CHAPTER 13 – STRUCTURE OF THE SUPPLY CHAIN
AIMS OF THE CHAPTER
Products move through a series of operations in their process. This movement usually includes a physical flow of goods, and then we refer to the flow of materials through a supply chain. This chapter introduces the concept of logistics – or supply chain management – which is responsible for this flow. The chapter looks at the broad area of design, emphasising the number of points on the supply chain, the best locations for these, and the relationships between them.
The aim of the chapter is to introduce the concept of supply chain management. More specific aims are to:
Logistics – which is equivalently known as supply chain management and sometimes physical distribution – is responsible for all the physical movement of materials. This includes movement into the process from suppliers, through operations, and then out of the process to customers. It is difficult to think of any business activity that does not depend, to some extent on logistics supplying required materials. Activities generally included in logistics are procurement, inward transport, receiving, warehousing, stock control, order picking, material handling, distribution, recycling, returns and waste disposal, location and associated communications.
A supply chain consists of the series of activities and organisations that materials move through on their journey from initial suppliers to final customers. The importance of supply chain is that almost every activity depends to some extent on the availability of materials brought from suppliers and the delivery of products out to customers. These fundamental activities are organised as flows through supply chains. So logistics is essential, is expensive, directly affects profits, forms the main links between suppliers and customers, determines lead time, reliability and other measures of customer service, gives public exposure, can be risky, determines the size and location of facilities and may prohibit some operations.
From each organisation’ s point of view, activities that move materials inwards are called upstream; those that move materials outwards are called downstream. Upstream activities are divided into tiers of suppliers. A supplier that sends materials directly to the operations is a first tier supplier; one that send materials to a first tier supplier is a second tier supplier; one that sends materials to second tier supplier is a third tier supplier, and so on back to the original sources. Most organisations get materials from many different suppliers, so the supply chain converges as raw materials move in through the tiers of suppliers.
Customers are also divided into tiers; one that buys products directly from the operations is a first tier customer; one that gets products from a first tier customer is a second tier customer; one that get products from a second tier customer is a third tier customer, and so on to final customers. Most organisations sell products to many different customers, so the supply chain diverges as products move out through tiers of customers.
There are two types of decisions about the supply chain. Firstly, there are decisions that design the structure of the chain, showing the facilities, their relationships and locations. Secondly, there is the mechanism for moving material through the chain. The most important decisions about supply chain structure are likely to concern the shape of the chain (setting its width and length), the number of distinct facilities, their function, the size of each, the type of operation at each facility, location of these facilities, capacity at each location, location of stock, customers served from each facility, transport arrangements, relations between organisations, and so on.
Within an organisation, integrated logistics bring the basic advantage of more efficient operations. This means that it gives unified aims, avoids duplicated effort, reduces waste of resources, gives better information flows and co-ordination, increases the speed of movement through the chain, makes planning easier, eliminates buffers between the activities such as stocks of work in progress, reduces uncertainty, and highlights important information such as costs.
There is a progression of activities where integration starts within an organisation, and then spreads to other organisations within a supply chain. Within an organisation, integration might be accomplished in seven steps – start with separate logistics activities, recognise that logistics are important for success, make improvements to the separate activities, internal integration, developing a logistics strategy, to set the long term direction of logistics, benchmarking and then looking for continuous improvement. External integration follows similar principles, and might involve informal co-operation, contractual arrangements, strategic alliances, or vertical integration.
Facilities location finds the best geographic location for operations. Related decisions include the number of locations, size of facility, type of operation, and so on. This is an important decision that has effects over the long term – and a poor location can give low productivity, unreliable deliveries of materials, poor quality products, high costs, poor customer service, and a host of other problems. And if an organisation makes a mistake in location it cannot often write-off its investment in the site, close down and move to a better place.
This is usually a complicated set of related decisions that we can describe as a hierarchy. At the top of this are the broad decisions about geographic regions, moving down to detailed decisions about individual sites. To be more specific, a reasonable approach will:
It is difficult for any organisation to give an exact figure for the logistics costs, because normal accounting conventions do not consider them separately. There is also some disagreement about the activities to include. Rules of thumb and more considered analyses suggest figures in the range 12 percent to more than 30 percent of turnover. Perhaps the main point of agreement is that logistics is expensive. Whether it is too expensive is open to debate. Organisations certainly keep looking for ways of improving their logistics – so there is an implication that current costs are higher than they could be. However, this is true for all business activities and does not necessarily mean that the costs are too high. Realistically, a few leading companies organise their logistics much more efficiently that others, so it is fair to say that in general costs are high and could be substantially reduced if all organisations adopted the policies of the leaders.
