Supply Chain Operations Speaking Notes -ICLT Program

1
Supply
Chain
Operations
Dr. Turhan Bilgili (CMILT*)
Head, Training & Consultation
Middle East Logistics High Institute
e-mail: turhanbilgili@meli.edu.sa
www.meli.edu.sa
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Timeline
Period Activity
18.00 19.00 Introduction & 1st Session
19.00 19.15 Q & A, Break
19.15 20.00 2nd Session
20.00 20.20 Q & A
20.20 Wrap-up
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CILT Assessment Scheme – Final
* Only four (4) questions from Section D will be evaluated.
SECTION A (1 point/ea.) multiple choice
Qs 1 2 3 4 5 6 7 8 9 10
Points
Subtotal 10
SECTION B (1 point/ea.) right statement
Qs 1 2 3 4 5 6 7 8 9 10
Points
Subtotal 10
SECTION C (2 points/ea.) short sentences/listing
Qs 1 2 3 4 5 6 7 8 9 10
Points
Subtotal 20
SECTION D* (15 points/ea.) essay type
Qs 1 2 3 4 5 6
Points
Subtotal 60
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CILT Assessment Scheme – Final
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Abbreviations – 1
3PLs Third-Party Logistics
ABC Activity-Based Costing
APS Advanced Planning and Scheduling
ATO Assemble to Order
B2B Business-to-Business
B2C Business-to-Consumer
BOM Bill of Material
BSC Balance Score Card
BTO Built to Order
CEO Chief Executive Officer
CILT The Chartered Institute of Logistics
and Transport
CMI Co-Managed Inventory
DSS Decision Support System
EAN European Article Number
ECR Efficient Consumer Response
EDI Electronic Data Interchange
EIS Emergency Information Systems
EOQ Economic Order Quantity
EPOS Electronic Point of Supply
ERP Enterprise Resource Planning
ESI Early Supplier Involvement
ETO Engineer to Order
EU European Union
GIS Geographical Information systems
ICT Information Communication Technology
IT Information Technology
JIT Just in Time
KPI Key Performance Indicator
LoNGPEST Local, National, Global, Political,
Economic, Social and Technological
LT Lead-time
MIS Management Information Systems
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Abbreviations – 2
MM Materials Management
MPS Master Production Schedule
MRO Maintenance, Repairs and
Operations
MRP Material Requirements Planning
MRPII Manufacturing Resource
Planning
MTO Make to Order
MTS Make to Stock
OEM Original Equipment Manufacturer
OTIF On Time in Full
PEST Political, Economic, Social and
Technological
PESTLE Political, Economic, Social,
Technological, Legal and Environmental
PLC Product Life Cycle
POD Proof of Delivery
QR Quick Response
RFID Radio Frequency Identification
ROL Re-order Level
ROP Re-order Point
SBU Strategic Business Unit
SCM Supply Chain Management
SCOR Supply Chain Operation
Reference
SKU Store Keeping Unit
SLEPT Social, Legal, Economic,
Political and Technological
STEEPLE Social, Technological,
Economic, Environmental, Political,
Legal and Ethical
SWOT Strengths, Weakness,
Opportunities and Threats
THE Technical Help to Exporters
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Abbreviations – 3
TPM Total Productive Maintenance
TPS Transaction Processing Systems
UN United Nations
UNLB United Nations Logistics Base
VMI Vendor Managed Inventory
WFP World Food Programme
WIP Work in Progress
WMS Warehouse Management Systems
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Glossary of Terms – 1
1st tier represents the immediate suppliers of the firm in a supply chain.
2nd tier represents the suppliers of the 1st tier supplier to an organization.
Activity-based costing (ABC) an accounting system linking costs directly to the activities
driving them.
Agile concept is a supply chain approach for an organization to respond quickly to
changes in demand.
Benchmarking is a set of methods of comparing operations and performance with other
operations or organizations.
Business-to-Business (B2B) is a relationship for online trading transactions between
organizations with automatic information flows.
Bill of Materials (BOM) is the quantification of the materials and components necessary for
the manufacture of the products required from MPS.
Collaboration is sharing and working together between members of a supply chain
Coordination means integration of functional and at times geographically dispersed
operations.
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Cross docking is a form of warehousing in which large shipments are received and broken
down into smaller outgoing shipments, without being placed into storage.
Cycle time is the actual time between the receipt of an order or initiation of an activity to
the time at which the activity ends or the time at which the order is received.
Direct costs are those costs which are tied directly to an activity, product or service.
Downstream is a term used to describe supply chain activities or partners positioned
towards end users.
E-business is a term used to refer to trading between organizations and their business
customers via electronic means, i.e., business-to-business (B2B).
Economic Order Quantity (EOQ) is the order quantity that minimizes the annual holding
and ordering costs.
Early Supplier Involvement (ESI) is a process in which suppliers are involved early, such as
in new product or service development in order to benefit from suppliers' expertise.
End customer is the ultimate user of the product, which may not be the same as the
organization or individual who places the order and/or pays for the product.
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Fixed costs; costs incurred by an organization regardless of the level and timing of
activities, and which cannot be changed very quickly.
Indirect costs those costs which are not tied to a product/ service or level of operations.
Inventory stocks and items used to supply organizational operations and customer
service.
Just-in-time (JIT) is a philosophy of production based on the planned elimination of all
waste and on continuous improvement.
Key performance indicator (KPI) is quantifiable measures which reflect an organization's
critical success factors.
Lead-time (LT) is the time elapsed between the receipt of an order or the request, through
to the time that the order or request is fulfilled.
Lean thinking is an approach of seeking to reduce unnecessary costs by eliminating waste
from supply chain operations, thereby enriching value from a customer perspective.
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Logistics concept is a management concept requiring that an organization's objectives
can be realized through the mutual interdependence of all major functional activities of
the organization.
Master Production Schedule (MPS) is the total requirements from customer orders and
any provisional demand for a specific time period.
Material Requirement Planning (MRP) is a planning process that translates the master
production schedule (MPS) into planned orders for actual parts and schedule (MPS)
components (based upon the BoM) needed for the production of items on the MPS.
Product Life Cycle (PLC) is a concept stating that products and services evolve through a
life cycle so that specific management techniques apply at each stage of the life cycle.
Proof of Delivery (POD) is an evidence that goods or a service has been received usually a
signed document by the recipient or their representative.
Purchasing cycle refers to all purchasing activities from required identification to the time
to goods or services delivered to the user.
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Purchasing involves all activities associated with the identification of needs, the location
and selection of suppliers, the negotiation of terms (where possible), and following up in
order to ensure supplies are delivered on time, in the right quantities, and at the right
price and place.
Purchase order (PO) is a document specifying the terms and conditions of purchase
agreements, including quantity and price, and which initiates supplier action.
Quality is a measure of whether or not a product or service lives up to customer
expectations.
Quick response is an information and logistics system aiming to provide and supply the
right product of the right quality to the right place at the right time. This derives from the
need to be competitive by responding quickly to market needs.
Radio Frequency IDentification (RFID) is tracking technology attached to the product or
packaging, informing the reader of the nature and location of what is attached.
Reverse logistics is the management of the flow of goods upstream, usually unwanted,
used, damaged or packaging materials.
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Supply chain comprises all activities associated with the flow and transformation of
goods from the raw material stage through to the final consumer.
Supply chain flows are the movements as material, information and money flows in a
supply chain.
Supply chain integration is the coordination of the flow of information and materials
from source through production, up to final consumption in a supply chain.
Supply chain is the efficient, effective management of supply chain activities for the
production of goods and services in order to maximize customer value and maintain
sustainable operations.
Supply chain networks are a group of organizations and activities interconnected for
purposes of production, and the subsequent delivery of a product or service.
Trade-off is a compromise of one activity or function in order to gain in another for the
overall benefit of the system or whole.
Upstream relates to activities and partners from the supply side of a supply chain.
Variable costs are the costs that change with the scale of level of operational activity.
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Fundamentals of a Supply Chain
The Supply Chain Environment
Operations in a Supply Chain
Supply Chain Performance
1.
2.
3.
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UNIT OUTLINES – 1
Learning Outcomes
The Supply Chain Concept
Competitive Advantages of Supply Chains
Supply Chain Structure
Types and Flows of a Supply Chain
Supply Chain Structures
Reverse Flows
Planning Supply Chain Operations
Summary
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Learning Outcomes – 1
We will begin by looking at a normal business operations model the so-called input-
transformation-output model. It is important to note that the term business used in
this context refers to all entities concerned with buying and selling, including the work of
the government, its agencies and non-governmental organizations. This broad view is
essential in our discussion as the business methods, skills, attitudes and objectives are
being adopted irrespective of the type of the organization.
Every organization produces a product or service required by a variety of customers.
These products and services range in variety, form and price.
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The organization needs to understand the needs of its customers so that it can organize
the procurement and/or production and delivery of these products and services to the
satisfaction of all stakeholders.
All organizations require resources as inputs into the transformation such as the
production processes in order to produce a product or a service output , whilst the type,
amount or combination of these resources may vary according to the needs of each
organization.
The above process is common to most organizations, although this may vary in nature
and type of inputs and outputs.
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It is also important to note that an organization's
output may actually represent another s input. The
interrelationship between businesses goes beyond
organization types and industries; therefore, it
follows that the success of any business entity is
linked to those with which it is connected.
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The Supply Chain Concept
Every organization or product has a supply chain. As with the logistics concept, it is
important that we begin by looking at the definition of supply chain . Supply chain
comprises all activities associated with the flow and transformation of goods, from raw
material stage through to the final consumer (Handfield & Nichols, 1999); in other words, it is a
sequence of events intended to satisfy a customer or end user. It can include procurement,
manufacture, distribution and waste disposal together with the associated
transportations, warehousing, inventory control, materials handling, order processing,
distribution, recycling, information processing to name some of the elements. We will
look at some of these in more detail later in this module.
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What is Supply Chain Management?
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Definitions and Role in Business Operations – 1
Have you ever asked yourself how long it takes to assemble a vehicle? Is it 20 hours or
three days? If so, why does it take 3 months for a manufacturer to make and deliver a
vehicle that a customer wants?
You probably have gone to the supermarket and found some items you wanted to buy
not on the shelves. Why?
These are the types of questions that raise issues of logistics and supply chain
operations, and which we will attempt to identify and address. When we think about
logistics and supply chain, we are thinking about how to make and deliver goods and
services to customers and consumers when they are required and at the right time, in the
right quantities and to the required quality.
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It is worth noting here that every product has a complete package including both goods
and service. The traditional model of an organization's supply chain role, implies that the
activities of procurement, production and distribution were managed independently with
little coordinated effort. Inventory would be used to buffer between these activities,
resulting in large stocks of inventories being held and duplication of effort and
stockholdings.
Organizations have focused more keenly on the effectiveness of the activities as
separate functions; this has meant that the activities of purchasing, production,
warehousing, marketing and transportation have been decoupled into functions, ignoring
the fact that these activities are dependent upon each other. Organizations are moving
away from this traditional model and towards the improved coordination and integration
of activities in order to provide their markets with higher service levels at reduced costs.
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This coordination and control of processes results in:
smooth materials and goods flows in and out of the organization,
clean, well-designed work processes,
sufficient production capacity for the demand,
sufficient goods and service to satisfy the customers,
sufficient logistical resources for distribution appropriate quality systems in place.
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To illustrate this, let us consider an organization taking a variety of inputs (raw
materials, labor, equipment, information, finance, spare parts, and other resources) into its
operations, i.e., procurement, production, service, transportation, selling, training, etc., in
order to create outputs especially the product that the organization sells to its customers
or consumers.
A frozen food manufacturer requires a range of inputs including fresh food, staff, food-
processing equipment, energy and freezers in order to prepare and produce frozen food.
Similarly, a Police Force will require inputs of computer systems, officers, information and
public awareness, in order to provide the outputs of security and a lawful society.
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The key traditional supply chain activities are procurement, production and
distribution, with early approaches witnessing opportunities for coordination of
operations between purchasing and production activities or production and distribution
activities.
At the heart of every organization are the logistics operations that create and deliver
products and services. These operations require inputs in order to produce the right
output in order to be delivered on time, in the right quality and at the right price.
Essentially, logistics operations are the fibers and lifelines that enable organizations to
survive and thrive within their operating environments. We will look at these fiber and
lifelines in our module.
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Procurement, Production and Distribution
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Organizations are continuously searching for improvements in their operations.
Managers have sought new ways of managing their organizations' operations in order to
satisfy demands from stakeholders whilst meeting organizational goals and objectives.
Goals and objectives enable organizations to unify decision-making in order to focus
operational resources and effort towards a set of common goals.
Today, organizations' goals and objectives form part of their mission statements and
business plans, and are usually posted and placed at strategic positions to which all staff
can become familiarized. As a first step, staff must have a clear understanding of a
common supply chain objective for their organization. This is important in order to
capitalize on any opportunity that arises whilst mitigating the barriers and threats.
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You can trace back and discover an array of management techniques that have been
applied with the aim of improvements in operations to survive changing customer
requirements in the markets in which they operate.
Some of these techniques include:
Operations Management: focusing more on the internal capability of the organization
to mobilize its resources in the production of goods and services.
Production Management: with a focus on production or manufacturing organizations
to improve the cost efficiency of manufacturing.
Physical Distribution Management: focusing more on the distribution of finished
goods.
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Materials Management (MM): focusing more on materials requirements for production,
to smooth the flow and availability of raw materials and other inventories in a
manufacturing environment. MM is more concerned with the inbound movement and
storage of raw materials, purchased components, and subassemblies entering and
flowing through the conversion process (Fawcett et al., 2007)
Supply Chain Management (SCM): extending the logistics concept outside an
organization's internal boundaries. Logistics management has become part of supply
chain management that plans, implements, and controls the efficient, effective
forward and reverse flows and storage of goods, services, and related information
between the point of origin and the point of consumption in order to meet customers
requirements (Fawcett et al., 2007, p. 153).
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Logistics Management: with more focus on the coordination of functional activities
towards a common goal. Logistics is the art and science of moving things from one
point to another and storing them along the way. Efficient logistics makes global
economies possible, lowering the cost of living for people around the globe. A
supermarket in London may sell vegetables and fruits grown in Africa, whilst an
apparel retailer in North America might sell products sourced from many countries in
North Africa and Asia.
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Today, pressure is increasing from other angles especially the need to be cost-effective
and responsive to other key stakeholders in the business environment. This means
businesses whether profit-focused or not-for-profit, and both private and public sector
organizations are all expected to operate within certain parameters in order to satisfy all
stakeholders. Let us now look at some of the key management approaches for the last
two decades which have led to supply chain thinking.
The supply chain concept has evolved since the middle of the 20th Century, with the
following developments:
1950 1960s: Distribution broadly represented by haulage industries, with a focus on
transport.
1960 1970s: Concept of Physical Distribution developed and the distribution activities
were considered the dark continent of operations therefore becoming a valid
management area.
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1980 1990s: The logistics concept in search of cost trade-offs, the search for cost
competiveness continued with emphasis on reduction on stock levels, the use of ICT, and
the growth of Third-Party logistics (3PLs) service providers.
1990 2000: Supply chain concept emerging from the need to plan and control all
processes from sources through production to distribution to the final consumer. This
called for a rethink of business processes, e.g. process re-engineering (BPR), so as to
include operations of partners outside organizational boundaries, e.g. partnerships,
alliances, etc.
2000 2010: Sustainability of operations has also become a contemporary management
issue for logistics and supply chains due to pressures regarding efficient use of resources,
global trade and other societal demands.
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Competitive Advantages of Supply Chains – 1
There has been pressure on organizations to improve competitiveness. This is because
customers have more alternatives as a result of the globalization of markets and
improvements in information technologies. In order to remain competitive, organizations
are responding by seeking to improve customer service levels at reduced operational
costs. So, in addition to internal process improvements, organizations are now searching
for further improvements along their supply chains, that is, their upstream and
downstream partners.
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Some of these organizations have realized the potentials offered for competitiveness
through coordinated supply chain operations. The aim is to ensure that the right product
is available on the market at the lowest possible cost. Supply chains have provided
different options for competitiveness. An example is where some organizations have
chosen to outsource various activities to outside supply chain partners (e.g. component
manufacturing, warehousing, transportation). With globalization, we have also seen
increasing concentration in many industries mostly through merger and acquisition and
so there are fewer larger and more complex players, operating on an international and
often global basis.
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These decisions have implications on organizations' competitiveness, given that any
failure on the part of the supply chain network partner will negatively affect the
organization's service and/or competitiveness. We will look at how organizations and
their supply chain partners are managing some of these challenges in order to maintain
acceptable service levels in order to remain competitive.
In supply chain operations, the logistics concept plays an important part in ensuring the
organization's competitiveness.
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The competitive elements that have been used for manufacturing activities have
traditionally been expressed in terms of:
Low cost per unit,
Quality,
Delivery.
We can add to these elements:
Innovativeness,
Time to market,
Delivery speed,
Delivery reliability,
Flexibility.
Therefore, it can be noted that supply chain performance is not based on cost alone but
rather on a combination of the issues of quality, flexibility, innovation, speed, time,
dependability and cost.
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In an effort to enhance supply chain performance, the industry has witnessed the
emergency of logistics service providers with core competencies in activities such as
warehousing, transportation, inventory management and others. These, together with
improved technology and communications, have broadened the scope and ability of
supply chain networks. The management of supply chains has become an important part
for most organizations to
ensure that supply chain
operations deliver the
expected results.
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Supply Chain Management (SCM) is receiving more attention as the alternative to
achieving competiveness through cost-reduction and improved customer service levels.
So, what does supply chain management involve? SCM is about managing and
coordinating the information, materials and money flows of the supply chain; that is, the
whole process from the time that a need is identified to the time that this need is
satisfied. This includes all the activities of the chain, from source through to
manufacturing, distribution, and up to final consumption. It also includes the return of
unwanted and packaging materials.
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Driving Competitive Advantage
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Task 1.3
List five elements that can be used to express how an organization's supply chain
operation is competitive.
Answer:
Any five (5) from the following list:
▪ Cost
▪ Quality
▪ Innovativeness
▪ Time to market
▪ Delivery speed
▪ Delivery reliability
▪ Flexibility
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Supply Chain Structure – 1
Let us now consider the configuration of supply chains. Every firm or organization is
part of a supply chain and, similarly, every product or service has a supply chain. Consider
that an organization, as depicted on the next slide, has a demand for a product or service
from one of its customers. The firm will require supplies of raw materials and
components from suppliers in order to produce and supply the product or service.
