Best Practices for the Implementation of Supply Chain Management Initiatives* V.M. Rao Tummala College of Business, 412 Owen Building, CIS Department, Eastern Michigan University, Ypsilanti, MI 48197, Tel.: (734) 487-1933, Fax: (734) 487-1941, E-mail:
[email protected] Tobias Schoenherr† College of Business, 412 Owen Building, CIS Department, Eastern Michigan University, Ypsilanti, MI 48197, Tel.: (734) 487-9748, Fax: (734) 487-1941, E-mail:
[email protected] Biographical Notes: Dr. V.M. Rao Tummala is Professor of Operations and Supply Chain Management in the College of Business, Eastern Michigan University, Ypsilanti, MI, USA. Professor Tummala is widely recognized for his scholarly contributions in Project Risk Management, Quality Management, Product Development Practices and Supply Chain Management. He is also known for his contributions in Decision Analysis, Bayesian Decision Theory, and Analytic Hierarchy Process. Dr. Tummala has published five books, over 60 journal papers and over 60 international, and national conference proceedings papers in these areas. Some of the journals in which he has published papers include OMEGA - The International Journal of Management Science, Journal of Operational Research Society, Quality Management Journal, International Journal of Project Management, Production Planning and Control, International Journal of Quality & Reliability Management, The Journal of Supply Chain Management, Supply Chain Management - An International Journal, Concurrent Engineering Research and Applications, and Construction Management and Economics. Dr. Tobias Schoenherr is Assistant Professor of Operations and Supply Chain Management, and University Faculty Research Fellow at Eastern Michigan University. He has a Ph.D. in Operations Management and Decision Sciences from Indiana University, from which he also obtained an M.B. and a B.Sc. In addition, he holds a Diplom-Betriebswirt (FH) from the European School of Business. His research focuses on supply chain management, purchasing, ERP systems, and global manufacturing. His work has appeared or is forthcoming in the Journal of Operations Management, Journal of Supply Chain Management, the International Journal of Operations and Production Management, OMEGA - The International Journal of Management Science, Business Horizons, the International Journal of Integrated Supply Management, the Journal of Information Technology and Information Management, and PRACTIX, among others (for recent publications: http://people.emich.edu/tschoenh). Dr. Schoenherr is on the editorial review board of the Journal of Operations Management and the International Journal of Integrated Supply Management, and serves as reviewer for several leading academic journals, including Decision Sciences, the Journal of Supply Chain Management, and the Journal of Purchasing and Supply Management.
Citation: Tummala, V.M. Rao, and Tobias Schoenherr. “Best Practices for the Implementation of Supply Chain Management Initiatives,” International Journal of Logistics Systems and Management, Vol. 4, No. 4, 2008, pp. 391-410. †
Corresponding Author
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Best Practices for the Implementation of Supply Chain Management Initiatives‡
Abstract Effective supply chain management (SCM) can be achieved via a variety of initiatives. However, which initiative is chosen is a crucial decision because not every approach is suitable for all companies. This paper aims to facilitate this task by developing an implementation-decision framework for SCM initiatives based on best practices. In this framework, goals of supply chain management are linked with their enablers; enablers are linked with initiatives, where initiatives are linked with activities, which in turn are associated with performance measures. Based on best-practice examples found in the SCM literature, this paper identifies and conceptually develops these goals, enablers, initiatives, activities and performance measures, as well as their linkages. Keywords: supply chain management initiatives, implementation, best practices
1. Introduction The implementation and practice of supply chain management (SCM) initiatives requires that companies take a long-term view, focusing on all processes involved in the transformation from raw materials to finished goods. Process mapping of supply chain activities can help in the identification and elimination of non-value added steps, creating a reliable and flexible transformation process. This often necessitates that organizations rethink how business is done at every level within and outside the organization, making highlevel commitment from senior management an absolute prerequisite. Companies such as Wal-Mart, Costco, Amazon.com and Dell, serve as good examples of organizations having implemented their own unique supply chain management systems, enabling them to become the market leaders in their respective industries. However, managing the supply chain effectively and efficiently can be challenging, and can lead to significant losses. For example, in April 2001 Cisco announced an inventory write-off of $2.5 billion of surplus raw materials, causing the company a net loss of $2.69 billion for the quarter (Narayanan and Raman, 2004). Despite these challenges, many companies have shown that the basis of competition in many industries revolves around supply chain development, which can become a core competency. Hewlett-Packard (HP), for example, faced mounting inventories and plummeting customer satisfaction (Lee and Billington, 1995). The company began targeting and analyzing the procurement, manufacturing and distribution aspects of the supply chain. Subsequent decision modeling and analysis lead to the establishment of a Worldwide Inventory Network Optimizer (WINO) that was able to track material flow and other performance indicators to reduce system wide variabilities and uncertainties. These supply chain modeling and analysis efforts lead to better overall supply chain design, including increased sourcing effectiveness (supply costs ‡
Disclaimer: This is a continuation and improvement of our earlier paper entitled “Supply Chain Management: An Implementation Decision Framework” published in the Proceedings of the 2005 ABA Annual Conference, Aruba. Consequently, there is some overlap between this paper and its earlier version. However, in this version, several components of the framework have been modified / added based on our further best practices literature review; the comprehensive framework has also been included.
