Supply Chain Planning and Control

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<ul><li><p>E X E C U T I V E M B A P R O G R A M M E </p><p>Operations Management </p><p> 2006 Shaaban K. Juma P.O. Box 171 00517, Nairobi, KENYA </p><p>Phone +254-20-603502 Fax +254-20-607683 Email: </p></li><li><p>OPERATIONS MANAGEMENT 1</p><p>Supply Chain Planning and Control Introduction </p><p> Traditionally Operations Managers have viewed their responsibility as being only within their operation. </p><p> 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. </p><p> Such intercompany operations management is referred to as supply chain management. </p><p> 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. </p><p> The objective of supply chain management is trying to satisfy end customers effectively and efficiently. </p><p> 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. </p><p> 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. </p><p> 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 </p><p> 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. </p><p>6 </p></li><li><p>OPERATIONS MANAGEMENT 2</p><p>when they are need, balancing capacity, and generally controlling the smooth flow of materials. </p><p>Component Activities of Supply Chain Management </p><p> 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 </p><p>operations interface with its supply market o Physical distribution management. Managing the activity of supplying </p><p>immediate customers. o Logistics. An extension of physical distribution management that </p><p>refers to the management of materials and information flow from a business, down through a distribution channel, to end customers. </p><p>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. </p><p> FOCAL </p><p>OPERATION </p><p>1st tier suppliers </p><p>X </p><p>Y </p><p>2nd tier suppliers </p><p>C </p><p>A </p><p>B </p><p>Wholesalers </p><p>Retailers </p><p>1st Tier Customers </p><p>2nd Tier Customers </p><p>Supply side Demand side</p><p>Purchasing and supply management </p><p>Physical distribution </p><p>management </p><p>Logistics </p><p>Materials management</p><p>Supply chain management</p><p> Illustration of terminologies used in supply chain management </p></li><li><p>OPERATIONS MANAGEMENT 3</p><p>Purchasing and supply management </p><p> 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. </p><p> 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. </p><p> Tasks involved in purchasing are: </p><p> o Operations raise a requisition for materials or services o Purchasing function compares and selects potential suppliers and sends </p><p>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. </p><p>o Quotations are received, analysed and a selection is made of the qualified supplier. </p><p>o A purchase order which is a contractual legal document between the supplier and the operation is raised and forwarded to the chosen supplier. </p><p>Company XYZ</p><p>Purchasing Process</p><p>Buy</p><p>ing </p><p>Dep</p><p>t.Su</p><p>pplie</p><p>rTh</p><p>e In</p><p>tern</p><p>al </p><p>Ope</p><p>ratio</p><p>n</p><p>Request for product and </p><p>service</p><p>Prepare request for quotations</p><p>Select preferred supplier</p><p>Prepare quotation</p><p>Prepare purchase order</p><p>Produce goods and services</p><p>Receive goods and services</p></li><li><p>OPERATIONS MANAGEMENT 4</p><p>o The supplier produces and delivers the materials and or services ordered. </p><p>o The purchasing function receives the materials and forwards them to the relevant recipient operation within the organisation. </p><p>Group Discussion </p><p>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 </p><p> 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. </p><p> 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. </p><p> 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. </p><p> 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. </p><p> 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. </p><p> 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. </p><p> 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. </p></li><li><p>OPERATIONS MANAGEMENT 5</p><p> Present Strategy Issues to Consider Decision Projected </p><p> MK 000 MK 000 </p><p>Revenues 10,000 Increase by 5% Counter productive to sales No action 10,000 </p><p>Purchases 7,000 Decrease by 7.14% Negotiate. No immediate impact Decrease by 7.14% 6,500 </p><p>Staff costs 2,000 Decrease by 25% Impact on morale No action 2,000 </p><p>Overheads 500 Decrease by 100% Difficult in the short run No action 500 </p><p>Profits 500 Increase by 100% 1,000 </p><p>Group Discussion </p><p>What do you think should be the main information which is exchanged between the purchasing function and other parts of the organization? </p><p>Emergent Issues on Purchasing and Supply Management </p><p>Single- versus multi sourcing </p><p> 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: </p><p> Single-sourcing Multi-sourcing </p><p>Adv</p><p>anta</p><p>ges </p><p> Better quality subject to adherence to standards </p><p> Strong relationships may be created Greater commitment due to dependency Better communication Ease of cooperation in developing new products </p><p>or services Economies of scale Greater confidentiality </p><p> Price reductions due to competition Can switch sources in case of supply failure Wide sources of knowledge and expertise to </p><p>tap from </p><p>Dis</p><p>adva</p><p>nta</p><p>ges </p><p> Vulnerability to disruptions in case of supply failure </p><p> Volume fluctuations may easily affect individual supplier </p><p> Monopolies may exert upward price increases </p><p> Commitment of supplier may be difficult to enforce </p><p> Difficulty to develop standards Communication difficulties Supplier less likely to invest in new </p><p>processes Difficult to attain