Therefore, it will have linkages and relationships with its suppliers, in addition to links
and relationships with its customers or end users. This is a simple form of a supply chain
in operation.
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Supply Chain Organization and Key Functions
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As you may have experienced already, things are not as simple as they appear above.
We have complex supply chain configurations that comprise several linkages and
relationships, as shown on the next slide. The result is that the numbers of participating
partners facilitating the operations in the supply chain have increased. Therefore, the
supply chain is represented by a number of activities and organizations requiring
coordination in order to achieve the desired levels of service.
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Upstream and Downstream Supply Chain
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We will make reference to upstream and downstream partners and flows of a
supply chain. Upstream represents all activities and partners from the supply side of the
firm; these partners are further grouped into tiers where first (1st) tier represents the
immediate suppliers of the firm, second (2nd) tier represents suppliers to the first tier, and
so on. Similarly, downstream flows and partners are on the customer side of the firm,
with the first (1st) tier being the firm s immediate customers, and the second (2nd) tier
representing customers of the first tier customer.
As illustrated, a supply chain encompasses every effort involved in producing and
delivering a final product or service from a supplier s supplier to a customer s customer.
Keeping in mind this concept, we note that a supply chain does not focus on a single firm
but rather on a number of players in the process of satisfying customer needs.
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Nike Supply Chain Structure
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Types and Flows of a Supply Chain – 1
The supply chain has distinct movements that provide the linkages to the various
activities. We refer to these movements as material, information and money flows in a
supply chain. The types and directions of these flows will be discussed in more detail
below. The success and failure of a supply chain depend on the capacity and capability of
these flows along the supply chain.
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Types and Flows of a Supply Chain – 2
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Material Flows
The aim within any supply
chain is to maintain the timely,
uninterrupted flow of materials
from sources to consumption.
Let us look at some of the
activities involved in this flow
of materials from sources to
consumption.
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Acquisition of Goods – 1
Organizations will have to make a decision concerning whether to produce goods or a
service internally or to source it from an outside supply chain partner. If goods or services
are to be sourced from supply chain partners, it is then the role of procurement to provide
this important linkage so as to ensure materials flow into the organization effectively.
Every organization depends on purchasing to an extent, and some of these procurements
involve very critical goods and services.
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Acquisition of Goods – 2
Purchasing involves all the activities associated with the identification of needs, the
location and selection of suppliers, the negotiation of terms (where possible), and
following up to ensure that supplies are delivered on time, in the right quantities, and at
the right price and place. Procurement is critical in the flow of goods and service, as often
the purchasing cycle has an impact on delivery lead time and customer satisfaction. The
ability of a supply chain pipeline to continuously move goods and service depends to a
large extent on the ability of its purchasing function and its relationships with upstream
partners.
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Information Flows
We observed earlier that one of the key flows of a supply chain is information. It is
important that information flows in all directions of the supply chain. This aspect is
referred to as information sharing , and is essential if the objectives of a supply chain are
to be achieved.
We often talk of upstream flows involving demand and requirements from the buy
side of the chain and downstream flows depicting product availability information from
the supply side of the chain. Organizations and their supply chain partners use
information to support the various supply chain activities. Some of the activities we have
described above use information intensively. We need information to tell us the
requirements and demands from our customers. We need information flows to record and
retrieve necessary data for physical and monetary flows. At times called execution and
transaction processing , this type of information can be highly automated as, most of the
time, the activities are performed in the same way.
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SC Information Flows
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The Nature of Information Needs for the Supply Chain – 1
We have already described above the two main flows of information as upstream and
downstream. In this section, we look at the specific information requirements of the
supply chain.
Role of information
Plan or kick-off physical flows, e.g. customer order, production plan,
Record and retrieve status and plans, e.g. check inventory levels, shipping schedule,
etc.
Codify decision rules and planning values, e.g. standard costs and times, inventory
reorder points, etc.
Record and report performance, e.g. quality levels, on-time delivery, actual costs, etc.
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At another level, information is required to support routine decision-making. A retailer
may need information in order to forecast inventory. In this case, information regarding
demand will support this activity and other requirements, e.g. planned promotions,
competitor activity and re-order level calculations.
The following details reasons as to why accurate and timely information is critical to
our operations:
For customer satisfaction, we need to understand customer requirements; we need
information about order status, inventory availability, delivery schedule, shipment
tracking and invoices. All this information should be available in real time.
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Information is a substitute for inventory and other resources, especially when
dealing with uncertainty. In this case, information helps as it reduces costs in the
supply chain.
With information, we can be flexible as to when, where and how we can use the
resources in order to gain competitive advantage in the market. We can also enhance
our relationship with supply chain partners through information sharing.
As a result, we can assert that, in order for information to sustain the requirements of
our supply chain, operations it must be perfect. What, then, is perfect information?
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In this regard, perfect
information for supply chain
operations must be:
Accurate
Timely
Correct in detail and form
Shared
Complete.
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From the above, it does imply that successful supply chains require perfect
information; unfortunately, however, the real world is not always like that! Our role as
logistics and supply chain partners is to ensure that information flows smoothly and on
time so that our operations can be visible enough to enhance effectiveness. Moreover,
as supply chain professionals, we manage the planning and operations in situations
where the perfect information is not available.
Here we illustrate the above point by discussing some activities of the supply chain,
showing how information flows facilitate supply chain operations.
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The Law of Demand and Supply
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Demand and Supply Data
These take the form of customer orders and supply related data for various purposes,
such as for stock-tracking. The flow of customer orders through the chain, as noted earlier,
will trigger all other activities of the chain although, for many businesses, it is the demand
forecast that does some of this. In some systems, such as where minimum stock levels
have been set up, supply chain demand is easier to manage; however, it requires systems
to be updated and monitored so as to capture stock levels. Order processing systems
which are interfaced with other operations such as procurement and inventory control
will facilitate a smooth flow of demand and supply data.
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Documentation
Documentation forms part of the
information flows in supply chain
operations. Increasingly companies are
trying to minimize documentation and go
paperless however success is only partial
currently. The operations generate a
substantial amount of documents from
the different transaction that take place.
Let's explore some of these documents to
demonstrate how they enhance the flow
of information and support materials
flows.
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Documentation for Int’l Trade
Commercial Documents
Official Documents
Insurance Documents
Shipping Documents
Financial Documents
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Purchasing – 1
Purchasing is a process of all activities
associated with the identification of
needs, the location and selection of
suppliers, the negotiation of terms and
conditions (where possible), and
following up so as to ensure goods and
services are delivered and supplied at
acceptable service levels. Purchase
systems play a significant role in
triggering the material flows of a supply
chain. These systems and activities may
differ from organization to organization,
and also vary in terms of values and
process complexity.
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Purchasing Process
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Purchasing – 2
In an attempt to improve information
flows for the procurement processes,
organizations have introduced e-
procurement or web-based procurement
platforms for their supply chains.
With electronic data interchange (EDI),
purchase orders are released
electronically between the information
systems. There are also opportunities for
automatic transfer of funds from the
buyer s bank account to suppliers
accounts once goods or services have
been delivered.
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Transportation Documents
Goods and services flow through the supply chain by various means of transportation.
The importance of the different modes of transport has an obvious impact on the
effectiveness of supply chain operations.
Each of these modes of transport has specific documents required for the movement of
goods throughout the supply chain operations (e.g. road consignment note, sea waybill,
air waybill, etc.). These documents specify:
The names of the sender (consignor) and receiver (consignee),
The origin and destination points,
The description of the goods to be moved,
The freight charges,
The responsibilities for payment of freight changes.
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Other Relevant Doc’s
These include the following:
Commercial invoice,
Packing list,
Manifest, lists all goods carried by
carrier,
Declaration/certificate of origin,
endorsed by issuing authority
Invoice declaration goods qualify for
preference,
Preference (movement) certificate.
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Labelling and Material Flows – 1
Labelling is a very important aspect of the
flow of information and goods along a supply
chain. When we mark and label items for supply
chain flows, it is essential that the correct
external identification of the goods and their
destination is clearly provided.
Labels on external packaging should show the
packaging number, the port or airport of
destination, and a mark that would enable ready
identification for when the consignee takes
delivery. The package number and identification
mark should also be written on the
documentation.
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When necessary, material handling marks or symbols are
provided to show e.g. fragile, handle with care , use no
hooks , this way up , keep away from heat , sling here ,
center of gravity and keep dry . These marks and
instructions should be adhered to as they facilitate the
smooth flows of goods and services so that they arrive in the
right quantity and quality at the right time, destination,
condition and cost.
Labelling should conform to the legislation and codes of
practice requirements in the destination country, otherwise
there could be problems using or selling the product, and
potentially claims for product liability. Technical Help to
Exporters (THE) can advise on this.
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It is important to note that, in the UK, the
Trade Descriptions Act 1968 prohibits,
amongst other things, inaccurate descriptions
of goods, services and facilities provided in
the course of trade, together with false or
misleading indications of prices.
A number of labels are now in use and can be
read by scanners, e.g. barcodes.
In some cases, buyers specify labelling
requirements to certain suppliers. This is
known as compliance labelling, which may
facilitate the movement of the products
through the supply chain.
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Some labelling now uses internationally recognized barcodes. These codes have
substantial information that can be stored and read by scanners, for use in the planning
and tracking of flows in a supply chain.
At yet another level, we may require information flows to enable us to make long-term
decisions of a strategic nature for the supply chain activities. Here, information is
manipulated by analytical tools in order to identify patterns or relationships between
activities or segments of the supply chain. Accordingly, it follows that organizations
require information of a good quality.
Advances in information technologies have enhanced information flow in supply chains.
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Money Flows – 1
The flow of money is required in
every supply chain. Money flows
from the consumer upstream in a
supply chain until all suppliers have
received payment for the goods and
services they provided. In general,
goods and services flow relatively
well and information flow can be
considered erratic but improving.
Usually, funds or money flows
appear to lag behind as they
depend on the flow of products and
information.
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Money Flow in SC
Although there are other fund
flows in a company, such as for
equipment purchases and payroll,
we will only be concerned with
flow along the supply chain,
which affects the working capital
of a company, i.e. its accounts
receivable, inventory and accounts
payable.
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Money Flows – 2
Some authors argue that the flow of funds in most supply chains is still an
uncoordinated and sub-optimized flow. Reasons for this are that there is still a lot of
shuffling paper invoices and checks that increase the cash to cash cycle times (Grealish, 2005;
Krishnan & Shulman, 2007).
Our role is to ensure that we minimize delays in processing invoices, and ensuring
accuracy when producing financial-related documents. Improved funds flow would
improve customer-supplier relationships and, similarly, improved customer-supplier
relationships would improve funds flow. As the flow of goods and services improve and
information-sharing advances, fund flows will improve. If we make payments to
suppliers more promptly and consistently, we will also improve our relationships with
them. The result would be a win-win situation throughout the whole supply chain.
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Impact on Customer Service – 1
From a logistics perspective and the total systems concept, the needs of the customers
and consumers are satisfied through the coordination of the materials and information
flows that extend beyond the firm s boundaries to its suppliers and distributors this is
what supply chain management is all about.
It is now common knowledge that organizations now compete as networks value
chains or, more specifically, as supply chains (Christopher, 2005). From our earlier illustration,
we note that every organization requires materials for its operations. These materials can
be tangible materials, such as raw materials, work-in-progress, finished goods, spare
parts, etc., or may be intangible, such as information, finance and knowledge. The supply
chain becomes more of a network of organizations linked together upstream and
downstream in the different processes and activities that produce and supply goods and
services.
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Impact on Customer Service – 2
These materials
generally move through
several suppliers on
their journey from initial
suppliers into
organizations, moving
through several stages
of the production and
distribution process
until they reach the final
consumption point.
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Supply Chain Structures – 1
Every industry is unique, and so are the supply chain structures. The configuration of
supply chains will differ from organization to organization and from industry to industry.
In a manufacturing supply chain, the key challenge may be maintaining continuous flows
of raw materials into the production process. In a retail business, the emphasis may be
with downstream partners to ensure demand is adequately satisfied. The automotive
industry has networks of suppliers, including component manufactures, often situated
near the manufacturing plants. The key issue here is the smooth flow of materials and
components into assembly lines to avoid line stoppages.
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Suppliers to the 2021 Chevrolet Suburban
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In construction supply chains, the major challenge is minimizing and dealing with
large waste that is often created along the different stages of the chain. In the
humanitarian sector, emphasis would be placed on the physical flows of relief materials
and people responding to emergency situations.
Whilst there could be differences in the nature and type, every supply chain works,
and the elements are linked together through physical flows, information flows and
monetary flows. We will look at some examples of supply chains later.
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Construction Supply Chain
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Supply Chain for Cereal
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The structure in previous figure depicts the relationships between the partners of the
chain. Purchased goods and services flow from suppliers though the production process.
In manufacturing, grain is sourced from farmers as raw materials for the production
processing. The raw material is then processed into various types of cereal, which is then
packed into suitable packaging. The finished products are then consolidated into unit
loads for delivery to distributors, e.g. wholesalers. At the distribution centers, goods are
sorted out for retailers who will then make these available to consumers for final
consumption. In all cases, information flows in both directions to allow members of the
chain to plan and coordinate their efforts.
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Utilities and Services Industries – 1
In utilities and service industries i.e. hotel, power and transport organizations the
same supply chain configurations depicting first-, second- and third-tier upstream and
downstream supply chain partners would apply. A utilities company will depict
downstream and upstream partners of its chain. Purchased goods and services flow from
suppliers upstream towards customers downstream, with information flowing in both
directions. Utilities supply chains have more recently focused their priorities towards
cost-reduction; this is a reaction to pressure from regulators, demand for better returns
from shareholders and falling disposal incomes of many of their customers. One way in
which some of these utilities have responded to this call is by outsourcing their non-core
functions. The result has been an increase in subcontractors, each with their own supply
chains.
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Pharmaceutical Supply Chain
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Utilities and Services Industries – 2
This further complicates and disjoints the supply chains, requiring more skills and
talent in managing the supply chain operations.
A typical pharmaceutical supply chain will consist of the following:
Primary manufacturing
Secondary manufacturing
Market warehouses/distribution centers
Wholesalers
Retailers/hospitals.
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Reverse Flows – 1
We have focused more on the downstream movement of materials from suppliers to
customers. There are occasions when materials move upstream or in the opposite
direction, i.e. from customers to suppliers. This activity is referred to as reverse
logistics . Products move upstream for various reasons including:
Product recalls for quality or safety reasons,
Damages,
Unwanted goods and
obsolete products,
Used packaging for
recycling and disposal.
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Reverse Flows – 2
We have witnessed increasing amounts of legislation, setting out clear rules for many
products to be collected at the end of their use and returned to designated collection and
recycling points locally, nationally and globally: for example, Taiwan recently
promulgated a Scrap Home Appliances and Computers Recycling Regulation that
mandates manufacturers and importers to take back their products.
All of this adds up to an important aspect of the reverse logistics. Organizations and
their supply chains must gear themselves up for reverse flows of goods and materials.
Responsibilities must be clear in advance, and the necessary resources (internal or
external) identified in order to enable an effective and efficient system of dealing with
these reverse flows.
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Reverse Flows – 3
The main reverse logistics activities include:
Identification of returnable items,
Inspection and separation,
Making a decision on applicable disposal options (e.g. repair, recondition, return to
supplier, re-manufacture, etc.),
Collection of returnable items for dispatch,
Deliver to appropriate site/location,
Appropriate documentation for tracking,
Financial frameworks to allocate costs and responsibilities.
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Reverse Flows – 4
A number of organizations have taken the initiative in providing customers with options
and logistics solutions that stretch throughout the entire lifecycle of a product. These
include return packaging and free reverse transportation. In other logistics scenarios,
transport planners have arranged distribution processes to customers in conjunction with
reverse pick-up of re-usable packaging and goods for recycling and remanufacture. The
coordination of this operation can be challenging for supply chain partners in terms of
routing and scheduling. Often, there is sound justification for this approach from an
environmental and cost perspective.
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Reverse Flows – 5
The application of returnable containers is another example of reverse logistics. A
returnable container is a type of secondary packaging that can be used several times in
the same form in contrast with traditional cardboard boxes. For this equipment to be
used, a system for the return logistics of the containers should be available. This system
should guarantee that the containers are transported from the recipients
to the next senders, and that they are cleaned and maintained,
as necessary.
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Humanitarian Relief Supply Chains – 1
The unpredictability of global emergencies, such as volcano eruptions, earthquakes,
tsunamis and floods, etc., as well as the critical requirements of adequate and timely
delivery, are all factors that dominate the uniqueness and challenge of managing material
flow in the relief chain, which holds as its ultimate objective to deliver the correct
amount or number of people, goods, and monetary resources to locations worldwide in a
timely manner.
Government donor
International
agency
International NGOs
Local NGOs (in aid-
recipient
countries)
Community-based
organizations
(local partners)
Consumers (aid
recipients)
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Earthquake in Japan and Tsunami
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Relief operations have the same needs in terms of coordination, collaboration, visibility,
and logistical information systems as the military and business sectors. They are often
high-stakes, life-and-death operations. They often occur away from major traffic lanes in
less developed regions with inadequate infrastructure (Long & Wood, 1995). Locations are
frequently unknown until the demand occurs. Short lead times dramatically affect
inventory availability, procurement, and distribution.
Often, transportation and supply information is unreliable, incomplete or altogether
non-existent. Owing to the high profile and sense of urgency in natural disasters and
complex emergencies, the desire to rush aid to victims presents challenges for the
operations.
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Here are some of the specific characteristics of humanitarian relief chains that
differentiate them from traditional commercial supply chains. These include:
Zero (or near-zero) lead times, dramatically affecting inventory availability,
procurement, and distribution,
High stakes (often life-and-death),
Unreliable, incomplete, or non-existent supply and transportation information,
Many relief operations are naturally ad-hoc without effective performance
measurement systems in place,
Variable levels of enabling technology availability.
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One other major difference in the relief supply chain is the demand pattern: for many
commercial supply chains, the external demand for products is comparatively stable and
fairly predictable. Often, for the commercial chain, the demands seen from warehouses
occur from established locations in relatively regular intervals.
