SUPPLY CHAIN
DEFINITION AND
TACTICAL OBJECTIVES
Jean-Marie PROTH
INTRODUCTION
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•
•
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Only recently has the pressure of the
competitive
market
and
new
information technologies affected the
structures of the production systems,
calling for:
Reduction of time to market.
Higher flexibility of the systems.
Drastic reduction of costs.
Extended quality concept.
DEFINITION OF A SUPPLY CHAIN
• A Supply Chain is a global network of
organizations that cooperate to improve
the flows of material and information
between suppliers and customers at the
lowest cost and the highest speed.
• The objective of a Supply Chain is
customer satisfaction.
Thus, the goal is not only to meet the
tolerances defined by the designer.
SUPPLY CHAINS
Remarks:
- Viewed from the outside, a Supply
Chain is a unique entity with, in
particular, a unique strategy.
- Companies involved in a Supply Chain
could be companies that compete to
perform the same activities. This
requires
an
agreement
between
participants (sharing process) at the
strategic level.
SUPPLY CHAIN AT THE
TACTICAL LEVEL
This part of the presentation focuses
on the partial objectives to be reached
in
order
to
fulfill
customers’
satisfaction.
A financial and operational evaluation
are proposed as a conclusion.
INTRODUCTION
A decision made by any partner of the
Supply Chain disseminates among the
whole Supply Chain. It means that such
a
decision
requires
adjustment
decisions from the other partners.
As a consequence, a global information
system is necessary to allow all the
partners to be informed in real time of
the state of the system and the
decisions made anywhere in the
system.
Also, each partner should accept the
rules derived from the co-operation
arrangements decided at the strategic
level. The goal of these rules is to make
sure that each one of the partners is
prepared to adjust itself to any decision
that complies with these rules.
The sharing process is one of the most
important rules
THE TACTICAL OBJECTIVES IN A
SUPPLY CHAIN
The global objective of a Supply Chain is
customers’ satisfaction. At the same time,
individual components of the Supply Chain
aim at maximizing their shareholder value by
maximizing the Return on Investment (ROI)
of their investors. ROI is the ratio of profit to
capital employed over one year. This
strategic objective can be translated into
several short- and medium-term objectives at
the tactical level.
The main tactical level objectives in a Supply
Chain are:
• Minimizing the time required for converting
orders into cash.
• Minimizing the total Work-In-Process (WIP) in
the Supply Chain.
• Improving pipeline visibility, that is the
visibility of each one of the activities of the
Supply Chain by each one of the partners.
• Improving visibility of demand by each one
of the partners.
• Improving quality.
• Reducing costs.
• Improving services.
Minimizing the time required converting
orders into cash
This objective is much more than reducing
the production cycle. It includes the time
required to get raw material and
components, to control their quality, to
handle and, if necessary, store them until
they are used. It also includes the time
finished products are stored and prepared
to be shipped to retailers, the transportation
time, and the time they are stored again
before being delivered to customers.
Minimizing the time required to convert
orders into cash requires scheduling
each order as soon as it arrives in the
Supply Chain. This scheduling activity
should cover simultaneously all the
activities, that is buying, making,
moving, storing and selling activities.
Due to the complexity of the scheduling
problems and the fact that each order
is scheduled as soon as it arrives in the
Supply Chain, re-scheduling of existing
tasks should be avoided, baring
exceptional cases.
• The times needed to perform the
activities required to complete a
process can be reduced gradually
through the mapping of the project
process and the analysis of each one of
the activities.
• Reengineering is an abrupt approach
that is hard to apply.
Mapping of the project process
Time
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Activities
Minimizing the total Work-In-Process
(WIP)
• In the past, the relationships between
the partners of the production chains
were more adversarial than cooperative. Each one of them was trying
to increase its own efficiency instead of
working to increase the global
efficiency of the system.
The goal of each partner was not to
decrease inventories, since inventories
favor productivity, but more to move
them upstream or downstream in the
chain to keep the advantages of
inventories while transferring the
related costs to other partners or
subcontractors.
This was quite common in the auto
industry where auto makers used to
ask subcontractors to deliver parts or
subsystems
"Just-In-Time",
which
often
resulted
in
transferring
inventories to subcontractors. It is still
the case in production
systems
working on a master-slave basis: the
"master" builds his success at the
expense of the "slaves".
The philosophy behind the Supply
Chain paradigm is totally different : the
goal is to improve the efficiency of the
whole system, and thus to reduce the
total WIP.
A real time approach as been proposed
that both minimizes the completion
time
and control the W.I.P.
Improving pipeline visibility
The evolution of the computer systems from
central mainframe to local workstations has
drastically changed the way information is
delivered. Nowadays, information can be
sent from the place it is generated to any
other place in the Supply Chain in real time.
Theoretically, this allows close monitoring
over product movements, inventories,
market changes, logistics, etc.
Technical barriers in information
systems have been virtually removed.
However,
two
problems
remain
sensitive when a new Supply Chain is
designed.
These are:
• The removal of the psychological
barriers that incite people and
organizations to hold back information.
• The selection of information to be sent
to each partner, including the instants
these pieces of information should be
sent and their format, are of utmost
importance.
