Supply chain drivers - Presentation Transcript

1. Supply Chain Drivers & Metrics

2. Drivers of Supply Chain
The major drivers of Supply chain performance consists of three logistical drivers & three cross-
functional drivers.
Logistical drivers:
Facilities
Inventory
Transportation
Cross-functional drivers:
Information
Sourcing
Pricing
Company’s supply chain achieve the balance between responsiveness & efficiency that best meets the
needs of the company competitive strategy.
3. Drivers of Supply Chain Performance
Efficiency
Responsiveness
Supply chain structure
Inventory
Transportation
Facilities
Information
Drivers
Sourcing
Pricing
4. FACILITY
Facility are the actual physical locations in the supply chain network where product are stored,
assembled or fabricated. The two major types of facilities are :
Production sites(factories)
Storage sites(warehouses)
 Factories can be built to accommodate one of two approaches to manufacturing:
Product Focus: A factory that takes a product focus performs the range of different operations required
to make a given product line from fabrication of different product parts to assembly of these parts.
Functional focus: A functional focus approach concentrates on performing just a few operations such as
only making a select group of parts or doing only assembly
5. Contd….
Warehousing: There are three main approaches to use in warehousing:
Stock keeping unit(SKU) storage: In this approach all of a given type of product is stored together.
Job lot storage: In this approach all the different products related to the needs of a certain type of
customer or related to the needs of a particular job are stored together.
Crossdocking: In this approach, product is not actually warehoused in the facility, instead the facility is
used to house a process where trucks from suppliers arrive and unload large quantities of different
products. These large lots are then broken down into smaller lots. Smaller lots of different products are
recombined according to the needs of the day and quickly loaded onto outbound trucks that deliver the
product to their final destination.
So the fundamental trade-off that managers face when making facilities decision between the cost of
the number, location & type of facilities(efficiency) & the level of responsiveness that these facilities
provide the company’s customer.
6. INVENTORY
Inventory encompasses all the raw materials, work in process, and finished goods within a supply chain.
Changing inventory policies can dramatically alter the supply chain’s efficiency & responsiveness.
There are three basic decisions to make regarding the creation and holding of inventory:
Cycle Inventory: This is the amount of inventory needed to satisfy demand for the product in the period
between purchases of the product.
Safety Inventory: inventory that is held as a buffer against uncertainty. If demand forecasting could be
done with perfect accuracy, then the only inventory that would be needed would be cycle inventory.
Seasonal Inventory: This is inventory that is built up in anticipation of predictable increases in demand
that occur at certain times of the year.
7. TRANSPORTATION
Transportation entails moving inventory from point to point in the supply chain . Transportation can
take the form of many combinations of modes & routes, each with its own performance characteristics.
There are six basic modes of transport that a company can choose from:
 Ship which is very cost efficient but also the slowest mode of transport. It is limited to use between
locations that are situated nest to navigable waterways & facilities such as harbor & canals.
Rails which is also very cost efficient but can be slow. This mode is also restricted to use between
locations that are served by rail lines.
Pipelines can be very efficient but are restricted to commodities that are liquid or gases such as water,
oil & natural gas.
Trucks are a relatively quick & very flexible mode of transport. Trucks can go almost anywhere. The cost
of this mode is prone to fluctuations though, as the cost of fuel fluctuates and the condition of road
varies.
Airplanes are a very fast mode of transport and are very responsive. This mode is also very expensive
mode & is somewhat limited by the availability of appropriate airport facilities.
Electronic transport is the fastest mode of transport and it is very flexible & cost efficient. However , it
can be only be used for movement of certain types of products such as electric energy, data, & products
composed of data such as music, pictures & text.
8. INFORMATION
Information serves as the connection between various stages of a supply chain, allowing them to
coordinate & maximize total supply chain profitability. It is also crucial to the daily operations of each
stage in a supply chain for e.g a production scheduling system.
Information is used for the following purpose in a supply chain:
Coordinating daily activities related to the functioning of other supply chain drivers: facility, inventory &
transportation.
Forecasting & planning to anticipate& meet future demands. Available information is used to make
tactical forecasts to guide the setting of monthly & quarterly production schedules & time table
Enabling technologies: many technologies exist to share & analyze information in the supply chain.
Managers must decide which technologies to use & how to integrate these technologies into their
companies like internet, ERP, RFID.
9. SOURCING
Sourcing is the set of business processes required to purchase goods & services. Managers must first
decide which tasks will be outsourced & those that will be performed within the firm.
Components of sourcing decisions 
In-House or outsource: The most significant sourcing decision for a firm is whether to perform a task in-
house or outsource it to a third party. This decision should be driven in part by its impact on the total
 supply chain profitability.
Supplier selection: It must be decided on the number of suppliers they will have for a particular activity.
The must then identify the criteria along which suppliers will be evaluated & how they will be selected
like through direct negotiations or resort to an auction.
10. PRICING
Pricing determines how much a firm will charge for goods & services that it makes available in the
supply chain. Pricing affects the behavior of the buyer of the good or services, thus affecting supply
chain performance, for example, if a transportation company varies its charges based on the lead time
provided by the customers, it s very likely that customers who value efficiency will order early &
customers who value responsiveness will be willing to wait & order just before they need a product
transported. This directly affects the supply chain in terms of the level of responsiveness required as
well as the demand profile that the supply chain attempts to serve. Pricing is also a lever that can be
used to match supply & demand.
Components of Pricing Decisions:
Fixed Price versus Menu pricing: A firm must decide whether it will charge a fixed price for its supply
chain activities or have a menu with prices that vary with some other attribute, such as response time or
location of delivery.
Every day low pricing versus High-Low pricing
11. Obstacles to Achieving Strategic fit
Increasing variety of products
Decreasing product life cycles
Increasingly demanding customers
Fragmentation of supply chain ownership
Globalization
Total Quality Management (TQM) is an approach that seeks to improve quality and performance which
will meet or exceed customer expectations. This can be achieved by integrating all quality-related
functions and processes throughout the company. TQM looks at the overall quality measures used by a
company including managing quality design and development, quality control and maintenance, quality
improvement, and quality assurance. TQM takes into account all quality measures taken at all levels and
involving all company employees.

