Supply Chain Management Process Flows

Supply chain management flows consists of these three main flows:

1) The product flow
2) The information flow
3) The finances flow

The product flow usually involves movement of products from a supplier to a customer, and also the back end process such as any customer returns or service needs.

The information flow involves the flow of information on orders and updating the status of delivery.

The financial flow consists of credit terms, payment schedules, and consignment and title ownership arrangements.

Here are some good example on the process flow of supply chain management:-

The Basic of Supply Chain

The most basic of supply chain process is where a company purchased raw materials from vendors and transformed it into a finished product in a single step. The company then sells it to the end users or customers. Let’s take a basic example, a boy who wants to sell lemonades. He gets all his materials from his parents. He makes the raw material into lemonades and sells it directly to customers. But, in a realistic business world, supply chains have multiple end products with many vendors supplying different parts of items, components and services that end up with a complete product that is ready to be shipped out or distribute. The flow of materials is also not usually in a linear network but sometimes along multiple networks. Here are a video showing a cartoon example of a very basic supply chain.

Supply Chain Rationalisation

Rationalising the supply chain is the activity of selecting the right number of suppliers and the most suitable suppliers within that numbers. Therefore the strategic consideration in rationalising the supply chain is that, the company has to look and evaluate the supply chain in a tier level perspective. The suppliers can be broken into several different tiers, with the first tier providing the major component to the company. By rationalizing the supply base, the company only needs to handle a few suppliers in delivering a complex product. This can be seen in the automotive industry and also aerospace industry. 

However minimizing the number of suppliers does not necessarily translate the action into an effective supply chain. The effectiveness is highly dependent on which suppliers the company chooses and the commitment it have for long term growth and contracts. Rationalisation of the supply base is closely related to the strategy of the company for long term growth. By limiting the company’s network, it can affect the flexibility of the company to move forward. This action can only be mitigated by the means of stringent selection criteria and choosing the best suppliers to become a part of the company.

As an example, Lotus Cars Ltd has taken the approach of rationalizing their supply chain in 2004. Working with 200 suppliers and producing 2800 products, Lotus Group produced value stream mapping to understand, simplify and restructure the value stream of their supply chain. These resulted in a closer alignment of the supply to demand and therefore reduce the inventory of Lotus with accurate scheduling and improved information. The activity has resulted in 50% improvement in delivery performance.

Supply Chain - The Toyota Way

The best example of a supplier’s development is Toyota. Their commitment to help their suppliers goes beyond the boundary of cost reduction. Toyota Motor Corporation have also stated in their purchasing rules that Toyota must be treated as a part of Toyota. In the stated rules of Toyota also, they have the responsibility to raise the performance of their nominated suppliers. They believe in helping the suppliers achieved their optimum level by teaching them the Toyota Production System and Total Quality Control.

Below are a video about the Japanese pattern of the supply chain:-

Strategic Considerations for Supply Chain Management

source: http://www.srgpartners.com
In Supply Chain Management, the suppliers are often considered as ‘extended enterprise’ and act as one entity for the buyers benefits. This entity is triggered by the buyer decision and the input of the buyer will cause an effect into the whole supply chain. The whole entity comprises of partnership between suppliers, manufacturers and distributors working together in fulfilling the demand of the buyer. There are many points or selection criteria in determining suppliers but as Eleni Hadjiconstantinou in her book "Quick Response in the Supply Chain", states that the basic rules of defining a partnership are:-

1) Scope of Work
2) Division of Responsibilities
3) Required Service Levels
4) Dedicated or Multi-user Facilities
5) Performance Monitoring
6) Open or Closed Book Accounting
7) Ownership of Assets
8) Length of Commitment
9) Exit Arrangements

These criteria must be well stated in the selection process as this process will lay the foundation for the relationship to grow and mature. Without these ground rules, there is high possibility that the relationship will falter.

Response Management in Supply Chain

Managing the entire supply chain requires companies to view their supply chain as a single entity. Strategic decision making and efficient management is essential in determining the success of the collaborative effort between the suppliers. Collective strategy is developed through mutual understanding and common objectives. Setting a clear goal post for the suppliers will help them in steering towards the same direction regardless of any setback they suffer along the way. Reaction to any disturbances caused by outside factors must also be dealt with collectively by suppliers as a group. The collaboration is also much stronger and enables them to compete effectively in either the local or global market.

