BB10. Innovative Supply Chain Management

INTRODUCTION

The primary goal of Innovative Supply Chain Management is value creation by providing products and services to customers through optimally managed processes, resources, and capabilities. Innovative Supply Chain Management is a cradle-to-grave process that is involved from the earliest recognition of customer need through end-of-life and final disposal or retirement of products and services.

APICS, formerly founded as American Production and Inventory Control Society (APICS) defines Supply Chain Management as “the design, planning, execution, control, and monitoring of supply-chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally.”

There are five basic steps that provide an analytical and objective structure to formulate a strategic linkage between the supply chain and marketing. These are:

• 1. Define organizational objectives.
• 2. Determine marketing strategies to meet these objectives.
• 3. Assess how different products qualify in their respective markets and win orders against competitors.

• 4. Establish the appropriate process to manufacture or outsource production of these products.
• 5. Provide the infrastructure to support the manufacturing or sourcing of these products and related supply chain infrastructure.

Collaboration is at the heart of Supply Chain Management. The Supply Chain Management process should look at the needs of the entire enterprise and processes should be designed accordingly. While the Supply Chain Manager may not own the individual process, it is important to understand and participate in decision making at all levels from the inception of the product to its final discontinuance, retirement, disposal, and recycling. This will mean establishing a close working relationship with other departments. An important example is Sales and Marketing, which controls customer facing processes such as Customer Relationship Management and Demand Forecasting.

CUSTOMER RELATIONSHIP MANAGEMENT PROCESS

Customer-relationship management (CRM) is used to manage a company’s interactions with current and potential customers. It uses data analysis of the customers’ history with an organization to improve business relationships with customers, focusing on customer retention and driving sales growth.

Also, important is the Engineering department, which innovates and provides new product designs.

Determination of stakeholder needs, and requirements is accomplished through an engineering process. Several areas of engineering are very much involved with collaboration and directly involve the supply chain management process. Ensuring that proper feedback from throughout the organization is available to engineering can help to ensure a successful innovative product development program.

SYSTEMS ENGINEERING

Systems engineering is an interdisciplinary approach and a means to enable the realization of successful systems. It focuses on defining customer needs and required functionality early in the development cycle, documenting requirements, and then proceeding with design synthesis and system validation while considering the complete problem: operations, cost and schedule, performance, training and support, test, manufacturing, and disposal. Systems Engineering considers both the business and the technical needs of all customers with the goal of providing a quality product that meets the user needs (INCOSE).

COLLABORATIVE ENGINEERING

Collaborative engineering is defined by the International Journal of Collaborative Engineering as a discipline that “studies the interactive process of engineering collaboration, whereby multiple interested stakeholders resolve conflicts, bargain for individual or collective advantages, agree upon courses of action, and/or attempt to craft joint outcomes which serve their mutual interests.”

CONCURRENT ENGINEERING

Concurrent engineering (CE) is a work methodology emphasizing the parallelization of tasks (i.e., performing tasks concurrently), which is sometimes called simultaneous engineering or integrated product development (IPD) using an integrated product team approach. It refers to an approach used in product development in which functions of design engineering, manufacturing engineering, and other functions are integrated to reduce the time required to bring a new product to market.

In many organizations, functional managers are measured by their departmental efficiency rather than overall effectiveness. Consequently, Managers often make trade-offs that are suboptimal for the business as a whole. The Supply Chain Manager should collaborate with other departments to ensure that decisions are made that will optimally benefit the organization.

SCOR MODEL

The supply chain operations reference model (SCOR) is a management tool used to address, improve, and communicate supply chain management decisions within a company and with suppliers and customers of a company. The model describes the business processes required to satisfy a customer’s demands. It also helps to explain the processes along the entire supply chain and provides a basis for how to improve those processes. (See Figure BB10.1)

The SCOR model was developed by the supply chain council (www. supply-chain.org) with the assistance of 70 of the world’s leading manufacturing companies. The model integrates business concepts of process re-engineering, benchmarking, and measurement into its framework. The supply chain council refers to this process as spanning from “the supplier’s supplier to the customer’s customer.”

