strengthening the supply chain

8/3/2019 Strengthening the Supply Chain

http://slidepdf.com/reader/full/strengthening-the-supply-chain 1/21

9. Strengthening the Supply Chain

In the modern business environment, sound in-bound supply chain management practices and

methodologies are systematic, flexible, and competitive. The approach is end-to-end,involving everyone, in every link of the chain, so that all links work smoothly with eachspecified requirement. Sound supply management strategies have in particular:

• Better supplier relations.• Better information technology.• Small supply base.• Substantial interest in supplier development.• Long-term contracts with suppliers and transporters.• In-bound supply chain linked with other chain members seamlessly.

The supply chain is a combination of integrated processes composed of sub-activities. Thearrangement of sub-activities must be orderly, their cumulative effect creating an optimalstrategic fit with the changing external and internal environment. Some of the actionsinvolved are:

• Reduction in lead-time between chain links.

• Making the chain highly reliable.• Maximizing the ability to transfer value.• Elimination of non-value-adding activities.• Providing information to everyone instantly (with or without computers).• Improving efficiency and effectiveness.• Using innovative ways to improve.

Managing the in-bound supply chain is about the ordering, planning, and control of productsand services to meet internal customer needs. Strengthening the in-bound supply chaininvolves linking up various chain elements in such a way that it will use less time, less space,and less equipment while satisfying more and more next customer needs.

Some Critical Actions of In-bound Supply Management

QUALITY OF IN-COMING PRODUCTS

There are a multitude of concepts and definitions of quality, such as fitness for use,

conformance to specifications, and so on. Some still say that improvement in quality leads tocost increases. This is a big misunderstanding. Real quality sells, it helps to reduce rejects andfailures, it cuts down repairs and scrap, it: boosts trust from customers, and results in salesincreases, and large cost reductions. The source of profit maintenance can indeed be said to

be 'Quality First' .

A major American appliance manufacturer estimates that 40 per cent of its quality problemscome from purchased parts. A Japanese company had to recall 45,000 washing machines dueto fires caused by a supplier's defective capacitor. Investigations into the Challenger andChernobyl accidents revealed that they were caused due to defective procurement policieswhich undermined the quality aspect. Supplier setbacks like these not only severely hamper efforts to upgrade quality but also lead to competitive disadvantages and slow down supplychain efficiency.



Quality is an often elusive concept, addressed only when troubles or complaints from internalcustomers to the buyers become excessive. The buyer needs to understand the importance of quality in supplies in the broadest way since it affects all aspects of value chain performance.

Not just product quality in terms of specifications but also internal and external customer satisfaction. Quality, once a little known, an unimportant or little understood part of in-boundsupply chain management, considered next to price and sometimes even on lower ranks in the

buyer's menu, today has become a vital element in improving procurement performance, andcompanies' profitability.

Quality is dynamic. What is considered high quality today, will definitely not be high qualitytomorrow. Quality therefore has to be benchmarked on a continuous basis to strengthen thesupply chain from time to time.

Zero defect supply has become a most important aspect not only from the supplier evaluation point of view or meeting internal customer requirement but it has equal importance instrengthening the supply chain. Procuring defective goods means not only spending onmaterials but also incurring expenses related to its procurement process and also weakening

the supply chain.

New United Motor Manufacturing Inc. (NUMMI), the joint venture company established byGeneral Motors and Toyota to manufacture subcompact automobiles in the United States,does not usually perform receiving inspection for quality or quantity, on incoming shipments.However shipments from the suppliers with identified quality problems are 100 per centinspected. The problems are analysed and corrected through the joint efforts of NUMMI andsupplier. NUMMI also limits inventory through the receipts of small lot sizes from suppliers.Suppliers are encouraged to produce in small lots, which confirm to the daily or more thandaily shipments that NUMMI requires of its suppliers. These small lots of materials arefurther broken down when received at NUMMI and parts that are delivered are equal to thequantity necessary to support one hour's production.

The number of times apart is moved for inspection before releasing it on the shop floor addsno value to the product. It merely complicates the material flow and sometimes involvesadditional work of detecting and correcting problems. This slows down the supply chain.

Any defective goods procured can also ruin the positioning of an offer. The manufacturingdepartment may have to produce goods under pressure or under deviations that may result in

poor quality in the final product leading to lower returns from the market. Defective supplyalso increases cost of detection, cost of internal and external failures, forces to performneedless activities, needless paper processing and procedures, waste of time and other resources. No company can afford this kind of lost productivity. Improving quality of incoming materials helps companies to maintain market position. Quality has to be designed

right the first time. It cannot be inspected in.

Stopping Defects at Supplier's Plant

If defective goods are discovered, measures to prevent its recurrence must be takenimmediately at the supplier's factory so that similar defective supply will not be manufacturedand dispatched. Some of the early actions to be taken by the buyer are:

• Stopping immediately manufacturing and shipment of goods at the supplier'slocation.

• Alerting all the suppliers concerned in the supply chain about the nature of

defect and necessary corrective action.



• Studying the root cause that may be man, machines, materials, method of manufacturing or any supply management-related problems.

• Using extensive quality data, give the buyer's feedback of inspection to allconcerned.

• Periodic evaluation of suppliers on quality performance.

•

Studying supplier processes and giving suggestions, if essential- .Using smalllot sizes for early identification of defectives-

• Launching supplier development programme and working with suppliers onquality and related issues.

• Taking corrective action and starting supply again.

• Conducting periodic audits to verify the existence of the problem.

If the quality of goods received from the supplier is improved on a permanent basis, it willresult in less materials handling in the receiving area and production floor. We can employless rigorous (and cheaper) methods of inspection of materials and enhance internal Customer satisfaction. ;

Important Aspects of Quality in Supply Chain

Consistency: How consistently does the supply conform to what is expected by theinternal customer?Capability: How well does the supply meet the desired requirements of the internalCustomer, e.g. how quick is it? How fulfilling is it? How is it compared tocompetitor's supply, in terms of performance, features, reliability, etc.?

