Because few get the opportunity to design a supply chain from scratch, the logical starting point for most efforts is to reconfigure or improve the outbound link to customers, according to Joe Martha, vice president at Cleveland, Ohio, USA-based Mercer Management Consulting's supply chain practice. “Ensure that the customers' needs are met first,” he says.
Driving that choice is the realization that improved links with the customer generally pay the biggest, most immediate benefits such as better service and reduced cost—factors that drive higher sales and profits.
In addition, it's generally cheaper and easier to revamp the outbound distribution network than to address some thornier issues such as long-term supply contracts for raw materials or the location and operation of production facilities. “Distribution warehouses, whether owned and operated by the manufacturer or a third party, can be relocated at minimal cost,” says Martha.
Local vs. Global
Setting up a global supply chain can be intimidating, but some software packages provide product sourcing and comparative contractor capability data to determine the cost of having items made in other countries and transporting them to your local business.
TRIED AND TRUE
The Supply-Chain Council Inc., a Pittsburgh, Pa., USA-based independent organization dedicated to improving supply chain performance, offers the Supply-Chain Operation Reference (SCOR) model, a detailed template available to help manufacturers design a supply chain, measure it against company- and industry-specific goals and enhance it over time. It spans all customer interactions (from order entry to paid invoice). By describing supply chains using the SCOR building blocks, the model can be employed to describe supply chains that are very simple or very complex, using a common set of definitions.
The detailed hierarchical, three-level model addresses the complete manufacturing process from planning work to sourcing raw materials, making and delivering final product. The eight elements that span each of these plan sections include establishing and managing business rules, assessing performance, managing data, inventory, transportation and supply chain configuration, and regulatory compliance.
SCOR provides standard definitions for each element as well as text/tables with inputs and outputs. Moreover, it promotes a graduated approach to designing, implementing, monitoring and benchmarking the operation of a supply chain. This model describes processes, not functions. In other words, the model focuses on the activity involved, not the person or organizational element that performs the activity.
For more information, visit www.supply-chain.org.
Driving that choice is the realization that improved links with the customer generally pay the biggest, most immediate benefits such as better service and reduced cost.
This software can offer modules that consider transit times, allowing users to account for the time and expense of maintaining a supply chain that extends across the world. The goal is to manage the global supply chain and establish adequate buffers throughout to minimize the impact of any distribution.
Separately, a number of international trade logistics software packages can help ensure that manufacturers comply with customs regulations, generate required documentation and determine the shipment's landed cost (which includes such surcharges as duties, tariffs and transportation costs).
Purchasing raw materials locally, the other option, allows manufacturers to avoid having to contend with the host of issues tied to worldwide transit such as long lead times for ocean transport or more expedited and expensive air freight, customs clearance, compliance with import/export rules and payment of any required fee. Moreover, such sourcing “allows for quicker corrective action, should there be a problem,” says Stuart Zerneri, materials director for Brooks Automation of Chelmsford, Mass., USA, a producer of semiconductor production equipment.
Relying on a shorter, local supply chain generally means manufacturers can carry less safety stock because it's easier and quicker to replenish. However, such benefits come at a cost: a higher raw charge for the material being purchased, says James Goffee, vice president, manufacturing at Zebra Technologies Corp., Vernon Hills, Ill., USA.
Tools of the Trade
To generate a dynamic supply chain schematic, Mercer Management, owned by insurance giant Marsh & McLennan Cos. Inc., New York, N.Y., USA, uses supply chain design tools. Essentially, a user loads 12 months of operating data into schematic software to create a model of its supply chain. The software builds an outbound link from the factory loading dock to warehouses, distribution centers and ultimately major customers' specific plants.
“The key factor is having and using information, and the related flow of information, to manage the planning, scheduling, oversight and control of procurement, processing and distribution,” says Albert Widman, chairman of the management department at Berkeley College, N.Y., USA. Most of these activities are sequential rather than simultaneous, making a difficult job somewhat easier, he says.
In addition, the user should inventory all available resources—including cash, personnel and their specific expertise, warehousing and production capability, and flexibility plus transportation options—needed to operate and manage the supply chain, Widman says. Taking such measures is required to configure the optimal network for each user.
Understand the specific manufacturing process and each player's role, says Ron Pariseau, vice president of supply chain for Invensys PLC, a large London, UK-based industrial controls company. Manufacturers need this knowledge to correctly allocate responsibility and ensure accountability and control, says Pariseau, who is based in Foxboro, Mass., USA.
Another critical mandate is to build flexibility into the system design because forecasts, used to set supply chain parameters, are inherently inaccurate, says Goffee. “One of the hardest things to do is draft a production forecast and project what you need. There always is variability.”
The Right Way
To build correct, adequate pathways back to suppliers, manufacturers first must draft a bill of materials outlining the components needed to make each major product, according to Goffee. Those requirements then are translated into determining minimum safety stock for each component and the lead time needed to replenish it.
Essentially, the software builds specified buffers after clearing the critical path. Once users can visualize the network and better understand the cost of various components, scenarios can be weighed. For example, overlaying transportation options allows users to make the most appropriate choice after establishing priorities, such as increased speed of delivery vs. lower cost. The effectiveness of adding or reducing assets, such as warehouses, is demonstrated easily. Mercer Management generally tweaks company data by plus or minus 5 percent to derive a more realistic picture of the actual supply chain. It tests forecasts for three to five years out.
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Moreover, basic underpinnings of the supply chain design and performance, like demand forecasts, should be compared with actual results and tweaked, if necessary, to ensure optimal operation of the supply chain, Widman says.
The original supply chain evaluation exercises, done on a powerful desktop computer, normally last three to four months, according to Martha. Data is collected throughout the first month. Manufacturers spend much of the second month building supply chain models and validating them. During the final two months, users run various scenarios—basically a lot of “what if” thinking when testing options and constraints.
Relying on and working with unreliable, unscrubbed data can gobble extra time and cost. Because much information is processed during this exercise—as much as that generated over five years—errors can be multiplied when bad data cascades throughout the supply chain, leading to the “bullwhip effect,” says Widman.
Weighty Benefits
This strategic supply chain design exercise costs between US$350,000 and US$750,000 and covers the cost of licensing the required software and hiring three or four staffers during the four-month project, according to Martha. However, if and when users decide to embrace all changes suggested by the software, they can receive 10 times annual return on the original project outlay once the final supply chain revision is in place.
And should users consciously decide to ignore some recommendations, they know the related specific cost. That premium, for example, often causes extra handling required by a specific company or meeting very tight delivery windows. Ideally, that added cost could be allocated to or shared with the specific customer, Martha says. PM
Ira Breskin, a freelance writer based in Great Neck, N.Y., USA, has appeared in Manufacturing Operations, The New York Times and Long Island Business News. He also was a staff writer for The Daily Deal, The Journal of Commerce and Investor's Business Daily.
PM NETWORK | APRIL 2002 | www.pmi.org
APRIL 2002 | PM NETWORK