Supply Chain Management and SC Partnership - Report Example

Table of Contents Introduction 2 2. Supply Chain Management ... 2 3. Supply Chain Partnerships . 5 4. Conclusion . 8 5. Bibliography .. 9 Introduction Operations Management includes management of all processes in a manufacturing unit that are related to procurement of raw materials to the production and distribution of goods. Its activities include managing purchase of raw materials, inventory control, quality control, storage and logistics. The progress of operations management over the years can be traced as early as the advent of the Industrial Revolution. In 1913, Henry Ford developed a system for the manufacture of his Model-T cars (Chase, Jacobs and Acquilano, 2004). This system, which developed into the philosophical Just-In-Time system in the 1980's, entailed the process of on-time delivery so as to ensure that workers and machines were never idle. He also believed that companies should own and control virtually every aspect of its business. Late 1970's and early 1980's witnessed the development of the manufacturing strategy paradigm. The thinkers of the time argued that a company should devise a focused strategy, creating a focused factory that performs a core activity that the company is best at. Late 1980's saw the development of quality management for setting international quality standards. The International Organization for Standardization created the ISO 9000 certification standards with this purpose in view. Innovations in the process of operations led to the development of Business Process Reengineering in the 1990's. Companies saw the need to become lean in their manufacturing process to remain competitive and BPR aided by helping them eliminate the non-value added steps in their manufacturing process and computerizing the remaining ones to achieve low-cost and higher quality. Then came the Supply chain Management; applying a total system approach to managing the flow from suppliers through factories and warehouses to the end customers. Internet aided the progression during the late 1990's bringing supply chain management to its current level as an essential element of business activity (Chase, Jacobs and Acquilano, 2004). Supply-chain management (SCM) is a method for integrating a manufacturer's operations with those of all of its suppliers and customers and their intermediaries. SCM seeks to integrate the relationships and operations of several-tier suppliers in meeting necessities such as quantity, delivery and the timely exchange of information (Gunasekaran and Ngai, 2004). Supply Chain Management Supply chain management is the discipline of managing the movement of raw materials into an organization and the finished products out of the organization. SCM is an approach that encompasses every process concerned in manufacturing a product, from source to consumption. There has to be a linkage between the suppliers that provide inputs, manufacturing and service support operations that transform the inputs into products and services, and the distribution and local service providers that localize the product (Chase, Jacobs and Acquilano, 2004). This involves building a network that allows a flow of materials, without a break or hitch, throughout the process of production. This flow is fuelled by co-operation, and co-ordination among the diverse channel partners. Supply chain management thrives on improving efficiency and reducing cost of production by focusing on the core competencies of a company. Functions such as procurement of raw materials and distribution of products are outsourced to companies that are better equipped and more cost-efficient to perform them. Strategic planning is necessary to develop a network to monitor the supply chain so that it is efficient, costs less and delivers high quality and value to customers. Information technology has helped integrate the various components of SCM by building a network that aids in sharing necessary data between all supply chain partners within a system. A company that has developed and become a benchmark through its supply chain management is Dell Computer. Through a combination of innovative product design, an Internet order-taking process, an innovative assembly system and co-operation from its suppliers, Dell has created a supply chain that has proved to be extremely efficient. Dell is possibly the most efficient manufacturer in the world today and Dell attributes its success to its innovative use of operations technology. Radical changes in the structure of operations, with the aid of technology, have led to lower cost while providing value to the customers (Chase, Jacobs and Acquilano, 2004). Adversial relations between supply chain partners (Fisher, 1997) can lead to losses for all parties involved. This can cause a rift in their communication process and hamper the very essence of supply chain management, namely networking. For example, a mismatch between supply and demand could mean overstocking by a supplier and higher inventory for the manufacturer. A lack of synchronization among the supply chain partners is referred to as the Bullwhip Effect. Bullwhip effect leads to inefficient resource utilization because planning and managing becomes much more difficult (Levi et al., 2003). Even a slight change in consumer sales ripples backward in the form of magnified oscillations upstream, resembling the result of a flick of a bullwhip handle. When supply and demand patterns do not correspond, inventory accumulates at various stages and shortages and delays occur at others (Chase, Jacobs and Acquilano, 2004). Such intricacies can be offset with the aid of technology. Technology helps in connecting the supply chain partners through an integrated system that crosses the seams of communication as well as geographical