Supply Chain Management Principles

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Dr.FlynnHanks,United States,Teacher
Published Date:26-07-2017
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A Practical Application of Supply Chain Management PrinciplesIntroduction n years past, customers were able to drive the prices and deliveries of their materials. This was possible in a domestic economy. With global- Iization increasing more and more each day, customers must begin to build relationships with their suppliers and practice effective supply chain management to maintain the supply of essential materials. With the signing of the NAFTA agreement in January 1, 1994, the United States saw its industry base change. Many companies created opera- tions in Mexico because it was cheaper and more profitable to operate there. Today we are seeing another business shift. This time it is from Mexico and the United States to China and India. As these shifts occur, the countries’ economies are changing as well. Countries that are securing new businesses are getting stronger while those that are losing businesses become weaker. These changes prompt significant questions: “If a company had been managing the supply chain, would the business be moving?” “If a company works to develop healthy suppliers, will the operations remain nearby?” These are very tough questions that seem to have been ignored by many U.S. companies over the years, when the focus was on price alone. Can the trend to keep moving operations offshore be reversed? I believe that it can, but it will require a change in the way many U.S. companies are currently doing business. As we look at the subject of making the needed quantum leap by managing the supply chain, we will see an opportunity to develop and maintain efficient and competitive businesses within the United States. This book is designed to share the principles of supply chain manage- ment. It is written based on the practical experiences of the author, relat- ing them to industry principles that are discussed in the various chapters. This book can be used as a textbook for business education or as a reference book for businesses that recognize the need to change the way that their supply chain processes are managed. xviixviii Introduction Chapter 1 evaluates business developments over the years to demon- strate how the trends have gone almost full circle. Many companies have not learned from their experiences. We present examples of how businesses were driven a few years ago compared to how they are driven today. In Chapter 2 we will define the supply chain and the companies involved, and show several examples. In addition, we will discuss the devel- opment and effective use of process mapping. A complete supply chain and process map of a specific organization will be presented in order to introduce the supply chain concept. This will help identify who the players might be for your organization. Chapter 3 helps develop the supply chain management strategy within an organization. A supply chain maturity model has been created that can be used to determine where different organizations are in the process. In this chapter, forecasting and other areas dealing with the customer are dis- cussed. This will help you begin to think about your organization and what changes might be made. An evaluation will be presented to help a company assess themselves as a customer. Would you want to be your own customer? This evaluation will help visualize what a good customer looks like for your particular company. Chapter 4 discusses the decision of whether to make or buy. This is the first step in supply chain management. In Chapter 5 there is a supplier selection process to help identify the best supplier for the organization in its present situation. This detailed method works well regardless of volumes and prices by considering many variables that companies encounter when dealing with members of the sup- ply chain. Having selected a supplier, Chapter 6 introduces a procedure for their effective implementation. This is the beginning stage of the supplier certi- fication process. Chapter 7 describes international situations and how to effectively build international relationships. Culture is a very important aspect of interna- tional relationships that must be considered in supplier relationships. The issues of globalization and international relationships will be discussed, as well as the impact that different cultures and companies can have on supply chain management. In Chapter 8, we begin to consider relationship building. Initially, we will look at relationships from many perspectives. It is important to deter- mine who should be involved, how teams should be arranged, and the scope of the work that the teams can do. In Chapter 9 supplier quality system surveys are discussed, with exam- ples. Supplier visits are addressed, and we will explain both how to run a visit and the results that might be expected from the supplier. Introduction xix Chapter 10 discusses scorecards and measures of suppliers. The con- cept of the seven-part total perfect order is presented and how this can help both your organization and your supplier to improve. Chapter 11 focuses on customer satisfaction. This incorporates a dis- cussion of where different quality standards fit into supply chain manage- ment. Currently, there is a disconnect in this area in many organizations because quality subsists as a discrete department that is weakly related to other areas of the organization. Customer satisfaction is one area that is called out in the quality standards. Chapter 12 