An example of a response management in a supply chain management can be seen in this video:-

Integration of Supply Chain

source: http://b2btech.com

Organizations or companies that intend to use SCM should focus on the need for integration of their supply chain. The effectiveness of the company to deliver its goods to the end user is highly dependent on the integration of its linkages between their partners. A company can no longer compete effectively on its own but with support and integration with its downstream partners also. Supply Chain integration is a process integration of upstream and also downstream activities through a medium or platform interconnecting each other. With the rapid development of ICT, the process of integration has become much more easily compared to the past. As Martin stated in his book "Logistics and Supply Chain Management: Strategies for Reducing Cost and Improving Service", “supply chain integration is defined by the collaborative activities between buyers and suppliers, joint product development, common systems and shared information”.

In the past, in the buyer-supplier relationship, the buyer will usually reduce the cost of purchased materials through aggressive negotiations. This usually bring to a win-lose situation whereby the supplier profit margin have been reduced drastically to meet the demands of the buyer. With supply chain integration, this is no longer the case. In a win-win situation, the buyer and supplier are in the form of strategic partnership. The approach is taken based on mutual benefits and continuous improvement on both sides. The approach is also less aggressive and commands the respect of each supplier. Each negotiation that occurs in this approach is done with focus on quality as the priority and follows by the cost.

Example of a local Malaysian company that integrates their supply chain is the Malaysian car automotive carmaker, Proton. After Proton suffers negative growth in the last few years, the new management of Proton has decided to integrate its supply chain and reduce their vendor based from 260 vendors to only 20 to 30 vendors only. Proton’s logistic provider companies have also been reduced from 14 companies to 3 companies only. The objective of the reducing was simply to cut waste and minimize the transaction that does not add value to the company. Reducing the vendors has helped Proton to cut the cost of the car they are selling and with higher quality.

RFID in Supply Chain Management

According to IDTechEx, the entire RFID market is valued at $5.29 billion worldwide in 2008. This value includes tags, readers, softwares and all other forms related to the system. One major sector that is benefiting from RFID is the transportation and logistic sector. Definitely, RFID will revolutionise and change the way of Supply Chain being managed in the future. Check out this video for more information.

Applying Supply Chain to Manage a Business Network

Market leadership can only be achieved by managing the network effectively as well as managing internal processes. Supply Chain Management can be divided into three main flows; Product flow, Finance flow and Information flow. In a successful supply chain network, these three vital categories flow simultaneously among the supply chain partners. Among the critical factors in determining the success of managing the network are collective strategy development.

Managing the entire supply chain requires companies to view their supply chain as a single entity. Strategic decision making and efficient management is essential in determining the success of the collaborative effort between the suppliers. Collective strategy is developed through mutual understanding and common objectives. Setting a clear goal post for the suppliers will help them in steering towards the same direction regardless of any setback they suffer along the way. Reaction to any disturbances caused by outside factors must also be dealt with collectively by suppliers as a group. The collaboration is also much stronger and enables them to compete effectively in either the local or global market.

Minimising Risk using Supply Chain Management

A supply chain is a system which needs a certain amount of control and management. Like any other system, it is prone to outside disturbance that can cause numerous effects to its system. One example of disturbance in the supply chain is the Forrester effect. Forrester effect is the distortion caused by demands from the retailer that causes fluctuation of inventory from the distributors, warehouses up to the factory. Other such distortion that can bring impact to the supply chain is the failure of any parties to deliver its good to other partners in a specific time period that causes major disruption to the overall supply chain process.

In mitigating this disruption, Supply Chain Management allows certain risk to be shared or delegated among its partners. Activities that carry the highest risk can be done by either the buyer itself or outsource to several reliable partners. The activities that hold the lowest risk can be outsource to new partners as to gauge the supplier’s performance before migrating them into a higher level. The strategy of managing this risk should be handled effectively by all partners in the supply chain. Identifying capability of internal and also external processes must be done with thorough risk analysis and mitigation strategy.