Origins Of TQM

Total quality management has evolved from the quality assurance methods that were first developed
around the time of the First World War. The war effort led to large scale manufacturing efforts that
often produced poor quality. To help correct this, quality inspectors were introduced on the production
line to ensure that the level of failures due to quality was minimized.

After the First World War, quality inspection became more commonplace in manufacturing
environments and this led to the introduction of Statistical Quality Control (SQC), a theory developed by
Dr. W. Edwards Deming. This quality method provided a statistical method of quality based on sampling.
Where it was not possible to inspect every item, a sample was tested for quality. The theory of SQC was
based on the notion that a variation in the production process leads to variation in the end product. If
the variation in the process could be removed this would lead to a higher level of quality in the end
product.

After World War Two, the industrial manufacturers in Japan produced poor quality items. In a response
to this, the Japanese Union of Scientists and Engineers invited Dr. Deming to train engineers in quality
processes. By the 1950’s quality control was an integral part of Japanese manufacturing and was
adopted by all levels of workers within an organization.

By the 1970’s the notion of total quality was being discussed. This was seen as company-wide quality
control that involves all employees from top management to the workers, in quality control. In the next
decade more non-Japanese companies were introducing quality management procedures that based on
the results seen in Japan. The new wave of quality control became known as Total Quality Management,
which was used to describe the many quality-focused strategies and techniques that became the center
of focus for the quality movement.
Principles of TQM

TQM can be defined as the management of initiatives and procedures that are aimed at achieving the
delivery of quality products and services. A number of key principles can be identified in defining TQM,
including:

 Executive Management – Top management should act as the main driver for TQM and create an
environment that ensures its success.
 Training – Employees should receive regular training on the methods and concepts of quality.
 Customer Focus – Improvements in quality should improve customer satisfaction.
 Decision Making – Quality decisions should be made based on measurements.
 Methodology and Tools – Use of appropriate methodology and tools ensures that non-
conformances are identified, measured and responded to consistently.
 Continuous Improvement – Companies should continuously work towards improving
manufacturing and quality procedures.
 Company Culture – The culture of the company should aim at developing employees ability to
work together to improve quality.
 Employee Involvement – Employees should be encouraged to be pro-active in identifying and
addressing quality related problems.

