Supply chain management is the management of the flow of goods and services and includes all processes that transform raw materials into final products. It involves the active streamlining of a business's supply-side activities to maximize customer value and gain a competitive advantage in the marketplace. SCM represents an effort by suppliers to develop and implement supply chains that are as efficient and economical as possible. Supply chains cover everything from production to product development to the information systems needed to direct these undertakings. A supply chain is a network of functional organizations that through their activities perform the logistics functions. These functions include procurement of materials transformation of materials and inter- mediate products into intermediate and finished products, and distribution of finished products to the customers. Supply chains exist both in manufacturing and service organizations Supply chains can differ greatly in complexity from industry to industry and from individual company to company, Because of the widespread prevalence and variety of supply chains, many alternative definitions of a supply chain exist.
The term supply chain is somewhat of a misnomer because a supply chain is often not a single or simple chain but a complex network with many divergent and convergent flows. Because of the current focus of companies on their core competencies, there are usually many different organizations active in a supply chain. If all these organizations belong to the same (multinational) corporation, information flows usually are more comprehensive and engineering methodology based decision-making is easier. However, the fundamental nature of the supply chain does not change with the number of corporations involved. In other words, there is no difference in the definition of a supply chain depending on the fact if one or more corporations are responsible for executing the logistics functions For an organization to become and remain part of a supply chain requires this to be a beneficial relationship or win-win situation in the long run for both this organization and for the other organizations in the supply chain.
Supply chain management (SCM) is the broad
range of activities required to plan, control and execute a product's flow, from
acquiring raw materials and production through distribution to the final customer,
in the most streamlined and cost-effective way possible. SCM encompasses the integrated
planning and execution of processes required to optimize the flow of materials,
information and financial capital in the areas that broadly include demand planning,
sourcing, production, inventory management and storage, transportation or logistics
and return for excess or defective products. Both business strategy and specialized
software are used in these endeavors to create a competitive advantage. Supply chain
management is an expansive, complex undertaking that relies on each partner from
suppliers to manufacturers and beyond to run well. Because of this, effective supply
chain management also requires change management, collaboration and risk management
to create alignment and communication between all the entities. In addition, supply
chain sustainability which covers environmental, social and legal issues, in addition
to sustainable procurement and the closely related concept of corporate social responsibility
which evaluates a company's effect on the environment and social well-being are
areas of major concern for today's companies.
Supply-chain
management (SCM), the management of the flow of goods and services,
involves the movement and storage of raw materials, of work-in-process
inventory, and of finished goods from point of origin to point of consumption.
Interconnected or interlinked networks, channels and node businesses combine
in the provision of products and services required by end
customers in a supply chain. Supply-chain management has been
defined as the "design, planning, execution, control, and monitoring
of supply-chain activities with the objective of creating net value, building a
competitive infrastructure, leveraging worldwide logistics, synchronizing
supply with demand and measuring performance globally." SCM practice draws
heavily from the areas of industrial engineering, systems engineering, operations
management, logistics, procurement, information technology, and
marketing and strives for an integrated approach. Marketing channels play
an important role in supply-chain management. Current research in
supply-chain management is concerned with topics related to sustainability and risk
management, among others. Some suggest that the “people dimension” of SCM,
ethical issues, internal integration, transparency/visibility, and human
capital/talent management are topics that have, so far, been underrepresented
on the research agenda.
How Supply Chain Management Works
Typically, SCM attempts to centrally
control or link the production, shipment, and distribution of a product. By
managing the supply chain, companies are able to cut excess costs and deliver
products to the consumer faster. This is done by keeping tighter control of
internal inventories, internal production, distribution, sales, and the inventories of
company vendors. SCM is based on the idea that nearly every product that comes
to market results from the efforts of various organizations that make up a
supply chain. Although supply chains have existed for ages, most companies have
only recently paid attention to them as a value-add to their operations.
In SCM, the supply chain manager coordinates
the logistics of all aspects of the supply chain which consists
of five parts: 1) the plan or strategy, 2) the source (of raw materials or
services), 3) manufacturing (focused on productivity and efficiency), 4) delivery
and logistics, and 5) the return system (for defective or unwanted products).
The supply chain manager tries to minimize shortages and keep costs down. The
job is not only about logistics and purchasing inventory. According to Salary.com,
supply chain managers, “make recommendations to improve productivity, quality,
and efficiency of operations.” Improvements in productivity and efficiency go
straight to the bottom line of a company and have a real and lasting impact.
Good supply chain management keeps companies out of the headlines and away from
expensive recalls and lawsuits.
Supply
Chains
A supply chain is the
connected network of individuals, organizations, resources, activities, and
technologies involved in the manufacture and sale of a product or service. A
supply chain starts with the delivery of raw materials from a supplier to a
manufacturer and ends with the delivery of the finished product or service to
the end consumer. SCM oversees each touch point of a company's product or
service, from initial creation to the final sale. With so many places along the
supply chain that can add value through efficiencies or lose value through
increased expenses, proper SCM can increase revenues, decrease costs, and
impact a company's bottom line.
Elementary Perception of Supply Chain
A supply chain is a network of retailers,
distributors, transporters, storage facilities and suppliers that participate in
the production, delivery, and sale of a product to the consumer. It is typically
made up of multiple companies who coordinate activities to set themselves apart
from the competition.
There are three key parts to a supply chain:
- Supply focuses on the raw materials
supplied to manufacturing, including how, when, and from what location.
- Manufacturing focuses on converting
these raw materials into finished products.
