Transcription for David Closs for Supply Chain Management
Hi, this is Dave Closs again from the supply chain faculty at Michigan State. Happy to be with you. In this lecture, we’re gonna talk about defining supply chain management in terms of the physical entities involved and some of the key requirements to improving its performance. This particular slide demonstrates or illustrates the integrated supply chain model.
Typically, we focus on the center part of the model, which we call the integrated enterprise. In most organizations or most situations, we see that as a manufacturer. The manufacturer may be an automotive manufacturer here in Michigan, or it may be a cereal manufacturer or electronics manufacturer in Asia, or a clothing manufacturer in South America. In that manufacturing sense, they order raw materials through the procurement process. They do some type of changing of form; we label that here manufacturing or production. And then they fulfill orders to the end consumer or to the marketing channel, which is includes the distributors.
In the middle there, we have logistics, which is the activity of moving and storing product as it moves through the supply chain. So the focus on a supply chain organization is that integrated enterprise, but in fact, that could be a retailer or as a distributor because in many cases, manufacturing or production or valued-added activities occur throughout the supply chain. For example, if you were to go buy paint, the actual manufacturing of the final can of paint doesn’t occur until you get to the retailer. You walk into the retailer and say, “I would like some red paint,” and the retailer at that point mixes the base coat with the red and, in a sense, performs the last aspect of the manufacturing process.
But when we look at the total supply chain, it’s just not the single manufacturer that’s the focus. On the left-hand side, we see the supplier network that brings in raw materials. If we keep our discussion with paint, we’re bringing in the chemicals and the water and the cans and the labels and all those activities to bring it together and into the manufacturer. And even prior to that, we have to go out into raw materials providers or commodity providers to provide, again, chemicals or tin for the can and so on.
So the supply chain, on the supplier side, includes all the activities to bring that material from the farm, from the field, from the mine into the integrated enterprise that we call the manufacturer. Once we make the finished product, going to the right in this case, we go to what’s called the market distribution network, and there we go to distributors or wholesalers, the large circles; the retailers, which are the smaller circles, and ultimately to the end consumer, that’s you and I as we consume or use the paint to liven up our house or to perform some artwork.
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There’s also the possibility increasingly of going directly from the manufacturer to the end consumer. So the two entities in the channel, the distributors and the retailers, may not be used on specific supply chains. So our view of the integrated supply chain goes all the way from the raw material stage on the left to suppliers, to manufacturers and production sites through the market and distribution system all the way to the end consumer. The objective, as we talked about last in last lecture, was to focus on providing that solution to the end consumer.
Well, what are some of the challenges involved in making this work?
Well, obviously, we want to do this at the lowest cost, but the primary focus as we’ll talk into the future, is to satisfy and provide service to the end consumer.
What type of firms have discovered value enhancement through supply chain management?
Typically, those are the ones with very large inventories in their supply chain, such as automotive or electronics manufacturers. Even clothing and food manufacturers have significant inventories in their supply chain and if they can reduce the amount of inventory in a supply chain, they reduce cost, provide us a better product at a lower price.
Supply chain management is also critical for companies with a large number of suppliers. If we’re making cars, for example, it requires about 5,000 parts to make a car. So I’m dealing with a lot of suppliers to bring the cars the individual components in and getting them in place, in the right sequence so I have the right color seats in the right color internal part of the car.
Supply chain management is also critical for complex companies that have very complex products, again, making them right. If you think of the charge of designing and making computers, I’ve got all kinds of different combinations of motherboards and components, disk drives and video cards and all those types of things to make a computer or make a video game to make it work. And getting those in the right sequence and the right type together in a way that can manufacture is a challenge.
And finally, customers with a large purchasing budget also merit or benefit most from the supply chain.
So, what’s happened over the last 20 years or so is supply chain has evolved from what we would call a backroom activity, meaning nobody, people, most firms, don’t think it has a significant impact on their bottom line, to many firms today that understand its major impact, and again, we’ll talk about that in one of the next lectures.