Reliability: How reliable and dependable is the product quality of incoming goods andto what extent can chain members eliminate any cost that does not add value to thechain?

ON- TIME DELIVERY

With the evolution of concepts such as just-in-time(JIT) , quick response, efficient consumer response (ECR), the warehousing concept is becoming of secondary aspect to supplymanagement.

The companies in future will bring a variety of products faster and faster to the market andforget about dealing with only plain vanilla products. T o meet this requirement buyers willhave to speed up deliveries of raw materials from suppliers on time, so that finished goodsare manufactured and supplied before the company loses the opportunity and customer

goodwill.

Today , on-time deliveries are both a result and a key indicator of procurement performance.They are also a measure of the speed and response of the procurement functions.

Normally, once an internal customer releases a procurement requisition, not only does hewant to know when his requested goods will arrive. But while waiting, he may also want toknow what is being produced at the supplier's end, what is in transit, at what location, and, if the deliveries are getting late, why are they late? What is the alternative to meet hismanufacturing plan?



Any negligence in providing this information to internal customer can not only increasedirectly or indirectly the cost of product but also can cause dissatisfaction, confusion,conflicts and mess up of schedules, and loss of profit.

Late deliveries cause problems, such as workers being laid off, disturbed productionschedule, unloading of existing materials currently being processed from machines or half

processed to accommodate new materials received, and so on.

Also the paperwork and inventories will build up, throughput times will be increased, moreresources get used than optimum, people become busy in fire-fighting and sometimes will not

be actually producing what is required when it is required. For example, the cost of stoppingthe line at a typical Ford assembly plant is $15,000 to $20,000 per minute.

In most companies the ability of buyers to procure products, services as per internal customer needs decides the company's scope and ability

• To deliver end products on time.

• To capture substantial business from its competitors.

• To be first in the market.

• To maintain the same service levels with less inventory.• To meet mass customization needs for the same investment in working capital.

• To improve new product introduction rate by three to four times.

• To reduce total manufacturing time (procurement lead-time is ! normallygreater than manufacturing within the factory) and enable to deliver the

product in less time.• To thereby increase the growth and profitability of the company.

• To utilize resources to the optimum level on account of short procurementlead-time.

Typically buyers in many companies report that more than 40 per cent of their work time isspent in fire-fighting issues such as organizing repair, rework, attending to complaints,follow-up for deviations, attending supplier grievances, follow-up of shortage lists, changingschedules, attending coordination meetings, and so on. This leaves less than 60 per cent of thetime for routine work and almost no time for improvement activities. This situation getsfurther compounded by the uncertainties arising from demand fluctuations from internalcustomer and delivery problems from suppliers from the other side.

We see enormous fire-fighting in meeting on-time deliveries, since the typical crises as wellas the reactions to the crisis usually tend to disrupt the much-needed coordination between

different members of the supply chain who have already planned their deliveries into theschedules. Elimination of fire-fighting necessarily requires a concerted approach thatinvolves bringing about pursuit of a relentless practice and a habit of solving problems of source.

Attaining on-time deliveries requires close integration, a close degree of alignment or harmony between links of the supply chain. They must act, and communicate on the samewavelength. It would also need intensive training, shared vision, continued practice and yearsof partnership; there should be few or no slips in communication. Members of the supplychain function like a super relay team, with flawless handoffs. Moreover, the handoffs would

be quick without wasting time and other resources. Because of shared vision, on-timedeliveries would transfer products and information rapidly, with little or no error. Speed is a



particularly good measure of integration because it reflects the tightness of the couplingwithin the supply chain.

On-time deliveries also depend on the culture of the companies. People having own set of values and organizational politics impressed under different cultures and practices formedover the years govern companies. The culture of an organization decides how it will react tothe next customer's requirement. Timely I deliveries need a total cultural fit in the chain.

On-time delivery is a vision of perfection and needs missionary zeal. It is hard to develop. Itshould be evaluated by defining matrices like:

• How do we decide a good delivery from a bad delivery?

• Does it meet internal customer's expectations?

• What are the requirements for timely delivery management itself?• What is an acceptable procurement lead-time?• What type of delivery planning will be used?• How do we differentiate big lots or small lots, as well as need between hourly,

daily or weekly deliveries?• What type of transportation methods will be used to achieve the objective?• What will be the emergency plan if we miss the delivery?• What will be the best recovery plan to still maximize the supply chain value?

Buyers who try to define these requirements will run into tough questions, such as, how dowe measure cost of delivering one day, one hour late to the internal customer? In addition,they end up with requirements that include 'minimize maximum lateness' or no latedeliveries, 'minimize inventory costs without allowing a shortage to occur. Once the performance measurement system is in place, the structure will be available for continuous improvement effort, and re-engineering tools and methods will be in place toidentify additional. opportunities to improve in-bound supply chain.

The performance target for delivering supply on time will impact the amount and type of resources that can be utilized by supply chain members. Many members use these

performance targets to bring out innovative low-cost answers to supply chain problemsthrough process re-engineering.

The auto industry is bringing its suppliers closer and closer, making the supplier moreinvolved in design, even co-locating the supplier's manufacturing activity in its premises.Volkswagen has even started to use the supplier to assemble the vehicle (Dove 1996).

Perfecting On.time Delivery Process

Perfecting on time deliveries needs closer look at the following points:

1. A key factor in achieving on-time deliveries is a disciplined approach to schedules. The buyers should know precisely how much time is required to procure items that their internalcustomers need and what actions are essential to perform the whole process of moving

products from supplier's factory to manufacturing shop floor. The best matrix to measure the performance of this part of supply chain is to measure how much time buyers take to procure

products from the release of procurement requisition.



2. On-time delivering becomes simple if the suppliers are located near the manufacturing plant.

3. A comparative analysis and benchmarking can provide leverage to improve deliveries ontime. The suppliers and transporters should avoid the seemingly inevitable delays in day- to-day operations by creating calendars for important deliveries and time and meet this

commitment. Any failure must be reviewed to keep the ultimate aim of on-time delivery andstay on track.

