Supply Chain Management in PEP - Case Study Example

PEP Case Study Student’s Name Professor Course Date Introduction Supply Chain Management (SCM) refers to the delivery of superior consumer as well as economic value using coordinated managing of the physical goods as well as the related information flow from sourcing through consumption. SCM consists of complex matrix of concepts and practical applications, which are employed to respond to a myriad of problems affecting organisations within its own operations and in the channel (Pagell 2004). This is evident in the PEP case where the company faced distribution problems. There was need to reduce or contain the possible cost effect of the distribution system while improving the company performance principles as well as service levels. PEP Stores was under pressure to deliver its products to the market faster to increase process flexibility to respond to the shifts in the marketplace needs, and to reduce product and operating costs. This led to the company turning to the strengths found in the supply chain partners to enrich its competitive capacity. Supply Chain Management in PEP PEP looked for new ways to converge its strategic and operational strengths to become more creative and more responsive to the marketplace using supply chain management. Its success in employment of SCM and the benefits accrued shows that companies that succeed in exploiting supply chains are able to control and focus production roles better whilst expanding their products reach to meet nationwide as well as global demands (Danese 2011). The PEP case proved that poorly defined relationships with suppliers, disconnection between channel systems lead to avoidable costs as well as redundancies and hidden supply chain constrains which means disaster for the company and its product. SCM forms one of the key cornerstones of avoiding such disasters and achieving marketplace in leadership in today’s ever-changing market place (Danese 2011). SCM plays a major role in consolidating supplier and customer basis getting rid of redundant stages in the supply chain, accelerating materials flows, and enabling lasting partnership with main suppliers and customers to influence the capacities of various companies involved in the chains. Generally, SCM set of activities endeavour to manage and coordinate the supply chain from the suppliers of raw material to the final user to achieve win-win position (Jayaram, Tan, & Nachiappan 2010). SCM is a tactical tool, which the management used in managing various operational actions, such as controlling of outbound and inbound materials and information flow, and the removal of channel ineffectiveness, redundancies and costs broadening from acquirement of raw materials, via product manufacture, distribution, and consumption. By enabling this, as evident in the PEP case, SCM is in a unique position to offer supply chain systems with the capacity to create total new approaches to product innovation and being shaped by the practical requirements of identifying and winning today’s most profitable marketplace opportunities. Inventory Management and Risk Pooling PEP used the risk pooling strategy in inventory management in its supply chain management initiatives. Inventory management plays an important function in the value chain of an organization. Companies opt to push or pull inventory approach via its distribution channel (Pagel 2004). Managing inventory leads to improvements in customer service and costs reductions. Clear and consistent of performance measures for inventory management process are key to a company success. The measures show the tradeoff between inventory and service level. According to Simchi-Levi, Kaminsky and Simchi-Levi (2008), the objective of efficient inventory management in supply chains is to have the accurate inventory at the required time as well as at the required location to reduce structure costs whilst meeting the requirements of consumer services. However, they further argue that managing inventory is complex supply chains is usually hard, and thus decisions related to inventory have considerable influence on customer service levels as well as supply chain system wide costs. In the PEP case, inventory control mechanisms were employed. PEP introduced five cross-docking centres with their associated infrastructure and processes. Production in these five facilities led to improved standards and service levels, which was achieved in all regions and a fast learning curve exhibited in every centre. The risk-pooling concept played a role in this development. Risk pooling suggests that if a company aggregates demand across locations, demand variability is reduced (Grant, Lambert, Stock, & Ellram 2006). The reduced demand variability facilitates a reduction in safety stock and as a result trims down average supply. Risk pooling minimizes the risk in inventory understocks or overstocks through the means of taking correct inventory stocking as well as distribution policy. PEP decentralized its operations by establishing a network of field warehouses, which serve diverse markets. The decentralized facilities necessitated inventories at every location. The concept of risk pooling has basis on the firm’s inventory availability at fewer locations and thus reducing total inventory without reducing the service level. This results in aggregating the total demand because elevated demand in a single location is counterbalanced by lower demand in another location (Simchi-Levi et al. 2008). The major challenge that PEP faced was harmonizing supply with indecisive demand and risk pooling played an effective and hopeful