Adaptive SCM for excellence in manufacturing

Supply Chain Management involves the management of materials, information and finance as a product moves from supplier to manufacturer and from there to the wholesaler, retailer and finally the consumer. This article by SUNIL JUNNARKAR introduces the reader to SCM, its design considerations, metrics and benefits

Figure 1. Critical Success Factors in Supply Chain Design

THE need for supply chain management (SCM) has risen due to several business challenges including:

Shrinking Product Lifec- ycle: Continuous product innovation is a necessity in today’s highly competitive markets. It has led to dramatic reductions in product lifecycles. Businesses have to introduce quality products and upgrades much faster and more frequently to survive in a market overflowing with choices for the discerning customer. As the product lifecycle is distributed over disparate enterprises in a supply chain, its efficient management becomes a necessity.

• Mass Customisation: Inte-nse competition has forced businesses to achieve differentiation in the market by providing highly customised products catering to specific customer needs. The entire supply chain has to be synchronised to achieve the flexibility required to respond to this need.
• Increasing Outsourcing: The current trend in the manufacturing industry is to outsource parts or operations from specialised vendors who provide more cost-effective and better quality products than those that can be manufactured in-house. This trend has led to major manufacturing companies mostly assembling parts or sub-assemblies supplied by complex supply chains.
• Globalisation: Business alliances have to be forged on a global basis to derive the optimum benefit from strategic locations in terms of factors like cost, quality, proximity to raw material or markets. Thus, supply chains are more widely dispersed than before.

These challenges have led to the emergence of complex supply chains in all manufacturing sectors and industries. Competition between individual enterprises has been transformed to competition between their supply chains or extended enterprises. Efficient management of these supply chains has emerged as the biggest differentiating factor between a successful and unsuccessful business.

A typical supply chain

In a typical supply chain, raw materials are procured, then products are manufactured (in single or multiple factories) and shipped to warehouses (intermediate storage) and finally to retailers or end customers. Suppliers, manufacturing centres, warehouses, distribution centres, retail outlets, raw materials, work in process, inventories and finished products are the basic components of any supply chain.

“Supply chain management is a set of approaches utilised to efficiently integrate suppliers, manufacturers, warehouses and stores so that the merchandise is produced and distributed in the right quantities, to the right locations, and at the right time, in order to minimise system-wide costs while satisfying service requirements.”

SCM is an approach that decides on the business plans and partnerships that can best reduce costs and improve service levels. It also decides incentives, performance measures and profit sharing that are essential for effecting a successful partnership.

Some of the key issues dealt with by SCM are:

Figure 2. SCM Application Overview

• Distribution network configuration.
• Inventory control.
• Distribution strategies.
• Supply chain integration and partnering.
• Information technology and decision support systems.
• Customer value.

SCM decisions

The configuration of SCM systems (Figure 1) is dependent on the decisions taken in relation to SCM at different levels.

• Strategic level: These are the decisions that will have a long-lasting impact on the organisation e.g. deciding upon the number, location and capacity of warehouses and manufacturing plants, and the flow in the logistics network. Supply chain design and optimisation applications are used at this level.
• Tactical level: These decisions, like purchasing or production decisions, inventory policies, transportation strategies, customer visits and scheduling are typically updated once every quarter or year. Advanced planning and scheduling applications support decisions at this level.
• Operational level: Day-to-day decisions regarding lead-time quotations, routing and truck-loading are operational decisions which are typically made utilising MRP/ERP applications.

Strategic and tactical level decisions (and thus applications) amount to 80 percent of the value of SCM solutions; the operational level makes up the rest.

SCM metrics

A metric is a standard of measurement of performance. The design and management of supply chains are mostly evaluated on the basis of the following metrics: (See table on SCM metrics)

Benefits of SCM

Some of the major measurable benefits of implementing an SCM application are:

- Increase in Customer Service Levels.

- Reduction in Safety Stocks and thus Inventory-holding Cost.

- Increase in Inventory Turns.

SCM application overview

As illustrated in Figure 2, an SCM application is made up of individual modules that have separately-defined functions which interact with each other to create a synchronised supply chain.