This framework focuses on five areas of the supply chain - plan, source, make, deliver, and return:

• • Plan - Demand and supply planning and management are included in this first step. Elements include balancing resources with requirements and determining communication along the entire chain. The plan also includes determining business rules to improve and measure supply chain efficiency. These business rules span inventory, transportation, assets, and regulatory compliance, among others. The plan also aligns the supply chain plan with the financial plan of the company.
• • Source - This step describes sourcing infrastructure and material acquisition. It describes how to manage inventory, the supplier

FIGURE BB10.1

SCOR Model network, supplier agreements, and supplier performance. It discusses how to handle supplier payments and when to receive, verify, and transfer product.

• • Make - Manufacturing and production are the emphasis of this step. Is the manufacturing process make-to-order, make-to-stock, or engineer-to-order? The make step includes, production activities, packaging, staging product, and releasing. It also includes managing the production network, equipment and facilities, and transportation.
• • Deliver - Delivery includes order management, warehousing, and transportation. It also includes receiving orders from customers and invoicing them once product has been received. This step involves management of finished inventories, assets, transportation, product life cycles, and importing and exporting requirements.
• • Return - Companies must be prepared to handle the return of containers, packaging, or defective product. The return involves the management of business rules, return inventory, assets, transportation, and regulatory requirements.

The SCOR process can go into many levels of process detail to help a company analyze its supply chain. It gives companies an idea of how advanced its supply chain is. The process helps companies understand how the five steps repeat over and over again between suppliers, the company, and customers.

DEVELOPING AN INNOVATIVE SUPPLY CHAIN STRATEGY (OPERATIONS STRATEGY)

Porter's Five Forces

Porter’s Five Forces Framework is a tool for analyzing the competitive environment of an organization. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness (or lack of it) of an industry in terms of its profitability. An “unattractive” industry is one in which the effect of these five forces reduces overall profitability. The most unattractive industry would be one approaching “pure competition,” in which available profits for all firms are driven to normal profit levels. The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University. This framework was first published in Harvard Business Review in 1979. (See Figure BB10.2)

THREAT OF NEW ENTRANTS

Profitable industries that yield high returns will attract new firms. New entrants eventually will decrease profitability for other firms in the industry. Unless the entry of new firms can be made more difficult by incumbents, abnormal profitability will fall toward zero (perfect competition), which is the minimum level of profitability required to keep an industry in business.

THREAT OF SUBSTITUTES

A substitute product uses a different technolog)' to try to solve the same economic need.

FIGURE BB10.2

Porter’s Five Forces

BARGAINING POWER OF CUSTOMERS

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer’s sensitivity to price changes. Firms can take measures to reduce buyer power, such as implementing a loyalty program. Buyers’ power is high if buyers have many alternatives. It is low if they have few choices.

BARGAINING POWER OF SUPPLIERS

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm when there are few substitutes. If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from them. Suppliers may refuse to work with the firm or charge excessively high prices for unique resources.

COMPETITIVE RIVALRY

For most industries the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. An understanding of industry rivals is vital to successfully market a product. Positioning pertains to how the public perceives a product and distinguishes it from competitors. A business must be aware of its competitors’ marketing strategies and pricing and be reactive to any changes made.

SIPOC Diagram - Describes Suppliers, Inputs, Processes, Outputs, and Customers Diagram

A SIPOC diagram is a tool that summarizes the inputs and outputs processes in flow chart form. The acronym SIPOC stands for suppliers, inputs, process, outputs, and customers. The SIPOC diagram is used by a

FIGURE BB10.3

SIPOC Diagram

team to identify all relevant elements of a supply chain process before work begins. It helps define a complex project that may not be properly scoped. A SIPOC diagram defines the inputs the process receives and the suppliers providing those inputs and the outputs that a process delivers to the customers receiving the outputs. In traditional manufacturing processes, these represent the physical flow of all inputs to the product and, finally, the completed product to the customer. (See Figure BB10.3)

