All supply chain management shares one common, and central, objective – to satisfy the end customer. All stages in a chain must eventually include consideration of the final customer, no matter how far an individual operation is from the end-customer. Each operation in the chain should be satisfying its own customer, but also making sure that eventually the end-customer is also satisfied.
Supply chain objectives
Meeting the requirements of end-customers requires the supply chain to achieve appropriate levels of the five operations performance objectives:
quality, speed, dependability, flexibility and cost. Quality – the quality of a product or service when it reaches the customer is a function of the quality performance of every operation in the chain that supplied it. Errors in each stage of the chain can multiply in their effect on end-customer service. Speed has two meanings in a supply chain context. The first is how fast customers can be served, an important element in any business’s ability to compete. However, fast customer response can be achieved simply by over-resourcing or over-stocking within the supply chain. Dependability – like speed, one can almost guarantee ‘on-time’ delivery by keeping excessive resources, such as inventory, within the chain.
However, dependability of throughput time is a much more desirable aim because it reduces uncertainty within the chain. Flexibility – in a supply chain context is usually taken to mean the chain’s ability to cope with changes and disturbances. Very often this is referred to as supply chain agility. The concept of agility includes previously discussed issues such as focusing on the end-customer and ensuring fast throughput and responsiveness to customer needs.
But, in addition, agile supply chains are sufficiently flexible to cope with changes, either in the nature of customer demand or in the supply capabilities of operations within the chain. Cost – in addition to the costs incurred within each operation, the supply chain as a whole incurs additional costs that derive from each operation in a chain doing business with each other. These may include such things as the costs of finding appropriate suppliers, setting up contractual agreements, monitoring supply performance, transporting products between operations, holding inventories, and so on.
5 factors for rating alternative suppliers
Short-term ability to supply
Range of products or services provided
Quality of products or services
Dependability of supply
Delivery and volume flexibility
Total cost of being supplied
Ability to supply in the required quantity
Long-term ability to supply
Potential for innovation
Ease of doing business
Willingness to share risk
Long-term commitment to supply
Ability to transfer knowledge as well as products and services
Choosing suppliers should involve evaluating the relative importance of all these factors.
6 supply chain relationship
business-to-business (B2B) relationships are by far the most common in a supply chain context and include some of the e-procurement exchange networks discussed earlier. Business-to-consumer (B2C) relationships include both ‘bricks and mortar’ retailers and online retailers. Consumer-to-business (C2B) relationships involve consumers posting their needs on the web (sometimes stating the price they are willing to pay), companies then deciding whether to offer. Customer-to-customer (C2C) or peer-to-peer (P2P) relationships include the online exchange and auction services and file sharing services.
7 types of supply chain relationship
The very opposite of performing an operation in-house is to purchase goods and services from outside in a ‘pure’ market fashion, often seeking the ‘best’ supplier every time it is necessary to purchase. Each transaction effectively becomes a separate decision. The relationship between buyer and seller, therefore, can be very short-term. Once the goods or services are delivered and payment is made, there may be no further trading between the parties. The advantages of traditional market supplier relationships are usually seen as follows: ● They maintain competition between alternative suppliers. This promotes a constant drive between suppliers to provide best value. ● A supplier specializing in a small number of products or services (or perhaps just one), but supplying them to many customers, can gain natural economies of scale. This enables the supplier to offer the products and services at a lower price than would be obtained if customers performed the activities themselves on a smaller scale.
● There is inherent flexibility in outsourced supplies. If demand changes, customers can simply change the number and type of suppliers. This is a far faster and simpler alternative to having to redirect their internal activities. ● Innovations can be exploited no matter where they originate. Specialist suppliers are more likely to come up with innovative products and services which can be bought in faster and cheaper than would be the case if the company were itself trying to innovate. ● They help operations to concentrate on their core activities. One business cannot be good at everything. It is sensible therefore to concentrate on the important activities and outsource the rest. There are, however, disadvantages in buying in a totally ‘free market’ manner:
● There may be supply uncertainties. Once an order has been placed, it is difficult to maintain control over how that order is fulfilled. ● Choosing who to buy from takes time and effort. Gathering sufficient information and making decisions continually are, in themselves, activities which need to be resourced ● There are strategic risks in subcontracting activities to other businesses. An over-reliance on outsourcing can ‘hollow out’ the company, leaving it with no internal capabilities which it can exploit in its markets. Short-term relationships may be used on a trial basis when new companies are being considered as more regular suppliers.
Also, many purchases which are made by operations are one-off or very irregular. For example, the replacement of all the windows in a company’s office block would typically involve this type of competitive-tendering market relationship. In some public-sector operations, purchasing is still based on short-term contracts. This is mainly because of the need to prove that public money is being spent as judiciously as possible. However, this short-term, price-oriented type of relationship can have a downside in terms of ongoing support and reliability. This may mean that a short-term ‘least-cost’ purchase decision will lead to long-term high cost.
An extreme form of outsourcing operational activities is that of the virtual operation. Virtual operations do relatively little themselves, but rely on a network of suppliers that can provide products and services on demand. A network may be formed for only one project and then disbanded once that project ends. The advantage of virtual operations is their flexibility and the fact that the risks of investing in production facilities are far lower than in a conventional operation. However, without any solid base of resources, a company may find it difficult to hold onto and develop a unique core of technical expertise. The resources used by virtual companies will almost certainly be available to competitors. In effect, the core competence of a virtual operation can only lie in the way it is able to manage its supply network.