Yes – it is always difficult to get efficient low cost logistics. Some organisations manage this very well – but many others do not and there is considerable room for improvement.
Some of the benefits of integrated logistics are genuine co-operation between all parts of the supply chain, lower costs, improved performance, improved material flow, better customer service, more flexibility, standardised procedures, and integrated quality management. However, these benefits can be difficult to obtain, and it is often impossible to get complete integration. Supply chains come in all kinds of shapes and sizes, and the problems of integration are often so great that it is not a realistic option, and then it is better to work with different parts separately. Occasionally, integration would be possible, but the benefits do not make it worthwhile. For example, you can imagine an organisation that outsources separate activities to a specialist provider, so that each part of logistics is done so efficiently that further integration would be pointless.
There is some truth in this. When two organisation exchange products for money, one inevitably wants to charge high prices for cheap products, and the other wants to buy expensive products at low cost. These two aims are clearly in conflict, and they have to find a compromise that is acceptable to them both. The point of compromise depends on their relative power. The principle of integrated supply chains is that overall performance improves, so that both organisations can benefit simultaneously. In principle, they can both share the benefits – but some organisations (like suppliers to major supermarkets) complain that they still do not get a fair share of the benefits.
Strategic alliances aim at giving benefits to both parties – but one is inevitably stronger than the other and has more bargaining power. For example, a car manufacturer has more power than a small supplier of one component. Then there can be difficulties when, say, the manufacturer decides to change its designs and no longer trade with the supplier – who may lose its only customer. The effects of such differences can be reduced by having binding contracts that clearly set-out the roles and responsibilities of each partner. The four levels of integration are described as informal co-operation, contractual arrangements, strategic alliances and vertical integration.
Primarily there are the problems when people used to one business environment have to work in another – including language, laws and the broad legal system, culture, financial arrangements, attitudes towards business, infrastructure, available technology, etc. These difficulties become acute when the two environments come into direct contact, such as at national borders or with international communications.
Facilities location finds the best geographic location for operations. This is an important decision that has effects over the long term – and a poor location can give low productivity, unreliable deliveries of materials, poor quality products, high costs, poor customer service, and a host of other problems. And if an organisation makes a mistake in location it can rarely write-off its investment in the site, close down and move to a better place. So the choice of location fundamentally affects an organisations long-term performance – and even its survival.
Usually, some of the most important factors for location decisions the location of customers, location of suppliers and materials, location of competitors, location of utilities, government attitudes, prevailing economic conditions, culture and quality of life, social attitudes, indirect costs and climate. A decision about the best location for an independent management consultant should include these – and any other relevant – factors. In practice, most people are likely to locate where they are currently working or living – or where they would like to work or live.
IDEAS IN PRACTICE
Aim: to indicate the scale of major supply chains
Wal-Mart is the world’s largest retailer, and it has a correspondingly large and complex supply network. The figures illustrate the complexity, which we can imagine from the single figure that it has 61,000 distinct suppliers in mainland USA. The company’s success is founded on the efficiency that it moves materials through these chains. Smaller organisations may not have such complex problems as Wal-Mart, but it is still difficult to organise logistics efficiently.
Aim: to illustrate the scope of smaller supply chains
This case outlines the shape of the main supply chains in a simple manufacturer. With ShoeRight materials are obtained locally, or imported from a few main suppliers. The more interesting part of their logistics comes with distribution out to customers. The supply chains give alternative routes to customers, and these are surprisingly complex. Designing the supply chain, setting the relationships between different parts, and organising the flow of materials is a surprisingly difficult job.
Aim: to outline the approach of a major oil company to strategic alliances
Initially Petro-Canada started developing strategic alliances with its suppliers as a way of reducing its cost of materials. Their early experiences proved so successful that this became a standard way of working. However, it is never easy to make change working practices, so PC developed a formal procedure that it goes through with potential partners. These seven steps suggest a general way for organisations to move towards a new alliance.
Aim: to suggest that vertical integration is not inevitably the best option for improving operations
Sony is a manufacturer of consumer electronic products. They had a huge success with their Walkman, and then put a lot of effort into different kinds of recording devices. When their (arguably technically superior) Betamax lost out to the VHS system, Sony felt that it could have been more successful if it had more influence with content providers. They felt that the best way to achieve this was through vertical integration, buying studios and music companies. However, the story was repeated with DVD format and then high capacity DVDs. The argument was that vertical integration has actually weakened Sony’s position as it is seen as competing with both electronics manufacturers and content providers. Its internal operations are trying to satisfy two types of strategic aim, and this is proving unexpectedly difficult.
