Effects of recssion on supply chain management

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2.1. Introduction

The purpose of this literature review is to explore the current literature that relates to the research topic of "The Effects of Recession on Supply Chain Management", as well as identify areas for further study that will form the basis of the research questions that the overall dissertation will try to answer.

The literature review will be split into four sections with the first section identifying what both Recession and supply chain management are, this section will provide the back ground theories that will be further broken down into individual theories in section two.

Section two of the literature review will look at theories applicable to supply chain management and recession. within this section individual theories of supply chain management will be identified, as well as stating how recession has effected each of these areas of supply chain management.

Section three of the literature review will identify the research questions, of which the answers to will form the basis of the research findings chapter of the dissertation. This section will also provide the reasoning's behind why each of the questions was chosen as an area for research.

The final section of the literature review will be the conclusion.

2.2. Recession and supply chain management

As the title of the research project is The effects of recession on Supply chain management, this section of the literature review will look at both recession and supply chain management in order to fill in the back ground information relating to both.

2.2.1. Recession

Recession is defined as a "whenever the economy has two consecutive quarters or six months of negative growth in GNP/GDP, then economists classify such an economic downturn as a recession"(King & Cushman, 1997). Normally, the recession is visible in real GDP growth, industrial production, wholesale-retail trade, real personal income, and employment.

Recession is not a new phenomenon and happens in economic cycle periods of "boom and bust". It is these down turn "bust" periods where recession occurs. Not every recession has a major impact, it is quite natural for countries to experience mild recessions, as this is a built-in or endogenous factor of a society. In every country fluctuations are going to occur as spending and consumption are going to increase and decrease, as will prices in response to these fluctuations in the economy. (King & Cushman, 1997). However, another factor besides these occasional built-in drops in spending is needed to evoke a recession. Usually, something changes quickly and provokes sharp increase or decrease in prices such as can be seen from the collapse of the banking system due to the credit crunch that was the catalyst for the most recent global recession. (Rhodes & Stelter, 2010).

During a recession a high unemployment rates are present, this is often a result of organisations having to make cut backs to preserve capital, and in many cases this involves cutting jobs, The other cause of high unemployment is due to organisations not being financially stable enough to survive the recession leading to the organisations collapsing as capital reserves dry up. With this high unemployment during a recession total buying power decreases as both consumer and businesses have less disposable capital. As buying power decreases consumers tend to be more value conscious and reluctant to purchase frivolous items. In response to this businesses tend to focus on the products and services that provide the most value to their customers (Pride et al, 2010)

Due to recession happening in cycles it has lead to some operations managers and management theorists to try and come up with ways of preventively recession proofing their supply chains.

2.2.2. Supply Chain

Supply chain management involves the movement of products, services, and information between and within businesses, the creation of value, and support of enterprises in the pursuance of a competitive advantage in the market place (Kilty, 2000).

Christopher (1988) defines the supply chain as "The network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer". a simple depiction of a supply chain can be seen in figure(). For example a company that makes pre packaged microwave meals is part of a supply chain, the company would be supplied upstream from the farmers that produce the meat and vegetables that constitute the ingredients of the microwave meals, and would be the downstream supplier of the distributors, shops and super markets that stock the meals.

Figure ()Image source: http://www.productionplanning.com/graphics/production_planning/DLOGSupplyChain.jpg

Supply chains for today's organisations now resemble more of a spiders web than the simple structure shown in figure() this is because "For each individual finished product or line item, whilst some of the buying, making, moving and selling process will be identical or very similar, the total supply chain for each product will be different and will involve often a complex network" (Emmett, 2008) this statement can be applied to each stage of the supply chain as each supplier will in turn have its own complex network of suppliers.

The Objectives of supply chain management is to satisfy the end customers requirements, by satisfying their needs with the products and services when they are required, delivered at a competitive price. In order to achieve this a supply chain has to be able to meet the five performance objectives of: quality, speed, dependability, flexibility and cost.(Slack et al, 2009)

Quality

The final quality of the good that the customer receives is the function of quality performance objectives at every stage in the supply chain that created the product. The problem for quality is that if there are errors in the quality further down the supply chain then these errors can become multiplied as it travels up the chain towards the customer. Slack et al (2009) states that "if each stage of seven stages in a supply chain has a 1 per cent error rate, only 93.2 per cent of products or services will be of good quality on reaching the end customer(i.e. 0.99)" . for this reason each stage in the supply chain takes reasonability for both their own and their suppliers quality.