- Distribution focuses on ensuring these
products reach the consumers through an organized network of distributors,
warehouses, and retailers.
While often applied to manufacturing and
consumer products, a supply chain can also be used to show how several processes
supply one another. The definition in this sense can apply to Internet technology,
finance, and many other industries. A supply chain strategy defines how the network
should operate in order to compete in the market, evaluating the benefits and costs
relating to the operation. While a business strategy focuses on the overall direction
a company wishes to pursue, supply chain strategy focuses on the actual operations
of the organization and the path that will be used to meet a specific goal.
Another related term is supply chain management
(SCM), which is the oversight of materials, information, and finances as they are
distributed from supplier to consumer. The supply chain also includes all the necessary
stops between the supplier and the consumer, so its management involves coordinating
this flow of materials within a company and to the end consumer.
The SCM can be divided into three main flows:
- The Product flow includes moving goods
from supplier to consumer, as well as dealing with customer service needs.
- The Information flow includes order
information and delivery status.
- The Financial flow includes payment
schedules, credit terms, and additional arrangements.
The supply chain operations reference model
(SCOR) is a management tool used to address, improve, and communicate the SCM decisions
within a company and with suppliers and customers of a company. The model describes
the business processes required to satisfy a customer’s demands. It also helps to
explain the processes along the entire supply chain and provides a basis for how
to improve those processes.
The SCOR model was developed by the supply
chain council with the assistance of 70 of the world’s leading manufacturing companies.
It has been described as the “most promising model for supply chain strategic decision
making. The model integrates business concepts of process re-engineering, benchmarking,
and measurement into its framework. This framework focuses on five areas of the
supply chain: plan, source, make, deliver, and return. These areas repeat again
and again along the supply chain. The supply chain council says this process spans
from “the supplier’s supplier to the customer’s customer.”
This is the strategic portion of SCM. Companies
need a strategy for managing all the resources that go toward meeting customer demand
for their product or service. A big piece of SCM planning is developing a set of
metrics to monitor the supply chain so that it is efficient, costs less and delivers
high quality and value to customers.
Supply chain planning (SCP) is the component
of SCM involved with predicting future requirements to balance supply and demand.
The SCM is sometimes broken down into the
stages of planning, execution and shipping. Supply chain planning and supply chain
execution (SCE) is the two main categories of SCM software. The SCP products may
include supply chain modeling, and design, distribution and supply network planning.
SCE software applications track the physical status of goods, the management of
materials, and financial information involving all parties.
Demand and supply planning and management
are included in this first step. Elements include balancing resources with requirements
and determining communication along the entire chain. The plan also includes determining
business rules to improve and measure supply chain efficiency. These business rules
span inventory, transportation, assets, and regulatory compliance, among others.
The plan also aligns the supply chain plan with the financial plan of the company.
This step describes sourcing infrastructure
and material acquisition. It describes how to manage inventory, the supplier network,
supplier agreements, and supplier performance. It discusses how to handle supplier
payments and when to receive, verify, and transfer product.
The companies must choose suppliers to deliver
the goods and services they need to create their product. Therefore, supply chain
managers must develop a set of pricing, delivery and payment processes with suppliers
and create metrics for monitoring and improving the relationships. And then, SCM
managers can put together processes for managing their goods and services inventory,
including receiving and verifying shipments, transferring them to the manufacturing
facilities and authorizing supplier payments.
Manufacturing and production are the emphasis
of this step. Is the manufacturing process make-to-order, make-to-stock, or engineer-to-order?
The make step includes, production activities, packaging, staging product, and releasing.
It also includes managing the production network, equipment and facilities, and
transportation.
Delivery includes order management, warehousing,
and transportation. It also includes receiving orders from customers and invoicing
them once product has been received. This step involves management of finished inventories,
assets, transportation, product life cycles, and importing and exporting requirements.
This can be a problematic part of the supply
chain for many companies. Supply chain planners have to create a responsive and
flexible network for receiving defective and excess products back from their customers
and supporting customers who have problems with delivered products.
Companies must be prepared to handle the
return of containers, packaging, or defective product. The return involves the management
of business rules, return inventory, assets, transportation, and regulatory requirements.
Management must have humans, communication, and a positive enterprise endeavor.
Plans, measurements, motivational psychological tools, goals, and economic measures
(profit, etc.) may or may not be necessary components for there to be management.
The SCOR process can go into many levels
of process detail to help a company analyze its supply chain. It gives companies
an idea of how advanced its supply chain is. The process helps companies understand
how these steps repeat over and over again between suppliers, the company, and customers.
Each step is a link in the supply chain that is critical in getting a product successfully
along each level. The SCOR model has proven to benefit companies that use it to
identify supply chain problems. The model enables full leverage of capital investment,
creation of a supply chain road map, alignment of business functions, and an average
of two to six times return on investment.
The terms supply chain management and logistics are often confused or used synonymously. However, logistics
is a component of supply chain management. It focuses on moving a product or material
in the most efficient way so it arrives at the right place at the right time. It
manages activities such as packaging, transportation, distribution, warehousing
and delivery.
In contrast, SCM involves a more expansive
range of activities, such as strategic sourcing of raw materials, procuring the
best prices on goods and materials, and coordinating supply chain visibility efforts
across the supply chain network of partners, to name just a few.
Supply chain management creates efficiencies,
raises profits, lowers costs, and boosts collaboration and more. SCM enables companies
to better manage demand, carry the right amount of inventory, deal with disruptions,
keep costs to a minimum and meet customer demand in the most effective way possible.
