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Drivers of Supply Chain The major drivers of Supply chain performance consists of three logistical drivers & three crossfunctional 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 Facilityare 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)
work in process. Crossdocking: In this approach. location & type of facilities(efficiency) & the level of responsiveness that these facilities provide the company s customer. 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. Transportation can take the form of many combinations of modes & routes. instead the facility is used to house a process where trucks from suppliers arrive and unload large quantities of different products. 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. 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. INVENTORY Inventory encompasses all the raw materials. Contd . These large lots are then broken down into smaller lots. then the only inventory that would be needed would be cycle inventory. each with its own performance characteristics. 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. TRANSPORTATION Transportation entails moving inventory from point to point in the supply chain . So the fundamental trade-off that managers face when making facilities decision between the cost of the number. and finished goods within a supply chain. Changing inventory policies can dramatically alter the supply chain s efficiency & responsiveness. If demand forecasting could be done with perfect accuracy. product is not actually warehoused in the facility. Safety Inventory: inventory that is held as a buffer against uncertainty. There are six basic modes of transport that a company can choose from: . Seasonal Inventory: This is inventory that is built up in anticipation of predictable increases in demand that occur at certain times of the year. 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. 7. 6.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.
pictures & text. Components of sourcing decisions In-House or outsource: The most significant sourcing decision for a firm is whether to perform a task inhouse or outsource it to a third party. Airplanes are a very fast mode of transport and are very responsive. 8. & products composed of data such as music. It is limited to use between locations that are situated nest to navigable waterways & facilities such as harbor & canals. This mode is also restricted to use between locations that are served by rail lines. inventory & transportation. This mode is also very expensive mode & is somewhat limited by the availability of appropriate airport facilities.g a production scheduling system. 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. Trucks can go almost anywhere. This decision should be driven in part by its impact on the total . it can be only be used for movement of certain types of products such as electric energy. Managers must decide which technologies to use & how to integrate these technologies into their companies like internet. 9.Ship which is very cost efficient but also the slowest mode of transport. Pipelines can be very efficient but are restricted to commodities that are liquid or gases such as water. oil & natural gas. INFORMATION Information serves as the connection between various stages of a supply chain. data. Managers must first decide which tasks will be outsourced & those that will be performed within the firm. It is also crucial to the daily operations of each stage in a supply chain for e. as the cost of fuel fluctuates and the condition of road varies. Rails which is also very cost efficient but can be slow. RFID. SOURCING Sourcing is the set of business processes required to purchase goods & services. Electronic transport is the fastest mode of transport and it is very flexible & cost efficient. ERP. Trucks are a relatively quick & very flexible mode of transport. However . The cost of this mode is prone to fluctuations though. Forecasting & planning to anticipate& meet future demands. allowing them to coordinate & maximize total supply chain profitability. Information is used for the following purpose in a supply chain: Coordinating daily activities related to the functioning of other supply chain drivers: facility.
Every day low pricing versus High-Low pricing 11. 10. Pricing affects the behavior of the buyer of the good or services. 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.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. Obstacles to Achieving Strategic fit Increasing variety of products Decreasing product life cycles Increasingly demanding customers Fragmentation of supply chain ownership Globalization . such as response time or location of delivery. thus affecting supply chain performance. PRICING Pricing determines how much a firm will charge for goods & services that it makes available in the supply chain. Pricing is also a lever that can be used to match supply & demand. if a transportation company varies its charges based on the lead time provided by the customers. for example. 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. 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.
After World War Two. in quality control. This quality method provided a statistical method of quality based on sampling. To help correct this. In a response to this. quality inspection became more commonplace in manufacturing environments and this led to the introduction of Statistical Quality Control (SQC). The new wave of quality control became known as Total Quality Management. By the 1950 s quality control was an integral part of Japanese manufacturing and was adopted by all levels of workers within an organization. a sample was tested for quality. TQM takes into account all quality measures taken at all levels and involving all company employees. the industrial manufacturers in Japan produced poor quality items. quality control and maintenance. quality improvement. 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. W. which was used to describe the many quality-focused strategies and techniques that became the center of focus for the quality movement. . The theory of SQC was based on the notion that a variation in the production process leads to variation in the end product. In the next decade more non-Japanese companies were introducing quality management procedures that based on the results seen in Japan. This was seen as company-wide quality control that involves all employees from top management to the workers. If the variation in the process could be removed this would lead to a higher level of quality in the end product. a theory developed by Dr.Total Quality Management (TQM) is an approach that seeks to improve quality and performance which will meet or exceed customer expectations. After the First World War. the Japanese Union of Scientists and Engineers invited Dr. Deming to train engineers in quality processes. The war effort led to large scale manufacturing efforts that often produced poor quality. and quality assurance. Where it was not possible to inspect every item. 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. quality inspectors were introduced on the production line to ensure that the level of failures due to quality was minimized. Edwards Deming. By the 1970 s the notion of total quality was being discussed.
