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The dynamic competitive environment today ensures that exploiting the same drivers will not help any business be competitive. Competition has changed and will change even more in the near future. As competition increases, it is become pertinent for business to get savvier in their operations and to ensure that every possible function of the business is streamlined to reduce costs as much as possible to maintain a competitive business edge over their rivals.
In the assignment, as the Operations Manager of a Manufacturing plant, I need to determine how I am going to improve production efficiencies, effectiveness and productivity of the plant in order to maintain a competitive edge over my rival businesses. In order to be able to gain a competitive edge businesses may try different means to get one over their rivals. Historically companies leveraged a variety of factors to differentiate themselves from their competition, including (Barney, 1991):
Â· Product features
Â· Product availability and
Â· Customer service
Today however, while these still remain an integral part of business differentiation, businesses have taken further steps to ensure better business practices (Barney, 1991). Till recent years, supply chain management was largely utilised only to help reduce business costs with not much emphasis being laid on its other features. In recent years however, businesses have evolved and have realised many more strategies through which they can achieve a strategic advantage to outperform their competitors in the market Christopher (2005).
The main problem that the company is plagued with in this case is the poor Supply Chain Management which has seen the company not being able to manage inventories properly, faced with the dilemma of too many suppliers which will ultimately lead to a decline in customer focus.
The firm basically requires a total quality management approach to help improve production efficiencies, effectiveness and productivity of the plant in order to maintain a competitive edge in the industry. A Supply chain management programs and streamlining of suppliers along with inventory management and production planning is also required in the firm is to attain efficiency its operations. As the Operations Manager, I would look at implementing the above mentioned in order to optimize production and operations. Details of the problems faced along with solutions are given below.
The Supply Chain Management Problem
One of the major problems that the company has to deal with is that its supply chain is not effectively designed resulting in excessive costs to the company besides also creating a disequilibria between customer demand and production planning.
Christopher (2005) describes supply chain management as follows: "The management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole"
In today's competitive world, managing a supply chain is a cumbersome challenge. The greater the qualms in such factors as supply and demand, globalisation of the market, shorter product and technology life cycles, and the increased use of outsourced manufacturing, distribution and logistics partners, the greater is the intricacy of the supply chain. Along with other factors, they result in rising disequilibria between customer demand and production planning (DeMin, 2005).
With business going global, supply chains have also lengthened and are becoming global. Demand for products is also increasing at a rapid pace and the lifecycle of a product is also decreasing. It is therefore essential that companies pay attention to their supply networks to ensure that they are flexible enough to meet the pressures of the competitive market while at the same time maintaining product quality as this is an important factor in determining company success. Companies must therefore lay emphasis on their supply networks and must realise their supply networks are a competitive weapon that can not only deliver low costs but also impact top-line growth through superior responsiveness and best-in-class customer service if effectively enforced (Barney, 1991; Ketchen, 2004; Rungtusanatham et al., 2003). However, a consideration has to be taken so that optimization does not end in optimizing one function at the expense of the others (Lumsden, 1998; Porter, 1985).
In order to ensure lower costs to the firm in the supply chain, it is essential for the firms to draw up an effective Supply Chain Management (SCM) system that would not only ensure lower costs but also a quality final product to the consumer. However, while doing so, the firm must be aware that it has to properly ensure that the supply chain is designed as efficiently as possible as firms who fail to do so face financial risks which can be huge due to Inventory costs due to obsolescence, mark-downs and stock-outs which have an immediate impact on the firms bottom-line performance. The intricacy and improbability forces of a supply chain can also cause "chaos risks" which makes it difficult for the players in the chain to take a right or effective decision such as an optimal production schedule if there is an uncertainty of whether raw materials will be available (DeMin, 2005).
A supply chain is also exposed to market risks. If the right market signals are not obtainable or interpretable, the supply chain cannot respond. Similarly, it will not be able to enter a new market if it's not flexible enough to meet fluctuations in demand. Orders placed with extremely short lead times by customers and wholesalers which cannot be met by current production capacity will also the see firm missing market opportunities (DeMin, 2005).
In order to be able to meet the risks in the market more effectively, developing a Supply Chain Management is of primary importance to any firm looking for long term success. Supply Chain Management (SCM) is the combination of art and science that seeks to improve the process of sourcing raw materials to make a final product or service to be delivered to the customer (Wailgum, Worthen, 2008).
An effective SCM comprises 5 basic components (Wailgum, Worthen, 2008):
Planning- strategically, this is the most important component of SCM. Without a strategy, companies wouldn't be able to manage all the resources that go toward meeting customer demand for their product or service. The firm must develop a set of metrics to help monitor the supply chain to ensure not only its cost efficiency, but also the value to the final consumer.