barriers. Today the survival of most companies depends on intelligent supply chain decisions. Firms today have to take full advantage of the internet to become more responsive and to better penetrate customer markets (Chase, Jacobs and Acquilano, 2004). With the advent of IT and internet, communication between supply chain partners has become easier and more cost-efficient. Internet has paved way for integrating the varied partners in the SCM system, to bring them closer through the power of electronic communication. Automating SCM is the process of building an electronic information network for transactions among supplier-manufacturer-retailer-customer in virtual space using IT. Every company in a large supply chain or distribution chain is dependent on each other. Thus, the unit of value creation has shifted from individual firms to value-networks that consist of partner firms and their close collaboration. SCM consists of choosing what work to outsource to suppliers (make vs. buy) and selecting suppliers to use and negotiating contracts - both the legalities and the culture of the supply chain relationships. (Milak, 2006) One area where Ford and Toyota have diverged is supplier relations. Armed with cost and quality control at the process level, Toyota can concentrate on a value-based enterprise product strategy focused on customer value. Instead of building and maintaining collaborative supplier strategies, Ford and other American companies concentrate their expertise on mere cost-cutting strategies. Toyota recognizes that fulfilling the enterprise potential of TPS requires a substantial cultural shift toward collaboration and continuous improvement, both internally and externally. Toyota diverges from its competitors like Ford on make-versus-buy decisions. The company is not as interested in outsourcing as its American competitors. Like its material suppliers, Toyota also keeps its R&D close to production (Industry Week, 2006). Fisher (1997) identified that the nature of a product affects its supply chain management. Different products require different supply chain strategies and the root cause of supply chain problems lie in the mismatch between them. Another factor that Fisher identified that affects supply chain management is demand for a product. He states that the nature of demand of a product should be understood and a supply chain should be devised that best satisfies that demand. For this, one should consider aspects of demand such as product life cycle, demand predictability and so on. While Fisher's ideas focused on demand of the product, Lee (2002) pointed out the uncertainties surrounding the supply side of the supply chain that also act as drivers for the right supply chain strategy. Depending on the nature of a product, availability and procurement of supplies would vary. The quality of a product would depend very highly on the quality of the raw materials acquired for manufacturing the product. Some products require raw materials which would be geographically dispersed while some others would face the threat of substitution. When discussing supply chain management, one cannot ignore mass customization, the new wave that delivers goods according to customer specifics. Mass customization is the process of delivering customized products to customers. The key to mass customization is postponing the task of differentiating the product until the last possible point in the supply network. To achieve this, the company must integrate the designs, manufacturing and delivery process and the configuration of the entire supply network. With the help of this, companies will be able to maximize efficiency and deliver customer specific products with minimum amount of inventory (Chase, Jacobs and Acquilano, 2004). When a company is able to deliver more value to a customer than its competitors, then the company is said to have a competitive advantage. Porter (1980) identified two basic types of competitive advantage - cost leadership and differentiation. Achieving cost leadership means that the company sets out to be the low cost producer in its industry while achieving differentiation means that the company seeks to be unique in its industry within the parameters appreciated by the buyers. With supply chain management, the value and service provided to the end customer can be enhanced, particularly reducing the time needed to deliver vehicles and meeting deadlines, thereby contributing to increase the competitiveness of the company. Many companies actually achieve competitive advantage by leveraging the management of their supply chains. Two of the most powerful SCM competitive advantage principles are - 1) Stick to your core competencies and outsource non-core competencies and 2) Coordinate these functions across supply chain partners (John. T. Mentzer, 2007). Supply chain management revolves around efficient integration of suppliers, manufacturers and warehouses. By coordinating activities across the supply chain, companies can improve performance, reduce cost, reduce the bullwhip effect, better use resources and respond effectively to changes in the market place (Levi et al., 2003). In simplest terms, an integrated supply chain is a connected series of organizations, resources and activities involved in the creation and delivery of value in the form of finished products and services to end customers. Supply Chain Partnerships To maximize efficiency in supply chain management, companies form partnerships with supply chain partners to encourage greater cooperation between them and their suppliers. Companies promote partnerships with their key suppliers to improve business efficiency through minimizing waste and maximizing cost savings. Integration of processes involves linking the many steps along the way from determination of the customer wants and needs to the creation of a new product or service to meet that demand. A company may not have the essential financial and managerial resources to run its entire manufacturing process in-house. Moreover, a company may find it more effective to use other companies with special resources and technical knowledge to perform some of its processes (Levi. et al., 2003). For example, a car manufacturing company would find it more resourceful to outsource its tires to a company that specialises in tire manufacturing. Specialization helps in improving quality and a company is bound by the quality of manufacturing of its suppliers. There are four basic ways a company can ensure that its logistics based function is performed. 