4. Meeting deliveries as per schedule at right location every time is a good measure of reliability.

5. Flexibility to meet sudden changes in the internal customer requirement or marketconditions is also a good measure.

6. If the output of procurement process maintains quality, price, and delivery schedule, it isseen as being reliable. That is, it continues to do what it is expected to do, what the functionis intended to do. This process is further controlled by monitoring the output, i.e. procurement

performance on various parameters, and then, compared with internal and external benchmarks, interpreting the difference and acting to readjust procurement process so thatthey conform to the standards. However, in the complex market environment, it is notsufficient to think only in terms of standard performance. Buyers will have to continuouslyimprove standards as well as performance.

7. Contracting in advance for the specified period and volume of raw material deliveries canreduce delivery lead-time and control procurement cost. The supplier produces a pre-decidedvolume to be delivered periodically at a fixed cost. If smaller volumes are required, the costremains fixed at the contractual level. If larger volumes are required, the buyer incursadditional costs. Transportation costs are factored in as well. Parameters such as demandlevels and frequency of delivery must be chosen for scenarios of inventory policy anddemand variation.8. By eliminating non-value-adding activities, the time for deliveries can be shortened. Some

buyers are used to taking actions sequentially. This affects their objective of bringingmaterials on promised dates. Some of the actions can be taken simultaneously with others.

9. Synchronization of supply and supplier support is thus a critical factor for strengtheningdeliveries on time. It is also essential to reward the supplier appropriately for a good track record of delivering on time.

10. Delivering supply on time also depends upon the demand patterns of internal customers:they playa significant part in determining resource provision. Variation in demand with

respect to variety and volume requires a different kind of management for delivering on time but perfection in achieving control over them can improve procurement performancedrastically.

11. Being able to procure goods at the right time is a key to ! improving in-bound supplychain performance. Anticipation of j supply market changes and striving to improve effortsrapidly todeal with surprises makes it possible to sustain competitive advantage.



IMPROVING FLEXIBILITY

Predicting changes in the business environment is difficult. Changes such as a low-growtheconomy, recession, currency fluctuations, trade frictions between different blocks of countries, import restrictions, and rising raw material costs, can sometimes threaten theexistence of a company.

As we enter the twenty-first century , companies will focus more and more on producingspecific products for specific customers and delivering them through specific distributionchannels, at lower cost than competitors, rather than producing on a mass scale and thendelivering the products through standard distribution channels. Also those companies whichgo closer to customers and understand their present needs, anticipate future needs and reactquickly with appropriate products with unique features will have a competitive advantage.

• T o meet such tough needs, all the functions will have to work towards acommon goal. The immediate role of procurement professionals will be to re-look their traditional in-bound supply strategies and re-engineer them to excelin:

• Meeting internal customer's requirements flexibly by supplying products andservices in desired lead-time.

• Being flexible enough to allocate and use resources creatively and managetension between stability and change.

• Perfecting coordination of complex in-bound supply chains, keeping strictcontrol on details of individual linkage so as to enable high value addition andenable companies to leverage their competitiveness.

• Developing and nurturing supplier to become fast and flexible enough torespond to market conditions.

• Maximizing flexibility in the operation of individual chain member, saysupplier or transporters, leading to overall improvement in flexibility

• Understanding the changes in supply market, and acquiring new suppliers,their capabilities, skills, new ideas replacing incapable suppliers.

• Using previous experiences for decision-making and making them the basis of the ability to remain flexible-

• Creating a supply chain that has unique features to deal with demand of internal customers, namely by reducing cost of transportation, economicmovement of small lots, quick deliveries, etc.

What Happens when Procurement Activities Are Flexible

Flexibility is fundamentally rooted in the ability to anticipate change by being in a position toadjust to unexpected uncertainties like exchange rate fluctuations, raw material price changes,missing deliveries or a flash strike at sole supplier's plant. While it is not possible to list alluncertainties in the complex business environment, anticipating and visualizing it can help tounderstand at least a few ground rules.



Flexibility can vary in a number of dimensions: volume variety, and variation in the natureand level of demand. Some of the benefits of remaining flexible are:

• It allows the company not to depend too much on traditional methods, of material requirement planning based on sales forecasting. Thereby it canrespond immediately to any changes in market conditions.

•

It gives a company ability to respond to uncertainties by adjusting itsobjectives with the support of its core competence and capabilities. The latter consist of people, processes, products, and technology.

• It allows a company to support the development of future procurementstrategies, and these enable the buyer to react swiftly to the changing nature of internal and environmental conditions.

• It represents the company's ability to continuously transform its corporatestrategy, structure, systems and processes to respond to or cope withenvironmental pressures, demand and changes in an adaptive manner so that it

becomes difficult to emulate them easily.

Flexibility and Supplier

Traditional mass production practices of the early 1970s simply allowed the buyer to meet thequantity and delivery schedules.

The recent shift towards lean production and mass customization practices has forced him toacquire new knowledge, capabilities, use extensively information technology and create

partnership with capable suppliers to bring flexibility in the supply chain.

A traditional supplier uses narrowly skilled, unskilled or semi- skilled workers and single- purpose dedicated machines, uses product-based layouts, uses high inventories at each link in

the manufacturing chain, keeps large plant capacities to deal with uncertainties and extramanpower to manufacture products. Flexibility is achieved by keeping every resource extraso that no bottleneck occurs at any point of time.

As stated earlier, companies in the future competition cannot cope independently. They willneed strong support of suppliers to achieve their objectives. Such suppliers should be not onlycapable in their skills but also flexible in their operations so that they can tackle any threat tothe buying company. For such critical requirements they may have to be selected on the basisof speed, responsiveness, quality, etc. and not only on the traditional lowest price formulas.

The company can become highly flexible when its internal functions and external supply base become fully flexible and create an appropriate fit with the changing environment. Actually

they become an extension of efficiency and quality to enhance productivity.

