Supply Chain Management Approaches - Essay Example

EXECUTIVE SUMMARY Supply Chain Management practices across all organisations, form an important component of both operational as well as strategic importance. Moreover, these practices are made up of several smaller activities which need to be co-ordinated and monitored simultaneously. For this purpose, various approaches have been designed and some have evolved over years of practice and experience. These approaches, on a broad basis can be enlisted as The Customer Relationship management, The Order Fulfilment management and The Supplier Relationship management. This essay illustrates how the various procedural concepts like electronic commerce, consumer and business marketing orientations have aided a better management of customers and tapping their orders in the supply chain link. Furthermore, inventory placement approaches, inventory pooling and forward placement concepts like vendor management integration along with the practice of continuous replenishment have facilitated the order placement process of the supply chain. Management of relationship with suppliers is also a major focus of these SCM approaches. Finally, all these approaches help execute mass customisation strategy and a lean supply chain in any organisation which aims to implement these approaches into their framework. SUPPLY CHAIN MANAGEMENT APPROACHES Supply Chain Management is a very dynamic and wide-ranging topic. It involves a set of approaches which integrate the various units within the supply chain. These approaches thus merit a detailed and structured study so as to provide an insight into the various aspects governing these approaches. This essay aims at enhancing the understanding of these approaches and how do these make a supply chain effective. The essay starts with an analysis into why these approaches are adopted in the supply chain management perspective which is a need analysis. It is followed by an evaluation of the several approaches which are available for study and the various activities which are contained in these approaches. Further, an effort has been made towards justifiably examining and illustrating the presence and importance of every key term associated with these approaches. A study into the ‘supply chain strategy’ focus which is developed as an outcome of the investigation of the contribution of the various approaches to supply chain management was also undertaken. Supply chain management involves organising, controlling and managing many different individual entities such as suppliers, manufacturers, warehouses, distribution centres, etc. The involvement of these multiple units induces complexity in the entire process and hence increases the chances of errors and disruptions. The reason for such errors can be both outside as well as inside the firm. A firm has least amount of control over its external customers and suppliers who can cause such disruptions periodically. These external errors can be changes in volume, service and product mix changes, late deliveries or under filled shipments. Volume changes might take place when customers, unexpectedly change the quantity of product or service ordered by them. Sometimes market also demands short lead times which make it necessary for the firm to demand a quick reaction from its suppliers. Whenever customers change their mix of items in an order, it causes a wave effect all through the supply chain. Firms which supply model-specific items face disruptions in schedules due to late deliveries of materials or delay in vital services forcing the firms to substitute its schedule from manufacture of one product model to another. Many times, instead of late shipments, there are partial shipments send by suppliers due to disruptions at their own plants and these under filled shipments are similar to late shipments unless it contains enough to allow the firm to operate until next shipment. The various disruptions in the supply chain of a firm are not only external but internal too such as internally generated shortages, engineering changes, new service or product introductions, service or product promotions and information errors. A scarcity of parts produced by a firm due to machine crash or immature workers can change a firm’s production schedule which would affect suppliers too. Labour shortages due to high turnover also affects similarly. Changes in service or product design can also impact the suppliers directly and so do introductions of new services or products. A firm decides on the number of introductions, their timings thus affecting the supply chain. New services or products may even require a new supply chain or the addition of new members to an existing supply chain. Promoting sales of standardized products and services through pricing strategies and discounts create a sudden hike in demand affecting the supply chain all throughout. These pricing programs also sometimes bring in efficiencies into the supply chain by discouraging cost increasing activities. Also, demand forecast errors lead to surplus or inadequate services and raw material order. Error in sales forecast can affect supply chain due to an unexpected increase or decrease in demand putting pressure on them due to shortage fears or extra inventory pile up burden. Also, faulty communication between buyers and suppliers affect supply chain dynamics. As we can evidently conclude now that many of the above disruptions in supply chain mainly occur due ineffective co-ordination in the supply which happens as a result of so many separate operations involved. Although it is impossible to eliminate these disruptions completely, supply chain managers can attempt to remove as many of these as possible and minimise the impact of those which cannot be eliminated. To minimise these supply chain disruptions, it thus becomes imperative to develop a supply chain with a high degree of operational and structural integration. This integration gradually evolves over time and must include linkages between the firm and its suppliers and customers, distributors, etc. The supplier relationship, which includes purchasing, order fulfilment, production and distribution; and customer relationship processes along with internal and external linkages are all to be integrated into the normal business cycle. This is important as it helps in a better customer orientation (which strives to work with its customers rather than just reacting to their demands and thus benefiting everyone from improved flow of services and materials) and a better understanding of its suppliers’ organisations, capacities, strengths, and weaknesses (also including its suppliers early into the design of new services or products). Integrated supply chain has a complex setup. There are several approaches which make this integration possible (Bowersox & Closs, 1996) and these approaches can be mainly categorized as ‘Customer Relationship