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EVOLUTION OF SUPPLY CHAIN

Supply chain has a history of its evolution ,which has moved thru many phases to reach or so called supply chain these days. These phase are stoned under three revolutions over the last century.

EVOLUTION OF SUPPLY CHAIN


Supply chain has a history of its evolution ,which has moved thru many phases to reach or so called supply chain these days. These phase are stoned under three revolutions over the last century.

THE FIRST REVOLUTION : 1910-1920: The ford way


The major revolution was staged by the ford motor where they have managed to build a tightly integrated supply chain. The ford owned every part of the chain right from timber to rail. Through its tightly integrated chain it could manage the journey from the iron ore mine to the finished automobile within 81 hours. The supply chain is highly efficient & integrated but also inflexible as the famous saying Ford supply chain can offer any color as long as it was black, and any design as long as it was model T in 81st hour. Fords supply chain takes long time to setup changes thus having huge inventory blockade. This is called as multifunction internalization.

Key Findings High inventory High setup time Low at variety Highly integrated firms where bulk of manufacturing in done in-house

The Second Revolution: 1960-1970: The Toyota way


Towards the end of the first revolution the manufacturing industry saw many changes including the trend towards a wide product variety. Supply chain needs flexibility & efficiency so as to deal with wide variety holding least or few inventory. Toyota came out with ideas that allowed the final assembly and manufacturing of the key components to be done in-house. The bulk of the component was sourced from a large number of suppliers who are the parts of the keiretsu referred to as a set of companies with interlocking business relationship and shareholding. Toyota believes in long term relationship with all its suppliers. These suppliers are located near to the manufacturing plant. Consequently setup time which takes a couple of hours were reduces to couple of minutes.

So low setup time, quick change of assembly specifications and long term relationship with suppliers are the key features of the second revolutions. This principle of Toyota is known as Lean manufacturing systems.

But this system starts facing problem in later part of century due to the following factors 1. It depicts high rigidity as to permanent relationship with suppliers, which may become liability over a period of time. 2. Advent of EDI which facilitates electronic exchange of information between firms. 3. Advent of Globalization , force the Japanese firms to move across borders. 4. Non compliancy on the part of the suppliers to move abroad along and also to remain cost effective.

The Third revolution:(1995-2005):The Dell Way

With advance in IT , Dell computer allowed customer to customize their computers. Dell allowed customers to configure their own PCs and track the same in their production & distribution system. Unlike Toyota Dell do not believe in long term relation ,else maintains medium relations with suppliers and always keep them on test. They believe in world class suppliers who would maintain technology & cost leadership in their respective field. Dell integrate suppliers electronically even if they were partners only for medium terms. At DELL the triggers for suppliers order is actually the order and not the forecast. This helps reducing the Inventory, also helps in quick customer response to any change in market place.

Thus key features are


Low rigidity or flexible supply chain focusing wide variety Medium term relation that to on test with suppliers World class suppliers Electronically integrated supply chain.

SO Advance in IT have fuelled the third revolution and the exact contours of the third revolution are still being defined it takes couple of years before we understand the model fully and apply same to all industries.

Thus we can see from this that three major revolution in supply chain have been fuelled by dynamic economy & market.

Remember : Firms need to realize that the performance of the chain is determined by its weakest link.

Move from Producer centric to consumer centric focus


During

first two phases of the evolution of supply chain i.e. Ford & Little during Toyota way the focus is said to be producer centric, which gets its major change into consumer centric moderately during the Toyota phase to become complete consumer centric during the dell phase. How?

Producer centric supply chain its catalysts Usage of electric power to drive machinery was a major force. Introduction of airplanes, automobiles, telecommunication which flourishes the west. Rise in continuous production system- The desire to maximize utilization of scare resources capacity led to products being produced in batches. Producer centric supply chain its Results Coordination between the supply chain partner is not the major concern. Demands for goods and services outstripped production capacity It was the time customer wants to buy anything that manufacturer had to sell. Producer has the maximum clout in supply chain. As other partner are into the business of just supplying or forwarding what the prime or end product manufacturer has to needs to produce or sell.