These SCM benefits are achieved through the appropriate strategies and software
to help manage the growing complexity of today's supply chains.
Supply Chain Complexity
The most basic version of a supply chain
includes a company, its suppliers and the customers of that company. The chain could
look like this: raw material producer, manufacturer, distributor, retailer and retail
customer.
A more complex, or extended, supply chain
will likely include a number of suppliers and suppliers' suppliers, a number of
customers and customers' customers or final customers and all the organizations
that offer the services required to effectively get products to customers, including
third-party logistics providers, financial organizations, supply chain software
vendors and marketing research providers. These entities also use services from
other providers.
The totality of these organizations, which
evokes the metaphor of an interrelated web rather than a linear chain, gives insight
into why supply chain management is so complex. That complexity also hints at the
types of issues that can arise, from demand management issues, such as a release
of a new iPhone that chokes demand for old iPhone cases; to natural supply chain
disruptions, such as the halt of transportation in the U.S. in 2015 due to extreme
winter weather, or California's drought and its effect on crops; to political upheaval,
such as the strikes in India that throttled movement at its largest container port.
The Role of Supply Chain Management Software
Technology is critical in managing today's
supply chains, and ERP vendors offer modules that focus on relevant areas. There
are also business software vendors that focus specifically on SCM. A few important
areas to note include:
- Supply chain planning software for
activities such as demand management.
- Supply chain execution software for
activities such as day-to-day manufacturing operations.
- Supply chain visibility software for
tasks such as spotting and anticipating risks and proactively managing them.
- Inventory management software for tasks
such as tracking and optimizing inventory levels.
- Logistics management software and transportation
management systems for activities such as managing the transport of goods,
especially across global supply chains.
- Warehouse management systems for activities
related to warehouse operations.
The increasingly global nature of today's
supply chains and the rise of e-commerce, with its focus on nearly instant small
deliveries straight to consumers, are posing challenges, particularly in the area
of logistics and demand planning. A number of strategies such as lean and newer
approaches such as demand-driven material requirements planning may prove helpful.
Technology especially big data, predictive
analytics, internet of things (IoT) technology, supply chain analytics, robotics
and autonomous vehicles is also being used to help solve modern challenges, including
in the areas of supply chain risk and disruption and supply chain sustainability.
As just two examples, IoT can help with
transparency and traceability to help boost food quality and safety by using sensors
to monitor the temperature of perishable food while it's in transit. And analytics
can help determine where to put smart lockers in densely populated areas to cut
the number of single-item deliveries and lower greenhouse gas emissions.
Effective supply chains give businesses
a competitive advantage in the marketplace and help mitigate risks associated with
acquiring raw materials and delivering products or services. By implementing supply
chain management systems, businesses are able reduce waste, overhead costs and shipping
delays in a scientific way. The benefits of this systematic approach impacts areas
ranging from product quality to order turn-around times.
Many manufacturers in the U.S. have relocated
their operations to countries such as China, India and Russia in an effort to cut
production costs. This has caused experienced domestic personnel to opt for other
job assignments. As a result, product quality within the supply chain has become
a pressing issue. Defects and rework attributable to poor systems are raising the
costs of doing business. One of the advantages of supply chain management is that
it incorporates quality techniques, such as quality management systems, to improve
operations.
In almost every type of business, there
is variability in customer spending. This requires companies to manage their inventories
in a way that minimizes holding costs while providing enough flexibility to meet
customer demands. If inventory levels fall too low, businesses may have to pay overtime
to produce products or lose out on revenue by making customers wait or shop somewhere
else. Supply chain management systems typically include inventory buffer levels
that are pre-determined with careful analysis of historical trends.
As e-commerce continues to grow globally,
buyers have more options to order products than ever before. Shipping options need
to keep pace with the demands of the marketplace, which requires companies to readjust
their supply chains to meet customers’ preferences. Whether it is small parcel shipping
or larger bulk orders, shipping in a quick and accurate fashion is key for business
success. Supply chain management systems help companies determine the optimal ways
to ship while reducing costs to the lowest possible level.
Managing risk is a key responsibility for
business leaders, and supply chain management systems allow for the identification
of critical risk factors in an organization or with their suppliers. Whether it
is product quality, compliance with applicable laws or operational safety, management
must mitigate risk in an effective manner. Supply chain methodologies assist management
with organizing risks and ascertaining the potential for internal or external failures.
Without effective supply chain management systems, many companies are exposed to
legal risks and liabilities.
Operations and Supply Chain Management
The Supply Chain and Operations Management
(SCOM) major examines the integration of all key business processes from original
suppliers through end users and provides products, services, and information that
can add value for customers and stakeholders. The supply chain portion of the curriculum
examines the supply, storage, movement of materials, and finished goods within an
organization while the operations function relates to the efficient and most effective
use of personnel, machines, and other resources.
Operations and SCM have concepts related
to the design, planning, control, and improvement of manufacturing and service operations.
One will be introduced to an innovative blend of analytical and empirical approaches
to important problems facing the private and public sectors, including: project
management, service delivery systems, product development, business analytics, inventory
and supply chain management, among others
A supply chain is the collection of steps
that a company takes to transform raw components into final products and deliver
them to customers. The SCM is the process that is used by a company to ensure that
its supply chain is efficient and cost effective. This typically is comprised of
five stages: planning, development, manufacturing, logistics and returns.
During the planning stage, a strategy must
be developed to address how a given product will meet the needs of the customers.
