supply chain planning and control

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: [email protected]

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 operation’s 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 operation’s 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 them…creating 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.

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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 operation’s inputs o Demand side. Operations that consume a focal operation’s outputs o Purchasing and supply management. The function that deals with the

operation’s 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


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 operation’s 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


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.


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 easily affect individual supplier

• Monopolies may exert upward price increases

• Commitment of supplier may be difficult to enforce

• Difficulty to develop standards • Communication difficulties • Supplier less likely to invest in new

processes • Difficult to attain economies of scale

The Internet

• Trade that occurs over the internet (or any computer network) is called electronic commerce, e-commerce, or e-business.


• The internet has fundamentally changed how businesses and consumers interact as shown in the new value chain below:

• The traditional value chain has in some cases been replaced by a new one

where intermediaries or middlemen who do not add value to the supply chain have been phased out (disintermediation).

• 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.

• 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

I N F O R M A T I O N K E Y

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.

Consumer

Retailer

Manufacturer Wholesaler/ Distributor

a) The traditional value chain

Consumer

Retailer

Manufacturer Wholesaler/ Distributor

b) Intermediaries Eliminated (Disintermediation)

Informediary e-Retailer Aggregator Portal ConsumerManufacturer

c) New intermediaries introduced (Reintermediation)


o New ways of doing business o Globalisation

• In some instances large companies have used the internet to link their databases in one exchange where they can share information with their suppliers.

Keiretsu networks

• This is a Japanese term to describe a ‘network of suppliers’ who have come together as an alliance to trade with one large manufacturer.

• The large manufacturer will support the activities of the keiretsu members in form of loans or other facilitation roles.

• In return the keiretsu members commit to agreed terms such adherence to quality standards, technical expertise and guaranteed supplies.

Global sourcing

• Operations have increasingly tended towards buying their inputs from cheap sources regardless of international boundaries.

• This phenomena often referred to as global sourcing has been occasioned by: o Formation of trading blocks among neighbouring countries with

corresponding lowering of tariff barriers among member states. Examples of trading blocks are: COMESA, SADC, WTO, EU, NAFTA, ASEAN, etc.

o Improved international transportation systems such as air travel, ports and harbours, road and railway systems.

o Cheaper input costs such as labour in some countries, abundance of raw materials, legal and taxation incentives, etc.

Physical Distribution Management

• On the demand side of the operation, products and services need to be delivered to the customer.

• 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.

• Here, we shall focus on distribution of outputs that require physical distribution management beyond the immediate customer through to final the customer (logistics).

• Characteristics of physical distribution are: o ‘Multi-echelon systems’. Materials flowing through a system are stored

at different points, including points outside the operations, before reaching the customer, e.g. at own warehouse, at regional warehouses


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.

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.

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.

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.

Materials Management

• Materials management was previously seen as a means of reducing ‘total costs associated with the acquisition and management of materials’2.

• This has now changed to encompass the integration of material flows and its supporting functions, both throughout the business and out to immediate customers. It includes the functions of purchasing, expediting, inventory management, production planning and control and physical distribution management.

• In retail operations where sales cycles are short and the replenishment rate is high (FMCG), the roles of purchasing, physical distribution and sales maybe combined into one (a role commonly referred to as merchandising) to ensure that the right levels of goods are available for sale to customers at any time.

• Merchandising may be facilitated by use of PoS systems which update stock levels automatically as they are sold and trigger purchase orders when control levels are reached. Goods specifications and supplier details among others are identified in a PoS system by bar codes inscribed on the face of their packages.

2 Lee, L. and Dobler, D.W. (1977) Purchasing and Materials Management, McGraw-Hill.


Group Discussion

What do you understand by the terms logistics, merchandising, materials management and supply chain management?

Types of Relationships in Supply Chains

• Within individual operations it is important to manage the relationships between an operation and its immediate suppliers and customers. The relations may be in the form of business to business (B2B) or in the form of business to consumer (B2C) or the reverse of this, i.e. (C2B).

• Types of supply chain relationships are vertical integration relationships, traditional market supply relationships, virtual operations, partnership supply relationships and exchange relationships.

Vertical integration relationships

• These involve shorter term decisions of ‘make-or-buy’ (manufacturing) or ‘do-or-buy’ (services) decisions.

• Major issues to consider here are quality, costs and speed apart from the issue of core competency (i.e. concentrate on what is core to its operation and will win it business in the market and outsource those that are not core to it).

• As for costs, the operation will make a decision based on the marginal cost3 it will incur in doing or making the service or product in-house. If the third party cost is less than what the operation will spend were it to do it or make it in-house, then the sensible thing would be to outsource.

Group Discussion

A company is considering buying in leaflets to be included with the packaging of its products. Its own in-house printing department could produce the leaflets but not at the same level of quality which a specialist printer could supply. Nevertheless, the in-house printing department is keen to be given the job of printing the leaflets. The cost of printing the leaflets in-house is MK 10 per 1,000 leaflets. This cost includes the cost of the paper and inks (MK 7), the cost of the energy used by the printing machines (MK 0.50) and a standard overhead charge calculated according to the time the job would take (MK 2.50). The in-house printing department has sufficient capacity to print all the leaflets which will be required without any extra staff or machines. The company’s purchasing department has several quotations from local printers, the cheapest of which

3 The extra or additional cost, i.e. the difference between its in-house cost and that of the external supplier.


is MK 8.50 per 1,000 leaflets, although the printer made it clear that delivery times would be at least two weeks for each order because they have so much other business currently. How would you advise the company if it asked you whether it should buy in the leaflets or allow its own in-house printing unit to do the job?

