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Supply Chain Management Developments
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Supply Chain Management Developments
Introduction
Supply chain management is emerging as one of the decade's most powerful business practices. It is transforming the way manufactures operate and work with partners ¾ even the way they think about business. Why all the sudden interest? Mere observation of industrial practice brings to light a simple truth; very few materials remain in the constant ownership of one person, persons or company from their source to the time they are sold to the end customer. Almost invariably, material flows through a series of 'players' whose role may be to transform (manufacturing plants), store (warehouses) or move (distributors) material. This results in the establishment of complex systems that industry has labeled supply chains or supply networks.
Supply chains are not new; they have been around as long as the market place. Historically, however, each supply chain link tended to regard its role as satisfying the demand of its immediate customer. A more holistic view point suggests that each is just a part of a wider supply chain system whose role is to satisfy end customer demand. This refocusing of the company roles in terms of end customer satisfaction is in line with a systems thinking approach to management. From a conceptual viewpoint, one could view the ideal supply chain as a pipeline with laminar flow.
Traditionally, most supply chains simply evolved rather than being designed. This fact makes supply chains susceptible to turbulence. Companies
are discovering that the vast majority of supply chains are logistically inefficient and therefore prone to poor supply chain dynamic behavior. Because of the huge success of a couple of retaliators, the concepts of supply chain design have come to the forefront. Supply chain is one of the big buzzwords, or in this case phrase, in the U.S. industry today.
What does all of this mean for the mom and pop stores? Probably not a whole lot for now. Those who are currently using the Internet may find it easier to order supplies or even distribute. For the middle size company, it could be a blessing or curse. Those who invest and use the new technology may rise to new heights; those who do not may be pushed into bankruptcy.
This paper will attempt to touch upon the history, the various new transpirations and developments in supply chain technology and project a direction for the future.
Literature review
The subject of supply chain has been examined, studied and dissected by great scholars. Their works have been published and have been around since the 1950s. However, the technology that is now being used, or rather is beginning to be used, is not documented in any text. The industry of supply chain management technology is in such infancy stages, that not a lot of good periodical articles are in circulation.
As of February 1998, articles began appearing in magazines like Information Week, Computer World and Info World Magazine. The articles were basic and very vague. No real inside stories as to how any one particular firm's Supply chain management system worked. At this point in the development, most of the detailed information is probably regarded as trade secrets.
The paper is put together from pieces of new clippings, magazine articles, news wire releases. Hardier sources of information came from Journal writings out of Europe, a few books about how import supply chain management is going to be and a handful of not so up-to-date textbooks.
A Brief History
As previously stated, the supply chain is not anything new, its been around for centuries. The farmer sold grain to the miller, who sold floor to the backer, how sold bread and pastries to an end customer. Such chains were based on gentleman's agreements. Once the good changed hands, the former proprietor of the good, as far as he was concerned, was finished. Such supply chains have very dynamic properties. From the point of view of stocks it may result in alternating periods of high and low stocks with the possibility of obsolescence in the stock out. Alternatively it may manifest as periods of capacity expansion and contraction, with the possibility of increased cost due to over capacity and lost market opportunities through capacity cut-backs.
Much of the pioneering work into aspects of supply chain dynamics was undertaken by Forrester in the late 1950s using a simple but representative simulation model of a production distribution supply chain: Figure 1Based on a series of simulation experiments, Forrester revealed a number of important behavioral features of a supply chain:
1) Demand in the marketplace becomes delayed and distorted moving upstream through a supply chain
· At any one point in time, processes in various companies in the chain may be moving in different directions to each other and the market, Figure 2
· Supply chain designs tend to amplify marketplace variations. The magnitude of the variations in orders placed on the factory is greater than the variation in marketplace demand, Figure 2.
· Supply chain designs can introduce 'periodicities', which can be mis-interpreted as a consequence of seasonal variations in the marketplace, rather than a property of the supply chain dynamic.
2) Attempts to reduce poor supply chain dynamic behavior can exacerbate the problem. Counterintuitive behavior occurs because the causes of the behavior are obscured from the decision makers in the chain.
Some industries, e.g. the semi-conductor industry, exhibit almost characteristic surplus-shortage behavior, as shown in Figure 2. Figure 2 backs up a remark from the President of Intel made approximately 10 years ago, the capacity in my industry has been in balance with demand for 35minutes during the past 10 years. Clearly, there was some way to go back then in overcoming the problems of supply chain dynamics. Much progress has been made since his remark back in 1986.