A significant portion of this strategy often focuses on planning a profitable supply
chain. The development stage involves building a strong relationship with suppliers
of the raw materials that are needed in making the product the company delivers.
This phase involves not only identifying reliable suppliers but also creating methods
for shipping, delivery and payment.
In the next stage, the product is manufactured,
tested, packaged and scheduled for delivery. Then, at the logistics phase, customer
orders are received, and delivery of the goods is planned. The final stage of SCM
is when customers can return defective products. The company also must address customer
questions during this stage.
Supply Chain Management Flows
One can be divided into three main flows:
- The product flow includes the movement
of goods from a supplier to a customer, as well as any customer returns or
service needs.
- The information flow involves transmitting
orders and updating the status of delivery.
- The financial flow consists of credit
terms, payment schedules, and consignment and title ownership arrangements.
Elements of the Supply Chain
A simple supply chain is made up of several
elements that are linked by the movement of products along it. The supply chain
starts and ends with the customer.
- Customer: The customer starts the chain of
events when they decide to purchase a product that has been offered for sale
by a company. The customer contacts the sales department of the company, which
enters the sales order for a specific quantity to be delivered on a specific
date. If the product has to be manufactured, the sales order will include a
requirement that needs to be fulfilled by the production facility.
- Planning: The requirement triggered by the
customer’s sales order will be combined with other orders. The planning department
will create a production plan to produce the products to fulfill the customer’s
orders. To manufacture the products the company will then have to purchase
the raw materials needed.
- Purchasing: The purchasing department receives
a list of raw materials and services required by the production department
to complete the customer’s orders. The purchasing department sends purchase
orders to selected suppliers to deliver the necessary raw materials to the
manufacturing site on the required date.
- Inventory: The raw materials are received from
the suppliers, checked for quality and accuracy and moved into the warehouse.
The supplier will then send an invoice to the company for the items they delivered.
The raw materials are stored until they are required by the production department.
- Production: Based on a production plan, the raw
materials are moved inventory to the production area. The finished products
ordered by the customer are manufactured using the raw materials purchased
from suppliers. After the items have been completed and tested, they are stored
back in the warehouse prior to delivery to the customer.
- Transportation: When the finished product arrives
in the warehouse, the shipping department determines the most efficient method
to ship the products so that they are delivered on or before the date specified
by the customer. When the goods are received by the customer, the company will
send an invoice for the delivered products.
The SCM is an essential element to operational
efficiency. SCM can be applied to customer satisfaction and company success, as
well as within societal settings, including medical missions; disaster relief operations
and other kinds of emergencies; cultural evolution; and it can help improve quality
of life. Because of the vital role SCM plays within organizations, employers seek
employees with an abundance of SCM skills and knowledge. The SCM is critical to
business operations and success for the following reasons:
Basically, the world is one big supply chain.
The SCM touches major issues, including the rapid growth of multinational corporations
and strategic partnerships; global expansion and sourcing; fluctuating gas prices
and environmental concerns, each of these issues dramatically affects corporate
strategy and bottom line. Because of these emerging trends, SCM is the most critical
business discipline in the world today.
The SCM is necessary to the foundation and
infrastructure within societies. SCM within a well-functioning society creates jobs,
decreases pollution, decreases energy use and increases the standard of living.
Clearly, the impact that SCM has on business
is significant and exponential. Two of the main ways SCM affects business include:
The SCM impacts customer service by making
sure the right product assortment and quantity are delivered in a timely fashion.
Additionally, those products must be available in the location that customers expect.
Customers should also receive quality after-sale customer support.
Improves Bottom Line
The SCM has a tremendous impact on the bottom
line. Firms value supply chain managers because they decrease the use of large fixed
assets such as plants, warehouses and transportation vehicles in the supply chain.
Also, cash flow is increased because if delivery of the product can be expedited,
profits will also be received quickly.
Supply chain management helps streamline
everything from day-to-day product flows to unexpected natural disasters. With the
tools and techniques that SCM offers, one will has the ability to properly diagnose
problems, work around disruptions and determine how to efficiently move products
to those in a crisis situation.
Functions of SCM
The process of SCM can be divided into three
distinct flows; product flow, information flow, and finances flow.
- Product flow includes the movement
of goods from a supplier to the customer.
- The flow of information related to
the status of product delivery is referred to as information flow.
- The finances flow involves the payment
schedule, credit terms, and title ownership arrangements.
Strategic activities that are a part of
the SCM involve strategic network optimization, the establishment of partnerships
with suppliers, distributors and customers, planning for the integration of existing
products into the supply chain, and the design of a business strategy. Taking inventory
and production decisions, devising transportation strategies, benchmarking of operations
and focusing on customer demand are some of the other activities involved in the
supply chain management. Planning of daily production and distribution, planning
and scheduling of inbound and outbound operations are some of the important operational
activities involved in supply chain management.
An important component in supply chain design
and analysis is the establishment of appropriate performance measures. A performance
measure, or a set of performance measures, is used to determine the efficiency and/or
effectiveness of an existing system, or to compare competing alternative systems.
Performance measures are also used to design proposed systems, by determining the
values of the decision variables that yield the most desirable level(s) of performance.
Available literature identifies a number of performance measures as important in
the evaluation of supply chain effectiveness and efficiency.