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2. 3.

1. 2. 3. 4.

Management structures during this phase

Partitioning of the organization into divisions and subunits of divisions. Accounting dominating control system. The core objective for these organizational and control structure was to design a system in which the people responsible for managing the smaller units could solely on their domain of authority. Organization operates with the belief that local optimization would result in global optimization. organization of conservation. Thus during the producer centric era org. were managed typically through conflicting departmental goals that results from the emphasis on local optimization. Here each department attempt to maximize its own objectives, objectives that often went counter to the objectives for departments.

Consumer centric supply chain its catalysts


Need to give better and more variety and to cater customers demand better and early. To initiate production run when it was needed, rather than making a production run in anticipation of demand. Evolution of batch production system. Product quality consciousness in the customer. Consumer centric supply chain its Results Consumers and not the producers have become the dominant component. The local optimization view encourages by the accounting model did not often result in global improvement. Factors such as reliability of deliveries quality of products, speed with which orders can be filled and variety of products offered are the dominating factor determining a companys competitive positions. Direct labor cost on which most allocation decisions were made was no longer the major cost component.

The

local task improvement view at the heart of the management style in a producer centric era must be replaced by a new approach that take a system view of the organization and strive to deliver the 5rights of merchandizing.

Evolution of Supply Chain Management


Further Refinement of SCM Capabilities SCM Formation/ Extensions JIT, TQM, BPR, Alliances Inventory Management/Cost Optimization Traditional Mass Manufacturing

1950s

1960s

1970s

1980s

1990s

2000s

Beyond

KEY CONCEPT OF SUPPLY CHAIN


Traditionally firms have focused their energies on the following functions Purchasing Manufacturing Distribution But these traditional organization need following function now days Information Inventory management Transportation Warehousing LOGISTICS Packaging & Security Please see diagram taught by me

Supply Chain types


Efficient

supply Chain Risk hedging Supply Chain Responsive Supply Chain Agile Supply Chain

Efficient Supply Chain


It alms at creating highest cost efficiency It aims at eliminating non value added activities Its main focus is scale economies So it works with the objective to achieve optimum utilization of capacity at all level of coordination's via better information linkage and efficient & effective transfer of information. e.g. Grocery, basic apparels, food, oil, gas etc.

Risk Hedging Supply Chains


It aims at pooling & sharing resources in a supply chain. It aims at elimination of disruption of supplies It focuses on development of real time information on inventory & demand among the various sources of supplies. So it focuses on development of more than one source of supply so as to reduce the risk of supply disruption due to single entity being working itself. e.g.FMCG, packed food industry, branded apparels. Etc. A company increases the safety stick of its component/goods to hedge against the risk of supply disruption, and by sharing the safety stock with other companies/firms who also need this key part/goods the cost of maintaining this safety stock can be shared.

Responsive supply chain


It

aims at being responsive to changing & diverse needs of the customer. It focuses quick response systems to attend the needs of the customer.

Agile Supply Chain


It aims at being responsive & flexible to customer needs while the risk of supply shortage or disruption are hedged by pooling inventory & other capacity resources. It is the combination of the strength of hedged & responsive supply chains. So they are agile because they have the abi,lity to be responsive to the changing, diverse and unpredictable demands of the customer on the front end while minimizing the back end risks of supply disruption.

Focal Firm: The firm that provides the identity to the product in terms of brand has higher stake in the chain. By virtue of being the main identity, the firm concerned also has the necessary clout and resources and usually takes on the responsibility for designing the incentive systems for the various entities in the supply chain.
e.g. Nike might not manufacture the product , or may not own the retail outlet, but since end customer identify the product with Nike, we will identify NIKE as the main entity in the supply chain. In general , we will refer to this entity as the Focal firm, central node or the main entity in the chain. In marketing this is called as STEWARD FIRM

Launch

of seventh Harry potter book

HARRY POTTER & THE DEATHLY HALLOWS, much awaited seventh and final book

in the Harry potter series of novels, was released in 93 countries simultaneously on 21 July 2007. Managing the launch of this magnitude is a supply chain nightmare. Ensuring the sufficient quantity of books across 10 thousand of outlets across 93 countries across the globe poses substantial challenge to supply chain managers. Book is to reach every store just in time for the launch , neither too early nor too late. Penguin India , the distributor of HP books in India had to manage the seemingly difficult task of delivering books simultaneously to 300 destination just few hour prior to the launch time of 6.30 am

So Can we think now Why a supply chain has become such a critical success factor in most of the industries?

