EliteClean International Logistics Strategies - Essay Example

EliteClean International Logistics Strategies Introduction According to Simchi et al (2008) supply chain management is a set of approaches that are utilized by businesses operations to integrate suppliers, manufacturers, warehouses, and stores efficiently so that goods are produced and distributed in the right quantities, to the right locations and at the appropriate time. This is done in order to minimise costs throughout the system as well as to satisfy the level of service demanded by customers. Global optimisation of logistics strategies is important to gaining competitive advantage in business. A number of techniques are available to document the supply chain or logistics process. These techniques are used to detect areas of non-value adding processes otherwise defined as waste so that the necessary steps can be taken to eliminate them. One of these techniques is value stream mapping. Value stream mapping According to Mangier (2003) value stream mapping is a technique of creating a “one page picture” of all the processes that take place in a company. This is the process from the time a customer places an order for a product until the customer has received the product at their location. The aim of value stream mapping is to illustrate the flow of material and information across and throughout all the processes that add value from the stage of production to shipment to the customer. Value stream maps documents both value-adding and non-value-adding processes from production to shipment. In creating the value stream map business and manufacturing waste can be easily identified and thus becomes the basis on which improvements can be made to the company’s operations. Mangier (2003) indicates that there are four steps involved in value stream mapping. They are: i. Defining the product or product family; ii. Creating the “current state” value stream mapping (CSVSM); iii. Creating the “future state” value stream mapping (FSVSM); and iv. Developing the action plan to make the FSVSM the CSVSM. The products that EliteClean manufactures are: washing machines; tumble driers; dishwashers and more recently range cookers. The product lines are dishwashers; laundry (washing machines and tumble driers); and range cookers. The dishwasher line is manufactured in South Korea; the laundry product line in China; and the range cookers in Thailand. The value stream map for EliteClean is shown below. Figure 1 – Current State Value Stream Map In Figure 1 above a number of activities leading to the production of items are duplicated. There are several persons carrying out procurement activities. Instead of the head office obtaining information on materials required for production, the factories are allowed to do their own procurement. This procurement is carried out by the factory manager in the case of laundry and the chief production engineer who may delegate it to a production manager at the other factories. There are several trucks of raw material going to the three different factories. Some of these trucks carry similar items which are purchased separately by the three different factories. Elite Clean has employed a push based supply chain strategy. The factories which are located in South Korea, China and Thailand produce items without any knowledge of demand and ship them to the regional distribution centres (RDCs). These distribution centres are located in Birmingham in the UK, Jordan in the Middle East and Chicago in the USA. There is a capacity problem at the RDCs due to the fact that there are too many inventory items in stores. There is some concern that some of these items may become obsolete. There is a cost involved in holding inventory. Additionally, when the storage facilities are too packed there will be a problem moving out inventory on a first-in first-out basis. Items are not transported to the distribution centres based on demand. They are transported in batches containing equal amounts (50 each) of different items, with the exception of the range cookers which can only accommodate 25 in the same area allocated to the other products. Furthermore, each RDC has its own fleet of trucks which transport items from the factory to the RDCs. Strengths and weakness analysis of EliteClean’s current operations An analysis of the strengths of EliteClean suggests that the company has developed a strong market niche in the marketplace and is seen by customers as innovative and fashionable. The company also has reliable marketing facilities. The products are consistently highly efficient, reliable and provide superior cleaning. Additionally, all the company’s products have a low energy rating which makes them ideal for customers who are conscious about greenhouse gas emissions and wants to reduce the level of energy consumed. The company’s products are uniquely designed and perform at a high standard; therefore they command a premium price. The weaknesses in EliteClean’s operations are many. The company’s procurement activities are dispersed among its three factories and head office. This is a wasteful activity as it involves duplication of tasks which are time consuming and costly. It would be better handled by head office since the materials used in the development of prototypes are procured directly from head office. The company would be much better off if the purchasing activity was centralised. EliteClean would be in a better position to benefit from quantity discounts from suppliers. Additionally, having several distribution centres means that some warehouses may run out of inventory items while others may still have excess supplies of the same items thus resulting in a loss of sale for the company in one instance and obsolescence in another instance, if the stock does not move fast enough from the warehouse. EliteClean currently operates several delivery fleets from the RDCs and this has complicated the company’s operations as it