Case Study of the Rewired Supply Chain
Upon reading the case study the CEO, Mr. Charles O'Run, realizes that were some core issues that need to be addressed in order to give a competitive advantages. The first thing I noticed was that over the course of time, the ORUN remote operations have been become independent in their local procedures. This could have been caused by numerous reasons such as poor information sharing during employee changeover or strategic level management begin to look at the future and push more and more responsibility to themed level managers. But no matter the reason, there has now been a significant communication gap between the corporate headquarters and the 4 plants located in the three states. This is a major problem because all the plants are dependent on each other's information for daily operations. With the metrics used by operating units being developed at each remote site and not distributed throughout the company, this creates a lack of information getting to the local and headquarters management on time, the headquarters staff can get confused because everyone isn't on the same page, affecting future company decisions. There has also been a lack of supply chain metrics that has prevented managers to see what and how the individual plants improvements done and how it has not lead to improved overall performance of the supply chain. The objective of supply chain metrics is to give the basis for evaluations of the performance of the whole supply chain as one system. Supply chain managers are often focused only on the internal supply chain. Going beyond the internal supply chain by including external suppliers and customers often exposes new opportunities for improving internal operations. (Supply Chain Management, 1997)\
This not only goes for the different metrics being used, but they have also been using different procedures for the manufacturing, supply chain management, marketing, and financial reporting throughout the various plants. By having different procedures, it is costing them time and money. This also makes it difficult for their suppliers to understand the process creating a lot more mistakes and creating poor relationships. Because the upper level did not have a complete understanding of the procedures from each plant and plant section, that is the reason why there was some resistance to change by the workers and by mid-level management at the various plants. Just by having the whole company on the same page, it will make it easier to streamline ORUNs supply chain and help them achieve their primary goals of controlling the rapidly fluctuating material purchase costs and to reduce a significant increase in raw material and finished goods inventories.
Addressing the Five Goals
PROC 5820, Operations Management course
Allow ORUN to minimize costly inventory.
To minimize the costly inventory and obtain the primary goal that the owners identified, which is to control the rapidly fluctuating material purchase costs and to reduce a significant increase in raw material and finished goods inventories, they have to look at the whole process. Having too much inventory is an indicator of a costly business process and systems problems that can be seen throughout the organization. These may include poor forecasting, inadequate order/product specifications, ineffective production scheduling, poor quality, bottlenecks, long cycle times, product and process problems and inappropriate performance metrics. And these problems can compound themselves. (Donovan) a lot of these can be fixed with a long lead time, but long lead times lead to a requirement of an accurate and stable forecast. But the downfall to that is that it is very difficult to obtain and long term forecasts can be inaccurate. They have to ensure that forecast is accurate as possible because it creates an overage or shortfall of products. Unsold inventory quickly accumulates in expensive piles, while expensive expediting is used to produce the needed products that are in short supply. It is not that simple to reduce costly inventory. If were that simple to reduce inventory, you will automatically inventory management to reduce cost, if that were so, everyone company would be running perfect. But in reality, the biggest problems are the inefficient business processes that cause excessive inventories to exist. (Donovan)
ORUN needs a major reduction in all forms of inventory, without harming customer service. This will require the re-engineering of the order-to-delivery cycle to find ways to do it faster, better and cheaper. This could result in significant reductions in lead times and increases in control that eliminate the need for inventory buffers. This will also benefits them with the increase of quality and improved customer service. (Donovan) ORUN needs to develop transform their production to more of a flexible manufacturing system. When a manufacturer is set up to produce long production runs, there is a tendency to maintain higher than necessary production levels even in the face of reduced demand. The "inflexible" manufacturer maintains high production to absorb overhead. By developing this flexibility, this will help ORUN minimize inventor, improve customer responsiveness and allow them to operate to quickly respond to changing customer demand.