Phil Crosby. implementation and maintenance of the TQM system. are far greater than the costs of implementing TQM. y 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.e. The American quality expert. Methodology and Tools Use of appropriate methodology and tools ensures that non-conformances are identified. y Continuous Improvement Companies should continuously work towards improving manufacturing and quality procedures.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. Failure (PAF) Model. including: y Executive Management Top management should act as the main driver for TQM and create an environment that ensures its success. i. Appraisal. However research across a number of industries has costs involved in doing nothing. y y y y Training Employees should receive regular training on the methods and concepts of quality. They are planned and incurred before actual operation. A number of key principles can be identified in defining TQM. and can include: . y Company Culture The culture of the company should aim at developing employees ability to work together to improve quality. wrote that many companies chose to pay for the poor quality in what he referred to as the Price of Nonconformance . measured and responded to consistently. The costs are identified in the Prevention. Customer Focus Improvements in quality should improve customer satisfaction. the direct and indirect costs of quality problems. Prevention costs are associated with the design. Decision Making Quality decisions should be made based on measurements.
operational. Rework Correction of defective material or errors. reliability. poor organization or communication. finished products/services. . These can include: y Waste Unnecessary work or holding stocks as a result of errors. Warranty Claims Items are replaced or services re-performed under warranty. processes. Appraisal costs are associated with the vendors and customers evaluation of purchased materials and services to ensure they are within specification. Failure Analysis This is required to establish the causes of internal product failure. investigation and handling of returned items. y y y Quality Planning Creation of plans for quality. Training The development.y Product Requirements The setting specifications for incoming materials. Failure costs can be split into those resulting from internal and external failure. External failure costs occur when the products or services fail to reach quality standards. Quality Assurance The creation and maintenance of the quality system. but are not detected until after the customer receives the item. production and inspections. Quality Audits Check that the quality system is functioning correctly. They can include: y y y Verification Inspection of incoming material against agreed upon specifications. preparation and maintenance of processes. Internal failure costs occur when results fail to reach quality standards and are detected before they are shipped to the customer. These can include: y y y y Repairs Servicing of returned products or at the customer site. used or sold. Returns Transportation. Complaints All work and costs associated with dealing with customer s complaints. Vendor Evaluation Assessment and approval of vendors. y y y Scrap Defective product or material that cannot be repaired.
and establishing higher ones. The improvement function is aimed at improving current standards. Under the maintenance function. When a company introduces something new. but soon such success disappear like fireworks on summer night and after a while nothing is left. Appointing the best available personnel to manage the Kaizen process 6. rules. and management keeps looking for a new flavor of the month. Top management commitment 3. Under the improvement function. Top management commitment 2. The latter is achieved through a combination of discipline and human resource development measures. and 2.What is Kaizen? Kaizen means "improvement". 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. Innovation involves a drastic improvement in the existing process and requires large investments. it experiences some initial success. Setting up an organization dedicated to promote Kaizen 5. the management must first establish policies. once they have been mastered. This is because the company lacks the first three most important conditions for the successful introduction and implementation of Kaizen strategy. Conducting training and education 7. maintenance. Establishing a step-by-step process for Kaizen introduction. directives and standard operating procedures (SOPs) and then work towards ensuring that everybody follows SOP. or total quality management(TQM). Improvement can be broken down between innovation and Kaizen. Top management commitment 4. . managerial. improvement. management works continuously towards revising the current standards. efforts for Seven Conditions for Successful Implementation of Kaizen Strategy 1. such as quality circles. Kaizen strategy calls for never-ending improvement involving everyone in the organization managers and workers alike. The objective of the maintenance function is to maintain current technological. and operating standards. Management has two major components: 1.
and it must take every opportunity to preach the message. . Top management may express commitment in many different ways. and allocate resources for successful implementation. however.All conditions are important. become personally involved in following up the progress ofKaizen. Without top management supporting every move. the trial will be short-lived regardless of other preconditions.