The demands in the relief chain are supplies and people, and such demands are lumpy,
often occurring in irregular amounts and at irregular intervals, and also occur suddenly,
such that the locations are often completely unknown until the demand occurs. Although
many of the concepts associated with commercial supply chains can be applied to
humanitarian logistics, the unique characteristics of the humanitarian relief delivery
process present many challenges.
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Planning Supply Chain Operations – 1
Supply chain decisions can be classified into two broad categories:
1. Strategic, i.e. mainly long-term related
2. Operational, i.e. short-term and day-to-day matters.
You should note, however, that strategic decisions will also have an impact on
operational activities. We will look at the key supply chain decisions necessary for
effective operations in a supply chain.
The following are the key decisions:
Location: The key to supply chain planning is to determine where to locate production,
warehousing and stockholding locations in order to provide an acceptable service at
sustainable costs. The number, size and location of these facilities will influence the
flows of material in a supply chain.
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The following are key factors that will influence location factors:
Distribution costs,
Production limitations and locations,
Taxes payable,
Duty payable,
Local content,
Customer locations both numbers and geographies,
Lead times both from suppliers and out to customers,
Product shelf-life.
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Sourcing: Sourcing decisions are high-level strategic decisions aimed at addressing which
products and services should be provided using the organization's internal resources
(make), or which should be bought from outside the organization (buy); in other words,
make-or-buy decisions. Sourcing decisions become very critical for supply chain
operations, as they define the supply chain network partners and their responsibilities. If
an organization decides to outsource the product or service, the emphasis is on the
purchasing activities to identify the most suitable suppliers for the organization's
requirements. There are advantages and disadvantages associated with make-or-buy
decisions for organizations and their supply chain operations. Below is a summary of the
advantages and disadvantages of making (insourcing) and buying (outsourcing)
decisions.
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Insourcing (make)
Advantages Disadvantages
High degree of operational control Reduced strategic flexibility
Ability to oversee the entire process High investment may be required
Economies of scale Loss of access to superior products and
services from potential suppliers
Outsourcing (buy)
Advantages Disadvantages
High degree of flexibility Possibility of choosing a bad supplier
Low investment risk Loss of control over process and core
technologies
Improved cash flows Communication/coordination challenges
Access to state-of-the-art products and
services
Confidentiality may be compromised
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Other sourcing decisions include choices concerning whether to single source or
multiple source. Single sourcing means that the organization will buy from a single
supplier for all or nearly all of its requirements of a particular product or service; in
multiple sourcing, on the other hand, the organization will buy from a wide supply base.
Organizations must consider both multiple sourcing and single sourcing because each
approach has its own advantages and disadvantages.
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Task 1.10
What do you consider to be the advantages and disadvantages for single and
multiple sourcing for an organization of your choice?
Answer:
The advantages and disadvantages to include the following:
Single sourcing Multiple sourcing
Advantages ▪ Reduces transportation costs
▪ Improves supplier/buyer relations
▪ Reduces quality variability
▪ Creates competition
▪ Spreads risks
▪ Can ensure suppliers do not
become complacent
Disadvantages ▪ Can result in higher costs
▪ Increases supply risks
▪ Buyer becomes captive market
▪ Loss of competitive prices and
better-quality opportunities
▪ Reduces supplier loyalty
▪ Can increase risks in the event of
shortages
▪ May result in different product
attributes with varying quality
▪ Increases price over time
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Production: Production decisions are concerned with what products or services to
produce and offer the market. The planning and control of production is based on the
information gathered as forecasts and specific customer orders. This information
determines the overall production capacity plans. From this, the master production
schedule will inform what inventory or resources are required in order to satisfy the
production of the required
products and services.
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It should be noted that production decisions have been made in conjunction with the
make-or-buy decision, as discussed above. Many of the most successful consumer
businesses now don t actually produce anything/much themselves (e.g. Apple, Nike).
Once decisions concerning which production location and the specific products and
services are to be produced, materials requirement planning takes the process a step
further (we will come back to this aspect in the next section). Production decisions may
also allocate suppliers and distribution centers to particular production plants.
Operational decisions will include production schedule planning, material requirement
planning, which we will look at a later stage.
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Formulas/Calculations
for SC Planning
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Task 1.11
List five factors that will influence the location of production facilities for a supply chain.
Answer:
The key factors that will influence location factors:
Distribution costs
Production limitations
Taxes payable
Duty payable
Local content
Demand points and volumes
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Smart Warehousing
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Warehousing – 1
Warehouses come in different shapes and sizes, ranging from facilities of a few
hundred square meters to large automated installation with storage capacities up to
+50,000 pallets. These facilities have transformed to offer a wide range of services with
a prime objective of supporting the smooth flows of goods and services from source to
consumption.
When planning for storage facilities, we should recognize that these centers operate as
an integral part of a supply chain such that the key decisions should be influenced by
the overall supply chain objectives. Remember the need for smooth flows of information
and materials is the ultimate objective of a supply chain.
Likewise, warehouses should facilitate this ultimate supply chain objective.
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Warehousing – 2
The key decisions affecting warehousing would consider the following:
Long-term market expectations,
Types of goods to be handled,
Type, size and location of the warehousing facility,
Inventory levels,
Level of technology,
The choice of unit load.
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Warehousing – 3
As can be seen, the above factors have wider implications for other aspects of logistics
and supply chain operations; therefore, it would follow that warehousing decisions are
an important part in the flows of supply chain operations.
Inventory: Product flow throughout the various stages of supply chain operations in the
form of inventory. In one form or another, most organizations keep stock of different
types of inventory for various reasons. Decisions on inventory profiles will impact on
other logistics activities of supply chain operations. These decisions include the
maximum and minimum stock levels for raw materials finished or semi-finished goods
to be held at any time period the replenishment systems are to be used. Inventory levels
will impact on customer service levels, on distribution and warehousing costs; hence the
importance of these decisions on supply chain operations.
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Warehousing – 4
Transportation (distribution): Decisions regarding modal types are important for supply
chain costs. These are also interlinked with facilities location and inventory levels. The
best choice of transport mode is often found by trading-off transportation costs with
other logistics costs of inventory, packaging, warehouse and customer service levels.
Transportation cost can represent a high proportion of the overall supply chain costs
especially with the seemingly ever-increasing energy prices that continue to drive
transport inflation. This is partly because fuel is an important source of additional
taxation revenue for most national governments, and partly owing to the demand-
supply imbalances on the market. Transportation decisions play a vital role in the
design of logistics and supply chain operations; accordingly, these decisions are very
significant for operational efficiencies.
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Supply Chain Linkages – 1
As we can see, the above decisions are essential so that the flows of the supply chain
are linked together. The flows we have identified are physical flows of materials and
products, information flows and monetary flows provide the downstream and upstream
linkages. These linkages have further been enhanced by information technology (IT) and
improved communications. Like glue holding together parts that make a whole, IT has
permeated through supply chain operations at every point, transforming the way
exchange-related activities are performed.
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Supply Chain Linkages – 2
The nature of the linkages between them determines the strengths of the links. A more
recent development on linkages within the supply chain is the emergence of inter-
organizational systems, which are sophisticated information systems connecting
separate organizations. The strength of inter-organizational systems has been
particularly crucial with respect to enabling the process transformation needed to create
effective networks.
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Collaborative Arrangements – 1
Organizations have traditionally tended towards multiple supply sources for their
requirements so as to play the suppliers against each other in order to obtain the best
prices. Such relationships tend to be arm s length and adversarial, thereby resulting in
sub-optimal output where suppliers may seek to reduce costs by providing only the basic
specification and compromising on other quality issues. Closer relationships between
suppliers and buying organizations are more likely to improve supply chain operations.
Suppliers are increasingly expected to provide customers with information regarding
their processes, quality performance, and even cost structure.
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We can identify other companies
especially those in the automotive
industry, such as Toyota and Honda,
which rely upon suppliers for
approximately 80 per cent of their car
manufacturing needs. The need for JIT
deliveries has made impracticable
inbound logistics from multiple
suppliers. Companies have discovered
that close cooperation with their
suppliers will improve product design,
speed to market, and overall
performance improvement.
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The emergence of concepts such as co-makership or partnership sourcing implies
that organizations develop long-term relationships with a limited number of suppliers.
This means that suppliers become an extension of the customer s operation, thereby
creating a seamless end-to-end pipeline. The approach has enabled companies such as
Nissan Motors in the UK to use supplier development in order to reduce costs and
increase efficiencies for both parties. A point to note here is that the principal aim of co-
makership or partnership sourcing is the reduction of total costs rather than the
reduction of supplier profit margins.
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Collaborative relationships can be extended in both directions, i.e. upstream and
downstream, in order to deliver cost savings and flexibility of supply chain operations
through integrating activities and removing duplication. Integration via buyer-supplier
collaboration is redefining supply chain partners so that they are now working as profit
partners rather than adversaries.
It is also important to note that this collaborative approach is not universally adopted
by all organizations, nor is it used by those who do with all their suppliers. The
establishment of such long-term relationships take time. Some organizations, due to the
nature of their operations and markets, may find this approach risky in terms of, amongst
others, operational control and confidentiality issues.
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Earlier on, we highlighted the proliferation
of logistics services providers and an increase
in sources of supply due to globalization of
supply markets. Many organizations are
adopting collaborative arrangements with
specific partners. This means, in some cases,
for strategic reasons, the number of primary
suppliers has been reduced resulting in a
majority of the purchased material being
allocated to a few suppliers or even a single
source.
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This action provides multiple benefits to organization supply chain operations,
including:
Fewer suppliers to contact in case of orders required at short notice,
Reduced inventory management costs,
Volume consolidation and quantity discounts,
Increased economies of scale based on order volume and the learning curve effect,
Reduced lead times due to dedicated capacity and work-in-process inventory from
the suppliers.
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However, there are disadvantages with this approach which include potential risks, e.g.
a supplier goes out of business, or is unable to actually meet the demand. In other cases,
the organization may be unable to achieve the cost prices they want as they have less
leverage. Where technology has improved in the broader marketplace, it may be difficult
for the organization to tap into this owing to the long-term contractual relationship with
particular suppliers.
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Summary
We have seen how the supply chain concept has developed to become an important
strategic tool for organizations' survival. They key issues discussed begin with the
recognition that all organizations, their products or service are part of a supply chain.
Supply chain operations are the material, informational and monetary flows from and
between upstream suppliers to and between downstream customers within the chain.
In order for these flows to be uninterrupted, control and coordination is necessary,
and this is the crucial element of the supply chain. Some supply chains are well planned
and coordinated whilst others are still operating as separate entities. The environment
within which organizations and their supply chains are operating is changing, and there
is pressure on organizations irrespective of the industry or sector of the economy.
In the next section, we will look at the supply chain environment and how
organizations can assess some of the key factors that will affect the operations of their
supply chains.
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1.
2.
3.
4.

42
UNIT OUTLINES – 2
Learning Outcomes
Introduction
External Factors
The Internal Environment
Customer Service
Customer Concept
Product Life Cycles (PLC)
Global Supply Chains
Supply Chain Lead Times (LT)
Technological Impact
Enabling Technologies for Supply Chain Operations
Communication Systems
Transaction Processing Systems (TPS)
Supply Chain Risks
Summary
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Introduction – 1
The commercial and operational environment for most organizations includes:
Suppliers,
Competitors,
Labor markets,
Financial institutions,
Customers,
Trade unions,
Governments.
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Introduction – 2
The interrelationship between these entities is a good example of how complex and
integrated the supply chain activities are. In this context, supply chain activities are
influenced by other forces, referred to as external factors. It is not within the scope of
this unit to detail the process of environmental analysis for strategy formulation; we
have noted, however, that there are key decisions to be made in supply chain operations,
and it is essential that these decisions are developed from a careful understanding of the
factors that will impact supply chain operations.
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External Factors – 1
Each organization has a unique environment in its operations. In order to understand
this environment, organizations undertake what is known as environmental analysis,
involving identification of the key factors external to the organization that are likely to
affect its operations. Strategies and implementation programmes are then developed
after careful analysis of the impact of these external factors on operations.
There are various tools and techniques that can be applied to assist in the process of
environmental analysis for factors that are likely to impact on the organization, and
therefore its strategy formulation.
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The tools and techniques have acronyms such as:
STEEPLE: social, technology, economic, environment, political, legal and ethical.
PESTLE: political, economic, social, technology, legal and environmental
PEST: political, economic, social and technological.
SLEPT: social, legal, economic, political and technology.
SWOT: strengths, weaknesses, opportunities and threats.
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Remember the above tools and techniques are only a guide towards the identification
of the type of factors; they only assist us in focusing on the process of the identification
of key factors. The question is concerned with establishing the factors under the
respective headings, e.g. political; technological, etc.
Let us look at the factors we can identify using PESTLE as set out below:
Political factors: These are political factors, such as rules and regulations imposed by
the government, and could include political influences from various trade association
and trade unions.
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Economic factors: These influences include economic growth factors, money market
rates, trading blocks and their impact on economies. At macro levels, the economic state
of affairs in a country plays a significant role in how the organization shapes itself for
business operations. Other factors, such as inflation and interest rates, are important and
will influence decision-making in terms of logistics and supply chain operations.
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Sociological factors: Organizations exist and function within societies and, as a result,
are subject to a variety of sociological factors. These include demographics (the structure
of the population), e.g. size and age distribution, birth and death rates, and cultural
behaviors.
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Technological factors: Defined as the sum knowledge of means and methods of
producing goods and services , technology continues to play a significant role in
business decision-making today. Technological changes have led to the introduction of
new products, new ways of storing and distributing goods, and new ways of storing and
transmission of information. A good example of this would be the growth of the Internet
as both a communications and trading platform. Some of these technological
developments include increased use and availability of computers; developments and
use of media and other communication technologies.
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Legal factors: All business activities are
influenced by law. Legal factors are
sets of rules and regulations dictating
how organizations should be organized
and operated. These rules and
regulations can be local, national and
international, i.e. employment laws,
health and safety, transportation
regulations, environmental and other
consumer laws. The failure of
organizations to observe these rules
may be deemed as negligent behavior,
leading to high penalties against the
organizations.
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Ethical factors: Whilst businesses operate and function within the framework of law, in
most cases, laws are inadequate to direct and influence how organizations behave in
their business operations. Not all ethical issues are covered by law, hence the rise of
business ethics. Also, there has been a broadening of ethical issues, e.g. child labor,
questionable commercial practices, illegal logging, and unfair labor practices. With
improvements in media technologies, firms do not want to risk their reputation owing to
bad publicity arising from allegations of unethical behavior.
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You will use the acronyms to help identify the factors that are likely to have the most
impact on the operations of your organization. Some factors will have less impact than
others depending on the nature, time and location of the operations. Detailed
environmental analysis is essential to establishing the key threats and opportunities form
the factors in the above elements.
One other dimensional view is to consider these factors from a local, national and
global (LoNG) perspective. Many organizations are now operating in a global environment,
and it has become essential to understand the global factors from this angle.
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Political Economic Sociological Technological
Local Local government
Local associations
Local economies Local communities
Local social demands
Employment levels
Local network
Infrastructure
Systems and
support
National National government
structure
Devolvement
National bodies
National
economies
Stock markets
Interest rates
Growth
Demographic levels
Social and cultural
Global Alliances
Agreements
International
convention
International bodies
e.g. UN
Commonwealth;
NATO, AU, EU
Trading blocks and
bodies e.g. EU;
EFTA; OECD; NAFTA;
ASEAN
World money
markets
Global economies
Global demographics
Cross-cultural issues
e.g. language; culture;
behavior
Consumer pressure
groups
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Task 2.2
Take time to identify factors that are likely to impact on the operations of your
organization. Use the LoNGPEST grid to assist you in the exercise.
Answer:
Factors can include the following:
▪ Political stability e.g. strikes, boycotts, civil wars,
▪ Social and Cultural issues,
▪ Economic growth e.g. negative or positive,
▪ Competition level monopoly or intense,
▪ Currency fluctuation,
▪ Legislation e.g. employment, health and safety,
▪ Technological systems,
▪ Skills availability,
▪ Demography profiles.
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The Internal Environment – 1
In response to the pressures from the external environment, organizations have in
place systems and policies that reflect these demands. This means producing appropriate
strategies and organizational structures to fulfil the operational demands. The key
internal environmental factors include:
Corporate culture: customer focus,
Organizational priorities: external relationships technological leverages,
Organizational structure: relationships,
Resources: facilities, core competencies, outsourcing,
Business objectives: defining competitive advantages through supply chain,
Skills and reward systems: performance related and staff competences.
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The Internal Environment – 2
We will now look further at some of the key environmental factors that have influenced
and continue to affect supply chain operations. We will also explore how supply chain
operations are mitigating the threats and weaknesses or otherwise
maximizing the opportunities and strengths from
these factors.
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Market Perspectives
The marketplace continues to be very competitive, and the nature of competition is
changing. Although marketing has been a business approach for a long time, the same
approaches do not always work as well as before. In marketing, all activities of the
organization are focused on the satisfaction of the end-customer. Marketing is a process
that anticipates and establishes the needs of the different segments of the market. The
aim is to mobilize organizational resources towards satisfaction of customer needs and
customers have become more demanding than before. It is become increasingly difficult
to satisfy customers at all times. The world continues to change and the markets have
become more sophisticated.
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Task 2.3
What are the internal factors that organizations will consider when responding to the
external environment?
Answer:
These include:
▪ Corporate culture customer focus
▪ Organizational priorities external relationships technological leverages
▪ Organizational structure relationships
▪ Resources facilities, core competencies, outsourcing
▪ Business objectives defining competitive advantages through supply chain
▪ Skills and reward systems performance related and staff competences
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Customer Service – 1
The rise of customer service is changing the competitive playing field. In order for
organizations to maintain a share of the market, they must increase their ability to
deliver as today s customers have become increasingly service-sensitive , seeking
greater reliability, responsiveness, reduction in lead times, and value-added service. With
improvements in IT, customers now have the opportunity to obtain considerable
information, relatively easily, about alternative products and sources of supply. They are
also now empowered with a range of product and pricing information, and are able to
specify what they need online making price comparisons immediately.
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Our role in customer service, as supply chain professionals, is to ensure timely
delivery of goods and services within supply chain operations. As Christopher (2005)
states, "there is no value in the product or service until it is in the hands of the
customer or consumer". This then reinforces the overall aim of supply chain operations
to ensure goods and service are available to customers and consumers at the right time,
in the right quantity and quality, at the right price and delivered to the right place.
Availability has many factors including:
Delivery frequency,
Stock levels,
Order cycle time,
After sales and back-up.
