Business Report Based on a Scenario
A. Recommend, with sufficient support, the adoption of one of the following strategies by the power tool company: a Keiretsu network, a virtue company, a vertical integration, or a different supplier chain strategy:
Supplier chain strategies are one of the most important aspects of supply chain management. The key to success of an organization is the supply chain strategy. The supply chain makes up 55-85% to total costs for a business, so it is understandable why so many people are searching for newer and better strategies. (Bruce O. Bartschenfeld)
A Keiretsu Network:Keiretsu network is a network composed of manufactures, supply chain partners, distributors and financiers who remain financially independent but work closely together to ensure each other’s success. The formation of a keiretsu allows a manufacturer to establish stable, long-term partnerships, which in turn helps them to stay lean and focus on core business requirements. (Whatis.com)
Virtual Company:Virtual companies rely on a variety of supplier relationship to provide services on demand. In this strategy, a company forms a network with other companies. All companies are dependent upon one another. Each member of the network performs essential functions to the project. (Bruce O. Bartchenfeld)
Vertical Integration:A vertical integration refers to a firm’s ownership of vertically related activities. The greater a firm’s ownership extends over successive states of the value chain for its product, the greater its degree of vertical integration. The extent of vertical integration is indicated by the ratio of a firm’s value added to its sales revenue: the more a firm makes rather than buys, the lower are its bought-in goods relative to its sales revenue. Vertical integration can be either backward, where the firm takes over ownership and control of producing its own components or other inputs, or forward, where the firm takes over ownership and control of activities previously undertaken by its customers. (inkling.com)
Having discussed the definition of these terms I would recommend Vertical Integration strategy for the following reasons. 1. The power tool company will have more control by adopting Vertical Integration over the value chain. (Neil Kokemuller) 2. Vertical integration offers significant ability to control costs throughout the distribution process. By selling the products directly to end buyers, the power tool company can “eliminate the middle man”, removing one or more steps of mark-ups along the way. (Neil Kokemuller) 3. Vertical integration gives the power tool company to access to more production inputs, distribution resources and process and retail channel. Each of these offers opportunities for the company to distinguish itself from competitors through effective marketing. (Neil Kokemuller) 4. Vertical integration offers the power tool company to control the end product as well as its component parts.
B. Discuss metrics that could be used to measure performance of the supply chain. Supply Chain Performance refers to the extended supply chain’s activities in meeting end-customer requirements, including product availability, on-time delivery, and all the necessary inventory and capacity in the supply chain to deliver that performance in a responsive manner. (Warren H. Hausman)
Supply chain measurements or metrics such as Backorder Reporting, Cycle Time, Defects per Million Opportunities (DPMO), Fill Rate and various other metrics are used to track Supply Chain performance. These metrics can helps a company to understand how your company is operating over a given period of time. Supply chain measurements can cover areas including Procurement, Production, Distribution, warehousing, Inventory, Transportation and Customer Service. (John Taras)
i. Backorder Reporting: An unfilled customer order. A backorder is demand (immediate or past due) against an item whose current stock level is insufficient to satisfy demand. This calculation can vary. Some companies count items that are not confirmed (not allocated) and past the Requested Delivery Date (or Requested Ship Date). Other companies may also count those items with stock confirmed, but past due.
ii. Cycle Time Measurements: The following are some of the Cycle Times that should be considered for the supply chain:
a. Customer Order Promised Cycle Time: the anticipated or agreed upon cycle time of a Purchase Order. It is gap between the Purchase Order Creation date and the Requested Delivery Date. This tells us the cycle that we should except – not the actual. (John Taras) b. Customer Order Actual Cycle Time: the coverage time it takes to actually fill a customer purchase order. This measure can be viewed on an Order or an Order Line level. (John Taras) c. Manufacturing Cycle Time: Measured from the Firm Planned Order until the final production is reported. Is usually takes into account the original planned production quantity versus the actual production quantity. (John Taras) d. Purchase Order Cycle Time: Measured from the creation of the PO to the receipt at your location (Distribution Center, Hub, etc.). One of the keys here is not to have your RDD (Requested Delivery Date) exceed the agreed to lead time. If it does, it may artificially inflate your lead time. (John Taras)
iii. Defects Per Million Opportunities (DPMO):DPMO is a Six Sigma calculation used to indicate the amount of defects in a process per one million opportunities. (John Taras)
iv. Fill Rate: Fill Rate definitions and calculations can vary greatly. In the broadest sense, Fill Rate calculates the service level between 2 parties. It is usually a measure of shipping performance expressed as a percentage of the total order. (John Taras)
v. Other Metrics: The various other metrics are Inventory Months of Supply
(inventory on hand/average monthly usage); Inventory Rationalization (an analysis that categorizes inventory by various categories); Material Value Add (sell price minus material cost divided by material cost); and Upside Flexibility (the ability of a manufacturer to meet additional demand requirements) (John Taras)
C. Discuss THREE of the following issues that could complicate the development of an efficient, integrated supply chain: local optimization, incentives, large lots, and the bullwhip effect.