Qualitative Performance Measures
Qualitative performance measures are those
measures for which there is no single direct numerical measurement, although some
aspects of them may be quantified. These objectives have been identified as important,
but are not used in the models reviewed here:
- Customer Satisfaction: The degree to
which customers are satisfied with the product and/or service received, and
may apply to internal customers or external customers. Customer satisfaction
is comprised of three elements.
o
Pre-Transaction Satisfaction: satisfaction
associated with service elements occurring prior to product purchase.
o
Transaction Satisfaction: satisfaction associated
with service elements directly involved in the physical distribution of products.
o
Post-Transaction Satisfaction: satisfaction
associated with support provided for products while in use.
- Flexibility: The degree to which the
supply chain can respond to random fluctuations in the demand pattern.
- Information and Material Flow Integration:
The extent to which all functions within the supply chain communicate information
and transport materials.
- Effective Risk Management: All of the
relationships within the supply chain contain inherent risk. Effective risk
management describes the degree to which the effects of these risks is minimized.
- Supplier Performance: With what consistency
suppliers deliver raw materials to production facilities on time and in good
condition.
Quantitative Performance Measures
Quantitative performance measures are those
measures that may be directly described numerically. Quantitative supply chain performance
measures may be categorized by:
- objectives that are based directly
on cost or profit and
- Objectives that are based on some measure
of customer responsiveness.
Measures Based on Cost
- Cost Minimization: The most widely
used objective. Cost is typically minimized for an entire supply chain (total
cost), or is minimized for particular business units or stages.
- Sales Maximization: Maximize the amount
of sales dollars or units sold.
- Profit Maximization: Maximize revenues
less costs.
- Inventory Investment Minimization:
Minimize the amount of inventory costs (including product costs and holding
costs)
- Return on Investment Maximization:
Maximize the ratio of net profit to capital that was employed to produce that
profit.
- Fill Rate Maximization: Maximize the
fraction of customer orders filled on time.
- Product Lateness Minimization: Minimize
the amount of time between the promised product delivery date and the actual
product delivery date.
- Customer Response Time Minimization:
Minimize the amount of time required from the time an order is placed until
the time the order is received by the customer.
- Usually refers to external customers
only.
- Lead Time Minimization: Minimize the
amount of time required from the time a product has begun its manufacture until
the time it is completely processed.
- Function Duplication Minimization:
Minimize the number of business functions that are provided by more than one
business entity.
Evolution from Manufacturing to Operations Management
For over two century’s operations and production
management has been recognized as an important factor in a country’s economic growth.
The traditional view of manufacturing management
began in eighteenth century when Adam Smith recognized the economic benefits of
specialization of labor. He recommended breaking of jobs down into subtasks and
recognizes workers to specialized tasks in which they would become highly skilled
and efficient.
In the early twentieth century, F.W. Taylor
implemented Smith’s theories and development of scientific management. From then
till 1930, many techniques were developed prevailing the traditional view.
Systems for production have existed since
ancient times. The production of goods for sale, at least in the modern sense, and
the modern factory system had their roots in the Industrial Revolution.
The Industrial Revolution began in the 1770s
in England and spread to the rest of Europe and to the United States during the
19th century. Prior to that time, goods were produced in small shops by craftsmen
and their apprentices. Under that system, it was common for one person to be responsible
for making a product, such as a horse-drawn wagon or a piece of furniture, from
start to finish. Only simple tools were available; the machines in use today had
not been invented.
Then, a number of innovations in the 18th
century changed the face of production forever by substituting machine power for
human power. Perhaps the most significant of these was the steam engine, because
it provided a source of power to operate machines in factories. Ample supplies of
coal and iron ore provided materials for generating power and making machinery.
The new machines, made of iron, were much stronger and more durable than the simple
wooden machines they replaced.
In the earliest days of manufacturing, goods
were produced using craft production: highly skilled workers using simple, flexible
tools produced goods according to customer specifications.
Craft production had major shortcomings.
Because products were made by skilled craftsmen who custom fitted parts, production
was slow and costly. And when parts failed, the replacements also had to be custom
made, which was also slow and costly. Another shortcoming was that production costs
did not decrease as volume increased; there were no economies of scale, which would
have provided a major incentive for companies to expand. Instead, many small companies
emerged, each with its own set of standards.
A major change occurred that gave the Industrial
Revolution a boost: the development of standard gauging systems. This greatly reduced
the need for custom-made goods. Factories began to spring up and grow rapidly, providing
jobs for countless people who were attracted in large numbers from rural areas.
Despite the major changes that were taking
place, management theory and practice had not progressed much from early days. What
was needed was an enlightened and more systematic approach to management.
Scientific Management
The scientific management era brought widespread
changes to the management of factories. The movement was spearheaded by the efficiency
engineer and inventor Frederick Winslow Taylor, who is often referred to as the
father of scientific management. Taylor believed in a “science of management” based
on observation, measurement, analysis and improvement of work methods, and economic
incentives. He studied work methods in great detail to identify the best method
for doing each job. Taylor also believed that management should be responsible for
planning, carefully selecting and training workers, finding the best way to perform
each job, achieving cooperation between management and workers, and separating management
activities from work activities.
Taylor’s methods emphasized maximizing output.
They were not always popular with workers, who sometimes thought the methods were
used to unfairly increase output without a corresponding increase in compensation.
Certainly some companies did abuse workers in their quest for efficiency. Eventually,
the public outcry reached the halls of Congress, and hearings were held on the matter.
Taylor himself was called to testify in 1911, the same year in which his classic
book, The Principles of Scientific Management, was published. The publicity from
those hearings actually helped scientific management principles to achieve wide
acceptance in industry.