describes some quality tools and explains how they can be applied to supply chain management. The details of how to develop these tools can be found in other texts; we concentrate on their applications. Chapter 13 discusses two of the hot topics in supply chin management today: inventory and logistics. These areas can involve significant invest- ment and so they need to be managed as part of the supply chain. Chapter 14 covers information systems and some applications that can help in supply chain management. This is an overview of software pack- ages that does not promote specific vendors. The primary focus here is how information technology can help manage the supply chain. In a postscript (Chapter 15), taking the supply chain management to the consumer level is discussed with some personal examples. It is essen- tial to remember that each of us are both customer and supplier. In either circumstance we want to be treated well and so we should return the same behavior. As you read this book, think about the concepts presented in terms of how they might be implemented in your organization to make it better and improve the supply chain management process. I trust that this will be a learning journey for you as you read and apply what is in this book. Thomas Schoenfeldt1 The Way Things Were (Are) osts were more important than quality in the late 1970s and early 1980s, and now again in the early 2000s. When senior manage- Cment focuses on costs, the supplier that can provide the material at the lowest price is always selected. Many times suppliers have had to cut corners to make any profit and still keep the business running. Often these corners are cut in the quality arena. The focus on costs became more prominent because the managers’ incentive programs were based on cost performance. One company that I worked with had a standard cost system that calculated the amount of money that should have been spent based on the production achieved. The standards were based on historical data and calculated by regression analyses with multiple variables. These cost systems took into account all the costs involved in the specific operation or product. Computer pro- grams performed all of the calculations and prepared a detailed report that included any variances between the actual and the predicted costs. Vari- ances had to be explained to senior managers at least quarterly and at larger plants monthly. Many of these standard cost systems were developed using historical data spanning about five years. An arbitrary improvement factor was incorporated into the current cost calculation in an attempt to force the process to become more cost-efficient. These rates—the improvement factor—were adjusted every year with the goal of improving cost perfor- mance and plant efficiency without changing the system. Some improve- ments could be achieved by eliminating waste from the system, but without systemic changes major breakthroughs could not occur. As Dr. Deming and Joseph Juran would have said, management controls the system and man- agement must be the ones to change it. Dr. W. Edwards Deming was one of the quality gurus in the 1950s and 1960s who used statistics to understand the performance of processes. Deming’s process became known as statistical process control or SPC. His 12 Chapter One mission became to spread the gospel of quality management. Dr. Deming’s theories were aimed at the top management of an organization. Joseph M. Juran was another of the quality gurus of the same era as Dr. Deming. Juran developed the quality trilogy of quality planning, qual- ity control, and quality improvement to help organizations reduce costs that can be associated with poor quality. Going a step further, the cost standards only measured operating per- formance with no regard for quality or overall yield. A manager could push a lot of material through a process and look good from a cost basis even though the product was substandard and/or required rework. This could easily happen in intermediate process steps where the material is passed on to another process. The next phase that came about was called raw material standards, which were a material balance, also called a mass balance, applied around the entire operation, with standard yields that were based on a five-year history of the operation. Again, these yields were developed by using his- torical data and applying an improvement factor. Hypothetical values were also calculated for any chemical reactions so an assumed number was the theoretical standard. Process results could be evaluated as to how close they come to the theoretical best possible performance. The cost (operating costs that are controllable at the plant level) por- tion of the standards amounted for about 30 percent of the costs while the raw materials amounted to nearly 70 percent of the costs. By using both of these methods, the system of standards dealt with the total costs for running an operation. At this point, the purchase price of the raw materials was used as the standard since purchasing was handled by a centralized purchasing organization. The plant had no control over the price paid for raw materi- als; the only costs they could control were the operating costs determined by the efficiency of the plant. The purchasing managers were the individuals who interacted with the suppliers, and they contacted the sales representatives or the order desks. This was the only point of contact between the company and suppliers. Requests for new or replacement materials and parts depended on the purchasing department to locate a supplier and place orders. Purchasing