Local Optimization:In local optimization, every facility in the supply chain tries to optimize its own decision with very little regard to the impact of its decision on other parties within the same supply chain. (David Simchi-Levi). To remain competitive, enterprises must produce services of high quality, customized to local needs, open to be integrated with other services, environmentally benign, and technically advanced. (J. Dorn). However, during the execution of the supply chain it is important to optimize locally to maximize your investments in critical resources: infrastructure, assets and technology. Local optimization – focusing on local profit or cost minimization based on limited knowledge. Local optimization, in terms of local forecasting and individual cost optimization, and a lack of cooperation are at the heart of the bullwhip problem. A good example for local optimization is the batch order phenomenon. In practice, ordering entails fix cost, e.g. ordering in full truck loads is cheaper then ordering smaller amounts. Furthermore, many suppliers offer volume discounts when ordering larger amounts. Hence, there is a certain incentive for individual players to hold back orders and only place aggregate orders. This behavior however aggravates the problem of demand forecasting, because very little information about actual demand is transported in such batch orders.
Incentives:To induce supply chain partners to behave in ways that are best for everybody, companies have to create or modify monetary incentives. A supply chain works well if its companies’ incentives are aligned – that is, if the risks, costs and rewards of doing business are distributed fairly across the network. If incentives are not in line, the companies’ actions won’t optimize the chain’s performance. Indeed, misaligned incentives are often the cause of excess inventory, stock-outs, incorrect forecasts, inadequate sales efforts, and even poor customer service. When incentives aren’t aligned in supply chains, it’s not just operational efficient that’s at stake. A company can increase the size of the pie itself by aligning partners’ incentives. Thus, the fates of all supply chain members are interlinked: If the companies work together to efficiently deliver goods and services to consumers, they will all win. If they don’t they will all lose to another supply chain. If they don’t they will all lose to another supply chain. The challenge is to get all the firms in your supply network to play the game so that everybody wins. The only way you can do that is by aligning incentives. (V.G. Narayanan and Ananth Raman).
Bullwhip Effect:The bullwhip effect can be described as a series of events that leads to supplier demand variability up the supply chain. Trigger events include the frequency of orders, varying quantities ordered, or the combination of both events by downstream partners in a supply chain. As the orders make their way upstream, the perceived demand is amplified and produces what is known as the bullwhip effect. (Scott Frahm) Some causes of the bullwhip effect include:
i. Consumer demand swings
ii. Natural disasters that disrupt the flow of goods and services iii. Overcompensation when addressing inventory issues
iv. Ordering process, such as order batching, can also contribute to bullwhip effect v. Customers can also contribute to the bullwhip effect by engaging in shortage gaming during periods of short supply by purchasing more than they need. (University of San Francisco)
To reduce the Bullwhip Effect:
1. Improve the flow of information along the supply chain. Improving communication and forecasting end-user needs greatly assist in reducing the bullwhip effect. In addition, look to day-today operations along the supply chain to observe trends and better predict customer demands. (Owen Richason) 2. Reduce delays in the supply chain. Use computer aided ordering to better track products along the supply chain. Cutting order to delivery time also greatly decreases fluctuations along with Lessing inventory levels and operating costs. (Owen Richason) 3. Pay closer attention to point of sale purchases made by customers. Using your point of sale system to create reports that track customer preferences and ordering behavior. (Owen Richason) 4. Reduce your order sizes. Ordering according to customer need instead of ordering for promotional discounts also assists in attenuating the bullwhip effect. (Owen Richason) 5. Maintain price consistency. Maintain prices during market fluctuation to have an immediate impact on customer purchases. (Owen Richason)
D. Recommend two tactics or methods which are opportunities for effective management in an integrated supply chain
Running a supply chain requires many components to make it a completely functional and effective system. This means things like strategies, tactics and daily operations. The problem isn’t necessarily getting everything working; it is ensuring that the company’s choices meet the expectations from your customers. (Guido van Osch) I would recommend Strategic and Operational tactics.
