Supply Chain Management Tools - Essay Example

? Supply Chain Management I. Introduction The company is a power tool manufacturer whose products include electric drills, saws, and sanders. There are several highly competitive players in the industry that compels the company to be competitive and responsive by having its products available to the customers at the right time and at the right cost. To achieve this balance, it is important to have a synergistic supply chain that will provide sustainable dominant competitive advantage to the company. This report will discuss the various aspects of the power tool company's supply chain on how it can best ensure its optimum performance that would enable the organization to realize its business objectives. II. Options of recommendation of a supply chain strategy: Keiretsu network The business will utilize the keiretsu network for the power tool company. Keiretsu is a network of organizations linked together by having a stake in each other's organization. The structure is usually likened to a spider's web and was designed to diffuse the adversarial relationship between buyer and supplier. The supplier also becomes a stakeholder of the organization and this set up induces the parties to work for their mutual benefit. This kind of relationship promotes cooperation and collaboration as each organization becomes a stakeholder in each other's organization whereby all stakeholders will share the fruit of profit or in the case of loss, also a share in the financial setback (Miyashia and Russel, 1994). The parts needed for the power tools (electric drills, saws, and sanders) are highly specialized and costly. It has a high learning curve and cannot be procured with any supplier overnight because its specifications must be met before it can purchase from a certain supplier. Needless to say, a collaborative long-term and non-antagonistic relationship with suppliers is favorable for the company due to the requirements of its parts. The keiretsu procurement network serves this purpose. This kind of procurement strategy is aligned with the company's vision of producing the highest quality for its power tool because the company will be working close with its suppliers. Keiretsu is basically a collaborative supplier-client networking where each player has a stake in each other and this kind of supplier chain relationship serves this purpose. Power tools depend on the quality, timeliness and reasonability of the cost of its parts and it is imperative that the supplier that provides the parts of the power tools is committed to delivering its supplies according to those requirements. Of all the supply chain strategies, keiretsu network is the best option that serves the company's objectives. The best way to commit suppliers to provide supplies of quality, timely and cost effective is to build a relationship with them whereby the company can work with the supplier on how to better achieve these business objectives. This will not only produce better power tool products, but also allow better prices making the company more competitive in the market making keiretsu a top choice. The only downside of keiretsu network is that if a non-performing (tardy on delivery) and substandard (not meeting specifications) supplier is wrongly chosen, it would be difficult shake it off because the company has committed itself on a long-term basis, especially if there is a contract between the two parties. These issues can be easily remedied. For the issue of incorrectly choosing non-performing and substandard supplier, the power tool company must first establish a strict criteria before looking for a supplier. These criteria must reflect the objectives, quality standard and timeliness of the company and must be met by the supplier in consideration. This would avoid incorrectly choosing a wrong supplier. For the issue of binding the company to a wrong supplier, it can be remedied by stipulating an opt out and a fine in the event that supplier will renege the contract. This will compensate the company for any losses incurred by the non-performing supplier and an opportunity to replace such supplier. III. Metrices to measure supply chain Maintaining the efficacy of the supply chain requires metrics for the management of the power tool company to monitor, control and apply appropriate measures for any issues that may occur or anticipated in the supply chain. The metrics that shall be applied for the power tool company is the Lean Six Sigma which is a combination of Six Sigma’s managerial concept and Lean which was designed to improve quality of the products and/or services and minimize if not eliminate waste in an organization with the end of enhancing its bottom line (Fu-Kwun). The precursor of Lean Six Sigma was the Six Sigma which was first developed by Motorola in the 1980s. “Six Sigma is primarily a methodology for improving the capability of business processes by using statistical methods to identify and decrease or eliminate process variation. Its goal is reduction of defects and improvements in profits, employee morale and product quality” (Fu-Kwun 2010:301). While it was originally developed to improve manufacturing processes, it has also been used by many organizations to improve other areas of their business” which in this case in the power tool’s supply chain (Guarraia 2009). Lean Manufacturing on the other hand had its roots back to production system of Toyota Production System which was “traditionally associated with moving equipment” (Klaasse, 2006). As a management strategy it aims to optimize the company’s productivity by reducing waste during the development of products/services which is appropriate in using in eliminating waste in the power tool company’s supply chain. The need to align service delivery in accordance to customer expectations and the market imperative to reduce cost to remain competitive in the market however compels the operations of the power