Supply Chain Management for production industry

Table of Contents

I. Supply Chain Management in the Operations Management context

II. Supply Chain Management
1. Reasons for implementing SCM
2. Aims of SCM in the production industry
3. What influences the design of a Supply Chain ?
a The impact of the way of production
b The impact of the product’s category
4. Types of supply chains
5. Critical factors for success
a General success factors
b Incentives as a motivator
6. Supply chain interferences

III. Case study: Information process redesign

IV. Further fields of research

V. Bibliography

VI. Appendix: tables and pictures
The field of Supply Chain Management in the scientific system of Operations Management
Types of supply chains according to the firms function as producer of goods
Building the Triple-A Supply Chain
The monthly logistic process at Fiat

I. Supply Chain Management in the Operations Management Context

Operations Management (OM) is a field of science that includes each process and activity in an enterprise that is needed for generating any output:

- Operations Management:

“Management of the conversion process which transforms inputs such as raw material and labor into outputs in the form of finished goods and services.”^[1]

This definition shows that the part of logistics is one of the crucial parts of OM as it must be made sure that input goods are available in the quantity, quality, time and place required. This special field is called Supply Chain Management (SCM). Although nearly each firm is involved more or less intensive in any kind of a supply chain, as a supplier or as a customer, the awareness of the importance of SCM is a relatively new development. First, the term appeared in 1982, and was coined by Keith Oliver.^[2] But, to know what SCM includes, I first would like to define the terms:

- Supply Chain:

“The network of services, material, and information flows that a firm’s customer relationship, order fulfilment, and supplier relationship processes to those of its suppliers and customers.”^[3] That means the supply chain is a wider term than logistics that focuses on goods, what Taylor mentions in the explanation: Thus, logistics is “the process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials (…) and related information from point-of-origin to point of final consumption (…)”.^[4]

- Supply Chain Management

“Supply Chain Management is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as effectively as possible. Supply Chain Management spans all movement and storage raw materials, work-in-process inventory, and finished goods from point-of origin to point-of consumption.”^[5] SCM also includes as an essential aspect the development of a supply chain strategy. The aim of developing a supply chain strategy should enhance the company to meet the competitive priorities of the company’s operations strategy.^[6]

II. Supply Chain Management

1. Reasons for implementing SCM

Each business or organization is involved in a supply chain – it is hard to imagine any process in production or service providing that is not affected by a supply chain. Supply chains must be managed to coordinate the inputs with the outputs in a company to achieve the appropriate competitive priorities of the firm’s enterprise process.^[7] To reach this strategic goal, SCM controls and optimises the key processes that are involved in the value-adding process. Parts of the process are all activities, that are involved in material or information flow.^[8] In this context, the management has to decide about several circumstances, where current practice should be critical proved:

- kind, place and capacity of buffer storage
- species, number and capacity of means of transport
- production logistics’ general principles
- identification and enhancement of interfaces between involved companies
- determination of production- and transportation lot size in the face of logistics
- way of organisation of logistic-oriented positions in the firm^[9]

2. Aims of SCM in the production industry

The overall aim of OM for any business is to support survival and the strategy and objectives. In special, OM is responsible for achieving the targets of production:

- meet customer expectations (i.e. high quality in Japan)
- low production costs
- short lead time/quick response
- ability to change/flexibility
- reliability of service or products offered
- keep service level high^[10]

Belonging to production industries, the aim of optimising operations is greater speed and cost-effectiveness. Cost-saving should be achieved by cutting time production requires, lowering inventory and bettering demand forwarding.^[11]

Inventory (defined as stock of materials that are used for production or to satisfy customer’s demand) appears in three different categories: As raw material, work-in-process items and as finished goods ready for delivery. Materials management and in consequence SCM must ensure that

- the needed kind and quality of material
- in the right quantity
- at the right time
- and at the right place is available.^[12]

3. What influences the design of a Supply Chain ?

a The impact of the way of production

The design of the production process has a strong impact on the supply chain of a company. Thaler differentiates three ways of production:

- stock production
- forecast production
- order production^[13]

The following table shows the characteristics of each production method:

illustration not visible in this excerpt

Table 1: Correlation between production method and Supply Chain challenge, own illustration based on Thaler (2001), page 69

b The impact of the product’s category

Not only the way of production must be taken into account for designing an effective supply chain, also the classification of products is essential. As Fisher mentions, two categories of products are available that both have typical attributes: products can be either primarily functional or primarily innovative. The demand characteristics of both product categories are totally different: Functional products (like most daily consumer goods) have a predictable demand and are mostly price-sensitive. Innovative products, on the other hand, in general have a volatile demand but higher sales margins.^[14]

As functional products are price-sensitive, the objective of designing the supply chain is to guarantee the availability of the products in the quantity of demand for prices customers are willing to pay. In consequence, priority of the operations is to minimize inventory and maximize production and logistics efficiency. In this instance, coordination and synchronisation between supply and demand, based on information exchange is essential.

But that approach goes into a totally wrong direction for innovative products. As demand could not be forecasted in an adequate satisfying way for intensive synchronisation between supplier and demand, quick market reaction is priority. In this environment the price of the supply chain is not most crucial, as the price level and profit margins are higher it is much more effective to keep the production and supply chain flexible for quick response on changes in demand.^[15]

[...]

^[1] See Davis (1999), page 5 on www.uwc.ac.za/EMS/man/MAN111/OPERATIONS%20MANAGEMENT%20-%20INTRODUCTION_1.ppt

^[2] Compare http://en.wikipedia.org/wiki/Supply_Chain_Management

^[3] See Krajewski/Ritzman/Malhotra (2007), page 372

^[4] See Taylor (1997), page 2

^[5] See http://en.wikipedia.org/wiki/Supply_Chain_Management

^[6] Compare Krajewski/Ritzman/Malhotra (2007), page 372

^[7] Compare Krajewski/Ritzman/Malhotra (2007), page 372f.

^[8] Compare Thaler (2001), page 48f.

^[9] Compare Nebl (2001), page 614f.

^[10] Compare www.uwc.ac.za/EMS/man/MAN111/OPERATIONS%20MANAGEMENT%20-%20INTRODUCTION_1.ppt

^[11] Compare Breyer/Riechelmann, www.rz.fh-ulm.de/~breyer/SCOR2002/SCOR1web.pdf

^[12] Compare Wöhe (1996), page 540

^[13] Compare Thaler (2001), page 67ff.

^[14] Compare Corsten/Gabriel (2004), page 235

^[15] Compare Fisher (1997), page 105ff.