Strategic Method:at this level, senior management is involved in the supply chain process and makes decisions that concern the entire organization. Decisions made this level include the size and site of the production area, the collaborations with suppliers, and the type of that product that is going to be manufactured and so forth. (Guido van Osch). Usually, a firm decides strategic objectives at different organizational levels – corporate, business unit and operating firm. These strategic objectives might include finance, market, customer and firm. To ensure achievement of these strategic objectives for the whole firm, they need to be deployed from corporate to each business unit and operating firm so that all operating units are aligned. (Prof. Alan Harrison)
Operational Method:at operational level, activity decisions are made on a day-to-day basis and these decision affect how the product shits along the supply chain. Some of the decisions taken at this level include customer orders and the movement of goods from the warehouse to the point of consumption. (Guido van Osch). You reduce the operational costs and achieve 100% on-time in fully delivery. To achieve operational excellence – combine price, reliability, and hassle free service to deliver lower cost. Operations decision is a framework: it is a systematic process and decisions that get made in that process are a framework of integrated decision and concepts that have to come together. It is also cross functional in a sense that within an organization there are many different decision at each functional level that to have to integrate with other functions for the whole process of work.
E. Explain the actions that should be taken to mitigate one clearly identified possible risk for each of the following areas: i. Process
Process:processes are the sequences of value-adding and managerial activities undertaken by the firm. Process risk relates to disruptions to key processes. Following actions should be taken to mitigate Processes: i. Low cost country sourcing:companies should seek locations with cheap labor in which to build product. However, in some cases, long lead times, exposure to political, security, regulatory, currency risks could offset many of the savings. ii. Outsourcing:outsourcing more and more of the company’s manufacturing and operational activities. This can improve operations performance and service levels. iii. Supply base rationalization:companies should reduce the number of suppliers. This approach will reduce the cost of managing supplier.
iv. “Soiled” business processes:it is not financial viable to conduct business old ways. It will push costs and quality will deteriorate to achieve lowest possible price. Invest in new supply chain technology. New supply chain technology can power up existing operations, streamline inventory, and increase revenue. Making sure new solutions integrate with existing technologies and processes is crucial. (Kinaxis)
Controls:controls are the assumptions, rules, systems and procedures that govern how an organization exerts control over the processes. In terms of the supply chain they may be order quantities, batch sizes, safety stock policies, etc. plus the policies and procedures that govern asset and transportation management. Control risk is therefore the risk arising from the application/misapplication of these rules. i. Data: Supply chain can be as good as the data the system or software the company is using. Obtaining and using quality data is very important. Do not take a small sample of data as the basis for the predictions; the results are likely to be quite reliable. Additional, data always changes. Take a large sample of data and latest data for the basis of predictions. ii. Technology: Implement integrated, internet-based supply chain. But hire third party auditors to check the computer systems for vulnerabilities and to recommend improvements to keep the information private. The risk for not having these controls would not only put the transactional data at risk but also the reputation of the company.
Environmental:risks may result, for example, be the result of accidents (ex. Fire), socio-political actions (ex. Terrorists attacks) or force majeure (like hurricanes or earthquakes) (Daniel Dumke). To reduce the risks of natural disaster or terrorist attack the company should adopt a policy to deal with two or more suppliers for each part and in different geographic locations in case of a local event that effects one supplier negatively. By dealing with multiple suppliers the company will have negative impact across the supply chain. In addition, multiple suppliers in multiple location will also reduce the possibility of supply chain effected by natural disasters and other local risks.
F. Recommend a hierarchical functional organizational structure for the power tool manufacturing company. 1. Discuss what departments might be included in the operations function of the company
I would recommend the following functional organizational structure for the power tool manufacturing company:
Departments that are included in the Operations function of the company: I would recommend the following departments in the operations function of this company. They are as follows: 1. Product design and development: in this department new products designed and developed. In additions redesign and changes/modifications will be made to the existing tools. 2. Production and Inventory Control: concerns with planning and controlling all aspects of manufacturing and inventory including materials using in manufacturing tools, scheduling machines and people and coordinating with suppliers and customers. 3. Manufacturing: this department will be responsible for manufacturing of tools, including electric drills, saws and sanders. 4. Quality Assurance: during the developing the tools it is important to have a process of checking to see whether a product or service being developed is meeting specified requirements. 5. Supply chain Management: this department will streamline the business’ supply side activities to maximize customer value and to gain a competitive advantage in the marketplace.
G. Discuss strategic operations management decisions related to at least three of the following concepts that would support the implementation of the company’s mission and strategy:
Design of good and services:companies make products or deliver services rely
heavily upon operational processes to produce effective products and efficiently deliver them on time. Operations management have the responsibility for the transformational process of converting business inputs, for example, staff, materials, machines, money, etc., to produce a final product, in a way that adds value to customers, e.g. creates profit margin. These functions can be critical to gaining competitive advantage for an organization. When planning on producing a new product and/or service, the key factor is the product and service design. Successful design comes down to the following basic principles: i. Translate customers’ wants and needs
ii. Refine existing products and services
iii. Develop new products and services
iv. Formulate quality goals
v. Formulate cost targets
vi. Construct and test prototypes
vii. Document specifications, and
viii. Translate products and service specifications into process specifications The tool company must take into consideration the Changes in technology, the competitive market and the economic and demographic changes when designing a product or planning a service. It must utilize computer tools like Computer-aided manufacturing (CAM) in the design process.
