Maintaining a Competitive Supply Chain - Essay Example

?Introduction Because of the fast pace of change in the current business environment, a business organization has to create a sustainable competitiveadvantage. For this reason, the management of the business organization has to focus on supply chain management. It is defined as managing the supply chain which consists of five key elements: production, supply, inventory, transportation and location. Production It is a transformation process with three phases: raw materials, work in process and finished products. It can be defined as the process through which raw materials are transformed into finished goods. In order to ensure that the production process is strategically aligned to the supply chain, it must be aligned to market demand. For this reason, organizations undertake the process of production planning and scheduling which involves optimizing the output level. This is the output level that takes into account sales and production capacities of the company. Production planning and scheduling enables the management to organize the production facilities in such a manner that they are able to capitalize upon customer wants and market demand to the highest possible extent (Grimson and Pyke 325). Because customer wants change and market demand fluctuates, production has to be flexible. For this reason production planning and scheduling is a key success factor when it comes to building and maintaining a competitive supply chain. As mentioned before, production involves a transformation process from raw materials to finished goods. Production involves managing this transformation in such a manner that production capacities are capitalized upon to the best extent possible taking into account market demand. For this reason, production planning and scheduling are related to strategic decisions. This is a long-term planning process which must take into account future changes in market demand so that the technology that the company possesses can accommodate these changes. When it comes to strategic decisions in the production element of the supply chain, the management must consider whether the current production facilities can produce goods which meet the quality expectations of the customers. Unless the production process can maintain the sufficient level of quality, the goods produced have to be returned and it decreases supply chain efficiency. Therefore the management has to invest in production equipment that not only incorporates the latest technology, but can also produce goods according to total quality management. Production planning and scheduling enables the management to meet the objective of maintaining state-of-the-art production facilities which can meet market expectations. Production ensures product availability according to forecasted sales. When the customer order is received, the production process must start immediately. Production planning ensures that the required production capabilities are maintained in the long term. Production scheduling ensures that the optimum volume of output is available in order to maximize the profitability of the company. Supply Supply can be defined as the process of defining the balance between capacity and quality. When considering supply, the management must assess whether the production facilities are able to maintain product quality that maximizes company profitability. As mentioned before, the production process must occur according to market demand. This ensures product availability. However this incorporates quality as well. This is taken into account in supply considerations. In this case, the management considers whether the company’s production facilities can meet the quality requirements economically. If it takes too much investment to ensure quality, then this drives up the cost of supply and therefore profitability is reduced. So considering supply forces the management to take into account the production capacity for ensuring product availability at the lowest possible cost. As mentioned before, production is the transformation from raw materials to finished goods. Therefore the management has to ensure the supply of raw materials. To this end they have to select suppliers. The suppliers must have flexible capacities which can accommodate the production demands of the manufacturer. For this reason, companies like Dell Inc., the manufacturer of computer hardware, have implemented information systems which enable them to stay in real-time communication with the suppliers. Enterprise resource planning solutions enable suppliers of raw materials to share data regarding production planning and scheduling so that they can maintain their own capacities accordingly. This is a key success factor when creating a supply structure that is suitable for just-in-time production strategy. Sharing data ensures that the supply of raw materials is aligned to production demands. Therefore when it comes to creating a competitive supply chain management framework, supply is one of the key elements ensuring that the costs of the supply chain are controlled. How well the element of supply is managed impacts upon production costs since it ensures the availability of raw materials. The element of supply is related to the core capabilities of production facilities. For example, if the company does not possess core competencies in producing one item, it can be outsourced. Outsourcing is defined as the process of transferring a business function to an outside company (Hill and Jones 35). By outsourcing business functions, a production company minimizes the cost of supply which in turn controls the cost of supply chain. When it comes to making strategic decisions in supply, core capabilities in production and outsourcing partnerships should be considered. Inventory Inventory is one of the key elements of the supply chain because it determines whether a company is able to meet market demand. The current business environment is characterized by a constant process of change and therefore strategic decisions in inventory are one of the key success factors. The management must make strategic decisions about how much inventory to maintain. Too much inventory means that cash is tied up in these resources so that it is not available for other business functions. Too little inventory creates the risk that the company might not be able to ensure product availability. Therefore the management must make strategic decisions about how much inventory to maintain. Decisions regarding the volume of goods and services to hold on stock are addressed in inventory. Inventory enables the management to coordinate between supply and production so that there is enough stock in-house for effective supply chain management. Inventory is one of the key elements of the supply chain because it drives the decisions about how best to meet uncertain demand. It is not possible to determine an exact level of inventory because of uncertain demand. Therefore the management has to focus upon minimizing the uncertainty so that inventory decisions can be made more efficiently. Topics such as economic order quantity or reorder point are relevant. The level of inventory at which a new order is placed with the suppliers is the re-order point. The re-order point ensures that the current level of inventory is the economic order quantity (Fred 65). This is the level of inventory that ensures the lowest level of costs. By ensuring the correct level