The Supply Chain buildup
Reform actually began before the president of Intel made his statements. Over the past several decades, a number of philosophies that center on decreasing cost and lead-time have been developed and practiced with great success. Most, if not all of these practices play a part in supply chain management. Once the effort in everything else has been exhausted, supply chain management is the only logical step.
Before the 1960s, industry looked inward for improvements. Logistics literature offered generally two divergent main approaches to business management: the total cost concept and the customer service concept. The total cost concept considers logistics as a cost incurring function, which has to be managed by minimizing total logistics costs. According to the total cost concept, the cost of individual factions need not be at their optimum, but attention must be paid to minimizing the delivery cost of the entire firm. It seems to be an easy task to forget the customer when consumed with the task of controlling cost. To avoid excessive attention to cost control, and focus more on the need of the customer, the customer service approach could be adopted. In the customer service approach, logistics customer service is split into components or service elements. It is possible for a company to differentiate itself from the competitors by offering better logistics services appreciated by the customers. This value-adding logistics strategy is known as differentiation by logistics.
After World War II, Japan had to rebuild totally its industrial base. They were then infamous for poor quality and second rate products. In the 1970s, the Japanese began making quality a priority. This priority was not just invoked at the management level, it descended into the very depths of the manufacturing industry. They had received help from a few American consultants during their rebuilding phase after the war. In just a short 30 years, they were able to raise their quality standards to that of Benchmark proportions. By the 1980s U.S. manufacturers, particularly auto manufactures, awoke and realized that they, too, would have to adopt such quality standards. Total Quality Management (TQM) became the focus of most manufactures during the 70s and early 80s.
The advent of just-in-time supply systems motivated people even more to develop new, better and more streamlined systems. The idea behind JIT, sometimes called zero inventory system, is to have materials arrive on site, as they are needed. This requires a unique relationship between suppliers, stockpilers and distributors as well as good, reliable technology.
JIT was originally developed in Japan by Taiichi Okno, a vice-president of Toyota. Originally, the system was called the kanban system, named after the cards that were placed in the parts bins that were used to call for a new supply. JIT may seem like just and inventory control system, but it is more of a production and management system. Not only is inventory cut down to a minimum, but the time and physical distance between the various production operations are also reduced. Inn addition, management is willing to trade off cost to develop close relationships with suppliers and promote speedy replenishment of inventory in return for the ability to hold less safety stock. JIT fucus on reducing inefficiency and unproductive time in the production process to improve continuously the process and the quality of the product or service.
The relationship that exist between manufacturers, distributors and all the people in between has been expanded into the broader concept of supply chain management. Supply chain management starts earlier than physical distribution, attempting to procure the right inputs (raw materials, components and capital equipment); convert them efficiently into finished products: and dispatch them to the final destinations. An even broader perspective calls for studying how the company's suppliers themselves obtain their inputs all the way back to the raw materials.
The Pioneer
In industrial and retail circles, when supply chain management is mentioned, the word Wal-Mart has to come to mind. Wal-Mart was one of the first retailers to make heavy investments in supply chain technology. Computerized scanning equipment at the checkout line enables Wal-Mart to know what customers are buying and where they are buying it. They, or rather the system, then tells manufactures what to produce and where to ship the goods. A recent statement made in jest by a student of Radford University is not far off the mark. If women in Roanoke, Virginia, start buying bobby pins, stores in Atlanta, Georgia know about it within five minutes and manufactures start shipping truckloads of bobby pins to all the Wal-Mart stores in the U.S. As humorous as this may sound, the statement is accurate.
Wal-Mart insists on linking their computers directly to those of its suppliers. If a manufacturer wants to supply goods to Wal-Mart, they have to use EDI. Once connected, Wal-Mart puts the responsibility of making resupply decisions in the hands of the manufacture, not the retailer. To discourage oversupply, Wal-Mart does not pay its suppliers until their products are sold.
Wal-Mart requires its suppliers to ship their goods tagged and hung, so that they can be moved directly into the store's selling space, thus reducing warehousing and data processing cost. As a result, Wal-Mart stores use only 10% of their space for goods storage, compared to the 25% average non-selling space in competitor stores. Another result of Wal-Mart's computerized ordering system is the use of EDI.