Speed

Speed within the context of supply chain management has two meanings. The first meaning is how fast customers receive their finally products, meaning the elapse of time that happens between when a customer places and order to when they receive it. Speed in this context can be met by over stacking over inventory, so that there is always enough stock to meet demand, though larger inventories incur larger costs. The second meaning of speed is the amount of time a product takes to move through the supply chain. Goods that move fast down the supply chain will spend less time as inventory, and thus this will reduce the costs associated with the storing of inventory (Slack et al, 2009).

Dependability

Dependability within the setting of a supply chain relates to the ability for products within the supply chain to be delivered on time. This dependability of throughput time helps to eliminate uncertainty in the supply chain, for example if one part of the supply chain is unable to deliver on time , it leads to a tendency for their customers to over order in order to compensate, which can have the knock on problem of creating a "Bullwhip Effect" within the supply chain as companies within the chain adjust their forecasts to compensate. (Slack et al, 2009).

Flexibility

This is the ability of a supply chain to cope with changes and disturbances and is sometimes referred to as a supply chains "Agility". In order to succeed a supply chain has to be flexible enough to cope with any changes in customer demand, or in the case of recession if any of the parts of the supply chain are removed due to companies going out of business. (Slack et al, 2009).

Cost

Costs in a supply chain are a result of two different factors the first is, due to the value adding activates of the transformation process, meaning that the value adding activities are added to the costs at each stage of the supply chain. The second type of costs come from transaction costs, these are the costs incurred as a result of different organisations doing business within the supply chain, and include such things as setting up contractual agreements, transportation, finding appropriate suppliers, etc. (Slack et al, 2009).

2.3. Theories applicable to recession and supply chain management.

In order to identify any gaps in the current knowledge it is important to identify and highlight the current theories that are associated with the research topic.

2.3.1. Supply chain as a source of competitive advantage.

The old view of the supply chain was one of a necessary evil with much of the focus being on cost reduction, it is only recently that the supply chain has started to be viewed as a source of competitive advantage for an organisation. (Jones & Tilley, 2003). The change comes in response to an ever changing market place for instance products today have an ever shrinking product life cycle. "Products are brought to market faster and more frequently, and are obsoleted even more rapidly. Nowhere is this more evident than in high technology market space, where rapid technological advances have compressed computers and computer components to six months or less." (Sturim, 1999) With these shorter life spans of products it is essential that an organisation brings its products to market in the fastest possible way, and as such have started to view their supply chains as "a competitive weapon that can not only deliver low costs but impact top line growth trough superior responsiveness and best-in-class customer service." (Chuckwuma, date).

It can be said that the supply chain for an organisation represents that organisations value chain. The term 'Value Chain' was used by Michael Porter in his book "Competitive Advantage: Creating and Sustaining superior Performance" (1985), and is depicted in figure(). The value chain analysis describes the activities the organization performs and links them to the organisations competitive position.

http://www.ukeducation.org.uk/qdocsview.asp?ID=1340

Porter (1985) argues that competitive advantage is gained by being the lowest cost-competitor or by differentiating. However, within the supply chain domain, competitive advantage is gained by two facts: reducing costs, and increasing responsiveness (agility) to customer's needs (Martin & Grbac, 2003).

In a recession the majority of companies lose their competitive advantage, this is due to a reduction in the investment in research and advertising, as companies reduce spending on these activities in order to maintain cash flow (Vickers, 2006). Thompson & Martin (2005) suggest that companies that survive recession most successfully, are the organisations that focus on markets or segments where distinctive competitive advantage is possible. This competitive advantage will usually be the result of effective cost control, speed of reaction and quality. An economic recession will typically force an organisation to be creative in searching for cost reductions especially if productivity drives have already eliminated many operational inefficiencies.

