Supply chains manage the movement of products from the acquisition of raw materials through production and finally distribution to the end user. A properly designed supply chain can create many opportunities to drive down cost and increase revenue opportunities. In order to create a supply chain that is sustainable and flexible it is necessary to identify and align company goals and initiatives with the manufacturing and distribution of products.
In the following sections I will propose a supply chain strategy which will align company goals and initiatives increasing efficiency and driving down cost thereby creating a sustainable competitive advantage through the implementation of a synergistic supply chain strategy.
Supply Chain Strategy
There are a number of different supply chain strategies offering companies an opportunity to choose a strategy which fits their goals and objectives. Amongst these types of strategies are a Keiretsu Network, Virtual Corporation, and many other options. The aforementioned strategies require close relationships with vendor firms relying on them to supply services and components throughout the manufacturing process to get the product to the end user. For many different industries it may be better to outsource parts of the process to firms which specialize in that technology. However, for the power tool industry it may be better to handle the supply chain internally. Throughout the remainder of this section I will propose that the supply chain strategy used for the company be a vertical integration strategy.
Vertical integration will give this company an opportunity to control every aspect of the supply chain. Implementing this strategy into their business model will allow the company to control manufacturing, material acquisition, distribution and everything in between. By controlling these facets the company will be able to find profit in the supply chain having the capability to stream line operations, finding efficiencies where possible, controlling inputs and influencing downstream activities such as distribution (Wei, 2012).
Vertical integration will give the manufacturer of power tools an ability to control their components and create a brand which will have the flexibility to meet the demands of its consumers. In other forms of supply chain management companies have to create contracts with outside suppliers relying on them to manufacture and deliver parts. These supply chain models take the control of manufacturing cost, quality and timing out of the hands of the receiving firm. By implementing a Vertical Integration the company will have the flexibility to identify opportunities within the supply chain allowing them to create efficiencies thereby driving down the cost of manufacturing and increasing profit opportunities.
Other supply chain strategies, such as a virtual corporation or a keiretsu network, require that many companies be involved in the total process of manufacturing. This creates a situation in which there are many different firms with different corporate strategies and goals. When manufacturing goods such as power tools it is beneficial to have the ability to identify opportunities in the supply chain and act quickly to capitalize on these opportunities. In other forms of supply chain strategies changing the process of manufacturing and distribution require that many companies agree on the change and implement the agreed upon change. Implementing Vertical Integration will make the firm more flexible allowing them to identify opportunity and act upon it quickly.
In order to take full advantage of Vertical Integration it is important to identify and implement performance metrics. Performance metrics are a set of measurements which assess a firms overall performance creating an opportunity to align corporate goals with production and distribution chains (Lambert 2001). Implementing these metrics will allow the business to identify where their supply chain is inefficient thereby allowing them to drive down cost and increase production. In this section I will identify three metrics to implement in the manufacturing process.
Lead time is the amount of time it takes to produce a product and have it available for end user consumption (Vermorel 2011). This metric will be very telling as it measures the capability of the supply chain to meet the demand from the consumer. By keeping a reasonable lead time the company will avoid outs and have an accurate measurement about their total supply chain capabilities.
Lead time involves the manufacturing, timing, supply of raw materials, distribution and sales. Lead time gives an accurate depiction of the overall strength of the supply chain and is an excellent metric in determining the effectiveness of planning and execution of supply chain goals and initiatives.
The average lead time of a corporation is 15 weeks from production to consumption. Benchmark firms have a lead time of 8 weeks which is the goal for the supply chain (Heizer & Render 2010). The 8 week number will be achieved by analyzing opportunities to streamline the process thereby creating efficiencies and driving down the amount of time it takes to produce and ship products. Setting a goal for an 8 week lead time will give the firm an opportunity to assess their forecasting and production capabilities presenting a way to identify and address inefficiencies.
Number of shortages per year:
Number of shortages per year is the number of times a product has demand but no inventory to support it. This metric will be helpful in determining the effectiveness of the supply chain by counting how many times they have failed to meet consumer demand. Failing to meet demand of the end user means the company misses out on revenue and loses faith from the consumer in their ability to meet their need.
Measuring the number of shortages throughout the year will give the company the opportunity to identify inefficiencies in the supply chain and find out where the breakdown occurs and at what level. Shortages can be the outcome of poor forecasting, timing discrepancies in the production process, not enough raw materials or a breakdown in the distribution chain.
The average company has a total of 400 outs per year as where the benchmark company has a total of 4 outs per year (Heizer & Render 2010). In order to meet this goal it will be imperative that every aspect of the supply chain be analyzed to find out why these outages happen and to create a plan to meet the goal of 4 outs per year. The fewer outs that the company has the more revenue will be generated and additional profit can be found in the supply chain by understanding how to make the process more efficient by eliminating waste in terms of materials, time and missed opportunities.