Industry Interest peak
In the last two years, it seems the rest of American industry is ready to stop watching Wal-Mart and ready to jump on the bandwagon. Most available literature trumpets supply chain management applications as revolutionary vehicles that can save businesses millions of dollars and optimize business and customer relations. A recent Pittiglio Rabin Todd & McGrath study of 225 large manufactures reveals that good supply chains have up to 60% less inventory days than their counter parts. The study also shows, that for a $600 million company, solid supply chains facilitate savings of up to $42 million per year.
There is only one little problem, there is not a package on the market. There is not a well-known vendor of supply chain management software. The Reynolds company, for example, bought a $500,000 package from Logility, a forerunner in supply chain management software. Logility wanted to offer its product as a turnkey package, but Reynolds wanted the vendor to tailor the software. Reynolds purchased the software in February and received it in June. The tailoring added another 10% to the cost. The software wasn't easy to learn, its not user friendly, and it took several weeks to get familiar with it. Along with little inconvenience is the fact there are no standards for such software.
Many people and groups realize the lack of organization in the supply chain management field. This is, as best, an oxymoron. There is an old saying, necessity is the mother of invention. When searching for information on the Internet, it does not take long to realize how many new business have recently come into existence because of the new, vogue trend known as supply chain management. Advanced Manufacturing Research reports that supply chain software and service are likely to increase to $1.6 billion in the year 2000 from $350 million in 1996. Periodical after periodical is full of well-known industry names that are announcing investments in new supply chain software packages. The question remains, why now? Why not 10 years ago or even sooner?
The answer is technology. Up until recently, the technology that make good supply chain management possible and reliable was not really available. There have been major gains in logistical efficiency and this is directly related to advancements in information technology. Gains have been made in recent years particularly in the area of computers, terminals, uniform product codes, electronic data interchange (EDI), electronic funds transfer (EDF), and asynchronous transfer mode (ATM), video conferencing and so on. Most high-powered packages have only been available since the early 1990s. These software packages along with other developments have made it possible for companies to have fingertip like access to information and people, even in a global environment.
Another key factor, says John Bermudez, an AMR analyst, is that many companies have spent the last 10 years perfecting their processes inside the plant. ' There is not a lot of room left for improvement,' he says. 'The way to drive down cost now is to go outside the factory and look at your supply chain.' One last, critical reason for the su..
...dden Interest in supply chain systems has been the shortcomings of traditional enterprise resource planning (ERP).
ERP systems are not constraint-based. They do not take into consideration where all the resources need to execute the plan are in place. Supply chain applications propose a schedule, highlight bottlenecks, and let users adjust due dates or resources until they find a satisfactory schedule. These plans can then be zapped into the transactional ERP system.
The Race is On
There now seems to be a race in the technology field amongst the industry giants to get a product to market. Supply chain management and planning software are still in their infancy. There are a lot of sunk cost in the development of these systems and if a company can get a product to market and make it universal enough for other companies, then there is big money to be made. This is a new area business and people have hopes of, at the very least, earning back their investments before the market is saturated.
Paraphrasing comments from an April, 1998 interview, IBM Global Business Intelligence Solutions General Manager Ben Barns stated the organization is focused entirely on business intelligence (BI). BI appears to be coined, IBM phrase that refers to the gathering, management, analysis and distribution of information and data. Barns is predicting that spending on BI systems will exceed spending on traditional operational systems soon after the turn of the century. Barnes identified four keys to business success: Getting to market first, flexibility, choice and supply chain management. All four require BI, Barns says, as well as the technology required to distribute the data quickly. Most businesses have the raw components for BI, IBM is just going to make it work.
The industry is very aware of what is happening and Council after council is forming. Advanced Manufacturing Research of Boston and the consulting firm Pittiglio Rabin Todd and McGrath (PRTM) of Weston, Massachusetts formed the Supply Chain Council in April of 1996 to construct a reference model. The model was to be named Supply Chain Operations Reference (SCOR) and was intended to give manufacturers, suppliers and retailers a frame work for evaluation their supply chain effectiveness. The counsel, back in 1996, was made up of 69 manufacturers and their mission was to develop standards for measuring supply chain performance in various industries. The model breaks down the supply chain into four basic processes: planning, sourcing, making, and delivering, providing a common set of definitions for the elements in those processes. The model also provides benchmark metrics to measure performance, with different levels for different industries. In addition, it includes descriptions of 'best in class' management practices. A review of 200 companies found that best-in-class companies enjoy a cost advantage of 0.3 to 7.0 percent of revenue compared to the median performance of companies in their industries.