tools company to think of management implements that would serve this purpose. Lean Six Sigma specifically caters to this need of reducing costs and maintaining competitiveness by removing processes that do not add value to its supply chain. As a business practice, Lean Six Sigma can be likened to the company’s existing quality control where it seeks to eliminate poor quality of its product and/or services and standardized procedures of its operation. The difference is that Lean Six Sigma is more comprehensive because it involves all processes and requires cultural change on the whole stream of the chain because the core of philosophy of Lean Six Sigma is the identification of customer value that any activities that is not consistent to customer value, or anything that the customer is not willing to pay for will be removed. Thus, with the implementation of Lean Six Sigma, the organization is driven to improve values in its supply that the customer is willing to pay for. The Lean Sigma Metrics shall be divided into three categories namely time metrics, cost metrics and quality metrics. Time metrics determine the time needed for the supplies to come in after the order has made and the idle time or delay in delivering the same supply. Cost metrics is the economic component whereby areas in the supply stream are identified where savings can be possible. Quality metrics on the other hand determine the frequency of substandard parts, the damage products in inventory and number of rework. Below is the application of the metrics of Lean Sigma in the power tools company. Time Metrics - time needed for the supplies to come in after the order has made and the idle time or delay in delivering the supply Cost metrics – costs associated in getting the supplies in the plant. Savings identified in the supply stream. Quality Metrics – frequency of substandard part delivery that leads to rework and/or damaged power tools Lead time of delivery-time required the supplies arrived from the time the order was placed as express in business days. Completion time (shortest and longest) Value added time Essential non-value added time Percentage of the time value added time. Freight cost savings Manpower savings Savings on the price of the supplies/component/parts Quality of the power tools produced Reworked due to substandard parts delivered Accuracy of completion – percent of events that work in progress moved to the next phase without going back downstream for correction. Rolling pass yield – percent of the product administrative work that is completed without rework. Output metrics Quantity delivered in a given period of time Supplies delivered Supplies in transit Supplies backlog Inventory – parts in stock, finished and unfinished power tools that exceeded actual demand. Value added in the supply chain Process steps Decisions Supply stream metrics Lean events in the supply stream conducted Number of employees participated in the lean event Number of employees participated in lean training IV. Issues in developing an efficient integrated supply chain There are three common issues that the power tool company faces in achieving an efficient integrated supply chain. These are; a) bull whip effect b) local optimization and large lots. The goal of any supply chain is to get the right selection of goods and services to customers in the most efficient way possible. To meet this goal, each link along the supply chain must not only function as efficiently as possible; it must also coordinate and integrate with links both upstream and downstream in the chain. a. Bullwhip effect Bullwhip effect are phenomena in supply chain that induces the trend of larger swings in inventory as a result of the change in demand (1997). According to Lee et al., the bullwhip effect occurs when the demand order variabilities in the supply chain are amplified as they moved up the supply chain. Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies (1997 pg. 93). These swings in demand stimulate the supply dimension of the entire chain to meet it and makes the inadvertent effect of increasing the supply and affecting all the factors in the chain from production to the consumer's end. b. Local optimization Local optimization is a temptation to minimize cost based on limited knowledge which on the power tool company's case, is to resort to suppliers that offer cheaper but untested parts whose support and timeliness is also not well established. Power tool company may be offered by unreliable suppliers parts and supply at lower cost hoping to entice the company to avail of such supplier due to the short term savings it can offer. This could raise an issue however on the long run especially if the quality and support of the supplier to the objective of the organization is unreliable. c. Incentives Incentives are the rewards given to induce or encourage a certain behavior in the supply chain. It could come in the form of sales incentives, quantity discounts, quotas, promotions etch all designed to push the supply and merchandise into the market. Incentives creates supply management issues both in the supply side and customer side. It creates an issue in the supply side when incentives are given through discounts in ordering huge quantity. In the customer side, it incentive creates a supply issue promotions are given that induces sudden pick up of demand. (Harvard Business Review, nd) V. Recommendation for effective integrated supply chain a. Against bullwhip effect The spike in demand that characterizes the bullwhip effect in supply chain is an indication of lack of understanding of what drives customer demand leading to lack of planning in inventory consumption. The bullwhip effect in the power tool industry is quite costly because the tools that are manufactured are not cheap. Overproduction due to bullwhip will increase the volume of inventory and makes it movement slow. Both phenomena incur unnecessary costs to the company undermining its