Process’, ‘Order Fulfilment Process’, ‘Supplier Relationship Process’ and these set of approaches finally constitute the integration strategy known as ‘Supply Chain Strategies’. These approaches need to be analysed from the point of view of process structure, process improvement, layout and capacity. The Customer Relationship Process helps manage a firm’s interaction with its customers downstream in the supply chain. Its purpose is to identify, attract, and build relationships with customers and to facilitate the conduction and tracing of orders efficiently. This process involves two key sub processes called the marketing process and the order placement process. It has become very useful to implement electronic commerce or e-commerce systems into these activities which involve the application of information technology along the value chain of business processes. The marketing processes involve business to consumer (B2C) focus as well as business to business (B2B) marketing focus. B2C system approaches allow customers to transact business over the internet. The avenue for e-commerce offers a new distribution channel businesses, and consumers can avoid crowded department stores with long checkout lines and parking-space shortages apart from saving time and cost of travelling distances for shopping. This convenience of this approach has been very nicely tapped by many retail companies. B2B transactions have also seen a boost owing to these improved approaches and have lead to an enhancement of business condition for both the seller and the buyer firm. The internet has also helped the firms to re-engineer their order placement process so as to benefit both the customer and the firm. It provides several advantages such as Reduction in costs, increase in Revenue flow, Global access and Pricing flexibility. Reduction in costs of processing orders takes place by allowing greater participation of the customer. These customers can select their own services and products on their without eliminating the need for call centres which are labour intensive and often take longer to place orders. Revenue flow increases as web pages allow customers to enter credit card information or purchase-order numbers as part of the order placement process. This reduces time lags associated with billing customers or waiting for checks sent through the mail. Global access is yet another advantage provided by internet giving the opportunity to accept orders 24 hours a day thus reducing the time taken to satisfy the customers who can shop and purchase at any time. Pricing Flexibility is another advantage of this approach which enables firms to alter prices of their services and products on the web as the need arises; therefore avoiding the cost and delay of publishing new catalogues. Also, the customers have the current prices available to them while making buying decisions. The Order Fulfilment Process follows the customer relationship process closely. The several tools and methodologies which help manage the order fulfilment processes by managing he material flows between the firm and its external customers involve: Inventory placement, Vendor managed inventories, Continuous replenishment programs and Distribution processes. Inventory Placement approach deals with the identification of the location of an inventory of finished goods. These are handled by distribution centres at various locations nationally and internationally which have strategic implications for firms. There are two inventory placement approaches namely ‘INVENTORY POOLING” and ‘FORWARD PLACEMENT’. Inventory pooling is brought about by a process known as centralized placement which keeps all inventories of a product at a single location for instance, the firm’s manufacturing unit or a warehouse and transporting it directly to each of its customers. Inventory pooling although helps in reduction of inventory and safety stock by merging variable demands of customers, it also adds cost of transporting smaller units directly to customers over long distances which becomes uneconomical. In contrast, Forward Placement locates the stocks closer to customers at a warehouse, distribution centre, wholesaler, or retailer (Lee & Corey, 1992). Vendor Managed Inventories, VMI (Freund & Freund, 2003) approach involves locating inventories at the customer’s facilities which is an extreme case of forward placement. However, the possession of the inventory is still with the supplier until the customer uses it. This requires a collaborative effort on part of both supplier and customers requiring an atmosphere of trust and accountability. Cost savings are brought in this due to removal of administrative and inventory costs leading to reduction in order placement costs also. It helps in better customer service due to the frequent availability of supplier on customer’s site improving response times and reducing stock outs. Continuous Replenishment Program (CRP) is an extension of VMI where the supplier monitors customer’s inventory levels and replenishes it as and when required. It is done using a program known as collaborative planning, forecasting, and replenishment, CPFR (Steerman, 2003). Radio frequency identification (RFID) is yet another method to identify items through the use of radio signals from a tag attached to an item. Distribution systems involve decisions of ownership, mode selection and Cross-Docking (Cook, Gibson & MacCurdy, 2005). It can be the sole owner known as ‘private carrier’ or can let professionals handle the distribution known as ‘contract carriers’. Mode selection of transportation such as roadway, rail transport, water shipment, pipeline transport, and air shipment are the alternatives available to the firms. A technique called cross-docking can enhance delivery speed and reduce cost by packing products on incoming shipments to be sorted easily at the immediate warehouse for outgoing shipments based on the final destinations. The Supplier Relationship Process focuses on interaction of the firm and upstream suppliers. The various activities involved in this process are sourcing, designing collaboration process, negotiation process, buying process and information exchange process. The sourcing process involves qualifying, selecting, evaluating suppliers and managing contracts. The activity of Purchasing decides which suppliers to use, negotiating contracts and looking at supplier certification to verify the capabilities of potential suppliers to provide the services or materials that the buying firm requires. In the negotiation process, the firm’s orientation towards supplier relation (Liker & Thomas, 2004) will affect the negotiation and design collaboration processes. This orientation can be competitive (where one gains and the other loses) or a cooperative one (where both accommodate each other to the extent possible). The buying process involves creation, management and approval of purchase orders which