of supplies, strategic decisions in inventory enable an organization to meet customer satisfaction at each location. Inasmuch as the ultimate objective of supply chain management is to assure customer satisfaction through demand fluctuations, strategic decisions in inventory are crucial for day-to-day operation of supply chain activities. Inventory decisions determine the cost structure of the supply chain as these decisions impact upon production and supply. Therefore inventory decisions are crucial in supply chain management. Several tools are available to facilitate decision making in inventory. One is the economic order quantity. This represents the level of inventory that optimizes the cost structure. Re-order points, holding costs and ordering costs are also related to inventory decisions. By applying these tools, the management is able to manage inventory in such a manner that it contributes effectively to supply chain management. Inventory decisions that involve how much to order and when drive supply chain costs. Therefore inventory is one of the key elements of supply chain management. Transportation Transportation decisions are directly related to inventory decisions. Depending upon the time taken by the products to reach their destinations, inventory decisions are made. If the transportation time is longer, then higher levels of inventory have to be maintained. With shorter transportation times, lower levels of inventory can be accommodated. Strategic decisions in transportation should be taken accordingly. The management can decide to go for air transport which leads to a faster delivery system. However it is more expensive. Shipping by sea or rail is less expensive but the lead time is high so that higher levels of inventory have to be maintained. Therefore the supply chain decisions in this case involve determining the mode of transport that will ensure the highest possible customer satisfaction at each location. Such decisions can be operational or strategic. Operational decisions are implemented in the short-term. Transportation decisions in this case involve addressing customer service levels. However longer term strategic decisions are also made regarding the mode of transport that minimizes distribution costs. Transportation decisions are related to creating the most efficient delivery system so that the highest customer service levels can be maintained. It involves the movement of products from one end of the supply chain to the other. In the process, freight transportation costs become relevant. As mentioned before, the management can choose to transport by air, sea or rail. Therefore operational or strategic decisions in transportation are related to selecting the mode of transport which minimizes freight transportation costs. In this regard the production company can build long-term relationships with carriers such as UPS or FedEx to take care of distribution. Because UPS and FedEx have shipping operations worldwide, they can offer economies of scale in transport operations. By creating outsourcing partnerships with shipping companies, the production company can create cost-efficient distribution of goods and services. In this manner transportation decisions are directly related to supply chain management activities. Transportation decisions, whether strategic or operational, must be made with the objective that delivery to the end customer is performed on or before the date agreed upon in the service level agreement. Once the customer receives the product, the company sends an invoice which determines the freight costs. The freight costs will vary depending upon the mode of transport employed. As mentioned before, if the company employs a delivery system by air, then the system will be faster but it will be more costly. Transporting by sea or rail will take more lead time but will reduce freight costs. Location Location is a key element of supply chain management because the question of where the production facilities are located will have a significant impact upon total costs of the supply chain. If the production plant is located close to the customer, then transportation costs will be lower. It will also enable the company to deliver to the customers faster. Location planning is particularly relevant in international business. In this framework, the management has to consider the issues of standardization vs. customization (Chase 2006). If the decision is made to customize the products to the local market conditions, then strategic decisions are facilitated if the production facilitates are located in the region in question. It will enable the management to make production decisions quicker in line with local market changes. This is a key success factor in a competitive market which requires faster decision-making if the products are to tap into the existing demand. Location planning is crucial in addressing demand fluctuations. As mentioned before, location planning is particularly relevant in international business. In international trade, the cost of the supply chain is determined by cross-border tariffs. If the production plant is located in the local market, then the cost of production will be reduced because the company will not pay tariffs. If the products have to be transported from headquarters in each shipment, then tariffs will have to be paid and this will drive up supply chain costs. Therefore international businesses should try to make location decision as close to the market as is economically feasible. Strategic decisions in location are long-term. Unlike transportation or inventory decisions, which can be changed according to demand changes, location decisions cannot be changed. Therefore facility location involves long-term commitment when it comes to designing the supply chain. Depending upon where the production facilities are located, the costs of production, supply, inventory and transportation will be affected. Location planning leads to a supply chain design which lowers the costs. If the production plant is located close to the source of the raw material, then the cost of supplies will be reduced. If the production plant is located close to the delivery point of the customer, then both inventory costs and transportation costs can be controlled to a greater extent. In location planning, the management must consider the long-term demand and supply scenario since location decisions cannot be changed if there are unforeseen changes in the market conditions. Location planning is crucial to an effective supply chain design. Conclusion Production decisions lead to a supply chain which is aligned to market demand. Supply decisions are affected by outsourcing partnerships. Inventory decisions have a significant impact on costs. Transportation decisions are also related to costs. Location planning is a longer term process. These five elements are combined to create a framework for effective supply chain management. References Chase, Richard, et al. (2006). Operations Management for Competitive Advantage. New York: McGraw Hill/Irwin, 2005. Print Fred, David. Strategic Management: Concepts and Cases. New York: Prentice Hall, 2006. Print. Grimson, Andrew & David Pyke. “Sales and Operations Planning: An Exploratory Study and Framework.” The International Journal of Logistics and Management 18. 2007: 322-345. Print. Hill, Charles, and Gareth Jones. Strategic Management Theory: An Integrated Approach. New York: McGraw Hill/Irwin, 2008. Print. Read More