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The concept of customer service is a combination of all the above elements. In some
products or markets, some of the above elements may be more important than others,
and so it is important to understand the specific expectations of particular customer
segments or markets.
Another development has been that retail organizations are starting to realize the
importance of integrating their supply chain operations across multiple sales channels.
Many retailers now offer a range of customer-interface models where consumers can
buy either in-store, online, by mobile phone or via catalogue, and are able to choose how
they receive the goods whether ordering online for home delivery or for pick-up from
store.
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Customer Concept – 1
Every organization has customers. The organization that you may be working for,
from business enterprise to voluntary organization, operates within a certain industry
or market. The differences are that some organizations have a more focused view of
their customers than others and an objective to earn returns for their shareholders. The
ability to focus operations on the expectations of the customers is important to the
survival of any business. In this regard, it is essential to know who your customers are in
order to meet their expectations.
The nature and demands of customers are different, and we try to serve them in
various ways. The key issue is understanding their needs and requirements in order to
satisfy such needs. In addition, when we know who the customers are, we are then
better able to communicate with them using suitable communication methods which
are appropriate to the circumstances.
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Customer Concept – 2
This is essential if we can:
Obtain relevant information on the requirements of customers for logistics operations,
Provide customers with clear and relevant advice and information on the logistics
operations,
Respond positively and effectively to the requirements of customers,
Ensure customers are regularly informed of progress in responding to their
requirements,
Respond promptly and accurately to queries raised by customers, and pass on any
queries that cannot be answered to the appropriate people,
Respond positively to any comments, and ensure they are dealt with by the
appropriate person,
Recommend improvements to the service level,
Collaborate with customers to improve and streamline the planning and operations.
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Understanding Customer Satisfaction – 1
Let us assume a customer purchases our product or service, they are buying a set of
satisfaction from the product or service. Three positions can results from this purchase
as follows:
If the customer s experience is equal to expectations, they are satisfied
If the customer s experience is less than expectations, they are dissatisfied
If the customer s experience is more than expectations, there is strong satisfaction
sometimes referred to as delight.
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Understanding Customer Satisfaction – 2
When there is strong satisfaction, the customer is more likely to return to the
organization than when they are merely satisfied. It goes without saying as to what the
dissatisfied customer s behaviors will be we are lucky if they knock at our door again,
although research shows that dissatisfied customers are more likely to tell people about
the service or product than satisfied customers:
We spend up to 10% more for the same product with better service?
We tell anywhere from 9 to 12 people when we get good service
When we receive poor service, we tell up to 20 people.
The above statistics bear testimony that it pays to have a good customer service, and any
simple action that will retain a customer should be encouraged. Moreover, greater effort
is needed to avoid providing bad service.
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Who is the Customer?
Firstly, let us find out what this word customer means. We will find several
definitions but, simply, a customer is anyone who uses or receives a product or service
from an organization. Even if they do not buy something that they place into a plastic
bag, this does not mean they are not our customer. The important point here is how we
treat them. For discussion purposes, we will classify customers into two main categories:
internal and external customers.
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Internal Customers
These can also be assumed to be direct customers, although they may be in frequent
contact with us. Here we have staff, volunteers, trustees, committee members and
managers. They are usually supportive of us and committed to our aims and objectives.
Within organizations various departments and functions are also what can be termed
customers or consumers for our products and services. Alternatively, any unit in an
organization that contributes to the task of another or other units whether as part of
the process or in an advisory or service relationship can also be regarded as a supplier
of a product or service. In this regard, the other units become internal customers to this
unit.
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External Customers – 1
Often considered the most important of all groups of customers, these are those who
deal with our organizations on a one-to-one basis, receiving a service or product
(regardless of whether or not payment is received). These customers may be less
informed about an organization and may deal direct or indirect through other agencies.
In this case, as supply chain operators, we need to be well aware of the implications of
our service to these customers in order to ensure that these customers receive an
acceptable service. If our definition of customer ended here, we are only seeing half the
picture as we shall see later.
It is possible to split this group further into direct external customers and indirect
external customers.
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Let us look at the difference between the two:
External direct customers: This is usually the largest of customer groups. These include
all service users, clients, and purchasers of our goods or services. These customers take
the center stage for supply chain operations. Every effort should be made to determine
how to satisfy this group; they have responsibility for downstream operations or
partners, but the operations or partners rely heavily upon upstream suppliers. A retailer
may not thrive if the product that is hot on the market is not available on the shelf.
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External indirect customers: One step removed from our direct customers, and may
include groups like sponsors of a charity organization, who are not necessarily the
purchasers of our product or service. We can note that they are important, and will have
an effect on our organization as they can
be affected by our customer service.
Some suggestions on
external indirect
customers are media,
politicians, local
community and the
general public.
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Below is a list of some of the groups who can therefore be part of our customer
definition:
Purchasers of our products or services
Consumers or users of our products/service
Potential purchasers/users of our products and services
Internal customers or consumers of services and information within our organization
Other stakeholders or groups who have a legitimate interest in our organization, such
as:
▪ Volunteers
▪ Committee members
▪ Donors
▪ Local communities
▪ Supporters
▪ General public
▪ Funding agencies.
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People can place demands on an organization's operations, which are often
conflicting. The term that has been used in assessing these demands is stakeholder .
Every organization has a group of stakeholders who will impact on its operations, and
who will therefore influence the key decisions relating to the organization's operations.
We will look at this further in the next section when we look at suitability issues.
Earlier on, we noted that, in a supply chain, there are tier levels of supply chain
customers. We referred to Tier 1 customers as those that deal with our organization
directly or business customer , and end-customers as these that buy our finished
product or service at the end of the supply chain. In other discussions, we will refer to
such relationships as business-to-business (B2B) and business-to-customer (B2C)
relationships.
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Task 2.4
Applying the customer concept, explain the key groups of customers for organizations
in supply chain operations.
Answer:
These are:
▪ Internal customer e.g. staff, co-workers, department and other organization's
functions
▪ External direct customers - These include all service users, clients, and purchasers of
our goods or services.
▪ External indirect customers - one step removed from our direct customers and may
include groups like sponsors of a charity organization who are not necessarily the
purchasers of our product or service.
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Another distinction between customers is that of consumer and customers:
Consumers are people who use or consume the product of service;
Customers are the individuals or businesses who buy the product or service, i.e., they
acquire it.
Sourcing organizations can also identify potential suppliers on-line and compare and
evaluate prices with speed and accuracy. The same businesses are expecting more from
their suppliers; therefore, as suppliers, we need to pay attention to our dealings with
these business customers. Survival and success depend on our organization's capacity
and ability to deliver value that satisfies the customers.
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The key questions that need to be answered to help us satisfy our customers are:
What are the real needs of our immediate customers?
What are the needs of our customers customers?
What are the real needs of our supply chain s end customers?
What information needs must be shared?
How can we help improve the satisfaction of our overall supply chain customers?
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As we have noted, information has empowered customers and they have access to
more knowledge about products and services available on the market, and they may
have more choices from which to choose. Loyalty or repeat purchase is not guaranteed;
we need to remember that today s customer is not necessarily there for us tomorrow;
this means that, in order to retain customers, our upstream and downstream supply
chain partners must deliver added value in order for these customers to come back for
our products or services.
Customer value can be delivered in the following elements:
Quality
Cost
Delivery
Flexibility
Innovation
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Quality: Defined in terms of conformance to specification or requirement. In reality, it
is whether or not our product or service lives up to the expectations of our customers or
clients. Fawcett et al. suggest that quality drives consumer behavior, and analysis
considers this to be the most important element for customer service and the long-term
success of the organization. In addition to this, poor quality will hurt an organization's
performance in other areas.
What does quality mean to you? You should be able to say it is doing the right thing
the first time and every time. Therefore, quality must be the common language in our
work environments.
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How customers define quality is dependent on the nature of the product or service.
Here are some factors that Garvin (1983) considers to constitute quality in the minds of
customers:
Performance characteristics of the product,
Features that distinguish the product or service,
Reliability on probability of failure,
Durability, i.e. the mean time between failure and life expectancy,
Serviceability, i.e. the speed of repair when problems and defects are reported,
Perceptions, whether product or service brand.
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Cost: Customers value low prices, and it is not surprising that many organizations are
looking for opportunities for cost-reduction within supply chain operations. This means
that, in our supply chain operations, we will be faced with pressure to reduce costs in
all our activities. In both local and globalized procurement, most organizations use the
same evaluation criteria, where cost is one of the elements when selecting suppliers of
goods and services. Cost-reduction becomes a key value-adding criteria for
organizations.
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Strategies being pursued in this regard include:
Productivity enhancement, e.g. producing and delivering more with the same or
fewer resources,
The adoption of advanced process technologies, e.g. improved IT Systems,
Facilities location in countries with low-cost inputs, e.g. low labor and material
costs,
Sourcing from most efficient suppliers, e.g. suppliers with improved lead-times,
reliability and good quality products.
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Delivery: Simply doing things fast and consistently. Delivery should also be reliable so
as to reduce the order cycle times, thereby eliminating variability of supply. Sourcing
and logistics operations play a significant role in this element of customer service as
these activities often represent approximately 90% of the total order cycle time.
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Task 2.5
▪ What are some of the factors that affect an organization's ability to deliver on time?
▪ Suggest how your organization can minimize the impact of these factors on its ability
to deliver on time.
Answer:
Factors include:
▪ Order size,
▪ Transport selection,
▪ Scheduling,
▪ Order processing,
▪ Flexibility of systems and processes.
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Flexibility: The capacity to adapt to different and changing requirements. A flexible
supply chain operates with short lead times and is responsive to the special
requirements from customers, adjusting rapidly to changing and unexpected events.
Processes must be visible to ensure continuity should an event occur. We must be able
to cross-train or organize as cross-functional teams to be flexible enough in our product
or service offering.
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Innovation: Help to create new products and services. This is achieved when
organizations and their supply chain partners work together from the conceptualization
through to development of products and services, e.g. Canon, Honda and 3M, where early
supplier involvement (ESI) has been adopted as an innovation strategy. Organizations
that are innovative can maintain and capture markets, and thereby improve customer
service. Innovation reduces costs and waste, and can enhance sustainability of
operations. In environments where product life cycles continue to shorten, innovation
has given some companies a competitive edge in the market. For example, it is reported
that Canon s continued innovation has enabled its continued dominance of the
photocopier industry over other providers.
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Task 2.6
Explain five approaches that logistics can add value to customer service.
Answer:
The five approaches include:
▪ Cost searching for logistics cost trade-offs
▪ Quality consistency and reliability of service and products
▪ Delivery reduction in delivery lead times
▪ Flexibility responsive to different and changing customer needs in supply chain
environment
▪ Innovation new products and services that reduces waste
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The Role of Logistics – 1
As we have noted from above, the financial dimensions alone are not the only criteria
for organizational sustainability. Logistics operations, with its objective to integrate
resources across the supply chain, provide the means whereby cost-reduction and
customer value can be enhanced. This is achieved by ensuring that the orders are
delivered correctly, when and where they are needed, and at desirable costs. The order
cycle the sequence of all activities from the time the order is received to the time the
needs are actually fulfilled , becomes an important aspect in logistics operations. This
cycle begins and ends with the customer.
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The Role of Logistics – 2
There are several ways in which logistics operations enhance value creation and
customer satisfaction. These include the following:
Reduction of the order cycle times which may require the coordination of all
activities that comprise the order cycle,
Improvement in quality,
Reduction of delivery time,
Reduction in costs,
Improvements in direct product profitability,
Ability to meet diverse customer requirements,
Ability to consistently provide the service required.
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Product Life Cycles (PLC) – 1
Supply chains also face challenges regarding the innovativeness and function of
products or services being offered on the market. In some cases, innovative products
may be fashion-related items that usually have short life cycles, such as video games,
fashion clothing and mobile telephones.
The demand for short product life cycle goods is unpredictable and short-lived. This
means that the supply chain for such items must be flexible in order to meet the
demand. There are issue with inventory controls, such as high stock levels, which may be
necessary to meet unpredictable demand; however, this carries with it the risk of
obsolescence in the event of excess stocks.
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Product Life Cycle
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The traditional four-stage product life cycle may be seen below:
Introductory stage: There is low demand, but little variety of products
Growth stage: Volume increases in the growth stage. The supply chain needs to be well
organized, with formal structures in order to cope with the demand. It is necessary for
the supply chain to hold adequate stocks to meet the growing demand.
Maturity stage: Variety increases in response to deceasing market growth in the main
products. The supply chain needs to be adjusted in line with these characteristics.
Decline stage: With the increase in variety and market segments, supply chain should
focus on reverse life cycle and containing costs.
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According to the PLC concept, the pattern of sales during the stages of product life
cycle can be predicted. However, life cycles have shortened over the last decade, which
means that the times taken for these products to be developed, produced and delivered
to markets have been drastically reduced.
It becomes necessary for supply chain operations to be able to design, manufacture
and distribute products and services within these short time life cycles in order to reduce
the risk and financial consequences of obsolescence. The ability of the supply chain to re-
supply within the shortened life cycles is equally important if the opportunities are to be
exploited. The time between growth and decline stages may be a few months, e.g.
seasonal and certain fashion goods and services, and so it is essential that the order to
delivery cycle time is managed in order to achieve competitive advantage.
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Task 2.7
Explain the four stages of product life cycle for supply chain operations.
Answer:
The four traditional stages are:
▪ At introductory stage: there is likely to be less demand but little variety of products
▪ Growth stage: volume increases in this growth stage. The supply chain need to be well
organized, with formal structures in order to cope with the demand.
▪ Maturity stage: variety increases in response to deceasing market growth in the main
products. The supply chain needs to be adjusted in line with these characteristics.
▪ Decline stage: with an increase in variety and market segments the supply chain
should focus on cost-effectiveness
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Global Supply Chains – 1
Trade has been liberated with the removal and/or reduction in tariffs and barriers to
the free flows of goods. Tariffs are intended to protect domestic industries form global
competition, but these restrictions have gradually been eased in many parts of the
world. The world is moving towards a more integrated global economy and
organizations are now relying upon sources around the world for their critical raw
materials. We also hear of low-cost production locations, including some technological
advantages from other countries, where both retailers and manufacturers have decided
to relocate the source of manufacturer and other services to Eastern Europe, India, the
Pacific Rim and China.
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Global Supply Chains – 2
The production of electronic and clothing goods, to a large extent, has also become
focused on the specialism from other parts of the world, such as China, Indonesia and
Italy. Organizations can now access the best resources from the globe and, as such,
global sourcing has become part of most procurement processes. Organizations are
taking advantage of these global factors, resulting in supply chain operations spanning
across country boundaries. The pace of globalization has been influenced by four key
factors:
Advances in information and communication technology,
The availability of reliable transportation Systems,
The reduction of protectionist trade laws,
Major differences in labor costs between countries.
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International Demand and Supply of Goods and Services – 1
Things are happening fast and, as Andrew Grove, the former CEO of Intel, states,
everything that can be done will be done, if not by you, then by someone else,
somewhere . Organizations are operating in environments where supply and demand
span across country and continental borders; this means that organizations need to
meet the demands of customers worldwide and manage suppliers working with
different business cultures in other time zones. Other external environmental factors,
such as natural disasters, industrial and consumer actions have presented challenges for
supply chain operations.
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International Demand and Supply of Goods and Services – 2
Customer expectations have risen with the requirement for (near-) perfect quality,
immediate responsiveness and total availability. Consumers are often aware of new
products that they have seen or experienced through the internet. As a result, the
market place has become volatile, coupled with short product and technological life
cycles; this has made supply chains less predictable and more vulnerable. The impact of
some of these supply chain risks can be significant. Research has suggested that, as a
result of problems associated with supply chain risks, some companies have
experienced a severe drop in operating incomes. It has also been predicted that one in
every five businesses will be impacted by some form of supply chain risks, with 60% of
these companies going out of business as a result. Therefore, organizations need to
develop plans and programmes of action to identify and manage these potential risks
within their supply chains.
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Assess Risks and Challenges – 1
The extended supply chain has brought with it risks that need to be considered when
planning global supply chain operations. These can be grouped into;
Supply chain operational risks:
Language and culture,
Quality,
Specifying what customers want,
Arranging changes to requirements and timings,
Higher stock levels,
Increased storage requirements,
Customs delays and payments,
Other physical disruption events, e.g. earthquakes, hurricanes, tsunamis etc.
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Management risks:
The larger the supply chain, generally the more complex the structures,
Management time required in distant locations,
May require some outsourcing,
Challenges for outsourcing including the potential loss of control,
Availability of a particular skills set,
Cultural,
Communication.
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Financial risks:
fluctuation exposures to Exchange Rate variations,
increased shipping costs,
financial information systems.
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Political risks:
Trade quotas
Instability
Differences in working conditions
One way of establishing the impacts of risk is to conduct a risk assessment exercise.
The risk is expressed as:
Supply chain risk = Likelihood x Impact
The highest risk or vulnerability is where the likelihood and impact is high.
Accordingly, an audit is essential in order to identify and map the potential sources and
impact with results being mapped into a matrix, as shown on the next slide.
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Risk Assessment Matrix
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Appropriate methods and action steps can be implemented in order to mitigate the
risks, assign ownership and timelines, and develop contingencies to deal with their
possible impacts.
Assuming long lead times have been identified as a high probability with high impact
on the performance of the supply chain, the organization may then possibly take steps to
identify short-term alternative supply sources. All factors identified to be high-risk with
high-impact on operations should have action steps for mitigation. Notably, it is not only
about cataloguing possible risks but also about understanding the causes in order to
isolate the most relevant and critical threats. In this way, we can prepare a plan to
monitor the environment in order to develop mitigating and contingency action plans to
reduce the impact on supply chain operations.
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Supply Chain Risks; Probability vs. Mitigation
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Task 2.8
List four supply chain risks associated with global supply chain operations.
Answer:
These include:
▪ Operational risks e.g. specifications, quality, cultural, language and customs
requirements
▪ Management risks e.g. complexity of supply chains, skills availability
▪ Financial risks currency fluctuation, payment methods
▪ Political risks country specific, working conditions trade restrictions
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Supply Chain Lead-times (LT) – 1
Whilst most supply chains have made considerable gains in cost-reduction and quality
improvement, the only other differentiator is time. Time has emerged as the competitive
tool on the battleground for supply chains, using On Time in Full (OTIF) as the key
performance indicator that will provide competitive advantages.