Sourcing- at this stage, companies must select suppliers from whom they wish to purchase raw materials to produce their product. At this stage, supply chain managers must set about developing a set of pricing, delivery and payment processes with suppliers and set about monitoring and improving the relationships with the suppliers. Once done, SCM managers can concentrate on putting together processes by which they will manage their goods and services inventory, including receiving and verifying shipments, transferring them to the manufacturing facilities and authorizing supplier payments.
Producing -also known as the manufacturing step. At this step, Supply chain managers schedule the activities necessary for production, testing, packaging and preparation for delivery. This portion of the supply chains in very metric intensive where companies are able to measure quality levels, production output and worker productivity.
Delivering-at this stage, customer orders are co-ordinated by the companies through a developed network of warehouses and carriers are picked to deliver the final product to the customer and an invoicing system is set-up to receive payments.
Returning -often referred to as the problematic part of the supply chain by many companies. Supply chain planners have to create a quick to respond and elastic network for receiving faulty and surplus products back from their customers and supporting customers who have problems with delivered products.
The end result of supply chain management is ultimately to provide the final consumer with a superior product with as low a cost as possible to the company who may then decide whether or not to pass on the cost saving to the consumer.
Single Sourcing or Multiple Sourcing: The problem of too many suppliers
The company is also faced with the situation where it has too many suppliers. While having a variety of suppliers is advantageous in the case of a product shortage, it is not necessarily always the case making streamlining of suppliers very important. While streamlining suppliers is important, it is also important to ensure that suppliers adhere to quality requirements to ensure no sub-standard product is used in the manufacturing process and also to ensure that consistency is adhered to.
In risky business environments, the selection of a purchasing strategy is a central and important activity. Firms may adopt single sourcing, which in a stable environment can be an efficient approach as it would mean less time spent on doing price comparisons and negotiating discounts and trade credit besides also seeing priority orders being given preference, standard level in quality of goods and services supplied and simpler ordering, inventory management and accounting procedures. However, it can amplify a firm's risk exposure during times of uncertainty where the supplier defaults in supply. Multiple sourcing while being able to reduce risks to the firm during uncertainty and being able to offer price competitiveness advantage, it presents firms with higher costs during stable times due to the management of more than one supplier (Pellegrino, Costantino, 2010).
With risks being present on both sides of the fence and no third option out, the Supply Chain Manager is left with making the difficult decision of which one to choose and how to possibly stream line which supplier/suppliers he will pick to get his raw materials from.
Streamlining good suppliers is a very vital component of supplier selection. If you get this step wrong, a firm may be burdened with significant costs such as additional costs for delays, returns and replacements. There is also the risk of losing business,Â and an emotional cost in the form of frustration and stress (SA Gov, 2010).
Pre-qualification is a part of pre-contract supplier appraisal. It is an important step in helping decide whether a supplier is has the ability to deliver quality goods in time and at an acceptable price. Suppliers that meet the pre-qualification criteria may be invited for further discussion (Canon, 2010).
Pre-Qualification is a twostep process: Finding suppliers and Verifying that they are suitable.
Finding suppliers: In this stage, all possible suppliers are identified with the help of various databases like the White pages, Internet etc. A basic check helps ensure that the identified potential supplier has the capacity to really supply the raw materials as required (Canon, 2010).
Verifying suppliers: The extent of any verification exercise depends on whether the requirements to be purchased are essential to the organisation or whether they are basic purchases of non essential requirements. Essential requirements mean that the purchasing organisation is heavily dependent on the supplier and a more extensive pre-qualification is required. This is not to be undertaken lightly as it is both expensive and time consuming to do (Canon, 2010).
Before undertaking a pre-qualification, it is important to identify the aspects of the potential supplier which need to be verified. It is also important to identify how the aspect can be verified. This involves setting a standard and then scoring the supplier against this standard (Canon, 2010).
Before finalising on a supplier, all factors that are important to the business should be assessed, not just cost. The Krajlic model can be used for this step. Some of the questions that need to be asked before entering into a supplier relationship are (SA Gov, 2010):
The duration the supplier has been in business?
What is the on-time delivery performance of the supplier?
Is the quality of the raw material being supplied good?
What is the lead time needed to supply goods and services to your business?
Does the supplier have the capacity to meet last minute orders?
What are the payment terms being offered?
What is the supplier's policy on damaged goods or the supply of goodsÂ that don't meet specification?
Does the supplier have local representation?
What is the supplier's pricing structure compared to those of competitors?
Is the supplier willing to negotiate supply contracts over a period of, say, 12 months?
Are there alternatives if there is a delay in supply?
What will I do if the chosen supplier goes out of business overnight?
Once a supplier is identified, it is then critical for the business to maintain good relations with the supplier to ensure a smooth operation. This will also enable a healthy relationship and help the company get credit if ever required.