The Cost Of TQM

Many companies believe that the costs of the introduction of TQM are far greater than the benefits it
will produce. However research across a number of industries has costs involved in doing nothing, i.e.
the direct and indirect costs of quality problems, are far greater than the costs of implementing TQM.

The American quality expert, Phil Crosby, wrote that many companies chose to pay for the poor quality
in what he referred to as the “Price of Nonconformance”. The costs are identified in the Prevention,
Appraisal, Failure (PAF) Model.

Prevention costs are associated with the design, implementation and maintenance of the TQM system.
They are planned and incurred before actual operation, and can include:
 Product Requirements – The setting specifications for incoming materials, processes, finished
products/services.
 Quality Planning – Creation of plans for quality, reliability, operational, production and
inspections.
 Quality Assurance – The creation and maintenance of the quality system.
 Training – The development, preparation and maintenance of processes.

Appraisal costs are associated with the vendors and customers evaluation of purchased materials and
services to ensure they are within specification. They can include:

 Verification – Inspection of incoming material against agreed upon specifications.

 Quality Audits – Check that the quality system is functioning correctly.
 Vendor Evaluation – Assessment and approval of vendors.

Failure costs can be split into those resulting from internal and external failure. Internal failure costs
occur when results fail to reach quality standards and are detected before they are shipped to the
customer. These can include:

 Waste – Unnecessary work or holding stocks as a result of errors, poor organization or

communication.
 Scrap – Defective product or material that cannot be repaired, used or sold.
 Rework – Correction of defective material or errors.
 Failure Analysis – This is required to establish the causes of internal product failure.

External failure costs occur when the products or services fail to reach quality standards, but are not
detected until after the customer receives the item. These can include:

 Repairs – Servicing of returned products or at the customer site.

 Warranty Claims – Items are replaced or services re-performed under warranty.
 Complaints – All work and costs associated with dealing with customer’s complaints.
 Returns – Transportation, investigation and handling of returned items.
What is Kaizen?
Kaizen means "improvement". Kaizen strategy calls for never-ending efforts for
improvement involving everyone in the organization – managers and workers alike. 
Management has two major components:
1. maintenance, and
2. improvement.

The objective of the maintenance function is to maintain current technological, managerial, and
operating standards. The improvement function is aimed at improving current standards.
Under the maintenance function, the management must first establish policies, rules, directives and
standard operating procedures (SOPs) and then work towards ensuring that everybody follows SOP.
The latter is achieved through a combination of discipline and human resource development
measures.
Under the improvement function, management works continuously towards revising the current
standards, once they have been mastered, and establishing higher ones. Improvement can be broken
down between innovation and Kaizen. Innovation involves a drastic improvement in the existing
process and requires large investments. Kaizen signifies small improvements as a result of
coordinated continuous efforts by all employee
The Problem Addressed
One of the most difficult aspects of introducing and implementing Kaizen (continuous improvement)
strategy is assuring its continuity.
When a company introduces something new, such as quality circles, or total quality
management(TQM), it experiences some initial success, but soon such success disappear like
fireworks on summer night and after a while nothing is left, and management keeps looking for a
new flavor of the month.
This is because the company lacks the first three most important conditions for the successful
introduction and implementation of Kaizen strategy.

Seven Conditions for Successful Implementation of Kaizen Strategy

1. Top management commitment
2. Top management commitment
3. Top management commitment
4. Setting up an organization dedicated to promote Kaizen
5. Appointing the best available personnel to manage the Kaizen process
6. Conducting training and education
7. Establishing a step-by-step process for Kaizen introduction.
All conditions are important. Without top management supporting every move, however, the trial
will be short-lived regardless of other preconditions.