VALUE STREAM

The Value Stream encompasses all actual value-added and nonvalue-added activities and associated processes used to transform information and/or raw material into a final product/service for delivery to the customer. VALUE STREAM MAPPING

Value Stream Mapping is a method used to define, measure, analyze, improve, and control the flow of the product or element being transformed, which could be inventor)⁷, a medical patient, paperwork, or anything in any segment of any value chain. The Value Stream Map provides a graphical representation of the information and physical flows of the value chain for a defined set of customers, suppliers, or product family from a systematic view. The informational flows are communicated across the top of the map and flow from left to right from customer to seller and provide the signal that sets the supply chain in motion resulting in communication of demand to suppliers and production facilities. The physical flows of product are communicatedalong the lower portion of the map and are represented as flowing from right to left from the Supplier through manufacturing and delivery processes to the customer. Metrics such as cycle time or Overall Equipment Effectiveness may be represented. Finally, a time line that compares Value-added time and Nonvalue-added time, the combination of which represents Total Lead time is displayed across the bottom of the graphic. The maps are normally drawn as Current State reflecting “as-is” conditions and Future State with the desired improvements being shown. (See Figure BB10.4) Performance improvement programs are used to bridge the gap between the Current State and Future State.

CURRENT STATE VALUE MAP

FIGURE BB10.4

Value Stream Map

SUPPLIER MANAGEMENT (PURCHASING)

Procurement process - Procurement is the process of finding and agreeing to terms, and acquiring goods, services, or works from an external source, often through a tendering or competitive bidding process. Procurement is used to ensure the buyer receives goods, services, or works at the best possible price when aspects such as quality, quantity, time, and location are compared. Organizations often define processes intended to promote fair and open competition for their business while minimizing risks such as exposure to fraud and collusion.

Supplier Management and the relationship with suppliers have never been more important than it is today. This reflects the increasing importance of innovation, and the supply chain. Organizations are increasingly called upon to justify the quality of products based on how they are designed and produced, including the materials procured from suppliers to create them. The importance of a safe, cost-effective, high-quality, integral, traceable, and agile supply chain cannot be overstated.

SUPPLIERS AND QUALITY

The quality organization provides one of the two key interfaces with suppliers. The other key interface is procurement whose primary focus is on cost and delivery date. The quality organization has the responsibility for ensuring that a supplier has added controls in place to prevent them from shipping detective parts and/or materials. As a starting point, ISO 9000 defines the basic quality system that needs to be in place in order to meet these requirements. This is only the start of a long-term relationship for items like correlation of measurement and test equipment, lot acceptance of product, changes in production activity, and supplier performance reporting.

DR. W. EDWARD DEMING

Deming’s book, “!4 Points, Out of the Crisis,” includes “end the practice of awarding business on the basis of price tag alone. Instead, minimize total cost.” Deming went on to discuss the differences between procurement strategies of Western and Japanese organizations. Deming thought of sourcing strategy as a strategic advantage and advantageous to any firm. Deming’s arguments include:

• • We can no longer leave quality, service and price to the forces of competition and price to the forces of competition and price - not in today’s requirements for uniformity and reliability.
• • What one company buys from another is not just material: it buys something far more important, namely engineering and capability.

Deming suggested moving toward a single supplier for any one item and not doing business and negotiating with suppliers based on the lowest price. It is worthwhile in the long term to build a good and long-standing relationship with suppliers, which enables trust and increases loyalty. An organization should be able to rely on their suppliers; they supply the parts for the production line and are the first link to a high-quality product.

While it has been more than three decades since Deming stated his 14 points, many companies are still learning the lessons of failure to incorporate these points into their strategies and culture.

SPECIFICATIONS AND DESIGN RESPONSIBILITY

Suppliers may have valuable input to offer for design consideration. They often can provide input that would improve the design, reduce the cost of manufacture, or improve quality, such as

• • The manufacturability of a design
• • Establishment of nominal specification and tolerances on dimensions, features, and various performance related specification
• • Use of alternate materials or manufacturing processes

A supplier might have specialized equipment, processes, and capabilities that influence the optimum design approach or requirements.