The end result of supply chain management as mentioned earlier is ultimately to provide the final consumer with a superior product with as low a cost as possible to the company. At the very start of the cycle, it is the customer who defines the quality and it is the duty of firm to produce goods according to his specification (Sowerbutts, 2010).
Today's world-class companies are dominating their market spaces by providing exceptional customer service. Companies can no longer compete by designing, manufacturing and selling a single product, and manufacturing that product in advance to handle anticipated demand. Today's sophisticated customers demand products specifically tailored to their needs, when they need them. Responsiveness to customer needs requires a high degree of coordination and information sharing between partners in a supply chain (Sturim, 2009).
Supply chain planners have to create a quick to respond and elastic network for receiving faulty and surplus products back from their customers and supporting customers who have problems with delivered products (Wailgum, Worthen, 2008).
It is only through achieving customer focus, will the firm achieve customer satisfaction enabling the firm to be profitable. So it is true to assume that this should be the underlying factor in any decision making in the firm.
Inventories form an integral part of any manufacturing activity. They are especially integral to retailing and wholesaling activities.
With the cost of inventories increasing considerably, the needs to exert greater control on Inventory has gained more attention now days. Considering direct costs, this is due particularly due to the high holding-costs which are in turn due to the interest rates, the cost of warehouse space and the cost of obsolescence.
The indirect costs firms pay towards inventory is much more significant than the direct costs. These costs are related with the managing of inventory, the problems that crop up when inventories are not under control, and the problems that are unseen by the inventories.
The performance of the supply chain and consumer service results correlates to inventory. Inventory-lack of velocity, poor turns and too many dollars tied up-is both a problem and a symptom of a problem. Whether it is WIP or in finished goods, it does not matter where the inventory problem lies. It is not just about managing the inventory on-hand, but it is the how to improve supply chain effectiveness as well as customer service while at the same time improving inventory - velocity and reducing dollars-at the same time (Craig, 2007).
The inventory failures mentioned above more often than not go further than forecasting or demand planning. They begin and finish with supplier performance. It is therefore not surprising to note that many companies with inventory problems lack a sourcing strategy as part of its supply chain management effort. These companies instead tend to focus primarily on price, landed or contract (Craig, 2007).
An analysis of supplier performance established that 25% of purchase orders are often not delivered on time. These service failures have a domino effect on the business and results in customer service problems, excessive money tied up in inventory, obsolete inventory, poor return on the capital investment required for the inventory, larger than needed warehouse space in terms of capital tied up and/or reduced warehouse productivity from having to travel extra distance around the excess inventory (Craig, 2007).
Even when orders are shipped on time, quality problems may arise which brings its own set of customer service, inventory and other costs and problems (Craig, 2007).
If one thinks of the excessive money tied up in inventory, one would see that too much capital in inventory lessens the value of the company. This in turn lessens the return to shareholders. The underlying objective and strategy may be diluted or sidetracked. All this can restrict the ability to develop, exploit or implement strategic alternatives or options (Craig, 2007).
The function of establishing an overall level of output is called the production plan.
Its prime reason is to ascertain production rates that will help management achieve its goal of fulfilling customer demand. By maintaining, raising, or lowering of inventories or backlogs, while keeping the workforce relatively stable one can achieve demand satisfaction. If just-in-time philosophy has been implemented, the firm would employ a chase tactic, which would mean satisfying customer demand while keeping inventories at a minimum level (RFB, 2010).
The production plan helps derive the production schedule to produce a certain quantity of an item within a specific time outline.
Production scheduling has three primary goals. The first involves due dates and avoiding late completion of jobs. The second goal involves throughput times; the firm wants to minimize the time a job spends in the system. The third goal concerns the utilization of work centres to its maximum (RFB, 2010).
Often, there is conflict among the three objectives. Excess capacity makes for better due-date performance and reduces throughput time but wreaks havoc on utilization. Releasing extra jobs to the shop can increase the utilization rate and perhaps improve due-date performance but tends to increase throughput time (RFB, 2010).
In order to be able to effectively determine how much one must produce, and to ensure that there is no shortage of required inventory, there must be an open flow of information from customers to the company and to the suppliers. The customer tells what type of a product he wants and how he would want it, the company relays the same information to the supplier who then provides the raw materials required. Such a transparency in information will derive a maximum benefit for the company. It will also help the company ascertain what the market demand is like, estimate forecasts, and the suppliers will be aware if they need to keep more raw materials ready to supply.
Failure to ensure a smooth flow of information could result in a 'bullwhip' or 'whiplash' which would lead to tremendous inefficiencies (DeMin, 2005).
Essential to minimising the bullwhip effect is to first understand the forces, which drive customer demand planning and inventory consumption, as they are the triggers for replenishment order quantities at various points in the supply chain (DeMin, 2005). .
