IT and Supply Chain Management

IS6006 – second term

A bit of History…

• Management -> Internal focus• Administration of business processes• Optimisation in the allocation of resources• Management of inventory…• “Competition” mode

• Focus turns to external considerations because processes don’t stop at the gate

• Many factors can only be fully optimised in collaboration with other firms

DeliverCustomerMakeSupplier

1950’s: unlimited demand

DeliverCustomerMake

Buy

Supplier

Plan

1960’s : inventory costs money => reduce costs

DeliverCustomerMake

Buy

Supplier

Plan

MRP

1960’s : inventory costs money

MRP II

Sell

CustomerMake

Buy

Supplier

Plan

MRP

Deliver

1970’s : first wave of integration

MRP II

Sell

CustomerMake

Buy

Supplier

Plan

MRP

Deliver

1980’s : sales order processing

SOP

MRP II

Sell

CustomerMake

Buy

Supplier

Plan

MRP

Deliver

1990’s : back-office integration

ERP

Accounting & Finance Human Resources

MRP II

Sell

CustomerMake

Buy

Supplier

Plan

MRP

Deliver

2000’s : the extended enterprise

ERP

Accounting & Finance Human Resources

Service

CRM

SCM

MRP II

Sell

CustomerMake

Buy

Supplier

Plan

MRP

Deliver

ERP

Accounting & Finance Human Resources

Service

CRM

SCM

Design

ERP II

What’s next?

The Great Acronym War

CRM Early 00’s

Sales Force AutomationContract ManagementCustomer Service & SupportMarketing AutomationDocumentation Management

SCMLogisticsElectronic InvoicingElectronicMarketplacesContract Management

Late 90’s

Early 00’sERP II Product Data Management Engineering Change Orders

New Product Introduction Collaborative Product DesignPLM

Concept of Supply ChainComplex network of relationships that organisations

maintain with trading partners to source, manufacture and deliver their products

• includes material, information and financial flows as shown below

ProductFlow

ProductFlow

ProductFlow

ProductFlowSupplier Manufacturing Distribution Retailer Consumer

Information Flows

Payment Flows

Transition to Supply Chain Management

• sustainable competitive advantage has two fundamental requirements:

• a strategic orientation focussed on consumer value (not production capability)– Different analyses

• value chains that are co-ordinated and responsive to consumer needs and wants– Organisational design

Legacy of pre-SCM thinking

• Focus on competition• Supply Chains contain far more than the

required inventory• Products are handled too many times (5/6

average)• Physical carriers struggle to maintain costly

equipment on slim margins• No player has enough info to synchronise /

optimise the entire chain

Consequences

• Lack of knowledge of the end-to-end demand function – high levels of uncertainty

• Erratic variations in demand (Bull whip effect)• inconsistent / out-of-date data about SC (poor

decision making)• Fragmentation of processes and operations• lack of process integration with partners• need for fundamental structural changes• Need for integrated information systems

Supply Chain Management is…

• an integrative philosophy to manage the flow of goods and information from the earliest supplier of raw materials to the ultimate customer through integration and collaboration of all channel partners”

• SCM aims to reduce costs and add value for the consumers through more efficient and effective supply chain linkages

• Operative across a range of industries• Leverages new technologies to achieve these aims

Other names

• supply networks• lean chain approach• supplier integration• Buyer-Supplier partnerships• value steam

A Definition

• ‘Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion and all logistics management activities. Importantly it also includes coordination and collaboration with the channel partners, which can be suppliers, intermediaries, the third party service providers, and customers. In essence the supply chain integrates supply and demand management within and across companies.’