Another thing that ORUN needs to do, is to reduce cycle times. Cycle-time reduction can mean reduced costs, reduced inventory levels, improved production predictability, increased customer service, and better quality. To reduce cycle time, manufacturers need to streamline every aspect of their operations, especially the order-to-delivery process. (Donovan) ORUN also needs to consider trying to better streamline their supply chain system. This will allow them to reduce inventory, improve time to market, compress cycle times, decrease costs and improve profitability. By consolidating their supplier base, they can establish a closer relationship with those they do business with. They can work together to improve products and operations, thereby reducing material costs, improve delivery timing, etc. (Donovan) Streamlining their supply chain system can really change their company for the better. This will remove the problem that may have with poor production scheduling that can cause product flow imbalance, bottlenecks, poor customer service, high inventory and long cycle times.
ORUN may also want to consider using a "pull" based method. ORUN may be using the "push" method at the moment and as a result they will always end up with high inventories. But with the "pull" method, it will require a well-engineered order-to-delivery process that can have enormous benefits beyond just inventory reduction, especially in customer service. (Donovan)
Improve the overall supply chain management within the company.
The first they needs to look at when trying to improve the overall supply chain is by understanding internal processes of their supply chain system. They need to understand each section and make sure everyone is on the same page. This will not only help them see what changes can and need to be change but presents themselves to their customers, suppliers, and competitors professionally. In order to improve the overall supply chain, all sections have to share goals to the extent to which the manager of each focal function are familiar with the strategic goals of the other focal functions. There also needs be some collaboration. Members of a function need to actively work on issues with members from the other focal functions. Supply chain within the company can be complex, particularly if the firm has multiple divisions and global organizational structures. (Teigen, 1997) ORUN should create cross functional teams to help set up process objectives and performance measures. These cross functional teams will consist of representatives from each of the organizations divisions that play a major role in the firms internal supply chain.
Another way to improve the overall supply chain by communicating up and down the chain and not just across the chain at the same level. As stated in the case study, in the past, there were attempts to improve far less complex organizational problems, but there was considerable resistance to change, both by the workers and by mid-level management at the various plants. The strategic, tactical and operational management need to communicate and have input with any changes. There was poor communication and maybe little understanding of each other role. The strategic level makes long term decisions. These decisions are related to location, production, inventory, and transportation. Location decisions are concerned with the size, number, and geographic location of the supply chain entities, such as plants, inventories, or distribution centers. The production decisions are meant to determine which products to produce, where to produce them, which suppliers to use, from which plants to supply distribution centers, and so on. Inventory decisions are concerned with the way of managing inventories throughout the supply chain. Transport decisions are made on the modes of transport to use. The tactical level is where the mid level decisions are made, such as weekly demand forecasts, distribution and transportation planning, production planning, and materials requirement planning. The operational level of supply chain management is concerned with the very short term decisions made from day to day. The border between the tactical and operational levels is vague. (Teigen, 1997) I think it would be beneficial if they have representatives from each level during major ORUN meetings. This would help everyone have a complete understanding of the changes and the experts from each level can give their input on their expertise. This will help save time and money on change future changes.
Ensure demand requirements are met, avoiding stock outs and reducing overall cost.
