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Table of Contents:

: Supply Chain Excellence

Overview

Supply chains continue to undergo rapid evolution. Operational capabilities are increasing in ways that were not possible only a few years ago. Some organizations now deliver products or services on the same day as they are ordered based on digitization and advanced inventory models. Energy efficiency and sustainability are now a focus in the context of ethical supply chains. These trends have already been operative in manufacturing and other operations for several years. Global supply chains now have unique IT platforms and applications that integrate with supply chain participants through cloud infrastructure. Previously discussed trends such as customer experience, Big Data, and the other initiatives directly impact global supply chains. RPA and the IoT applications are everywhere. Machine learning and artificial intelligence are being applied across supply chains just as they are in manufacturing and services. Cybersecurity has never been more important because of remote access to sensitive data. Operational changes are being pushed by digital transformations. Nevertheless, the basis for supply chain operations and improvement remain the same: meeting service-level agreements with enough capacity, and reducing lead times and operational cost. Supply chains are becoming more complicated with different transportation modes, changes in laws and regulations, and competition from different directions. The focus is also on enabling the workforce and the importance of effective project management and team virtualization as competitive differentiators. A deep understanding of where value is created and reconfiguration of supply chain design will be the key differentiators in an era of global supply chain digitization and competition.

Current digitization trends include blockchain, drones and artificial intelligence deliveries, same-day or last-mile deliveries, layered third- party logistics, as well as those discussed in previous chapters (e.g., artificial intelligence, RPA, and Big Data). Blockchain technology enables secure transactions between all supply chain participants. Drones and remote self-driving machines are increasingly being used to transport materials. Airborne drones provide an advantage in that deliveries can be made efficiently over otherwise difficult terrain. Last-mile deliveries include partnerships with third-party logistics suppliers as well as retail organizations and other participants to coordinate inventory availability in ways that allow fast access as well as lower cost. Layered third-party logistics incorporates third-party providers with enabling technologies that link e-business providers into the supply chain.

Global supply chains continue to evolve because of increasingly competitive environments, technology, changing consumer preferences, and increased access to local markets around the world. This evolutionary process has been supported through enabling technologies and newly developed tools, methods, and concepts that increase supply chain responsiveness and flexibility to match supply and demand. In parallel, customers have been demanding higher quality and lower costs for products and services. To satisfy evolving customer requirements, delivery strategies and systems have evolved to transport these highly differentiated global products and services. New types of businesses have been created, and older ones have reinvented themselves. Many of these newer organizations were formed around completely new products and services that did not exist several years ago. Global supply chains continue to evolve at a rapid pace.

Productivity and shareholder economic value added are goals of supply chain strategy. Transaction costs continue to be dramatically reduced because the cost for moving information is low and materials can be located optimally anywhere in the world through enabling technologies. In addition to infrastructure advancements, people have learned to work more effectively using team building and project management methods. Manufacturers have also benefited from globalization with lower production costs and new market opportunities. In addition to making internal operations more effective and efficient, the insourcing of value-add work or the outsourcing of non-value-add work that is not associated with core competencies dramatically increases supply chain capacity and productivity. Dominant supply chains are profitable, dominate their markets, manage assets efficiently, and continually improve operations relative to supply, demand, logistics, and supporting activities. But organizations that use globalization only to lower cost rather than to focus on the critical strategy of enhancing the value of products and services from a customer perspective will likely see lower productivity over the long term.

Customers often prefer differentiated offerings and will not necessarily trade desired features and functions for lower cost alone As a result, it is important to build adaptable and flexible operations to produce products and services that customers need and want (i.e., that customers value). In this context, operational strategies, including supply chain strategies, should align to marketing strategies. Sometimes an industry is too heavily invested in outdated products, services, and supporting processes to effectively align to changing operations. Measurements become important to align an organization with its strategic vision and enhanced operational capabilities. Some good measurements for global supply strategic alignment are profit, gross margin, market share, customer satisfaction, asset utilization, service levels, lead-time reduction, and value-add work percentage stratified by demographic factors of interest (e.g., product, service, location, etc.).

Global supply chains also need to align tactical competencies to strategy to mitigate global competitive threats; various forms of local governmental regulations, incentives, and sanctions; and myriad other factors that could impact operational efficiency. The operational focus remains on improving the many supply chain processes including forward logistics, including demand planning, sourcing, operations, supplier relationships, and reverse logistics associated with customer dissatisfaction for various reasons.

