Supply Chain Management
Supply chain efficiency
It is better to optimise the supply chain as a whole rather than optimise each individual element within the supply chain
A main source of waste is the delay of resource in a system, whether it is an item stuck as inventory in a store or trapped in a queue.
Throughput efficiency = (Total value adding time/Total throughput time) x 100
The bullwhip effect
Where demand fluctuations magnify through the supply chain
Magnifies demand variability at each interface between customer and supplier.
There are some practices that can reduce the demand amplification
Reducing the number of stages in the supply chain
Sharing demand information across the supply chain
Generating smaller, more frequent replenishment orders
Reducing lead times
Limiting promotions that create demand surges.
Why it is created?
Demand uncertainty across the supply chain
Lead times between supply chain tiers
Under or over reaction to demand changes
The situation is not helped by
Process characteristics that make coordination difficult
Limited levels of collaboration between tiers
Conflicts of interest with different customers
Difficulties in deciding who keeps what stock and where this is kept
Vertically integrated supply chains
Material extraction > Material processing > Component production > Manufacture/assembly > Warehousing > Distribution > Retailer
To address how much of the supply chain one organisation should own, there are three sets of decisions to make:
1. The direction of any further intended integration
If we are part of a middle tier of a supply chain, we can choose to integrate upstream (to buy our suppliers) or to integrate downstream (to buy our distributors or customers)
2. The extent of the integration
We need to address how far upstream or downstream we integrate
Do we really want to own our raw materials producers or is component supply far enough?
Do we want to get involved in retail or is that someone elses competence
3. The balance of the integration
We need to address how much capacity to have at each tier in the supply chain
Do we want to own enough capacity at one tier to meet all our needs or should we buy out some supply?
Def - Where different parts of the supply chain are owned by one organisation
Upstream drivers
Security of supply
Reliability of supply
Restriction to competitors of scarce materials
Control of raw material costs
Downstream drivers
Control customers
Guarantee of business
Access to market data
Customer knowledge
Narrow extent
Only controlling few areas of the supply chain
Wide extent
Controlling the whole supply chain
Can be more desirable
Allows for disintermediation - the removal of a supply chain tier through closer integration of the tiers either side
In seasonal market, the entire supply capacity will have to adjust
Creates the questions as to whether one should design the supply chain with sufficient capacity to meet core demand and then outsource any variation
It is difficult to integrate systems vertically due to different scale and cycle times
Why have supply chains de-integrated?
Issues with vertical integration
VI reduces the market forces in the supply chain
Ownership of the entire supply chain reduces market forces within that supply chain
If a supplier has guaranteed business they may become inefficient
Minimum economic scales are different at each tier
Usually very different in each tier
Upstream usually operates at a very large scale
Downstream typically tends to be on a smaller scale with smaller volumes
Typically tends to be a capacity mismatch
Product variety/ complexity increases downstream
Difficult to control if all tiers are owned
Cost competition increased upstream
Commodity items upstream compete on cost
Downstream competition is on differeitnation (qauilty
Vertically integrated supply chains find that different tiers have different competitive strengths
VI 'locks in' supply for better or worse
If a supplier is not performing/noncompetitive a VI system are still stuck with this supplier - can change if you accept the cost of doing so
Risks - what if the end demand falls away
The capacity will have to be reduced at the end supply as well as potentially along the whole supply chain
Supply chain control can be problematic
Challanging to coordinate and contro the flow
Better to have decoupling points where you have buffers in between tiers - reduces efficiency
Outsourcing is the main alternative to VI
Where producers have a contractual relationship with external suppliers to provide goods and services
In the majority, external suppliers are selected for their distinct capability in excess of what can be provided in house
Outsourcing
Advantages
Disadvantages
The ability to focus on core internal capabilities
Access to supplier capabilities
Reduced need for capital investment
Fewer direct staff
Outsource suppliers usually have lower unit costs
Clear, identifiable supply chain costs
Can be used to expand overall capacity
Loss of control
Costs involved in managing suppliers
Reduced economies of scale
Potential closure of existing facilities
Need to share sensitive information with third parties
Risks of being dependent on a supplier
Increased supply chain risks
When considering outsourcing, two things should be considered...
The strategic value of the good/service
The criticality of the component or service
For each component or service the decision-makers should assess the extent to which the item contributes in some way to the overall competitive advantage of the business
You should ask whether or not the component or service contributes to the performance of the final product or service
The Barnes outsourcing mix
Proprietary items
Commodity items
Novelty items
Utility items
Ones that create competitive advantage and are critical to the end product or service. These would normally be made in-house
Use proprietary technology and are not critical to the performance of the final product. They would normally be widely available from a range of low-cost suppliers. These can usually be outsourced
Specialized and can contribute to competitive advantage. They are not critical but can be difficult to source reliably at low cost. The company has to decide whether it is more economical to make in-house or to outsource.
Based on widely available technology but performance of the product depends on the performance of that technology. This type of item can be outsourced and there should be a range of potential suppliers willing to supply the item at a competitive price. However, it is important that the supplier is reliable and is willing to cooperate and develop a supply relationship because failure to deliver can lead to significant problems with product availability or performance.
Supplier relationships
Working with a supplier is rarely as simple as arranging a contract that states details such as price and service level agreements
In many cases, there is a degree of collaboration and cooperation between customer and the supplier
Within the supply chain, there are three levels of collaboration (Lamberts categorisation of supply relationships)
Type 1
Type 2
Type 3
Organisations recognize each other as partners, with limited coordination and planning. Often only one division or functional area
Organisations progress beyond coordination to integration of activities. Multiple functions/departments involved in the partnership
Organisations share a significant level of operational integration. No ‘end date’ to the relationship
Arms length
‘Joint ventures’ and ‘Vertical integration’ are structural ways of generating joint working. Where no collaboration exists, this is classed as ‘Arm’s length’.
Nicholson and Young (2012)
Identify a number of abusive buying practices that can arise from the imbalance of power between supermarkets and their suppliers
Cancellation of an order
Listing feeds
Delisting feeds
Late payments