1) The company can perform the activity using its internal sources and technical know-how, but it will be beneficial only if the activity is one of the core strengths of the company. 2) If the company cannot conjure up the necessary resources, it can identify another company that specializes in that activity and acquire that company. But acquisition is an expensive and difficult process, especially if the working culture of the acquired company does not match with that of the acquiring company. 3) The third way is called arm's-length transaction in which, companies strike short-term arrangements with other companies for a specific need. But this kind of an arrangement, even though benefits a short-term need, will not convert into long-term advantages. 4) The final and most effective way identified so far is strategic alliances. These are typically multi-faceted, long term partnerships between two companies that lead to long-term strategic advantages for both partners (Levi et al., 2003). Strategic alliance benefits a firm in several ways: it shares risks, adds product value, builds financial and technological strength and strategic growth, enhances organizational skills and facilitates access to resources and markets (Levi. et al., 2003). By strategically aligning with other companies, firms are able to access strategies of differentiation and cost leadership, and are hence able to gain sustainable competitive advantages in the marketplace (Porter, 1980). Every company has its own core competency that differentiates it from its competitors. Before initiating an alliance, a company must ensure that its core competency will not be weakened with the alliance, which will happen if the resources that are intended for the core activities are channeled into the partnership. The company must also address issues such as value addition to the product, improving market access, adding technological and financial strength and enhancing strategic growth before initiating an alliance with another company (Levi. et al., 2003). Outsourcing became the focus of many companies in the 1990s; manufacturers considered outsourcing everything from procurement to production and manufacturing (Levi. et al., 2003). Outsourcing is the act of moving some of some of the company's non-core activities and decision responsibilities to an outside provider. Outsourcing involves transferring not just the activity or process alone; but also the resources that make the activities occur, including manpower, equipments, technology and even the responsibility of decision making as well. For example, in the electronics industry, 11% of the manufacturing is outsourced, including distribution and repairs (Chase, Jacobs and Acquilano, 2004). Apple Computers also outsources most of its manufacturing activities; the company outsources 70 percent of its components (Levi et al., 2003). Procurement and outsourcing benefit a firm in several ways. Firstly they enable firms to save financial, human and temporal resources in terms of their low involvement in set-up capital, labor force and time in the production process. They also facilitate firms in speeding up their lead time to reach the market since the time to produce a finished product has been reduced. Along with these benefits they can efficiently and effectively help to improve a product's quality, delivery and reliability. There are nonetheless risks associated with procurement and outsourcing. For example, firms may feel the pressure of bargaining power from suppliers or they may suffer from losing competitive knowledge by outsourcing to others. Firms therefore need to apply strategies in managing procurement and outsourcing activities that harness their benefits to the maximum whilst minimizing the risks involved. As companies outsource more of their value chain to their suppliers, their competitive advantage depends increasingly on the performance of those suppliers. Japanese car manufacturer, Toyota, depends on suppliers for more than 70 percent of its vehicles and suppliers play a key role in building quality into Toyota vehicle. Over the years, Toyota has invested heavily in networks of communication among its suppliers, to promote spread of successful practices, involving both tacit and explicit knowledge. Toyota decentralizes its knowledge base by insisting on non-proprietary and subsidized knowledge-sharing activities within the extended enterprise. This has enabled Toyota to gain the co-operation and energetic participation of its suppliers, along with their loyalty and devotion (Dyer, 2000). Toyota maintains a diverse supplier base which reflects the manufacturer's diversity of customers and its employees. Partnering with suppliers with a diversity of ideas, in addition to providing support goods for the product, creates a significant competitive advantage for the company. Toyotas efficiencies in manufacturing and supply chain practices place it in a strategic position to take advantage of the next level of possibility. The present times call for maximum customer indulgence. Satisfying the customer