Supply Chain Planning and Control

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  • E X E C U T I V E M B A P R O G R A M M E

    Operations Management

    2006 Shaaban K. Juma P.O. Box 171 00517, Nairobi, KENYA

    Phone +254-20-603502 Fax +254-20-607683 Email: info@shaabanjuma.com

  • OPERATIONS MANAGEMENT 1

    Supply Chain Planning and Control Introduction

    Traditionally Operations Managers have viewed their responsibility as being only within their operation.

    However, for them to manage this operation competitively and effectively, they need to look beyond their own operation more so when it becomes imperative to ensure that the needs of the ultimate consumer in a supply network are met by the efforts of all operations in the supply network.

    Such intercompany operations management is referred to as supply chain management.

    Supply chain management is the management of the interconnection of organisations which relate to each other through upstream and downstream linkages between the different processes that produce value1 in the form of products and services to the ultimate consumer.

    The objective of supply chain management is trying to satisfy end customers effectively and efficiently.

    In trying to do so, each operation will consider the key question of what level of quality, speed, dependability and flexibility do they need to develop in their part of the chain in order to satisfy the end customer.

    Although the emphasis here is on the end customers, satisfying an operations immediate customers is equally important as they too will need efficient and quality inputs to their operations in order to contribute to the overall needs of the final consumer.

    Focusing on managing the supply chain efficiently provides opportunities for analysis and improvements of operations. For example where an operations profits are low, savings could be achieved by reducing costs incurred in such areas as inventory accumulations by analysing the chain for bottlenecks that may cause lengthy throughput time, thereby contributing to buffering. The OM may then solve the problem by allowing materials to be produced only

    1 According to Michael Porter: Value is the amount buyers are willing to pay for what an organisation provides themcreating value for buyers that exceeds the cost of doing so is the goal of any generic strategy. Value, instead of cost, must be used in analyzing competitive position.

    6

  • OPERATIONS MANAGEMENT 2

    when they are need, balancing capacity, and generally controlling the smooth flow of materials.

    Component Activities of Supply Chain Management

    Definition of terms: o Focal operation. A single operation in a supply chain o Supply side. Operations that contribute to a focal operations inputs o Demand side. Operations that consume a focal operations outputs o Purchasing and supply management. The function that deals with the

    operations interface with its supply market o Physical distribution management. Managing the activity of supplying

    immediate customers. o Logistics. An extension of physical distribution management that

    refers to the management of materials and information flow from a business, down through a distribution channel, to end customers.

    o Materials management. The management of the flow of materials and information through the immediate supply chain, including purchasing, inventory management, stores management, operations planning and control and physical distribution management.

    FOCAL

    OPERATION

    1st tier suppliers

    X

    Y

    2nd tier suppliers

    C

    A

    B

    Wholesalers

    Retailers

    1st Tier Customers

    2nd Tier Customers

    Supply side Demand side

    Purchasing and supply management

    Physical distribution

    management

    Logistics

    Materials management

    Supply chain management

    Illustration of terminologies used in supply chain management

  • OPERATIONS MANAGEMENT 3

    Purchasing and supply management

    At the supply end of an operation the purchasing or buying function contracts with suppliers of materials and services that will be used for production of goods and services. Some goods and services may not be for production but are bought for an operations internal consumption, e.g. stationery, furniture and fittings, etc.

    Being the link between the operation and its immediate suppliers, a purchasing manager must understand the requirements of all the processes within the operation including the technical details or specifications of materials and services to be bought and the capabilities of the suppliers.

    Tasks involved in purchasing are:

    o Operations raise a requisition for materials or services o Purchasing function compares and selects potential suppliers and sends

    a formal request for quotations, especially where purchasing has not been done for a long time or the items are being bought for the first time.

    o Quotations are received, analysed and a selection is made of the qualified supplier.

    o A purchase order which is a contractual legal document between the supplier and the operation is raised and forwarded to the chosen supplier.

    Company XYZ

    Purchasing Process

    Buy

    ing

    Dep

    t.Su

    pplie

    rTh

    e In

    tern

    al

    Ope

    ratio

    n

    Request for product and

    service

    Prepare request for quotations

    Select preferred supplier

    Prepare quotation

    Prepare purchase order

    Produce goods and services

    Receive goods and services

  • OPERATIONS MANAGEMENT 4

    o The supplier produces and delivers the materials and or services ordered.

    o The purchasing function receives the materials and forwards them to the relevant recipient operation within the organisation.

    Group Discussion

    If you were drawing up a document to be sent out to potential suppliers of a new photocopying machine for your local library, what would you ask them to specify

    The purchasing functions objective is to buy the materials and services of the right quality, if necessary to be delivered quickly, at the right time and completely, at the right price and where necessary to be able to change specifications in terms of delivery time and quantity.

    The responsibility of ensuring quality lies with the supplier who should be able to provide a right first time level of quality products and services. It is not the role of the operations to inspect the goods on delivery as this beats the purpose of TQM. The supplier will therefore be required to adhere to high standards of quality and where necessary be certified by the relevant standards bodies such ISO.

    Speed of delivery is relative to the requirements of the industry and will be affected by the level of competition, complexity of production, logistical issues among others.

    Delivery at the right time and in the right quantities required is important in order to avoid inventory accumulation or shortages or storage costs. In service industries late arrival or early arrival can also disrupt schedules.

    Supply flexibility is important for operations which operate in fast changing or uncertain markets. For example a hospital needs to respond to all manner of ailments from patients who may need unforeseen medication that is not stocked at the hospital at the time or at all due its storage nature. The supplier to the hospital must be ready to supply at short notice to meet such demand. Or must have alternative medication to take care of emergencies and save a life.

    Purchasing at the right price helps an organisation acquire cost advantage in its operations. This point can only be true if we assume suppliers are producing quality products or services, hence price is the only significant issue under consideration.

    In many organisations purchase costs account for the biggest share of total organisational costs, and their proper management can bring significant savings to the organisation. The following illustration shows how purchasing at the right price can impact on profitability.

  • OPERATIONS MANAGEMENT 5

    Present Strategy Issues to Consider Decision Projected

    MK 000 MK 000

    Revenues 10,000 Increase by 5% Counter productive to sales No action 10,000

    Purchases 7,000 Decrease by 7.14% Negotiate. No immediate impact Decrease by 7.14% 6,500

    Staff costs 2,000 Decrease by 25% Impact on morale No action 2,000

    Overheads 500 Decrease by 100% Difficult in the short run No action 500

    Profits 500 Increase by 100% 1,000

    Group Discussion

    What do you think should be the main information which is exchanged between the purchasing function and other parts of the organization?

    Emergent Issues on Purchasing and Supply Management

    Single- versus multi sourcing

    A controversial decision faced by many operations managers is whether to source their input products and services from a single or multiple suppliers. The pros and cons of either of these decisions are summarised below:

    Single-sourcing Multi-sourcing

    Adv

    anta

    ges

    Better quality subject to adherence to standards

    Strong relationships may be created Greater commitment due to dependency Better communication Ease of cooperation in developing new products

    or services Economies of scale Greater confidentiality

    Price reductions due to competition Can switch sources in case of supply failure Wide sources of knowledge and expertise to

    tap from

    Dis

    adva

    nta

    ges

    Vulnerability to disruptions in case of supply failure

    Volume fluctuations may e