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Supply Chain Lead-times (LT) – 2
Customers in all markets that is, consumers or industrial markets will value time in
their purchasing behavior. The choices that have become available to customers have
led to the growth of time-sensitive supply chains. This means that supply chains aim
to reduce lead times in order to maintain an acceptable customer service level. The term
lead-time is often used in place of, or alongside, delivery. To add to the confusion,
lead time can have different meanings, and so it is always wise to qualify what is
meant by delivery or lead-time .
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Components of Lead-times (LT) – 1
Supply lead time is the total time from the start of determining the need , to the
end of the product being available for use. From a buying perspective, lead-time
involves many processes, such as:
internal processes of determining when to order, requisitions and obtaining
necessary authority up to placing the order
the external supplier lead time from order receipt by supplier to the delivering of
the goods or service to the buyer s premises
the internal process of receiving the goods, checking and putting away into
storage, and updating the system and users that the product is available for issue.
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Time Factor over SC Activities
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As illustrated, several players contribute to lead time in supply chain activities, which
is why we emphasize the need for partners in the chain to work towards the same goal
so that they can fully respond to the satisfaction of the consumer.
On-time delivery is a key logistics and supply chain objective. Late delivery risks
production line stoppage, lost sales, poor customer service, or delays to projects. A key
role for all activities of supply chain operations is the time-based completion of supply
chain tasks because of the competitive nature of markets.
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People working in the purchasing function need to be aware of supplier delivery
times and advise users of what they are. When on-time delivery is critically important,
the buyer may consider it necessary to expedite orders, i.e. chase or progress the
supplier. Expediting can be carried out by phone, letter, email or visits to the supplier;
however, this can be expensive, and should therefore be carried out selectively.
When on-time delivery is important, delivery performance will be a key criterion in
supplier selection decisions, and the supplier s delivery performance should be
monitored.
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Benefits of managing and controlling lead times include:
Shorter cash-to-cash cycle,
Releasing working capital,
Reduction of asset intensity,
Lowering of inventory levels in supply chains,
Speeding up stock turnover,
Improvement in responsiveness.
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International Logistics – 1
We have considered the global nature of supply chains and the need to evaluate how
this will impact the operations of the chain. The logistics requirements for supply
chains of an international nature are complex, including a web of transporters, freight
forwarders, suppliers, and all who facilitate these international movements.
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Because of these complexities, international logistics present more challenges than
domestic logistics.
The challenges include:
Assumptions may not be as reliable as with domestics,
Situations may be less stable in some respects,
The geography can be much larger and widespread,
Monitoring process and capacity can be stretched,
Cultural differences,
Legal systems, enforcement and differences.
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The flows of a supply chain may appear straight forward from our previous
discussion, but in an international set-up, the operations can become exceedingly
complex. Let us consider the case study on the next slide.
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Case Study – 1
Levi Strauss, an American clothing manufacturer headquartered in San Francisco, USA,
manufactures goods worldwide. Tracking its US production of Slates (dress slacks for
men and women) provides an interesting example of implementation complexity. The
fabric for the pants is manufactured in both the USA and Mexico, and moved by truck to
Miami, Florida. In Miami, the fabric is cut according to design patterns and matched up
with required ancillary materials, such as labels, buttons and zippers (also manufactured
in the USA and shipped by truck to Miami). The cut sets are then shipped by ocean
container freight to the manufacturing in-bound trade zone in the Dominican Republic.
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Case Study – 2
The cut sets are sewn together there and returned by ocean container freight to Miami,
at a Levi s distribution center in Little Rock, Arkansas, where they are sorted and stored
for reshipment (usually by truck, but sometimes by air) to Levi s retail store customers.
As the goods enter and leave the manufacturing in-bound trade zone in the Dominican
Republic duty-free, they are subjected to examination by customs officials in both the
USA and the Dominican Republic. Once the goods are returned to Miami, they are
shipped by truck (Fawcett et al., 2007).
NOTE: From the case study, Levi Strauss appear to be using a sub-optimal route, as the better logistical solution is probably to
ship the container through New Orleans.
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Levi Strauss Value Chain
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Task 2.11
▪ What do you consider to be the main logistics challenges for this supply chain?
▪ What would you suggest to minimize the impact of these challenges on the objectives
of supply chain operations?
Answer:
The challenges include:
▪ Transportation,
▪ Packaging,
▪ Lead-times,
▪ Customs requirements,
▪ Increasing environmental legislation and restrictions, e.g. low emission zones,
▪ Customer expectations of very short lead-times,
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Technological Impact – 1
Technological innovation has changed the market place in that:
Time has been compressed
Customer expectations have increased
IT has also enhanced supply chain efficiency
Real-time information can be made available regarding:
Product availability,
Inventory level,
Shipment status, and
Production requirements.
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Technological Impact – 2
IT has the potential to facilitate and improve collaborative planning amongst supply
chain partners by sharing information on demand forecasts and production schedules,
which dictate supply chain activities. In some supply chains, the goal is to replace
inventory with timely information; these systems will ensure the goals are achieved.
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Enabling Technologies for SCO – 1
Telephones, satellites, the internet and email have made communication relatively
inexpensive; even those in the remotest parts of the world now have access to the world
through satellite digital phones and the internet. And there are further opportunities for
supply chain integration owing to the availability of enabling technologies.
Note: We are referring to enabling technologies , which is exactly what they are enablers . They
are not the goal or a silver bullet that will solve any of our operational problems. If we make
mistakes using technologies in our duties, they enable us to make these mistakes faster and so do
the wrong things more efficiently!
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Enabling Technologies for SCO – 2
Information technology has been the key enabling technology that has impacted
positively supply chain operations. Organizations have been able to collaborate with
supply chain partners resulting in the integration of activities becoming more effective,
and reduced uncertainty and double-guessing. These activities include product and
service flows, which heavily rely upon information flows, i.e., the whole life cycle from
concept to consumption including disposal. The effectiveness of supply chain networks
and operations are often dependent on information technologies.
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Communication Systems – 1
Communication is important for all organizations; we need to communicate with our
different stakeholders, including suppliers, customers and fellow employees. From our
supply chain perspective, the need for a clear and well-executed communication system
should be obvious.
We can use telecommunication systems, such as fax machines, electronic mail (email),
and mobile phones, to mention a few. Emails accessed from mobile phones allows
logistics personnel to remain connected with their operations from outside their offices
24/7.
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Communication Systems – 1
There are other
advanced communication
technologies used within
the industry.
Technologies are now
applied for telephone and
video conferencing, and
the concept of virtual
meetings has increased.
Staff and work colleagues
located around the world
can now attend the same
meeting at agreed times
irrespective of time zones
and distances.
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Task 2.12
Select two enabling technologies for a supply chain you are familiar with.
▪ What are the benefits that accrue to the supply chain for using these technologies?
▪ What challenges should be addressed to ensure the efficient application of the
technologies?
Answer:
There are a variety of technologies that are used in logistics and supply chains, including
scanners, bar codes, voice-based technologies, RFID.
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Task 2.12
Answer:
The benefits are numerous depending on industry and application. These include:
▪ Improved productivity,
▪ Enhancement of logistics and supply chain operational effectiveness and efficiencies,
▪ Speed in data processing,
▪ Seamless data flows across the supply chain.
Challenges include:
▪ Lack of awareness,
▪ High set up costs,
▪ Lack of standard formats,
▪ Incompatibility of systems,
▪ Lack of appropriate training.
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Voice-based Order Picking Systems
Another example of technological improvements in logistics and supply chain
operations is the application of voice-based order picking systems. These voice-based
technologies are used to talk and give instructions to warehouse staff regarding which
and how many items to pick. These systems have become popular in use due to:
Low acquisition costs,
Powerful connectivity,
Better voice quality,
Improved productivity,
Enhancing logistics effectiveness and
efficiencies,
The ability to use different languages.
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Emergency Environments – 1
Radio communications have also
advanced significantly during the
late 20th Century. Amateur radio
operators have provided emergency
communications during disasters
since 1910. With equipment becoming
smaller and more portable,
processing power and bandwidth
increased. Information became more
readily available in databases and on
CD-ROM. By 1990, laptops and
portable printers could be carried on
a disaster response.
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Other developments include:
telecommunication companies switching from voice networks to packet switching
networks,
efficient transfer of data,
commercial e-mail services, such as CompuServe, became available,
electronic bulletin boards became popular places to share information,
emergency management professionals established such as the Emergency
Preparedness Information Exchange (EPIX), The United Nations Joint Logistics Center
(UNJLC - http://www.unjlc.org),
electronic communication has allowed remote access to information and broken
down the barriers to information exchange.
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Advances in wireless communication include new standards and widespread use in the
field. For example, GIS provides critical information to relief agency staff concerning how
humanitarian support efforts are progressing and helps ensure agencies are acting in a
coordinated and efficient manner. Once in the field, the coordination continues as new
data are added and distributed through wireless applications and internet connectivity.
The widespread availability of the internet has also encouraged the creation of networks
of relief workers.
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Applications of GIS
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EIS (Emergency Information Systems) International Corporation recognized the need
to prepare for, and communicate during, disasters, and accordingly created the first
commercial attempt to use computers in real-time emergency information management.
Geographic Information Systems (GIS), such as SPLASH and SLOSH, were also beginning
to be developed to map disaster risks. These systems utilize computer-generated maps
as an interface for integrating and accessing massive amounts of location-based
information.
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Transaction Processing Systems (TPS)
These systems collect and store information about transactions with the primary
objective of processing the transactions in batches or real time.
Batch processing allows for a number of transactions to be received
before the actual processing; for example, this could be after every
6 hours or at the end of each day. Real-time processing is
done almost the very
moment the
transaction takes
place.
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Electronic Data Interchange (EDI) – 1
A good example of TPS is Electronic Data Interchange (EDI), which is computer-to-
computer transmission of business data between and across organizations. EDI provides
seamless data and information flows across companies, provided there is compatibility
between systems. In logistics and supply chain operations, examples include:
purchase orders,
invoicing,
pricing,
advanced shipment notices,
electronic funds transfer,
bill payments.
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Electronic Data Interchange (EDI) – 2
Benefits Challenges and
potential drawbacks
replacement of paper
documents
reduction in shipping
errors
increase in cash
flows
a lack of awareness
reduction in document
preparation time
reduction in returned
goods
increase in billing
accuracy
high set-up costs
reduction in
processing time
reduction in lead
times
increase in
productivity
a lack of standard
formats
reduction in inventory
carrying cost
reduction in ordering
costs
increase in customer
satisfaction
incompatibility of
systems
reduction in personnel
costs
reduction in order
cycle time
a lack of appropriate
training
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What is EDI? A Painless Way to Learn about EDI
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Automatic Identification Technologies – 1
Other types of logistics-enabling technologies include:
Optical character recognition (technologies that can read letters, words and numbers)
Machine vision (technologies that can scan, inspect and interpret what is viewed)
Voice data entry (technologies which can record and interpret a human voice)
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Automatic Identification Technologies – 2
The barcode scanner remains the most popular
automatic identification system universally used
in logistics and supply chain operations. By
integrating suppliers with customers along supply
chain operations, barcodes enable parties to read
the same labels and, in addition to the transfers of
goods and services, the processes can be recorded
electronically.
Scanners are used to record inventory data, and
when these are connected to the system, they
enable inventory records to be updated
simultaneously.
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Electronic Point of Sale (EPOS) – 1
One of the best examples of EDI is the Electronic Point of Sale (EPOS), where the above
automatic identification systems have become an essential element of the systems.
EPOS involves scanning of product labels (barcodes), thereby reading and recording such
data as:
item description,
product price,
applicable taxes,
special promotions.
Let us visualize a customer at a point of sale in a supermarket. At the checkout, goods
are scanned by the check-out operator; the scanner reads the barcode on product labels,
which automatically registers the price on the till. The customer receives verification of
the products bought by way of an invoice (the receipt), listing the items and price
charged.
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Electronic Point of Sale (EPOS) – 2
A key idea behind EPOS is the ability to provide information across the supply chain to
enhance decision-making. The same transaction triggers a series of transactions, such as
replenishment. In this case, at the point of sale, the computer processes the purchase
through the inventory system of the retailer, potentially triggering replenishment of the
stock back to the store. Depending upon the replenishment cycles and reorder levels,
this could then trigger a requirement for more stock from the supplier, which could also
trigger a production cycle that reorders the item, whilst at the same time arranging for
transportation of the new order, together with the invoicing and payment.
With this EDI system, goods can be effectively re-stocked onto the shelf with little
paperwork and minimum human intervention.
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Radio Frequency Identification (RFID)
Another enabling technology that has supported supply chain operations is RFID. RFID
has helped organizations and their supply chain partners to trace, track and identify
important items using the data and information provided by the RFID tags. You will find
RFID tags implemented or incorporated into the item or packaging. The unique serial
identifier in RFID tags identifies the cartons individually, thereby preventing multiple
scanning of the same bulk items. These tags then send radio signals that help gather
regular information about the item. RFID has the potential to create a truly adaptive
supply chain, enabling all aspects of the supply chain cycle (sourcing, production,
storage, distribution, retail and returns) to be monitored in real-time.
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RFID
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RFID and Supply Chain Operations – 1
RFID has the potential to bring remarkable efficiency to the field of supply chain
operations in that we can now collect relevant and important data related to movement,
loading and unloading of goods on various sites such as docks. We can also get
important information related to the accurate time consumption whilst such activities
are on-going. This means better service within supply of goods and services leading to
minimization of unnecessary wastes: for example, RFID use in food and drug supply is
reported to have reduced wastage by up to 20% since its application in this industry.
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RFID and Supply Chain Operations – 2
The perceptions and application of RFID technologies differ from organization to
organization and from country to country. Challenges associated with RFID application
have been widespread, including different standards and incompatibility of the
technologies; notably, the costs associated with the technology are considered high in
some supply chain operations.
Although the price of smart tags has reduced over the years, they remain too expensive
for some applications particularly lower-value items, with problems associated with
their application to certain types of metals reported.
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RFID and
Supply Chain
Operations
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Proof of Delivery (POD)
When RFID technology is used, the receipt of materials into stock is enhanced. As a
result, it becomes much easier and faster to acknowledge receipt of goods with the
suppliers. Other electronic devices are used to obtain proof of deliveries signatures. In
Europe and other regions electronic proof of delivery is a common feature for logistics
operations. You may have already received a delivery when you have been asked to sign
on a hand-held electronic pad.
A soon as you affix your signature on the pad you have acknowledged receipt, and this
information is transmitted electronically to the depot and onto the sender of the goods
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Supply Chain E-business Operations – 1
E-business is a wider business range of transactions that include processes of
procurement, production, distribution and other supply chain related transactions,
which may not be directly buying and selling transactions. This is often referred to as
B2B, i.e., business-to-business interfaces. Some of the components of e-business in a
logistics and supply chain operation are:
procurement-related systems, such as e-procurement involving requisitioning, order
processing and award, receiving and payment processes,
production-related systems, such as materials requirement planning (MRP I);
manufacturing resources planning (MRP II), enterprise resource planning (ERP), with
prominent examples systems being SAP, Oracle, Baan to mention a few,
financial system invoicing including payment of suppliers.
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Warehouse Management Systems (WMS), covering all aspects of the warehouse
operations, such as automatic checking by scanning goods received and generating
locations for storage. Order-picking and automatic replenishment activations and
returns processing
and management.
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Transport Management Systems, including Fleet Management Systems, is the term
given to a type of software programme which comprises individual applications, such
as:
Fuel consumption,
Vehicle costing,
Tachograph chart analysis,
Scheduling and routing,
Administration,
Vehicle maintenance,
Fleet reporting on vehicle utilizations.
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Personnel Systems: salaries and other staff records. Many organizations hold a great
deal of personal information about people on their computers, and there is a strong
possibility that some of this information could become available to people who would
use it unscrupulously for junk mailings or more serious purposes. In the UK, the Data
Protection Act requires organizations that process data about people to be registered
with the Data Protection Registrar. The registration specifies what sort of data is held
and the purpose for which it can be used.
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Performance Monitoring Systems: Various KPIs are easily calculated and made
available in a timely manner for the purposes of control, monitoring and opportunity
identification. These systems
enable data to be accessed and
interchanged by all parts of a
business, quickly and easily.
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Supply Chain Risk Management
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Supply Chain Risks – 1
How can we understand the key supply chain risks? In this discussion, we will apply
the term to refer to risk, without making any distinctions between sources , drivers
and outcomes or consequences . These issues have already been covered in Section
One above.
Risks are principally the financial or commercial consequences of inefficiencies or sub-
optimal supply chain performance. This includes the inability of a supply chain to react
swiftly to volatility in demand and the changing needs of the market place. Christopher
& Lee refer to the latter as market risk , i.e. the risk of inertia.
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There are several sources for supply chain risks:
Supply source: supplier uncertainty arising from poor on-time performance or late
delivery and relationship risks.
Logistics: Transport disruption is a potential source of vulnerability to all supply chain
operations. It can be classified into three broad groups: damage, loss and delay all of
which can have a significant impact on service levels, with the first two also causing
discrepancies in demand and stock availability data.
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Infrastructure-related risks: As with everything else in this networked
world, elements of infrastructure are interconnected through commercial
and technological links. Back in May, 1998, a malfunction in a satellite cut
off 90% of all US pagers, affecting business transactions and emergency
services. The same authors report that the frequency and impact of events
of this kind are increasing. In the summer of 2003, for example, a localized
power-cut knocked out British Airways baggage handling system,
preventing the airline from meeting security requirements. The failure
effectively closed Heathrow Airport, disrupting flights for days. A strike by
aggrieved check-in staff had a similar effect.
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Passengers Suffer Heathrow Airport Terminal Five Chaos
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Local and global: Demands
for shorter lead-times,
outsourcing and increasing
use of global sourcing and
supply, have become sources
of risk to supply chain
performance. Purchasers
attracted by lower unit costs,
risk suffering larger order
quantities, longer lead times,
lower responsiveness and
worse customer service.
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Environmental, i.e. forces of nature: The great
tsunami of 2004 reminded everyone of the
devastating impact of these types of event. There are
other well-documented examples of how natural
phenomena, such as earthquakes, hurricanes, and
floods, have disrupted supply chains.
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Health and safety:
Threats include Foot and
Mouth Disease, and
SARS, which highlight
risks to efficient
consolidated seamless
distributions systems.