Some innovative supply chain improvement techniques include methods for reduction of number of new parts in the supply chain.

THE EIGHT RUNAWAY BY-PRODUCTS OF ONE NEW PART

(Gwendolyn D. Galsworth), Visual Thinking, Inc.

They fall into eight broad categories:

• 1. Exploding Active Parts Count. When new products are developed, new parts get added; the question is: Is each of these new parts required and unavoidable? Even if a new part is required, it may bring an escalation in the number of sendee parts the company must stock.
• 2. Pressurized Sourcing and Procurement Activities. As a part number is added, sourcing and purchasing teams respond; the continuous need for new purchased or made parts exert pressure on the parts procurement function as well as on other related functions.
• 3. Unwarranted Processes, Dies, Tooling, Fixtures, Equipment, and Changeover Times. New parts often require new production processes, and new equipment, dies, fixtures, or tooling, and associated extra changeovers; these burden already-loaded shopfloor activity.
• 4. Congested Floor Space, Shelving, and Storage Racks. As with parts in general, new parts need homes, however temporary, and add clutter to floors, racks, shelving, and stores; over time, multiplying service parts, and dead stock (obsolete but not yet retired parts) further cramp already congested storage areas.
• 5. Overburdened Material Handling. If the company accepts material handling as a given, added parts tax an already burdened transportation system, as each part requires its share of handling in the form of receiving, counting, inspecting, storing, retrieving, and otherwise moving it.
• 6. Ballooning IT Input and Maintenance. Each part that enters or leaves the system must be individually logged in and maintained; pressure to keep data systems up to date can be staggering.
• 7. Mushrooming Control Points. Literally hundreds of paper, computer, and other transactions across all departments (known as control points) support each new product and its new parts -drawings, catalogs, cost estimates, supplier searches, purchase orders, faxes, invoices, receipts, tracking checklists, inspection sheets, etc.

8. Loss of Opportunity. The resources needed to support runaway parts proliferation are astounding. They rob the company of assets it could otherwise use to develop and grow.

COTS

It may also be possible to make innovative improvements through the use of readily available commercially available of the shelf products.

Commercially available off-the-shelf (COTS) products are packaged solutions, which are adapted to satisfy the needs of the purchasing organization, rather than the development of custom fabricated materials or coded software solutions. Use of COTS solutions can reduce costs and time in product development and overall supply chain costs.

INVENTORY MANAGEMENT FOUNDATIONS

Sales Forecasting

Forecasting is a prelude to planning. Before making plans, an estimate must be made of what conditions will exist over some future period. The Sales Forecast is an input to Demand Planning.

• • Point 1: Forecasting is being done in virtually every company. The issues are who does it and at what level it’s done.
• • Point 2: Sales and Marketing people “own” the Sales Forecast.
• • Point 3: Better processes yield better results and forecasting is no exception; better forecasting processes will yield better forecasts. (T. Wallace)

Sales and Operations Planning

The purpose of Sales and Operations Planning is to achieve a balance in Supply and Demand It is a business process that focuses on aggregate volumes byproduct families and groups so that mix issues may be resolved later to fill individual customer orders. (See Figure BB10.5)

FIGURE BB10.5

The Monthly S&OP Process

Step 1 - Gather the data and run month end reports.

Step 2 - Plan the Demand.

Step 3 - Review capacity constraints and plan the supply.

Step 4 - The Pre-SOP Meeting is where representatives from the demand and supply departments meet and look to combine their work to determine the Sales and Operation Plan recommendations and alternative.

Step 5 - The Sales and Operations meeting is held monthly under the auspices of the Business Owner and final decisions are made as to volume and mix and the Sales and Operation Plan is agreed to.

The Sales and Operations Plan is updated monthly and provides a rolling plan of demand and planned production for the future 12 to 18 months by dollar volumes attributable to individual product families.