Figure 13.1 describes global supply chain activities from a value perspective that emphasizes process integration backward from the voice of the customer. This approach pulls value through a global supply chain and balances customer needs and value expectations against operations. In fact, order fulfillment processes become more sophisticated through IT applications that enhance operational flexibility. Lean methods have also increased supply chain flexibility through process simplification, standardization, and mistake-proofing strategies that significantly reduce lead times. On the demand management side, the acquisition of point-of-sale

FIGURE 13.1

Global supply chains integrate value.

(POS) data and similar real-time collection of information can minimize the use of forecasting models having notoriously poor accuracy. In parallel, electronic commerce (i.e., e-commerce) increasingly enables the capture of localized customer preferences Important characteristics of successful global supply chains include high collaboration between all participants, a high multi-cultural presence, adherence to global operational standards, high product availability, low costs, low order-to-delivery lead times, high transaction accuracy, and high asset availability and flexibility. High collaboration is enabled by virtual meetings, e-mail, and other communications systems. Collaboration helps identify where assets should be positioned across the supply chain to increase return on assets. Supporting this asset positioning are virtual and local project teams. There is also adherence to global design and operational standards relative to packing, fulfillment, and logistics. This ensures products and services consistently meet customer requirements across diverse regions. Standards also help simplify product and service designs and enable them to be used in different countries. Cost is also lowered.

High product availability is another important characteristic of a successful global supply chain. Availability implies supply is efficiently matched to demand. It is important to use demand-management strategies that ensure accuracy by moving away from a reliance on mathematical forecasting models toward firm demand commitments such as customer contracts (i.e., order book), POS information, and other systems that accurately capture demand. Integral to improving supply chain productivity is the elimination of intermediaries through simplification of products, services, and supporting processes. The application of operational initiatives such as Lean, Six Sigma, total productive maintenance, product and network design, and others can improve availability, flexibility, and productivity. Finally, standardization, mistake-proofing, and similar Lean tools, methods, and concepts can help improve supply chain productivity and reduce cycle time. The overall business benefits of a global supply chain using these combined initiatives are higher asset utilization and efficiency.

Table 13.1 lists strategic objectives of global supply chains. These include the development of strategic partnerships and other business relationships with incremental value, high margins across supply chain participants, differentiated products and services to increase competitiveness in local markets, ongoing rationalization of asset utilization and efficiency across the supply chain, and technology deployment. Chapter 8 discussed technology deployment relative to the business process management suite, business process management, business modeling and analysis, business intelligence, business activity monitoring, enterprise application integration, workflow management, and enterprise resource planning systems. Additional strategic objectives include ongoing rationalization of the distribution and logistics networks, rationalization of insourcing and outsourcing, optimizing global capacity planning, and increasing the percent of high-value operations while ensuring localized operational differentiation. Effectively integrating the flow of materials and information through a supply chain is an ongoing evaluative process that uses a hierarchy of IT platforms, tools, and methods to create useful information to manage a supply chain’s processes.

Strategic partnerships help expand a supply chain’s available capacity as well as new marketing opportunities. If properly designed, such partnerships will also increase operating margins for all participants. This is done

TABLE 13.1

Ten Strategic Objectives of Global Supply Chains

Objective

Description

1. Global strategic partnerships

Strategic partnerships expand a global supply chain’s resources to satisfy demand. All participants need to extract value relative to alternative strategies.

2. High margins across the supply chain

Margins should be at their entitlement level. Entitlement infers every part of the supply chain extracts a margin reflective of its capital investment, risk, and value contribution.

3. Highly differentiated products to increase competitiveness in local markets

Products and services must be designed to reflect local culture and consumer needs, but designed in a way that allows mass customization principles to be employed when possible.

4. Ongoing rationalization of asset utilization and efficiency across the supply chain

Questions surrounding what assets are required, where should they be located, and who should own them is an ongoing series of analyses designed to ensure all parts of the supply chain have high asset-utilization efficiencies.

5. Technology deployment

Integration of the flow of materials and information through a supply chain is an ongoing integrative process that uses a hierarchy of information technology platforms, tools, and methods to create useful information to manage workflows.