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Political: On-going regulatory changes and the practicalities of managing across
different legal, cultural and environmental settings have made supply chain
management a far more complex set of activities than a purely national operation.
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Financial: Currency fluctuations or other cyclical downturns, all of which have far-
reaching consequences for levels of demand, pricing, and purchasing policies for the
organization.
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Social responsibility: The wider
ethical and natural environment
within which organizations do
business. Organizations are not only
expected to control the negative
effects of their operations on
societies but also those of their
supply chain partners.
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Socio-political disruptions: Examples include protests, strikes or regulatory changes, all
of which happen without warning, and so the routine scanning of the industry and
general news services may identify threats of this kind.
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Fire at Logistics
Company
Warehouse –
August 6, 2021
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Summary
The supply chain environment poses a broad range of potential challenges and
opportunities for organizations. A careful analysis is essential to identify the key factors
in the external environment that are likely to offer these opportunities and threats.
When these are identified, organizations can develop plans and systems that will
safeguard and improve the ultimate goals of supply chain operations. These goals and
objectives include high levels of customer service and satisfaction.
We have also noted the key technological enablers available for supply chains
operations. When these are applied successfully, they act like the glue binding
operational activities of supply chains.
We will now consider the main activities of a supply chain and how these can be
coordinated in order to add value and provide benefits to end-users.
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1.
2.
3.
4.
UNIT OUTLINES – 3
Learning Outcomes
Introduction
Sourcing
Purchasing Process
Producing the Goods
Warehousing
Inventory Control
Transportation
The Logistics Concept
Reverse Logistics
Summary
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Introduction – 1
Earlier, we noted that organizations may vary significantly in terms of the scale and
breadth of product and service offering, but there is usually at least one thing in
common: the pressure and desire to survive the prevailing environment and market
conditions. We have also discovered that every organization is part of a larger network,
which we have called a supply chain, and that supply chain operations can enhance an
organization's competitiveness. We will now look at the key operational activities that
require careful management in order to prosper and survive the prevailing environment.
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Introduction – 2
We have also noted that the customer demand effectively triggers almost every other
activity in a supply chain. When a customer order is received, order processing ensures
that goods are picked ready for dispatch within acceptable times. This activity is often
concerned with how an organization handles an incoming order up to the time that order
is fulfilled. We will
now look further
into the various
activities of supply
chain operations.
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Introduction – 3
What do these organizations have in common?
Woolworths a leading retailer in South Africa, with a regional network of suppliers,
TESCO, who is the leading UK retailer, with a network of global suppliers,
CEVA Logistics, a service firm offering transport, warehousing and supply chain
solutions,
IBM, one of the largest global IT businesses,
Royal Mail, a post and parcels service provider in the UK,
Singapore Airlines, an international airline,
Carrefour and LuLu, a leading retailer in the Gulf region.
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Introduction – 4
These organizations may appear different, but we can identify that there is at least the
same desire to provide superior operations across their respective supply chains. For
each of the above organizations, the differences lie in how its operations function in the
provision of goods and services.
We have noted that organizations have a choice concerning whether to produce the
goods and services themselves which they will subsequently provide to the market. We
refer to these as make-or-buy decisions. If an organization decides to make the
products and services for its customers, it would then need to ensure that there is
enough capacity and resources for the production process.
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Introduction – 5
If, however, the
organization decides to
outsource or purchase the
products (or services or
component parts), the
emphasis will then be on
the purchasing activities
associated with the
identification of most
suitable suppliers. We will
now look at some of the
key activities in supply
chain operations.
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Sourcing – 1
Once the decision has been made to buy products or services for supply chain
operations, the organization still faces challenges. Does the organization buy all its
requirements from a single supplier or does it use the services of multiple suppliers?
Each of the options has its advantages and disadvantages: for example, the organization
may choose to obtain competitive prices by asking suppliers to compete for the supply
and delivery of certain products or services; in another situation, the organization may
decide to build a stronger relationship with one supplier and will choose to deal with
this single supplier for all or most of its supplies requirements.
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Sourcing – 2
Whatever the decision, the process of acquiring goods and services will have a major
impact on the performance of the supply chain operations. When a requirement is
received or demand is known, organizations initiate the necessary processes to attempt
to ensure the required goods or services are supplied in the right quantities and quality
from the right supplier, delivered to the right place, on time and at the right price.
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Purchasing Process – 1
If goods or services are to be sourced from external supply chain partners, it is then
the role of purchasing to ensure that this acquisition is carried out effectively.
Purchasing involves all the activities associated with the identification of needs,
locating and selecting suppliers, negotiating terms and following up so as to ensure that
supplies are delivered on time, in the right quantities, and at the right price and place.
Purchasing is critical in the flow of goods and service, as the purchasing cycle often
has an impact on the delivery lead time and customer satisfaction.
Moreover, there is need identification, the requirement of which may take any form,
ranging from a component and raw material sub-assemblies to a completely finished
product. In other cases, it could be a service, such as consultancy or training.
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Internal users communicate their requirements to purchasing in a variety of ways. A
common document used internally is a purchase requisition, which informs purchasing
of specific requirements. When we issue purchase requisitions, we must ensure that
adequate information is provided to include:
detailed description of the product or service,
quantity,
date required,
estimated costs,
authorization.
In other situations, a re-order point is another method of initiating purchasing
requirements. We will consider this aspect when we discuss inventory control later in
this section.
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Before purchasing goes out to the supply market, they must ensure that the
requirements are clearly described to avoid the wrong goods being supplied. The most
common way of communicating requirements with suppliers is through a
specification . A specification is a clear statement of requirement; it can be detailed
depending on the type of purchase or it can be very brief, such as by using a brand name
to describe what we need e.g., a Toyota Landcruiser or Landrover Discovery. Purchasing
personnel need to ensure the requirements are clearly and adequately described before
approaching the supply markets.
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Pakistan National Airline Cancels 349 Flights over Fuel
Shortage Row (26 October 2023)
Pakistan International Airlines (PIA) has canceled 349 flights in the last two weeks due to a
shortage of fuel, it said on Thursday, underscoring the difficulties faced by the cash-
bleeding national flag carrier.
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Supplier Selection
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Supplier Identification and Evaluation
There are situations where an organization has a preferred supplier list. Remember
single and multiple sourcing approaches to which we previously alluded? If we are single
sourcing, it is easy to select suppliers; however, if we are using multiple sourcing, it is
then a different approach.
Purchasing will prepare necessary enquiry documentation to receive quotes. The
common inquiry documents are and again depending on the nature of purchase, the RFQ
or invitation to tender documents. There are specific regulations affecting public sector
procurement, which create certain obligations for the way suppliers are communicated
with, tenders are conducted and suppliers are selected.
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Supplier Selection – 1
When quotations and bids have been received, they must be evaluated
using some of the criteria agreed earlier. Criteria depend on the nature of
purchase but include elements, such as:
specification,
quality,
delivery,
price,
after-sales service and support.
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Cost* & Price** (as of Nov. 13, 2023)
* https://www.androidauthority.com/iphone-15-cost-to-make-3378570/
** https://www.jarir.com/sa-en/apple-iphone-15-pro-max-smartphones-623670.html
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When a suitable supplier has been identified, a purchase order (PO) is prepared, which
is a formal communication to the supplier that they can supply the require goods or
services at the price and condition stated.
The ability of a supply chain pipeline to continuously move goods and services, to a
large extent, depends upon the ability of its purchasing function and relationships with
upstream partners. The purchasing cycle does not end when an order is placed. There is
the need to follow-up, i.e. to ensure the goods and services are supplied as per the
purchase order or contract.
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In addition, purchasing has a huge financial impact on an organization's operations
and cost-base. If you were to examine how much your organization spends in purchasing
goods and services you may find that this represents a huge amount both in terms of the
costs and also the quantities; this means that, for those of us working in purchasing, we
have a big impact on the flows we have identified in supply chain operations. Purchasing
also has an impact on other activities in the supply chain, including production,
transportation and inventory control. This has been illustrated in the evaluation criteria
often used, and which we will illustrate further in discussions later.
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Task 3.2
You have been informed that the selection of suppliers for much need supplies is failing
to deliver the smooth flow of materials into your organization's supply chain. You are
asked to provide your manager with the qualities of a good supplier. List these and
justify your reasons for identifying these qualities.
Answer:
Qualities of a good supplier would include the following attributes:
▪ Should be able to meet requirements on time every time
▪ Should be honest and fair in dealing with the purchaser
▪ Should have adequate capacity to meet purchaser requirements
▪ Should have sound financial resources
▪ Should aim to continually improve their provision of goods and services
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On-time delivery is a key purchasing and supply chain objective. Late delivery risks
production line stoppage, customer dissatisfaction, lost sales or project delays. A key role
for purchasing is monitoring supplier delivery times and advising users of what they are.
The term lead-time is often used in place of, or alongside, delivery. To add to the
confusion, lead-time can have different meanings. Therefore, it is always wise to qualify
what is meant by delivery or lead-time .
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Those of us working in purchasing functions should ensure that, before a supplier is
chosen, an overview of their capabilities has been made. This means, when necessary,
conducting an appraisal of the capabilities in the following areas:
technical
production
financial
environmental
supply chain
quality.
The supplier should demonstrate that they have sufficient technical capabilities to
reduce the risk of purchasing defective products or services.
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12 Criteria
to Supplier
Evaluation
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Task 3.3
Which five key capabilities would you appraise a supplier in order to establish suitability
for supply.
Answer:
Capabilities to include the following:
▪ Technical
▪ Production
▪ Financial
▪ Environmental
▪ Supply chain
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Producing the Goods – 1
The analysis of production approaches reveals that products and services can be
produced within one of four distinct supply chain structures. Organizations may choose
to:
Make to Stock (MTS): typically this is for generic products produced in large numbers
especially fast moving consumer goods (FMCG). There is no customization, and
customers usually buy these products off the shelf.
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Assemble to Order (ATO): These products are customized at the very end of the
production process. Customization is limited in nature; examples include a t-shirt with a
customer s name, or automobiles, which are also ATOs because of the final set of options
available to customers.
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Built to Order (BTO) or Make to Order (MTO): This is used for standard components, but
the final configuration of these components is customer-specific. In MTO, the
customization is further back in the production process, unlike in the ATO supply chain.
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Design to Order or Engineer to
Order (ETO): These products are
designed or engineered to meet
unusual customer needs or
requirements. This supply chain
is the most highly customized.
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Each of the four supply chain structures is appropriate for different products based on
their demand and supply characteristics. Each supply chain structure orients its
production and logistics processes differently based on its strategic priorities. For
example, high-volume, low-demand uncertainty products may be matched with lean
supply chains enabled by efficient processes, whereas low-volume, high-uncertainty
products should be matched with agile supply chains enabled by flexible processes.
Medium volume and medium demand uncertainty products should adopt agile supply
chains that utilize a combination of efficient and flexible processes.
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Most goods and services are produced dependent upon consumer needs, either
against a forecast or specific orders, where the lead times permit this. The demand for
the constituent parts or components for these goods is dependent upon the finished
product. This is known as dependent demand . It is relatively straightforward to
determine the requirements for inputs into the production of a given quantity of
finished products.
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There are tools and techniques used to manage and coordinate the production
activities of dependent demand items in a supply chain. The system commonly used to
plan production for these goods is known as Materials Requirement Planning (MRP).
There are three main files operating within this system: the master production schedule,
the bill of materials, and the inventory file. As has been highlighted previously, the first
step in the planning and control of production is the Master Production Schedule (MPS).
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The Master Production Schedule (MPS) is the total requirements derived from the
following:
Confirmed customer orders,
Forecasts,
Projected inventory levels,
Production quantities,
Any provisional demand for the period.
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When we have our MPS, the next step is to determine the materials requirement in
order to produce the total requirement. This is called the bill of materials. The bill of
materials (BOM) is the quantification of the materials and components necessary for the
manufacture of the quantities from the MPS. Assuming the MPS has a total requirement
of 500 chairs, the BOM will calculate the exact numbers of leg assemblies, back
assemblies, seats, and the associated components and materials required to produce
these assemblies.
We now know the materials required in producing the quantities from our MPS. The
next step is to ensure that these materials are available when they are required. The
inventory file represents the amount of stocks available to satisfy the BOM. Any
shortfall should be sourced using the purchasing system.
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The Bill of Materials
(BoM)
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MRP System Overview
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It is not always easy to determine the
exact quantity required for certain goods
and markets; this means that
organizations will often produce
independently of any clear view of the
actual customer demand, based solely on
forecasts.
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An MRP system when successfully implemented, has substantial benefits for supply
chain production operations, including:
direct links to the MPS and indication as to the exact timings and order quantities
for all components
the elimination of guess work associated with dependent demand, which lowers
inventory levels
the ability of management to trace every order through the linkages between higher
level and lower level items
the ability to advise the organization and its suppliers of what needs to be made and
when
information can be used in scheduling work or shipments, including budgets and
cash flows.
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Warehousing – 1
Warehousing is an integral part of supply chain operations. To many people,
warehousing is thought of only as a storage place. However, warehousing plays a much
broader role in supply chain operations. Warehousing refers to any supply chain
operation that temporarily stores, repackages, sorts or consolidates goods or materials.
Warehousing can be used to:
Reduce transportation costs, such as by exploiting economies of scale through the
following operations:
Consolidation warehousing, where shipments from a number of sources in the
same geographical area are combined into larger and economic shipping loads.
Cross-docking warehousing, utilized for operations designed to reduce
transportation costs, where large shipments are received and broken into smaller
shipments for onward delivery to local customers.
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Warehousing – 2
Goods may be received in large shipments
from multiple suppliers and re-sorted into
customized shipments for individual stores.
Improve operational flexibility, which
includes postponement warehousing
(see decoupling inventory below), where
warehouse operations combine light
manufacturing and packaging duties to
allow organization to complete final
assembly or packaging of goods. This
adds flexibility because organizations
can hold off on final packagings until
customers exact requirements are
known.
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Warehousing – 3
Shorter customer lead-times: when the total transportation time to the customer
exceeds customer requirements, the organization can use warehousing to reduce
the lead-times to customers. This means that the transportation time is split into
two main components, i.e. time to warehouse, and time to customer. Goods arrive
at the warehouse prior to a customer requirement, and so this time is of little
concern to the customer. The only time that is of importance to the customer is the
time from the warehouse to the customer.
Lower inventory costs: an example is where safety stock can be pooled together in
one warehouse than at multiple stores where floor space may be significantly more
expensive.
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Warehousing – 4
Goods usually have to be stored in advance of the actual demand this also requires
other activities, such as order processing sortation and consolidation to support
fulfilment of customer orders.
In supply-driven supply chains, warehouses play the role of storing materials and
component parts for the production process. In most cases, goods and materials flows
pass through storage facilities for various reasons.
The methods and systems of storage and handling will impact on the safe access and
flow of the goods within a supply chain. The storage and handling systems must be
compatible as much as possible with the rest of the supply chain operations.
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Warehousing – 5
In order to achieve a smooth flow of products and services within a supply chain,
proper storage systems require the following:
The nature and characteristics of the goods to be stored,
The layout and stock location,
Accessibility to stocks,
Storage and stock-handling methods,
Health and safety,
Costs,
Compatibility with warehousing systems.
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Warehousing – 6
The above elements are essential, but equally important is the maintenance of stock
availability by ensuring that sufficient stocks are held at all times. Sufficient stocks
require that, when maximum and minimum stock levels have been decided, there must
be a mechanism to ensure that replenishments are made at the right time in order to
avoid stock shortages. Stock shortages are not good for supply chain operations.
Imagine a requirement for materials is not met owing to stock out or, alternatively,
goods have been stored in such a way that retrieval becomes difficult, location is
haphazard, and order-picking is problematic. All these scenarios inhibit the physical
flows of a supply chain.
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Inventory Management
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Types and Purposes of Inventory – 1
Every organization has inventory of one kind or another. The need to have products
available at the right time and in the right quantities creates the need for stockholding.
Let us look at the different types of inventories that are held by organizations and their
supply chains. You will have come up with some of these types in the task above.
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We can classify the different inventory types as follows:
Raw materials: purchased for use in the production process, e.g. wheat for
production of flour or flour for production of bread.
Components and parts or work in progress (WIP): stocks requiring further processing
to be completed before they can be used to meet customer demand, e.g. gear boxes
for assembly of cars.
Finished goods: inventory that has completed all the processing from the
organization and are ready to be supplied to the customers e.g. groceries
Maintenance, repairs and operations (MRO): materials used to support the company s
business and production process. Typically these inventories will never be sold to
customers and is made up spare parts, stationery and other consumables.
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Stocks are held to satisfy customer demand and buffer against variations in supply,
such as material shortages in the production processes. In an ideal situation, inventories
should arrive at their point of use or consumption Just in Time and in exactly the right
quantity in order to satisfy the demand. If this were to happen, stocks would be minimal
as suppliers would be supplying exactly the right quantities on time. Unfortunately, the
business environment is not always as straightforward as this, and sometimes inventory
is required to buffer against uncertainty and variations in both demand and supply.
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Another way of categorizing inventory is by its function or use within a supply chain.
We have the following uses or functions for inventory:
transit inventory: this is stock that is in-transit from one part of the chain to another
and includes transportation inventories.
cycle inventory: this represents stock that exists for any time the replenishment rate
exceeds the demand
buffer or safety inventory: this is stock that is kept just in case to cushion the
operations from uncertainties in the supply chain s supply and demand patterns and
activities
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anticipatory inventory: this inventory is built up for purposes of anticipation of
demand in excess of the usual production output or to accommodate seasonal
demand, production shutdowns or, in some cases, marketing promotions.
decoupling inventory: this inventory is purposely placed between operational stages
to allow them to operate independently of each other. An example of decoupling
inventory is in the assemble-to-order (ATO) type of supply chains. Complete
production of a product is postponed until an actual order is received. In this case,
stocks of semi-finished products are kept awaiting an actual customer order to
complete the production of the product.
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As a logistician, you need to understand the impact of inventory on service levels and
financial performance of the organization. In this regard, you are expected to consider;
the minimum and maximum stock holdings,
when and how much to order for replenishment,
the costs associated with holding stocks,
the cost of ordering, and
the cost of stock-outs.
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Replenishment – 1
There are a number of issues that must be considered in managing and controlling
inventories. There are some key questions that an inventory controller should consider.
These are:
What is the amount of stock should be held at any given time?
When should stocks be replenished?