bottom line and profitability. To address this issue, in the case of the power tool company, this lack of understanding of what drives customer demand can be stemmed from the lack of accessibility about the demand of the customers. This information is stored in the Point of Sale (data) and should be made available to all the key players in the supply chain especially if the company is using the keiretsu as a structure for its supply network. This will enable the suppliers, manufacturers, providers and even customers to collaborate on improving the quality and frequency of information exchanged in the supply chain stream. This collaborate work to improve the quality and frequency of information in the supply chain stream that could prevent the effect of the bull whip can be done in several ways. These key players can opt to use the vendor management inventory (VMI). It would also prevent the spike of demand that induces the bullwhip effect by discouraging order batching. The advantage that can be had in ordering in scale can be offset by using Electronic Data Interchange (EDI) and Computer Aided Ordering (CAO) (University of San Francisco, nd). This way, demand are already anticipated and will enable these stakeholders to pace the stream of supply according to the anticipated demand. b. Local optimization To do away with the supply chain issue of local optimization, the power tool company must think long term and evaluate suppliers on a holistic criteria and not just on cost. Unreliable suppliers with cheaper products may prove to be more expensive in the long run not to mention the issues it will create that will undermine the company's position in the market. The power tool company will also consider quality, reliability, timeliness, willingness to coordinate and lastly, willingness to put a stake in the company for a long term relationship. c. Incentives Sound pricing strategies and policies are to be implemented to avoid the issue of incentives in supply management. This could be done by offering the power tools at a stable and fair prices and avoiding deep discounts that artificially stimulate demand. Removing incentives that induce customers to purchase only when discounts are given can make demand more predictable (University of San Francisco, 2013). In addition, addressing the causes of order cancellations helps establish a more predictable ordering pattern of the power tools enabling the company to make sound projection. The entire supply chain will be stable if incentives are aligned in the network. It meant the distribution of the rewards with its corresponding risks and costs of doing business to optimize the performance of the entire supply chain. Supply chain issues such as excessive inventory or stock outs, wrong forecasts are typically caused by misaligned incentives (Raman and Narayanan, 2004). VI. Risks a. Process Risk Process risks relates to the disruptions of the sequences of value-adding and managerial activities undertaken by the power tool company (Decision Craft Inc., nd). This disruption is considered a risk because it threatens the continuity of the business that made it necessary to embed mitigating measures that would ensure that the power tool company remains going concern despite the process risk. The process risk identified in the power tool company is the breakdown and/or neglect of quality control apparatus that is supposed to monitor, maintain and sustain the quality of the process of both the supply stream and the process of manufacturing the product itself. Ideally, quality control mechanism such as the Lean Sigma should be embedded in the process of supply chain. In the power tool company, this disruption of the value-adding managerial activities is identified as the degradation of operational quality whereby deviations from manufacturing plans becomes significant where quality standard of the process of manufacturing the power tools deteriorate. These results in unpredictable consistency in the quality of the power tools that could lead to dissatisfied customers and high after-sales cost (warranty, repairs, staffing to attend to customer complaints etch). Mitigating process risks To prevent operational degradation that tools that could lead to dissatisfied customers and high after-sales cost, quality control must be embedded beginning from materials acquisition to manufacturing process to ensure that quality is part of the process and avoid production of substandard power tools that could later back fire to the company. b. Control Risk "Controls are the assumptions, rules, systems and procedures that govern how an organization exerts control over the processes. In terms of the supply chain they may be order quantities, batch sizes, safety stock policies etc. Control risk is therefore the risk arising from the application or misapplication of these rules (Decision Craft Inc., nd). In the power tool company, the control risks identified are the order quantities and batch sizes. In an effort to save on cost, the company has a tendency to resort to economy of scale in ordering its parts to advantage of discounts given by the suppliers. Ordering in huge quantities and batches however does not reflect the actual need of the market that results to bull whip effect. This leads to huge inventory which incurs cost not to mention the greater possibility of causing damage to finished power tools and difficulty in spotting substandard parts in terms of the supplies and components ordered. Another common control risk for the power tool company is the incorrect forecasting of a supply need that either result to uncontrollable waste, under production, stock out and huge inventory which costs money to the company. Mitigating control risk The common driver for ordering large batches of supplies in huge quantity is the myopic business sense that scale automatically translates to savings. This is also the root cause of incorrect projections. The savings in