As an example of risk allocation at work was the Toyota case that occurred on 3rd February 1997. One of Toyota’s suppliers, Aisin Seki at that time suffered a devastating fire that caused its production to end abruptly. Aisin Seki is the only sole supplier of Brake Master Cylinder to Toyota in Japan. The fire in Aisin Seki causes the imminent collapse of Toyota Supply Chain. Following the incident, around 20 other Toyota suppliers immediately went on a collaborative mode to compensate the missing components. By 7th February 1997, Toyota managed to start back its assembly line and production presume back as normal.

Market Positioning using Supply Chain Management

A company that intends to implement Supply Chain Management does not necessarily increase their competitive edge. Often times, companies fail to identify the key business issues that are closely related to the effective implementation of Supply Chain Management. A company decision in market positioning can be consider as one of the most important key business issues to be dealt with.

Market positioning relates to the core competencies that they have and how they utilize it to get ahead from other competitors. In order to compete, non-core competencies are outsourced in order to give more focus on their core competencies. By stock taking company’s internal strengths and weaknesses, a company can benchmark itself with other similar competitors. Through benchmarking, a company can re-strategise its internal operation to favour the niche expertise that they have. Through re-strategising also, the company can decides which type of suppliers that they want in their supply chain so that they can position themselves in the correct market segment. According to Martin in his book "Logistics and Supply Chain Management: Strategies for Reducing Cost and Improving Service", the benchmarking can be set through these priorities as stated below:-
i) Which processes and entities in the supply chain are of strategic importance?
ii) Which processes and entities in the supply chain have a high relative impact on the
business?
iii) Where there is a choice between ‘make’ or ‘buy’.
iv) Where there is internal readiness to change.

As an example, in the case of Zara, Spain’s most successful apparel companies. Zara’s market positioning is in direct competition with fashion giant such as Benetton, The Gap and The Limited. But since, the fashion industry is a time-based competition; Zara therefore has utilized SCM as a tool for competitive advantage by having a much quicker response systems in the industry. Zara operates effectively through two successful objectives, and those are, working without stocks and respond faster to market demands. Zara not only managed to create competitive edge by positioning itself as the fastest apparel companies to deliver its goods to the customers but also as a leader in the fashion industry.

Applying Mass Customization in Supply Chain Management

“In this new frontier, a wealth of variety and customization is available to consumers and businesses through the flexibility and responsiveness of companies practicing this new system of management.” (B.J. Pine, 1993 in Mass Customization)

The manufacturing industry has now evolved from push manufacturing to demand driven manufacturing. Companies such as Toyota for example, have now transformed its manufacturing system from push to a pull manufacturing system in order to be more flexible with customer demands. This concept of delivering products based on customer’s demands is the basis form of mass customization. Mass customization can only be achieved with efficient supply chain management. Through SCM, companies that often realize the massive potential it can deliver through mass customization will emerge as market leaders eventually.

Mass customization will affect the supply chain in terms of inventory handling. By applying mass customization, suppliers will tend to have fewer inventories as Just-in-time concept being introduced and applied into the supply chain. The speed of which the goods being delivered among the supply chain will also increase and sharing of information is done at a rapid pace.

Supply Chain Creates Faster Response

In the end of 1990s, the trend of speedy delivery of products and services starts to emerge. The trend has become a critical factor of winning new customers and retaining a company as market leader. This emerging trend has created the need for a more effective management approach of quick delivery of products or services to the end users. The supply chain management approach offers the ability of greater flexibility in creating new products at a faster level. Supply Chain Management creates the ability of the company to respond much more quickly to the customers’ fast demand patterns. As Martin states, ‘greater market share and customer loyalty can be gained by quick and reliable response to customers’ changing needs’. The life cycle of product nowadays demands a faster response from the industry. The rapid change demand pattern requires extensive information sharing among the supply chain partners. Companies that are not fast enough to cope with the fast changing demand of end customer will lose a certain amount of market share.

As an example, in 1994, Compaq, a personal computer company has acknowledged their inability to respond faster to a sudden upsurge demands have caused the company a sale lost of $1 billion dollars. This example shows how companies now must adapt fast to changing pattern of consumer demands with effective management and monitoring.

Supply Chain Concept

Supply Chain Management (SCM) as defined by Tom McGuffog is “Maximising added value and reducing total cost across the entire trading process through focusing on speed and certainty of response to the market.”

