With many people currently locked in doors right now, we know that many are looking for blogs and articles to read during the current situation. That’s why we are making the first chapters from a selection of our learning materials available to read on our Blog free of charge.
This week, we will be providing access to five first chapters from different subject areas, including Supply Chain, Warehousing and Transport. Our first article this week is an introduction to the Supply Chain, taking a look a what a Supply Chain is and the importance of Supply Chain Management.
WHAT IS A SUPPLY CHAIN
At first glance there is nothing really complicated about a supply chain. If you are going to sell something, then clearly it must be made and then delivered to the customer. Of course, the difficulty of the task will depend on the product complexity; a car is much more complex than a pen. The location of the customer will also help or hinder; reaching a customer in London from your distribution centre in Holland will clearly be easier than reaching the customer in Vladivostok.
Start to explore what lies behind these simple activities and it does not take long to realise that the costs of supporting them could vary greatly from one company to the next. And how well you perform the activities will surely determine whether the customer returns to buy some more. Getting it right therefore could have a dramatic impact on the success of an organisation.
The simplest supply chain is one where the consumer places an order and there is sufficient time available to enable the factory to make and deliver the product. If there were also time available for suppliers of parts or components to also deliver, then the supply chain would need no inventory at all. This would be a true Make to Order supply chain.
Gradually complexity gets added. Consumers require product to be available when they want it and so Points of Sale (such as retailers) get added. In time the retailers create distribution centres to supply their outlets. As the retailer becomes more demanding the supplier decides to create their own distribution centre holding inventory of finished products. Later they add a materials warehouse to ensure supply of materials for the production line. Finally, suppliers too may choose to hold inventory in a warehouse to meet the demands of the factory.
Complexity is created for a variety of reasons:
- To overcome uncertainty and variability within processes
- To aid the maximisation of factory capacity utilisation
- To improve delivery reliability
- To reduce the risk of product becoming obsolete or passing the sell by date.
- To overcome the lack of trust between supply chain partners
- To aid the maximisation of transport capacity utilisation
- To facilitate the attainment of functional objectives
- To compensate for long cycle times
- To enable product to made in efficient batch sizes
- To protect against the variability in demand
- To compensate for the seasonality in demand and/or supply
- To minimise factory changeover costs
- To overcome the lack of information
- To provide product variety
- To minimise the impact of poor communication
- To protect against the inaccuracy of forecasts
- To allow silo thinking instead of process thinking.
Most of all complexity gets added to ensure product is available to the next stage of the supply chain. Product availability is the key linking theme for supply chain management.
WHAT IS SUPPLY CHAIN MANAGEMENT
Supply chain management commences with understanding consumer demand. This is the demand that arises from the actual use of the product. Customer demand may be different in that this arises from your immediate customer, such as a retailer, before it is then sold to a consumer.
At the other end of the chain is supply. Again this can be taken back as far as possible to the providers of materials or to growers.
There are a number of flows:
- The primary goods flow connects supply to demand. During this flow product may change format several times from raw material, into work in progress before becoming a finished product.
- There is also a reverse goods flow, covering the return of defective product or the recycling activity.
- There are information flows that act as a trigger to the activity (the consumer order) and accompany the product to control and monitor the flow.
- Finally, there are cash flows. These follow the reverse flow of the materials. Even in internal elements of the supply chain, there may be notional cash transfers to reflect the cost of the discrete activities within the supply chain.
As product progresses down the supply chain it typically passes through a number of functional activities involved with buy, make, move and sell. Often it will pass through functions, such as purchasing or manufacturing, more than once.
Further as it progresses a number of barriers are encountered:
- Functional barriers as activity is moved from one function to the next
- Company barriers as ownership transfers from one company to the next
- International barriers as the scope of the activity reaches across national borders.
Having considered what the supply chain is let’s examine the scope of activity associated with it.