The problem with inventory management is that keeping too little stock may result in production problems while keeping too much means investing a lot of money unnecessarily. Business can be lost through cancelled orders, and their reputation of outstanding customer service can be severely damaged. A stock-out occurs in a distribution center when there are orders that cannot be filled within their due date. It is when at a given moment in a given inventory there is not the quantity of a part or a product that is demanded. Stating that, it is in ORUN's interest to balance inventory holding cost and the cost of imperfect customer satisfaction. A manufacturer will account for the uncertainties and unforeseen events by keeping safety stocks. The safety stocks assure the necessary flexibility; or rather they act as buffers for the lack of flexibility in the supply chain. (Supply Chain Management, 1997)
Finding the right balance is therefore necessary. There are various different ways to inventory. The first thing they need to do is find the economic order quantity (EOQ). The output of EOQ formula helps to find out the optimum level of stocks that should be kept to minimize a firm's costs. Another option that they can do is to use fixed re-order stock level. This is when they identify the minimum level of stocks it can tolerate, and re-orders when stock reaches that level. There is also the option of fixed time re-ordering. This method suggests nothing but reordering of stocks at a fixed time each month or week. (Kakati, 2008) Although this seems like a simple and easy way to control stock, fixed time re-ordering is an inflexible method, since the amount of inventory may fluctuate depending on market demand of products. As stating above, ORUN needs to be more flexible in their supply chain process to be more productive in cost. In my opinion and recommendation I would use the popular method of "just in time". This method of inventory management aims reducing cost by keeping stocks to an absolute minimum. Raw materials are ordered "just-in-time" or when they are required. This saves warehouse space and costs. But this method does involve risk of running out of stock, depends upon reliability of the suppliers, and requiresÂ high level of organizational skill to be maintained effectively. With ORUN using similar parts for each item, I think it would ideal for them to use this method to avoid stock out and reduce overall cost. (Kakati, 2008)Â
Just in time would minimize storage costs. Storing less work-in-progress inventory and fewer finished goods reduces space requirements. Just in time will make the company a more flexible business with better communication with customers and suppliers and can react quickly to market demands. Implementing thorough just in time procedures can involve a major overhaul of your business systems and it will be difficult and expensive to introduce. Although it will be difficult, there is a lot of upside to the new process. The benefits to this method are that they create better quality products, reduced scrap and rework, reduced cycle times, smoother production flow, less inventory, of raw materials, work-in-progress and finished goods and reduced space requirements. The Just in Time method entails sourcing the required raw material or item for processing on demand, and scheduling the work based on order or demand for the product. This synchronization of supply with production, and production with demand improves the flow of goods and reduces the need for storage facilities. Just in time focuses on eliminating waste from the production process creating a smooth flow of goods. Eliminating redundant tasks and minimizing transportation of the product across the workspace. (Nayad, 2010)
Standardize business practices among plants with a given supplier.
ORUN needs to create a unified supplier management throughout the company, instead letting individual plant purchasing managers do what they want and how they want. The primary purchasing manager would responsible for buying or approving the acquisition of goods and services needed by the company. The position responsibilities would include a wider supervisory and managerial responsibility. The Purchasing Manager would oversee the acquisition of materials needed for production and equipment. They would also supervise purchasing agents and buyers. By having a primary purchasing manager, this would create a standard practice between each individual plant, continuity and accountability for each plant purchasing manager. They should plan, execute, and oversee purchasing strategies that are conducive to company profitability. (Cyprus)
Another way to help standardize business other than just having a primary purchase manager or head of purchases is by having a single supplier. This will reduce the amount of logistics and distribution cost of your company because you only have to deal with one company to provide your basic raw material. (Heche) By having a single supplier, it creates its advantages and disadvantages. By having a single supplier, you will know that the qualities of the raw materials purchased are consistent with the previous batches. This makes the quality assurance function of ORUN easier to conduct and they can expect to have lesser production difficulties and even less customer complaints. After selecting the right company for them, this will also give me some peace of mind knowing that they have the technical expertise and proven network integration capability with that supplier. This also allows ORUN to create a close relationship with their supplier because they will be able to understand their specific requirements. Some of the disadvantages for ORUN will be that they will become highly dependent on a single supplier to give them all the raw materials they need. They will also have less negotiating leverage if they become dependent on a single supplier who supplies their needs. The best way to obtain the advantages and prevent the disadvantages is by having a single supplier but at the same time you also know of a back up supplier who can satisfy your requirements when the first supplier fails to deliver. (Heche, 2009) All in all, by having a standardized and simplified process for all purchasing managers at all levels, it allows ORUN to focus on continuous trying to improve their service and products while reducing service costs.
Increase supplier efficiency with real time information on firm planned orders and forecast.
