Supply Chain Management

6.	Supply Chain Management Supply Chain Management is the management of the interconnection of organisations that relate to each other through upstream and downstream linkages between the processes that produce value to the ultimate consumer in the form of products and services (Slack et al., 2010). Activities in the supply chain include sourcing materials and components, manufacturing products, storing products in warehousing facilities and distributing products to customers. The management of the supply chain involves the coordination of the products through this process which will include the sharing of information between interested parties such as suppliers, distributors and customers.
	6.1.	Fluctuations in the Supply Chain The behaviour of supply chains that are subject to demand fluctuations has been described as the bullwhip effect and occurs when there is a lack of synchronisation is supply chain members, when even a slight change in consumer sales will ripple backwards in the form of magnified oscillations in demand upstream. The bullwhip effect occurs because each tier in the supply chain, increases demand by the current amount, but also assumes that demand is now at this new level, so increases demand to cover the next week also. Thus each member in the supply chain updates their demand forecast with every inventory review. There are other factors which increase variability in the supply chain. These include a time lag between ordering materials and getting them delivered, leading to over-ordering in advance to ensure sufficient stock are available to meet customer demand. Also the use of order batching (when orders are not placed until they reach a predetermined batch size) can cause a mismatch between demand and the order quantity. Price fluctuations such as price cuts and quantity discounts also lead to more demand variability in the supply chain as companies buy products before they need them. In order to limit the bullwhip effect certain actions can be taken. The major aspect that can limit supply chain variability is to share information amongst members of the supply chain. In particular it is useful for members to have access to the product demand to the final seller, so that all members in the chain are aware of the true customer demand. Information Technology such as Electronic point-of-sale (EPOS) systems can be used by retailers to collect customer demand information at cash registers which can be transmitted to warehouses and suppliers further down the supply chain. If information is available to all parts of the supply chain it will also help to reduce lead times between ordering and delivery by using a system of coordinated or synchronised material movement. Using smaller batch sizes will also smooth the demand pattern. Often batch sizes are large because of the relative high cost of each order. Technologies such as e-procurement and Electronic Data Interchange (EDI) can reduce the cost of placing an order and so help eliminate the need for large batch orders. Finally the use of a stable pricing policy can also help limit demand fluctuations.
	6.2.	Supply Chain Procurement An important aspect of supply chain activities is the role of procurement in not only acquiring the materials needed by an organisation but also undertaking activities such as selecting suppliers, approving orders and receiving goods from suppliers. The term procurement is often associated with the term purchasing but this is taken to refer to the actual act of buying the raw materials, parts, equipment and all the other goods and services used in operations systems. There has recently been an enhanced focus on the procurement activity due to the increased use of process technology, both in terms of materials and information processing. In terms of materials processing the use of process technology such as flexible manufacturing systems has meant a reduction in labour costs and thus a further increase in the relative cost of materials associated with a manufactured product. This means that the control of material costs becomes a major focus in the control of overall manufacturing costs for a product. Another issue that has increased the importance of procurement is that the efficient use of automated systems requires a high quality and reliable source of materials to be available. This is also the case with the adoption of production planning systems such as JIT which require the delivery of materials of perfect quality, at the right time and the right quantity.
		6.2.1.	Choosing Suppliers Before choosing a supplier, the organisation must decide whether it is feasible and desirable to produce the good or service in-house. Buyers in purchasing departments, with assistance from operations, will regularly perform a make-or-buy analysis to determine the source of supply. Often goods can be sourced internally at a lower cost, with higher quality or faster delivery than from a supplier. On the other hand suppliers who focus on delivering a good or service can specialise their expertise and resources and thus provide better performance. Strategic issues may also need to be considered when contemplating the outsourcing of supplies. For instance internal skills required to offer a distinctive competence may be lost if certain activities are outsourced. It may also mean that distinctive competencies can be offered to competitors by the supplier. If a decision is made to use an external supplier, the next decision relates to the choice of that supplier. Criteria for choosing suppliers for quotation and approval include the following :
			-	Price As stated in the introduction, the cost of goods and services from suppliers is forming an increasingly large percentage of the cost of goods and services which are delivered to customers. Thus minimising the price of purchased goods and services can provide a significant cost advantage to the organisation
			-	Quality To be considered as a supplier, it is expected that a company will provide an assured level of quality of product or service. This is because poor quality goods and services can have a significant disruptive effect on the performance of the operations function. For example resources may have to be deployed checking for quality before products can be used, poor quality products that get into the production system may be processed at expense before faults are found and poor quality goods and services that reach the customer will lead to returns and loss of goodwill.
