Category Archives: Supply Chain Management

Requirements for a Successful Supply Chain

Requirements for a Successful Supply Chain

Several elements are mandatory for the successful implementation of a supply chain management program. These elements often overlap and often are dependent on each other.


A primary ingredient in the establishment of a successful relationship between vendor and customer is the element of trust. Without trust, none of the other factors is possible. Trust allows vendors to participate and contribute in the new product development cycle .

Long- Term Relationships

With suppliers taking on a strategic role in a company, it is necessary to develop long-term relationships that permit the sharing of a strategic vision. The term often used in establishing these long-term relationships is evergreen contracts, implying they are automatically renewed as long as the vendors perform as agreed.

Information Sharing

Successful supply chain management requires the sharing of information between lenders and customers. This information can include everything from new product design specifications  o capacity planning and scheduling, and even access to a customer's entire database

Advances in Technology

Advances in Technology

Technology continues to have a significant impact on the supply chain-E.UL(.electronif  data interchange e) provides a direct link between a manufacturer's database and that of its vendors. In addition, the increased use of personal computers allows customers to communicate directly with their vendors' systems. For example, FedEx customers can order a  pickup and track the delivery of their packages through their PCs. . Business-to-business (B2B) has been one of the fastest growing segments on the Internet.One of the reasons for its high rate of growth has been the creation of electronic or B2B marketplaces.  B2B marketplaces are virtual markets that bring buyers and sellers together. Usually these B~B marketplaces focus on a specific industry or product category, and the items being bought and sold are typically common off-the-shelf products. Companies such as General Electric who have embraced the Internet as a purchasing tool have saved millions of dollars in the cost of their purchased goods and services.  These electronic marketplaces provide an opportunity for reverse auctions to take place.Reverse auctions occur when a firm requests bids for an item in an electronic marketplace, and potential suppliers keep submitting lower bids until either the bid closing deadline is reached or there is only one supplier left. As with a regular auction, the lowest bid price at any time is always available to all interested parties. The contract is then awarded to the supplier with the lowest bid. A major concern with reverse auctions is that it tends to be counterproductive. in terms   f creating long-term supplier relationships.At the same time. the use of technology, in many cases, can provide suppliers with a barrier against competitors. A customer typically will establish an ED! link with only a few vendors. Potential new vendors have to demonstrate significant improvement in price and/or quality to warrant the additional costs of an added EDI link. Similarly, Felix customers would be reluctant to change vendors because it would require an investment in  time to learn, a new computer system with little or no added benefit.In addition to ED!. a number of other systems have been developed such as quick response QR) and efficient consumer res one (ECR . In all cases these terms refer to the -communication throughout a supply or distribution pipeline. This is a paperless communication  between customers and vendors. For several years prior to this, there already had been some improvement in communication through the use of open computer systems using UNIX or -type software. but ED!, QR, and ECR go far beyond that.  Quick response (QR) programs have grown rapidly. A survey by Delete & Touche showed that 68 percent of retailers either have implemented or plan to implement QR within two years." Quick response is based on bar-code scanning and EDI. Its intent is 10 create a just-in-time replenishment system between vendors and retailers. Virtually all medium and large retail stores use Universal Product Code (UPC) barcode scanning. Point-of-sale (POS) scanning at the register also uses price-look-lip (PLU), as reported by 90 percent of the respondents.   Efficient consumer response (ECR) is a variation of QR and EDI adopted by the supermarket  industry as a bovines strategy where distributors, suppliers. and grocers work closely together to bring product to consumers. They can use bar-code scanning and ED!. Savings come from reduced supply chain costs and reduced inventory.  A study by Kurt Salmon Associations estimated a potential savings of more than$30 billion .:' In the dry grocery segment this could cut supply-chain inventory Irom 104 days to 61 days. Another study by McKinsey estimated that dry grocery consumer


prices could be reduced an average of 10.8 percent through industrywide adoption of ECR.without ECR. manufacturers push products on the markets by offering low prices on large quantities: A few ties a year the manufacturer offers the grocer a low price on a large quantity of product. This is forward buying. The manufacturer then works with the supermarket to offer coupons and incentives to entice customers to buy the product during a promotion. Products not sold during the promotion are then stored in inventory to carry that supermarket until the next manufacturer's promotional deal. ECR focuses on the customers to drive the system, not the manufacturers' deals. Customers pull goods through the store and through the pipeline by their purchases. This per- I11it~less inventory throughout the system. Cooke cites a study that estimated that distributors purchase 80 percent of their merchandise  during manufacturers' sales or "deals.' They may buy four times per year and fill their warehouses. Until the industry frees itself from this addiction to deal buying. all the great replenishment techniques will be worthless.l Wal-Mart Satellite network. first installed in 1987 in Bentonville. Arkan as. provide-, another, good example of how technology has iimpactedthe structure of the supply chain. This netw ork support data, voice, and video and allows real-time : ales and iTI\entory  information.Wal-Marts EDL shown in the photo on the next page, installed in 1990, issues electronic purchase order- and receives electronic invoices from virtually all of Wal-Marts vendors.