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were cut by 75 percent), improved design for localization, a realignment of manufacturing and distribution strategy, more accurate forecasting processes, and redesign of product production processes. This, in turn, resulted in significant inventory level reductions, improved manufacturing cycle times and higher customer service levels at HP. Similarly, Digital Equipment Corporation (DEC) felt it needed to set the pace in its industry. To do so, DEC changed its strategy of high vertical integration to a focus on several core technologies and competencies (Arntzen, Brown, Harrison and Trafton, 1995). These company practices illustrate the tremendous impact that effective supply chain management can have on lowering costs and increasing profits, which is especially true for companies producing price-sensitive products. Streamlining supply chain systems can then reduce demand and lead time uncertainties while creating reliable supply, quality and consistency of products. A system-wide focus on costs is essential in order to gain a complete picture of the forces that affect company performance. Cost savings can be created not only by improving processes internally, but also by working with suppliers and distributors as integrated supply chain partners, allowing the firm to focus on its core competencies. This way market dynamics will drive market optimization across ownership boundaries. As pointed out by Hammer “companies should work together with no more overhead or difficulty than if they were part of the same enterprise. It should be no more difficult to get something from a supplier than from your own warehouse” (Latamore, 1999). It is the focus of this paper to identify such initiatives, activities leading toward them, and overriding SCM goals, integrating them into a comprehensive framework. This framework reflects our thinking, which is based on a thorough literature review and knowledge of the subject. Supply chain management activities can be classified into one of the following initiatives: management of inventory, management of sources of supply, demand planning and forecasting, logistics and distribution planning, product and process flexibility, design for quality, and production and capacity planning. An organization cannot and must not devote equal importance to each of these, due to limited resources and a differing importance of each initiative. Which initiative, and which activities within this initiative, should a company now focus on for effective supply chain management? Previously cited examples illustrate that the choice of appropriate activities can lead to significant gains, but that the application of inappropriate activities can be detrimental. This paper aims to facilitate above decision by developing an implementation-decision framework for SCM initiatives (Figure 1). In this framework, each initiative is associated with several lower-level activities and performance measures, as well as higher-level beneficial enablers and goals. It should be noted that the components of the framework are not mutually exclusive. Based on best-practice examples found in the SCM literature, this paper identifies and conceptually develops these goals, enablers, initiatives, activities and performance measures. The chosen best practices references were selected because of their frequent mention in literature, as well as their truly benchmarking character, which can serve as an example for other companies. The paper proceeds as follows. Section 2 introduces the SCM goals, followed by a presentation of enablers facilitating their achievement in Section 3. Section 4 explains the SCM initiatives that are used to develop and implement various SCM plans and activities in organizations. Section 5 introduces the SCM performance measures, and finally, Section 6 summarizes and concludes.
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------------------------------Please place Figure 1 approximately here -------------------------------
2. SCM Goals Supply Chain Management can be defined as the integration of all supply chain activities through improved relationships to achieve sustainable competitive advantage, with overall goals being reduced costs and increased service levels. The focus of SCM is to minimize not only the cost of internal manufacturing/service operations, but also the costs to suppliers and customers. This can only be accomplished by integrating operations across the entire supply chain. One therefore needs to look critically at the broader picture and identify operations where the costs can be minimized without compromising service levels. This section elaborates on these two goals.
2.1 Supply Chain Wide Cost Reduction In the past, in order to minimize costs, many companies formulated strategies based on producing standardized products for large markets. Organizations developed and implemented strategies to improve yield by stabilizing production processes via automation and tighter productivity standards. This orientation changed in the 1980s and 1990s to a focus on the entire cost structure for reducing waste, while at the same time saving however only on direct labor costs. For example, many companies moved their production and service facilities to Mexico, China, and India etc., to take advantage of low labor costs. As such, GM has established more than 50 parts factories in Mexico since 1978, and was able to build a Buick assembly plant in China (Dillon, 1998). The opening and reforming of these countries’ economies, and approving trade agreements such as NAFTA (North American Free Trade Agreement), made the implementation of such strategies possible. Likewise, opening and reforms that occurred in India made it possible for many organizations to move back office operations and call centers to India in order to reduce costs by 40 to 70 percent (World Information Technology and Service Alliance, 2004). The advances made in information technology, such as broadband communications and lower telecommunication costs enabled the conduct of these customer service operations across the globe. Similarly, many companies have increased their profits without generating more sales by cutting the costs of their operations. Some organizations even accomplished this by not laying off their workforce. For example, Southwest Airlines, after the tragic event in the U. S. on September 11, 2001 generated an operating margin of 11%, resulting in a net profit margin of 9% and return on assets of 6%. None of the top four U.S. airlines produced these kinds of results. The reasons for Southwest Airlines’ performance include selecting one type of aircraft (thus only requiring mechanics to be trained and specialized on one aircraft), using point-to-point direct flights, no assigned seats (less administrative back-office operations), restricting on-board service to beverages and small snacks (economies of scale due to less variety; fewer services), and direct booking of flights (Chase, Jacobs, and Acquilano, 2006). Wal-Mart’s Vendor Managed Inventory (VMI) and HP’s WINO are other innovative examples of organizations streamlining their material and inventory flows to reduce overall system wide costs. More recently, the U.S. Postal Service realized $2.1 billion in savings
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through major supply chain management initiatives (Duffy, 2006). For example, USPS created category management centers, established category strategies for most of their spend, and integrated suppliers more fully into procedures. Yet other companies have cut their costs by introducing new products with fewer parts, or using new technologies and standard parts or modules. These and several other enterprises have implemented SCM plans to reduce supply chain wide costs. SRI International, an independent non-profit research institute, estimated that over $342 billion of potential savings could be achieved by companies implementing supply chain solutions. FedEx, a pioneer among companies offering products and services to streamline supply chain operations, improved sales and profitability, and saved millions of dollars in business costs for its supply chain clients (SRI International, 2001). Similarly, a recent survey by the Performance Measurement Group (PMG), a strategic operations performance measurement and management services firm, indicated that best-in-class companies have a SCM cost advantage of 4 to 7 percent of revenues over average firms in their industry (SRI International, 2001). These examples illustrate that streamlined supply chain solutions can become the key for market differentiation and competitive advantage.