Some of the major challenges in supply chain management are to reduce costs and coordinate resources throughout the supply chain. The two major aspects of that are reduced bullwhip effect and process integration.
The bullwhip effect is initiated because there is not always the best communication between supply chain partners. For example, if there were to be a run on the grocery store, we all decided to go in and buy cereal on the same day, the grocery store would see a huge increase in demand for cereal. They would react because, at first, their shelves would be bare, obviously. But the second thing they’d do is say, “all of a sudden, people are buying more cereal,” and so they would respond to Kellogg and General Mills and Quaker and say, "we need to order more cereal because apparently, people are eating more." And then Quaker and Kellogg and General Mills would react even further and say, "OK, we need to buy more boxes and more grain to make sure we can produce that cereal."
But the assumption was that people are gonna keep buying at that same increased rate. If that’s not the case, that creates what we call a bullwhip effect of a one-time increase that flows back through the supply chain. So one of the critical requirements or challenges, I should say, in making supply chains work together is to make sure we have that coordination of activities so we understand what the end demand is for a supply chain, the end demand of a product through the supply chain.
The second challenge is to integrate the processes. As we talked on the previous slide -- and I’ll go back to the slide that identified the supply chain -- each one of these boxes and the circles within the boxes really represents a different firm or could represent a different firm.
If they represent a different firm, then there’s a fair chance they aren’t gonna really coordinate with each other, and thus, they’ve really put into place an idea of “we need to work together”, and so, the idea of the coordination of exchanging information about demand and forecasts and requirements for delivery. If we don’t exchange that information and don’t work together, the processes of shipping, scheduling transportation and delivery and dealing with the financial requirements, and dealing with the inventory requirements and so on is not gonna be very coordinated. And as a result, we’ll end up with poor quality, longer cycle times, longer delay times, if you will, and poorer production methods.
So if we integrate these processes and work with our supply chain partners, work with our suppliers, work with our manufacturers and our contract manufacturers, the manufacturers that we don’t own, and our customers to work together, we’re gonna take out that waste in the supply chain and reduce costs, and again, with the primary focus on meeting the end requirements of consumers.
This list is a list provided by AMR Gartner, which is a consulting firm that focuses on supply chain. Every year they work with peer groups and work with their internal organization and look at the financial characteristics of 150 firms around the world. And they identify the supply chain top 25. In effect, this is the basketball ratings for the firms in the supply chain industry. And you can look at how they’re rated by their the peer experts, how they’re rated by AMR internally, and then the financial characteristics of return on assets, basically how well they use their assets, how much they grow, and how fast they turn their inventory. I think the interesting thing to look at, and you can look at the detail of the firms, but let me just lay out, I think, some of the conclusions I’d like you to get out of this particular chart.
First, supply chain expertise occurs at all levels of the distribution channel. For example, it’s provided by major manufacturers, it’s provided by such as Procter & Gamble and Apple. Its characteristics of a best supply chain organization are also provided by distributors and also by retailers. You see Tesco and Walmart and Target are some of the key retailers on the list. So it could be at any level of the distribution channel. It is not just manufacturers, it’s not just distributors, and it’s just not retailers. Secondly, supply chain expertise and supply chain, high performance occurs in many industries.
Some people have asked me in the past, well, what are the best industries in terms of supply chain? As you can see from the list, there are no real best industries. And you can see it in the certainly in the electronics industry, but right next to the electronics industry, you see it with Proctor & Gamble. And you think about it, well, one case we’re delivering very high tech products, and the other one we’re basically delivering soap, but in both cases, they’re very high-performing supply chain organizations. So it’s not like it’s restricted to one industry or another. It can happen in any industry.
And lastly, as I alluded to earlier, it can occur both in high tech and low tech firms. So this will give, this provides you with some background in terms of what a supply chain is and what are the core characteristics of the best supply chain organizations. And then in the next set of lectures, we’re gonna focus down into individual supply chain functional areas. Again, we’ll see you next time.