The selected suppliers should work in partnership and should be developed and nurtured tomeet present and future threats and also for current and future capabilities and flexibilityrequirements. To remain flexible suppliers must continuously learn and upgrade againstcarefully defined objectives with the help of available resources.

A flexible supplier uses highly skilled workers, and simple but flexible tools to make products. When the buyer asks for even a single piece at a time, he combines the advantagesof large batch manufacturing to single piece manufacturing while avoiding the high cost of manufacturing of the former and inflexibility of the latter.



The flexible supplier employs teams of multi-skilled workers and uses highly flexible,increasingly automated machines to produce volumes of products in enormous variety. Hetries to maximize the productivity of the plant, strives to achieve perfection, use resources tothe utmost, measures continuously cost of quality, removes wastage, concentrates oncontinuous improvement of processes, tending towards zero defects and zero inventories.Supply in small lots and without defects can only be achieved (at reasonable costs) by

controlling processes and manufacturing goods without defects that can lead to wastage of money and time. Such flexibility can lead to decimated inventories, less space, and simpler logistics. It improves quality through faster feedback loops.

Flexibility involves manufacturing small lots, using computers in design, engineering,manufacturing components implementing Single Minute Exchange Die (SMED), TotalProductive Maintenance (TPM), Total Quality Management (TQM) at supplier's factory andlocating suppliers near the buying company. It also requires the supplier to develop the abilityto rapidly redeploys his people, modify processes, change technologies, provide money, andoptimize his core capabilities as the buyer's requirements continue to change. It requireseffective management of quantity flow, quality, concentration on activities that take longlead-times, finding root causes .for uncontrolled inventories and total coordination of actions.

SCHEDULING DELIVERIES

Scheduling deliveries is an activity in which all the suppliers' deliveries are coordinated and projected on a time scale in such a manner that the materials arrive at the buyer's plantexactly when required, not earlier nor later causing either inventory or shortage problem. Adelivery schedule is a timetable that tells the buyer which supplier is dispatching what, when,how much and where.

Appropriate scheduling of inflow of products from suppliers depends on the combination of intelligence about what is actually happening in supply and demand market and forecastingwhat is expected to happen.

An established delivery schedule is likely to be forced to change due to external or internalconditions. If the buyer does not react appropriately and still carries out the original deliveryschedules, disruptions may occur at many places of the supply chain, adversely affecting the

bottom line of both companies.

The company's manufacturing plan is normally influenced by market demand. If there arechanges in demand, the instructions given to the supplier must be modified constantly to get

the right material at the right time in the right quantity at the right place.

The difficulty in managing deliveries arises when the complexity of demand by internalcustomer grows. When different internal customers need different products and serviceswithin a stipulated time-frame-say manufacturing needs regular raw materials by a certaindate, maintenance needs spares on the same date to commission machines, etc.-there willcertainly be pressure on procurement administration to manage the variety of demands withinthe specified time-frame. In such a situation, if the buyer is facing scheduling problem heshould consult his internal customers and try to reschedule the products without affecting

plant efficiency, rather than act unilaterally to meet the demands of the situation.



COMPRESSING PROCUREMENT LEAD-TIME

Lead-time management is a not anew activity. For buyers it has long been a key factor inimproving procurement performance. In the changed circumstances of globalization, inaddition to domestic sourcing, international sourcing is making lead-time problems evenmore challenging.

The basic aim behind procurement lead-time reduction is to design a supply chain that allowsfor material flow without bottlenecks, delays, errors, and inventories that most companieslive with.

Lead-time reduction goes a long way in strengthening the supply chain. As the lead-timeincreases, controlling supply management becomes difficult, inventories swell and safetystocks become indispensable. One of the major areas where the lead-time variation affects isthe companies' working capital requirement.

Reduction in lead-time requires every aspect of the supply chain to be regulated andstreamlined. As the lead-time increases or becomes uncertain the reasons for inventory

buffers become essential. Lead-time reduction also depends on how buyers redesign thesupply chain with highly visible and measurable parameters. It is not only the externalconditions that affect lead-time, but also internal conditions of the company, such as suddendelivery schedule changes, changes in purchase order quantities, and changes in mode of transport.

The buyer has to play an important role in balancing uncertainties in demand and supply frominternal customer and external supplier. Even minor mismanagement in supplier'smanufacturing plant can cause lead-time variations.

The longer the supply chain, the less flexible and more resistant to change it becomes. Theflow of goods becomes slow, communication gets diluted, resistance between the functionsincreases, conflicts become a way of life, and visibility of flow of goods becomes poor.Instead of operating as an end-to-end single supply system, the chain becomes weak.Inflexible coupled joints leak value and profits.

World-class companies recognize such danger and look hard to avoid it, by creatingawareness of how and where value is added and where wastages are hidden. They make theflow of goods in the supply chain more and more transparent and compressible. They investin people, technology, and process improvements. Moreover, they highlight the major handoffs between chains and within the chain and educate persons of the cost of quality byexamples in terms of monetary value as to how much a mistake costs.

They also create awareness among chain members as to what actions and decisions areessential for the highest efficiency of the chain and how to influence every action of theirs for the highest output of the chain. Based on the output measurement they readjust performanceefforts and benchmarks for future improvement. And most important, they continuouslyreinforce the chain by taking corrective action.

To reduce procurement lead-times the buyer and the supplier have to form small empowered

teams that can identify and iron out problems.



Benefits of Compressing Procurement Lead-time

• It allows reducing total cost of supply, and elimination of inventories between

supplier and buyer plant; improves internal customer service; improves quality, as

everything is done to satisfy or even delight the customer .•

Innovation and creativity become away of life because rapid new productdevelopment cycles keep buyers in close touch with suppliers and internal andexternal customers.

• As the lead-times get shorter the amount of inventory required becomes less and less.In many cases, safety stocks can be eliminated as the forecast horizon becomesshorter and forecast error is thereby reduced. Ultimately, as lead-times become veryshort products formerly made to stock can become made to order. Then finished goodinventory goes to zero and delivery improves dramatically (Wallace 1992).