Top management may express commitment in many different ways, and it must take every
opportunity to preach the message, become personally involved in following up the progress
ofKaizen, and allocate resources for successful implementation.
Principles of Toyota Production System (TPS)

1. Reduced Setup Times: All setup practices are wasteful because they add no value and they tie
up labor and equipment. By organizing procedures,  using carts, and training workers to do their
own setups, Toyota managed to slash setup times from months to hours and sometimes even
minutes.
2. Small-Lot Production: Producing things in large batches results in huge setup costs, high capital
cost of high-speed dedicated machinery, larger inventories, extended lead times, and   larger
defect costs. Because Toyota has found the way to make setups short and inexpensive, it
became possible for them to economically produce a variety of things in small quantities.
3. Employee Involvement and Empowerment: Toyota organized their workers by
forming team and gave them the responsibility and training to do many specialized
tasks.Teams are also given responsibility for housekeeping and minor equipment repair. Each
team has a leader who also works as one of them on the line.
4. Quality at the Source: To eliminate product defects, they must be discovered and corrected as
soon as possible.  Since workers are at the best position to discover a defect and to immediately
fix it, they are assigned this responsibility. If a defect cannot be readily fixed, any worker can halt
the entire line by pulling a cord (called Jidoka).
5. Equipment Maintenance: Toyota operators are assigned primary responsibility for basic
maintenance since they are in the best position to defect signs of malfunctions. Maintenance
specialists diagnose and fix only complex problems, improve the performance of equipment,
and train workers in maintenance.
6. Pull Production: To reduce inventory holding costs and lead times, Toyota developed the pull
production method wherein the quantity of work performed at each stage of the process is
dictated solely by demand for materials from the immediate next stage. The Kamban scheme
coordinates the flow of small containers of materials between stages. This is where the
termJust-in-Time (JIT) originated.
7. Supplier Involvement: Toyota treats its suppliers as partners, as integral elements of Toyota
Production System (TPS). Suppliers are trained in ways to reduce setup times, inventories;
defects, machine breakdowns etc., and take responsibility to deliver their best possible parts.

Supply chain and Keiretsu

by  V S RAMA RAO  on  DECEMBER 9, 2008
This reminds us of phenomenon Keiretsu in Japan. Keiretsu is a group of business companies that are
mutually dependent. It is like a large joint family having a head of the family and other members of
different generations. Family implies that there is much empathy for each other. One tries to
understand the other. Each has his own ‘goods’ to deliver in such a way that ultimately the family’s
objectives are achieved. In a family the persons of senior generation may exercise much control over
those of the younger generation, but the former are quite sensitive to the latter’s needs and provide for
them. Same is true of the Keiretsu the needs here being the business needs. That keeps every unit
within the Keiretsu healthy. Being a group of healthy organizations that are well directed and
coordinated makes the group capable of being very competitive. An industry group that coordinates the
design production distribution of parts and products for the final market can complete better than other
industry groups that are not coordinated. United we stand, divided we fall is an old adage. Supply chain
is a similar concept applied in a very positive manner. The objective is to provide more and more service
and value to the customers in the final market.

Keiretsu had seen much maligned, particularly in the West. It was thought of as a cartel several sharks
ganged up by a big shark amongst them so that they beat the international competition by unfair
means. It was seen as anti-ethical to laisse faire or the concept of free market and pure competition
which is known to be the basis of capitalism. The Japanese Keiretsu appeared akin to oligopoly which, in
the west, was a much despised restrictive trade practice. During the 1970s and 1980s, Japanese goods
swamped the American and European markets. They offered much better quality at significantly lower
prices and where very popular among the consumers. For a while one could not understand as to how
one could offer better quality, variety and lower prices consistently year after year.

There is a thin line between ganging up and teamwork. The major differences is that in the former the
intention of the gang is to reap undue benefits, while a team the benefits accrue to it because of its
efficiency and the superior performance and advantages delivered to the customer. Authentically
generated benefits due the synergy and economy of a team are shared with the customer. This sharing
is what makes the differences. It is a system of sharing between the business partners and with the
customers as well. It is a benefit-benefit situation and not ‘benefit-loss’. Supply chain management is a
concept of team working and sharing.

