Managing the supply chain
The customer-responsive organization not only seeks to put the customer at the center of the business but designs all its systems and procedures with the prime objective of improving the speed and response and the reliability of that response.
Creating the logistics vision
These days more companies are using mission statements as an articulation of the vision of the business. The mission statement seeks to define the purpose of the business, its boundaries and its aspirations. It is not uncommon for the company to have different mission statements for its components and also one for the business as a whole.
The purpose of the logistics vision statement is to give a clear indication of the basis whereby the business intends to build a position of advantage through closer customer relationships.
Ideally the logistics vision should be built around how the company intends to use logistics and supply chain management to create value to its customers. To operationalize the vision will require an understanding of how the customer value is created and delivered in the markets in which the business competes. Value chain analysis will be a fundamental element in this investigation as will the definition of core competencies and capabilities of the organization.
The problems with conventional organizations
It has been recognized that one of the key problems in implementing the logistics concept is organizational and to be more precise the organizational structure that the most businesses are burdened with. The companies cannot achieve the competitive advantage that comes from integrated logistics management.
The concept of integrated logistics management where flows of information and material between source and user are coordinated and managed as a system has been widely recognized as an important means of competitive advantage.
However, in conventional organizations this poses an immediate problem. Most companies are organized on a functional basis. So in this organization we might find a sales function, purchasing function, production function and so on. The heads of these functions are regularly senior managers who jealously guard their turf. Further reinforcing the functional or vertical orientation in the conventional organization is the budgeting system. Typically each function will be driven by a budget that seeks to control the resources consumed by those functions. It is almost as if the company is working on the assumption that the prime purpose of any enterprise is to control the consumption of resources.
If individual functions are encouraged to optimize their own costs – because of the budgeting system – then this will be at the expense of substantially increased inventory costs across the system as a whole. What happens if production attempts to reduce per unit costs by increasing production runs to larger batches and also what if purchasing buys in bulk for greater discounts – these can only lead to more inventory and greater financial burden in terms of higher working capital.
Cost of material flows across functional areas are not easy to measure – hence the real cost the serve different customers with different product mixes are rarely revealed. Once again the problem is that the conventional organization will identify costs only at functional levels and even then it will be aggregated figures. Hence we may well know our total transport cost in total but not necessarily how they vary from customer to customer or by delivery characteristics. The main problem is that costing systems are designed to measure inputs to functional areas and not to measure flow or output costs.
Developing the logistics organization
It has been suggested that the solution to the problems outlined above lies in creating a higher level of authority in the form of a logistics function that links together the purchasing, production and distribution tasks. This may seem attractive at first but it only helps to add another level of management and really does not add value.
Radical restructuring may be required – of the conventional ‘vertical’ organization to convert it to the horizontal or market facing organization. The horizontal organization has a number of distinguishing characteristics:
- Organized around processes not tasks
- Flat and de-layered
- Built upon multi-functional teams
- Guided by performance metrics that are market based
It is the focus on processes rather than functions that is the key to the horizontal organization. The basic precept of process management is that it is through processes that customer value is created. Hence the logic of seeking to manage processes on an integrated basis.
Horizontal organizational focus – in most organizations there will only be a limited number of core processes and the following are likely to be central to most businesses.
- Brand development (including new product development)
- Consumer development (primarily focused on building loyalty with end-users)
- Customer management
- Supplier development (strengthening upstream and alliance relationships)
- Supply chain management – the cash-to-cash process
Typically companies that focus upon process management have recognized that they are best managed by cross functional teams. These teams will comprise of specialists drawn from functional areas and will be led by integrators whose job it is to focus process teams around the achievement of market based goals. In such organizations a different set of skills profile is clearly required for managers at all levels. It may be obvious but the basis for any organization should be to generate orders and fulfill those orders. Everything a company does should be directed at facilitating this process. This leads to the conclusion that the customer order fulfillment process should be designed as an integrated activity with the conventional functions of the business supporting that process.
A customer order management system is a planning framework that links the information system with the physical flow of material required to fulfill demand. To achieve this requires the central management of forecasts, requirements plans, material and production control and purchasing.
Eliminating non-value adding activities – The order processing system is a good way of identifying non value adding activities. It is often discovered that that no one has ever questioned the way in which the paperwork is managed or the sequence in which the activities take place or why the activities take place. Where possible the goal should be to look for opportunities to combine steps in the processes, to integrate separate groups of people performing adjacent tasks and to simplify processes by reducing paperwork and reports.
Order fulfillment groups – Companies have experimented with the idea of using cross departmental, cross functional team to take the responsibility for the management of orders. This team is the order fulfillment group. Instead of seeing separate activities in the order fulfillments process we can see a single activity both physically and operationally if the group is at the same location. Also the possibility of culling non-value adding activities increases in scope.
The effect that such groups can have is often dramatic. All the people to be involved in the order fulfillment process are brought together and linked by a common entity the order – they are better able to sort out problems and eliminate bottlenecks.
Logistics as the vehicle for change
To compete and survive in global markets requires a logistics oriented organization. There has to be nothing less than a shift from a functional focus to a process focus. Such radical change means a regrouping within the organization so that tasks become the management of cross-functional work flows. Breakthroughs in information technology has made it possible for companies to develop processes that accurately measure market driven demand and make JIT order fulfillment a reality.
The need for integration
One of the biggest implications for the customer-responsive organization of challenges that have been described is the priority that must be attached to integration. Not just integration within the organization but integration with suppliers and customers. This integration is logistical rather than vertical on other words we do not mean domination or ownership of the supply chain but greater emphasis on the linkages of organizations through the sharing of information.