2.3.2. Supply Risk

"A chain is only as strong as its weakest link and small changes in one part of the supply chain can cause massive changes elsewhere" (Emmett 2008). The greatest risk for suppliers is to rely too heavily on one customer, as the old idiom says "Don't put all your eggs in one basket." For example a company who gets 5% of its business from one customer is highly unlikely to feel any long lasting pressure to their company if that customer goes out of business. Though as the percentage of the company's total business from a customer increases, so too does any risks associated with that customer failing. (Wu & Blackhurst, 2009) One of the greatest impacts that recession has on a supply chain is through the bankruptcy of smaller suppliers that do not have the financial backing to "weather the storm" as the expression goes. As organisations reduce inventory, the potential of a supply chain disruption increases." This is known as "supply risk" Kull and Closs (2008) in their paper "The risk of second-tier supplier failures in serial supply chains" went on to examine what happens to a supply chain when these second tier suppliers start to fail. This is an effect that is mirrored in today's global recession and is particularly poignant in the American Automotive industry, where vehicle sales are at a 26-year low and have forced GM and Chrysler to seek government aid with many of their second and third tier suppliers filing for bankruptcy as their main customers collapse. According to the Telegraph Online (2008) "The US government has saved General Motors and Chrysler from imminent bankruptcy with a $17.4bn (£11.6bn) lifeline loan package in an unprecedented move that will pile pressure on the British government to follow suit." This has had an effect on the part makers in America and left as many as a third of North American component-makers at risk of bankruptcy.

2.3.3. Bull whip effect

In existing Literature on supply chain management there is a term called the "Bullwhip Effect" the term was popularized by Lee, Padmanabhan, and Whang (1997) and Lee, So, and Tang (2000). The effect is used to describe the discrepancies that occur between where one company in a supply chain's supplier demand is greater than the supply order from their customers, the unplanned demand from customer oscillates back to distributor to the organization and finally to the supplier with increased degree of magnitude at each stage further down the supply chain, as the organisations within the supply chain adjust their forecasts in accordance with demand. this can be seen in figure().The cause of a bullwhip effect can be attributed to a single factor or combinations of many factors, this is due to suppliers, manufacturers, sales people, and customers, often having an incomplete understanding of what real demand is. Each group is responsible for only their part of the supply chain, though each group has influence over the entire chain in relation to the orders they place. This lack of coordination coupled with the ability to influence while being influenced by others leads to the creation of the bullwhip effect.

http://knowscm.blogspot.com/2008/02/bullwhip-effect-in-supply-chain.html

Dooly (2009) in his paper regarding the 2007-2009 recession stated that "he used monthly inventory and sales data to study the impact of the recession on manufacturers, wholesalers and retailers in the U.S. manufacturing sector." Which lead him to identify a "Bullwhip Effect" among wholesalers who were responding late and drastically to the supply chain fluctuations. This was due to recession creating erratic demand spikes for products within the supply chain, as companies were adjusting their demand forecasts.

2.3.4. Inventory Management

Inventory management forms a major part of organisations supply chain management and as such an understanding of what inventory management will be needed in order to carry out the research project. Slack et al, (2009) suggests that inventory management, or inventory control, is an attempt to balance inventory needs and requirements with the need to minimize costs resulting from obtaining and holding inventory. Inventory is a quantity or store of goods that is held for use by an organisation to fulfil a number of purposes from raw material for the transformation process to finished good for shipping to customers. Inventory may be kept "in-house," meaning on the premises or nearby for immediate use; or it may be held in a distant warehouse or distribution centres for future use. With the exception of firms utilizing just-in-time methods, more often than not, the term "inventory" implies a stored quantity of goods that exceeds what is needed for the firm to function at the current time. Inventory control is an important part of a supply chain without proper inventory control, a large retail store may run out of stock on an important item, or a manufacturing company may have to stop production if they don't not have vital components in their inventory.

Vickers (2006) suggest that one of the key things to do in recession for a business is to review their inventory management practices. Vickers (2006), suggest that this is done by looking to reduce inventory costs without sacrificing quality, this is done by looking at stock order levels for individual items, in order to identify any excess in quantities that can be reduced. Another method for reducing the costs associated with inventory is searching for alternative suppliers, with the aim of acquiring the same products from cheaper from alternative sources, as this will have the effect of driving down an organisations total over all inventory costs for each of the cheaper sourced products.

2.3.5. Methods of inventory control

The process of inventory control is essential for organisations in order to become cost effective within their supply chains, this is even more poignant during economic recession when organisations have reduced cash flow. In order to understand inventory control methods, the basics model is as follows, figure () depicts a simplified inventory over time profile for a one stock item. This is a visual representation of level of inventory over time, and makes the following simplifying assumptions; Instantaneous delivery, order delivery time is expected and constant, and demand for inventory is at a predictable steady demand rate. (Slack et al, 2009).