6. Ongoing rationalization of transportation modes

The development of optimal routing sequences analyzes networks using operations research tools and methods designed to reduce network length along a critical path and cost by evaluating constraints related to demand, supply, and other relevant information.

7. Insourcing and outsourcing rationalization

The analysis and decision regarding where work should be performed within a supply chain is an ongoing activity based on where the most value can be added to reduce overall supply chain lead time and cost to increase asset utilization.

8. Match supply and demand

The ability to determine item demand by location and time enables the efficient matching of supply to demand. Demand estimation is enabled using real-time data obtained from the customer regarding actual demand for products or services.

TABLE 13.1 (Continued)

Ten Strategic Objectives of Global Supply Chains

Objective

Description

9. Process driven operations having high value content

Processes should be designed around similar output requirements related to time, cost, and quality as well as similar product or service design.

10. High operational standardization

High standardization is required to ensure operations are completed in a minimum amount of time without error. However, a system should be easily reconfigurable, with the resultant standards reflecting the newly configured system.

through optimally managing assets and determining where they should be located and which participants should own them. This becomes an evolving series of analyses that ensures all participants have high asset utilization and productivity. Optimal routing is also important. This requires a continual evaluation of a supply chain’s demand and supply constraints using operations research tools and methods. Decisions regarding where and how work is done is an ongoing set of planning activities that evaluate where the highest value can be added to optimize asset utilization and reduce overall order-to-cash lead time and cost. Finally, global supply chains need to be easily reconfigurable. Ideally, operations including standards, reports, communications, network routing, and other operations are automatically enabled through digitization to create newly reconfigured systems.

Supply chains contain thousands of different work tasks that are aggregated into the functions shown in Figure 13.2 using a high-level Supplier- Input Boundary-Process-Output Boundary-Customer (SIPOC) chart. On the supplier side of the SIPOC, suppliers ship products or provide services to customers or distribution centers. Important integrative systems include distribution requirements, material resource planning, and enterprise resource planning systems. Material resource systems procure materials, components, and other items needed for immediate production requirements or for placement into inventory for later usage. Distribution requirements systems manage inventory across the global distribution network. Supporting activities include the management of purchase orders, accounts payables, and coordination of suppliers or others in the supply chain. Logistics also coordinates freight rates, shipping modes, and how a product is transported within a supply chain. Other activities include

FIGURE 13.2

Global supply participants.

shipment routing, regulations and tariffs, carrier costs and policies, accuracy of bills of lading, special tracking requirements, and required signoffs.

In parallel, customer claims, returns, and fleet maintenance are controlled at a distribution center. Distribution centers also receive and warehouse materials for shipment to customers. There may also be packaging and light assembly operations within a distribution center. Supporting activities may include developing workload forecasts, maintaining equipment, receiving inbound trucks, managing inventory storage and replenishment activities, and picking orders, including pack-out, dock audits, and loading outbound trucks. Each of these operations requires systems to control their material and information flows. These processes may be complicated and may require unique operational tools and methods. If order entry and processing functions reside within a distribution center, then information related to products and services, including pricing, availability, and performance features, must be made be available to the people handling order entry to provide customers with the information necessary to place their orders.

Table 13.2 views supply chain operations at a more detailed level. Imports and exports from one country to another require specialized processes to ensure orders are put together quickly using the most efficient means of transportation for shipment to customers. Supply chains also rely on different types of software systems that enable information systems in disparate locations to communicate. The optimal routings and transportation modes must also be determined for products in a supply chain. At an operational level, products are loaded onto trucks or containers in sequence and according to weight and volume requirements to ensure arrival at their destination without damage. It is also important that the correct numbers and types of equipment are available on demand. In summary, adequate tools and methods must be available to ensure enough labor and material capacity exists, and they must be efficiently utilized to move materials and information through the supply chain.