role in meeting this problem through easing the fundamental demand improbability via aggregation. With risk pooling, the management can reduce demand variability in case demand across the market demand points are aggregated (Simchi-Levi et al. 2008). This reduction in inventory helped the management to manage the inventory in better ways and reduced safety stocks to address the uncertainty. This is evident in PEP enhanced stock in store management. Matching demand and supply in the supply chain is a significant undertaking and thus to trim down cost and offer the needed level of service, it is critical to consider setup costs as well as inventory holding, lead time and its variability as well as projected demand (Simchi-Levi et al. 2008). PEP lead times increased by about 40% with the planned and scheduled distribution thus decreasing stock being distributed and controlled costs as the new system created an environment where distribution costs are managed in a better manner. The enhanced control and visibility over the variable costs as well as optimal resources utilization has allowed maximum benefit from the fixed cost component. In the PEP case, the product has been redesigned so that localization can occur as close as possible to the local market. Companies using the risk pooling strategy in the supply chains typically show considerable improvements through more accurate demand forecasting, reduced inventory costs, increased revenue and higher customer satisfaction (Sinha 2009). Inventory costs are lower as there a fewer overstocked products and revenues are higher because of fewer lost sales such as the ones incurred in transit (Grant et al. 2004). Network Planning PEP SCM strategy also focussed on network planning. PEP structured and managed the supply chain to discover stability between inventory and transportation expenses, matching demand, and supply under certainty through effective inventory positioning and utilizing resources efficiently in a dynamic situation. Network planning refers to a course, which necessitates a hierarchical strategy through which choices on inventory positions, network design, and resource and management use are pooled to decrease costs in addition to boosting service levels (Simchi-Levi 2008). PEP focussed on the network design; this in reflected in the decisions on the number and location of the five new facilities with their associated infrastructure and processes. According to Simchi-Levi (2008), network planning refers to the process through which an organization manages and structures its supply chain for purposes of finding the appropriate stability between transportation, manufacturing and inventory costs, matching uncertainty of demand and supply through managing and positioning inventory successfully and using resources efficiently through sourcing resources from the most appropriate manufacturing facility. PEP used network planning to derive these benefits. PEP introduced new service providers in different locations and this in turn led to a 50% improvement in distribution. This proposal objective was avoidance of reliance on a single organization to fulfil the company requirements and for the company to hold maximum power over its distribution activities as well as performance needs. PEP achieved this through designing and establishing a customized closed course distribution network, which catered completely for the company requirements. PEP facilities in Cape Town, Johannesburg, and Bloemfontein were to function as the consolidation for outside the country traffic to the B, L, N, S countries. According to Simchi-Levi (2008), network planning should take place in three steps: “network design, inventory positioning and resource allocation.” The first step is network design, which includes decisions on the number and locations as well as the size of the manufacturing warehouses and plants among other. An organization also makes major sourcing decisions at this stage as well as the typical horizon in a few years. To re-design and re-craft the organization distribution system, a staged strategy was adopted. The redesigning of the outbound distribution network was completed within one year. The second stage, inventory planning, includes identifying stocking points and choosing facilities, which will manufacture to store and as a result maintain facilities and inventory, which will manufacture to order and thus keep no inventory. At this stage, PEP chose five new facilities with their associated infrastructure and processes located in different places. The third stage-resource allocation objective is to establish whether production and packaging of diverse products is being done at the right facilities. It entails choosing the right sourcing strategies and the capacity that every facility should produce to meet seasonal demand. This stage is depicted in PEP decision that the Hubs in Cape Town, Johannesburg, and Bloemfontein would be the consolidating points for across border traffic to other countries. A well-managed chain relies in use of an efficient distribution system for receiving raw products and delivering products to the customers. The main objective of network planning is a supply chain, which is appropriately evenhanded among the contending aspects of transportation, manufacturing, and inventory (Simchi-Levi 2008). PEP came up with the most economical way of distributing products while escalating customer contentment needs-in simple terms network planning was an arrangement to optimize service and capitalize on profits. During network planning, there is need for an organization to determine the number of distribution centres