‘Partnership’ supply relationships
Partnership relationships in supply chains are sometimes seen as a compromise between vertical integration on the one hand (owning the resources which supply you) and pure market relationships on the other (having only a transactional relationship with those who supply you). Although to some extent this is true, partnership relationships are not only a simple mixture of vertical integration and market trading, although they do attempt to achieve some of the closeness and coordination efficiencies of vertical integration, but at the same time attempt to achieve a relationship that has a constant incentive to improve. Partnership relationships are defined as: ‘relatively enduring inter-firm cooperative agreements, involving flows and linkages that use resources and/or governance structures from autonomous organizations, for the joint accomplishment of individual goals linked to the corporate mission of each sponsoring firm’.11 What this means is that suppliers and customers are expected to cooperate, even to the extent of sharing skills and resources, to achieve joint benefits beyond those they ould have achieved by acting alone.
At the heart of the concept of partnership lies the issue of the closeness of the relationship. Partnerships are close relationships, the degree of which is influenced by a number of factors, as follows: ● Sharing success. An attitude of shared success means that both partners work together in order to increase the total amount of joint benefit they receive, rather than manoeuvring to maximize their own individual contribution. ● Long-term expectations. Partnership relationships imply relatively long-term commitments, but not necessarily permanent ones. ● Multiple points of contact. Communication between partners is not only through formal channels, but may take place between many individuals in both organizations. ● Joint learning. Partners in a relationship are committed to learn from each other’s experience and perceptions of the other operations in the chain.
● Few relationships. Although partnership relationships do not necessarily imply single sourcing by customers, they do imply a commitment on the part of both parties to limit the number of customers or suppliers with whom they do business. It is difficult to maintain close relationships with many different trading partners. ● Joint coordination of activities. Because there are fewer relationships, it becomes possible jointly to coordinate activities such as the flow of materials or service, payment, and so on.
● Information transparency. An open and efficient information exchange is seen as a key element in partnerships because it helps to build confidence between the partners. ● Joint problem-solving. Although partnerships do not always run smoothly, jointly approaching problems can increase closeness over time. ● Trust. This is probably the key element in partnership relationships. In this context, trust means the willingness of one party to relate to the other on the understanding that the relationship will be beneficial to both, even though that cannot be guaranteed. Trust is widely held to be both the key issue in successful partnerships, but also, by far, the most difficult element to develop and maintain.
8 Matching the supply chain with market requirements. The supply chain policies which are seen to be appropriate for functional products and innovative products are termed by Fisher efficient supply chain policies and responsive supply chain policies, respectively. Efficient supply chain policies include keeping inventories low, especially in the downstream parts of the network, so as to maintain fast throughput and reduce the amount of working capital tied up in the inventory. What inventory there is in the network is concentrated mainly in the manufacturing operation, where it can keep utilization high and therefore manufacturing costs low.
Information must flow quickly up and down the chain from retail outlets back up to the manufacturer so that schedules can be given the maximum amount of time to adjust efficiently. The chain is then managed to make sure that products flow as quickly as possible down the chain to replenish what few stocks are kept downstream. By contrast, responsive supply chain policy stresses high service levels and responsive supply to the end-customer. The inventory in the network will be deployed as closely as possible to the customer. In this way, the chain can still supply even when dramatic changes occur in customer demand. Fast throughput from the upstream parts of the chain will still be needed to replenish downstream stocks. But those downstream stocks are needed to ensure high levels of availability to end-customers.
9 The bullwhip effect
The ‘bullwhip effect’, is used to describe how a small disturbance at the downstream end of a supply chain causes increasingly large disturbances, errors, inaccuracies and volatility as it works its way upstream. Its main cause is an understandable desire by the different links in the supply chain to manage their production rates and inventory levels sensibly.
Miscommunication in the supply chain
Whenever two operations in a supply chain arrange for one to provide products or services to the other, there is the potential for misunderstanding and miscommunication. This may be caused simply by not being sufficiently clear about what a customer expects or what a supplier is capable of delivering. There may also be more subtle reasons stemming from differences in perception of seemingly clear agreements. The effect is analogous to the children’s game of ‘Chinese whispers’. The first child whispers a message to the next child who, whether he or she has heard it clearly or not, whispers an interpretation to the next child, and so on. The more children the message passes between, the more distorted it tends to become. The last child says out loud what the message is, and the children are amused by the distortion of the original message.
Reducing bullwhip effect
Reduce lead time
One of the reasons for the fluctuations in output described in the example earlier was that each operation in the chain reacted to the orders placed by its immediate customer. None of the operations had an overview of what was happening throughout the chain. If information had been available and shared throughout the chain, it is unlikely that such wild fluctuations would have occurred. It is sensible therefore to try to transmit information throughout the chain so that all the operations can monitor true demand, free of these distortions. An obvious improvement is to make information on end-customer demand available to upstream operations.
10 time compression
One of the most important approaches to improving the operational efficiency of supply chains is known as time compression. This means speeding up the flow of materials down the chain and the flow of information back up the chain. The supply chain dynamics effect was due partly to the slowness of information moving back up the chain.