Creating a well rounded inventory management, it would involve making a list of inventory stock and writing down its location and value. But with today's ever improving technology, this process has been made simpler by using bar-codes. ORUN should consider using bar codes to keep track of their stocks using Radio Frequency Identification (RFID) and computer software. This will prevent the significant communication gap between the corporate headquarters and the 4 plants. They need to implement this automated system that can track inventory across multiple warehouses, in different locations within one facility, and for the different serial numbers of different inventory items. (Kakati, 2008) This will help them with their daily operations, since they are quite dependent on the speed and availability of information.
The new system will monitor the item being purchased on a minute by minute basis, enabling the company to make real-time decisions on where to send more inventory items from its warehouses. This real time information will help ORUN better manage their supply chains. This will also help get the plant's operating results get to local and headquarters management on time. This will also simplify headquarters staff reports. Real time supply chain technology will reduce the amount of unneeded item. This new system allows ORUN to react to any changes in buying pattern on the same day rather than overnight, meaning they can make far better decisions on where to send stock before it leaves their depots. This will also solve the problem of have different metrics that are used by the different operating units at each remote site. This will simplify what is needed or not and this will reduce the risk by knowing exactly what is selling well at any given moment so we can react more quickly than any of our competitors, and provide their customers with what they want. (Sainsbury's Uses Real Time Supply Chain Technology to Improve Efficiency, Reduce Waste , 2010)
All in All, by using RFID, it ensures accurate stock figures and stock-counting becomes much faster and more accurate. It also creates better supply chain visibility at multiple points by ensuring that accuracy of forecasts, security of stock, etc. RFID will help facilitate real-time information, cross-network information sharing and decision making. By using RFID, this will help create standard procedures for the manufacturing, supply chain management, marketing, and financial reporting throughout the various plants. RFID can delete the complexity out of the supply chain by providing one network environment and the framework for efficient transactions and information sharing. For the end user, it improves product availability creating more satisfied customers because the product is on the shelf. (Supply Chain Delivering Real Time Visibility, 2005) The benefits of RFID are that it can improve the quality of inventory operations, increase the throughput distribution centers, lower operating costs, help with supply chain logistics tracking, increase the transparency of supply chain management, capture data and help with the transmission of information more quickly, accurately and safely. (forwarder, 2010)
Resolving the Issues
Supply chain benchmarking is a management tool companies use to measure the efficiency and effectiveness of their supply chain. Performance measures need to drive a consistent emphasis on the overall supply chain strategy and corresponding process objectives. ORUN would use these benchmarking to compare their company's supply chain with a competing company's supply chain or the industry standard. It allows management to identify problem areas. They can also compare their supply chain performance to previous periods to see if previous changes to the supply chain incurred any improvements. (Vitez)
A few examples of supply chain measurements or metrics are inventory turnover, cycle time, fill rate, product quality, customer satisfaction, etc, can be used to track supply chain performance. These metrics can help ORUN understand how their company is operating over a given period of time. Supply chain measurements can cover many areas including procurement, production, distribution, warehousing, inventory, transportation, and customer service. (Donovan)
Supply chain performance indicators are classified in two clearly defined but closely interrelated categories, functional indicators and end-to-end supply chain indicators. One measures the effectiveness of the function and second measures how well these functions are coordinated. While they are measured separately, they must not be considered in separation. With the advent of supply chain and focus on overall coordination and effectiveness, some of the functional indicators come out to be conflicting and counterproductive. These need to be removed, for example a company trying to improve its customer service cannot have reduction in machine change over as an indicator. (DecisionCraft) However, a good performance in one part of the Supply Chain is not sufficient. The supply chain is only as strong as its weakest link. The solution is to focus on the key metrics in each area of your supply chain. In order to improve the supply chain performance, ORUN must know what to measure and what targets to set. Tracking the measurements and corrections, it allows ORUN to view their performance over time and gives them a better understanding on how to optimize their supply chain. Measurements alone are not the solution to their weak areas. The solution lies in corrective actions that are taken to improve the measure.
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