Toyota managed to slash setup times from months to hours and sometimes even minutes. it became possible for them to economically produce a variety of things in small quantities. Quality at the Source: To eliminate product defects. This is where the termJust-in-Time (JIT) originated. 7. Reduced Setup Times: All setup practices are wasteful because they add no value and they tie up labor and equipment. using carts. 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. Each has his own goods to deliver in such a way that ultimately the family s objectives are achieved.Principles of Toyota Production System (TPS) 1. 2008 This reminds us of phenomenon Keiretsu in Japan. Keiretsu is a group of business companies that are mutually dependent. The Kamban scheme coordinates the flow of small containers of materials between stages. and larger defect costs. Because Toyota has found the way to make setups short and inexpensive. machine breakdowns etc. If a defect cannot be readily fixed. inventories. 5. 2. as integral elements ofToyota Production System (TPS). and train workers in maintenance. high capital cost of high-speed dedicated machinery. larger inventories. 6. and take responsibility to deliver their best possible parts. 3. 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.. extended lead times. In a family the persons of senior generation may exercise much control over . Small-Lot Production: Producing things in large batches results in huge setup costs. Maintenance specialists diagnose and fix only complex problems. One tries to understand the other. Equipment Maintenance: Toyota operators are assigned primary responsibility for basic maintenance since they are in the best position to defect signs of malfunctions. Employee Involvement and Empowerment: Toyota organized their workers by forming team and gave them the responsibility and training to do many specialized tasks. Each team has a leader who also works as one of them on the line. It is like a large joint family having a head of the family and other members of different generations. defects. Supplier Involvement: Toyota treats its suppliers as partners. Suppliers are trained in ways to reduce setup times.Teams are also given responsibility for housekeeping and minor equipment repair. Supply chain and Keiretsu by V S RAMA RAO on DECEMBER 9. they are assigned this responsibility. 4. Pull Production: To reduce inventory holding costs and lead times. Family implies that there is much empathy for each other. improve the performance of equipment. any worker can halt the entire line by pulling a cord (called Jidoka). By organizing procedures. and training workers to do their own setups.
Core Competence of Companies. 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. That keeps every unit within the Keiretsu healthy. During the 1970s and 1980s. 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. variety and lower prices consistently year after year. divided we fall is an old adage. Japanese goods swamped the American and European markets. It is a system of sharing between the business partners and with the customers as well. The major differences is that in the former the intention of the gang is to reap undue benefits. Same is true of the Keiretsu the needs here being the business needs. was a much despised restrictive trade practice. Supply chain management is a concept of team working and sharing. There is a thin line between ganging up and teamwork. For a while one could not understand as to how one could offer better quality. United we stand. 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. They offered much better quality at significantly lower prices and where very popular among the consumers. Increased competition has made businesses look for core competencies for enhanced performance. 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. it will get the business for that product/s service. Being a group of healthy organizations that are well directed and coordinated makes the group capable of being very competitive. The objective is to provide more and more service and value to the customers in the final market. particularly in the West. If a particular organization in some country has the core competence for a certain product/component/ service. It is a benefit-benefit situation and not benefit-loss . Supply chain is a similar concept applied in a very positive manner. Authentically generated benefits due the synergy and economy of a team are shared with the customer. This is called . The Japanese Keiretsu appeared akin to oligopoly which. but the former are quite sensitive to the latter s needs and provide for them. in the west. This sharing is what makes the differences.those of the younger generation. while a team the benefits accrue to it because of its efficiency and the superior performance and advantages delivered to the customer. Keiretsu had seen much maligned.
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. Greece and China. There is need to coordinate between the work being in India and that in USA. The appropriateness of supply chain management is accentuated when outsourcing globally. Also. 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. when the work is outsourced to several locations in the world. suppose an American company out sources its software services needs to India. there may be a need to closely coordinate between the work done in India. . For instance. a high degree of coordination becomes imperative between them and the parent organization and also between themselves. For instance. Greece and China. Thus. However.global outsourcing. similarly between Greece and USA and China and USA.
where it has been labeled the bullwhip effect. This phenomenon of "upstream amplification" occurs in many chains. 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. The amplification ratio is greater than 1. but not me. is to ponder why this ceaseless slowing down and ramping occurs. that were first doing a nice 100 km/hr. within a second or so. in the housing industry and is notorious in supply chains. speed will pick up again. It happens in food chains. pushes the brakes to slow down. because the small delay in reacting brought him rather close to the vehicle in front. Consider. This phenomenon was already observed and masterfully analyzed by Prof. perhaps back again to 100. it has something to do with the number of cars on the road. but a bit more. where I live. let's say 80. but here in The Netherlands. the following thought experiment: a truck moves from the right lane to the left. Every change downstream in the chain results in a relatively greater change one step upstream in the chain. dull and very crowded. Not just to 90. and orders for new wafer steppers and other equipment used to produce IC easily double from one year to the next.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 times1. So. a 10% decrease.0. orders to the semiconductor industry for mobile phone chips go up 30%. if you will. Surely. if enough cars are packed in the left lane. . claxon sounds and dangerous overtake maneuvers via the right lane. we call this an amplification ratio of 8 or 9. if only to kill the time. never mind that this is normally a useless action. What will happen? The first car behind this truck sees the big fellow moving in front of him and. So. still a must-read for all of us systems thinkers. because outside of the rush hours this rarely happens. Then. Your altruistic attempt to present those behind you with a stable flow of traffic will not be appreciated. let's say to 70. 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. What the systems thinker in you might want to do. You will be the cause of many angry faces. In this way. Technically speaking. speed may drop to 10 or 20 km/hr. if mobile phone sales increase 10%. The car just behind that follows the same pattern: reacting by slowing down after just a short delay. Jay Forrester in the late 1950s and described in his Industrial Dynamics . 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%. Some may get their kicks out of the stop-and-go traffic movements that are typical of our overcrowded roads. If you want your trip home to be exciting in our small country. roads are mostly neatly maintained.