Quantity Q

Slope = demand rate steady and predictable (D)

Average inventory Q/2

Instantaneous delivery at rate D/Q per period.

Q/D

Time

Inventory Level

Figure

Under these circumstances:

Average Inventory = Q/2 (due to the two shaded areas being equal)

Time Interval between deliveries = Q/D

Frequency of deliveries D/Q

Economic Order Quantity

The Economic Order Quantity (EOQ) is the number of units that a company should add to inventory with each order to minimize the total costs of inventory such as: holding costs, order costs, and shortage costs. The EOQ is a system of continuous reviewing inventory, in which inventory levels are monitored at all times, allowing for a fixed quantity to be ordered each time the inventory level reaches a specific reorder point. The EOQ provides a model for calculating the appropriate reorder point and the optimal reorder quantity to ensure the instantaneous replenishment of inventory with no shortages. It can be a valuable tool for aiding decision making, with decisions relating to how much inventory to keep on hand, quantity of items to order, and frequency of orders, to incur the lowest possible costs. (Gourdin, 2002)

The EOQ can be calculated using the formula:

Annual usage in units = Demand for the year.

Order cost = Cost to place a single order.

Annual carrying costs per unit = Cost to hold one unit inventory for a year.

This can be represented using the following graph in figure(). This illustrates the relationship between the ordering cost curve, the carrying cost curve, the total cost curve and the EOQ.

Figure http://www.resourcesystemsconsulting.com/blog/reference/glossary

It is worth noting that sometimes opportunities present themselves for acquiring inventory when there is no immediate demand for it. For example, a supplier may be offering a high value product at a significant cost reduction, with limited time period attached. This might be as a result of the supplier trying to reduce their own inventories, under these circumstances purchasing departments of organisations may decide to make these opportunistic purchases by taking advantages of the lower prices. (Slack et al, 2009).

2.4. Research Questions

The literature review "can identify established knowledge and, more important, develop significance and new questions" (Rossman & Wilson, 1994). It is in this way that the current knowledge was looked at in order to develop the questions that would need to be answered by primary research. Based on the previous literature three areas for further research were identified.

Emmett (2008) described a supply chain as "a complex web of interdependent relationships", it was the way in which recession has affected these relationships, due to the work of Pride et al, (2010) stating that organisations tend to become more focused on the products and services that add most value to the customer, that was identified as being the areas for further study. The first area that was identified for further research was organisations downstream supplier relationships, and as such the first research question would be:

"How has the recession affected organisations downstream supplier relationships?"

This question will look at the relationship between organisations and suppliers , in relation to Slack et al (2009) objectives of supply chain management. This question will also try to answer to what extent there is supply risk within the supply chains of the organisations, based on the work of Kull and Closs (2008) in order to better understand to what extent the recession has created supply risk within organisations supply chains. This question will lead on to the second question:

"How has recession affected organisations upstream customer relationships?"

This will follow the same line of questioning as the previous question, but instead will be applied to an organisations customers, in order to give insight on how an organisations business with its customers has be affected due to the recession.

The final question that has been identified from the literature will be in relation to organisations inventory, and is as follows :

"How has recession effected organisations inventory management?"

The reason this was chosen as an area for investigation was based on the work of Vickers (2006) where it was suggested that one of the key things to do in recession for a business is to review their inventory management practices. This question will help to identify in what way, if any, have organisations had to change their inventory management practices as a result of the recession.

2.4.1 Research Aim

The aim of the research is to better understand to what affect the current economic recession has had on supply chain management. due to the recession being fairly current, the existing literature on the subject mainly deals with previous recessions, this would allow the comparison to be made between literature depicting previous recessions and what is happening currently. By carrying out the research it will allow an insight into to what extent organisations within this current economic recession have had to alter their business practices in order to survive the recession.

2.5. Conclusion

The chapter started with a section giving background information on both "supply chain management" and "recession". this section was in order to highlight the two main areas that would serve as the basis of research in carrying out the literature review.

The second section of the literature review took the two main areas of recession and supply chain management and further broke them down into individual theories. these theories were then investigated in terms of how recession had had an impact on them.

The third section of the literature review served to identify areas for further research and in this way three question were identified in order to better answer the research aim of "How has recession affected supply chain management."

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