Evolution

The Evolution of Manufacturing Technology and Management Techniques (Source: Jin Hai, Anderson and Harrison 2003)

• Functional to integrated• Mass Production to Lean to agile and then

leagile

Different Visions of SCM

• Enterprise focus - traditional model– characterised by fragmentation– Frequent conflict between links in the chain

• Partner focus - modern vision– characterised by collaborative idea– Or provision of a SC related service

• Direct focus (e.g. Dell) - emerging vision– characterised by customer-direct capability– near zero inventories– Domineering concept

Types of SCM

• Integrated Make-to-stock– smoothing demand in mass production industries– linked to postponement in distribution channel

• Continuous replenishment– customer-demand pull system across firms– ECR, QR

• Build-to-order– efficient SCM allows return to BTO model– inventory substituted with information (Dell)

Understanding industry specificities

• Type of product• Complexity of production process• Type(s) of customers• Complexity of supply chain (eg: lead times)• Complexity of demand function (eg: seasonality)

• These determine the strategies that are suitable

Selecting a SCM strategy

• ‘It is supply chains that compete, not companies’ (Christopher, 1992)

• success / failure of supply chain strategy is determined in the marketplace by the end consumer

• understand the external environment• design an appropriate and effective supply

chain strategy

Elements of consumer responsiveness

• Product Availability• Length of order cycle Time• Consistency of Order Cycle Time• Invoice/ Billing Procedure Accuracy• Information Requests responsiveness• Flexibility in resolving problems• Distance to suppliers warehouse• Special Customer Request• Frequency of Damaged Goods• Quality of Order Department• On time Delivery

• A combination of there will add to customer satisfaction

Understanding the concept of value

Fisher’s ClassificationASPECTS OF DEMAND

FUCTIONAL (PREDICATABLE DEMAND)

INNOVATIVE(UNPREDICTABLE DEMAND)

Product Life Cycle More than 2 years 3 months-1 yearContribution* Margin 5%-20% 20%-60%Product Variety Low(10-20variants per

category)High (often million of variants per category)

Average margin of error in the forecast at the time production is committed

10% 40%-100%

Average Stock out rate 1%-2% 10%-40%Average forced end of season markdown as percentage of full price

0% 10-25%

Lead time required for made to order products

6 months to 1year 1 day to 2 weeks

Objective is to match efficient process strategy for functional productsand responsive process strategy for innovative products

Hill’s manufacturing strategy matrix

Christopher and Towill (2002)

Examples

• Wal-Mart stands out on price• McDonalds on access, availability, consistency and speed• Nike and Reebok on brand recognition• American Express on services• Dell on timely deliveries• Dominant in one attribute and efficient in others • choosing the right product attribute to create the right

customer value• Select the best-fit strategy but use segmentation as

generic supply chains don’t work• Dichotomy between efficient and responsive strategies

Lean production techniques

• Toyota-ism• result of resource scarcity and intense

domestic competition• achieving cost improvements• focus on reducing waste (‘muda’) and

continuous improvements• Origins: JIT, Kanban and respect for employees

Core concept• simplify and reduce variance within complex

and dynamic systems• more predictable and controllable behaviour

Elimination Non Value added activities

• Waste from Irregular Flow • Waste from Inaccurate Supply • Waste from Inflexible response • Waste from Variability

• Inventory is main source of inefficiency – Storage adds no value to the product

• Idle time due to break down or set up– Preventative maintenance, reduction of lot size, use of common

parts across product lines• Reduction in within-firm movements

– Cell manufacturing

Continuous Improvement

• Improvements in material handling systems• involvement of all production employees

organised in teams• support of top management

Benefits and Constraints of Lean

• Ample literature indicating that many companies benefit from lean– Reduction in lead-time, in inventories, in the cost of

quality and in process changeovers – Increases in labour productivity

• Equally ample literature on problems– Inability to cope with variability– narrow operational focus on the shop floor– Inflexibility particularly outside the high volume

repetitive manufacturing

Case Study - Delphi• Modelled after the principles of the Toyota Production System, Delphi

Management Systems has enabled the company to be a lean manufacturer focused on customer needs. DMS addresses everything from how supplies are delivered to employee movement in the plant, with the goal of continuously increasing efficiency and eliminating waste in a cost-effective manner, DMS focuses on six specific but interdependent elements aimed at eliminating waste and improving product flow;

• Employee environment and involvement: Creating a team based work organization with joint efforts between workers and management, with shared goals and a commitment to continuous improvement.