to a degree where he or she can customize and choose the product even before it is manufactured. This can be achieved only on attaining an almost perfect supply chain management system. Toyota can achieve with cars what Dell achieved with customized selling of personal computer, thereby allowing customers to choose what their car would be like almost from the design stage before being submitted to the manufacturing stage. Williams et al. (2002) explored traditional SCM and electronic supply-chain management, and noted the resulting effect on strategic alliances and partnerships. The core characteristic of the electronic supply-chain was identified as flexibility. Successful SCM requires a change from managing individual functions to integrating activities into the key supply-chain processes. SCM can reach beyond the boundaries of a single company to share information among suppliers, manufacturers, distributors and retailers. The internet plays a major role in this sharing. The ability to focus on one layer of the supply-chain has enabled organizations such as AOL to be innovative (Gunasekaran and Ngai, 2004). Supply chain management is the effort of continuously improving supply chain -network-partners performance. Collaborative manufacturing goes one step further to include supply chain partners in the virtual corporation as if they were part of the company (McClellan, 2002). The results of the 2003 Industry Week Value Chain Survey pointed out two trends that are emerging and evolving: 1) Supply chains increasingly incorporate outsourcing and partnerships, presenting ever greater challenges in managing demand and supply and controlling logistics spend. 2) Optimizing supply chain performance, productivity and responsiveness is increasingly important to achieve cost- and service-level objectives. Collaboration is becoming the next frontier of improvement to reach a new level of operational excellence. True partnerships are required to develop new products and services (faster, better and more complex), produce hybrid and cost-effective products and services and deliver them to multiple channels. Leading companies have demonstrated that supply chain management not only concerns operational excellence and cost reduction objectives, but more and more is focused on developing new business strategies and managing new business models to outperform competition and to satisfy customers, while contributing to shareholder value (Bourde and Butner, 2004). Conclusion Traditional supply chain business models are giving way to the emergence of new horizontally integrated, high-performance, on demand value chain networks (Bourde and Butner, 2004). It is known that supply chain management is, as a research subject, still in its infancy, and in a phase of strong development. This reflects upon the usage of advanced logistical applications in companies; not all are aware of the possibilities that modern logistics could bring to their operations. To recognize the significance of logistics, companies have to understand that it could be a source of competitive advantage (Nyberg and Henriksson, 2005). The more integrated the flow of data between customers and suppliers, the easier it becomes to balance supply and demand across the entire network. Web-based technologies are now indispensable to demand forecasting, inventory planning, and customer relationship management. It is not just about the synergy of partners in the supply chain, but also about sharing real-time demand information and being responsive to customers. It is the customers who add the ultimate value to the product and hence should be catered to with more and more efficiency and care. Companies need to aim towards customer satisfaction by means of competitive pricing, improved quality, better reach, superior technology, valuable financing options and better after sales service. Global sourcing is now a competitive requirement of doing business. Companies with global presence need to find effective and cost-efficient ways of supply chain management without waste of time, all the while aiming for improved quality. Directing the offshore supply chain, as to costs, performance, inventory, visibility, collaboration, integration and agility is an imperative for corporate success. Bibliography Bourde, Marc and Butner, Karen, 2004, 'Energize your supply chain network: New competitive advantage from existing investments', IBM Institute for Business Value study, 5 January 2004. Chase, Richard B., Jacobs, Robert F. and Aquilano, Nicholas J. 2004, Operations Management For Competitive Advantage, (10th edn), Tata McGraw-Hill Publishing Company Limited, New Delhi. Dyer, Jeffrey H., 2000, Collaborative Advantage: Winning through Extended Enterprise Supplier Networks. Fisher, M. L., "What is the Right Supply Chain for Your Product' Harvard Business Review, March - April 1997, pg: 105-116 Gunasekaran, A and Ngai, E. W. T., 2004, 'Virtual supply-chain management', Production Planning & Control, Vol. 15, No. 6, September 2004, 584-595 Industry Week, 2006, Learning From Toyota - Again, (URL: http://www.industryweek.com/ReadArticle.aspxArticleID=11301), February 1, 2006 [Accessed: 24 April 2007] Levi, Edith Simchi, Kaminsky, Philip and Levi, David Simchi, 2003, Managing The Supply Chain: Definitive Guide for the Business Professional, The McGraw Hill Companies. McClellan, Michael, 2002, Collaborative Manufacturing: Using Real Time Information to Support the Supply Chain, St. Lucie Press. Mentzer, John T., 2007, Achieving Competitive Advantage Through Supply Chain Management, University of Tennessee, 10 January 2007. Nyberg, Tom and Henriksson, Toni., 2005, Supply Chain Management as a Source of Competitive Advantage A Case Study of Three Fast-growth Companies, Gteborg, Department of Business Administration Read More