SUPPLY CHAIN SCOPE
The scope of the supply chain spans many business activities:
- The supply chain is greatly impacted by the type of product and the markets a company serves. These two aspects are the heart of the business strategy – so a supply chain strategy must support a business strategy.
- The requirements of customers particularly linked to time influence supply chain design.
- The design of the supply chain network, deciding on the channel design to support different customer needs and the inventory policy that will position inventory in the appropriate places.
- The supply management activity involved with acquiring materials and converting them in the production process into finished goods.
- The demand management activity involved with capturing and processing orders and the warehousing and transport activity to ensure product is delivered when it is required.
- The support activities associated with people management, resource and systems management, process and performance management.
In summary supply chain management is about:
- Optimising flows from original source to point of consumption
- Connecting supply and demand in an integrated, coordinated manner
- Managing variability and uncertainty
- Synchronising activity so that plans and movements of goods are linked
- Making consumer visible to all partners in the supply chain process
- Reducing complexity, both in product variety and the infrastructure network
- Compressing time throughout the supply chain
- Breaking down functional, company and international barriers
Importantly, it is about making product available
Remember that supply chains have been in existence for some time. Customers receive product, use it and often come back for more, so supply chains are already operating. Supply chain management is about working together, in a different way, to satisfy consumer requirements.
WHY IS SUPPLY CHAIN MANAGEMENT IMPORTANT
Throughout the world there is increasing pressure to reduce the price of goods to consumers. This pressure comes from three sources:
- Consumers themselves
- Competitors as they reduce prices in an attempt to take market share
- Economic pressures from governments.
The usual response to this price pressure is to seek to reduce input prices on materials. This has resulted in the expansion of global sourcing. Few supply chains do not have an international element in them. However, the ability to reduce input prices at the same rate as output prices is very limited and this will result in a reducing profit margin.
The key to managing this reducing gap is supply chain management. Supply chain activity has a significant impact on the profit and loss statement, the balance sheet and the return on investment calculation. Equally important is the way customers decide to allocate their demand to suppliers.
If the customer doesn’t perceive the product has value then the customer will not buy it, regardless of what the supplier thinks. The customer will then be more likely to buy from a competitor. The market demand will be shared between your company and its competitors. The basis of how it will be shared will dictated by the value that customers receive from purchasing and using your product and services compared with your competitors. In order to satisfy the demand a company must convert inputs acquired from suppliers into outputs. Since many of the suppliers will also be suppliers to your competitors the way in which you convert them into outputs will determine how successful you will be. This depends upon your value creation process. In simple terms a good test of value is whether a customer will pay you for performing that activity.
Service is key to the customer value perception. Clearly, you can create value through providing a service that no one else does.
Quality in the sense of conformance to requirements or fitness for purpose can also add value.
Cost or how much it costs a customer to do business with you can also add value. This does not necessarily mean lower prices. It might be, for example, that your service has more reliable and consistent lead times allowing your customer to hold less safety stock. Clearly this would reduce the cost of doing business for your customer.
Finally cycle time can also be a route to improving value. If you can bring new products to the market quicker or respond to changes in the business environment more swiftly this has potential to add value to the customer.
There is a clear relationship between these value criteria that can be expressed as follows:
Value = Quality x Service
Cost x Cycle Time
Treat the components of value like an equation. It is possible to see that if you increase quality and the remaining three factors stay the same the overall value will increase. Likewise if cycle time is made longer and the remaining factors stay the same then the overall value will decrease.
Supply chain management offers opportunities that can lead to improved quality and service whilst at the same time reducing cost and cycle time with the consequence of securing a fourfold hit on increasing value. This makes it a very powerful competitive weapon.
We hope that you enjoyed this first chapter. If you are interested in learning more about Supply Chain, why not consider studying one of our LLA Online Short Courses? We are currently providing a 10% discount for all of our Short Courses until 31st May 2020. Prices start from just GBP340.00 (reduced to GBP306.00) for our Introductory Supply Chain short course. For more information, visit our Short Course page or email enquiry@logisticslearningalliance.com.
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