• The more speedily information, decisions and materials can flow through a larger supply chain the faster the internal customer can respond to external market changes.

• Less time will be spent in fire-fighting, coordination and readjusting. More time becomes available to buyers for creative and innovative work.

•

It also helps them to realign supply base that can meet just-in- time requirement.• It allows buyers to balance uncertainties in demand from internal customer and

external supplies.

Lead-time Reduction Process

Lead-time reduction process involves buyers taking decisions faster, developing newcapabilities or nurturing adequately existing suppliers. It involves quicker conversion of

purchases requisition into deliveries to internal customers and forecasting, anticipating and preparing to meet needs better than the competitor's buyers.

In case of new product development, compression of lead-time implies involving suppliers atthe earliest stage to obviate delay in launching the product, which may incur loss in revenue

but also risks competitors introducing competing products faster.

Buyers must understand what the internal customer wants. If the wants are not understoodwell, it is likely that any efforts applied towards reduction of lead-time will be misdirected.

The flow of goods often slows down where inspection, monitoring, and controls occur or where handoffs take place. It progressively slows down further where it crosses either depart-mental or company boundaries. Poor coordination between supply chain members not only

wastes resources but also increases the lead- time. Applying JIT principle implies thatsuppliers are requested to deliver small quantities of the ordered parts or materials at the

buying companies' premises exactly as and when they are required.

Extensive studies have found that buyer-supplier partnership contracts make it possible todefine programmes of information exchange between the partners that can enhancecommunication about production plans, delivery schedules, delivery orders, and qualitysystem.

In strengthening in-bound supply chain procurement, managers must decide where and howto absorb potential variation in the performance of chain elements. When an in-boundlogistics chain consists of loose couplings and joints, and functions that do not communicate



with each other, the actions taken to compensate for variation in lead-time management can be very costly to the company.

Lead-time can be better managed if buyers sit with their next customers and decide on predictable and unpredictable demand items, and critical and non-critical items. In mostcases, it is only unpredictable, unplanned, unanticipated, disorganized and critical items thatgenerate lead-time headaches.

In reducing lead-time, it must be ensured that information, people, and equipment movethrough the entire supply chain with marginal or no delay. Buyers of world-class companiesmeasure lead- time between each handoff so that it can be bench marked for further improvement. Such continuing efforts to reduce each lead- time in the link and therefore thetime of the whole in-bound supply chain consequently provide unique value to the internalcustomer.

Many a time, developing a capability of reducing procurement lead-time needs out-of-boxthinking, radical and fundamental rethinking of the ways in which the work is being

performed at present. It means that various elements of the supply chain, such as supplier,transporters, and buying company will have to work together in new and different ways.Every link acts in such away that it thinks of them as part of a closely integrated, interwoven,interdependent, seamless end-to-end supply chain, with wastage eliminated wherever,whenever and in whatever amount it is found. Each element understands how its own actionsand decisions affect not only the next customer but end results. T o compress lead-time andimprove the performance of the in-bound supply chain a buyer has to work in and managethrough relatively small, empowered teams made up of cross-functional team members. Theteam must be small because large groups can create communication problems and resolvingconflicts becomes an on-going phenomenon. The team should have members from eachelement of the supply chain. Putting together people from different links of the chain willallow them to understand each other's role and broaden their vision in organizing their work

towards creating productive output rather than seeing their individual role in isolation.

T o ensure that products and communication will move through the entire supply chain withlittle or no delay the buyer has to manage the lead-time of minute activities. He must track every small link value addition and see how it gets percolated smoothly into the other links.A continuing effort has to be made to reduce the lead-time of each link and therefore thelead-time of the entire in-bound supply chain, by constantly applying P-D-C-A {plan- Do-Check-Act) cycle for simplifying and integrating the entire sequence.

Compressing procurement lead-time can provide sustainable competitive advantage. It is nota new procurement performance parameter: it has long been a key factor in stretching

performance. The buyer should not only concentrate on in-bound supply chain after the

purchase order is released but act proactively by making radical changes in the whole buyingsequence starting from the emergence of need. Whatever the approach, the efforts applied toreduce procurement lead-time require motivation, attitude change,knowledge, innovation andcreativity.



Seven Commandments for Compressing Procurement Lead-time

1. Ensure supplier and internal customer requirements are well understood before

purchase order release.2. Promote visualization of supply chain while requirement is Istill on procurement

requisition.

3. Visualize supply chain barriers and solutions

4. Maintain a top five list of critical issues.

5. Promote rapid decision making

6. Integrate the cross-functional team and involve the supplier wherever necessary.

7. Promote end-to-end supply chain understanding among allchain elements.

CONTROLLING QUANTITY FLOW

The aim of quantity flow control is to minimize inventories such that there should be single piece flow without starving the chain. The ideal lot size in in-bound supply chainmanagement is unity or minimum desired lot.

The delivery of all parts and components should be just large enough for producing a singleunit of the final product. This can be achieved only if wastages in supply chains areeliminated, quality of supply is improved, and lead-times are reduced.

It was easier for companies to manage flow of goods when they were highly verticallyintegrated. But vertical integration has its own pitfalls. With the shift from vertical integrationmanufacturing to outsourcing of products, the buyers have a challenge to control flow of materials of multiple supply chains. These chains could be right from well-formed tieredstructures to unstructured supply chains. The management of such complex structures mustensure that there is neither bottleneck nor excess or shortage of products at any link of thesupply chain.

The flow becomes smooth when all links in the supply chain cooperate, coordinate andintegrate their separate processes to form a seamless chain. Instead of concentrating onlowering their individual chain cost, they emphasize the lowest end-to-end chain cost. Rather

than reducing individual cycle time the companies in the network of supply chains aim towork on a goal to attain the lowest combined cycle time. Achieving these criticalrequirements needs attention to individual chain quality, reliability, interdependence, trust,etc. among the chain members.