managers drove their operations under a system known as purchase price variance. This system began with the purchasing department compiling an annual budget for raw materials based on estimates provided by manufac- turing management. The total cost of these materials was then used as a point of reference for the incentives that were paid to the purchasing man- agers. If purchasing was able to buy materials cheaper than the estimates they could earn a substantial bonus. The lower the total final costs, the The Way Things Were (Are) 3 larger the bonus they would receive. Specifications were very loose and so quality was not considered in the purchases—only the costs dictated the purchasing decisions. Thus, if it could be purchased cheap, the plant would have to use it. Most of the purchasing staff had never even visited a plant so they had no idea what factors were important to the plant and its opera- tion. The only individual at the plant who had any role in purchasing was the one who released orders for raw materials as needed to the centralized purchasing office. To ensure that the plant was getting the best price, the purchasing department used many suppliers and had them bid against each other to drive the prices down. In many cases, unhealthy suppliers arose and no con- sideration was given as to how these suppliers were treated. Purchasing was instructed that the plant must never run out of material. To protect them- selves, purchasing used several suppliers, thus ensuring that material would be more readily available in the case of poor planning. Businesses were run with a focus on production, driven by the idea that if you could produce more material it would sell. The senior management wanted more, more, and more from the same amount of people and resources. If the workers worked harder, more production could be achieved. No con- sideration was made for the limitations of the system. Incentives were paid to the managers based on output, while many of the workers saw no benefit from their efforts. Suggestion systems existed, but responses were rare, weak, and slow in coming. Many people had to evaluate suggestions and by the time approval was given the process might have already changed. There was very little contact between plant person- nel and senior management. Every department functioned by itself and was responsible only for its own area of the business. There was almost no com- munication between departments and the result was a significant amount of waste. This is a classic example of a siloed company. Companies believed that viable competition only existed within the United States. To strengthen its position, a company would make business decisions that were designed to hurt the competition in order to potentially drive them out of the marketplace. No consideration was given to the impact that moves like this could have on suppliers. In the late 1960s and 1970s, more Asian companies entered the U.S. marketplace. The typical attitude within U.S. management was that their products were of lesser quality and they would not hurt our business. Remember the small portable radios from Japan? At first they were of poor quality, but the Japanese companies endeavored to try to improve their products and to be more competitive. Within a few years they became a major force in the electronics marketplace. Even today I see companies that still view their competition and market as only within the United States. 4 Chapter One There was also arrogance among U.S. businesses that said “we are the best and no one can do this business better than us.” A noteworthy exam- ple of this was the steel industry in Pittsburgh, Pennsylvania, in the early ’80s. Everything was going along fine and then the foreign competition arrived. In self-defense, the Pittsburgh steel industry cried out for govern- ment protection, fines for dumping, and so on. In reality, the company had not focused on the business from a global perspective and was hurt badly by the competition that used new and cheaper technology in other countries. As a result, many steel mills were closed and many workers lost their jobs and had to find new careers. These examples explain why many American industries fell behind Asia, and continue to face foreign competition. Today we can see the same sc enario in the automobile industry. The Big Three (Ford, General Motors, and Chrysler) have been focused on the domestic car business and the foreign car companies have worked very hard to establish their businesses in the United States. The Big Three are operating on a cost basis and are seeking the lowest price anywhere in the world. In the meantime, their for- eign competitors are working with local suppliers to produce quality parts at prices acceptable to the companies without constant pressure to reduce the price. The difference is apparent in that suppliers to the foreign auto- makers are not going bankrupt at the same rate as those for the Big Three. Today the domestic car companies have a major cash problem that com- promises their ability to pay their bills in a timely manner. The result is that their suppliers in turn run out of money and have to file for Chapter 11 bankruptcy protection. As you can see, the industry that focuses entirely on price may end up the loser in the long run if they do not watch what the competition is doing. Copying the foreign companies’ procedures will not guarantee success either. The context of the process that you want to duplicate is important. Cultures in different countries have a major impact on how the processes actually perform. This will be discussed in