Core Competence of Companies, Comparative Advantages of nations and outsourcing:

The reason as to supply chain management has become popular during the past decade is the
phenomenon of globalizations. Increased competition has made businesses look for core competencies
for enhanced performance. If a particular organization in some country has the core competence for a
certain product/component/ service, it will get the business for that product/s service. This is called
global outsourcing. For instance, a substantial amount of software service work is outsourced from USA
to India because several Indian companies have the core competence in providing those services.
However, when the work is outsourced to several locations in the world, a high degree of coordination
becomes imperative between them and the parent organization and also between themselves. For
instance, suppose an American company out sources its software services needs to India, Greece and
China. There is need to coordinate between the work being in India and that in USA, similarly between
Greece and USA and China and USA. Also, there may be a need to closely coordinate between the work
done in India, Greece and China. Thus, global outsourcing has compelled business organizations to look
for more effective ways of coordinating the flows of materials/information/services into and out of the
organizations. The appropriateness of supply chain management is accentuated when outsourcing
globally.

On the road: of bullwhip-effects in supply chains and how to avoid them

Life "on the road" may have been wild and exciting in some places during some times 1, but here in The
Netherlands, where I live, roads are mostly neatly maintained, dull and very crowded. Some may get
their kicks out of the stop-and-go traffic movements that are typical of our overcrowded roads, but not
me. If you want your trip home to be exciting in our small country, try to keep a more or less even
speed in the left lane while the traffic ahead of you first slows down and then ramps up again. Your
altruistic attempt to present those behind you with a stable flow of traffic will not be appreciated. You
will be the cause of many angry faces, claxon sounds and dangerous overtake maneuvers via the right
lane.
What the systems thinker in you might want to do, if only to kill the time, is to ponder why this
ceaseless slowing down and ramping occurs. Surely, it has something to do with the number of cars on
the road, because outside of the rush hours this rarely happens. Consider, if you will, the following
thought experiment: a truck moves from the right lane to the left, never mind that this is normally a
useless action. Let's assume that (this is Europe) the average speed in the left lane was 100 kilometers
per hour and now drops to 90 km, a 10% decrease. What will happen? The first car behind this truck
sees the big fellow moving in front of him and, within a second or so, pushes the brakes to slow down.
Not just to 90, but a bit more, let's say 80, because the small delay in reacting brought him rather close
to the vehicle in front. The car just behind that follows the same pattern: reacting by slowing down
after just a short delay, let's say to 70. In this way, if enough cars are packed in the left lane, that were
first doing a nice 100 km/hr, speed may drop to 10 or 20 km/hr. Then, speed will pick up again,
perhaps back again to 100. So, a maximum change in the "input" of this particular dynamic system of
cars of -10% results in a maximum change in the behavior of the system in its "output" of -80% or
-90%. Technically speaking, we call this an amplification ratio of 8 or 9.

This phenomenon of "upstream amplification" occurs in many chains. It happens in food chains, in the
housing industry and is notorious in supply chains, where it has been labeled the bullwhip effect. Every
change downstream in the chain results in a relatively greater change one step upstream in the chain.
The amplification ratio is greater than 1.0. So, if mobile phone sales increase 10%, orders to the
semiconductor industry for mobile phone chips go up 30%, and orders for new wafer steppers and
other equipment used to produce IC easily double from one year to the next. This phenomenon was
already observed and masterfully analyzed by Prof. Jay Forrester in the late 1950s and described in
his Industrial Dynamics , still a must-read for all of us systems thinkers.