Transportation, logistics, supply chain
management, materials handling, and inventory control continue to evolve. This evolution
has created cross-fertilization among these functions, driven by factors both conceptual
matching demand to supply and technological an enhanced ability to communicate and
collaborate.
This cross-fertilization has also blurred
the definition of some terms.
For example,
is logistics the same thing as supply chain management?
People working in different functional areas
of logistics often define supply chain management (SCM) as it relates to what they
do. A recent survey of Inbound Logistics readers supports this. Some respondents
say SCM is the same old thing with a new handle, while others note it is more encompassing
than logistics.
Many logistics veterans believe one has
progressed from transportation to physical distribution to logistics to supply chain
management. By contrast, purchasing managers have evolved their thinking from purchasing
management to procurement and now to supply management (SM). Some couch supply management
as SCM. Others do not want to give up the term purchasing, and now refer to this
functional area as purchasing and supply management.
Manufacturing professionals hold yet another
perception of SCM: as the task of allocating and committing resources for obtaining
necessary supplies and capacity, handling, and positioning products to meet customer
demands. The material requirements planning (MRP) and enterprise resource planning
(ERP) systems now address resource commitments that go beyond manufacturing to include
other enterprise and supplier resources, ultimately directed to satisfying customer
demands with limited and efficient use of resources.
Other departments in the company also wonder
about SCM and its orientation. In marketing as well as the broader functionality
that includes business and consumer research, promotions, and sales SCM addresses
the needs and market potential of not only immediate customers and consumers who
buy products and services, but also end users. Naturally, market research analyses
of end product usage are extremely important.
Many professionals perceive SCM in terms
of a conceptual flow model, with goods flowing from the beginning source of raw
materials to their end use. Within this context, my peers and I define SCM as "the
integration of processes composed of materials, services, information, and cash
within a company and in a network of companies or organizations that manufacture
and deliver products and services from initial sources to end users."
By its nature, SCM encapsulates inter-enterprise,
cross-functional processes that target end users of products and services. It requires
integrated teams who are open and trustful in their value engineering and activities
analysis.
Initially, logistics practitioners focus
on supply chain applications that interface with immediate customers, suppliers,
and intermediaries. Economic functional "activity" tradeoffs are analyzed
in terms of who best can perform functions that are for the good of all trading
partners. The long-term vision is inter-enterprise teams working seamlessly across
all functions and activities to meet end user needs.
Supply chain management directly impacts
product quality and the overall profitability of a company. For these reasons, quality
control in the supply chain is critical for maintaining a competitive edge in the
marketplace and reducing operating costs. Without quality control, waste becomes
prevalent beyond a tolerable amount. To help improve customer satisfaction, greater
emphasis is given to the aspect of quality in the supply chain. Poor quality products,
an unsafe work environment, or failure to comply with regulations ranging from product
safety to social responsibility, can cause business disruption, financial loss,
costly lawsuits, and long-lasting damage to the brand and corporate image of organizations
that are dependent upon supply chain vendor performance. In the extreme, a brand,
or even a company's reputation, can be damaged irreparably.
The crisis-catalyst may originate during
any step in the supply chain process, from design to raw materials, to production,
or transportation. Most often the issue centers on substandard materials or how
well components or finished goods were designed and produced. Recently, company
reputations have been damaged by substandard social responsibility practices of
suppliers, even when the product quality was acceptable.
The quality management policies and practices
of suppliers must be aligned with the standards of the company branding or selling
the product. These quality management practices should also be aligned with accepted
international standards. This is because failures in the supply chain are passed
down the line to the firms ultimately marketing the products. Such failures can
result in consumer dissatisfaction, regulatory noncompliance and, in some cases,
public criticism of the corporate management practices.
There have been numerous, highly publicized
cases in recent years from tainted toothpaste to lead paint in toys, to flawed labor
practices of manufacturers. Companies are increasingly setting standards of quality
management systems and worker treatment for their suppliers to avoid these kinds
of problems. Vendor quality management standards are increasingly becoming a contractual
condition for maintaining a supplier relationship.
Meeting stricter client and international
quality management standards requires some vendors to invest in improving practices,
policies, and management systems. Many adopt international standards, especially
those of the International Organization for Standardization (ISO), the American
National Standards Institute (ANSI), and the American Society for Quality (ASQ)
to demonstrate acceptable practices. Additional security standards also may have
to be adhered to by transportation, shipping, and logistics firms in the supply
chain. While improvements in performance require investment, there are compelling
benefits for suppliers to move forward. Adherence to quality management standards
differentiates suppliers from competitors who do not comply and strengthens the
relationship between a company and the vendor.
Companies should periodically validate vendor
adherence to the required quality management standards by conducting supply chain
vendor audits. Audit protocols serve an additional critical role, namely that of
identifying and qualifying new vendors. The validation process involves on-site
vendor audits that compare actual vs. required policy and practice standards. These
analyses enable identification of critical performance gaps and opportunities for
improvement. Constant improvement in quality management helps to reduce the risk
of costly and embarrassing failures.
If raw materials are flawed, it can make
entire production lines inefficient and increase defect rates in finished goods
inventory. Also, inferior materials may require extra machining or refining, which
adds to employees’ workloads and total manufacturing costs. Vendors and the materials
they provide are often audited by supply chain staff members to ensure raw materials
meet specifications. By controlling the quality of production inputs, supply chain
managers are protecting the integrity of their company’s operations.