Supply base rationalization – an example of this rationalization is Rover that had about 2000 suppliers that number was drastically reduced and with the remaining suppliers the requirement was for new systems and not cheaper components. For example a single first tier supplier was responsible for the complete dashboard for a particular type of car, complete with all the controls, displays and wiring ready for installation as a single unit – and the entire dashboard was delivered on a just in time basis.
Supplier development programs – Procurement function has been usually given the objective of purchasing at the lowest cost. This involves having more than one supplier and negotiating suppliers among these suppliers. This idea has chained drastically with the new emphasis been on developing close relationships with suppliers with production specialists working closely with suppliers on means of improving production processes as well as better means of interfacing with the suppliers.
Early supplier involvement in design – most of the design innovation in the motor industry is as a result of supplier participation. For example the ABS (breaking system), engine management systems and improved suspension systems comes a large from suppliers to the auto-industry.
Integrated information systems – the use of Electronic Data Interchange (EDI) coupled with the growing acceptance of the JIT philosophy led to a realization that the benefits of fully transparent information systems could be considerable. There are no orders, no delivery notes, no invoices – only a single source of information that provides the basis for a timely physical response which itself triggers a payment to the supplier.
Centralization of inventory – Traditionally dealers carried a stock of cars which may or may not have matched the requirements of their customers. If a customer demanded an option that was not available a ‘swap’ was arranged with another dealer who did have the required vehicle. The new system does not work in the same way – the dealer only has demonstration vehicles and a direct link to the car manufacturer and the customer demands and input on an on-line basis and delivery time is indicated and is this is acceptable to the customer the order is entered in the on-line system with the car manufacturer.
Managing the supply chain as a network
The new competitive paradigm that has been described places at the center of an inter-dependent network – a confederation of mutually complementary competencies and capabilities – which competes as an integrated supply chain against other supply chains.
Collective strategy development – Traditionally members of a supply chain have never considered themselves to be part of a marketing network and have not shared with each other their strategic thinking. For network competition to be truly effective requires a significantly higher level of joint strategy development.
Win-win thinking – Perhaps of the stumbling blocks to supply chain management is to break free from the often adversarial nature of buyer/ supplier relationships that existed in the past. There is now evidence to prove that co-operation between network partners usually leads to improved performance generally. The issue then becomes how the results of the improved performance can be shared amongst the various players. It does not means that the benefit should be shared 50/50 but all players should be better off as a result.
Open communication – With the advent of information technology making the exchange of information between supply chain partners so easy and advantageous has resulted in paradigm change in most industries. The textile industry in the United States has has benefited tremendously from the use of shared information which originates from the retail store but is then transferred from the retail store to garment manufacturer to material manufacturer this results in much better response times to market changes lower inventory and less risk of obsolescence. For network marketing to work full transparency is required throughout the supply chain.
Process integration and ECR
Quick response logistics have been alternatively termed ECR or efficient consumer response is an umbrella term that describes a number of related philosophies and techniques that seeks to enable the delivery of superior consumer value in shorter time frames and at less cost.
- Develop strategy and capacbility
- Optimize assortments
- Optimize promotions
- Optimize introductions
- Integrated suppliers
- reliable operations
- synchronized production
- Continuous replenishment
- Cross docking
- Automated store ordering
- EDI or electronic data interchange
- Electronic fund transfer
- Item coding and database management
- Activity based costing
The fundamental principle of ECR is that through partnership within the supply chain, significant cost reduction can be achieved through a better allocation of shelf space in the retail store, fewer wasteful promotions and new product introductions and more efficient physical replenishment. The key to the achievement of these goals is shared information, in particular information gathered at the checkout counter and transferred directly to suppliers.
The basics of ECR
|New product introduction||Trade and consumer promotions||Range and assortment||Product replenishment|
|Improve success rate||Improve consumer targeting||Match to consumer and shopper needs||Improve of shelf availability|
|Reduce time to market||Improve return on investment||Reduce duplication||Reduce cost|
|Improve return on investment||Co-operation across the supply chain||Improve return on space||Reduce inventory|
|Improve quality reduce cost|
Co-makership and logistics partnerships
From the examples that have been analyzed it is clear that most supply chain problems are related to the lack of co-ordination and linkage between various parties in the chain. Indeed there is a growing recognition by many companies that partnership and co-operation achieves more than narrow self-interest and conflict.
The benefits of co-maker relationships
- Shorter delivery lead times
- Reliable delivery promises
- Less schedule disruption
- Lower stock levels
- Faster implementation of design changes
- Fewer quality problems
- Stable competitive prices
- Orders given higher priority
The purpose of supplier development is to seek out with suppliers ways in which the relationship between the two parties can be made more mutually beneficial.
Comparison of conventional purchasing with co-makership
|Purchasing dynamics||Conventional purchasing||Co-markership|
|Supplier/ buyer relationships||Adversarial||Partnership|
|Tenure of relationships||Variable||long term|
|Tenure of contract||short||long|
|Transportation strategy||Full truck load of single item||JIT delivery|
|Quality assurance||Inspect and re-inspect||No incoming inspection|
|Means of communication to supplier||Purchase order||Verbal release|
|Frequency of communication||Sporadic||continuous|
|Impact on inventory||An asset||a liability|
|Number of suppliers||Many the more the better||Few or single|
|Design process||Design the product then ask for the quote||Ask for supplier ideas, then design the product|
|Production quantity||Large lots||small lots|
|Delivery schedule||Monthly||Weekly or daily|
|Supplier location||Widely dispersed||As compact as possible|
|Warehouse||Large, automated||Small, flexible|