2.2 Improved Supply Chain Wide Customer Service Levels Supply chain initiatives are not only undertaken to reduce costs, but also to increase reliability and responsiveness of the supply chain (Brady, 2006), with the ultimate goal to improve customer service levels. Customers are becoming more sophisticated and demand new products or new features in existing products with an increasing faster time-to-market speed. Thus, fast new product introductions have become an essential component to remain competitive. As the consultancy McKinsey stated, going 50% over budget during development to get a new product out on-time reduces total profits by only 4%; in contrast, staying on budget and getting it to market six months late reduces profits by 33% (Vesey, 1992). Furthermore, collapsing product and process life cycles make products, plant facilities and equipment obsolete long before their expected useful lives. Similarly, implementing plans to reduce delivery and/or service times and to improve their reliability have shown to increase a company’s market share and profitability (e.g., Lu, Loh, Ibrahim, Sander and Brombacher, 2000). Several companies are able to improve service levels by reduced delivery lead times due to shorter product/process design and development time, shorter time between product development and manufacturing, shorter throughput lead times, and minimized wastes (Moore, 1998). In addition, selection of routes to ship products, effective maintenance of transportation equipment and training of operators to avoid traffic jams, etc. enables firms to reduce delivery times. For example, North American Parts Operations, the parts and accessories distribution arm of Toyota, streamlined its distribution network and achieved an increase in customer service levels by 35 percent, as well as a reduction of $90 million worth of inventory tied up in the supply chain (Oxnard, 2004). Similarly, by using a consolidated referral parts distribution system enabling enhanced visibility throughout the supply chain, DaimlerChrysler reduced shipments of referral parts and improved on-time delivery and order tracking capabilities (UPS, 2004a). Likewise, the supply chain initiative Order-to-Delivery (OTD), designed to meet the increasing demands of customers in the growing digital environment, reduced GM’s average delivery lead times for all its vehicles by 50%, from more than 80 days prior to 2000 to just over 40 days in 2001 (Deloitte, 2007; Koudal et al., 2001). At the same time, delivery reliability jumped from 68% to 90%.
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In another success story, Nikon shortened its supply chain significantly through its integrated system for managing inbound air and ocean freight, repackaging and kitting products for final distribution (UPS,2004b). Results included improved product visibility across the supply chain, providing higher level of service to retailers. Similarly, by centralizing and simplifying the planning and order process for products, and outsourcing high-end items to suppliers who can ship directly to customers, a premium beer importer and distributor reduced wastes and redundancies throughout the system, raising accuracy and ontime delivery rates of shipments to 99.9 percent (UPS, 2005).
3. SCM Enablers Several enablers are necessary to achieve the above SCM goals. This section identifies and discusses these enablers.
3.1 SCM Visibility Supply chain visibility is important for efficient and effective supply chain management. As Lee et al. (1997) stated, “distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies: excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, ineffective transportation, and missed production schedules”. All these issues are caused by what Lee et al. coined the “bullwhip effect.” A better match between actual demand and supply to reduce the impact of the bullwhip effect needs to be achieved. This is true for both the internal operations of the company, as well as the external links to suppliers and customers. For example, Schmitz Cargobull UK recorded record profits due to increased visibility internally through the use of a kanban card system (Cork, 2006). Kutner and his team at General Motors discovered in the late 90s long scheduling lead times and unreliable production schedules leading to excessive inventory throughout the supply chain (Koudal et al., 2001). This was due to a long demand planning cycle, as well as lack of visibility to supplier, material, and production constraints, which was made even more challenging by GM’s complex global supplier network and expansive sales and distribution network of independent dealers. In order to address these problems, GM built a private Web-based portal called GM SupplyPower, linking its suppliers to transact and share information related to purchasing, sourcing of materials, quality and production control, logistics, engineering, and manufacturing. This initiative helped GM reduce operations cost, and contributed to speeding up the vehicle development process (VDP) via engineering collaboration, improved supplier quality and responsiveness, and improved supplier communication relative to product schedules and capacity plans. Similarly, Proctor & Gamble estimated that it saved retail customers $65 million by increased visibility and coordination across the extended supply chain (Cottrill, 1997). More recently, IBM, Intel, Phillips, SAP and Deutsche Post World Net joined forces to establish the DHL Innovation Initiative. This initiative aims to improve supply efficiency by improved visibility throughout the chain (Anonymous, 2006). For companies that do not have the expertise and knowledge to undertake these initiatives themselves, third-party SCM consultancies, like Vector SCM, can achieve similar results (Hoffman, 2005). This firm provides companies, such as General Motors, with solutions to complex logistics and supply chain challenges.