Table 13.3 summarizes financial metrics and ratios that are useful for measuring the effectiveness and efficiency of a global supply chain. Chapter 7 described several important metrics from an operational perspective. Recall that the profit and loss statement summarizes revenues and expenses for a specific time. The value of assets, such as inventory, buildings, and equipment, are recorded on the balance sheet. Inventory investment can be evaluated as an expense or as a turnover ratio. Excess inventory is associated with poor inventory management. It can be calculated in several ways, but from an operational perspective multiples of lead time or days of supply are useful metrics. If days of supply exceeds the demand quantity expected over the order cycle or the required lot size, there may be excess inventory. Net operating profit after taxes (NOPAT) is calculated by dividing income after taxes by total revenue. Higher NOPAT levels are better than lower ones; NOPAT tracks industry averages, however, so it is difficult to compare performance across different supply chains. Asset efficiency or turnover is calculated by dividing

TABLE 13.2

Fifteen Important Global Supply Chain Functions

Function

Description

1. Import/export

Imports and export from one country to another require specialized processes and training.

2. Electronic data interchange

Software systems that enable information technology platforms and applications in disparate locations to communicate with each other.

3. Transportation analysis

The tools and methods used to determine the best routing and mode of transportation in a network or supply chain.

4. Carrier management

The tools and methods used to select, negotiate, and monitor organizations that transport products or information across a supply chain.

5. Load optimization

The tools and methods used to ensure products are loaded correctly relative to weight, volume, and quality to ensure they arrive without damage and at the intended time.

6. Fleet management/ maintenance

The tools and methods used to ensure that a supply chain has the correct number and types of equipment and that they are available on demand.

7. Traffic routing

The tools and methods used to direct the flow of products or information through different transportation modes and networks to achieve the lowest lead time and cost.

8. Claims management

The tools and methods used to identify, manage, and reduce customer claims relative to errors, high cost, or longer than expected lead times.

9. Distribution

requirements planning

A system of tools and methods that matches supply with demand across a supply chain and inventory investment levels by item and location.

10. Network analysis

A model used to describe a supply chain including its operations and their spatial relationships with constraints on demand and supply.

11. Materials handling

The tools and methods used to move materials within fulfillment or distribution centers.

12. Packaging

Operations within a fulfillment or distribution center that remove items from stock and insert them into protective packaging for either direct shipment to customers or for storage as inventory.

13. Inventory management

The tools and methods used by organizations ensure inventory is available to satisfy customer demand by maintaining inventory at an optimum level as determined by lead time, expected demand, and target service levels.

14. Light assembly

Operations within a fulfillment or distribution center that require work other than packaging.

15. Workload management

The tools and methods used to ensure sufficient labor, material, and other capacity exist to meet work schedules.

TABLE 13.3

Global Supply Chain Financial Metrics

Metric

Description

Profit/loss

A profit and loss statement summarizes an organizations revenues and expenses for a specific time period. Expenses on this statement are costs incurred during business operations.

Inventory investment

Inventory investment is the amount of money invested in inventory. Inventory investment is evaluated in with an inventory turnover ratio.

Excess and inventory

Excess inventory is calculated based on multiples of lead time. A correlating metric is days of supply. If days of supply either exceeds the demand quantity expected over the order cycle (or lead time in some situations) or the required lot size, there may be excess inventory in the system.

Net operating profit after taxes (NOPAT)

NOPAT is calculated by dividing income after taxes by total revenue. Higher NOPAT levels are better than lower ones, but NOPAT tracks industry averages, so it is difficult to compare performance across different supply chains. As a result, NOPAT should be evaluated against direct competitors and an organizations competitive strategy.

Asset efficiency

Asset efficiency (or turnover) is calculated by dividing total sales revenue by the total asset investment necessary to obtain the sales for the time under analysis. Asset efficiency is an important metric to measure the degree of supply chain “leanness.” Lean supply chains have high asset efficiencies relative to competitors.

Fixed asset efficiency

Fixed Asset Efficiency (Turnover) = Sales/(Average Property + Plant + Equipment)

Receivables efficiency

Receivables Efficiency (Turnover) = Net Credit Sales/ Average Accounts Receivables

Profit margin

Profit Margin = Gross Profit/Sales

Return on assets

Return on Assets = Net Profit Margin x Asset Efficiency

Gross margin return on investment (GMROI)

GMROI = Gross Margin/Average Inventory Investment at Cost

total sales revenue by the total asset investment necessary to obtain these sales for the time under analysis. Asset efficiency (especially inventory) is an important metric that measures how lean a supply chain is relative to utilization. Lean supply chains have higher asset efficiencies relative to competitors. The other financial metrics shown in Table 13.3 represent additional key efficiency ratios.