more detail in Chapter 7, which addresses industry globalization. The other concept that was very prevalent prior to the 1980s was the idea that if I lost a customer I would gain one from another company and it would all balance out in the end. As a result, there was no effort to earn customer loyalty. As the foreign companies arrived with their focus on cus- tomer needs and wants, customers that left the domestic producer often never returned to a domestic company. Quality and service were the keys to attracting and retaining customers. Both domestic and foreign compa- nies realized this, but the foreign companies strived to achieve these and so gained greater results. The Way Things Were (Are) 5 The business world continues to change, and each company must be ready to change with it, accepting new ideas in order to remain competitive in today’s marketplace. The model adopted in the 1960s can be depicted by two funnels with the small ends touching each other. These small ends represent the only point of interface between the customer and the supplier: sales on the s upplier side and purchasing on the other (see Figure 1.1). This model did not encourage the development of relationships between companies. It encouraged the development of friendships or at least business relationships between the salespeople from the supplier and the purchasing people from the customer. Most of the other people in both organizations had little if any contact with each other. To be an effective business today, this model must change. Companies need to be involved with each other at many deeper levels to reap the benefits of supply chain management. Another concept that has been prevalent ever since the government bailed out Chrysler is that I don’t have to be a careful manager because the government won’t let an American company fail. Any newspaper today details the different demands businesses are making on the government for help. I believe that people have forgotten that the government has no money except what it takes from the citizens. Demanding that the government support businesses or any other private cause only spreads the burden to everyone. This will not solve U.S. industries’ problems. Supplier Customer is selling: is purchasing: � Top management � Top management � Marketing � Marketing Sales Purchasing � Logistics � Logistics � Finance/accounting � Finance/accounting � IS/IT � IS/IT Figure 1.1 The old selling model.6 Chapter One Part of this misconception is not only that the government should take care of American companies but that companies should preserve jobs above profit. All companies are in business today to make a profit. When compa- nies and employees get rid of entitlement attitudes and take responsibility for their own actions and attitudes we can make America a better place to do business. Another policy that I still see promoted today is the concept of “Buy American.” This is not a bad concept, but a recent article in the Sunday Detroit Free Press indicated that a Toyota car has about 80 percent of its parts manufactured in North America. Similar figures were presented for Honda. These two manufacturers are leading the industry. So if I buy a T oyota or a Honda vehicle, I am actually buying a primarily American- made vehicle. Does something seem wrong with this scenario? Shouldn’t American companies be leading the automobile industry? As you can see, there is a deeper-rooted problem in U.S. industries than is immediately apparent. This has to change because American businesses need to become competitive on a global scale with our own products. Companies need to make the paradigm shifts rather than continue to rely on the government to rescue them. CONCLUSION The old philosophies of doing business are not going to work today. Changes need to happen. The question before us as individuals is, Are we willing to adapt even as the world changes? KEYWORDS Cost standards Price Old business model The Way Things Were (Are) 7 DISCUSSION QUESTIONS 1. How have purchasing departments influenced procurement of raw materials? 2. Discuss an example of an organization that has been or is focused on the wrong customer. 3. How should a company and its management deal with the potential for local or national natural disasters? 4. Discuss a cost standard system that you are familiar with and the results that were obtained. 5. Why should a company or an individual change in today’s world?2 Understanding Your Supply Chain et’s begin by defining what a supply chain is. It is the group of orga- nizations and processes that a product goes through from its initial Lsource (like an ore mine) to the finished product that is delivered to the customer. Depending on the product, this can be a very long chain and have many links in it. A definition of the supply chain from the APICS Dictionary, Eighth Edition, 1995 is: 1) The processes from the initial raw materials to the ultimate consumption of the finished product linking across supplier–user companies. 