that is appropriate for satisfying its customer base and the places that the centres should be located as PEP did. Depending on the market needs of PEP as well as its entire chain mission, there was needed to add distribution centres to the network to solve its distribution problems. PEP planned to rent the five new docking centres on a three-year renewable basis and then buy and set up the required equipments. The dispatch roles in the centre as well as their operations and running of the transport deliver purposes would be controlled by SCS agreement with PEP. Supply Chain Integration Supply chain integration considerably increased the ability of PEP to delineate the weakness in the supply chain to influence improvement. There were obstacles along the company supply chain and integrating the supply chain connections into a working system improved the products flow, which generate a more efficient supply chain. Supply chain integration is favourable in increasing supply chain effectiveness (Grant et al. 2006). Its main purpose is to put up roles across the Supply Chain in order to improve performance. Simchi-Levi et al. (2008) argue that the predicament in integration of supply chain is to synchronize activities in the entire supply chain in order for a business to improve performance through reducing costs, increasing service level, reducing bullwhip effect, better utilizing resources, as well as efficiently responding to marketplace changes. After supply chain integration, PEP benefited from reduced costs, increased service level, better utilization resources, and better response to marketplace changes. Supply chain improves agility along the supply chain (Panayides 2006). Agility is the ability of a company to develop in a progressively unpredictable business setting. This means that agility along the supply chain has enabled enhanced flexibility as well as increased customer satisfaction levels. PEP also altered its supply chain management from a push-based supply chain to a push-pull based supply chain. In a push based supply chain, the manufacture as well as distribution options are dependent on lasting predictions estimates. It requires a considerable lengthy period for a push-based chain of supply to act in response to the varying market conditions and this causes the incapability to cope with varying demands patterns as well obsolescence of the inventory of the supply chain because demand for various products disappears. The unpredictability orders placed by the retailers as well as the warehouses are much bigger compared to the unpredictability in customer demand because of the bullwhip effect (Simchi-Levi et al. 2008). This increased variability causes more and larger variable production sets product obsolescence, improper service levels, as well as extensive inventories because of the requirements for huge safety reserves. Particularly the bullwhip effect caused ineffective resource operation as managing and planning was much harder (Simchi-Levi et al. 2008). The bullwhip effect affected PEP supply chain as no third party service provider has the ability to manage the distribution of PEP. PEP designed a base distribution in the third service provider for utilization by PEP competitors. PEP also has an unnecessary working capital engaged in the out bound supply chain leg because of product in-transit time). PEP did not have a clear way of determining production capacity. The company did also not have a clear way of planning transportation capacity. This resulted in high inventory levels as well as uncertainty of productivity availability at the store level because of high quantity of losses that the service provider experienced from losses of products in transit In a pull-based supply chain, demand drives production and distribution such that they are synchronized with correct customers demand as opposed to forecast demand in push-based system (Simchi-Levi et al. 2008). Companies do not have any inventory and just act in response to explicit orders. This is made possible by rapid information flow means for transferring demands of customers to the various participants in the chain of supply (Cannela & Ciancimino 2010). This supply chain system causes a considerable decrease in levels of inventory, improved capacity to handle resources as well as reduced system costs in relation to push-based system. PEP changed from a push supply chain to a push-pull supply chain. In a push-pull approach, the first phases are managed in a push-based way whereas the other phases are managed in a pull-based approach. The boundary connecting the pull based phases and the push-based phases is regarded to as the push-pull boundary. PEP designs the products and manufacturing processes such that resolutions regarding its particular products are delayed for as long as possible. The products are then transported rooted in a lasting aggregate estimate .This part of PEP supply chain is typically managed in a push-pull based approach. According to Simchi-Levi et al. (2008), customers demand for particular products usually have a high degree of uncertainty and as a result, differentiation of products only takes place in return to individual demands. As a result, the part of the supply chain that starts from the differentiation time is pull-based. PEP changed its philosophy and currently has a number of hubs in the country where the majority of its products are reserved. With the new strategy, inventory at the hubs is handled using push strategy whereas demand is contented depending on customer requirements, which is a pull strategy. PEP has improved its performance through lesser costs, improved