Improving visibility of demand
The goal when improving the visibility
of demand is to move the demand
penetration point, that is the point of
the Supply Chain where the demand is
known, as downstream as possible.
Tools are available to know with a
reasonable probability the customers’
demands even before it emerge in their
brains.
Improving quality
• Quality is often defined as "the set of
properties and characteristics of a product
or a service that allows it to meet
requirements that are explicitly or implicitly
expressed by the customer”.
• Three main aspects should be considered
when talking about quality. These are quality
mastery, quality insurance and total quality.
Quality Mastery
Quality mastery involves evaluating the
product or service characteristics’ fit with
the specifications provided by the
designers or the customers. Quality
mastery implies the ability to measure
quality which, in turn, allows measuring the
efficiency of the activities performed to
improve quality.
Quality Insurance
• The goal of quality insurance is to
guaranty the required quality level for
services
and
products.
Quality
insurance is often supported by the ISO
(International
Standard
for
Organization). ISO 9004 provides a
guide for the management of quality
system while ISO 9001, 9002 and 9003
aim at establishing quality standards
that
guarantee
the
level
and
invariability of quality.
Total Quality
• Total quality requires a special
management, called Total Quality
Management (TQM), that involves each
employee in the organization in the
improvement of quality.
• Total quality is a never-ending effort to
improve quality. It could be gradual
(Kaizen) or drastic (reengineering).
Reducing costs
• For years, the so-called analytical
accounting relied upon arbitrary
allocation of indirect costs to product
types or services, and hence made it
impossible to evaluate the true
profitability of these product types or
services. Accounting techniques have
evolved dramatically (and positively)
during the past few years, due to the
new project-oriented paradigm, which
is the most important characteristic of
Supply Chains.
Two basic rules are taken into account
when evaluating the costs in a Supply
Chain. These are:
• Costs should be attached to projects
instead of departments, i.e. the
approach when evaluating costs
should be horizontal instead of vertical.
• Only incremental costs should be
considered. These incremental costs
should be evaluated for each activity of
the project and even for each customer
segment.
Two approaches are used to reduce the
incremental costs of a project. These
are:
• A gradual approach, similar to the
Kaizen approach applied to improve
quality.
• A more abrupt approach which
consists in changing drastically the
manufacturing process (reengineering).
Improving services
• Factors that improve customer service
are the reduction of time from
customers’ orders to deliveries and the
improvement of the quality of product /
service documentation, reception of
customers and information about the
Supply Chain.
PERFORMANCE EVALUATION OF A
SUPPLY CHAIN
Financial evaluation
Costs to take into account in the
evaluation are the costs per unit (of
product, or service). This cost per unit
should be compared with the price paid
by customers to enjoy the product or
the service.
• The above evaluation tasks concern the
short-term horizon. This is not enough
to decide if a product type or service
should be a part of the Supply Chain
activity. We have to integrate three
more parameters in our evaluation,
namely: R&D activities, financial
resources utilization and cash flow.
• R&D activity, which is usually very
expensive, is necessary to preserve the
competitiveness of the Supply Chain in
the long term. It is usually difficult, if
not impossible, to assign a part of the
R&D cost to a specific type of product
or service, except if this R&D activity is
dedicated to the project under
consideration.
• The ROI is sometimes written as
follows:
ROI=(profit/sales)/(sales/required capital)
=margin*capital turnover
Written as the product of margin by
capital turnover, the ROI is not only
more understandable, it can also be
easily optimized because profit and
sales on one hand, and sales and
required capital on the other hand, are
handled by the same level of
responsibility in the companies.
• Another
important
parameter
to
consider is the cash flow. Simply
speaking, cash flow is the capital
available for investments. In some
sense, it represents the ability of a
Supply
Chain
to
seize
new
opportunities.
Operational evaluation
Three main parameters should be
measured to evaluate this aspect.
These parameters are:
- The availability.
- The
adequacy
to
customers’
expectations.
- Customers’ service
Availability
• This parameter measures the ability of
the Supply Chain to make products or
services available to customers faster
than competitors.
Adequacy to customers’
expectations
• The question to be answered here is
the following: are the products or
services being provided closer to
customers’ requirements than those of
the competitors? The comparison of
the "closeness" of products or services
to customer expectation is more
difficult to measure.
Customers’ service
The following measures should be made:
• How many phone calls are necessary, on the
average, to reach an employee? The result
should be as close as possible to one.
• How many employees should the customer
get in touch with, in order to obtain the
information he/she is looking for? The result
should also be as close as possible to one.
• How long does it take to obtain an
appointment?
• How long does it take to replace the
product in case of breakdown, or to
replace the provider of the service if
necessary?
• What is the average delivery delay?
This aspect is important to gain new
customers and keep them. As a
consequence, this delay should be
equal to zero.
• What is the percentage of first time
satisfied orders, i.e., orders that are
correct in quantity and quality?
• What is the percentage of invoices that
are not accurate?
• What is the time required, on average,
to complete an incomplete delivery?
• What is the time required, on average,
to correct an invoice that is not
accurate?
• Do the Supply Chain offer training if
necessary?
• Another important factor is a fast and
effective
reaction
to
complaints.
Flexibility, which is the ability to adapt
the outputs of the Supply Chain to the
evolution of customers’ requirements,
is a major factor for competitiveness