economies of scale </p><p> The Internet </p><p> Trade that occurs over the internet (or any computer network) is called electronic commerce, e-commerce, or e-business. </p></li><li><p>OPERATIONS MANAGEMENT 6</p><p> The internet has fundamentally changed how businesses and consumers interact as shown in the new value chain below: </p><p> The traditional value chain has in some cases been replaced by a new one </p><p>where intermediaries or middlemen who do not add value to the supply chain have been phased out (disintermediation). </p><p> However since not all consumers or business can handle the myriad transactions of selling on a one-to-one basis, and most consumers do not want to sift through hundreds of web sites to purchase every day items, new intermediaries of the internet have arisen as shown in example (c) above. </p><p> The internet has impacted on operations by promoting: o Better customer relations o More efficient processes o Lower material costs (economies of scale in purchasing) o Information technology synergy o Better and faster decision making o New forms of organisation o Expanded supply chain </p><p>I N F O R M A T I O N K E Y </p><p># Portal a site through consumers access the web, perform searches, and have an opportunity to link directly to other sites # Aggregator. Bring together related sites or sites of interests to affiliated groups # E-retailers act as virtual storefronts # Informediaries. A host of facilitating intermediaries for internet security, customer relationship management, financial services and delivery services. </p><p>Consumer </p><p>Retailer </p><p>Manufacturer Wholesaler/ Distributor</p><p>a) The traditional value chain </p><p>Consumer </p><p>Retailer </p><p>Manufacturer Wholesaler/ Distributor</p><p>b) Intermediaries Eliminated (Disintermediation) </p><p>Informediary e-Retailer Aggregator Portal ConsumerManufacturer </p><p>c) New intermediaries introduced (Reintermediation) </p></li><li><p>OPERATIONS MANAGEMENT 7</p><p>o New ways of doing business o Globalisation </p><p> In some instances large companies have used the internet to link their databases in one exchange where they can share information with their suppliers. </p><p> Keiretsu networks </p><p> This is a Japanese term to describe a network of suppliers who have come together as an alliance to trade with one large manufacturer. </p><p> The large manufacturer will support the activities of the keiretsu members in form of loans or other facilitation roles. </p><p> In return the keiretsu members commit to agreed terms such adherence to quality standards, technical expertise and guaranteed supplies. </p><p>Global sourcing </p><p> Operations have increasingly tended towards buying their inputs from cheap sources regardless of international boundaries. </p><p> This phenomena often referred to as global sourcing has been occasioned by: o Formation of trading blocks among neighbouring countries with </p><p>corresponding lowering of tariff barriers among member states. Examples of trading blocks are: COMESA, SADC, WTO, EU, NAFTA, ASEAN, etc. </p><p>o Improved international transportation systems such as air travel, ports and harbours, road and railway systems. </p><p>o Cheaper input costs such as labour in some countries, abundance of raw materials, legal and taxation incentives, etc. </p><p>Physical Distribution Management </p><p> On the demand side of the operation, products and services need to be delivered to the customer. </p><p> For manufacturing operations this will be transported to the customer while in the service operations these will involve on-location creation of the service in the presence of the customer. </p><p> Here, we shall focus on distribution of outputs that require physical distribution management beyond the immediate customer through to final the customer (logistics). </p><p> Characteristics of physical distribution are: o Multi-echelon systems. Materials flowing through a system are stored </p><p>at different points, including points outside the operations, before reaching the customer, e.g. at own warehouse, at regional warehouses </p></li><li><p>OPERATIONS MANAGEMENT 8</p><p>and even at retail stores. The purpose of this type of buffering is to provide an intermediate stage in the distribution system to cushion the manufacturer from dealing with every single customer on the one part and to avoid the customer from dealing with a plethora of suppliers on the other. </p><p>o Focused and simplified accessibility of supplies and information. By channelling outputs through distribution points or warehouses a manufacturer saves on routing of their products (a few central distributions placed strategically as opposed to door to door delivery) and also brings them closer to the customer. </p><p>o Backloading challenges. This involves finding a potential customer who wants their goods transported when conveyance vehicles are returning while empty to their loading distribution bases after making deliveries. </p><p>o Order fulfilment challenges. This is more pronounced where orders are received over the internet especially from individual consumer. Accumulating orders from different consumers to reach an economically deliverable batch or quantity is a nightmare to distributors or shippers especially when an operation is used to supplying in bulk to large single consumers or wholesalers. This may further be complicated when the consumers order different products and are scattered over a wide geographical location. </p><p> Materials Management </p><p> Materials management was previously seen as a means of reducing total costs associated with the acquisition and management of materials2. </p><p> This has now changed to encompass the integration of material flows...</p></li></ul>


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