			-	Delivery In terms of delivery, suppliers who can deliver on-time, every time, in other words show reliability, are required. The ability to deliver with a short lead time and respond quickly once an order has been placed, can also be an important aspect of performance.
			The process of locating a supplier will depend on the nature of the good or service and its importance to the organisation. If there are few suppliers capable of providing the service then they will most likely be well known to the organisation. If there are a number of potential suppliers and the goods are important to the organisation then a relatively lengthy process of searching for suppliers and the evaluation of quotations may take place. Most organisations have a list of approved suppliers they have used in the past, or are otherwise known to be reliable. However it is important to monitor suppliers in order to ensure that they continue to provide a satisfactory service. A system of supplier rating, or vendor rating is used to undertake this. One form of vendor rating is a checklist which provides feedback to the supplier on their performance and suggestions for improvement. Another approach is to identify the important performance criteria required of the supplier, for example delivery reliability, product quality and price. The supplier can then be rated on each of these performance measures against historical performance and competitor performance. When choosing suppliers a decision is made whether to source each good or service from an individual supplier, termed single sourcing or whether to use a number of suppliers, termed multi-sourcing.
	6.3.	Supply Chain Distribution Supply chain distribution refers to the movement of materials through the supply chain to the customer. Two main areas of physical distribution management are materials handling and warehousing.
		6.3.1.	Materials Handlin There are three types of materials handling systems available can be categorised as manual, mechanised and automated. A manual handling system uses people to move material. This provides a flexible system, but is only feasible when materials are movable using people with little assistance. An example is a supermarket where trolleys are used to assist with movement, but the presence of customers and the nature of the items make the use of mechanisation or automation not feasible. Mechanised warehouses use equipment such as forklift trucks, cranes and conveyor systems to provide a more efficient handling system, which can also handle items too heavy for people. Automated warehouses use technology such as Automated Guided Vehicles (AGVs) and loading/unloading machines to process high volumes of material efficiently
		6.3.2.	Warehousing Warehouses serve an obvious function as a long-term storage area for goods but also provide a useful staging post for activities within the supply chain such as sorting, consolidating and packing goods for distribution. Consolidation occurs by merging products from multiple suppliers over time, for transportation in a single load to the operations site. Finished goods sourced from a number of suppliers may also be grouped together for delivery to a customer in order to reduce the number of communication and transportation links between suppliers and customers. The opposite of consolidation is break-bulk where a supplier sends all the demand for a particular geographical area to a local warehouse. The warehouse then processes the goods and delivers the separate orders to the customers. One of the major issues in warehouse management is the level of decentralisation and thus the number and size of the warehouses required in inventory distribution. Decentralised facilities offer a service closer to the customer and thus should provide a better service level in terms of knowledge of customer needs and speed of service. Centralisation however offers the potential for less handling of goods between service points, less control costs and less overall inventory levels due to lower overall buffer levels required. The overall demand pattern for a centralised facility will be an aggregation of a number of variable demand patterns from customer outlets and so will be a smoother overall demand pattern thus requiring lower buffer stocks. Thus there is a trade-off between the customer service levels or effectiveness offered by a decentralised system and the lower costs or efficiency offered by a centralised system. One way of combining the advantages of a centralised facility with a high level of customer service is to reduce the delivery lead time between the centralised distribution centre and the customer outlet. This can be accomplished by using the facility of Electronic Data Interchange (EDI) or e-procurement systems discussed in the procurement section. The warehouse or distribution system can be itself outsourced and this will often be the only feasible option for small firms. The choice is between a single-user or private warehouse which is owned or leased by the organisation for its own use and a multi-user or public warehouse which is run as an independent business. The choice of single-user or multi-user warehouse may be seen as a break-even analysis with a comparison of the lower fixed costs, but higher operating costs of a multi-user warehouse, against the high fixed costs and lower operating cost of a single-user warehouse. However the cost analysis should be put into a strategic context. For example the warehouse and distribution system may enable a superior service to be offered to customers. It may also be seen as a barrier to entry to competitors due to the time and cost of setting up such a system