McFarlane and Sons
Aims: to illustrate some calculations for a decision on facility location
When moving into a new market, organisations usually have the five options of full local production, local assembly and finishing, local warehousing and sales, exporting, or licensing. Here McFarlane and Sons had simplified this down to six options for a planned expansion from Canada into the US market. The financial analysis suggested that their best returns came from a straightforward expansion of existing facilities, but other factors made a licensing arrangement potentially more attractive. The company explored this option with a small experimental scheme.
Aims: to illustrate some factors that are important in international location decisions
Intel is a high technology company, which would traditionally have looked for a location in a developed country with existing expertise in technology. However, along with other manufacturing industries, it has looked at the low costs that are available in less developed areas. The survey by Deloitte & Touche Fantus shows the sort of factors that high technology companies want in a location, and with improved communications and transport these can be found in countries that are not normally associated with high technology industries. For example, a country may not have its own advanced research centres, but regional ones can be accessible in a short time. Intel felt that their requirements would be met in Costa Rica, especially when added to the government incentives and other non-quantifiable factors.
Walsingham Fetters Ltd
Aim: to illustrate an infinite set approach to location
This case shows the first part of an analysis for a company starting its search for a new location. Here the company set about finding the centre of gravity of supply and demand. In practice thee were several hundred customers and suppliers to consider, and the centre of gravity gave an indication of where the company should start looking for sites. Then it moved on to consider available sites, following the methodology described in the chapter.
Aim: to illustrate a finite set approach to location
Here a company wants to compare a number of available sites, so it uses a scoring model. These models have the benefits of being easy to use and combining a range of qualitative factors into a decision – but the disadvantages of relying on a series of judgements about the factors to include, their relative importance and scores for each option.
Location of the 2012 Olympic Games
Aim: to show the key steps in making a major location decision
This case outlines the way that the International Olympic Committee makes their decision about the location of the Olympic Games. This is an unusual type of decision, as it does not explicitly involve commercial analyses, as costs and incomes are the concern of the sponsoring cities rather than the IOC. In principle, the IOC is only interested in finding the city that has the highest probability of running the most successful games in a given year. In practice, their decision is made by a secret ballot and depends on many factors, not all of which are clear.
CASE STUDY – SUPPLY CHAIN AUDIT
Managers need relevant information for their decisions. Often we assume that this information is automatically available through an MIS. Often, though, systems are set-up to deliver transactional or summary information, but not give an overall view of specific types of related activities. Earlier chapters of the book makes the point that managers often do not appreciate the full workings of their operations, and need some kind of operations audit to bring together the related ideas. In the same way, they need a supply chain audit to show exactly what is happening in logistics, and bring together all the related ideas.
Any manager making decisions about the supply chain must have detailed information about its workings. This is given by a supply chain audit which shows how it works, its capabilities, strengths, weaknesses, areas that need improvement, performance relative to competitors, costs, and any other relevant information. The audit is presented in a document that might already have been compiled by people who are generally referred to as ‘supply chain managers’, or it might have to be specially prepared. In either case, each section of the audit is likely to be written by people working in the relevant area and who are familiar with its operations. The benefits of an audit are that it presents all current information and thinking in a single document, that can be used for all related decisions.
Chapter 7 of the book suggested that the main parts of an operations audit are the product, process, resources and management, but it made the point that there were many variations on this. This case describes the six areas for focus in a supply chain audit as supply chain strategy, structure of the supply chain, operations within the supply chain, information, organisational structure, and performance measurement. Between them, these cover aspects of the supply chain that are generally considered most important. Most of the major concerns will fit into these six areas. However, other factors can be important in specific circumstances, and people always have their own opinions. A range of alternative sections can be suggested.
A supply chain audit aims at giving a complete picture of current operations in the supply chain – what it does, how it does things, who does them, where they are done, and why. It is based on information gathering, analysis and presentation. There is no right way of doing this, and many routes can be taken to the point of presenting a final document.
An obvious point is that the audit is done for a purpose – so it is worthwhile defining this, and then seeing exactly what the audit has to achieve. This might suggest a structure for the final document, and an associated route for preparing it. The document will presumably be divided into sections, each of which refers to a specific aspect of logistics. So the detailed audit is likely to consist of corresponding streams, each working in parallel on a specific area. So early decisions are the structure of the streams and contribution to the final document, who works in each stream, how and from where they collect information, what analyses are used, and how the results are presented. The results from these streams are considered, discussed and consolidated into a single document.
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