While most of the product flow is designed to have a smooth flow, this can slow down or getimpeded as changes are implemented over time on a piecemeal basis on various issues likequality, delivery schedules, etc. Additional resources, corrective schedule changes, line

balancing or concurrent actions need to be taken to simplify further quantity flow. The faster the flow, the easier it is to discover bottlenecks and address problems. Hence as we go oneliminating problems the need for resources becomes lesser.



The speed and efficiency with which the buyer meets the needs of the next customer have adrastic impact upon the profitability of the company. Time lag in meeting needs can not onlyincrease ordering cost but involve a lost order. The alternative of larger inventory holdingwill incur extra cost.

Some of the problems in controlling product flow either at the supplier's factory or the buyer's plant could be: change notices, scrap, absenteeism, machine breakdowns, rework,unpredictable events like strike, fire, political turmoil, shortages, miscommunication, etc.These variables control the buyer's ability to regulate the flow of products through the in-

bound supply chain. The best way to deal with these problems is to prepare a parallel plan based on the worst situation. Although costly, when the possible losses are great, they may be justified.The flow of materials smoothes when handoffs, interdepartmental and inter-company barriers are.removed, like low-viscosity oil flowing through a smooth hose with natural velocity. A

bottleneck, while it may manifest suddenly, almost never originates suddenly. It usually begins small somewhere in the total supply chain as a minor deviation from various standardsrelating to quality, scrap, defects, delays, etc. Unattended, it builds up, slowly at first andsoon accelerating, because of the interrelationship of various chain elements. Early correctiveaction is therefore warranted.

This process of solving problems at their source also constitutes the very journey towardcompetitive advantage.

Any slowdown in flow outside the buyer's company weakens the chain. This weakness isaggravated when material arrives late in the buyer's plant. The buyerr may have to put inovertime, increase machinery time, and incur extra direct or indirect expenses. If the materialarrives earlier than required, it may incur storage, inventory carrying cost or becomeobsolescent. In addition to loss incurred due to additional requisitioning or disposing non-

moving inventory to balance the schedule or even excess, shortage of a few items canimbalance the flow.

A large batch size, container capacity, transport schedules, local laws, etc. all disrupt thesupply chain. It is essential to control these constraints to maximize the flow. Poor productflow can cause long procurement lead-times.

Sometimes unevenness of materials flow, induced by patch-up solutions at the point of bottleneck manifestation, actually tends to get amplified in the upstream supply chain, further exacerbating the impact of the bottleneck.If the demands from the internal customer were to be constant, procurement managementwould be as simple as procuring standard qualities, with standard lead-times, and ensuring

other standards. Unfortunately, this is not how it works, because of variation in demand dueto internal or external causes.

Bottlenecks generally originate in two broad ways:

• Plans, schedules, and quantities get disrupted. Therefore, expediting every chainmember individually according to market requirements becomes the only availablealternative.

• .Failure to detect and resolve a problem in the supply chain at its source early enough.This soon begins to puncture the hose at different places, thus disrupting all existing

plans and schedules. Inventory is often used to take care of such problems, but that is



not the best solution. Buyers normally try to solve flow management problems bykeeping adequate stock at various places. But high inventories act like mud clogged inthe pipeline restricting the smooth flow.

In short, any imbalance in the system percolates down the supply chain. The flow should be

neither fast nor slow but must be right to suit the actual need.

BUYER-SUPPLIER PARTNERS

Traditionally the buyer-supplier relationship was adversarial rather than of partnership. The buyer managed his inventories by shifting them to the supplier, and squeezed him to get pricereductions. Squeezing suppliers forces them to dispatch substandard goods, which results inincreased cost of quality rather than improving the value of the product. This also has areverse effect on profitability.

Ideally, supply chain management is not just shifting the inventory: it is reduction and totalelimination of excess inventory at any location in the chain that affects the ultimate price of the product.

World-class companies understand this aspect and have made the supply chains leaner andleaner, adding value to them through lot size reduction, quality improvement, relentlesslysearching for eliminating waste and developing partnership with suppliers.

Working together as a team and working toward continual improvement is one of the basicrequirements for strengthening the supply chain. However, the top management of bothcompanies has an obligation to make that happen.

The buyer-supplier partnership helps strengthen the supply chain in three ways:

• By learning to perform their tasks more efficiently as they come closer andunderstand each other's requirements.

• New capabilities and core competences become available that enable them tostrengthen the supply chain.

• Products are redesigned for manufacture as modules, for easy handling andtransportation, especially in the automotive industry .

Once a partnership is formed a joint team can develop a comprehensive supply chainimprovement plan that will monitor and cut production, ordering lead-time, reduce inventory,improve responsiveness, and improve quality.

RE-LOOKING TRANSPORTATION NEEDS

Transportation management needs a strong bond between the supplier and the buyingcompany so that:

• optimum quantities are delivered in optimum time;

• efforts are aimed at taking out excess stock from the supply chain; and• neither early shipment nor late shipment but every shipment on time can be practised.



Every time material is moved, it consumes resources. Hence it is essential to understand (a)Why are they being transported, (b) What value the movement will add, and (c) Could theresources not be better spent by eliminating or minimizing the need for movement.

Just-in-time manufacturing has created great challenges and opportunities for transporters.

On one side they have to meet delivery windows; on the other side they have to aim atcoordinating their own resources optimally for the lowest cost.

Today , the requirements of the transportation industry have changed shape and direction. Allkinds of finished and incomplete assemblies and component parts must always be collectedon time from suppliers. This needs to be coordinated with suppliers and buyers, sometimes onreal-time basis, and delivered on time in good condition, followed by an accurate invoice,with no shortages or delays with scant regard to the distances or detail involved.

If for any reason the transporter is not able to deliver goods or delays deliveries he should beable to communicate with the buyer, pass on real-time information about the problem,reorganize delayed deliveries by best possible alternatives while trying to minimize loss to

the buyer and take immediate steps to avoid recurrence of such problem in future supplies.Transporters of the future will have to get this core competence to the make their clientscompetitive.

