Transcending Supply Chains

Posted in Operations & IT Articles, Total Reads: 2658 , Published on 21 June 2013
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Every product that reaches an end user represents the cumulative effort of multiple organizations involved in its existence. These organizations are referred to collectively as the Supply Chain. Traditionally, firms have focussed on the events and issues exclusively within their firm or one firm up and downstream at best. Few firms successfully understood, let alone managed the entire chain of activities that ultimately delivered the product to the end user. Without any specific effort to coordinate the overall supply chain system, each organization in the network has its own agenda and operates independently from the others. Such an unmanaged network results in inefficiencies and an uncoordinated supply chain.


Consider a project management firm. Suppliers for a large project may be many, each with their own strategic objectives and production schedules. For instance, a supplier’s objective may be to maximize output and reduce per unit costs. This output may not all be consumed by the end user causing inventory accumulation and other such losses in such a disjointed system. An unmanaged supply chain is not inherently stable. Demand variability increases as one moves the supply chain up away from the end user/ customer. Small changes in consumer demand can result in large variations in orders placed upstream. Eventually, the network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective. This phenomenon is known as the “Bullwhip Effect” and has been observed across most industries, resulting in increased cost and poorer service to the customer. We see that there is much to be gained by managing the “Supply Chain Network” to increase value to customers and to improve the company’s own profitability.


The term “Supply Chain Network” is used here to indicate that the supply chain is not just a linear flow of product, payment and information as the name suggests but is a complex network of multiple suppliers to multiple vendors, with separate and often criss-crossing channels for payment, products and information, all of which are to be managed to maximize customer value and profitability. Each individual unit of a supply chain is a customer to his immediate supplier. A greater level of understanding between the two entities in terms of demand, production capacities, constraints, lead times, etc. will enable the supplier better serve the needs of the customer. The customer gains on the account of improved product life cycle management, enhanced product marketing and greater inventory management. In turn, these lead to improved profitability for the customer. The supplier on the other hand is assured of steady demand patterns, revenues and can plan his production and procurement schedules more efficiently. This close knit supplier-customer relationship allows for innovative inventory management techniques like Vendor Managed Inventory (VMI). The vendor receives electronic data (usually via EDI or the internet) that tells him the customer’s sales and stock levels. The manufacturer is responsible for creating and maintaining the inventory plan. Under VMI, the vendor generates the order, not the customer.


Many involved in supply chains have begun involving key customers in the planning process. This customer relationship model allows businesses to better prepare strategies and forecasts because the customer, a critical component, is actively involved. Supply chain managers must think about social networking as a way to integrate customers into multiple aspects of the supply chain. To communicate with customers, companies must use their preferred methods of communication.

 


Another key concept in managing supply chains that help customers maximize profitability is that of Segmentation. Segmentation lets companies boost profitability by tailoring their supply chain strategy to each customer and product in their portfolio. Different customers associated with different channels and different products are served through different supply chain processes, policies, and operational modes. The goal is to find the best supply chain processes and policies to serve each customer and each product at a given point in time while also maximizing both customer service and company profitability. By understanding the profit profiles of their customers and products, companies can tailor a more profitable supply chain strategy to each of them and thus increase the overall profitability of their portfolios. A profitable Supply Chain is one that moves away from a “one size fits all" supply chain process and policy, over serving some customers and underserving others—a practice that leads to significant profitability and cash-flow leakages and potentially lost sales. Rather, it aligns supply chain policies to the customer value proposition as well as to the value proposition for the company as a whole.


Supply chain management is evolving toward a process similar to portfolio management. Companies have a portfolio of customers and channels, a portfolio of products, and a portfolio of suppliers and supply modes. By matching those portfolios based on the best way at a given time to reliably and profitably serve each customer, companies will see tremendous value potential, not only for themselves but also for their customers.


This article has been authored by Abhishek R and Kavea M from TAPMI, Manipal


References:

http://www.supplychainquarterly.com/topics/Strategy/201201segmentation/

http://www.wisegeek.com/what-is-supply-chain-management.htm

http://www.quickmba.com/ops/scm/

http://www.quickmba.com/ops/bullwhip-effect/

http://www.supplytimes.com/erp/news/2012/01/involving-customers-leads-to-more-profitable-supply-chains/



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