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3.2 Collaboration Many companies that employ SCM strategies find that the development of effective partnerships is critical. These partnerships enable supply chain entities to design or redesign products and services by teams consisting of members from suppliers and manufacturers. They are also useful to move goods faster by working with distributors and retailers. Manufacturing firms may also collaborate with 3PLs to perform part or all of logistics requirements (Moore, 1998; Sink, Langley, and Gibson, 1996). Joint ventures, partnerships, acquisitions/mergers, and other collaborative structures based on interdependencies between SCM member organizations and shared strategic goals will enable firms to develop win-win relationships that gain competitive advantage for all SCM partners. For example, Foundry Networks, a supplier of high performance routing and web traffic management solutions utilized the “drop shipment solution” from Clear Orbit, a provider of real time supply chain execution software, for better collaboration with supply chain partners. Results included dramatically increased accuracy, velocity and visibility, as well as improved control over 3PLs (Anonymous, 2005). Collaboration cannot only take place between supply chain partners, but also between competitors, as Nabisco demonstrates. The company shared warehouses and trucks with 25 other manufacturers in an initiative to increase efficiencies, which resulted in a total savings of $900,000 across the supply chain (Keenan, 2000). Due to lack of communication among multiple third-party logistics providers and disparate IT systems to manage inbound and outbound logistics activities, disabling the optimization of the supply chain, GM formed an alliance with CNF in 2000, and incorporated a new company, Vector SCM to manage its vast logistics network (Deloitte, 2003). By integrating all 3PLs into one information system, Vector offered real-time carrier management and improved visibility of all materials moving within GM’s supply chain. This technology enabled GM to track shipments via the Web and to manage shipments by exception,reducing the delivery lead times by 50% and 32% improvement in delivery reliability.
3.3 Information and Communication Technologies (ICT) Coordinating and integrating demand, financial, material, and information flows across the supply chain, is very critical to the implementation of effective SCM plans, and can lead to increased operational efficiency, responsiveness, and reduced costs. Shared IT platforms, shared databases, RFID (radio frequency identification) technologies, the use of transaction and analytical information technologies, and an understanding of web-based technologies play a crucial role in implementing efficient information and communication technologies (Shapiro, 2001). ICT also plays an important role in linking manufacturers, suppliers, distributors and end customers, to meet their needs in terms of product variety, delivery and quantity. The impact of ICT on enterprise systems can be classified into three categories, namely speeding up activities, providing intelligent and autonomous decision making processes, and enabling distributed operations with collaboration (Huang and Nof, 1999). By effectively utilizing these through an integrated ICT, companies can gather vital information along the entire supply chain and react quickly to any foreseeable market changes, thereby gaining competitive advantage. For instance, Wal-Mart, by using ICT effectively, gained a strong cost advantage over competitors from progressive buying, shipping and storage, which were built on supply chain advantages in inventory management. Some consider this as Wal-Mart’s core competency to gain an edge over its competitors. Currently Wal-Mart is also experimenting with an RFID-based pallet and case-level tracking system to help determine re-stocking strategy, especially during peak seasons, and to make it
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easier to locate merchandise in the relatively small back room; it can also help in prioritizing what gets re-stocked first. Experiences have been successful; stores that are using RFID report a 16% decrease in out-of-stock inventories and a 10% decrease in manual orders (Sullivan, 2005).
3.4 Process & Product Innovation A recent benchmarking study by Deloitte suggested that significant growth in revenues will occur due to new product introduction (Deloitte Research Global Manufacturing Study, 2003). The results indicated that new products introduced within the last three years generated 29% of total revenue in 2003, up from 21% in 1998, and by 2006, manufacturers expect this number to reach 35%. Furthermore, manufacturers over the last three years have cut their product development cycle an average of 12% to 16%, and by 2006, they plan to shorten these cycle times to 13 months. Process and product innovation is therefore a crucial component to remain competitive. It enables firms to design products and services with less cost and in a speedier manner, and allows them to satisfy different needs and wants of customers. The goals and objectives of product/service and process innovation must be clearly stated and organizations need to work hard in achieving these goals. For example, at a time when washing machines and dryers and other appliances are being reduced to commodities and their prices are declining each year, Whirlpool, in 2000, decided to focus on innovation to design and produce its products that would truly differentiate it from its rivals. Whirlpool developed an approach to identify what customers really need and want, rather than tweaking its products to lower costs or boost performance. Since 2001, Whirlpools’ revenues from products that fit the company’s definition of innovation have increased from $10 million to $760 million in 2005. These impressive performance results led Hewlett-Packard, Nokia, and Proctor and Gamble to benchmark their programs against Whirlpool’s (Arndt, 2006).