Percentage of Assets Tied Up In Inventory:
Percentage of assets tied up in inventory is a metric which defines the assets committed to inventory to determine if the company is holding too much or too little inventory. It is calculated by inventory/assets x 100 and defines the overall percentage which inventory takes up. This measurement will be compared against benchmark corporations to determine if the amount of inventory currently being held is comparable to successful companies in the industry.
This metric is important because it tells the company whether the assets tied up in inventory are being productive as inventory or if the assets could be used more efficiently in other parts of the organization. Holding too much inventory is generally indicative of a breakdown in the supply chain. There could be a planning issue, manufacturing timing issue or a break down in distribution and forecasting. Assessing the amount of money tied up in inventory gives a company an excellent metric in determining whether they have an efficient supply chain.
In order to determine if the percentage tied up in inventory is appropriate it will be necessary to determine the average for the power tool industry and then find a benchmark corporation who is performing well and set a goal to reach this percentage. The company will reach this goal by assessing whether their assets being invested in inventory is effective or if there is a cause within the supply chain which is creating this inefficiency.
Complications in the supply chain
There are a few considerations which may derail an efficient supply chain. These issues can create a bottle neck of inventory or an out with the end user. Complications in the supply chain must be understood and every effort must be made to avoid these mistakes. I will discuss three of these issues below.
Incentives can cause wild fluctuations in the supply chain. For instance; if the retailer creates a sales incentive for one of the drills the company sells there is a high probability that the demand for the drill will increase. Incentives will cause additional demand thereby increasing the amount of required inventory to meet the extra demand. Incentives need to be planned in such a way that lead times can match and replenish inventory to avoid outs and capitalize on the promotion. Forecasting will be a powerful tool in lessening the effect incentives will have on the supply chain.
The bullwhip effect occurs when a breakdown in the supply chain creates a scenario in which there is too much or not enough inventory. Generally bullwhip scenarios are caused by poor forecasting causing fluctuations in the flow of inventory. In order to avoid this it is imperative to forecast for consumer demand and execute the plan as it is laid out. In addition, increased consumer demand can cause this effect when the supply chain over reacts to additional demand thereby flooding the chain with additional inventory. It is necessary to plan correctly and understand the fluctuations before reacting severely.
Many companies are avoiding this issue by employing a system which tracks real time consumer demand giving supply chain managers much more visibility of real time demand. By understanding real time demand the supply chain can allocate the necessary amount of inventory in a timely manner creating higher flexibility and decreasing the chance of excess inventory or outs.
Large lots can become a hindrance to the efficiency of the supply chain. Lot sizes can increase the cost of inventory by incurring additional expenditures in storage. Poor forecasting is generally the cause of excess inventory and large lot sizes are often preferred by production managers because they drive down the per unit cost of manufacturing and often lowers transportation cost by shipping full trucks. Lot sizes should ideally be big enough to reduce transportation and manufacturing costs while meeting the demand of the consumer and avoiding outs. In order to avoid the production and storage of too much inventory it is important to have proper forecasting and real time information about consumer demand in order to produce enough to avoid lost revenue in excess inventory.
Tactics for effectively managing an integrated supply chain
Managing an integrated supply chain requires tactics which increase visibility and pull real time data as the product moves to the end user. Having as much information as possible about the supply chain is paramount in creating a sustainable, efficient supply chain. In the following section I will propose two tactics to increase visibility and manage the movement of products from manufacturing to the end user.
Accurate pull data:
Accurate pull data takes POS information and shares it throughout the supply chain so that accurate ordering can be accomplished allowing the company to ship the proper amount of inventory. This information also allows for future forecast and production from real time customer demand thereby decreasing the likelihood of the bull whip effect and increasing efficiency throughout the supply chain.
One example of implementing an accurate pull data system is Wal-Mart’s usage of radio tags to track and order inventory. This system gives supply chain managers real time info about inventory levels then creates an order to meet the demand for the product. This type of system allows the company to be on top of their inventory situation reducing lot sizes by shipping out product as needed.
Lot size reduction:
Reducing the average lot size will lower the percent of assets tied up in inventory. This tactic will be effective in creating a more efficient process and will require an aggressive commitment to creating accurate forecasting models. To reduce lot sizes it is necessary to have high visibility throughout the supply chain in order to understand market conditions to avoid outs and potential revenue opportunities.
There are a few ways to implement this tactic. Since the company is taking care of the supply chain from start to finish it will be necessary to ship smaller truckloads to retail outlets. Secondly the company will need to implement an accurate pull data system where the retail outlets can send POS data back to the supply chain managers. This information will trigger ordering based on weeks of supply giving the company a more powerful forecasting tool. This tool will allow the company to have an accurate depiction of consumer demand weeks of supply creating accurate forecasting.
There are many factors to consider and situations which present potential risk to disrupt the supply chain. In order to mitigate these potential risks it is important to understand how the supply chain works and identify areas which may be affected by internal and external issues. Creating plans to limit the risk of these eventualities is an important aspect of any supply chain. In this section I will discuss three potential risks and an example of each.