SUPPLY CHAIN MANAGEMENT

IntroductionMost manufacturing concerns spend more than 60% of the money for materials. A small savings in materials can reduce the production cost to a large extend. and thus add to the profits. Materials management (supply chain management)is used to describe the management of material, suppliers, production facilities and distribution services.

Objectives of Supply Chain ManagementThe primary objective of supply chain management is to reduce risks and uncertainties in to

supply chain, thereby positively affecting inventory levels, operation and product cycle time, processes and ultimately end users service levels.

1. to minimize material cost2. to procure and provide materials of desired quality when required, at the lowest

possible overall cost of the concern.3. to reduce investment tied in inventories for use in other productive purposes and to

develop high inventory turnover ratios.4. to purchase, receive, transport(ie handle)and store materials efficiently and to reduce

the related costs.5. to trace new sources of supply and to develop cordial relations with them in order to

ensure continuous material supply at reasonable rates.6. to cut down costs through simplification, standardization, value analysis, import

substitution, etc7. Minimize delays in procuring materials.8. to conduct studies in areas such as quality, consumption and cost of materials so as to

minimize cost of production.9. to train personnel in the field of materials management in order to increase operational

efficiency.

FUNCTIONS1. Materials planning2. procurement of purchasing of materials.3. receiving and warehousing4. storage and store administration5. inventory control6. standardization, simplification and value analysis7. external transportation (ie traffic, shipping etc) and materials handling8. disposal of scrap, surplus and obsolete materials

MEASURING SUPPLY CHAIN PERFORMANCEInventory means money to the enterprise. Because the inventory at each stage ties up money, it is important that the operation at each stage are synchronized to minimize the size of these buffer in inventories. The efficiency of supply chain management can be measured based on the size of the inventory investment in the supply chain. The inventory investment is measured relative to the cost of goods that are provided throughout the supply

chain

Two common measures to evaluate supply chain are inventory turnover and weeks of supply.

These essentially measure the same thing and mathematically are the inverse of one another.Inventory turnover is calculated as follows= cost of goods soldaverage aggregate inventory valueThe cost of goods is the annual cost of a company to produce the goods or services. It is sometimes referred to as the cost of revenue. This does not include the selling and administrative expenses of the company. The average aggregate inventory value is the total value of all items held in inventory for the firm valued at cost. It includes the raw material, work in process, finished goods and distribution inventory considered owned by the company.Weeks supply=average aggregate inventory value x52 weeks cost of goods sold

A firm considers inventory an investment because it ties up funds that could be used for other purposes, and firm may have to borrow money to finance the inventory investment. The objective is to have the proper amount of inventory and to have it in the correct locations in the supply chain.

ExampleNet revenue for 2007 18243mCost of revenue 2007 14137mCost of production2007 6423mProduction materials on hand J2007 234mWork in process J 2007 39

Inventory turnover 14137/234+39 = 51.78Weeks of supply 234+39/14137 x 52 = 1 week

Supply Chain Performance Drivers

There are four supply Chain drivers which affect the performance of the supply chain. They are

1. InventoryInventory refers to all raw materials, work-in-process and finished goods within the supply

chain. Inventory is an important supply chain driver because changing inventory policies can dramatically alter the supply chain efficiency and responsiveness. Inventory is spread throughout the supply chain from raw materials to work in process to finished goods that suppliers, manufactures, distributors and retailers hold.

2. TransportationTransportation refers to moving inventory from point to point in the supply chain.

Transportation takes the form of many combination of modes and routes, each with its own performance characteristics. Transportation choices have a large impact on supply chain responsiveness and efficiency.

Transportation moves the product between different stages in a supply chain. It has a large impact on both responsiveness and efficiency. Faster and quick transportation by different modes, allows the supply chain to be more responsive but reduces the efficiency. Transportation used by the company uses also affects the inventory and facility locations in supply chain.