3.5 Global Operations In the 1980s, many manufacturing companies in the U.S., Europe, and Japan started to build factories and hire workers in low-wage countries to produce goods that were to be exported back to their home countries. This practice continued to grow in the 1990s, fueled by several multilateral trade agreements, such as NAFTA in 1994. This treaty enabled companies to move entire production lines to Mexico, as was the case with General Motors’ Pontiac Aztec and Chrysler’s P.T. Cruiser (Farrell, 2004). Similar practices have been seen in service operations. Advances in telecommunications technologies such as broadband, global positioning systems (GPS), radio frequency identification (RFID), plummeting telecommunication costs and digitalization of paper-based business processes enabled this phenomenon. Consequently many service jobs and back office operations are being moved to countries like India, Ireland and the Philippines. This affects not only data entry, transaction processing, and call-center support operations, but also includes activities such as software design and development, and pharmaceutical research requiring highly skilled workers. According to a recent benchmarking study, more than 80% of study participants indicated selling outside their home regions, about 53% have shifted their production to lower-cost regions such as China, Mexico, and Central and Eastern Europe, and about 3 out of 5 outsource pieces of engineering (59%) and manufacturing (62%) to low cost countries (Deloitte Research Global Manufacturing Study, 2003). While these improved global
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operations can present significant opportunities and an enabler for increased SCM performance, the planning and execution of these initiatives is not an easy task. Furthermore, while this can mean a shift from domestic to global operations, the significance of having a well-managed and streamlined domestic supply chain is not decreased.
4. SCM Initiatives The enablers described above can be achieved via certain initiatives. This section identifies these initiatives and associated activities and issues. These will assist SCM managers in developing and implementing appropriate SCM strategies.
4.1 Managing Inventories Managing inventories effectively and efficiently throughout the supply chain is a crucial ingredient for superior supply chain performance. Benefits of lower inventories include reduced overall supply chain cost, decreased risk of obsolescence, and increased responsiveness and flexibility. General Motors, which was able to reduce cost by 26 percent annually via better inventory management, serves as an illustrative example (Blumfeld, Burns, Daganzo, Frick and Hall, 1987). Widely known for its super-efficient supply chain, Dell successfully uses a build to order and direct sales business models to hold down its inventory to only a four-day supply while shipping 95% of customer order within eight hours (Serwer, 2005). Hewlett-Packard relies on postponement strategy to minimize forecasting errors and to manage inventory and production. Last minute customization can be done in accordance with actual demand, with managing and forecasting inventory of generic products being more efficient. Other advances and best practices in this area include vendor managed inventory (VMI – an approach where the supplier manages inventory at the customer’s location), quick response manufacturing (QRM – an approach to reduce lead times), and efficient consumer response (ECR – an approach to create the best value for the customer at the lowest cost). The activities associated with effectively managing inventories include then some of the following activities: 1. Use of direct sales and build-to-order model. 2. Use of postponement strategy to reduce finished good inventories. 3. Use of information technology (EDI or RFID) up and down the supply chain to share demand and manufacturing information to reduce component and finished good inventories. 4. Use of the Internet to share demand and manufacturing information up and down the supply chain to reduce inventory cost. 5. Strive for product availability without increasing service levels to compete in the market place. 6. Use of vendor-managed inventories (VMI) to manage inventories effectively. 7. Use of Quick Response (QR) Code to manage inventories efficiently. 8. Use of efficient consumer response (ECR) to manage inventories effectively and efficiently. 9. Use of just-in-time (JIT) to reduce inventories. 10. Collaborate with suppliers and customers for better inventory management and replenishment.
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4.2 Managing Sources of Supply The management of supply sources has become increasingly important due to globalization and specialization, supply base restructuring and optimization, the drive to outsourcing and the focus on core competencies, and the more competitive environment and need to reduce costs. Value added by suppliers can include the early assistance and input in product development activities, which is stressed for example by Delphi Electronics and Safety (Carbone, 2006). The company pays attention to have close ties between their engineering department and the suppliers, to ensure that the best solutions are selected. A similar approach is taken by Boeing, which strives to have supplier involvement to enable access to technologies and ideas early on in the development process, which is also a way to share risks between the partners (Bernstein, 2006). A further development is the move of purchasing activities to an electronic platform. Benefits of electronic procurement include lower procurement costs, faster cycle times, reduced maverick or unauthorized buying, wellorganized reporting information, tighter integration of the procurement function, increased control over the supply chain, proactive management of key data, as well as higher-quality purchasing decisions. More recently, contract management has come onto the radar screen of supply chain professionals, due to its associated potential for better risk management and compliance, improved control and performance, as well as overall enhanced visibility, both internally and externally. A recent study by the Aberdeen Group among supply management executives and professionals revealed this heightened attention toward contract management (Patel, 2006). The potential is quite high; according to the study, 40 percent of the respondents indicated their company having limited visibility into contracts and compliance. Based on this discussion and other best practices, one can identify the following list of supply chain activities that are related to the management of supply sources: 1. Collaborate with suppliers in product and process development. 2. Evaluate and select suppliers based on cost, quality, and delivery. 3. Certify suppliers for quality. 4. Engage in e-sourcing / e-procurement. 5. Reduce and streamline the supply base. 6. Collaborate with suppliers in demand planning and forecasting. 7. Develop long term supplier relationships fostering trust and mutual well-being. 8. Use supply contracts to maintain effective relationships with suppliers. 9. Conduct joint improvement activities (Kaizen, best practices etc.) with suppliers. 10. Share information (demand, manufacturing, cost, quality, delivery, etc.,) with suppliers. 11. Developing technical capabilities of supplier, such as problem solving and joint product/process innovation. 12. Conduct structured communication with suppliers (monthly reports and feedback, etc.).
