Processes within supply chain management

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In the current global market, supply chain is increasingly a field of research and concern for most small and large firms. This paper looks into the different processes in supply chain management initiating from materials requirement planning to sales and operations planning. Managing a supply chain in a company successfully includes everything from buying raw materials for producing the goods, to master scheduling, resource and sales and operations planning and delivering the product to the customer. The reason most companies opt for professional services for supply chain today is because they manage to cut a large amount of costs in the production and also store the right amount of stock for supplying them to the customers. This increases profitability and reduces loses in leftover stock or phased out stock. Just-in-time is considered to be one of the most useful and preferred methods today are lean manufacturing concepts. The paper also looks into the case of L'Oreal and the steps it had taken to overcome its issues in its supply chain process.

Part One

Levels in Supply Chain Management - SOP to MRP

Supply chain essentially consists of many stages and the most vital stages are the Sales and operations planning, Master scheduling and the Materials required planning.

Sales and Operations Planning

Sales and Operations planning is a business process that associates the corporate strategic plan to regular operations plans and empowers companies to balance demand and supply for their products (Wight (1999)). The sales and operations are typically divided into five stages (IOMA (2003)) in a corporate structure.

The team gathers a formal or informal meeting to create a baseline demand forecast which is unimpeded in that it assures not what the business can produce, but what could be delivered or sold to the consumers.

In the second step, a pre-meeting with the operations team is organized to collect information about inventory strategy, internal capacity and supply chain capacity. Parts of MRP are often used in this stage to create a time-phased image of future requirements and plans.

The SOP team has a formal meeting to discuss the final operating plan required for the next stage.

The fourth stage involves the distribution and the implementation of the plan where the operations team carries has to meet the required production targets and the sales team occasionally

The final step consists of measuring the efficiency and results of the SOP process.

Master Scheduling

The master scheduling is the formal link between production planning and actual production. This plan measures and calculates significant data about processes, parts, and other resources to optimize production, and to identify the demand for a product. The output of the MPS stage is used to forecast the day-to-day cash flow. It also forms the basis for making customer delivery process and often used to identify bottlenecks in the process. Since master scheduling is the base for manufacturing budgets, the financial budget of the firm or process should be integrated with the planning activities.

Materials requirements planning

MRP is a computer based information system used to organize the ordering and scheduling of inventory which includes raw materials, assembly parts, activity logs, etc. The MRP system is typically designed to meet three targets:

Maintain the lowest amount of inventory

Make sure that raw materials and final products are available for the production and the delivery to consumers.

To plan delivery schedules, activity logs, and purchasing activities.

The diagram above represents a link between Master scheduling (MPS) and MRP with the outputs being that of the MRP stage. The diagram below is a perfect representation of how the software controls the process of supply chain cycle in a company.

Just-in-Time

JIT is a non-traditional approach which targets on producing the right amount of output at the right time and delivered to the right place. JIT is usually referred to as lean production since it avoids unnecessary moving of materials, the storage of excess inventory or the usage of inefficient production methods which result in the rework of these tasks. In a typical JIT system, underutilized capacity is consumed as a substitute of buffer inventories. Some significant elements in the Just-in-time technique that vary from traditional methods include:

Alleviate the Master scheduling with constant plant loading. Meeting demand variation through end-item inventory instead of oscillations in production level. It also creates an unvarying work load on all centers through constant day-to-day production.

Decreasing or disregarding setup times. This is done using automation and one-touch setup using process redesign techniques and better planning.

Decreasing lot sizes. This allows a radical decrease in setup times and allows production of lower amounts of inventory and avoids wastage. However, constant cooperation with the dealers is important to attain reductions order lot sizes since frequent deliveries are required.

Decreasing Lead times. Work stations can be moved closer in order to reduce lead times. Also, applying new technology and cellular manufacturing concepts help decrease the length of the queue. Working close to the suppliers and consumers also reduces the lead times drastically.

Quality assurance and zero-defects quality techniques. Methods like Six Sigma can be implemented to reduce re-work, increase productivity and decrease the defects to minimum in a production life cycle. Quality assurance also gives the employees a personal responsibility and the necessity to maintain quality metrics which further help in deliver the best quality product to customers.

Kanban Production Control System. The dual-card kanban system developed by the Japanese helps create a pull-system in order to control the production. Kanban is a card that contains the specific details of a product which is used as a message to the supplier to deliver materials.

Bullwhip Effect

The Bullwhip effect is a dynamical occurrence in typical supply chains. It describes the tendency of variability of orders with respect to the increase in demand as they go through stratums of supply chains consisting of suppliers and providers. Any factor that creates a distorted perception between within the echelons of the supply chain due to information disorder results in a Bull Whip effect. The formula below shows the nature of variation of the bullwhip effect according to the variation in the orders versus the demand.

The Figures 1 &2 show the difference in perception of the order cycle with and without information sharing. The consumers demand creates a supply chain with information exchange - which comprises sales (water flowing out of the tank), inventory (the water present in the tank) and orders requested, but not yet received or the water flowing in the pipe towards the tank. As the number of stratums increase in the supply chain, the variation of orders placed increase rapidly and thus creates inefficiencies.

