Best Practices in Supply Chain Management & Optimization
Published by MBA Skool Team, Published on November 26, 2012
Today, the business environment in which the companies operate is highly competitive. As the competition increases, the profitability of the companies’ decreases; this leads to an increased pressure on decreasing the costs incurred by the companies. The Supply chain management is aimed to reduce the system wide costs while satisfying customers; it does so by efficiently integrating suppliers, manufacturers, warehouses, and retail outlets so that the right quantity of material is made available in the right place and at the right time (David Simchi-Levi, 2003).
Thus decreasing costs and enhancing delivery performance are two of the primary objectives of Supply Chain management. The Supply Chain practices that company does may differ across the companies and geographies. But some of these practices may be best when compared to what others follow because the former achieves the objective more effectively than the latter. Below are some of the best practices that are followed by companies highly known for their supply chain management.
Pull/ Demand Supply chain systems
Traditionally manufactures control the supply chain where they will produce the items based on the optimal production quantities. After having produced they push the products to the channel members which include retailers. Hence this supply chain is called ‘push’ supply chain system. One of the problems that arise because of this is that the production mostly doesn’t match with the demand. Overproduction or underproduction may result leading to higher inventory carrying costs, storage costs and even loss occurring due to loss of sales because of stock outs. One of the ways to mitigate such costs is to transform push to a pull based or demand supply chain system. Here the retailer gives the order to the manufacturer based on the sales that happens in the outlet and manufacturer immediately replenishes it. This method aims for a short term accurate forecasts and thus needs less safety stocks leading to a decrease in storage costs. The frequency of delivery to the retail outlet increases with this method as the orders may not be in bulk quantities as it had been before. Nevertheless the gap between supply and demand reduces, thus decreasing inventory carrying costs and stock out costs. One of the companies that use this system is the retail Giant Wal-Mart (Cherie Blanchard, 2008).
The online retailers have to have a variety of merchandise in their list of offerings to the customer. Some of these may not have enough demand and are ordered once in a while. These merchandises if kept as inventory in the warehouse, which is run by online retailers, will increase the storage and inventory carrying cost of the company. Some of these merchandises may get obsolete and hence won’t be saleable anymore. For any company, these losses need to be minimised; but at the same time online retailers have to offer more merchandises to their customer since the latter wants more variety. Thus for an online retailer there is a trade-off between variety of merchandises and inventory costs. This problem can be alleviated with the method called drop shipping.
Here as the customers’ orders for a product, the online retailer will check for the availability of that product in the warehouse. If it is not available, then the retailers get the product from their suppliers which may be a manufacturing company or a third party supplier. Thus this method allows the internet retailers to offer a variety of products even though they don’t own them and don’t have it in their warehouse. As the customer orders a product which is not available with the online retailer, the latter gets that product from the manufacturer/ vendor during their standard shipment from the manufacturer/vendor when the other regularly demanded products are taken (Maltz A, 2005). The online retail giant Amazon.com has been using this practice for a long time since they have to offer a variety of merchandises to the customers given the huge number of customers they deal with. (Chiles, 2005)
One of the objectives of supply chain management is to reduce the costs while satisfying the customers. The companies aim to reduce inventory costs, transportation costs and other costs associated from the time the material is sourced till it reaches the end customer. For sectors like retail, different mix of product is required to be made available at the right time since a stock out results in loss of sales volume. Speed of delivery and the right mix of product matter a lot to the customer who will incur costs because of a bad delivery service. Cross docking is one of the best methods employed to alleviate this problem faced in the supply chain. To put it simply, Cross docking is the process of receiving the materials from incoming shipments and transferring it to outgoing shipments without putting those materials into storage. Thus in a warehouse where cross docking is employed, the products from incoming trucks that come from vendors are received and are transferred to outgoing trucks that go to the respective customer for replenishment.
It helps in saving logistics cost since it receives different materials from incoming shipments of multiple vendors, consolidates it to a single outgoing shipment; this outgoing shipment goes through a specific route and caters to the demand of customers in that route. Thus a single outgoing shipment will suffice instead of multiple shipments. It also helps in reducing inventory carrying costs of the customers since the cross docking method is fast and economical and hence reduces the lead time of the materials to get delivered; thus customers can increase the frequency of orders by reducing the order size and work with less inventory. It helps the company to give to their customers the right mix of the products that they have demanded from multiple vendors and thus increases the satisfaction of their customer. (Delbovo, 2011) For the retail giant Wal-Mart, cross docking shifted the focus from “supply chain” to “demand chain” where the customers’ order material based on its consumption instead of companies pushing products based on the forecasted demand. (Christine, 1998)
A delta T Analysis
For any company delivery is one of the key performance measures of its supply chain. Especially when a manufacturing company follows a make to order system in production, it needs to minimize the total lead time that customer faces from the time it orders to the time it gets delivered. The existing total lead time may be very high and causing dissatisfaction to the customer or the competitor may be delivering the product at a lesser time. There may be many activities in the supply chain which are not adding any value and can be removed. These activities, if removed, will reduce the lead time and increase the delivery performance. One of the methods used in identifying the value adding and non value adding activities is A delta T analysis.
A stands for Actual: Those process steps that actually happen the time taken by them
Delta (D): Those activities that are Non-Value adding to the output
Theoretical (T): Those activities that are Value adding to the output
Actual = Theoretical + Delta
The A delta ratio indicates process efficiency and shows how many times bigger the actual process is when compared to the theoretical process where there is only Non Value adding activity. The table below shows the outcome of an A delta T analysis
A Delta T analysis
No of steps
Process cycle time
A Delta T ratio
This is the analysis used by Modi Xerox Ltd. in 1996 to identify the non value adding activities in their supply chain. The analysis laid the foundation for redesigning the supply chain aimed for reducing the Non value adding time. As a result of this Modi Xerox reduced the overall process cycle time from 20.5 days to 7 days. (Chopra, 2004). Even though this was used by Xerox in 1996, this analysis is best even today to get a better picture of value adding and non value adding activities.
The above four practices are carried out to achieve the objectives of Supply chain management more effectively. In the future there are likely to emerge practices which are better than the above ones since the competition is getting fierce and companies put more emphasis on innovative practices that give them an edge over the competitors.
This article has been authored by Akheel M Baramy from SDMIMD Mysore.
Views expressed in the article are personal. The articles are for educational & academic purpose only, and have been uploaded by the MBA Skool Team.
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