The most effective process for smoothing out the oscillations of the bullwhip effect will typically be distributors and suppliers understanding what drives demand and supply patterns and then, collaboratively working to improve information quality and compressing cycle times throughout the entire supply chain process (DeMin, 2005).
Total Quality Management
TQM is a set of management practices throughout the organization, geared to ensure the organization consistently meets or exceeds customer requirements. TQM places strong focus on process measurement and controls as means of continuous improvement (Stark, 2010).
In TQM, customer satisfaction means much more than defect and error reduction or meeting specifications and reducing customer complaints. It goes beyond that to enhance customer value and differentiate them from competitive advantage (Stark, 2010).
Since TQM is a way of life in a company, it has to be implemented and led by the top management or else failure is certain. Continuous improvement of all operations and activities is required to continuously increase customer satisfaction. Short product and service introduction cycles must be introduced (Stark, 2010).
Product development in a TQM environment is customer-driven and focused on quality. Teams are process-oriented, and interact with their internal customers to deliver the required results. Management's focus is on controlling the overall process, and rewarding teamwork (Stark, 2010).Â
The TQM approach is based on the use of objective data, and provides a based on reason rather than an emotional basis for decision making. The statistical approach to procedure management in both engineering and manufacturing recognizes that most problems are system-related, and are not caused by particular employees (Stark, 2010).
A successful TQM environment requires a committed and well-trained work force that participates fully in quality improvement activities. On-going education and training of all employees supports the drive for quality. As people behave the way they are measured and remunerated, TQM links remuneration to customer satisfaction metrics (Stark, 2010).Â
RECOMENDATIONS TO BE IMPLEMENTED
Introducing an Effective Supply Chain Management System
As discussed, efficient Supply Chain Management is very critical in reducing costs and improving the product thus delivering customer satisfaction.
If an effective supply chain is maintained, inventories would be kept at a low, quality goods would be sources from suppliers, the response time to customer problems would be quicker and there would be reduced costs which could be passed on to the customer in order to increase the firms market share by being a price leader.
As the Operations manager, I would undertake the task of improving the firms Supply Chain management to improve efficiencies and within the company.
As identified in the case, the firm has too many suppliers. While that has its advantages, it also comes with its disadvantages.
As the Operations Manager, I would preferably have 2 suppliers for each critical good that I require a supply of to prevent any shortcomings in production. Goods would be ordered from each supplier on every alternate order. This way, no one supplier gets extra orders keeping both suppliers happy. It also gives me the option of going to the other supplier in case one supplier cannot provide me the goods on time.
However, I would ensure that the goods that are being supplied meet a standard that has been previously set by the firm and the suppliers in agreement. Also, rates would be negotiated for every quarter to ensure price planning.
Improving Customer focus
By improving the supply management chain and implementing Total Quality Management in the firm, customer service will be greatly improved.
Particular focus will be put on information flow from the customers in terms of what they expect from our company in terms of quality of products as well as their demand needs while at the same time ensuring that errors in production are reduced and customer grievances are addressed quickly to ensure customer is happy.
Better Inventory Management
By improving the Supply Chain management and also increasing the flow of information from the customer to the company, better inventory management practices will take place.
Since we would now be aware more or less the demand in the market, we can avoid excessive orders of raw materials.
Also, since we will be having only a few suppliers there will be no need to horde items as there will be no need to wait for price comparisons which would reduce order lead time.
Planned Production Schedule
With the implementation of a Supply Chain Management system as well as improved communication flow from the consumers, it will be possible to improve the production schedule and plan accordingly by producing the amount as required by the market.
With the help of a planned production schedule, costs of inventory will also be kept at the minimum and the firm can achieve effective utilization of its resources.
Implementing Total Quality Management in the Organization
Very importantly, I would look to implement TQM in the entire organization to make the company more efficient. The customer oriented approach of TQM is the reason for my decision because ultimately, it is the customer who a business should be able to please as they contribute to the firm's profits.
By introducing TQM in the company, all areas of the company will be efficient and will work towards continuously improving themselves which would ultimately benefit the company as a whole.
Implementation of TQM will greatly help improve the image of the company in the eyes of its customers as errors would be reduced and problems will be quickly and efficiently handled. Further, any new demands from customers will be known to the firm and the firm can work towards catering those demands when they arise.
Since employee performance will be partly linked to the customer satisfaction matrix, employees will also be motivated to do their best to keep customers satisfied.
The ultimate aim of every firm remains customer satisfaction at as low a cost as possible to the firm. By implementing Total Quality Management, Supply Chain Management, Inventory Management, Production Planning, Improved customer focus and streamlining suppliers, the Plant would be able to meet its aim of customer satisfaction.
The implementation of the above will also see the firm increase its production and operational effectiveness.