What is the size of an order?
How variable and predictable is the demand pattern?
How variable and predictable is the supply?
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Replenishment – 2
In order to answer these questions, it is essential to consider two basic inventory
demand categories:
Dependent demand: Referring to those inventory items that are required for the
production of a finished product, the demand levels of which are tied directly to the
production of another item in the organization's production process. The quantities and
timings of demand-dependent items can be predicted with some accuracy, as these are
under the control of the organizations. We have shown earlier how MRP systems work
once quantities of items to be produced are known. The demand for component parts,
sub-assemblies and related materials can be estimated with ease, as it is dependent
upon the quantity of the items to be produced. The replenishment timings and
quantities are therefore tied up with the production schedule.
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Replenishment – 3
Independent demand: Referring to inventory items with demand levels which are
beyond an organization's complete control. As for independent demand, items are
usually for finished products and services that are dependent on customer demand
forecasts.
Two basic approaches are used to control and replenish independent demand
inventory items: that is, periodic reviews (fixed time) and continuous reviews (fixed
quantities) methods. Each of these is discussed further below.
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BoM
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Replenishment – 4
Periodic reviews: for this approach organizations check their inventory levels at regular
times and restock to some predetermined maximum levels (R). The actual order
quantity is the amount required to bring the inventory level back to level R. So in this
case:
Q = R I where
Q = Order quantity
R = Restocking level
I = Inventory level at time of review.
Periodic reviews provide a good opportunity for planning replenishments and
spreading the cost of restocking across more stock items; however a high safety stock
level should be maintained to avoid a stock-out during the intervals. This can be the
major disadvantage of this replenishment system.
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Replenishment – 5
Continuous reviews: In this approach a re-order level is determined for specific items.
This requires a system for constantly monitoring the inventory levels, such that when a
certain reorder point is reached, a replenishment order is placed. The key features of
continuous review system are:
the constant monitoring of stock levels,
pre-determined reorder point,
determined safety stock level,
replenishment orders issued only when the reorder point is reached,
order size is based on the trade-off between the cost of holding stock and the cost
of ordering.
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Replenishment – 6
Re-order points (ROP) are calculated as:
ROP = d x l where
d = demand rate
l = lead-time
When safety stock (SS) is considered necessary, this should be factored into the
calculation of ROP.
ROP = dl + SS
Periodic Review Continuous Review
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Replenishment – 7
Assuming the demand pattern is constant, an order quantity equal to economic order
quantity (EOQ) can be ordered each time the level reaches the re-order point. EOQ is the
quantity at which the holding costs are equal to the ordering costs.
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Replenishment – 8
There are limitations to EOQ because the holding and ordering costs cannot be
estimated accurately. EOQ has been criticized for not taking into account issues such as
quantity discounts, that may be offered by suppliers for large order sizes and ordering
multiples (such as pallet quantities). However, it should be noted here that EOQ
provides the basis for inventory controllers to establish order sizes for respective stock
items.
The major limitation with EOQ has been its focus on the cost impacts for only the
single organization, ignoring the impact on the supply chain network. EOQ minimizes
costs for a particular firm, but may create problems for the partners, thereby actually
increasing the overall stock holding in the supply pipeline. This is often described as the
bullwhip effect , defined as the extreme change in stock levels as a result of a small
change in demand downstream in the supply chain.
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Replenishment – 9
In order to reduce the bullwhip effect, it is essential that supply chain partners work
closely together, as noted earlier. The more collaborative and cooperative partners are in
planning their supply chain operations, the easier it becomes to share information that
will minimize inventory levels throughout the pipeline.
Organizations keep stock of goods for various reasons, the main one being to satisfy
normal demand patterns. Inventory control aims to hold optimum levels of stocks to
support production and customer service levels.
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Bullwhip Effect
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Order Processing – 1
This is an important aspect of supply chain operations in relation to customer service.
A common phrase that is used is order cycle time , measured as the time at which the
order is placed by the customer or user to the time that the order is received by the
customer or user. In order to appreciate the order cycle time you need to assess the
following aspects:
Order
planning
Order
transmittal
Order
processing
Order picking
Order
assembly
Order delivery
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Order planning: Develop plans for efficient order handling to avoid bottlenecks.
Order transmittal: Some organizations and their supply chain partners use faster order
transmission processes, such as fax, phone or transactional websites. Order transmittal
has an impact on the order cycle time because a long transmittal time will result in
longer order processing time.
Order processing: this includes activities like checking for completeness and accuracy;
credit check where necessary, and producing the order picking instructions. Checking
for availability and stock location.
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Order picking: Allocating the resources for picking, the actual pick list.
Order assembly: including packaging and sortation when necessary, and marshalling to
dispatch docks.
Order delivery: The final phase of order cycle; carrier advising and loading takes place;
necessary documents completed and signatures obtained for tracking and tracing
purposes.
Order cycle time has a big impact on the customer service level both in terms of the
lead-time and also order fill rates and productivity.
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Task 3.10
What is order cycle time and why is it important in supply chain operations?
Answer:
Order cycle time :
▪ Is measured as the time from when the order is received from the customer or user to
the time that the order is received by the customer or user
▪ It has a big impact on the customer service level both in terms of the lead time and
also order fill rates
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Case Study - First Time Right Orders at Atchison Topeka, UK
A UK, Third-Party Logistics (3PL) company, Atchison Topeka, has increased supply
chain visibility and eliminated order processing errors after implementing Wesupply
electronic trading software, known as OneTime .
Atchison Topeka specializes in the food sector, delivering ingredients such as
chocolate, jams, fruit mixes, sugars and bagged powdered ingredients to its customers
UK manufacturing centers. Previously, the company used a manual order entry process,
but the system was time-consuming and, as it involved dealing with large quantities of
paperwork and fax orders, there were a considerable number of errors.
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Case Study
Our existing B2B processes were hugely inefficient and the situation was worsening
with each additional trading partner, states Darren Cronshaw, Operations Director at
Atchison Topeka. The order processing solution in place lacked resilience to the
changing demands of our customers and it was decided that a more robust and scalable
electronic trading solution was required.
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Case Study
Moving to Wesupply allowed Atchison Topeka to connect to its customer base via a
single platform, enabling greater control of the customer ordering process, as well as
providing 100 per cent inventory record matching.
Errors are now eliminated before they have a chance to impact on performance, and
the costs associated with the manual procedure have been reduced both of which have
increased the quality of service to the customer.
Additionally, Atchison Topeka can now add new trading partners more quickly and
efficiently, as OneTime integrates its business processes with those of the company s
customers. OneTime was rolled out to the company s major customers over a six-month
period.
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Case Study
We have customers linked via the OneTime solution, with varying levels of
complexity, from simple order transfers to full SAP integration across multiple
operating sites throughout Europe, says Cronshaw. Notably, the company now plans to
roll out the software to its entire customer base. Furthermore, the implementation of
the OneTime solution has enabled efficiencies across our customer-facing supply chains
which were previously unattainable. We can now exchange real-time supply data with
our customers, enabling increased efficiency and improved customer service, concludes
Cronshaw (Logistics Manager, 2010).
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Transportation – 1
Goods and people are required to be moved during an organization's operations.
Transportation is the physical movement and is often the most visible and costly
logistics activity. Transportation involves five main modes: road, rail, air, water and
pipeline. Transportation is pivotal to the success of logistics and supply chain objectives
in the following ways:
Transportation costs are affected by the location of facilities, customer and
suppliers,
Inventory requirements are influenced by the mode of transport,
Transport mode influences the packaging required,
Transport mode dictates, in some cases, the material handling equipment (e.g.
loading and offloading including the design of receiving and dispatch docks),
Customer service goals influence the type and quality of the carrier selected.
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Road transport: Dominating the logistics infrastructure in most countries. According
to the US Transportation Statistics Annual Report (2000) in the US, road freight
movement by businesses and individuals accounted for 80 per cent of the total value of
goods moved. In the European Union (EU), it is reported that there has been a growth in
ton kilometers by road, largely attributed to the integration of national economies into
the continental trading bloc.
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Other factors that have driven the growth in road freight movement include:
Geographical extension of supply chains, e.g. relationships between buyers and
their non-local suppliers.
Greater emphasis on customer service: road transport offers more flexibility than
other modes of transport, especially where the source and destination points for
the goods can be reached by road.
The supply chain linkages amongst manufacturers, wholesalers and retailers have
resulted in growth of parcel, postal and courier services by road.
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Rail transport: ideal for high-volume and weight-to-value ratio especially where speed
may not be that critical.
Air transport: ideal for materials with low weight-to-value ratio especially for
deliveries where speed and reliability is critical.
Water: ideal for high weight-to-value ratios where speed is not that critical. As with rail
transport, this mode of transport can help keep costs down.
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Transport & Logistics - Breaking down the Barriers
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MoT Comparison
Mode Strengths Weaknesses
Road
Very flexible for collection and destination points; can
take any characteristic of product; can follow free routes
(some legal constraints in time and weight); specialized
designs for any product; does not need other modes of
movement; diversity in size and application of vehicle
for tasks; can move between continents by sea
Small volumes per movement; higher unit costs; higher
manpower; congestion on roads; can be affected by
weather conditions
Rail
Large volumes in one movement; flexibility in product
type; can take pallets and bulk goods such as cement,
aggregates; can take hazardous materials, developed
specialized container inter-modal units and exchange
points; medium speed of movement; unaffected by
weather usually; lower unit costs
Can only enter railheads; fixed networks and timings
for movement; needs other modes of transport to
complete; movement; railhead congestion; government
interface with passenger rail can inhibit growth; cannot
bridge large sea gaps
Sea
Large volumes in one movement; developed efficient
port exchange points with road and rail; bulk products
as grain; specialized in gases and oils; lower unit costs
Can only enter ports; needs other modes of transport to
complete movements; slow transition on route;
affected by weather conditions; port congestion
Air
Speed between points; can take medium volumes in one
movement; flexibility in routes; flexibility in cargo;
specialize in perishable and higher value goods
Can enter only airports; needs other modes to complete
movements; no loose or bulk products; no hazardous
materials; specialized containers requiring pre-loading;
affected by some weather conditions; higher unit costs
Pipeline
Fast transfer of product; safe transfer of product; lower
unit costs over time; lower manpower
Fixed locations; high initial capital; suitable for a few
products only
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The Logistics Concept – 1
Road or rail? Consolidation or direct shipping? All these questions are addressed by
the logistics approach the organization has decided to apply. Logistics is a management
concept whereby an organization's objectives can be realized by harnessing and
optimizing the mutual interdependence of all its major functional activities. The
logistics approach ensures that the choices of transportation, warehousing information
systems and supply chain partners are consistent and support the performance
expectations of the customers.
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The key dimensions of supply chain operation performance we identified, including
quality, time, flexibility, cost, reliability and delivery speed, can only be achieved if a
good logistical approach is taken across the whole supply chain. Like a systems
approach to the way in which business is conducted, an organization comprises a set of
activities some which of have been identified in our discussion above. From a systems
approach, an organization's aims and objectives are best achieved when the various
activities recognize their interdependence.
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The logistics concept is a good example of a systems approach to business aimed at
achieving an overall goal. The different functions or department are components of
these systems, and should direct all their efforts towards the common goal. Does this
always happen in real practice? Often, some department or functions tend to function
individually and separately from each other, which becomes a challenge to achieving
the organizational goals in such situations.
Activities in marketing finance, production, warehousing and transport are
interdependent, and this also relates to the activities within the logistics function (intra-
functional logistics). A decision in one functional area will have potential impacts on
another.
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Consider a marketing effort resulting in increased demand and product variety; this
has an effect of increasing the store-keeping units for inventory and warehousing from a
variety of suppliers. From a logistics perspective, this means the placement of more
orders to suppliers with an increased number of items for stores.
The logistics concept attempts to balance these expectations through a coordinated
approach to planning the operations. The concept uses the total cost approach by
coordinating inbound logistics, warehousing and distribution costs so that all relevant
activities involving the acquisition, production, storage and movement of goods and
services are considered as a whole (i.e. their total costs), and not individually. The total
cost approach requires that all costs are considered simultaneously so that trade-offs
can be identified.
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Cost trade-offs recognize that changes in one activity of the logistics operations can
cause some costs to increase and others to decrease. For example, a decision to use
expedited transport systems may incur higher transport costs, but may ultimately
reduce the level of stockholding. Overall, the total cost of logistics activities might be
lower, simultaneously improving the customer service level; therefore, it follows that, as
logisticians, you need some understanding of cost items in order to find the lowest cost
for an operation that supports a particular customer service requirement. This means
there is no one fit all logistics solution, and the key is to understand the elements that
make up your particular customer or operational requirements.
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Logistics has also become an important part of a supply chain, and this total logistics
concept has been extended to include an organization's suppliers and customers, such
as in supply chain management. We will explore this further in sections to follow, but
will first look at some of the activities associated with logistics concept.
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Task 2.12
What is a logistics cost trade-off ?
Answer:
Changes in one activity of the logistics operations that can cause some costs to increase
and others to decrease with an overall objective of improving the logistics service.
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Supply Chain Integration – 1
We have noted earlier that organizations are members or a part of a wider supply
chain. We have also discovered that, if activities within the same organization are not
coordinated, the overall objective of the organization may then be compromised. It is
therefore essential to integrate our activities in order to improve operations and
customer service. There are various levels or degrees of supply chain integration:
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Internal integration: This is essential for collaboration between the functional units of
the organization to work together in terms of sharing information. As we perform our
daily activities, we should recognize that our function s output is another s input.
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Systems integration: Every organization comprises a set of activities, such as from a
systems approach. Its aims and objectives are best achieved when the various activities
recognize their interdependence. The supply chain concept is a good example of a
systems approach to business approach, aiming at achieving an overall goal. The
different functions or supply chain partners are components of this system, and should
direct all their efforts towards the common goal. Higher levels of integration are
enhanced by increased logistics-related communication, and greater coordination of
the firm s logistics activities with those of its suppliers and customers.
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Relationship integration: Mainly adopted from the Japanese concepts of kieretsu ,
referring to relationships between buyer and suppliers, these relationships have
provided organizations with competitive advantages. From a purchasing perspective,
supplier contracts are increasingly becoming long-term. Through close relationships,
supply chain partners are more willing to share risks, and reward and maintain the
relationship over a longer period of time.
From a distribution perspective, some organizations have targeted a few key
customers for integration, sometimes referred to as forward integration.
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Task 2.12
Explain supply chain integration and why it is essential for customer service. Give
examples of supply chain integration in your answer.
Answer:
Supply chain integration is coordination of all activities of the chain in order to improve
operations and customer service. Examples include:
▪ Internal integration
▪ External integration
▪ Systems integration
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Reverse Logistics
Products are returned for various reasons; these range from recalls and damages to
unwanted and obsolete products.
We have already noted that a number of organizations have taken the initiative to
provide customers with options and logistics solutions along the entire life cycle of a
product. These options include return packaging and free transportation.
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Summary – 1
We have discussed the various activities of supply chain operations. These activities
are interrelated with opportunities for trade-offs through the application of the logistics
concept.
With the logistics concept, all of these activities can be planned together and
coordinated to enhance the delivery of products and services at the right time, at the
right cost, to the right place, and in the right quantity and quality.
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Summary – 2
There are challenges associated with the management of the various functions or
activities in a supply chain environment; without clear and measureable performance
indicators, it is very difficult to monitor and control the operations, or to be certain that
we are meeting the service levels that satisfy our customers. As a result, we are not able
to improve our performance unless we are clear on our current performance.
In the next section, we will look at how supply chain operations can be measured. We
will also identify various performance measures that can be used in the different
activities in order to monitor and implement some performance improvement
programmes.
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1.
2.
3.
4.
UNIT OUTLINES – 4
Learning Outcomes
Introduction
Lean Thinking
JIT Concept
Agile Concepts
Supply Chain Performance Measurement
Supply Chain Costs
Summary
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Introduction
All supply chain management approaches seek to improve performance through
better use of internal and external capabilities in order to create a seamlessly
coordinated supply chain. This elevates inter-company competition to inter-supply chain
competition. In this section, we will look at some of the approaches that supply chains
have adopted to improve and enhance performance. We will also identify some of the
key performance indicators for supply chain operations.
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Lean Thinking Principles – 1
We have observed from previous discussions that supply chain operations involve
several activities, and that these activities are best coordinated for the supply chain to
deliver value to the end user. Although we can adopt the principles of materials flowing
in a coordinated and controlled manner, wastage is bound to accrue along the pipeline
or the chain. We must continuously search for the sources of waste in order to deal with
them appropriately.
The concept of lean thinking has been applied in many organizations, with the aim
of identifying potential wasteful areas and then to eliminate or minimize these.
Originating in the Japanese automotive industry as an alternative to mass production
methods, the concept of lean thinking has now been adopted in other sectors including
supply chain operations.
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What is Lean Production?
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The concept in a lean production environment is based on the principle that the
resources should be reduced, i.e., using less of everything in the process. In Womack et
al. (1990), it is reported that the International Vehicle Programme (IMVP) set itself to:
half the human effort in the factory, halving the production space, the investment in
tools, and the engineering period required to produce the products.
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Does this sound ambitious? Maybe not, as today we can see this concept working in
logistics environments, where the emphasis is to re-engineer processes for performance
improvements.
The term lean thinking refers to elimination of waste or muda the Japanese word
for waste. Using lean thinking, we can ensure that the end product or service is not
loaded with unnecessary costs of wasteful processes in the supply chain. We need to
understand the nature of waste in our organization and the supply chain network; these
have been identified as follows:
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7 8 Wastes
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Over production: This occurs when goods a produced in large quantities, or, as Harrison
& van Hoek (2005) state, too early or just in case ; when we over-produce or deliver we
create problems for the supply chain, as this increases costs.
Unnecessary transportation: There are times when products which are finished or semi-
finished are moved unnecessarily within our premises without really adding any value.
Such movements are wasteful due to double-handling and may actually cause damage.
Process layout should consider linking up processes to reduce this type of waste.
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Unnecessary motions: At times, we waste valuable time and effort moving from one
place to the other in pursuit of our tasks. This could be the tools and equipment used
for an activity or production process. There is also another aspect of the need to obtain
signatures for documents during a process, such as by taking a store requisition for
signature.
Excess inventory: Inventory is necessary only in certain cases. There are cases when
inventory becomes a waste because it has accumulated as a result of disruption to the
smooth flows. It has also been argued that inventory is a symptom of the way in which
a business or supply chain is operated.