Important supply chain operational metrics are described in Table 13.4. Service level targets are expressed as unit, line, or order fulfillment. Service level targets can also be defined as on-time delivery or delivery-to-prom- ise, as well as manufacturing schedule attainment. The second metric, supplier on-time delivery performance, is calculated based on an agreed- upon versus actual delivery date. There could also be several variations of an on-time delivery metric, depending on the organization and industry. It is important all supply chain participants agree on the on-time delivery definition and its measurement. Overdue order backlogs occur for several reasons. In most situations, available capacity does not exist, but there could be different reasons based on the industry and organization.

The fourth metric, inventory efficiency (turnover), has been described as a ratio of annualized cost of goods sold (COGS) divided by monthly average inventory investment, and it can be determined at a product level or aggregated. There are many reasons for an unplanned order, such as poor forecasting, internal process breakdowns, or a failure to adhere to lead time promises or capacity requirements. Schedule changes are different from unplanned orders in the sense they are caused by unforeseen circumstances that result in products not being produced as originally planned. Unplanned orders are one cause for schedule changes. Data accuracy has a significant impact on decisions regarding how much and when to manufacture products or to provide services and their location. It is important to understand the extent, types, and locations of measurement errors across a supply chain. These include manual and automated data collection, analysis, and reporting. Lack of materials, other resources, or information that is required for production requires capacity be held in reserve to meet service levels. In manufacturing, raw materials and work-in-process (WIP) inventories remain unutilized because of scheduling issues.

Poor forecasting accuracy causes many production issues and wastes capacity, including inventory. The tenth operational metric, lead time, is impacted by several issues that increase the time from order to cash. Lead time can be defined several ways. In one context, it is the time required to perform a single operation; this is also called the operational cycle time to produce one unit. In another context, it could be the end-to-end time to move through a process. Individual components of lead time include preparation time, queue or waiting time, processing time, movement or transportation time, and inspection time.

TABLE 13.4

Global Supply Operational Chain Metrics

Metric

Description

Customer service target

Service level targets are expressed as unit fill, line fill, order fill, and financial terms. Service level targets can be defined as on-time delivery or delivery-to-promise, as well as manufacturing schedule attainment and other processes that touch the customer.

On-time supplier delivery

Supplier on-time delivery performance is calculated using agreed-upon versus actual delivery time. There could be several variations of the metric.

Overdue order backlogs

Overdue order backlogs occur for several reasons. Available capacity may not exist (for a variety of reasons), or the backlog represents the industry practice of make-to-stock, or the problem based on technology constraints (i.e., make-to-order systems).

Inventory efficiency (turnover)

The number of times that an inventory turns over during a year is calculated as the ratio of annualized cost of goods sold divided by monthly average inventory investment.

Unplanned orders

There are several reasons for unplanned orders, including poor demand forecasts, internal process breakdowns, or failure to adhere to standard operating procedures regarding lead time and capacity requirements.

Schedule changes

Schedule changes are different from unplanned orders in the sense they are caused by process changes or unforeseen circumstances.

Data accuracy

Data inaccuracies existing in a supply chain impact decisions regarding how much product to make, what services to offer, which subcomponents to order, and other decisions. It is important to understand the degree of measurement error in supply chain information systems.

Material availability

Lack of material, other resources, or information drives up inventory investment because raw material and work-in- process inventories remain unutilized and impact production schedules. The same concept holds true in any system where other resources wait.

Forecast accuracy

Poor forecasting accuracy causes demand and supply mismatch. There are many reasons for poor forecast accuracy.

Lead time

Cycle time is the time required to perform a single operation, and lead time is the time to complete two or more operations in a network. Individual components of cycle time or lead time include order preparation time, queue or waiting time, processing time, transporting time and, time to inspect the work.

Some industries measure capacity by the number of production facilities, pieces of equipment, or the number of available people. These organizations are large and well capitalized and dominate national and international markets; market entry is difficult, and barriers to competition are significant. However, entire new industries have been created recently in which capacity is dynamic and markets are highly differentiated and globally dispersed. Capacity management has evolved to incorporate virtualization as well as decentralization. This has dramatically changed the competitive landscape as well as the strategies and tactics used to compete.

 
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