Answer to the question can be If customer observe inefficiency on account of non availability, damaged packaging, higher price and malfunction of systems etc.. At the retail end with regards to HULs product, They attribute inefficiency to HUL and not to its chain partners. Customer is only interested in having right product at right time and at right place & price. For a simple product like soap , The supply chain involves ingredients suppliers , transporters, the company's manufacturing plants, carrying & forwarding agents, wholesalers, distributors & retailers. Obviously HUL does not own all these entities but the HUL brand name is at stake and has to insure that the entire chain delivers value to the end customers. HUL cannot afford to to focus only on those parts of the chain that owned by it and ignore the other parts of the chain.

Importance of Supply Chain


In past customer were not very demanding nor competition was very intense. As a result SC like issues faces ignorance. Now days if you dont manage your supply chain you may face huge inventory cost, also customer loss because right product no available at right place and at right time. SO these five trend have emerged to make supply chain management a CSF in most industries

Proliferation in product lines: Wide variety demand or SKU ( Stock Keeping unit) range. Shorter Product life cycle: Intensity of competition & customer demand for change due to demographic & technological pressure has shortened the PLC of the product. Inflator economies may choose high inventory as the source of profit but now days this is quite expensive decision. Even data as to forecasting and stock holding is not available well in advance

Higher level of outsourcing: i.e getting your non core activities done by a specialized & professional expert of that area. Outsourcing is quite an attractive strategy followed by corporate throughout the globe. Onshore and now offshore outsourcing has also taken effective grab of the situations. Bharti televenture has outsourced networking management, IT services & Call center services Shift in power structure in the chain: Entities closer to customer are becoming more powerful. With increasing competition a steadily rising number of products are chasing the same retail shelf space. Retail shelf space has not increased at the pace the product variety has increased . So now days retailers ask for slotting allowance to the manufacturer to provide shelf space to their product. Savvy firms started talking about trade marketing and treating dealers & retailers as their customer while simultaneously trying to woo retailers aggressively. There is the clear shift in power structure.

Retailers have realized that they are powerful entities in the chain and hence expect the manufacturers to be more responsive to their needs and demands. Globalization of manufacturing: Over the past decade tariff level have come down significantly. Many companies are restructuring their production facility to be at par with global standards. Rather being exploring local markets the companies are moving offshore by integrating their supply chain for the entire world market. ABB has developed some global center for excellence for each of their product lines that take care of the global market.

So do you believe that New product must be defined with not only the market in mind but also the production process and related operations that will be used to make & sell product. How?

Successful supply chain management involve several decision with varying time frames. These can be classified in to two broad categories: 1. Supply chain Design Decision 2. Supply Chain Operation Decision

DECISION IN SUPPLY CHAIN

Design Decision

Involves:

What should be the design of Supply chain, type of supply chain to be used ( model to be followed) What activities to be carried out by Focal Firm & what to be outsourced How to select entities/Partner to perform outsourced activities and what should be the nature of the relationship with those entities. Decision pertain to capacity & location of various facilities.( Manufacturing, Warehousing, etc..)

It is a long term decision and are very expensive to alter in short notice.( Couple of years)

Operation Decision-

Involves

They are the short term decision regarding the management of supply chain operations. Their time horizon of tactics ranges from Week to half or full year some time. Even a Day decision is some time unavoidable. They involve following decisions. Demand forecasting Procurement planning & control Production planning & control Distribution planning & control

Inventory management

Information processing management

Transportation & transit management

Warehousing

& storage management

Customer

order processing

Vendor

relation management

Customer

relation management Channel partners management