ordering in scale can easily be defrayed by waste and increased frequency in substandard parts that could lead to rework and other myriad issues in production and therefore costlier than making orders compared to actual need and demand. It is more economical therefore to place orders based on the demand of the customers, seasonality of sales and inability to project product life cycle. This information must be had to have a greater probability of making the right supply projections having the power tools at the right time, right place and the right price. This could be minimized by utilizing vendor management inventory (VMI) which would prevent the spike of demand. Using Electronic Data Interchange (EDI) can also make ordering manageable that would also minimize if not avoid waste c. Environmental risk Environment risks are those factors and externalities that the organization has very little or almost no control (De Loach, 2000). They include competitors, customer behavior, regulatory agency and natural disasters. For the power tool company, there environmental risks it has to contend with are its competitors and natural disasters. Competitors are considered to be one of the external risks because they may be able to procure supplies at a better quality at lower cost that could ultimately translate to their competitiveness in the market. Next is the force majeure or Acts of God such as natural disasters that could disrupt and/or delay delivery of supplies. Mitigating environmental risk The best way to mitigate the risk posed by competitors is just to do what it is supposed to do as a business entity, make all the aspect of its business and its processes competitive with emphasis on quality and efficiency. In short, the best way to ward off or overcome competitor's risk is to make better and more cost effective products. Acts of God such as natural disasters that could disrupt and/or delay supplies could not be controlled nor predicted but it does not also mean that the power tool company will be left entirely vulnerable against it. There should be similar suppliers providing the same components where the company can increase order in the event one supplier is unable to deliver due to force majeure. With regard to the facility, there should be a secondary facility to ensure business continuity during the worst event that the main manufacturing facility is disabled by natural calamity. VII. Manufacturing facility organizational structure VIII. Organizational components The manufacturing facility will be headed by the Manufacturing Director. He or she shall be responsible of the over-all operations of the manufacturing facility. He has one Administrative Assistant and a Consultant that would give the Manufacturing Director a second perspective on the operation of the plant. His Materials Handler will then make the order in the Keiretsu network mindful of the availability of such supply and timeliness of its delivery. Upon arrival of the supplies, the Inventory Control Specialist will then inspect the accuracy of the delivery compared to what is ordered. Defective, substandard materials are segregated before passing it to the Process Engineer to prevent rework of production. It is advisable that the inventory is kept according to the need of the market for the Inventory Control Specialist to easily monitor accuracy of delivery and to easily spot defect and prevent further issues in the production line. The process engineer is in-charge for drafting the manufacturing plan and the process necessary for production. The specifications of mass customized products are integrated in the manufacturing process in this department. The process technician will oversee that such manufacturing plan is complied in every stage of the production process to ensure quality and prevent costly rework. The Plant Supervisor is in-charge of the production process and the implementation of the manufacturing plan. The Foreman helps him oversee that the factory workers and assemblers manufacture the power tools according to process, set quality and schedule. Upon completion, the Materials Handler inspects for quality before warehousing. Reworks are then sent back to the Foreman and documented to avoid reoccurrence. The Warehousing and Inventory then arrange the shipping and delivery of power tools to its retailers. IX. Strategic operations management There are three operational factors that the company must be mindful to achieve its strategic objectives as a business organization. These are quality, supply chain management and inventory management. a Quality Quality can make or break the power tool company. The company differentiates from the competition that its power tools are reliable and of the highest quality. The operation of the business therefore must be mindful of this company standard by emphasizing quality not only in the materials procured but also in the observance of processes that creates the company's products. b Supply-chain management The advent of globalization has heightened competition that companies now have to think of ways on how to enhance their competitiveness in the market. The power tool company recognizes their evolving reality in the market and is now turning to supply chain management as a source of strategic leverage. This is a business necessity because customers now are demanding higher quality products at lower prices indicating the need that the company has to be efficient. Supply chain management serves this end and the collaborative integration of procurement activities allow the company to produce products that are more reliable at a more cost effective price. c Inventory management Inventory needs to be managed as part of the company's strategic thrust to lower operational cost that will ultimately reflect on the company's competitiveness as a business organization. Factors that need to be management in the inventory extends to the quantity and location of raw materials, work