Strategic Supply Chain Management - Essay Example

?SECTION With the increasing focus on managing risks in the business chains, supply chain risks have a special case. It is an element of a large transformation in the focus on the subject of risks consisting a broad range of uncertainties that exist within business supply chains. Businesses around the world have been facing a high number of losses and risks which proactively state the importance of effectively managing supply chain risks. There are a number of causes that result in supply chain concerns and problems and the causes can vary from natural disasters, labor issues, financial concerns, war and terrorism to lack of resources etc., which are found to seriously disrupt the business profits. Broadly categorizing the risks faced by supply chains globally, they include delays, disruptions, increased breakdowns, IP violations, forecasting, resourcing, procurement and inventory problems. Every risk stated above is caused due to a some particular set of drivers and has its own set of mitigation methods as well. The state and level of preparedness of a management decides how the business will fare against these risks. Comprehending the types and the link between the supply chain risks, business managers can easily plan for effective risk mitigation methods that are best suited for their management, (Chopra and Meindl, 2003). This section will study the various types of risks that are faced by supply chains around the world. Types of Supply chain risks – 1. Disruptions – the main drivers of this form of supply chain risks are natural disasters, labor problems, supplier economic failures, dependency upon a single suppliers, abilities of alternative suppliers to meet business requirements, and war / terrorism. This form of supply chain risk is mainly in the form of discontinuity of resources and material which may be unpredictable and damaging in nature. These disruptions often occur without a warning and are both external and internal in nature. Since no company is independent in nature, and its business relies upon other companies, so risks induced in one company’s supply chain may adversely affect other interlinked businesses as well. As an example, a fire at the automotive parts factory in Japan in 1997, forced the automotive giant Toyota to close down its operations for more than 4 months which resulted in huge losses for the international company apart from affecting its brand image. Similarly, in 1994, when the Kobe earthquake hit Japan, US based chip maker company Kelly micro Systems and many other small companies were forced to shut down their companies, (Chopra and Meindl, 2003). These risks due to supply chain disruptions can be countered by stocking up inventory in advance, or by maintaining an alternative set of suppliers. However piling up of inventory may not be a cost effective solution. 2. Delays – These types of risks are caused when a supply chain supplier is unable to respond to the changes in the demand due to his inflexibility to adaptation to new environment like high demand, complex requirements. Other delays caused may also be due to poor quality of products being supplied by the supplier, difficult transportation and logistics, high inspections, lack of information, poor decision making of the managers. Delay may also be caused due to the unavailability of resources like information, office building, warehouses etc. Companies can avoid the risks of delay by sizing and preplanning of capacities and requirements in advance. Preparing the production process for excess capacity or substitute options may be a solution in some cases to avoid delays. As an example, in normal circumstances, Dell holds inventory in less quantity (of high value) in the United States, and also maintains inventories in large numbers of low cost outside United States which is used in times of delay and is often airlifted due to the low cost of inventory maintenance outside US. 3. Systems – systems risks occur mainly in centralized information networks or centralized production facilities within companies. In this types of system, if a failure occurs at any point in the system, then the whole system breakdowns. An example, earlier the banking industry used to promote globally integrated systems which integrated all the global branches of the bank. A computer virus attack in 2002, forced to shut down many centralized banks causing millions of damage to the database. Similarly, Royal Royce earlier used its Geneva based manufacturing plant to cater for its all automotive air-conditioning units. A major breakdown in the plant in the year 2000, again led to forced delays in many other systems across the other global units of Royal Royce. The best solutions in this case can be efficient back up systems, and successful recovery systems. 4. Inaccurate Forecasting – this type of risks is caused due to the inaccuracies in the forecasting done by the company management about the actual demand for the company services / product. High forecasting results in excess of inventories and less forecasting results in no business. Forecasting errors are caused when a small number of customers purchase in large amounts at a time, rather than a number of customers making smaller purchases. Information distortion, poor end customer information, unavailability also leads to forecasting inaccuracy, (Mishina, 1992). As an example, Nokia, in the event of some product shortages in western Europe in 2003, decided to store higher inventories in order to meet future demands. Unfortunately, the market scenario was exaggerated and the company suffered losses due to inaccurate forecasting information. The solution for reducing the forecasting risks is decrease the variation in orders and maintains a continuous flow, order batching, collaborative planning and replenishment. 5. Procurement Risks – this is related to the unforeseen increase in the acquisition value that is more often the result of price increase by the suppliers or the variation in the exchange rates. Moreover, a company will be more affected and prone to procurement risks if it uses only one supplier. As an example, during the economic crisis, the value of the US currency decreased, as a result of which the costs to many US based companies drove up. Setting up financial hedges, balancing the costs by selecting at least one global location for product selling, can counter the risks. Also, maintaining several suppliers at a time, or holding inventory, making short term contracts with suppliers may help to avoid risks. 