MASTER PRODUCTION SCHEDULING

After developing the production plan, within the Sales and Operations planning process, the next step is to prepare a master production schedule. The MPS is a statement of which end items are to be produced, the quantity of each and the dates they are to be completed. The MPS is a vital link in the production planning system. It constitutes the link between production planning and what operations will produce. It forms the basis for calculating the capacity and resources needed. The MPS drives the materials requirements plan based on finished goods. The MPS sets the priority plan for manufacturing.

MATERIALS REQUIREMENTS PLANNING

The MPS serves as an input to Materials Requirements Planning. Materials Requirements Planning is used to break down the MPS and determine which materials you need to purchase and components you need to make, the quantity of these materials and components, and when they are needed. It uses time phasing, but the time phases are shorter time periods than those used in the MPS. Time phases in an MRP may be in weeks, days, or even hours, depending on organizational needs.

SUPPLY CHAIN RISK MANAGEMENT

Supply-chain risk management (SCRM) is “the implementation of strategies to manage both every day and exceptional risks along the supply chain based on continuous risk assessment with the objective of reducing vulnerability and ensuring continuity” (Wieland).

DISTRIBUTION RESOURCE PLANNING (DRP)

Distribution resource planning (DRP) is a method used for planning orders within a supply chain. DRP enables the user to set certain inventory control parameters (such as safety stock) and calculate the time-phased inventor)' requirements. It is able to both respond to customer demand and coordinate planning and control. This process is also commonly referred to as distribution requirements planning.

BUSINESS-PROCESS INTEGRATION

Business Process Integration (BPI) is essential for organizations looking to connect systems and information efficiently. BPI allows for automation of business processes, integration of systems and sendees, and the secure sharing of data across numerous applications. Overcoming integration challenges allows organizations to connect systems internally and externally. BPI allows for the automation of management, operational, and supporting processes. This gives businesses an advantage over competitors as they can spend more time developing new and innovative processes.

ENTERPRISE RESOURCE PLANNING (ERP)

Enterprise Resource Planning, or ERP is a business software system that supports business or enterprise throughout ongoing operations and projects in organizing, planning, maintaining, tracking, and utilization of resources effectively.

ERP allows organizations to integrate all the operational units such as financing, human resources, production, sales, marketing, finance and accounting, procurement, and inventory management, etc.

ERP helps the organization to achieve real time business information processing, increase productivity, improve delivery, reduce cost, increase profits, improve product quality, enhance reporting, and improved performance management.

Successful SCM requires a change from managing individual functions to integrating activities into key supply-chain or operational processes. An ERP system integrates the core functional processes within an organization. The ERP system is used to collect, store, manage, interpret, and report data from these many business processes.

Understand the processes, innovate, implement, and standardize, automating where possible. The ERP integrates and provides for automation of many of the organizational processes.

SUPPLY CHAIN PERFORMANCE METRICS

Supply Chain Metrics may include measurements for procurement, production, transportation, inventory, warehousing, material handling, packaging, and customer service. Some of the more useful include:

• 1. Perfect Order Measurement - The percentage of orders that are error-free.
• 2. Cash to Cash Cycle Time - The number of days between paying for materials and getting paid for product.
• 3. Customer Order Cycle Time - Measures how long it takes to deliver a customer order after the purchase order (PO) is received.
• 4. Fill Rate - The percentage of a customer’s order that is filled on the first shipment. This can be represented as the percentage of items, SKUs or order value that is included with the first shipment.
• 5. Supply Chain Cycle Time - The time it would take to fill a customer order if inventory levels were zero.
• 6. Inventory Days of Supply - The number of days it would take to run out of supply if it was not replenished.
• 7. Freight bill accuracy - The percentage of freight bills that are error-free.
• 8. Freight cost per unit - This is usually measured as the cost of freight per item or SKU.
• 9. Inventory Turnover - The number of times that a company’s inventor)' cycles per year.
• 10. Days Sales Outstanding - A measure of how quickly revenue can be collected from customers.
• 11. Average Payment Period for Production Materials - The average time from receipt of materials and payment for those materials.
• 12. On Time Shipping Rate - The percentage of items, SKUs or order value that arrives on or before the requested ship date.