Effective Management by utilising Supply Chain Management

The peak era of mass manufacturing where all the managing aspect in delivering a product being done in one roof is no longer a trend. Companies who tend to manage internal process only and squeeze the suppliers for cost reduction will lose their competitive edge. As customers demands rapidly change and products life cycle are shortening, companies now not only need to manage their internal process effectively, they now must also manage their external suppliers more effectively. Managing the supply chain as a whole will create the ability of the company to identify weaknesses and strength in the entire supply chain. To compete, it is not enough by just identifying the company’s strength but also identifying what is your supply chain partner’s strength as well. By managing the supply chain and eliminating waste processes, the cost reduction will be significant and at the same time value addition to the product.

Dell for example, has use its supply chain management as a unique advantage over already established PC makers by eliminating process waste in their overall supply chain of producing Personal Computers. Dell identified that by eliminating retailers from their supply chain, the company can response much faster to customer’s demand compared to having a retailer to market their PC. Dell has able to reduce waste by identifying the weaknesses of the entire process and eliminate it as soon as possible.

Value Advantage through Supply Chain Management

Supply Chain Management has allowed business nowadays to not just have productivity advantage alone but also on value advantage. As Martin states, ‘Productivity advantage gives a lower cost profile and the value advantage gives the product or offering a differential ‘plus’ over competitive offerings.’ Through maximizing added value and also reduce the cost in the same time, more innovation can be added to the product and process. Mass manufacturing offers productivity advantage but through effective supply chain management, mass customization can be achieved. With mass customization, customers are given the value advantage through flexible manufacturing and customized adaptation. Product life cycles also can be improved through effective use of Supply Chain Management. Value advantage also changes the norm of traditional offerings that is ‘one-size-fits-all.’ Through Supply Chain Management, the more accepted offerings by the industry to the consumers would be a variety of products catered to different market segments and customers preferences.

As an example, the Toyota Production System practiced in Toyota, evaluates its supply chain and determines what is value added activities and what is not value added activities. Non added value activities are considered to be ‘Muda’ or waste and therefore must be eliminated. Such non added value activities are overproduction, waiting, unnecessary transport, over processing, excess inventory, unnecessary movement, defects and unused employee creativity. The steps taken to eliminate waste are through Kaizen, Kanban, Just-in-time and also push-pull production to meet actual customer’s demands. The Toyota Production System revolutionise the Supply Chain Management towards becoming a leaner supply chain system that is more agile and flexible towards meeting the end users demands.

Competitive Edge through Supply Chain Management

Today’s business climate has rapidly changed and has become more competitive as ever in nature. Businesses now not only need to operate at a lower cost to compete, it must also develop its own core competencies to distinguish itself from competitors and stand out in the market. In creating the competitive edge, companies need to divert its resources to focus on what they do best and outsource the process and task that is not important to the overall objective of the company.

Supply Chain Management has allowed company to rethink their entire operation and restructure it so that they can focus on its core competencies and outsource processes that are not within the core competencies of the company. Due to the current competitive market, it is the only way for a company to survive. The strategy on applying Supply Chain Management will not only impact their market positioning but also strategic decision on choosing the right partners, resources and manpower. By focusing on core competencies also will allow the company to create niches and specialization of core areas. As stated in the Blue Ocean Strategy outlined by Chan Kim, in order to create a niche for competitive advantage, companies must look at the big picture of the whole process, and figuring out which process can be reduce, eliminate, raise and create.

As an example stated by Chan Kim, the Japanese automotive industries capitalise on its resources to build small and efficient cars. The Japanese automotive industries gain competitive edge by utilising their supply chain to maximise their core competencies and position itself in a niche market. The strategy works and now Toyota Motor Corporation, a Japanese company, is considered to be the number one auto car maker in the world beating Ford and General Motors of the United States.

What is Supply Chain Management?

Supply Chain Management (SCM) as defined by Tom McGuffog is “Maximising added value and reducing total cost across the entire trading process through focusing on speed and certainty of response to the market.” Due to globalization and ICT, SCM has become a tool for companies to compete effectively either at a local level or at a global scale. SCM has become a necessity especially for manufacturing industry when it comes to deliver products at a competitive cost and at a higher quality than their competitors.