Hand-Tool Corporation, hereafter referred to as the initialism, HTC, was established to take advantage of the hand-tools market, which consists of sales of electric drills, saws, and sanders, to consumers in the homebuilding and home-improvement market. These consumers will comprise both business and private end users.
The corporation is seeking data to determine the optimal course of action for distribution, referred to hereafter as the supply chain. This analyst has researched several supply-chain strategies. These strategies will be presented in this report. The analyst will also provide a concerted recommendation for a course of action that will support the company’s profit-maximization goals.
As indicated in the precedent paragraph, there are several supply-chain strategies extant in the business world. However, some of the strategies are insufficient to meet the corporation’s business needs. The following list offers the attributes of two competing strategies as well as a recommendation for or against it.
Bloomberg Businessweek offers the following definition of a virtual corporation:
The virtual corporation is a temporary network of independent companies–suppliers, customers, even erstwhile rivals–linked by information technology to share skills, costs, and access to one another’s markets. It will have neither central office nor organization chart. It will have no hierarchy, no vertical integration (Bloomberg Businessweek, 1993).
The virtual corporation is also known as a hollow corporation. For supply-chain purposes, the hollow corporation implies that a source company, Hand-Tool Corporation, outsources all supply-chain-related activities. For example, in this network, Hand-Tool Corporation would not be responsible for the procurement and quality validation of the resources needed to build a drill. An identified company or cluster of companies would manage those processes. This concept applies to all areas of the supply chain. Human resources and the issues that it presents are managed by another entity. Payroll and its own issues are managed by a separate company. The actual manufacturing of the product is handled by another entity. And the distribution of the goods is handled by another entity.
The hollow corporation is a compelling strategy for many businesses, including Hand-Tool Corporation. This approach allows HTC to focus on the conceptual, rather than the physical, development of its products and the marketing of it to an identified customer segment. Essentially, this network types supports mellifluousness regarding operations management. Whereas HTC’s investment in any aspect of the supply chain would require substantial resources to change directions, hollow corporations leave those responsibilities to vendors. It should be viewed as a professional hands-off approach to the supply chain.
The principal detractor for this network type is the overreliance on vendors for the management of the supply chain. For example, if an issue arises with the procurement of raw materials to produce the corporation’s hand tools due to labor disputes, i.e., striking employees, a significant failure of the supply chain will occur, and it will be HTC’s responsibility to communicate and remedy this failure with its customers.
Unfortunately, this network type is incompatible with the aims of the corporation’s investors. HTC is committed to corporately involving itself in the supply chain, which is at variance with the attributes of a hollow corporation. This analyst is compelled to not recommend this network type. Please note that this analyst does believe that this network type is a viable solution now and should be pursued. However, all indications from the investors are that they are interested in some type of involvement in the supply chain.
A Keiretsu network employs an assortment of strategies to achieve a synergistic supply chain committed to providing quality products to HTC’s customers. This network strategy is defined as:
Keiretsu is a Japanese word which, translated literally, means headless combine. It is the name given to a form of corporate structure in which a number of organisations link together, usually by taking small stakes in each other and usually as a result of having a close business relationship, often as suppliers to each other (Hindle, 2008).
This network type is similar to the hollow corporation in that it cultivates relationships with an assortment of vendors to manage the supply chain. The distinction, however, is that while hollow corporations focus on the conceptual development and marketing of their products, the Keiretsu network is corporately invested in at least some aspects of the supply chain. For example, the following network strategies could be contained in the Keiretsu network:
* Joint ventures: the corporation and outsourced entity’s taking responsibility for distribution; corporate investment in the supply chain expected * Few suppliers: the corporations developing long-term relationships with select outsourced suppliers; relatively no corporate investment expected * Vertical integration: the corporation’s decision to distribute product without outsourcing or purchasing the outsourced company to manage supply chain; nearly unanimous corporate investment expected.
This network strategy is also compelling in that it spreads the risks inherent in supply chains. Please note that the underlying motivation to an effective supply chain is customer satisfaction. Failures in the supply chain will lead to customer dissatisfaction, which will correlate to lower sales opportunities. The Keiretsu network addresses these concerns by, for example, developing short-term relationships with a multitude of vendors to negotiate lower costs paid by HTC to these vendors. (Consider this approach Darwinian—the survival of the fittest.)
But HTC also develops long-lasting relationships with a few vendors, perhaps at some other point in the supply chain, that provides security that products will be delivered with high quality expectations in mind. Yet for other vendors, HTC may choose to invest to bring these outsources under HTC’s purview, thereby authoritatively controlling some aspect of the supply chain. The confluence of these strategies in the Keiretsu network provides security for the corporation’s supply chain, which translates as higher levels of customer satisfaction.
There are two principal detractors identified in this network type. First, it is costly to maintain this type of network, simply because the level of outsourced vendors may be staggering, depending on the product offered. But also, the number of different relationships with these different vendors can be staggering, difficult to manage, and, frankly, confusing. The result may be higher-than-expected expense for distribution.