BUSINESS PROCESS MANAGEMENT (BPM)

Business Process Management is a management discipline that integrates the strategy and goals of an organization with the expectations and needs of customers by focusing on end-to-end processes. It brings together strategies, goals, culture, organizational structures, roles, policies, methodologies, and IT tools to:

• • Analyze, design, implement, control, and continuously improve end-to-end processes, and
• • Establish process governance.

It is focused on delivering operational improvement, or, in a large-scale change, transformation. This process-centric approach to business management is supported by automated tools to deliver an operational environment that supports rapid change and continuous improvement. BPM provides a view of the business activity through the use of process models with clearly visible associated business and technical operational rules (ABPMP).

A business process is the complete, and dynamically coordinated set of collaborative activities that deliver value to customers (Fingar).

Upper management provides the vision and direction, teams correct the problems, and individuals provide the creativity, but it is the processes within any organization that get things done (Harrington).

WORKFLOW

This is a generic term for the sequential movement of information or materials from one activity in a process or subprocess to another in the same overall process. This is the aggregation of activity within a single Business Unit. Activity will be a combination of work from one or more processes. Organization of this work will be around efficiency. The activities within the workflow will be shown as a flow that describes each activity’s relationship with all the others performed in the Business Unit. Modeling will show this work as a flow that describes each activity’s relationship with all the others performed in the Business Unit.

Workflows can be manual, automated, or more likely a combination of both. Workflow models often include both the diagram and the specific rules that define the flow of information from one activity to the next. When used in conjunction with the workflow system or engine, it usually refers to a software-based workflow system that will move information from a database to one computer or organization after the other (ABPMP).

SUPPLY CHAIN PROCESS IMPROVEMENT AND AUTOMATION

While the discussion of best Supply Chain Management practices and appropriate customization thereof to individual organizations is beyond the scope of this text, there are several process improvement methodologies that may be useful in this regard. These may include tools for definition and management of existing processes, or improvement of these processes through Area Activity Analysis, Business Process Improvement, Streamlined Process Improvement, or Lean Six Sigma methodologies. Finally, once these processes are fully understood and streamlined, they may be candidates for automation.

Automation may make use of artificial intelligence or machine learning. Artificial intelligence has the potential to make supply chains run faster, better, and cheaper. In an extreme case, a fully automated supply chain could use artificial intelligence to make decisions and take actions autonomously. (See Figure BB10.6)

• • Understand - A thorough understanding of the current state of practice and the actual processes of the industry and organization is an important first step.
• • Streamline - This is the improvement methodology.
• • Automate - This covers a range of activities from eliminating the human element from the production process to increasing the productivity of humans throughout the supply chain by automating processes.

ELEMENTS OF INNOVATIVE SUPPLY CHAIN MANAGEMENT LEADERSHIP

The core elements of Innovative Supply Chain Management include customer satisfaction, design, and operational efficiency (Figure BB10.7).

FIGURE BB10.7

Elements of Innovative Supply Chain Management Leadership

PLOSSL'S SEVEN SUPPLY CHAIN POINTS

George Plossl, one of the key innovators credited with the popularization of Material Requirements Planning, the forerunner of what we now know as a component of Supply Chain Management, developed a simple set of Seven Supply Chain Points that are as relevant advice today as they were when written and provide a good starting point for the development of an effective supply chain management system.

• 1. Satisfy the customer’s real needs, not wants.
• 2. Understand how the real world works.
• 3. Have a complete integrated system.
• 4. Use accurate data.
• 5. Manage cycle time.
• 6. Eliminate nonvalue-added activity.
• 7. Use fully qualified people.

SUMMARY

The development of innovative supply chains remains a great opportunity for many organizations. Innovations in supply chain have fundamentally changed the way business is done globally. Amazon has disrupted traditional retail through creating flexible supply chains that serve to meet customer needs efficiently with minimal variability. Wal-Mart and other retail organizations have worked to significantly improve their supply chain performance. Uber has shown a pathway for automating the balancing of supply and demand in sendee organizations through their software platform. Opportunities abound for innovation that will automate many repetitive processes and augment others to enhance human performance in supply chains of the future.