Traditional market supply relationships

• In its pure form or free market, this involves buying from a ‘new’ supplier every time an input is needed by seeking the ‘best quotation’ from competing suppliers. Once goods are received and payment is made, there may be no further trading between the two parties.

• Advantages of this relationships are: o Maintains competition between suppliers and a constant drive to

provide the best. o Allows the supplier to specialise and attain economies of scale thereby

reducing costs. o Flexibility is enhanced as the operation can change the number of

suppliers as demand for goods or services changes. o Innovation can be exploited wherever it occurs amongst the host of

supplier. o Operations can concentrate on their core services.

• Disadvantage attached to this relationship are: o Supply uncertainties as an operations waits for its order to be fulfilled. o Time and effort involved in the sourcing and selecting suppliers. o Erosion of confidentiality, especially where subcontracting or

outsourcing is involved. Virtual operations

• This involves bringing together a conglomerate of different specialists to work on an assignment or project and then disband thereafter once the project is completed.

• The lead operation plays the role of broker and depends on its skills and contacts to manage, organise and supervise the concerned project or assignment.

• Examples of such operations are movie production projects or strategic alliances in professional organisations.

‘Partnership’ supply relationships

• These relationships are defined as ‘…relatively enduring inter-firm cooperative agreements, involving flows and linkages that use resources


and/or governance structures from autonomous organisations, for the joint accomplishment of individual goals linked to the corporate mission of each sponsoring firm’4

• The aim of the relationship is to establish close cooperation, even to the extent of sharing skills and resources, to achieve joint benefits beyond those they could have achieved by acting alone.

• The degree of closeness in such partnerships is influenced by such factors as: o Sharing success. Both parties strive to increase the total amount of

joint benefit they receive rather that concentrating on maximizing individual personal gains.

o Long term expectations and commitment. o Multiple points or channels of contact. Communication may transcend

formal channels and involves many individuals and organisations. o Joint learning. Sharing of experience and perceptions with each

other’s operations. o Few relationships. Commitment to limit the number of customers or

suppliers with whom they do business. o Joint coordination of activities. Ease of coordination of material and

service flows, payment, etc due to the limited number of players. o Information transparency. An open exchange of information between

the parties which in turn enhances confidence and reliability. o Joint problem solving. o Trust. A willingness of both parties to relate to each other on the

understanding that the relationship will be beneficial to both, even though this may not be guaranteed.

• Examples of these relationships are joint ventures like in the automobile and aircraft manufacture.

• The operations exchange5 between them design specification, medium/long term plans, goods and services as well as knowledge and investment.

Group Discussion

How is vertical integration different from partnership purchasing?

4 Parke, A. (1993) ‘Strategic Alliance Structuring’, Academy of Management Journal, Vol. 36, pp 794-829. 5 Exchanges are flows between operations of transformed resources such as material or transforming resources such as people or equipment.


Supply Chain Behaviour

Supply chain policy

• Faced with a dual market demand for different (competing) and at times complimentary products emanating from the same operations, a manufacturer will need to decide how to manage the flow of the two in its supply network.

• One product may involve innovative products while the other stable and long term products. For example car models are innovative and their sale may last for a short time while their spares may be required over a longer time span. How to deal with these two conflicting demands will obviously require different approaches.

• A suggestion6 is to organise the supply chains serving those individual markets differently using the efficient supply chain policy for the functional and stable product (spares) and the responsive supply chain policy for the innovative product (new car model).

• The ESC policy will attempt to maintain low inventory levels in the downstream parts of the network so as to maintain fast throughputs and reduce the amount of working capital tied up in inventory. At the upstream end of the market, the inventory levels may be high to ensure high capacity utilization and hence lower manufacturing unit costs. Information flow up and down the network is critical to ensure quick response in restocking the few stocks maintained downstream.

• The RSC policy on the other hand stresses on high service levels and responsive supply to the end consumer. Inventory levels will therefore be high at the downstream end of the network and a quick response to demand change will be required at the upstream end of the market to ensure supplies are maintained. However, the upstream end will need to hold fewer inventories due to the temporary nature of demand for such innovative products. This will mean low capacity utilization and hence high unit manufacturing costs.

Supply chain dynamics

• Errors, inaccuracies and volatility may cause distortions in supply networks causing a build up of inventories by different operations within the network. The distortions may also be caused by individual operations within the network trying to manage their flows sensibly.

• This effect is known as the Forrestor (or Bullwhip) Effect. Supply chain improvement

• Distortions such as the above may be avoided by the sharing of information among operators in the network, channel alignments and increasing operational efficiencies.

6 Fisher, M. L. (1997) ‘What is the Right Supply Chain for Your Product’, March-April

supply chain planning and control

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