External Failures
When supply chain quality control is poor,
products are more likely to break or wear out before their warranty period expires.
There are a large number of failures that can occur once a product leaves a manufacturing
facility, depending on the nature of the business. Customers who are forced to return
items may lose respect for the company from which they purchased the product. Quality
control in the supply chain ultimately helps to protect a company’s reputation.
The better the control over supplier inputs, the less risk of returns and potentially
hazardous product failures.
Companies that experience large quantities
of defects and other forms of waste produced during manufacturing, often implement
manual inspections to ensure product quality. Inspections raise operating costs
and are unnecessary if quality controls are functioning properly. Quality control
procedures and audits of supplier relationships are critical for avoiding continual
inspections on the production line. Otherwise, labor hours will be lost inspecting
materials and finished-goods inventory that could be allocated to value-added activities.
Toxic Materials
Hazardous materials are used throughout
the world for various purposes in manufacturing, especially in defense-related industries.
Quality control helps to protect employees and other stakeholders from being exposed
to the harmful side-effects of toxic materials. The U.S. Department of Transportation
prescribes important rules for the transport of hazardous substances. Non-compliance
can lead to penalties or fines, which makes quality control imperative. The more
efficiently and effectively toxic materials are handled in the supply chain, the
better for all internal and external stakeholders.
Although there are several definitions of
quality, simply put, quality can be defined as meeting or exceeding customer expectations.
According to the American Society for Quality, the definition of quality is "A
subjective term for which each person or sector has its own definition.
In technical usage, quality can have two
meanings:
- The characteristics of a product or
service that bear on its ability to satisfy stated or implied needs; a product
or service free of deficiencies.
- According to Joseph Juran, quality
means “fitness for use;” according to Philip Crosby, it means “conformance
to requirements.” Quality tools exist and include, but are not limited to:
cause analysis (cause-and-effect diagrams, pareto charts, and scatter diagram),
evaluation and decision-making tools (decision matrix and multi-voting), process
analysis (flowchart, failure modes and effects analysis, mistake-proofing,
and spaghetti diagrams), data collection and analysis (box and whisker plot,
check sheet, control chart, design of experiments, histogram, scatter diagram,
stratification, and surveys), idea creation (affinity diagram, benchmarking,
brainstorming, and nominal group technique), an improvement project (Gantt
chart and Plan-Do-Study-Act continuous improvement model), and management tools
(relations diagram, tree diagram, matrix diagram, L-shaped matrix, arrow diagram,
and process decision program chart).
Total quality management is a set of quality
practices that seek to continuously improve quality in processes.
There are some key principles of total quality
include:
- Define quality in terms of customers
and their requirements.
- Pursue quality at the source.
- Stress objective rather than subjective
analysis.
- Emphasize prevention rather than detection
of defects.
- Focus on process rather than output.
- Strive for zero defects.
- Establish continuous improvement as
a way of life.
- Make quality everyone's responsibility.
Customers and suppliers must be integrated
into the product development process in order to reduce the time to market. As product
life cycles shorten, the appropriate products must be developed and successfully
launched with ever-shorter time schedules in order for firms to remain competitive.
An internal customer is a client who purchases
products that are manufactured by the employer. The term can be applied in a number
of situations, including company structures in which one department effectively
purchases products from another as part of the manufacturing chain. At other times,
an internal customer is simply an employee who purchased a finished good or service
directly from the employer, sometimes at a price that is discounted from the pricing
that is charged to other types of consumers.
The concept of an internal customer is somewhat
different from that of an external customer. External customers are buyers who are
not part of the company organization. For instance, if ABC Company chooses to buy
widgets from XYZ Company, and the two companies are not subsidiaries of a larger
business operation, the purchase is said to be external. Should ABC and XYZ actually
be owned by JKL company and operate as subsidiaries to that parent organization,
then the purchase would be considered internal.
Many different types of companies enjoy
a flow of business volume from internal customers. Retail organizations often provide
employees with opportunities to purchase goods at discounted prices, a move that
prompts those employees to meet their needs by making purchases with the employer
rather than buying from a competitor. In like manner, agents and administrative
staff who work with insurance agencies may choose to take out policies with their
employer rather than other agencies. Even with individuals who work with communication
companies may be offered services such as DSL or audio conference services at a
discount not readily available through other vendors.
One of the challenges for any business is
to find ways to include internal customer care in the overall client strategy. Since
the focus of many customer service and support operations is directed outward, the
needs and concerns of a customer who is part of the organization can be overlooked.
This can be counter-productive on a number of levels, sometimes to the point of
losing business and having an adverse effect on how the employee perceives his or
her contribution to the success of the company. Choosing to include components that
provide incentives to each internal customer as well as afford them the opportunity
to receive assistance when and as needed will often not only increase the desire
to buy from within, but will also have the benefit of motivating those employees
to be as productive on the job as possible.
Total quality management is the continuous
process of reducing or eliminating errors in manufacturing, streamlining supply
chain management, improving the customer experience and ensuring that employees
are up-to-speed with their training. Total quality management aims to hold all parties
involved in the production process as accountable for the overall quality of the
final product or service.
Lean management is an important part of
lean thinking. As one implement lean in any organization the traditional way of
managing does not guarantee right focus or help sustaining lean initiatives. If
no action is taken to change the way one manage process, people and products one
is likely to see failure of lean implementations. Many people on lean journey fail
to apply lean in a holistic manner. Usually they start with applying tools without
proper guidance and leadership the company cannot move to the next level. Thus a
management system that specifically meets the needs of a transforming organization
is very much essential.