Example of the Bullwhip effect: Proctor & Gamble

A classic example of the Bull whip effect was demonstrated by P&G which is regarded to be one of the most suitable samples of the bullwhip effect. In the case of this company, the inventories of the disposable diapers were inconsistent with the demand in the market because the suppliers were stocking up large quantities of diapers after anticipating the rise in consumption. However, the suppliers' calculations or assumptions of the demand were quite inefficient and thus the inventory costs increased radically.

During the same period, P&G had offered aggressive price promotions which resulted in the wrong perception of the demand. A similar situation had occurred when Toyota had promoted special offers for its green cars. Also, the company faced problems with ineffective transportation and misguided capacity plans.

Part Two - L'Oreal Case Study

Business model

L'Oreal is one of the largest companies in the world in the field of cosmetics and beauty products. It has established a wide consumer database all over the world and markets over 500 brands for men and women. L'Oreal has concentrated on globalization and a shared business growth model while at the same time improving profitability from its operations in different sectors. Research and Development has been consistently employed in the company to achieve innovative grooming and luxury products.

L'Oreal's products are marketed using a wide range of distribution channels which include hair salons, hyper and super markets, pharmacies, perfumeries and direct mail to the consumers. The company has divided its products into four areas: consumer products, professional, luxury and dermocosmetics with percentages shown in the Pie Chart below. The company had focused majority of its efforts towards the development of consumer products since they less expansive and will help in increase the customer database extensively.

However, dermocosmetics seems to be the area with lowest focus; since this is one of the areas with a massive growth potential in the current world, they should consider expanding their R&D into this area.

Mission & Objectives

The L'Oreal group states that its mission is to develop beauty products for men and women, which gives them the confidence and the ability to carry off a positive attitude. The company believes in sustainable growth and wants to create a business model that is capable of sustainably ensuring its social and economic balance. This would further create value for all the stakeholders of the company and create a long-term growth approach. L'Oreal states that sustainable growth depends on the capacity to make innovative ideas and products and enrich the value of the intangible assets, intellectual property and associations with the stakeholders. The company valued its customers' satisfaction and thus ensured high quality products and quick deliveries.

Issues

The main distribution channel of L'Oreal was based in Germany and emphasized on focusing on delivery performance and price. The products were ordered electronically from Jade Maybelline/Garnier logistics center and further commissioned and delivered to its consumer distribution centers. A system called the Electronic Data Interchange was used to exchange orders and invoices between partners and then transferred using a converter into the SAP R/3 system. The German subdivision of L'Oreal had distorted visibility when it comes to stock and inventory issues at customer sites. This caused inefficiency in the production planning and management of warehouse stocks, especially when large orders were placed. The limitations in the control of phasing out products made it unmanageable to define an ideal cutoff date. This causes the increase in excess inventory and thus increases the inventory carrying costs. This was quite opposite to the company's goal to reduce the overhead costs.

The company decided to be more effective in collaborating with the retail stores and simplifying its administrative processes. It also planned to implement the VMI system which helped better-manage the inventories and communications between the partners.

Partnership between DM & L'Oreal

L'Oreal new strategy to use the VMI process by building it into the mySAP Supply Chain Management had created the necessity for focusing the software implementation on a particular vendor. After extensive market research, it decided on implementing the software with its biggest vendor, DM-Drogerie Markt consisting of 617 drugstores in Germany. DM was already implementing VMI scenarios with 10 of its suppliers and had an experienced technical and business process.

DM had been chosen to be the best option since it would be easier to implement the VMI systems and increase effective communications between different levels in the supply chain. This would help L'Oreal and DM to create and manage invoices for their existing orders and future orders effectively.

After a considerable amount of research on the best software for implementation from the product catalogue of INFLUE, a French software solution company, it confirmed that the most appropriate software for improving delivery services and manage partners and inventory would be the VMI business process. The VMI system stands for Vendor Managed Inventory which indicates there is a lot of priority given to the vendor and hence they can control and order new stocks when their inventory is empty. This will enable a smooth delivery of good quality products to the consumers and also reduce overhead costs because the carrying costs for excess inventory are lowered.

SCM implemented and the Results

MySAP SCM has helped L'Oreal Germany to control and manage effectively its merchandise planning and standard products. The company receives inventory information and data about the day-to-day sales from DM distribution centers, mainly the center based in Meckenheim. The information retrieved in uploaded electronically to the software and it also determines the delivery quantities and the forecast demand. The software also has the capabilities of anticipating the stock movements and creating optimal delivery plans.

At the end of June 2002, the implementation of VMI at the German subdivision of L'Oreal clearly showed the benefits in alignment with the strategic goals. The inventory at the market distribution centers at DM was reduced by a significant 50%, and the inventory turns were doubled. Some added costs when merchandise planning was taken up were compensated by the improved planning processes and the resulting profits from the inventory reduction.

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