2) The functions within and outside a company that enable the value chain to make products and provide services to the customer. PROCESS MAPPING This is one of the seven basic quality tools to help understand a process and then improve that process. One definition of a process is a group of activities that together create value for the customer. Using this definition there are a wide variety of different things that could be considered a process. This definition of a process is very appro- priate for supply chain management. Many companies are involved in the process of getting a product to the consumer. There are several reasons that process mapping might be done. These are (a) quality assurance, (b) re engineering, (c) continuous improvement, (d) as a teaching tool. There are 910 Chapter Two some specific terms related to process mapping that need to be explained. Different terms are used for different purposes in the process maps. Some of the terms that you will hear are: critical path, handoffs, waste, parallel processes, decision points, total cycle time, redundancy, exceptions (alter- nate routes), theoretical cycle time. All of these terms will have some appli- cation as we develop a supply chain map. There are three types of process maps: 1. As-is (Now) 2. Could-be (Short-term goals have been included) 3. Should-be (Long-term goals have been included) The last two types help the continuous improvement process as these maps are evaluated and then implemented. Almost every department in an organization will use process mapping in some form, including sales, marketing, information technology, finance, project managers, quality, and others. A process map is defined as a graphical representation of all the steps involved in an entire process. Let’s look at the steps in creating a process map. 1. Define the process steps. One of the ways to do this is to put a large sheet of brown shipping paper on the wall and have a group of people write down all of the steps that each one sees in the process being examined. 2. Sort the steps into the order of occurrence. 3. Place the steps in appropriate flowchart symbols. 4. Evaluate the steps for completeness, efficiency, and possible problems. Let’s look at an example of a process map. The situation is “buying gas for your car.” What are the steps involved? At a 50,000-foot level the process might look like Figure 2.1. At a more detailed level, the process might look like Figure 2.2. The next step in process mapping is to understand how your business oper- ates and how the different departments interact with each other. This needs to be understood before you can begin to examine how the supply chain works and how improvements can be made. A process map for a business Understanding Your Supply Chain 11 Drive to Pay Start Get Start Drive gas for car gas car away station gas Figure 2.1 Process map for “buying gas for your car” at a very high (50,000-foot) level. Start car Check gas gauge Drive car Need gas? No Yes Decide Drive to Park at Turn off amount gas station pump engine Give requirements Attendant fulfills How will Self-service you pay? to attendant requirements pump? No Yes Credit Cash Cash or Select Pay at credit card? pump? pay inside No Yes Give credit Give cash to card to attendant No attendant Insert credit Do you have card and wait to prepay? for approval Yes Go inside to A B E C D pay attendant Figure 2.2 Process map for “buying gas for your car” at a much more detailed level.12 Chapter Two A B E C D Select Return No Did I already gas type to pump get gas? Yes Remove gas cap No Did I already get gas? Follow instructions Credit Card swiped on pump to Yes for approval pump gas Cash Credit Get or cash? Replace No change gas cap Receipt prints Yes No Do I need a Did I Is it already prepay? receipt? paid for? No Sign receipt Yes Yes Press button for Receipt receipt if you don’t prints already have one Take receipt Start car File any receipt for Drive future accounting away when you get home Figure 2.2 Continued. may look like Figure 2.3. Its two maps cover an entire business. These process maps are created at a very detailed level for ease of understanding the business. Now that you have an understanding of how your business operates, you can begin to look at the supply chain. Using the quality tool of process mapping, a picture of the supply chain can be developed. When this process is started you must look at where the process begins and ends. This requires a good understanding of where your Understanding Your Supply Chain 13 Material need identified Order Approved Purchase Purchase Material quantity supplier order order sent arrives determined selected prepared to supplier Reject Material Stock shipment correct? item? No No Yes Yes No 9 Contact Quantity supplier correct? No Yes Supplier provides RMA (returned Material Agreement? material damaged? No authorization) number Yes Yes Material returned Investigate to supplier problem Material placed in inventory 2 13 12 Invoice matched Invoice with previous received documents No 14 Match? Yes Material need identified Check written to Check written to supplier to supplier Figure 2.3 A sample process map for a business.14 Chapter Two 2 Trucking File claim Yes contact with trucking necessary? company No Supplier No contact necessary? Material Yes 9 placed in 13 storage area 3 4 3 Contact 14 supplier Yes Request Corrected Invoice corrected invoice 12 problem? invoice received No 4 No Corrective Situation action necessary? resolved Yes No Form required? Yes Corrective action request sent to supplier Supplier returns corrective action Material need identified request to Check written to supplier No Yes Corrective action acceptable? Figure 2.3 Continued. Understanding Your Supply Chain 15 Customer Sales inquiry call Quote prepared, sent, and numbered as required Phone call Fax Mail Internet EDI or visitor order order order order with order Product order form completed No Quoted? Yes Initial customer contact Order to Check deposited matched with quote a a No Can requested date and quantity be met? Customer Yes No contact necessary? Yes Contact customer Yes No Operation Acceptable Order type agreement canceled b Figure 2.3 Continued.

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