4.3 Demand Planning and Forecasting Demand planning, management and forecasting focuses on the effective coordination of actual and projected requirements from customers and distribution networks. Hyundai serves as an illustrative example. The company implemented a demand planning and
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forecasting software, and was thus able to reduce its inventory by several months (Taninecz, 2003). Examples of other companies that managed to streamline and improve their supply chains via better demand planning and forecasting include Boeing, Thomson Consumer Electronics, Dayton Hudson, Dell, Eastman Chemical, and Home Depot (Stein and Sweat, 1998). Visibility is not only important with external supply chain partners, but also within the company. For example, marketing and sales personnel use their own instruments to influence demand, including pricing, promotions and other special deals (terms and conditions). These artificially demand-influencing aspects need to be considered carefully (cf., Lee, 2001). For instance, West Marine, the largest boating-supply retail chain in the U.S., with more than 400 stores and annual sales of $690 million, had too many SKU’s to manage with extraordinarily complicated inventory requirements, primarily due to the seasonal nature of the business. West Marine implemented a collaborative planning, forecasting, and replenishment (CPFR) system with 200 suppliers and more than 20,000 items, representing 90 percent of its total procurement spend. More than 70 of its top suppliers were able to load West Marine’s order forecast directly into their production planning systems, increasing forecast accuracy to approximately 85% and on-time delivery shipments to be better than 80% (Smith, 2006). Based on this discussion and other company best practices one can identify the following implementation issues. 1. Establish forecasting techniques appropriate to each product family, rather than a single SKU. 2. Link sales and operations planning process to enhance demand planning and forecasting, to assess future demand. 3. Identify factors (promotions, discounts, product mix or assortments, etc.), that influence demand and assess clearly their strength and likely impact on future demand. 4. Establish efficient and effective collaboration practices between the firm’s departments, as well as with its key trading partners, to develop a true consensus demand plan. 5. Produce and deliver according to the consensus demand plan. 6. Compare actual results with the forecast to make necessary adjustments to future forecasts based on found variances. 7. Implement order process management. 8. Practice supplier collaboration on marketing and promotion planning. 9. Practice customer collaboration on marketing and promotion planning. 10. Share demand information with suppliers and customers.
4.4 Logistics & Distribution Planning Once the finished or semi-finished goods are made, manufacturers and suppliers need to deliver them to correct customer sites on time and in right quantities. Thus the development and implementation of an effective logistical network is critical. In the 1980s and 1990s, companies began to view logistics capabilities as more than simply a source of cost savings and recognized it as a source of enhancing product and service offerings as part of the broader supply chain process to create value to customers (McDuffie, West, Welch and Baker, 2001; Mentzer, Min and Bobbitt, 2004). Wal-Mart serves as a prime example of one of the first to recognize logistics and distribution planning as a competitive advantage. As such, the retailer introduced cross-docking to reduce inventory, and thus tied-up capital,
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tremendously (Stalk, Evans and Shulman, 1992). Similarly, FedEx is estimated to have saved its U.S. and international clients over $325 million in 2000 by using FedEx express services to reduce the transit time that raises inventory carrying costs. If we consider the 1993-2000 period, the cumulative business savings could be $1,318 billion (SRI International, 2001). Similarly, The Colography Group estimated that every $1 a firm spends on premium transportation result in as much as $1.50 savings in overall logistics costs, representing a price-value ratio of 1.5. Using this rule of thumb, it is estimated that FedEx customers gained a value of $27.4 billion in logistics cost savings from utilizing FedEx services in one year alone (SRI International, 2001). Logistics and distribution planning plays a distinctive role in the integrative strategic process to improve efficiency (cost and capital reduction), effectiveness (customer service and logistics quality), competitiveness and profitability (Mentzer, Min and Bobbitt, 2004). Important considerations when making logistics and distribution network decisions include the following issues:
1. Manage the firm’s overall resources to enable distinctive logistics capabilities. 2. Understand the firm’s goals and the resulting relationship between logistics capabilities and competitive advantage. 3. Use technology to enhance logistics capabilities (e.g., use of global positioning systems to track the location of trucks in the field). 4. Expose the firm to global competition and logistics capabilities to improve global competitiveness. 5. Use logistics capabilities to achieve competitive cost advantage through efficiency (cost and capital reduction). 6. Use logistics capabilities to achieve of competitive differentiation advantage through effectiveness (customer service). 7. Implement customer-focused multidimensional customer service (flexibility and responsiveness) and logistics quality (timeliness, availability, reliable delivery, and related communication with customers), as well as demand management interface capabilities to gain strategic advantage. 8. Enable before-during-and-after sales service interface capabilities to gain strategic advantage. 9. Enable logistics supply management interface capabilities to minimize supply chain wide cost without compromising service levels. 10. Practice cross functional management to enhance logistics supply management interface capabilities. 11. Use information management logistics capabilities to meet operational and strategic information needs to balance supply with demand and to facilitate supply chain exchanges, optimizing chain wide capital investment. 12. Actively coordinate logistics with other functions within the firm in pursuing efficiency and effectiveness to create value to customers. 13. Actively coordinate collaboration of logistics with other firms across the supply chain in pursuing efficiency and effectiveness to match supply with demand. 14. Use 3PLs to leverage their competencies in implementing form’s logistics strategy.