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Reworks/Rejects: Any form of rework or reject is wasteful both in terms of money and
time. Usually associated with poor quality, rejects and reworks can be minimized within
a total quality management approach to operations.
Waiting time: Unnecessary waiting for materials or a service during supply chain
activities is wasteful to all.
Inappropriate processes: Some processes are inappropriate for a particular product or
service provision. Whenever these inappropriate processes are used, there is bound to be
waste created either through excess resources required or excess or unused capacity.
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Lean thinking entails that we periodically review our processes by mapping all
activities with a view to identify areas of wastes. These areas then become the focus for
performance improvement initiatives. Lean concept has permeated into logistics and
supply chain operations, and there are potentials in this respect.
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Task 4.2
What are the seven eight wastes that can be identified in organizations and their supply
chains?
Answer:
The following wastes can be identified:
▪ Overproduction
▪ Unnecessary transportation
▪ Inappropriate processes
▪ Excess inventory
▪ Rejects
▪ Unnecessary motions
▪ Waiting time
▪ Non-utilized talent
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Just in-time (JIT)
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JIT Concept – 1
In an effort to eliminate wasteful inventory, the philosophy of just in time (JIT) is a
good management approach. With JIT, we are simply doing things just in time, i.e. when
needed neither too early nor too late.
Again with its origins from Japan, Toyota has become known as the leader in adopting
this concept. Today, this concept is considered to be appropriate in modified form to
most operations large or small, and manufacturing- or service-related. The most visible
waste of the seven wastes identified above is inventory. We have noted that inventory
has been associated with how an organization or supply chain is managed; the concept
of JIT is an attempt at addressing this perspective.
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JIT Concept – 2
The view of JIT is that processes should operate only when there is a customer order.
Goods and services are then provided and delivered when needed, and this should then
cascade upstream the supply chain. The supply chain becomes a chain of customers
with each link coordinated by the JIT signals and responses. This system of material
flows is referred to as the pull system. In contrast, products and services were
produced according to some plan without any order from the customer. This system is
referred to as a push system.
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JIT Concept – 3
Push: Systems where producers and suppliers produce products and services ahead of
demand. These are usually in response to pre-set schedules in the process. Materials
Requirement Planning (MRP) has been associated with a push system for the reason
that materials are calculated ahead of time (planned order release).
Pull: Developed as an alternative to the push system. The concept is not to pre-plan
production or the supply of a product or service until there is an order from the
customer or down the supply chain; production and delivery is only in response to the
signal from downstream partners. This system is usually associated with reorder point
system of stock replenishment.
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Pull vs Push
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Task 4.4
Explain push and pull supply chain systems.
Answer:
Push systems are where producers and suppliers provide or make products and services
ahead of demand.
Pull systems are where production and delivery are only in response to the demand
from downstream customers.
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Requirement of JIT
In order for our organization and its supply chain to be able to produce and deliver
within JIT principles, the following conditions must apply:
A production system must be able to work in a JIT way,
There must be the ability to produce and deliver according to demand that is placed
on the suppliers,
There must be the elimination of systems delays,
There should be the elimination of quality-related problems,
The reduction of machine downtime should be ensured,
Focused relationships between operations must be maintained,
There should be visibility of processes.
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Waste-reduction Approaches
We should analyze processes and concentrate on the elimination of waste from
processes. The principles include those identified by researchers in this field as follows:
We should create value from the customers perspective and not concerning
individual departments,
We should produce across the entire system,
We should highlight non-value adding activities,
We should reduce interruptions, waiting and scrap,
We should strive for perfection or continuous improvement.
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122
Task 4.5
List five essential elements for a JIT system.
Answer:
These include the following:
▪ Production system must be able to work in a JIT way
▪ The ability to produce and deliver according to demand that is placed on the
suppliers
▪ Elimination of systems delays
▪ Elimination of quality related problems
▪ Reduction of machine downtime
▪ Focused relationships between operations
▪ Visibility of processes
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Agile Concepts
We have reviewed the concepts of JIT and lean
thinking as they are applicable within the supply chain
environment. These approaches are essential to support
the competitiveness of supply chains. We will now look
at another dimension of supply chain responsiveness.
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Operating Environment
We have noted that the nature of markets has changed over the last decade.
Customers have become more sophisticated in their demands, and product and service
life cycles have shortened. In the production of goods and services, there has been an
increase in the rate of technological innovation. Current logistics and supply chain
operations need to ensure that the right product is delivered to the right place and at the
right time for the exact needs of the end-user. This means that the end-user becomes the
focus of modern logistics.
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Agile Supply Chain
The concept of agility is the desire for supply chains to respond to fluctuations in the
demand of consumers often at short notice and unpredictable situations. Agility
implies the ability of the supply chain to react quickly to changes in market demand
whether they be they changes in volume, variety or mix.
Agility is all about customer responsiveness, which means that:
a supply chain is able to read the market place
a supply chain is able to respond to the end-customer demand.
This requires that a supply chain is demand-driven rather than forecast-driven, as in
most cases. In the case of forecast-driven, supply chains rely upon historical data, e.g.
past sales data, in order to predict future demand, which means that demand
information must flow in real time.
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Conditions for Successful Agile Practices – 1
With the advent of improved IT and communications, data is captured in real-time
direct from the point of sale, and transmitted to network partners. In a demand-driven
scenario, the challenge is to design processes and develop system capabilities with
appropriate network partners that will respond to customers demands in real time.
Some key characteristics for agile supply chains are:
finished goods sometimes delivered direct from factory to customer,
replenishments driven by actual sales data from customer interfaces,
supply chain systems highly integrated,
minimum lead times used,
postponement principles practiced,
the majority of stocks held as work-in-progress awaiting final configuration based
on actual customer demand.
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Task 4.6
What is an agile supply chain?
Answer:
An agile supply chain in one that displays an ability to react quickly to
changes in market demand be they changes in volume, variety or mix.
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Conditions for Successful Agile Practices – 2
Harrison & van Hoek suggest that the following questions should be asked in order to
assess the economic gain for agile supply chain operation:
Do customers really want fast delivery?
Do customers really want delivery whenever they ask for it?
Do we need product proliferation for Short-term gain?
Is there a limit in the number of product variations?
Do we offset added warehousing and distribution costs?
These questions need answers so that agility demands are met without costs going
out of hand.
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Benefits of Agile Supply Chain Operations – 1
Quick response: The concept of quick response (QR) derives from the need to be
competitive by responding quickly to market needs. Supply chain operations need to
develop systems which are responsive and fast; that is, the right product in the right
place and the right time .
The question is, how does an organization develop these systems in order to respond
quickly to customer needs? Organizations and their supply chain partners have used
information technology to facilitate QR.
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Benefits of Agile Supply Chain Operations – 2
In Section 2, we noted how IT is being applied in supply chain operations. EDI,
barcodes and EPOS enable demand data to be captured at point of sale and in real-time.
Processing times are reduced, thereby shortening the logistics supply lead times.
Working very well in the fashion and apparel industry, considerable benefits have been
achieved from this approach. The complete network of partners can be linked through
the sharing of information from the point of sale through upstream supply networks.
The net result is reduction in the overall lead-times and reductions in inventory levels.
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Differences between Agile and Lean – 1
An analysis of the two concepts is depicted in proceeding table. From the table, it is
clear that certain markets and demand patterns would suit either lean or agility. Clearly,
the fashion goods market with short life cycles is best served by an agile supply chain.
On the other hand, however, certain commodity markets are best served by lean supply
chains where the focus is more keenly placed on waste reduction.
The analysis will assist management of supply chains in identifying the key
characteristics of the particular markets they are serving. It is important to note that
there is no one size fits all supply chain, and it is possible to mix and match the two
approaches in a single supply chain.
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DISTINGUISHING
ATTRIBUTES
LEAN SUPPLY AGILE SUPPLY
Typical Products Commodities Fashion Goods
Marketplace Demand Predictable Volatile
Product Variety Low High
Product Life Cycle Long Short
Customer Drivers Cost Availability
Profit Margins Low High
Dominant Costs Physical Costs Marketability
Stock-out Penalties Long-term Contractual Immediate and volatile
Logistics Focus Elimination of waste Customer and markets
Partnerships Long-term, stable Fluid clusters
Key Measures Output measures, e.g.
productivity and cost
Measures capabilities; focus on
customer satisfaction
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Trade offs
between Lean
and Agile Supply
Chain Inventory
Attributes
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126
This means adopting lean capabilities up to a given downstream stage, and then
adopting an agile strategy from there to the point of consumption.
An example of this approach is common in the automotive industries. Rather than
building and assembling a vehicle in anticipation of customer demand, the
manufacturer will build components parts and postpone the assembly of the car until
actual demand is known. Features such as color and accessories, together with final
assembly, can be undertaken within a short period of time, e.g. the 3-day car concept.
Whilst it has been demonstrated that the 3-day car can be achieved, the major
automotive companies still work on the basis of several weeks or months lead times,
reflecting broader issues than just manufacturing capability.
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Task 2.8
List five key attributes of
lean and agile supply
chains.
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Supply Chain Performance Measurement – 1
The question now is how the best organizations and their supply chain partners can
sustain performance improvements in supply chains? The key issue concerns
performance sustainability, which is not about techniques but more about people.
People bring about change; they are changed and they react to change both positively
and negatively.
In order to get people s involvement, it is important that there is a clear understanding
as to:
Why the improvement is being undertaken,
What it involves,
When it is happening, and
How the results will be measured.
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All of this is usually contained in an organization's policies. This requires the support
of a set of focused targets or KPIs in the local language of those involved. The KPIs
should measure aspects on which staff can have a direct impact. Management must
support this process by providing support during daily routines; this involves regular
and active discussion with teams on improvement activities being undertaken, the
issues involved, and actions being taken. There should also be a formal way of
documenting ideas. Care should be taken to ensure that operators make decisions in a
team regarding the ways in which they work. Time must be dedicated to housekeeping
or to improvement activity each day.
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We need to develop a balanced measurement system not only for evaluation of
performance but also in order to facilitate greater understanding, so as to positively
influence our different but complementary supply chain activities.
Performance measurement is the process of quantifying the effectiveness and
efficiency of an action. In this case, efficiency measures how economically the resources
have been utilized and effectiveness the extent to which requirements are met.
Performance measurement systems provide insight into the nature and workings of
value-added processes.
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128
A well-defined performance measurement system provides feedback regarding:
customer requirements,
company and supplier capabilities,
probable/likely success of collaborative initiatives.
Supply chain performance measures should report on performance beyond a single
organization; rather, the performance of all members involved contributes to the overall
performance of the entire supply chain. With this in mind, the framework should include
both upstream and downstream performance. In particular, both operational indicators
i.e. non-financial and financial are considered. In order to achieve minimum standards
for competitiveness, performance measures in the five main areas of customer value
must be set. These areas are quality, cost, flexibility, delivery and innovation.
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Performance measure can be grouped into two main groups: productivity and
utilization.
Productivity: One way of reducing costs is by improving productivity. Productivity can
be measured as output per hours of labor, e.g. the number of hours it takes to produce a
product. Simply, productivity is the ratio of outputs achieved divided by the inputs
required to achieve such outputs.
Example: Outputs/Inputs
We can increase productivity over time by decreasing the number of inputs whilst
maintaining the same output level; increasing the outputs from the same inputs;
increasing outputs at a faster rate than inputs; and decreasing inputs at a faster rate
than outputs.
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Utilization: The utilization of resources is key to ensuring that the initial outlay and
subsequent operating costs are managed. Another way of achieving the pay-back on the
investment is to maximize the utilization of capital assets. In utilization, the ratio of
output level achieved divided by the maximum possible output level.
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129
Example: Actual level of output achieved/Maximum possible output x 100%
Traditionally, this ratio is expressed as a percentage. We have noted that an increase
in productivity has an influence on cost reduction; similarly, improved utilization will
reduce costs. Both service and operational performance can be identified through KPIs,
with measured and control management implemented.
As a manager, you should ensure that your performance measures are balanced so as
to give you a clear position both on the productivity and utilization levels of your
operations. With this in mind, below are some of the specific performance measures
that have been applied for supply chain operations:
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Performance Metrics Measures
SC Inventory Days of Supply
Total number of days of inventory required to support the supply chain from raw
materials to the final customer acquisition. Expressed as calendar days of supply
based on recent actual daily cost of sales.
Supply-Chain Response
Time
The theoretical number of days required to recognize a major shift in market
demand and increase production by a per cent.
Total Supply Chain Cost
The sum of all the costs incurred in planning, designing, sourcing, making, and
delivering a product broken down for each member of the supply chain.
Cash-to-Cash Cycle Time
The time required to convert a dollar spent to acquire raw materials into a dollar
collected for finished product. (Total Inventory Days of Supply + Days Sales
Outstanding).
Perfect Order Fulfilment
A perfect order is an order that is delivered complete, on time, in perfect condition,
and with accurate and complete documentation. Fulfillments the per cent of orders
that are perfect (Perfect orders/Total orders).
Inventory Dwell Time The ratio of days inventory sits idle to days inventory is being productively used or
positioned.
Customer Inquiry Response
Time
The average elapsed time between receipt of a customer call and connection with
the appropriate company representative.
Customer Inquiry Resolution
Time
The average elapsed time required to completely resolve a customer inquiry.
Order Fulfilment Cycle Time
The average actual lead times consistently achieved, in calendar days, from
customer order to customer delivery. Includes order authorization to entry, entry to
release, release to shippable, shippable to customer receipt, and receipt to
customer acceptance.
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From the table, a balanced set of performance measures can be seen. Like a balanced
score card (BSC), the measure will offer supply chain opportunities to develop non-
financial measures in addition to the traditional financial ones. Typically, a scorecard
emphasizes cost, quality, delivery, responsiveness, and innovation. It then provides a
mechanism for the evaluation and communication of performance along critical
dimensions. Notably, the process encompasses objectives, measures, targets, and action
plans.
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130
Benchmarking Approaches and Process
Benchmarking is the process of comparing a business process and performance
metrics to industry best practices, and those from other industries. The main dimensions
typically measured are quality, time and cost.
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Types of Benchmarking – 1
Functional benchmarking: A company will focus its benchmarking on a single function
in order to improve the operation of that particular function. Complex functions, such as
Human Resources, Finance and Accounting, and Information and Communication
Technology, are unlikely to be directly comparable in terms of cost and efficiency, and
may need to be disaggregated into processes to make valid comparison.
Best-in-class benchmarking: Involves studying the leading competitor or the company
that best carries out a specific function.
Operational benchmarking: Embraces everything from staffing and productivity to
office flow and analysis of procedures performed
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131
Types of Benchmarking – 2
Process benchmarking: The initiating organization focuses its observation and
investigation of business processes with a goal of identifying and observing the best
practices from one or more benchmark organizations. Activity analysis will be required
where the objective is to benchmark cost and efficiency, which is increasingly applied
to back-office processes where outsourcing may be a consideration.
Financial benchmarking: Performing a financial analysis and comparing the results in an
effort to assess your overall competitiveness and productivity.
Performance benchmarking: Allows the firm to assess their competitive position by
comparing products and services with those of target firms.
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Supply Chain Costs – 1
Another element for supply chain performance improvement is the analysis of supply
chain costs. This involves the examination of processes, from the earliest supplier to
the ultimate consumer, including the final disposal process, where relevant.
Total costing is a prerequisite to good process design and the management of supply
chain operations. Here, the total cost is the sum of all the costs incurred in planning,
designing, sourcing, making, and delivering a product from raw material to the final
customer.
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Supply chains that lack accurate total
cost information will experience
difficulties in developing and acting
upon trade-offs within the supply chain.
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132
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Cost are usually classified into the following main categories:
Fixed occur every day irrespective of any activity taking place. Examples for a
warehouse include:
- Rent and/or rates
- Heat/lighting
- Insurance on premises
- Depreciation.
Variable incurred only when there is an activity:
- Overtime
- Repairs and maintenance
- Running costs of equipment
Overheads other costs
Direct costs those which directly link to a specific product or service, such as
material, labor and expenses (prime costs).
Indirect costs cannot be directly related to a specific product or service.
Traditional cost-accounting aggregates all indirect expenses into a classification
known as overhead . This tends to ignore the true costs but rather captures costs at too
high a level of aggregation. Costs become more functional in nature.
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Activity-based Costing – 1
Activity-based costing (ABC) directly links costs to the activities driving them. This
requires process transparency and detailed information on products, customers,
activities, and resource costs. Moreover, activity-based accounting provides a more
accurate alternative to traditional cost accounting above. It also attempts to match
indirect costs with the products or services that generate them.
ABC is suitable for logistics and supply chain operations in that it is capable of
identifying cost for the provision of a particular proposition. The approach is output-
oriented costing, enabling the identification of the key cost drivers for a particular
product or service offering. It calculates the costs associated with the offering, and
allocates all relevant costs. Profitability per activity or process can be measured more
accurately.
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133
Activity-based Costing – 2
Purchase
Department
# of Purchase
orders
Machine
Support
# of Setup
times
Machine
Department
# of Machine
hours
Assembly
Department
# of
Assemblies
Quality
Department
# of
Inspections
Shipping
Department
# of Parcels
Cost
Pools
Activit
y
PRODUCTS
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Summary
We have looked at current thinking and approaches utilized in supply chains in order
to improve performance. These approaches range from lean thinking and just in time
principles, through to agile supply chain.
We have noted the conditions deemed necessary for these approaches to be successful
in terms of improving the overall performance of supply chain operation.
The various costs structures have been explored, and how understanding and
appreciation of these cost groups will assist us in managing and controlling. This is
important if the goods and services we are providing the market with are to be supplied
at the right price or cost to the operations.
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THANK YOU!

Dr. Turhan Bilgili©
P.O BOX 336, DAMMAM 31411 KSA
DAMMAM CORNICHE
TEL: +966 3 8315454
FAX: +966 3 8315656
E-MAIL: info@meli.edu.sa
www.meli.edu.sa
Middle East Logistics High Institute – MELI®
This material used for the participants of CILT International Certificate in Logistics and Transport on Supply Chain
Operations is subject to copyright protection. Material in this programme is only for the use of
students/participants enrolled in this particular training for purposes associated only with this training, and may be
retained for longer than training period however unauthorized retention, duplication, distribution, or modification
of this copyrighted material without consent of Dr. Turhan Bilgili©
is strictly prohibited by existing national and
international laws.

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