levels of service, reduced bullwhip effect, and enhanced openness to marketplace changes through supply chain integration. Distribution Strategies It is usually important to implement efficient distribution strategies in spite of the total level of supply chain integration. PEP established various hubs to facilitate risk pooling. This was also an effective approach for inventory management in the supply chain with five more centers. Market lead-time was reduced as numerous centers were established nearer to the market regions. PEP established an effective distribution strategy. Simchi-Levi et al. (2008) argued that a fully effective chain requires the incorporation of the supply chain front end, customer demand, with the supply chain back end, the production processes. Depending on PEP, situation-uncertainty concerning the continuing capability of the company existing third party services to provide the preferred distribution services- distribution strategies using intermediate inventory storage points or distribution centres was more appropriate. The distribution solution generated sustainable and material cost savings to be attained as the same time as considerably increasing reliability, control, speed, as well as information quality on every delivery to and between PEP retail channels. According to Simchi-Levi et al. (2008), the distribution strategy is influenced by demand variability: the bigger the unpredictability, the bigger safety stock required. The stock kept at different PEP hubs offer protection against uncertainty and variability. The function of distribution in the supply chains is the foundation of efficient fulfilment processes. Distribution strategies should be tailored to the products being handles, customer requirements as well as the available internal resources and expertise (Cannela & Ciancimino 2010). A set of interrelated planning decisions have to be made to ensure that the strategy can be executed at a reasonable cost while supporting the demands of the supply chain. PEP distribution strategy entails moving products through distribution facilities to customers. The facilities offered the supply chain with added capacities. The centres hold the products in anticipation of customer orders, providing a buffer of safety stock to protect against contingencies and to handle small quantity orders effectively from transportation and fulfilment standpoints. Strategic Alliance PEP used a strategic alliance that benefit to its products, improved market access, strengthened operations and one that enhanced strategic growth and financial strength. There are three types of strategic alliances, which play a major role in supply chain management: retailer-supplier relationships (RSP), Third party logistics (3PL), as well as distributor integration (DI). PEP used distributor integration (DI) to address its service-related and inventory-related issues. According to Simchi-Levi et al. (2008), DI can be utilized in building a big collection of inventory in the full distribution system, reducing total inventory expenses while increasing the levels of service in terms of inventory. Equally, DI can be employed in meeting customer’s specific technical service requirements through routing the requests to the distributors who are most apt in addressing them. Conclusion Supply chain management facilitates efficiency as well as cost effectiveness in the entire system: it reduces the entire system extensive expenses from distribution and transportation costs. PEP applied supply chain management, which enabled it to meet all the set objectives and targets in terms of performance as well as costs standards and the successive refinements added considerable added cost savings as well as service enhancement. SCM allowed for continued development and additional economies to be attained and gave PEP power over their distribution process means. The SCM concepts of supply chain integration-pull and push systems, risk pooling, network planning, distribution strategies as well as strategic alliances were applied in the PEP case and this led to delivery of superior customer as well as economic value via coordinated management of physical goods flows as well as the related information from sourcing through consumption. Reference List Cannela, S & Ciancimino, E 2010, ‘On the Bullwhip Avoidance Phase: supply chain collaboration and order smoothing’, International Journal of Production Research, vol. 48, no. 22, pp. 6739-6776. Danese, P 2011, Towards a contingency theory of collaborative planning initiatives in supply networks, International Journal of Production Research, vol. 49, no. 4, pp. 1081–1103 Grant, D., Lambert, D., Stock, J & Ellram, L 2006, Fundamentals of Logistics Management, European Edn, McGraw-Hill Book Co., Berkshire Jayaram, J, Tan, K & Nachiappan, S 2010, ‘Examining the interrelationship between supply chain integration scope and supply chain management efforts,’ International Journal of Production Research, vol. 48, no. 22, pp 6837-6857. Pagell, M 2004, Understanding the factors that enable and inhibit the integration of operations, purchasing and logistics, Journal of Operations Management, vol. 22, no. 5, pp. 459– 487. Panayides, P 2006, Maritime logistics and global supply chains: Towards a research agenda. Maritime Economics & Logistics, vol. 8, no.1, pp. 3–18. Simchi-Levi, D., Kaminsky, P & Simchi-Levi, E 2008, Design, and Managing the Supply Chain. Concepts, Strategies, and Case Studies, 3ed. McGraw Hill Inc. Sinha, A 2009, Supply Chain Management: Collaboration, Planning, Execution and Co- ordination, Global India Publications Pvt Ltd, New Delhi Read More