and MRP lies at the basis of ERP.Delays between perceiving that a change has occurred and reacting to this change form one part of the explanation for the bullwhip effect. is that demand will remain at this higher level. and so I will receive the 60 I need. didn't we just spend several billions in various industries on making that the corner stone of our goods flow control systems? Yes. these routines are typically forgotten as soon as the next boom takes off. MRP systems typically work this way. you will order 30% more materials. doesn't it? Yes. Now. But. So. But. Unfortunately. but 3 times 10%. So. Hence. or at least for the coming three weeks. we did. One important type of behavior is shortage gaming . but the MRP algorithms embedded in it as production control system suck. and amplification happens again. When. With the advent of Advanced Planning Systems (APS) on top of these . So. If I know that you can make 100 and my competitor and I both need 60. This is one example of the unintended destabilizing effects of inadequate inventory control policies. he is over extended by half of his capacity. then we normally will both get 50 if the supplier allocates his stock fairly. he will only ship 2 units for every demand of 3. Sounds reasonable enough. 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. demand in one week goes up with 10%. What many order-up-to policies will assume. every period. if only my competitor hadn't thought of the same idea. while my competitor will only get 40. mobile phone producers noticed that the semiconductor manufacturers of this world could not keep up with their demand. total demand is inflated and everybody is worse off. And ERP. but let's now assume that it takes you 3 weeks to produce to stock. in 1999. taking into account the expected demand in the coming period. 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. few people are questioning if the algorithms in these systems are really what we need to make our supply chains perform better. Great idea.2 ERP may be great to get rid of patchworks of legacy systems. they inflated their orders for ICs. And since so many lemmings can't be wrong. Wasn't inventory intended to buffer against fluctuations in the environment and hence smooth what happens behind it? Yes. A widely used inventory control policy is the order-up-to rule: try and keep the stock level at X. there are more. where X is so many weeks of average demand. Much less obvious causes of demand amplification in chains are our inventory control systems. This means that you will start producing not 10%. 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. but then you need the right algorithms to do so. you try to produce to stock as much as you need to bring stock levels back to X.
In many dynamic systems. This may not have been the kind of excitement that Jack Kerouac was once looking for. and how other sets of parameter values will make fluctuations go totally out of control. Mathematically speaking. And. . This was not an example of just amplification. but of oscillation as well. Road speeds keep going up and down.ERP systems. a repeated fluctuation around some long-term average. you will not be making more than you need. or how they should relate to each other. There are no simple answers as to what the "right" lengths will be. such experiments are neither feasible nor wise to do in your car. provided your production cycle times are short enough. to me. life does not get better. The important thing to note here is that this happens because many supply chains are inherently unstable . oscillatory movement. But. it takes only a one-time disturbance to create a continuous. but all the time. have no stable equilibrium value. they belong to a class of systems that. it is feasible to do this for your business. Before we diversify into the many pitfalls of cycle time reduction and pull systems. Key parameter values here are the lengths of the various delays in the system. not just once. but if you only pull through the chain what you need. let's return to our traffic congestion example one more time. but it may just make your supply chain a much more robust one. and also very much a part of the everyday driving experience of the Dutch commuter. So. like a pendulum that keeps swinging for a long time after you have pushed it once. 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. However. Of course. because the underlying model remains flawed. making that happen is all the excitement I need. This need not be because there is an infinite number of truck drivers that keep moving to the right lane one after another. even better. on the contrary. or at least long-lasting. for specific parameter settings. Oscillation. why don't we move from push to pull? MRP pushes goods through chains. what can be done to reduce demand amplification? One can obviously shorten response delays both in cycle times and in order fulfillment. is very much present in the visual metaphor of the bullwhip.
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