is not able to effectively plan the routes to be used in transporting goods to customers. Figure 2 below shows the future state value stream map. Figure 2 – Future State Value Stream Map The diagram labelled Figure 2 shows the future state value stream map. In this state there is no duplication of activities in terms of procurement. All raw material purchases are made directly from head office after obtaining the necessary requisitions from the factory. This is done through the application of a hybrid (pull-push) strategy where the factories produce based on demand from the warehouse and the warehouse only keeps the minimum of safety stock based on the lead time between production and fulfilment of orders. According to Simichi-Levi et al (p. 51) the use of a centralised distribution which specifically involves risk pooling across locations reduces the level of safety stock and average level of inventory in the system. Whenever demand in one market area is higher than the average level of inventory and demand in another market area is less than the average, items originally allocated for one market can be reallocated to another. This is not possible under the current system as the RDCs are based in different geographical areas. By controlling inventory, holding costs (inclusive of the cost of obsolescence) will be reduced. This will eliminate waste in the system. Additionally, both the costs of inventory and the cost of transporting items will be reduced as economies of scale will be gained from buying larger quantities of the same items for the three factories. This gives EliteClean greater bargaining power vis-à-vis the company’s suppliers. The company will therefore be able to obtain more beneficial contracts from suppliers. Furthermore, the transportation cost to the distribution centre is reduced and instead of operating several fleets of trucks the centralised distribution centre can either operate its own fleet which would indicate a smaller number of trucks in operation or outsourcing this aspect of the operations to a third party. This will help to improve the service levels of EliteClean’s operations. Lean production Leanness means developing a value stream in order to eliminate all waste including time and to enable level scheduling (Naylor et al 1999; Christopher and Towill 2000; Marcus 2010). The real issue at EliteClean is how to eliminate waste. Lean production is basically about eliminating waste in manufacturing in order to achieve the lowest cost possible. This involves reducing stock to a minimum therefore reducing inventory holding costs. Christopher and Towill (2002) indicate that lean production works best when demand is relatively stable and therefore predictable and where little variety exists. This is the case in some instances with EliteClean. Lean production helps to maximise value in the supply chain. Chopra and Meindl (2007, p. 22) indicates that the aim of supply chain management is to maximise value in the supply chain and the value that is generated is the difference between the value of the product to the customer and the cost incurred by EliteClean in fulfilling customer demand. Handfield et al (2009, p. 11) indicates that value is not inherent in products but is instead perceived and experienced by customers. The ultimate goal of supply chain management therefore is to deliver value to customers. Christopher and Towill (2000, p. 207) indicates that the lean paradigm becomes critical when the winning criterion is cost. This is the most critical variable of manufacturing businesses and in the case of EliteClean it is the most critical issue for the company. Christopher and Towill (2000, p. 208) also indicates that lean time needs to be reduced to the minimum time possible in lean production since by definition excess time represents waste and eliminating all waste is a fundamental characteristic of leanness. This will impact selling price which is linked to cost and therefore leanness. There are a variety of ways in which waste can be eliminated at EliteClean. Simichi-Levi et al (2008) indicates that strategic partnerships with buyers and suppliers represents an effective supply chain strategy that will lead to cost reduction. This includes information sharing which would allow EliteClean to use retailers’ up-to-date sales information to predict demand and thus reduce lead times. Information sharing makes it possible for manufacturers to control variability in the supply chain. This is known as the bull whip effect. By so doing inventory is reduced as production is smoothed. As with anything that requires planning and implementation, the task of moving from current state value stream map to another is one such project. Wysocki (2009, p. 2) indicates that a project is a sequence of unique activities which are complex and connected to each other; the aim of which is to achieve the organisations goal within a specific time period and within budget. The goal here is to create a future state for EliteClean in which the company is able to carry out its purchasing, manufacturing, storage, transportation and distribution activities in an efficient and effective manner. This essentially involves operating at an optimum level while achieving the constraints of cost, time, quality, and resources. The five major phases of a project are: i. Identification of needs; ii. Formation of objectives and project definition; iii. Detailed planning and scheduling; iv. Management of project activity; and v. Closure and feedback. Based on the current state value stream map illustrated in Figure 1, it is clear EliteClean needs to rationalise its operations in order to reduce cost. A number of activities are duplicated resulting in increases in the costs of purchasing raw materials. There are also problems brewing between suppliers and managers which do not augur well for the success of EliteClean’s operations. If factory managers are taking gifts from suppliers as suggested then