• Demand Planning: Dem-and forecasts, using various statistical techniques, take into account the history of the product, stability of demand, completeness of information about promotion expectations, and other product specifics to come up with the required production targets. Demand planning also considers the dynamics of various departments that provide inputs for forecasts.
• Supply Planning: Supply planning takes the demand plan as given and schedules raw materials to arrive in advance of when demand is likely to hit.
• Production, planning and scheduling: Production planning and scheduling is a process whereby a production plan consisting of a sequence of operations (to fulfil orders) is generated based on the capacity of available resources. The reso- urces may be machines, operators, tooling or anything else that is a constraint on the production process.
• Supplier Relationship Management (SRM): Supply chains are partnering for joint process development, product design, and collaborative planning and control. These interdependent working relationships are having tremendous impact on profitability and response. SRM provides a fully-automated process that helps successfully manage these complex relationships.
• Supply Chain Execution: It enables visibility through all the stages of the supply chain regarding order status.
• An SCM system has to be integrated with the Product Lifecycle Management (PLM) and Enterprise Resource Plan-ning (ERP) systems that exist in an organisation. PLM enables complete, integrated, end-to-end solutions for driving new product development from the concept right up to product obsolescence. ERP lets an enterprise link, consolidate and manage its business processes and associated functional areas such as finance, manufacturing, sales, distribution and human resources.

e-sourcing

e-sourcing helps reorganise the purchase function and supports aggregated buying across business units with the aid of Internet-based tools or B2C Internet portals. It can provide substantial price savings and cycle time reduction in the sourcing process. Being Internet-based, more global suppliers participate compared to the traditional strategic sourcing process. The cycle time reduction occurs mostly due to a shortening of time spent negotiating, expedited information gathering, and faster communication channels among buyers and sellers.

The key to successfully implementing an e-sourcing initiative is to implement it for procurement of high-value commodities in a few pilot projects. Once the first phase is successfully implemented, the RFQs (Request For Quotations) can be fine-tuned. It is imperative that e-sourcing strategies are developed well in advance to derive maximum profit from the system’s advantages. Some leading e-sourcing product vendors are FreeMarkets, CommerceOne, 01markets, and India Markets.

e-sourcing is catching up in India with many successful implementations. For example, Dabur saved Rs 2.5 crore with six reverse auction deals. (Reverse auctions provide an open and transparent platform for competing suppliers.) Tata Motors saved Rs 22 crore on transactions of Rs 362 crore, while the Kirloskar group saved Rs seven crore through reverse auctions worth Rs 50 crore.

From efficient to Adaptive

Figure 3. Types of Supply Chains

The current trend goes beyond pursuing just efficiency in supply chains to creating adaptive ones.

The difference between the two types of supply chains is depicted in Figure 3. Earlier, the main aim of SCM was to just manage transportation and inventory in warehouses. But in an adaptive supply chain, the focus is on preventing stockouts and product obsolescence while ensuring that all that is expected from an efficient supply chain materialises. Adaptive supply chains generate forecasts after consultation among members of the supply chain. They aim to ensure customer service by maintaining a buffer inventory close to the customers and not throughout the chain. Along with quality and cost, speed and flexibility of delivery also affect supplier selection in adaptive supply chains.

RFF—the way ahead

Further improvements in the design and management of supply chains will be to make them more responsive, flexible and focused (RFF).

• Responsive: Supply chains have to be highly sensitive to any change in demand and competition. This gives them sufficient lead-time to dynamically respond to any eventuality.
• Flexible: The chains should be able to adapt to different cost structures or business processes with minimal risk.
• Focused: While being flexible enough to adapt to changing market situations, supply chains should know and concentrate on their core competencies. They should focus on effective partner collaboration, and be ready to capture any business ‘on demand.’

The author is practice head, CM, KPIT Cummins Infos-ystems. He has 12 years’ experience with manufacturing organisations such as Hindustan Aeronautics, Thermax and the Shriram Group. Another five years were spent in business consulting and at IT companies such as Satyam Renaissance Consulting and Ancent software. He can be contacted at sunil.d.junnarkar@cummins.com