6. Inventory Risk – excess inventories have long been the focus point of supply chain problems due to the financial losses that usually accompanied them. In the year 2000, many IT companies kept suffered huge losses due to unpredictable and uncertain demands of the market. Moreover, with low demands. The companies had unfortunately stored as much as 12 weeks of inventories – this combination of excess inventories and lower demands – lower prices led to huge losses to the IT companies, (Mishina, 1992) Inventory risks basically rests on three main issues – product value, product obsolescence rate and the variation in demand and supply of the product. The three basic methods to avoid such risks are pooling up inventory, creating variety of products with same components / ingredients, and production only on customer demand. Popular fashion brand Zara follows this demand. They are known to keep zero inventories, and complete the orders in batch process. The production is only on user demand which is forecasted with proven methods that the company management makes use of. 7. Capacity Risk – The capacity of a business can only be increased over a period of time. Increasing capacity is a strategic decision that needs to be taken after careful management decision. In case, the capacity building are in excess, they remain underutilized and thus may become a liability for the management and less capacity leads to decreased supply and financial performance. To avoid these kinds of capacity risks, building flexible capacities is an option. For example, the case of Hino motors, Japan, utilizes multiple assembly lines which offers flexibility to adjust to increasing demands as well as reduces the excess capacity of workers during low demands, (Chopra and Meindl, 2003). The supply chain risks have risen up at an alarming rate during the last decade. Among the few main reasons that can be easily pointed out, the first is the increasing level of globalization trend. As a result of globalization, there are more number of hand-offs. Subsequently, the increasing level of complexities within the existing supply chains due to globalization and outsourcing of business activities has made the supply chains more prone to risks, (Chopra and Meindl, 2003). Lean operations – that means reduced inventories and supplier base reduction have been the other major causes of risks being increased. The next section will study the various methods to mitigate the risks. SECTION 2 In section, various robust supply chain risk mitigation strategies that assist the managers to avoid the risks or reduce their effects. 1. Generic production chain and Outsourcing – this method allows the company to produce a generic / general product according to the total demand forecasted. After the company management confirms the market demands, the company then enters the final stage and customizes the product as per client requirements. Cost effectiveness, low inventory of finished goods, easier and faster configuration of the product, easier adaptation to customer requirements are some of the advantages of this method. Nokia was informed of non delivery of some parts by its supplier – Phillips that due to a plant shut down, no later the management worked on its plan by configuring its existing generic inventory to adapt to new parts bought from some other supplier. Also, the companies are now quick to understand that outsourcing the generic part of the product production and retaining the customization process in house is much more easier, complex free and cheaper as well. This also helps the company to shift the production quickly in case of a problem arising in the supply chain. Zara fashion house outsources a major part of the generic garment inventory to China and keeps this unfinished inventory till demand comes up and then customizes it in house within no time. 2. Distributed inventory stock and multiple suppliers – companies have learnt to maintain their inventories in strategic locations so that there is no supply demand gap or functions run continuously in the wake of a supply chain problem. Unlike to the earlier practice of holding large amounts of safety stock, companies now resort to keeping unfinished inventories at strategic locations. Toyota maintains its unfinished / generic products / finished goods at some strategic locations at all times to be shared easily. This eliminates the risk caused due to the demand fluctuations. Also, companies earlier used to rely upon a single supplier, which lowered the costs due to discounts, logistics etc, however it created issues in case the single supplier faced problems with production. Businesses around the world have now set up multiple supplier bases which feed them in case of primary supplier failures. HP makes use of its Singapore production facility for meeting regular demands, however, it switches to its Washington based plant in case of high demand, or problems at its Singapore facility. 3. Collaborative forecasting – this concept helps the management to achieve higher collaboration with all its suppliers at a time without even increasing the costs of planning and other resources. Also, Collaborative forecasting and planning techniques helps to reduce the losses that are caused due to the bullwhip effect since it can easily and accurately forecast market demands and thereby helps to reduce inventories as well. Apart from using the traditional methods of inventory control, demand forecasting, collaborative forecasting and planning method make use of modern systems that is based on simulation and artificial neural networks already being utilized by many companies. This method allows easy sharing of all supply chain partners and their knowledge and cater to the market demands in an efficient manner. Collecting market data through various resources, presenting this data to the company, suppliers to achieve higher efficiencies. Dell makes use of collaborative forecasting and planning and regularly exchanges information with its suppliers and retailers on market demand patterns and upcoming trends. This sharing of knowledge has helped the company to make strategic decisions on products, design, and distribution and subsequently reduce the forecasting risks to almost zero. 4. Implementing lean supply chain – the concept of lean is the method to improve the supply chain by reducing the waste, lead time and offering faster replenishment rates to enhance deliveries. Lean helps to identify all