The computer industries have seen the light of supply chain management as well. An announcement was made the end of March that manufacturers, resellers and distributors of IT products plan to form an organization to oversee development of standards for what they call E-commerce transactions. In other words, transactions involving computer products. Fadi Chehade, executive director of newly formed Rosetta Net said, It's a shame that grocers can look within the supply chain and figure out how many Oreo cookies they need, but technology companies have thousands of product returns daily. Projects are underway to create data formats for software, memory, and notebook products. These new products are expected to be show cased in the summer of 98.
Companies are beginning to wake up and see that in order to compete successfully in the 21st century, a fundamental shift in executive mind-set of the manufacturing industry has to occur. A 1998 vision in Manufacturing study from Deloitte & Touche Inc., found the following: To create value for customers, manufacturers must eliminate traditional boundaries between customers and integrate more closely with them. The study has identified five strategic areas where companies must focus. These are:
· confront the realities of globalization
· craft a new agenda for product innovation
· resolve the customer paradox
· integrate the global supply chain
· align the organization to compete in the 21st century.
The Path to developing a good Supply Chain
Most supply chains consist of a large number of interacting, but not integrated business units. So, from this point the first order of business it to get the home location in order. JIT is the primary focus and the goal is to reduce in-plant lead times through the elimination of waste. Here, all levels of the work force must be educated in the objectives and techniques of JIT, otherwise it will not be possible to maintain the necessary discipline needed.
The next step has to be some sort of Interplant planning and logistics integration. JIT is good for reducing lead-times within various cells of an industry, but some sort of materials planning mechanism is needed to reduce the total lead-time of the business. Every activity needs to be identified and beginning and ending times for each must be defined. Once the is accomplished, a company wide effort can begin to reduce total lead-time.
The next step in the cycle is vendor integration. Before this can take place, the companies total number of vendors should be reduced to include only those that offer the best sources of supply or service. Most vendors will then be linked the location using some form of EDI. This then becomes the major channel for demand and supply information.
The next phase is to integrate customer ordering and product distribution. Traditionally this is controlled by some sort of trained sales or marketing staff and these need to remain in place. Products need to be added that allow the customer to directly place orders on-line, either to a central information system or directly to manufacturing. In parallel, systems need to be designed that allow direct shipment of products to the customer. In the end, there is a system that looks something like Figure 3 .
Who's doing what
Many companies seem to agree that supply chain management is the way of the future. Everywhere you look, new companies are forming and someone is talking about the newly discovered supply chain management techniques, software or packages. One company that should take particular notice of who is talking is Roanoke's own Norfolk and Southern Railroad.
CSX Rolls Out Java Application
CSX Technology, a division of the transportation giant CSX Corporation, announced that is now offering a network-centric supply-chain management application (SCM) named TWSNet Premium. This application lets businesses track cargo shipments over the Internet from Java-enabled browses. The companies Jacksonville, Florida, division began marketing the TWSNet Premium the third week in March, 1998. Customers already piloting the application include Apple computer, Nissan, Procter & Gamble, Xerox and the U.S. Department of Defense.
The application is server-resident and must be purchased by the customer. Subscriptions are on a per-use basis and offer different levels of information access. TWSNet Premium is actually the third phase of CSX's business critical Java deployment that began in 1995. CSX first rolled out TSWNet, an intranet-based application for its own employees to track shipments. Then came an extranet application called Transportation Workstation (TWS). The TWSNet Premium application is the first to include a multi-modal system from transportation company Sea-Land, as well as CSX's rail Network.
IBM offers asset-tracking service
Although this IBM product does not fit into the external supply chain picture, it does provide a service to get the supply house in order. In January of 1998, IBM's Global Services division announced an asset-tracking service that works via the Internet. Called Asset Services, the service is intended to help corporations keep track of hardware and software, as well as control the cost of managing existing equipment and buying new equipment. The service uses the Internet to pass information between companies and IBM.
Many companies go to great pains to track inventory coming in and going out of the business, but don't pay a lot of attention to in house inventories. In this day and age, it is relatively easy to invest hundreds of thousands of dollars in software and hardware and not have a whole lot to show for it. Personal experience in the computer industry has proven this repeatedly. Carilion Health System's network ist second in size only to Walt Disney on the East Coast. Network Services, a division of Carilion's Information Services, has been installing about $200,000.00 worth the hardware and software every month for the last three years. When so much money is being invested in internal computer systems each month, its easy to lose track of who has how much of what. People move around all the time and upgrade their PCs whenever possible. Its very easy to lose a $500.00 software license or forget to un-install a legacy system that cost $2.500.00 two years ago.