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4.5 Product & Process Flexibility Process flexibility and associated product variety has become important weapons for companies to compete in the marketplace (Vickery, Calantone and Droge, 1999). Flexibility is defined as the ability of an organization to efficiently and effectively adapt to both foreseen and unforeseen changes that can come from both inside and outside the organization. For example, with greater flexibility and faster adaptations, customers can have greater confidence in an organization’s ability to meet future needs. Procter & Gamble wants to be such an organization. The company therefore implemented a consumer-driven supply network strategy, with which it is driving consumer needs deeper into the supply network, in order to be more responsive and flexible (Richardson, 2005). Gerwin (1996) identified several types of flexibility including mix, changeover, modification, volume, routing/program, material, and responsiveness flexibility. It is critical to develop and implement SCM plans based on these flexibility categories. As stated by Melnyk and Denzler (1996), no firm can excel on all types of flexibility and improving flexibility can affect other characteristics as well, such as quality, time and cost. As such, the selection of methods to improve flexibility should reflect on what dimensions and how firms compete. The following are some of the issues related to this initiative. 1. Invest in firm’s R &D for product and process development. 2. Plan for effective product lifecycle management. 3. Implement internal cross functional teams, to coordinate efforts between functions and to ensure that input from all functions is heard, so that the overall company benefits can be maximized (as opposed to merely functional benefits, which may be to the detriment of other functions). 4. Use Design for Manufacture and Assembly (DFMA) for product and process development. 5. Use Failure Mode Effect Analysis (FMEA) for product and process development. 6. Use of techniques such as Quality Function Deployment (QFD) for product and process development. 7. Collaborate with suppliers and customers for product and process development. 8. Plan for product mix and process flexibility.
4.6 Design for Quality Design quality, which refers to the inherent value of the product a company provides for the marketplace, is a strategic decision (Chase, Jacobs and Acquilano, 2006), and can be a competitive weapon. For example, at Xerox in 1982, CEO David Kearns realized that Xerox needed to implement a total quality process if it were to remain competitive in the global market place. In the late 1970s and early 1980s Xerox faced stiff competition from Japan at the low end of the copier market, resulting in a market share drop to less than 50%. Japanese manufacturers were able to be so competitive due to the use of quality management principles. They managed to produce copiers at much lower costs and much shorter time-to-market. Firms like Motorola, Xerox, AT&T, and General Motors have shown how to follow quality criteria (proposed for example by Deming, Juran and others) to develop and implement quality strategies, and to win, for example, the prestigious Baldrige award. The six sigma quality process developed by Motorola is one such good example. By developing and implementing this process, Motorola showed others how to produce 3.4 defects per million
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parts and became a world class manufacturing organization. By implementing a six sigma quality process, GE showed how to improve returns on investment, for example, returns of $150 million on an investment of $200 million in 1996, $600 million on an investment of $400 million in 1997, and more than one billion on an investment of $400 million in 1998 (Pande and Holpp, 2002). Many manufacturers are requiring their suppliers to implement quality systems, such as six sigma, or getting certified with ISO 9000. Quality is an absolute necessity, and can be achieved including some of the following activities. 1. Use statistical process control techniques. 2. Use Taguchi designs to improve design quality. 3. Conduct continuous improvement / kaizen projects. 4. Conduct quality certifications to produce products. 5. Encourage supplier quality certifications for component parts and materials. 6. Establish six sigma quality processes to product quality products. 7. Ensure management commitment for quality. 8. Create cross functional teams for quality improvement. 9. Generate employee commitment and involvement for quality improvement. 10. Practice benchmarking based on est practices. 11. Use performance measures to assess quality of processes and products.