can take place through electronic purchasing involving EDI (Electronic Data Interchange), Catalogue hubs, Exchanges and Auctions. EDI is a technology which enables transmission of routine business documents with a standard format across computers digitally. Catalogue hubs are a system where suppliers post their catalogue of items on internet and buyers select and purchase electronically. Exchange is an electronic marketplace where buying and selling firms come together to do business. Auction is a marketplace for competitive bids to buy. Finally, the decision to buy centralized or localized has several implications on control of supply chain flows and negotiation and buying processes. Also, Value analysis is a systematic effort to reduce cost or improve performance of purchased or produced products and services. Overall, all these approaches apart from seamlessly integrating the various units involved in the supply chai process, also facilitates the development of Supply Chain Strategies. These approaches lead to a Strategic focus, Mass customisation, Lean supply chains, decisions for outsourcing and off-shoring these activities as well as creating Virtual supply chains. A supply chain is a network of various firms and in order to strengthen the supply chain, each firm in the chain should build its own chain and support competitive priorities of its services or products. The approaches above help us design two distinct designs used for competitive advantage such as efficient supply chain and responsive supply chain (Fisher, 1997). When the demands are predictable with low forecast errors; low cost, consistent quality and on time delivery are the focus; there are infrequent introduction of new products or services; contribution margins as well as product variety a re low; then efficient supply chains should be adopted. Whereas, in case of high forecast error and unpredictable demands, customisation, volume flexibility focus, frequent introductions of new products and services along with high contribution margins and product variety, one should adopt a responsive supply chain. Combining the two designs can also lead to great results. Supply chain approaches which lead to Mass Customisation strategy (Duray, 2002) where a firm has flexible processes to generate wide variety of personalized services or products at reasonably low costs leads to achievement of certain competitive advantages such as better management of customer relationships, elimination of finished goods inventory and increased perceived value of products or services (Flynn, 2000). Customer relationships are developed due to continuous detailed inputs taken from customers and delivering thus, the products or services of their choice. The approaches described in previous sections also aids reducing excessive inventories through several inventory management processes. As a result of the above two, the perceived value of products or services of a firm with nicely managed supply chain also increases. The several approaches which integrate the members of a supply chain and which brings in a focused attention on customers also leads to a Lean Supply Chain all the superfluous activities are broken into meaningful and simplified steps. It increases the need to deal with independent customers and suppliers rather than only the in-house processes. It involves strategic sourcing (Ravi, 1992), cost management and supplier development as key areas. The suppliers chosen for the high value adding product or service should be established a close relationship with and ensure high quality and delivery performance from them. Also effective negotiation processes as discussed in earlier sections can help in cost reductions and long term supplier development. One of the best examples of a lean supply management system is that at Delphi (Nelson, 2004). The approaches discussed above also talks of using contract carriers as suppliers which bring in the concept of outsourcing. It refers to payment of money to suppliers and distributors for providing their needed services and materials and performing other processes. The choice involves a ‘make or buy’ decision. Also, it can think towards a vertical integration of two types: backward integration (involving the firm’s movement upstream toawrds sources of raw materials, parts, services etc.) or forward integration (involving addition of more channels of distribution such as warehouses, retail stores or business customers). Off-shoring (Farell, 2004) would mean moving processes to another country which could be as a result of several factors like comparative labour costs, logistics costs, tariffs and taxes, labour laws and union, internet etc. and the activities of off-shoring can also be easily managed using the supply chain management approaches described in the earlier sections. Finally, the discussed supply chain approaches includes the aspect of utilizing the vast opportunity of internet. This gives rise to the benefits of a ‘Virtual Supply Chain’ (Randall et al. 2002). It involves the management of the order fulfilment process of the firms using sophisticated web-based information technology support services. The various benefits include reduced investment in inventories and order fulfilment infrastructure, greater service or product variety, lower costs due to economies of scale and lower transportation costs. In conclusion, it can be established that Supply Chain Management is indeed a set of distinct approaches which facilitate the integration of various members of this link. The approaches can be widely categorized into Customer Relationship Process’, ‘Order Fulfilment Process’ and ‘Supplier Relationship Process’. Each of these approaches involves several nuances of management which ultimately leads to a strong and healthy supply chain network. Customer Relationship process deals with upstream customers whereas Supplier Relationship process deals with upstream suppliers. Order Fulfilment process basically involves the management of inventory in the best possible manner so as to meet the demand in a cost effective and timely manner and eliminating demand shortages or inventory surpluses. These approaches apart from the crucial integration and amalgamation of suppliers, customers, warehouses, stores of a firm’s supply chain, also helps enhance its strategic focus towards achieving competitive advantages in operation and production. Also, the various disruptions and errors which might occur as a part of external bodies to the firm or may be an internal cause can be effectively managed or their effect minimised through optimum application of these approaches at various levels. Conclusively, the strength of a firms supply chain does lie in the strength of the links which it is made up of. These links are managed by the approaches which have been discussed throughout this essay and hence form the heart of Supply Chain Management understanding. Read More