to manage relationships and complex alliances and treat information as a strategic resource. They need to manage the learning agenda at the dyadic interface of their supply chain partners and yet remain competitive.
The key to modernising the supply chain is not in introducing new technology alone; a common mistake made by managers. Information and technology are critical enablers in all business operations. The key then is to get the management decisions that create value ‘spot-on’ at the outset of the process. Deciding service levels, deciding the architecture of who holds inventories, how is fulfilment delayed, mapping the supply chain, superimposing the key management and supply chain techniques that underlie value need to be resolved. Only then will the right information and technology enablers add value.
Allan Rodrigues is a specialist in restructuring modern supply chains. You can contact him at allan@theBusinessBinnacle.co.nz [no spam].
References
- Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. (2008). Designing and managing the supply chain: concepts strategies and case studies. (3rd ed.). Boston, Massachusetts. McGraw Hill/Irwin.
- Slack, N. Chambers, S., & Johnston, R. (2010). Operations Management . (6th ed.). Edinburgh, Pearson Education Ltd.
- Simchi-Levi, D. (2010). Operations rules: Delivering customer value through flexible operations. Boston, Massachusetts. MIT Press. (Ch 3)
- Boyer, K., & Verma, R,. (2010). Operations and supply chain management for the 21st century. Mason, USA: South-Western Cengage Learning. (Ch6).
- Jacobs, F.R., & Chase, R.B. (2011). Operations and supply chain management. (13th ed.). New York: McGraw-Hill/Irwin. (Ch 13).
- Jacobs, F.R., & Chase, R.B. (2010). Operations and supply management: The core (2nd ed.). New York: McGraw-Hill/Irwin. (Ch 8).
Next…