in progress and finished goods. It is important that inventory will be maintain at a level that is responsive to the demand of the market because high inventory could increase holding costs while stock outs can lead to undesirable marketing consequences which are both inimical to company's strategic objectives. X. Mass customization The power tool company will adopt a consumer-focused mass customization process. Mass customization allows changing and adding of a certain functionality of the power tool depending on the need of a certain market segment in a more efficient and affordable manner (Gilmore and Pine, nd). Mass customization benefits the power tool company by providing it a strategic advantage of variety and customization without adding significant cost. By providing variety at a lower cost, the power tool company can differentiate from its competitors as more responsive to its customer's needs by integrating customers into the company's value chain. In addition, providing variety to its customers, the power tool company can also take advantage of economy of scope whereby they can serve more customers by responding to their varying needs. Mass customization however is not without issues. It may result into operational conflicts due to the sheer diversity of its customer's demands that would require a high of component variability that could lead to administrative difficulty. This issue posed by mass customization however can be overcome by careful planning and limiting the extent of mass customization to a level that will not strain the supply chain and manufacturing activity. XI. Cost effectiveness of manufacturing facility location In addition to making the supply chain and process in the manufacturing facility efficient, the location of the manufacturing plant can also add cost effectiveness to the company. Cost efficiency of the location of the manufacturing facility can be had by considering sufficient access to raw materials to be used for production. This meant having a continuous and quality supply in the selected location. Transport and regulatory cost must also be considerably low to minimize cost. In addition, there should be available skilled labor to be able to make the various parts and materials into a finished power tool. It would also be beneficial to the company if wages are not that steep to make the production more cost effective. Thus, location of the manufacturing facility can improve its cost effectiveness when it is nearer with its suppliers because of the savings that can be had with a lower freight. Shorter time in transport also meant a savings in time and minimal risk while in transport. Risks have economic repercussion and by minimizing it, the company is also able to save on cost. Availability of skilled labor at a lower cost would definitely a defining factor in the location of a manufacturing facility because they are a recurring saving. In short, the accumulated savings that can be had by lower freight cost, cheaper raw materials, minimal risk due to shorter travel time, low wage skilled labor and lower regulatory cost can improve the cost effectiveness of the company which it can translate into its price making it more competitive in the market. XII. Recommendation to improve effectiveness of supply chain Globalization made business extremely competitive that business organizations such as the power tool company have to leverage every aspect of their business as a competitive tool to gain advantage over the competition. This includes their supply chain that has now evolved as a strategic tool from a mere function of material acquisition and procurement. To make its supply chain effective, there are initiatives that the power tool company has to implement. Foremost is to embed risk mitigating mechanism in its process and system. Risks that could disrupt and/or delay the stream of supply chain are always present even if at present everything seems to be working well. The company has to ensure that the business will continue to be a going concern even if the anticipated risks will materialize. Needless to say, quality must also be embedded in the various processes of the supply chain to prevent the product and documents from being reworked and to maintain consistency of quality in all its products. The company must also do away ordering in scale just to take advantage of the discount offered by suppliers. This is not responsive to the realities in the market and in fact more costly in the long run because it is more susceptible to damage, rework, overruns and high storage cost. Keeping inventory low will make it easy to monitor and spot damages that could lead to fewer if not totally eliminating rework and damages ultimately saving the power tool cost associated with waste and high inventory. Lastly, the power tool company must also be responsive with the changing market and technology. It should continuously improve to maintain and sustain quality. It is recommended for the company to adopt kaizen or continuous improvement not only in its process but also on its human resource by conducting perpetual training that keeps its human resource updated and highly skilled. References Aligning Incentives in Supply Chains - Harvard Business Review. (n.d.). Harvard Business Review Case Studies, Articles, Books, Pamphlets - Harvard Business Review. Retrieved July 26, 2013, from http://hbr.org/2004/11/aligning-incentives-in-supply-chains/ar/1 De Loach, J. W. (2000). Enterprise-wide Risk Management: Strategies for linking risk and opportunity, Prentice Hall. Hau L Lee, V Padmanabhan, and Seungjin Whang (1997). The Bullwhip Effect in Supply Chains. Sloan Management Review, Spring 1997, Volume 38, Issue 3, pp. 93-102 Lapide, Larry (nd). Waht About Measuring Supply Chain Performance? AMR Research. http://lapide.ASCET.com Managing the Bullwhip Effect on Your Supply Chain| Supply Chain Bullwhip Effect. 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