One of the main characteristic of traditional
management is that it is resulted oriented. Is it good or bad to be result oriented?
It is not bad to have goals but once people stop caring about how to get there rather
and only focus on end result that is when one has a problem. This leads malpractices
like expediting orders, over production, and excess inventory. One must be wondering
how management leads to these problems. If one is in any manufacturing organization
he/she will be able to relate to this problem better.
Supply Chain System: Impact
The SCM typically involves supervising the
transfer of products and goods, such as from a supplier, then to a manufacturer,
a wholesaler, a retailer and finally to the consumer. Information technology (IT)
refers to the use of computer-based programs to store and manipulate information.
IT advances directly can correlate to the SCM improvements, such as through the
rise of effective virtual supply chains.
One significant impact of IT relates to
the quality of information available within the supply chain. Companies can develop
Web-based programs or intranets to distribute information, such as about new products,
delays or changes. IT allows everyone in the supply chain to be integrated and thus,
stay informed, which when used appropriately can translate into management efficiency
and reduced risks.
Impact of Global Competition
Business today is in a global environment.
This environment forces companies, regardless of location or primary market base,
to consider the rest of the world in their competitive strategy analysis. Firms
cannot isolate themselves from or ignore external factors such as economic trends,
competitive situations or technology innovation in other countries, if some of their
competitors are competing or are located in those countries. Companies are going
truly global with Supply-chain Management. A company can develop a product in the
United States, manufacture in developing country and sell in Europe. Companies have
changed the ways in which they manage their operations and logistics activities.
Changes in trade, the spread and modernization of transport infrastructures and
the intensification of competition have elevated the importance of flow management
to new levels.
The last two decades have seen the evolution
of the global manufacturing environment. Majority of the manufacturers have global
presence through exports, strategic alliances, joint ventures or as a part of a
committed strategy to sell and produce in foreign markets.
There is tremendous growth potential in
the foreign developing markets which have resulted in intensified foreign competition
in local markets which forces the small and medium-sized companies to upgrade their
operations and even consider expanding internationally.
There has also been growth in foreign demand
which necessitates the development of a global network of manufacturing bases and
markets. When the markets are global, the production-planning task of the manager
becomes difficult on one hand and allows more efficient utilization of resources
on the other. Few industries remain today in which the international product life-cycle
theory still applies. Product markets, particularly in technologically intensive
industries, are changing rapidly. Product-cycles are shrinking as customers demand
new products faster. In addition, the advances in communication and transportation
technology give customers around the world immediate access to the latest available
products and technologies. Thus, manufacturers hoping to capture global demand must
introduce their new products simultaneously to all major markets. Furthermore, the
integration of product design and the development of related manufacturing processes
have become the key success factors in many high-technology industries, where fast
product introduction and extensive customization determine market success. As a
result, companies must maintain production facilities, pilot production plants,
engineering resources and even Research and Development (R & D) facilities all
over the world. Apple Computer, for example,
has built a global manufacturing and engineering infrastructure with facilities
in California, Ireland and Singapore. This network allows Apple to introduce new
products simultaneously in the American, European and Asian markets. Companies use
the state-of-the-art markets as learning grounds for product development and effective
production management, and then transfer this knowledge to their other production
facilities worldwide. This rationale explains why Mercedes-Benz decided recently
to locate a huge manufacturing plant in Vance, Alabama. The company recognizes that
the United States is the state-of-the-art market for sport utility vehicles. It
plans to produce those vehicles at the Vance plant and introduce them worldwide
by 1997.
The SCM refers to the active management
and control of materials, information and finances as they move in a process from
acquisition of raw materials to delivery to the consumer. Radio frequency identification
(RFID) involves fitting items with a small transponder, or RFID tag, which stores
information about the item, allowing it to be identified and tracked. RFID offers
some significant advantages over barcode technology in supply chain management.
The RFID technology does not require line-of-sight
between the RFID tag and reader. This means that, unlike barcode technology, items
do not require any particular orientation for reading. Radio waves travel through
most non-metallic materials, so RFID can be read even if they are embedded or encased
in packaging, provided they are within range of a reader. Furthermore, RFID readers
can read RFID tags in thousandths of a second and can scan multiple items simultaneously.
This technology can be extensively used
in the domains of business:
- Retail supply chain management and
warehousing management.
- Logistics, tracking of goods &
trucks.
- Shipping, container tracking, cargo
tracking.
- Security systems etc.
The RFID is the technology for future. In
the field of supply chain, establishing global standard will be a further boon for
advancement of this technology as a whole.
Labor accounts for up to 80% of the total
distribution costs of a typical distribution center. However, RFID technology can
automate many supply chain activities including check-in, order picking and verification
leading to reduced labor throughout the process. Even a small reduction in the amount
of labor required can yield substantial financial savings, up to 90% in some cases.
Ethical and Environmental Issues on Operations and Supply Chain Functions
Environmentally Conscious Supply Chain Management
(ECSCM) refers to the control exerted over all immediate and eventual environmental
effects of products and processes associated with converting raw materials into
final products.
While much work has been done in this area,
the focus has traditionally been on either: product recovery (recycling, remanufacturing,
or re-use) or the product design function only (e.g., design for environment). Environmental
considerations in manufacturing are often viewed as separate from traditional, value-added
considerations. However, the case can be made that professional people have an ethical
responsibility to consider the immediate and eventual environmental impacts of products
and processes that they design and/or manage.
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