4.7 Capacity, Sales and Production Planning Capacity, sales and production planning are important supply chain initiatives. How these activities are conducted has evolved over the years. It started with simple manufacturing requirements planning (MRP) in the 1970s, and was followed by the more encompassing manufacturing resource planning (MRP II), which eventually led to enterprise resource planning (ERP). ERP systems can provide seamless integration between various functions within a company, and offer advanced planning and optimization (APO) tools for production and capacity planning. In advanced stages, these systems are extended to outside supply chain partners, leading to strategic sharing of information, which in turn leads to better production and capacity planning. The right implementation, use and application of these systems can bring about significant improvements, and enables tighter production and capacity planning. For example, Courtaulds Films, a producer of plastic films used to package food products experienced in the late 1980s that 25 percent of its deliveries were shipped late, due to its production planning and scheduling system not being able to handle the complexity inherent in the company’s supply environment (Goddard, 1992). However, once an MRP II system was implemented, the goal of 95 percent on-time shipments was achieved soon in the early 1990s. Even further integration via ERP systems is illustrated by Chevron, which expects the ERP system to save $50 million annually, and Microsoft, which projected savings at $18 million per year (Shafer and Meredith, 2003). The following is a list of activities that are related to production and capacity planning initiatives: 1. Collaborate with suppliers and customers. 2. Use JIT production.
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3. Use sales and operations planning (i.e., implement sales plans by translating strategic imperatives into tactical actions). 4. Use advanced production planning systems. 5. Practice effective inventory management and replenishment. 6. Implement enterprise resource planning systems. 7. Change / modify products to meet market demand. 8. Rapidly change production volume. 9. Rapidly change product mix. 10. Rapidly handle customer orders, or engineer-to-order. 11. Use postponement (delayed differentiation) / mass customization strategies to meet market demand. 12. Plan for flexible capacity to quickly shift manufacturing load. 13. Strategically locate facilities domestically and internationally.
5. SCM Performance Measures Developing and implementing SCM plans related to the above mentioned decision areas are important. At the same time, it is equally important to determine the performance metrics to monitor the plans and to take corrective actions if deviations occur against the planned outcomes. For example, the most effective relationships exist where supply chain partners have been made aware of what performance standards they are being held accountable for (Stuart and McCutcheon, 2000). Selecting performance measures is intended to assess how well companies accomplish the specific (collaborative) goals they set. These characteristics include the primary requirements that organizations need to continually address when desiring the constant improvement of supply chain performance. These supply chain performance measures that an organization sets for itself and for others, should be specific and measurable, and should be evaluated at regular intervals. As stated by Gunasekaran et al. (2001), “such measures are needed to test and reveal the viability of strategies without which a clear direction for improvement and realization of goals would be highly difficult”. Furthermore, Lee and Billington (1995) argued that discrete sites in a supply chain do not lead to improved productivity if each is to pursue its goals independently, which has been the traditional practice. Since the metrics that are used in performance measurement influence decisions to be made at strategic, tactical and operational levels, it is critical and important to link the supply chain metrics to these levels. This would enable the SCM managers to assign each metric to a level that is most appropriate. The performance metrics also need to distinguish between financial and non-financial measures. However, some metrics could be classified as both financial and non-financial. For example, the buyer-supplier relationships can be classified in terms of financial performance achieved, such as cost savings, and in terms of non-financial performance, such as improved quality, reliability, flexibility and delivery. Thus, for effective supply chain management, measurement goals must consider integrated supply chain goals and the metrics to be used, linking all functional areas of sourcing and procurement, manufacturing, logistics and distribution, as well as supply chain planning and customer service. Enforcement needs to be a cohesive system of measuring performance between company units, internally as well as externally. Some of the SCM performance metrics include return on investment (ROI), flexibility to meet particular customer needs, delivery lead time, total transportation cost, product development cycle time,
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manufacturing cost, capacity utilization, and inventory carrying cost (Gunasekaran, Patel and Tirtiroglu, 2001). It is interesting to observe that the Supply Chain Operation Reference (SCOR) model identified five distinct categories, each with several specific performance measures [http://www.supply-chain.org/]. These include reliability (perfect order fulfillment), responsiveness (order fulfillment cycle time), flexibility (upside supply chain flexibility, upside supply chain adaptability, downside supply chain adaptability), cost (supply chain management cost, cost of goods sold), and assets (cash-to-cash cycle time, return on supply chain fixed assets, return on working capital). By no means are these metrics all inclusive; nevertheless, they need to clearly identified and used to assess supply chain performance. Furthermore, they need to correspond to strategic, tactical and operational levels and should be aligned to all SCM functional areas.
6. Summary This paper proposes a conceptual integrated implementation-decision framework for SCM, based on a review of best practices. The framework consists of SCM goals, enablers, SCM initiatives and the defining operational activities which will enable firms to develop and implement SCM plans logically and in systematic fashion. We believe that the proposed framework can easily be used by firms to implement SCM strategies. For example, if a firm is planning to implement an SCM approach, a survey questionnaire can be designed and distributed among concerned managers and other employees to examine which of these enablers, as well as which of the SCM initiatives and the corresponding operational issues are important. At the same time, this assessment can be used to conduct a gap analysis, contrasting the assigned importance of an initiative to its actual practice. In turn, appropriate SCM plans can be developed and implemented in the firm. Furthermore, the framework can be used with the AHP (analytic hierarchic process) modeling process to systematically prioritize the SCM plans for effective implementation by companies. AHP is a methodology for multi-attribute decision-making, which should be well-suited for the issues described in this manuscript. Our future efforts lie in the application of AHP to the proposed framework.
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Figure 1. SCM Implementation Decision Framework
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