• Workplace organisation: Paying attention to how employees, equipment, and materials arc coordinated, providing a safe, clean work environment.

• Quality: Focusing on variation reduction, waste elimination, and first-time-through customer satisfaction.

• Operational availability: Minimizing non productive time for operations.• Material movement: Assuring on-time delivery of required materials.• Flow manufacturing: Responding quickly, safely, and efficiently to customer

demand .with high quality, high-value products

Agile Manufacturing

• Agility is a business-wide capability that embraces organisational structures, logistics processes, information systems and, in particular, mind-sets’ (Christopher)– flexible manufacturing systems– mass customisation– leagile supply chain

• market sensitive and demand driven• Virtual arrangements• information sharing between upstream and downstream

partners• process alignments and collaborative approach

Cted

• ability of the firm to reconfigure itself • In the face of dynamic and competitive

environment• continuous and unanticipated changes outside

the firm– government policies– international trade agreements– changing customer expectations

Core Concepts (Gunasekaran et al. 1999)

Core Competence Management

• Specific factor that a business sees as being central to the way it works

• It provides consumer benefits • It is not easy for competitors to imitate • It can be leveraged widely to many products and

markets• Exist at two levels: the firm and its employees• It should be exploited • It should be further developed

Virtual organisation• integration of core competencies distributed among

a number of carefully chosen but real organisations • Solution to a wide range of problems

– improve product and process design– reduce manufacturing risks– enhance product service and repair

• high levels of cooperation - Agile teams work across organisational boundaries

• Temporary arrangement – need to be able to reconfigure rapidly

Example

• IBM - strategic partnerships to work jointly on research and development, product conceptualization, product development, and distribution as well as operations– HITACHI - advanced storage technologies – Tree Data - storage networking products for mid-

sized customers– UPS - distribution network

Capability for re-configuration

• Track windows of opportunities• Pre-empt competition• Develop a strategic architecture based on a

corporate-wide map of core skills• Invest in technologies to achieve flexibility in

both organisation and operations

Knowledge-driven enterprise

• Well-trained and motivated workforce• Focus on knowledge

– Creation, acquisition, codification, storage, maintenance and transfer

• Multi-path agility as a factor of speed• IT for coordination, communication and

ebusiness

Knowledge activities at firm levelKnowledge Activity

(KA)Definition

Acquire Identify and capture knowledge from source to a company. Sources include written form, physical objects, people, courses, cooperation between source and recipient, and outsourcing

Codify Assess the value of knowledge, distil, refine and assemble into comprehensive format

Store Store knowledge in an artefact e.g. system, document

Maintain Update on continuous basis, as a result of additional acquisition activities

Transfer Identify receiver, organize channel of communication and send

Create New knowledge cultivated through knowledge transfer. Acquisition activities come into play as new knowledge is acquired

Strengths and weaknesses of Agile

• effective only if physical set-ups made flexible– machineries, buildings, storage facilities

• Business processes, empowerment…• Without compromising control• HR issues are important

– Flexible employment– Unclear boundaries of responsibility– Team based organisation

Example

• Zarra – Benetton• Manage the 3 lead times of the fashion industry: time to

market, time to serve and time to react– team of fashion scouts seeking new ideas and trends across the

market and analyse the Point of Sale Data– Ideas quickly converted into tangible products – Time to market is a matter of weeks– working closely with small manufacturers, specialising in

production process and garment types– Admin can provide flexible technological, financial and logistical

support• Key to success: creating virtual technology enabled teams

with a high degree of information sharing

Lean + Agile?• Leagility is being discussed• a system in which the advantages of leanness

and agility are combined• strategic use of decoupling point

– lean concept upstream from the decoupling point to achieve economies of scale

– agility concept downstream to achieve consumer responsiveness

Forrester effect

Does it make sense?

Decoupling points

• “decoupling points : The locations in the product structure or distribution network where inventory is placed to create independence between processes or entities. Selection of decoupling points is a strategic decision that determines customer lead times and inventory investment.