the waste activities in the supply demand chain and synchronizes all the other activities through better communication and flow of products and information. Main benefits of this are seen in the logistics, delivery and real time information throughout the supply chains. Lean approach is based on the concept that it is important to acknowledge the value preference of the consumer. This can only be provided if the company has complete and accurate market information and the customer requirements. Activities that add value to the product as desired by the customer, can be concentrated upon, while ignoring those who do not add any value. Repeated identification of such activities at regular intervals free the supply chain of waste activities that are a cause of supply chain risks at later stages of the supply chain and help to improve the flow and provide more value to the end user. Zara fashion has been implementing Lean operations in its supply chains with the help of POS systems that offer them point of the sale data about customer requirements. 5. Among other tailored approaches to supply chain risk management that are worth mentioning in this paper are as follows – Increasing capacity of the business while focusing on low cost and a decentralized capacity to manage predictable demand patterns. Increasing the capability of the business instead of selecting high cost and high risk products. However, to reduce the risks, in case of low value products, cost can be preferred instead of capability. With so many risks present and a number of risk mitigation techniques available, it is important that the managers should first identify the risks present within their supply chains and then apply tailor made risk management techniques that suit best to the conditions. SECTION 3 This section will study the risks and mitigation techniques involved in lean supply chain and e-procurement. E-procurement faces a number of risks related to its successful implementation. The first risk involved is that the market place where the technique is wished to be employed may not be mature enough and unwilling to take the high costs of the technology and other value added services that usually accompany e—procurement technology like IT consulting, hosting, e-payments etc., are costly for start up companies. Investing a large amount of money into such a new technology may be a risk as it may not prove to be worth wile. Further, even if a company applies e-procurement, its suppliers may not be mature enough to deal with the technological change and may reject the system as a whole. Also, it may be a possibility that the employees of the company show resistance to learning new methods and techniques of e-procurement and maintain their alternative means of procurement cards and expensive submissions, (Aberdeen, 2001). In order to avoid the above mentioned risks in the implementation of e-procurement, it is important that the companies first select and list out some preferred suppliers (only a few suppliers) to deal with e-procurement method. This helps these suppliers to understand the benefits, future availability, costs of this technology initiative. The second method that can have the greatest effect on the successful implementation of e-procurement is redesigning the business processes influencing the behavior of the employees those who will be using the e-procurement and putting ion force the new business rules as per e-procurement requirements, (hannon, 2001). Lastly, it is important that the companies use a balanced selection strategy as to which e-procurement software will best suit their business requirements in the long term. Functionalities, technical architecture, installation costs, services and supports that will be provided by the e-procurement technique should be studied and analyzed before implementing the technique to promise long term benefits, (Aberdeen, 2001). With regards to the lean supply chain management, there are some challenges that businesses face in its implementation. As lean approach stresses upon pull type of demand management (produce only on customer demand and as a result, inventories are reduced), there are frequent deliveries, (Womack and Jones, 1994). Managing these frequent deliveries in an efficient manner may become complex and tiring for the management. Also, frequent deliveries may adversely impact the costs to the company and the Green policies if any followed by the company management. Also, the lean supply chains are easily open to external disruptions from any outside source and at times, they suffer from lack of chain visibility, (Nelson, 2004). Since lean operations focus on elimination of waste activities from the supply chain, it is quite obvious that some suppliers and other supply chain partners may not give importance to this activity due to extra time and costs involved with long time taking results to come into picture. The following example will show how these risks were eliminated in a lean supply chain. A supplier of Delphi systems wanted to increase its capacity and decrease costs as well. The supplier supplied metal stampings to the company. Being a pioneer in lean applications within its own entire business chain, Delphi decided to implement lean process with the help of its own lean operations engineering team. This team focused upon a series of continuous improvement in the product value stream and opened up more opportunities. Supplier development t process was also implemented with the help of a detailed value stream mapping process and a pull operations stream was put into place, (Nelson, 2004). Reductions in lead time, inventory levels, better production quality, higher operational availability were some of the advantages to the supplier. REFERENCES S. Chopra and P. Miendl, “Supply-Chain Management: Strategy, Planning, and Operations,” 2nd ed.,(Upper Saddle River, New Jersey, Prentice-Hall, 2003), 346-352. K. Mishina, “Toyota Motor Manufacturing, U.S.A. Inc.,” Harvard Business School case no. 9-693-019 (Boston: Harvard Business School Publishing, Sept. 8, 1992). Aberdeen Group (2001), Best Practices in e-Procurement: The Abridged Report, Aberdeen Group, Boston, MA Hannon, D. (2001), “‘Unready’ suppliers slow move to e-procurement”, Purchasing, Vol. 130 No. 23. R. David Nelson , How Delphi Went Lean,” , Supply Chain Management Review,. November/December 2004 p. 32-37 Womack, J. and Jones, D., “From lean production to the lean enterprise”, Harvard Business Review, March-April 1994, pp. 93-103. Read More