Delays between perceiving that a change has occurred and reacting to this change form one part of
the explanation for the bullwhip effect. But, there are more. Several of the explanations focus on
locally optimizing behavior of actors in the chain that result in sub-optimal performance of the chain as
a whole. One important type of behavior is shortage gaming . When, in 1999, mobile phone producers
noticed that the semiconductor manufacturers of this world could not keep up with their demand,
they inflated their orders for ICs. If I know that you can make 100 and my competitor and I both need
60, then we normally will both get 50 if the supplier allocates his stock fairly. But, what if I cheat and
ask for 90? Then the supplier will see a total demand of 150, and if he then tries to allocate fairly, he is
over extended by half of his capacity. So, he will only ship 2 units for every demand of 3, and so I will
receive the 60 I need, while my competitor will only get 40. Great idea, if only my competitor hadn't
thought of the same idea. So, total demand is inflated and everybody is worse off.

Behavioral routines such as these are the "usual suspects" of the bullwhip effect and you will find them
occasionally in retrospective accounts of a boom and bust. Unfortunately, these routines are typically
forgotten as soon as the next boom takes off. Much less obvious causes of demand amplification in
chains are our inventory control systems. Wasn't inventory intended to buffer against fluctuations in
the environment and hence smooth what happens behind it? Yes, but then you need the right
algorithms to do so. A widely used inventory control policy is the order-up-to rule: try and keep the
stock level at X, where X is so many weeks of average demand. So, every period, you try to produce to
stock as much as you need to bring stock levels back to X, taking into account the expected demand in
the coming period. Sounds reasonable enough, doesn't it? Yes, but let's now assume that it takes you 3
weeks to produce to stock. Now, demand in one week goes up with 10%. What many order-up-to
policies will assume, is that demand will remain at this higher level, or at least for the coming three
weeks. This means that you will start producing not 10%, but 3 times 10%. Hence, you will order 30%
more materials, and amplification happens again. This is one example of the unintended destabilizing
effects of inadequate inventory control policies. MRP systems typically work this way, and MRP lies at
the basis of ERP. And ERP, didn't we just spend several billions in various industries on making that the
corner stone of our goods flow control systems? Yes, we did. And since so many lemmings can't be
wrong, few people are questioning if the algorithms in these systems are really what we need to make
our supply chains perform better.2 ERP may be great to get rid of patchworks of legacy systems, but
the MRP algorithms embedded in it as production control system suck. With the advent of Advanced
Planning Systems (APS) on top of these ERP systems, life does not get better, on the contrary, because
the underlying model remains flawed.

So, what can be done to reduce demand amplification? One can obviously shorten response delays
both in cycle times and in order fulfillment. But, even better, why don't we move from push to pull?
MRP pushes goods through chains, but if you only pull through the chain what you need, you will not
be making more than you need, provided your production cycle times are short enough.

Before we diversify into the many pitfalls of cycle time reduction and pull systems, let's return to our
traffic congestion example one more time. This was not an example of just amplification, but
of oscillation as well. Oscillation, a repeated fluctuation around some long-term average, is very much
present in the visual metaphor of the bullwhip, and also very much a part of the everyday driving
experience of the Dutch commuter. Road speeds keep going up and down, not just once, but all the
time. This need not be because there is an infinite number of truck drivers that keep moving to the
right lane one after another. In many dynamic systems, it takes only a one-time disturbance to create a
continuous, or at least long-lasting, oscillatory movement, like a pendulum that keeps swinging for a
long time after you have pushed it once.
The important thing to note here is that this happens because many supply chains are inherently
unstable . Mathematically speaking, they belong to a class of systems that, for specific parameter
settings, have no stable equilibrium value. Key parameter values here are the lengths of the various
delays in the system. There are no simple answers as to what the "right" lengths will be, or how they
should relate to each other. What you can do is create a System Dynamics model of the structure of
the system and then conduct a sensitivity analysis: for what parameter values will this system start to
oscillate after a one-time disturbance and when will it remain stable? Just try and you will be amazed
how tiny differences in values turn an inherently unstable system into a robust one, and how other
sets of parameter values will make fluctuations go totally out of control.

Of course, such experiments are neither feasible nor wise to do in your car. However, it is feasible to
do this for your business. This may not have been the kind of excitement that Jack Kerouac was once
looking for, but it may just make your supply chain a much more robust one. And, to me, making that
happen is all the excitement I need.