Second, because this network may require some level of personal investment in the supply chain, often in the form of vertical integration, operations-management issues can ensue, especially if HTC is not familiar with a particular portion of the supply chain. Training would be required of the corporation’s staff, but errors will ensue simply because of the inexperience in running a portion of the network. In such an instance, sales may suffer during this orientation period. Furthermore, HTC will be directly responsible for this decline in customer service. (This issue financially influences HTC’s future actions and invites impressive amounts of risk to investors.)
Despite the inherent risks in this network, this analyst does recommend it as the course of action to proceed. It allows for corporate investment in the supply chain while also unloading some responsibility with a myriad of vendors.
To ensure normative functioning of the supply chain, metrics must be applied against the operation of the actual chain. Certain metrics are more appropriate to testing the validity of the constituents and supply chain as a whole.
The following that should be applied: Product Demand
Product demand is equivalent to the volume of sales for HTC’s products. This metric is particularly significant, since HTCs choice to over different but related products. It is necessary to determine which products drive the most and the least amount of sales so as to avoid stock-outs (insufficiently meeting demand) or unwanted inventory (having too much unsold product on the shelf).
Defects per Million Opportunities
Defect per Million Opportunities, or the initialism DPMO, is a quality-validation metric to identify two cost types, and how they can affect the production and storing products: prevention and appraisal. Prevention costs involve instituting a quality verification of the processes of two components of the supply chain: resource procurement and production. To measure defects during these two points, statistical process control can be employed to mitigate against defective output.
An example of this quality-control mitigation focus is achieved through a method called statistical process control, which is a tool of quality control that employs statistical methods to scrutinize the processes in place so that quality of output of the process can be reasonably assured. This assurance is predicated upon whether there are random or nonrandom variations in the output of the process. If there are random variations, we can reasonably be assured that there is veracity to the process; if there are nonrandom variations, i.e., deviations fall outside the acceptable range, the process is likely faulty and will result in poor-quality products; in other words, the process must be refined.
There are two types of statistical process controls that can be used to detect nonrandom variations in processes: control charts and controlled experiments. See below for the formula used in each:
(Stevenson W. , 2009)
In simplified terms, the reason why the corporation should appreciate prevention costs is that if one can filter any imperfections in the process used to manufacture products, HTC can be relatively comfortable that it will not even arrive at the point of producing poor products that will embarrass the company. In nonprofessionals’ terms, nip it in the bud.
A third cost type, failure cost, is interested in identifying product defects at the point of shipping or from customer feedback. For this reason, this cost type is the least desirable. Failure costs present themselves in two varieties: internal and external. An internal failure cost is identified by employees, e.g., at the shipping docks at the warehouse. These employees immediately determine defects and report them to operations and project managers for review. An external failure cost is identified by the customers—which has the pejorative influence on the corporations’ reputation and financial foundation.
The computation for DPMO is
Inventory turnover is defined as the number of times a company’s inventory is sold and replaced over a specified period. The computation for this ratio is
For this metric to be further beneficial to the corporation, its results should be compared with industry standards to ensure that it is properly aligned.
Inventory turnover should be appropriately managed to ensure that operational costs or customer service are not negatively affected. If a company demonstrates a low inventory-turnover ratio, the implication is that sales are not sufficient; such a scenario creates high costs for unwanted inventory. If a company demonstrates a high inventory-turnover ratio, the implication is that the investment rate is zero; such a scenario increases the likelihood of stock-outs due to demand elasticity.
To ensure a mellifluous supply chain and high levels of customer satisfaction, the operation of the delivery process must be handled appropriately in order to ensure customers receive their products in a timely fashion. There are a few strategies to contribute to the flourishing of both the corporation and the customer:
1. Just-in-Time Delivery: Customers should receive their products in the state that HTC promises and the time in which it promises to deliver them. Poor just-in-time delivery will lead to demonstrable influences to the corporation’s financial bedrock in the form of poor public-relations image, detractor behavior from customers, and increased costs from vendors required to make last-minute adjustments to meet sudden customer demand. It should be clearly noted that just-in-time delivery does not imply that every shipment will arrive on time. Variances are expected; however, these variances should remain as low as possible. It would be beneficial to compare delivery process and attendant results with industry standards. Certain adjustments may be required to bring HTC in alignment.
2. Delivery Cycle Time: This is a time-management metric that measures the time a customer order is received to the time the customer receives that order. It should be obvious that the more quickly an order can be fulfilled and delivered to customers, assuming all else functions accordingly, the likelihood of high customer-service rates increases substantially. Upon receiving initial results from the delivery cycle time, adjustments can be made any relevant part of the supply chain, such as in the plant where work cells may an appropriate remedy.
Any supply chain is subject to threats, or risks, to normative functioning. Four notable threats are local optimization, incentives, large lots, and Bullwhip Effect. The following discussion will introduce attributes.
Local optimization is a nearsighted approach to customer demand and is predicated from selfish corporate motives. Essentially, constituents of the supply chain focus on individual profit maximization without knowledge or even concern the effect it may have on the entire supply chain. In other words, niggling demand elasticity is met with a disproportionately positive supply response. (Please note that, overall, as demand increases, supplies should decrease. This is the law of supply and demand.)