Some of the transporters will be implementing enterprise resource planning (ERP) systems,to effectively tie their own business systems together, so that they can provide for moreopportunities to implement innovative ways to reduce cost in the supply chain and also meet

buyer's requirements effectively. A few transporters have already started investing inelectronic data interchange (ED!) and shipment tracking through the Internet. Suchdifferentiated service gives them competitive advantage over competitors.

Transporters of the future will not only have to understand customer's needs closely, but also

the cascading effect of delayed deliveries on the next few customers in the supply chain, andthe impact of delayed deliveries on their immediate customer's credibility. They will have totake their customers' needs very seriously, to the point of guaranteeing time-certaindelivery .For example, supply to a just-in-time assembly line at a car plant will needdelivering the right components in the right order, to the right plant at the right time, with nodamages. No excuses of any sort or error should be allowed to affect the livelihood of thousands and waste resources. Transporters culture also plays an important role instrengthening the supply chain. The culture has to be focused implicitly and explicitly onanticipating and servicing customer needs.

Traditional transport businesses place great emphasis on hardware depots, trucks,warehouses, and shipping rosters. The company has to demonstrate innovative use of

technology to solve complex logistical problems; hardware is there solely to facilitate the jobof satisfying customers. Moreover, doing so more cost- efficiently than competitors, like hub-and-spoke supply, cross- docking, next-day guaranteed door-to-door delivery service, theunique same-day service and computerized sorting system or meeting specific customers'needs can certainly increase the strength of the supply chain.

Transporters have to look for new ways to provide more value to their customers byassuming full responsibility for managing freight from the supplier's location to the buyer'slocation and thereby relieving the resources of both that traditionally performed this task. Inaddition, transporters have to give real-time information of freight under movement. Better information feedback will allow them to serve well and have competitive advantage withintheir industry .



The transporter can help eliminate inventory carrying cost, which has nothing to do with theactual price of goods. The price can be further reduced by further strengthening the supplychain.

The transportation cost per shipment depends on the geographical proximity of the supplier and the mode of transportation. When dealing with a network of suppliers, the distance

between each supplier and customer can affect the transport cost and effectiveness of thesupply chain.

Creating transportation logistics system in the automotive, steel, and computer industry is nosmall feat. These industries, very clear in the expectations they place on transporters,continuously force them to improve operations, reduce cost, increase quality and meet tighter deliveries. Transporters have to continually review their systems and core competence so thatthe whole supply chain is prepared to remain flexible and responsive to cope with thecompetition.

TAKING A PROCESS VIEW

What exactly is a process? The Oxford English Dictionary defines Process as a continuousand regular action or succession of actions, taking place or carried on in a definite manner,and leading to the accomplishment of some result (Oxford 1978).

In its simplest form a process has input and an output and is made up of a sequence of individual tasks through which this input passes to become an output. The process itself can

be anything that transforms, transfers, or merely looks after the input. In addition, it deliversit as output (Cherr 1993).

Taking a process view of the supply chain calls for taking out old rules and buyers findingnew ways to manage the supply chain. A process-focused supply chain management differsfrom the traditionally managed supply chain, in how they add value at each coupling, howthey remove wastage, and how they view each link's contribution to the end result. Theyfavour teams-based management of supply problems over islands of functions internal andexternal. They insist that everyone learn about interdependence, understand what will makeeveryone survive and grow and not operate as an island.

Process improvement presents a fundamental parameter in strengthening the supply chain.Although most supply chains have been developed over considerable periods and modified

through various input~ with varying degrees, they have rarely been understood end to end.Flow charts and measuring the performance of each link of the supply chain is critical tounderstanding and improving it. Mapping makes the process visible for easier analysis.Mapping also provides a focal point for discussion, allowing managers from differentfunctions and levels to work through problems on a realistic basis. Communication isenhanced and guesswork removed. Using maps will give a clearer explanation of an in-bound logistic process and will enable the

buyer to clearly see the supply process and identify waste and areas for improvement

Excellence in in-bound supply management is the product of well-designed interlinked

processes. Continuous improvement, which is a key activity needed to improve in-bound



supply management, can be practised by continuously surfing and exposing the weak pointsin the supply chain. Improvement is also promoted, by maintaining incentives to fix andstrengthen supply chain links that are not fully understood, or that are left to their fate. Unlessthese links are attended to, such supply chains tend to drift toward lower and lower competitiveness.

STREAMLINING MANUFACTURING ACTIVITY

Manufacturing management at the supplier's factory is crucial for strengthening the in-boundsupply chain. Mismanaged manufacturing at the supplier plant can cause serious problems for the buyer if he is dependent on the supplier either as a sole source or single source.

Almost all manufacturing companies require a supplier to deliver material or components of agiven specification at an agreed price on an agreed date. Poor supplier performance in termsof price can lead to costs being substantially greater than they should be. Poor delivery and

poor quality performance can result in a host of problems ranging from scrap, rework, to theextent of compromises and delays at various links in the supply chain. Buyers normally avoidthese problems by keeping surplus inventories that can take care of uncertainties.

But if the reasons for keeping inventories are observed under the microscope, it will emergethat the causes of building inventories are to be found in both companies. The buyer cannotdeal with them independently, as stocking inventories many times is an interdependent

problem. It needs identification and pulling out roots concurrently at buyer and supplier plant.Today, the supplier's problems are not limited to his plants, but they become mutual

problems. Since the outcome of their joint effort can alone make both survive and grow in thecompetition, it is essential for buyers to understand and develop the supplier in the process of controlling production.

Elimination of wastage in the supplier's factory can directly reduce the total cost of the product being shipped. Hence it is in the interest of the buyer to understand and guide thesupplier for optimum utilization of his production capacity and resources to achieve smoothflow of goods not only in his plant but also carry forward smooth and defect-free flowthroughout the supply chain till the product reaches the buyer's plant.

Since manufacturing forms a part of a large value chain, the buyer must look for improvements on both sides of the chain. Since a major part of the end product value gets

decided before the inputs reach the buyer's plant, the supplier's manufacturing becomes vitalfor competitive advantage. Hence the buyer must correlate and merge manufacturingcapabilities based on smoothly honed partnership that allows him to multiply peculiar advantages over competitors.