The components of transportation decisions in supply chain include;1. Mode of transportation.2. Route and network selection.3. In-house or outsource.

4. Trade off between the cost (efficiency) and the speed of transportation (Responsiveness).

3. FacilitiesFacilities refer to places in the supply chain network where inventory is stored, assembled or

fabricated. The two major types of facilities are production sites and storage sites. Irrespective of the function of the facility, decision regarding location, capacity and flexibility of facilities have a significant impact on the supply chains performance.

4. InformationInformation consists of data and analysis regarding inventory, transportation, facilities and

customers throughout the supply chain. It is the bigger driver of performance of supply chain as it directly affects each of the other drivers. Information presents management with the opportunity to make supply chains more efficient.

The goal of the supply chain management is to link the market, distribution channel, operations process and supplier base such that customer's needs are better met at lower costs.

2. OutsourcingPurchased items and services account for 60 to 70 percent of the cost of goods sold.

Outsourcing is a term used to describe when a firm purchases materials, assemblies and other services that were previously done within the company from sources external to the company. Out sourcing i.e. buying from outside allows the firm to focus on activities that represent its core competencies. Thus, a company can create a competitive advantage while reducing cost.

Organizations outsource when they decide to buy something that are being manufactured in house currently. It is a reversal of previous make decision. In order to focus on activities, which constitute core competence, many organizations out source the non-value adding activities like cleaning and house keeping.

Information system is one activity, which has captured major attention as a candidate for Outsourcing. An entire function may be out sourced or some may be outsourced and others are kept in house. Depending upon the importance of the function, its nature as to whether it is a

strategic or routine the decision regarding outsourcing will be taken.

Reasons for Outsourcing

• Cost reduction• Focus on core competencies• Reduction in man power• Reduce development and production cycle• Improve efficiency• Minimizes inventory, material handling and non-value added costs.

Risks and Disadvantages of Outsourcing• Higher exit barriers• Loss of control• Exposure to supplier risks• Difficulty in quantification• Possibility of bearing tied to obsolete technology• Attention required by top management• Supply restrictions

Strategic partnership - a close buyer-supplier relationshipA close relationship is both desirable and possible with all suppliers. The extent of the effort at

this relationship building is determined by number of considerations like(i) Based on value of suppliers of goods and services. This will establish a potential cost and

other benefits of developing a close relationship.(ii) Percentage of supplies coming from one supplier.

Stages of Development of Buyer-Supplier RelationshipOnce the organization makes the decision to buy, and then the next logical step is identification

of sources of supply. The basic stages of development of Buyer-Supplier relationship -1. Specification of basic contract between the two parties. Suppliers are provided with

drawings and basic specifications [Quantities to be supplied, rates and period of contract].2. Specifications of critical parameters for incoming parts. Aggregate production plans known

to suppliers.3. Standardization of quantity procedure at suppliers dispatch. Buyer is informed about

upstream development and testing procedures of suppliers, die-design, patterns and tooling, supplier product constraints are taken into account.

4. Initiation of improvements by buyer after supplier audit of supplier operations.5. Initiation of improvement by supplier with sharing of gains. This could conclude value

engineering and design improvements.

6. Common strategy planning of long-term relationship spanning many contracts.

Delphi technique - To make the judgmental forecasts more realistic by minimizing bias, this method is used. In this method, a panel of experts are asked sequential questions in which the response to one questionnaire is used to produce next questionnaire. The information available to some experts are made available to the other experts. This technique is an iterative process.

The Delphi method is a qualitative forecasting method in which opinions are collected from experts to arrive at a reliable consensus. A series of questionnaire is sent to a panel composed of experts from selected technical fields. Each questionnaire demands a written opinion about specific

subjects and reasons for justifying the opinions. These reasons are summarized in each iteration and returned for inspection by the whole panel. Through this series of exchanged view, the consensus is reached. This method can be extended to several decades in to future.