a conflict of interest exist which may impact the prices that are agreed with EliteClean. Additionally, the company does not have enough storage space at the RDCs to adequately store the amount of finished goods inventory that it currently holds and so there are capacity issues. Furthermore, the transportation of finished goods from the RDCs to the customers is a very complex procedure and needs to be simplified. The aim of any business is to maximise profits and this is no different in the case of EliteClean. In order to do so effectively the elimination of wasteful activities is of paramount importance. In order for this goal to be achieved major strategic changes are required at EliteClean as shown in the Future State Value Stream Map. The scope of the project therefore is to remove the duplication of procurement activities, create a centralised warehouse, and reduce and centralise the delivery fleet operations or outsource delivery to a third party. Centralising the warehouse facility will require the construction of a new facility. It will therefore take some time before the necessary changes aimed at reducing costs can be realised. The activities involved in constructing the central warehouse to store the products that EliteClean manufactures are numerous. The ideal location will have to be first identified and the necessary measures put in place before planning and scheduling activities can take place. The activities involved in constructing the new warehouse facility and the length of time that each activity will take is shown in the table below. It is important to note that time is of the essence and so the project needs to be completed within the shortest time possible with the limited budget and resources available. Table- Schedule of Construction Activities Task Description of Activity Preceding activity Time period Number of persons 1, A 2, B 3, C Create foundation - digging trenches - laying foundation - laying pipes 1 1 14 days 14 days 3 days 13 13 3 4, D 5, E 6, F Setting up the structures including partitions - setting up columns and walls - plumbing work - electrical work 1, 2 and 3 1,2,3 1,2,3 180 14 days 14 days 25 3 3 7, G Finishing 1,2,3,4,5,6 21 days 12 8, H Putting on roof , windows and doors 1,2,3,4,5,6 30 days 19 9, I 10 J Putting in plumbing and other fixtures and fittings Electrical outlets 1,2,3,4,5,6,7,8 30 days 25 11, K Putting in Air conditioning system 1,2,3,4,5,6,7,8 15 days 3 11, L Painting 1,2,3,4,5,6,7 30 days 10 12, M Landscaping 1,2,3,4,5,6,7 14 days 5 The table above shows the schedule of activities in relation to the project. The network diagram labelled as Figure 3 shows the critical path. This is illustrated with the use of bold lines and indicates that the project will take 303 days to complete. Critical path analysis is used to determine what needs to be done and when it needs to be done. The network diagram shows the earliest and latest start time as well as the earliest and latest finishing time for various activities in the construction project in a diagrammatical format (Lewis n.d). If the management of EliteClean decides to consider this strategy of lean production then this project is important. The critical path which is the longest path throughout the network diagram also indicates the shortest completion time within which the project can be completed. Although there is a float of 186 days between C and E as well as C and F, the activities on the critical path have to start as schedule. Any delays will result in an extension of the project completion date. There are certain activities like the plumbing and electrical work at E and F that needs to be done during the time when the structure is going up and so things need to take place within the 180 days allotted for structural work. The landscaping could also be pushed forward. This would reduce the work by approximately 14 days and could be done when the structural finishing work is taking place. It must be noted that there are normally unforeseen circumstances Network Diagram Figure 3: Network diagram of the central distribution warehouse project The network diagram in Figure 3 indicates that the critical path runs from A to B to D to G to J, K, L and M. There is no slack anywhere on that path and so if there is any reason that unforeseen circumstances results in insufficient persons available for work on any particular day, then overtime work may have to be considered. References Chopra, S and Meindl, P. (2007). Supply chain management: Strategy, Planning and Operation. New Jersey: Pearson. Christopher, M and Towill, D.R. (2000). Supply chain migration from lean and functional to agile and customised. Supply Chain Management: An International Journal: 5(4), p. 206-213 Christopher, M. and Towill, D.R. (2002). Developing Market Specific Supply Chain Strategies., International Journal of Logistics Management: 13(1), p. 1-14 Handfield, R.B., Monczka, R.M., Giunipero, L.C. and Patterson, J.L. (2009). Sourcing and supply chain management. 4th ed. Ontario: South Western. Lewis, A. (n.d.) Introduction to Project Management. [Online] Available at: http://www.projectsmart.co.uk/introduction-project-management.html. [Accessed 1 December 2011] Magnier, P. (2003). The Lean Enterprise: Value Stream Mapping. [Online] Available at: http://www.nwlean.net/toolsCD/VSM/4%20steps%20to%20VSM.pdf. [Accessed 28 November 2011] Marcus, I. (2010). Agile Supply Chain: Strategy for Competitive Advantage. Journal of Global Strategic Management: Issue 7 June 2010, p. 5-17 Mason-Jones, R, Naylor, J.B. and Towill, D.R. (2000): Engineering the leagile supply chain. International Journal of Agile Management Systems: 2(1). p.54 Simchi-Levi, D., Kaminsky, P. and Simchi-Levi, E. (2008). Designing and Managing the Supply Chain: Concepts, Strategies and Case Studies. 3rd ed. USA: McGraw-Hill/Irwin Wysocki, R.K. (2009). Effective Project Management: Traditional, Agile, Extreme. 5th ed. USA: Wiley Publishing Inc. Read More