Quality:When considering quality the tool company must consider design, production and service. It begins with what the customer wants and then translating this information into technical specifications to which goods or services must conform. The product specification will guide
i. Product and service design
ii. Process design
iii. Production and delivery of goods, and
iv. Service after the sale of tool(s)
The ultimate aim of the tool company should be to manufacture and sell good quality tools. However, the costs associated with good quality are: a. Appraisal costs – costs of activities designed to ensure quality or uncover
defects b. Prevention costs – costs of prevention defects from occurring c. Failure costs – costs caused by defective parts or products or by faulty services d. Internal failures – failures discovered during production e. External failures – failures discovered after delivery to the customer f. Return on quality (ROQ) – an approach that evaluates the financial return of investment in quality
Inventory: inventories represent a considerable investment for every organization; therefore, it is important that the tool company manage its inventory well. Excess inventory can indicate poor financial and operational management. However, on the other hand, less inventory or not having inventory when it is need can also result in business failure. (Chegg). Therefore, in order to be a successful and profitable company, inventory management must be managed wisely. The tool company must
i. Keep track of the inventory
ii. Have a reliable forecast of demand knowledge of lead times and lead time variability iii. Reliable estimates of inventory holding costs
iv. Ordering costs and shortage costs, and
v. Have a classification system for inventory items
Locationthe tool manufacturing company must use location planning techniques. The tool company must consider: i. Expanding existing location
ii. Shutting down one location and moving to another
iii. Adding new locations while retaining existing facilities; or iv. Do nothing
There are several factors that influence tool company location they include: a. Location of raw materials
b. Proximity to the market
c. Climate and culture
The tool company must utilize analytical techniques to aid in evaluating location alternatives: 1. Location Cost-Volume-Profit Analysis: it involves three steps: (i) for each location alternative, determine the fixed and variable costs, (ii)for all locations, plot the total-cost lines on the same graph and (iii) use the lines to determine which alternatives will have the highest and lowest total costs for expected levels of output. 2. Center of Gravity method: this technique used to determining the location of a facility which will either reduce travel time or lower shipping costs. Whether the company should adopt a consumer-focused customization process: Customization process is a make-to-order production process. I would suggest the tool company to adopt consumer-focused customization process for the following reasons: i. Mass Customization products compete directly with standard products, providing the tool company a competitive edge by having the capability to manufacture specialized or custom products at the speed, volume, cost, and quality as standard products. ii. Mass Customization is oriented toward high-volume/high mix, adding velocity and flexibility in the production process. (Rockford)
H. Recommend actions to improve cost effectiveness for each of the following: 1. Manufacturing facility
2. Supply chain
Manufacturing Facility: Moving products to market quickly remains a challenge for many companies including the tool manufacturing company. The ability to quickly manufacture products in a cost-effective manner will be key to the commercial success of the tool manufacturing company. For this reason I suggest that the tool manufacturing company should consider lean manufacturing. The lean manufacturing is intended to cut waste to reduce costs of the tool company. Waste is anything that doesn’t add value to the end product. They are as follows: i. Overproduction – the tool company should not produce more that consumers demand ii. Waiting – make sure that there is no or very little lag time between the production steps iii. Inventory (work in process) – make sure that the supply levels and work in progress inventories are not too high iv. Transportation – move materials efficiently
v. Over-processing – work on the product too many times
vi. Motion – make sure that people move equipment between tasks efficiently vii. Defects – make sure that less time is spent between finding and fixing production mistakes viii. Workforce – use workers efficiently
The tool company should:
A. Identify waste
B. Analyze the waste, and find the root cause, and
C. Solve the root cause, and repeat the cycle
i. Finding a suitable competitive supplier is fundamental to the success of the tool company
ii. Make sure that the tool company does not deal with unscrupulous supplier who provides substandard raw materials.
iii. The tool company should select right suppliers who not only provide raw material at a competitive cost but also possess the ability to reduce impact of economic uncertainties/natural disasters on the tool company’s supply chain strategies. iv. When demand changes the tool company should be prepared to change the supply chain plans. The tool company should actively collaborate with the suppliers who can react to address the demand changes in supply chain v. The tool company should be cost effective by taking a wholesome view of the costs across integrated processes to arrive at cost-levels that provide a cost-advantage for the company.