IBM's service begins with a manual survey of the equipment's location and information about the equipment's assigned person or department. A user requires a baseline inventory. We (IBM) can conduct it or direct them in it, and once it is done, we can update it as they need it. The information goes to an IBM service center in Georgia, which uses Lotus Domino and a centralized group of IBM employees using Notes to manage the inventory. The only software needed at a client site is a Web browser. The service includes: inventory, tracking, acquisition, moves and adds, and roll-outs.
Kellogg
Kellogg Co. is known as a breakfast food giant. It owns better that 40% of the breakfast food market share. This Eggo king is starting to feel pressure from the outside to get its act together. One guess as to where the pressure is coming. The answer is Wal-Mart.
Wal-Mart and Kellogg's own growth from $3.3 billion company 11 years ago to a 6.8 billion company last year, is spurring th producer of Pop-Tarts and Rice Krispies to invest millions in new software systems to support the business processes necessary for global operations. Kellogg states that they need to be able to give their customers what they want, but the truth of the matter is they are probably being strong-armed by Wal-Mart. Kellogg's point is legitimate, however, when the say the need to be able to quickly and correctly serve those industries, that are setting up shop in every corner of the globe. Kellogg is not buckling under the pressure. They do not want to invest in a technology just because of one or two customers; they want something they introduce unilaterally. There vision for the supply chain is, to take an order anywhere, make it anywhere, stock it anywhere and ship it from anywhere.
Kellogg has invested in an Oracle based package named Consumer Packaged Goods (CPG), which is a mix of applications from Oracle and other various specialty vendors.
Reynolds Metals Co.
Reynolds has thousands of products and millions of dollars in inventory. Being able to successfully forecast sales demand accurately is extremely important. In June of 1997, Reynolds implemented a new supply chain planning software from Logility Planning Solutions. In the six months after installation, Reynolds claimed it cut its forecasting error rates from 15% to as little as 5%. The statement was also made that they were also able to reduce inventories significantly.
The Logility system interfaces to Reynolds' software which resides on an IBM AS/400. The production plants are all connected via a closed-loop distribution system. If more product must be made, the plant materials managers are able to log on to the system, view the information and order the run.
Watch out for Vultures
The list of companies that are using the new techniques to gain new market share and bigger advantages goes on and on. In all the good, there is defiantly a lot of bad. Small companies down to mom and pop business are in a real good position to be abused. Many of these businesses want to take advantage of what the technological world has to offer, but they do not have the resources to invest in the proper tools.
An excellent example of a company that was formed because of all the hype is Supply Chain Solutions, Incorporated (SCS), founded in 1994. In February of 1998, the company announced the general availability of a full - function web - enabled service bureau that will support clients in implementing a vendor-managed-inventory. (VMI) This company grew out of the Pharmaceutical manufacturing and distribution industry. The article was entertaining enough that a few paragraphs just needed to be quoted.
The wire release starts off by stating, We have chose to offer the service bureau in response to key players in industry who desire the benefits of a VMI program with a much lower investment and lower risk associated with implementation. SCS prides itself on consistently rapid implementations and to assure success of our program we offer resources of hardware, software, and operational expertise. The article went on to say, SCS also revealed that seven clients are already using the service as part of there efforts to reduce inventories, increase customer service levels and so on and so on.
From personal experience, a red flag went up as the article appeared on the monitor screen. Still having the bitter taste of once having worked in a company that invested a not so small amount of money in such product, except this translation of the above news flash. Since there seems to be many companies that want Wal-Mart type of supply chain management at a Wal-Mart price. For this reason, we are offering our product at a price too good to be true. SCS prides itself on its ability to get quickly in and out of your business. If you want the program to run properly, it must be run on our hardware. We also have staff who can show you how to use the product if you cannot figure it out yourself. In the four years we have been in existence, we have managed to sell this product to seven other businesses. The record of accomplishment is not great, but good advertising and PR can cover a multitude of mistakes.
Conclusion
The whole idea is companies want to better serve their clients and decrease lead times. A good supply chain is measured by its ability to get a good or service to an end user as quickly as possible. Technology, particularly advancements in Personal Computers
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