• Information decoupling point (IDP) and other is material decoupling point (MDP)

Material decoupling point

• strategic point for buffer stock• position changes depending on the variability in

demand and product mix– increase in product mix and fluctuating volume

decoupling point move upstream -> supply chain more agile

– Reduced variability in demand or product mix decoupling point move downstream -> supply chain leaner

• Product differentiation must occur at or beyond the decoupling point

Information Decoupling point

Order penetration

• “order penetration point : The key variable in a logistics configuration; the point (in time) at which a product becomes earmarked for a particular customer. Downstream from this point, the system is driven by customer orders; upstream processes are driven by forecasts and plans.

• “postponement : A product design strategy that shifts product differentiation closer to the consumer by postponing identity changes, such as assembly or packaging, to the last possible supply chain location.”

Towards hybrid strategies

upstream from postponement applications and the information decoupling point,supply chains should be leandownstream from that point they should be agile

Some configurations

• I – basic• T – few products – many packaging variants• V – few raw materials, many end products• A – Many raw materials, few end products

Understanding SCM Strategies

Another one

Example – who is this?

LeaAgile in action

BT: a service case study• telephony and provision service for residential and small business customers,

– from call centre reception of orders/faults through to the field engineering workforce

– new customer services division– optimisation of whole process, rather than sub-optimisation of individual functions

such as sales or operations• Break departmental barriers and allows process measures from a customer

perspective• field engineering workforce given local autonomy -> formation of customer

service teams with multi-skilling• Automated proactive maintenance scanning network at night -> schedule

maintenance• automated software controlled systems delivering agile service (eg:

callminder)• ``Plug and Play‘’ equipment and mass customisation (eg: billing)

Some pointers

• Lean = centralise production of a standard product with few variants -> economies of scale

• Globalisation =serving different markets from one manufacturing site

• Compromised by increasing demand for product variability• Agile = re=organise firms so they leverage temporary

alliances to allow for closer focus on customers (virtual arrangements)

• Merging of the two strategies on either side of a differentiation point

• Postponment

HP: global leagile case study

• Primary production in the States - > generic product• Shipped to national distribution centres (push

system)• Each centre performs regionalisation on demand

(pull system)• Only one level of forecast: global demand for the

generic product• Unexpected demand can be covered by transfer

from one distribution hub to another

Comparison of lean, agile and leagile supply chains (Source: Agarwal, A. et.al. 2006)

Case study: food industry

• globalization and technological advancements in the past decade

• Supply chain evolved from simple to very complex • Challenges:

– Increased Consumer demand (and dominance) – Specialisation of products (organic…)– Increasing product variety (SKUs, recipes, packaging…)– Extensive new EU legislation– Increased retailer power (size effect)– Inherent Nature of Food Manufacturing (seasonal, disjointed,

variable supply and quality…)

Key issues for food industry• Process Efficiency

– mixing, processing, packaging and preservation– large number of routings – Activities labour intensive and dedicated

• Consumer Responsiveness – Especially at later stages (post-decoupling point)– All inventory retained in semi-processed state– Postponement until customer order (not final customer)– Innovation as a mode of market entry

• Demand Management – More attention to customer induced variations– Many misconceptions – eg: promotional policies and Supply-side effects

• Collaboration and Integration of Supply Chain– Size effect

Customer profile

• in the UK over 50 per cent of all food and drink consumed outside the home (2003)– 33 per cent in 1992

• significant increase in the number of single-person households

• demand for smaller package sizes and convenience

• logistics of supplying such a customer base can be daunting

Ireland

• Traditional agrarian country turned into a specialised producer• Location disadvantage (cost and dependence on transport

channels)• Therefore SCM very important• one in four businesses have taken on board SCM• 9% of Irish firms have a specialized SCM or logistics manager • Aware of SCM issues but not measuring them

– 46 % of companies do not have KPIs for customer service– 59 % of companies do not know their total supply chain costs– 41 % of firms do not know their transport costs– 82 % of companies do not formally measure warehousing in terms of

key performance indicators.

Perceived Integration of Supply chain activities in Irish Companies