The supplier's role is changing from merely supplying goods as per purchase order conditionto becoming a provider of better value to the buyer in the form of unique capabilities thatallow him to enhance his competitive advantage. The aim of the supplier in strengthening thesupply chain through his own production control is to optimize the balance between the costof production, the cost of holding inventory and still provide a very high level of service tothe buying company.



INFORMATION TECHNOLOGY

There is a sea-change in procurement management, on account of information technology .ITis transforming the way traditionally sourcing was performed. It is altering the way

companies select, evaluate and certify suppliers based on computerized data and buy goodsfrom them through electronic commerce.

New linkages are being' created everywhere and traditional boundaries getting eroded between markets and nations. New global sources are getting added to the buyers' list at the press of a key on computer. The internet, for example, has suddenly become a sourcing route,allowing access to a stupendous amount of information in any form to anyone, anywhere, atany time. This type of supply chain for the most part will create a virtual supply chain.

In a turbulent and dynamic environment it is increasingly risky to operate under an old set of rules and methods. One cannot anticipate every possible threat that might confront thecompany. Buyers must instead develop the ability to gather information to manage

uncertainty rather than concentrating on how to do routine work faster .

Information technology gives an opportunity to the buyer to consider whether certain tasksshould be done at all and whether they can be done better by other methods. Informationtechnology has empowered buyers to add competitive advantage, tie up with new sources andaccelerate the in-bound supply chain by entering into a partnership with suppliers outside andteaming up internally with cross-functional areas through intranets, extranets and internet.Dramatic reduction in computer prices, innovative softwares, drastic reduction in telecomtariff and deepening impact of information technology in daily use have encouraged intensiveuse of information technology in business. Moreover, the reduced cost of acquiring,modifying, and transmitting information is changing the ways companies can manage thesupply chain. Maximum use of information technology gives the buyers considerablecompetitive advantage.

Recent software technology developments have made it possible to integrate variousdecision-making support systems at the fingertips of the operator. EPOS and EFTPOSsystems (electronic point of sale data capture and electronic fund transfer at point of sale)extend these integrated decision support systems on two fronts. The inter-organizationexpansion enables other functions within the business to use the data generated for planningand control purposes. For example EPOS data, which provide product movementinformation, have been used to plan labour requirements and staffing schedules as well as

plan replenishment schedules from retailer-operated warehouse facilities. The inter-organization features of EPOS data are an extension of the data backwards into the supplychain in order that suppliers might more effectively plan production and raw materialsacquisitions. EFTPOS extends the external use of the data generated at the point of sale bylinking transaction data with customers' sources of funds, thus effecting a more rapid

payment cycle and thereby improving cash flows. Multimedia combining voice, image text, and data have redefined new sources for industries.The supplier can act alone or in a network and buy goods in new ways directly from other suppliers.

Future sourcing would be through interactive multimedia providing the capability of findingand getting qualified suppliers to attend, thereby eliminating unnecessary supplier visits. Thecomputer network between suppliers and buying company makes it easy to exchange

information about inventory levels and delivery schedules.



Information technology has allowed companies with CAD systems to collaborateelectronically on designs. It has permitted potential new suppliers to bid for jobs withminimum fuss and little or no investment. Finally, it would allow a small manufacturer tohave the same access to information as a large partner.

Strengthening the supply chain requires multiple feedback loops, so that information and dataare collected and analysed to know the status of performance and take corrective action ontime. Use of information technology can allow the chain members to take real-time decisions

by supplying information at the right time to the right people. Information technology alsoallows reducing the impact of uncertainties based on data. The databases of differentsuppliers, their production capacities, quality of performance, capabilities, product data,designs, suppliers' manufacturing time, process yields, current order status, inventories, back order status can be accessed through the computer network. The network can also be used for material requirement planning, inventory management, material valuation, invoiceverification, and warehouse management.

Global Sourcing

World-class companies rely on global sourcing to improve procurement performances thatcall on a company to think of the world as one supply source instead of a collection of domestic supply locations. They develop such unique pack of suppliers, which acts as aresource to deal with competitive threats and becomes another source to book competitiveadvantage.

Global. sourcing is not an entirely new phenomenon; it has been around for several hundredyears. However its momentum is now overwhelming. Accelerating changes in informationtechnology and transportation speeds are creating a global village in which anything can bemade and sold anywhere. The erasing boundaries pose not only threats but also unlimitedopportunities. This makes global sourcing different from domestic sourcing, not only in termsof cost of products but their unique capabilities, better processes, better technology , andquality that can satisfy customer needs most appropriately.

In spite of the benefits a number of problems result from global sourcing strategies. Some of the major problems could be: evaluation of suppliers abroad, lead-time, difficulty of expediting, lack of direct contact with suppliers, and political and labour problems.Additionally, overseas costs are significantly higher than domestic logistic expenditures

because of greater shipping distances, longer order cycles, greater use of multipletransportation, customs documentation, lengthier and more complicated credit checks, and

poor infrastructure at certain ports and airports.

Supplier Network Management.With traditional supplier structures failing, buyers must create and evaluate innovative typesof supplier networks and compete with competitors' supplier network. Future supplier networks are bound to be boundary-less, knocking down walls between the companies and

becoming more cooperative, communicative, permeable and transparent. They will replacetraditional supply base structure. A small group of suppliers will be responsible for controlling network assets, setting priorities and motivating other suppliers in the network.The small group of suppliers will be at the hub, located together physically. They will beconnected electronically with internet, extranets, and intranets to suppliers who are outsidethe hub. At the hub the outsourced work will be divided on the individual supplier'scapabilities and knowledge. The hub will have all business information and skills associated

with the buyer's needs. The success of hub performance will depend on how it translates



company objectives through successive supplier tiers, thereby motivating every supplier,every tier contributing to the shared vision providing a platform for win-win outcome.

strengthening the supply chain

Documents