Shared or Reduced Risk

The cost of developing new products is increasing. With product life cycles becoming shorter. the risk associated with these new products also increases. To reduce their own financial exposure. many companies are requesting that vendors take on an increasing percentage of this risk. Volkswagen's new automotive plant in Brazil epitomizes this sharing of risk with vendors. (See OM in Practice box.

Increase in Consignment Inventories

Increase in Consignment Inventories

In r cent years. there ha been increased emphasis on the management of a tirm ‘s assets. as m eured by the rate of return on as. ets. and the bon use of many managers are directly related to thi. measure. Ina. much a inventories arc: view ed a an asset on a firm ‘s balance -he t. the less inventory that i,>on hand, the better the return on a sets. To reduce invcntories without negatively affecting operations and customer deliveries. an increasing number of companies are using consignment inventories wherever possible. Consignment inventorie are inventories that are physically in a company facility but are still owned by the supplier. Thus. they do not appear an) where as an asset to the firm. Only when the cornponents are actually used in the production of an end product does the ownership transfer to the firm. and then. it tran fers almost immediately to the customer upon shipment. Consignment inventories also are used in services. where the retailer doesn’t pay the rnanuta  for the product until it is actually sold to the end user.

Factors Impacting the Supply Chain

Reduced Number of Suppliers

Companies. as part of their supply chain programs. have significantly reduced the number of vendors they buy from. Managers currently believe in establishing long-term relationships with a few, highly reliable vendors rather than haying multiple sources for every purchased item. As seen in Exhibit 13.3, the reduction in the number of suppliers has been significant in recent years, and is even more impressive in light of the tact that most of these companies are now offering a wider variety of products to their customers.

Increase in Competition

The emergence of a global economy has dramatically increased the number of competitors that offer similar products. As stated earlier. no corner of the world is immune to international competition. and this competition will only increase in intensity in the foreseeable future. As a result. supply chains will continue to grow in both directions: backwards toward suppliers in other countries and forward 10 aid new customers in these same countries.

Shorter Product Life Cycles

Product life cycles continue to shorten a, comparison introduce  products al  an ever increasing rate in the hope of gaining market  and a competitive adv garage. In order to  respond quickly to new product introduction-. a company need- to have  processes  hat can be converted easily to new product requirements-. Flexibility abo can he achieved  by shifting more responsibility onto supplier.

Increase in Supplier-Managed Inventories (SMI

In order to decrease purchasing transaction  and record-keeping co-tv, many firms now use a concept known as supplier-managed inventories (5\11) (or vendor-managed inventories (VMI» for many of their cost  bolt.


other tpes of fasteners. Thi approach is sometimes referred to as the breadbin method. (The term breadline comes from commercial bakeries where the Bremen or salesmen determine the number of loaves of bread to deliver to each retail outlet on their routes. and  who are also responsible for placing the bread on the retailer’s shelves. The retail operations then receive credit for any unsold bread that is returned.) With thi approach. minimum and maximum inventory level are established for each item. The firm’s supplier then are empowered to determine h w often these items should be replenish d. In addition. the suppliers have direct access to the manufacturing floor, and usually restock the item  t the points where they will be used. This eliminates the need for  stockroom. With approach. paperwork is reduced significantly because there are no punch . order” g noted. The receiving function also b reduced significantly,  the need for per one to move the Item from the stockroom onto the manufacturing floor



A1sin Seiki provides 99 percent of the brake valves that Toyota uses in the assembly of its automobiles. BecauseToyota uses a just-in-time (JIT) system with its vendor , it maintains only a four-hour supply of brake valves at each of its assembly plants. Consequently, when a fire destroyed Aisin Sekei's manufacturing facility on February 1, 1997 Toyota was forced to shut down its 20 automobile plants, which were producing 14,000 cars a day. Although many experts predicted that it would' take  weeks before Aisin could begin producing valves, Toyota' plants were again turning out cars five days after the fire.  This was accomplished through a concerted effort of all ofToyota's suppliers who worked together around the clock to provide an interim solution.

Cases inbound shipments of parts from nearly 1.000 suppliers worldwide. and outbound -shipments of finished goods that total 40,000 pieces of equipment to some 150 countries around the world. I The most recent innovation in supply chain management is the incorporation of  and their workers within the same manufacturing facility. Volkswagen'< new e assembly plant in Brazil, discussed later in this chapter. provide a good example of the- innovation. which IS illustrated in Exhibit 13.10.