Realities Of Modern Supply Chain Management Business Essay

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With the arrival of the new millennium now almost 10 years behind us, supply chain professionals are well into the realities of managing the never-ending balancing act that is today's global supply chain( marah and hofman, 2009). The historical context of supply chain's emergence is partly a function of information technology, which has so radically

altered the possibilities For faster, better, and cheaper materials management, and partly a product of the globalized economy( hofman et al, 2009)

INTRODUCTION : CASE OVERVIEW VIZ-AVIZ THE CHOSEN ORGANISATION:

The ideal supply chain is one that is predictable and reliable as well as responsive and agile. On one hand, a predictable and reliable supply chain adds value both to

customers downstream who can lean their own operations and to investors who naturally penalize stocks for negative surprises. On the other hand, responsiveness and agility arc essential if supply chains are to capture opportunities and solve problems faster than the competition. Excellence on these two essentially contradictory dimensions should justify- higher price-to-earnings multiples for shares of public companies able to do both( hofman et al, 2009).

The case at hand primary deals with Dell inc. As an organisation that is known as a global computer systems manufacturer with the most agile and flexible supply chain designs and highly appreciated and accounted for supply chain risk prevention and mitigation policies and frameworks. The report analyses and explains how the worlds no.1 computer systems manufacturing company works towards streamlining its supply chain strategies and practices to ensure further enhancement of sustainable planning and successful execution ensuring reduction of inventory levels to hours from days while maintaining response agility and immediate responsiveness to incoming customer orders.

DELL'S VALUE CHAIN-THE 'EARLY-TO-MARKET' ADVANTAGE:

The business model of dell operationally functions on the principle of using direct sales via internet, PC customization and readily assembled computer systems for direct purchase at the retail stores and outlets. This provides Dell with the competitive advantage of bringing products to market and customers, a lot faster than its main competitors. Traditional computer manufacturers work with the model of previously assembled computer systems ready for purchase at retail stores, with very little or no customization facilities or advantages.

According to Dave Schneider, continuous improvement engineering manager of Dell , the realtionships with customers and suppliers has allowed dell to know what as an organisation is expected out of it to supply in real time and respond quickly and precisely, meeting the demand while maintaining low inventory levels.

The following diagram shows the difference between dell's supplying strategy as compared to the others in the computer systems manufacturing business and also marks off for the competitive advantage that the dell direct model lays with respect to the direct link between the organisation and the customers(end users).

Fig.1.1

As seen in fig. 1.1, dell direct as a supply chain model, eliminates the channels of finished product flow by cutting down on the distributors and retailors, hence enhancing the agility of the supply chain , by establishing a direct interaction with the customer after the stage of component and peripheral assembly, making the supply chain environment more responsive as compared to market competitors.

THE DELL DIRECT CASE OVERVIEW:

The case encompasses the critical review of the supply chain strategy of dell computer systems which is identified and recognised as a global winner, in flexiblity and agility to supply strategies and quick response solutions to supply chain disruptions. The study of the supply chain viz-a-viz the dell direct model approach and provides a linkage between the supply chain strategy and the company risk structure. The ideology and advantages behind the usage of the pull control system with respect to drastically lowering down of the inventory levels has led the organisation to reach the customers faster and more efficiently than its competitors.

Fig 1.2 : how the organisation's operational model drives the market share.

The case also analyses the supply chain disruption faced by Dell and other computer systems manufacturer, during the time when Taiwan, one of the largest manufacturing base for semiconductor and motherboard production and assembly, suffered an earthquake, which is critically analysed as an unplanned unorganised risk for any functional supply chain in the manufacturing scenario. Noteworthy is the fact that Hinschu industrial park, the home to more than 28 semiconductor fabrication facilities, was based just 68 miles north of the epicentre of the earthquake. The enormity of the economic disruption is clear by the statistics that tell that about 120,000 people became unemployed and $1.2 billion was the aggregated industrial production loss as a major consequence.

LITERATURE REVIEW: STRATEGIC ANALYSIS OF THE SECTOR/INDUSTRY CHOSEN FOR STUDY:

The strategic analysis of Dell computer systems revolves around the quest to find viable supply chain alternatives to maintain a financially viable and profitable product portfolio, a very high level of direct consumer interaction with the processes and facilities of the manufacturing organisation, safe and economic information exchange both internally and externally to maintain a high profile with respect to competitive advantage and most importantly to avoid costly inventory overages and shortages. Demand and supply imbalances in the present day computer systems manufacturing industry are known to be the primary reasons for delinquent customer orders, missed revenue and excessive or shortage of inventory. The main stream of research related to this report is the quest for models and frameworks that clearly define the levels of disruption that can be associated to highly agile supply chain ecosystem practicing the following business improvement tools and techniques:

Just in time(JIT)

Pull control methodology

Lean as a business practice

As tested and devised academically by Manuj and Mintzer(2008) the concept of risk management has started broadening to encompass a post disruption event through the mitigation term. However, in a supply chain like dell , risks are generally looked as a pre disruption possibility. Akcay and xu(2004), broadly define supply chain disruptions in a highly responsive supplier customer relationship, to be any of the following:

Transportation delays

Industrial accidents

Acts of terrorism

IT malfunctions

Operational fallbacks

Natural disasters

Government regulations ; and

Opportunism by suppliers.

Sheffi and Rice(2005) opine that there cannot be any one correct way that categorizes disruptions and also define clearly that most disruptions are situational. The most common attributes of disruption as stated by Dietrich et al(2006) can be the level of impact of the disruption. A typical risk management matrix examines the likelihood of the disruption and is mostly matched or compared against the level of impact of the disruption (Ervolina and Dietrich(2001) . Most research focuses on disruptions that affect only one or two echelons at a time, such as a manufacturer facing disruption in supply because of a disruption occurring at a supplier (Zsidisin and Smith 2005).

The following matrix from Sheffi and Rice(2005) provides the relationship between the probability and consequences of supply chain disruptions.

Fig 2.1: mapping probability and consequences( from Sheffi and Rice 2005)

2.1 : DELL'S STRATEGIC ANALYSIS AS A WORLD LEADER IN COMPUTER SYSTEMS MANUFACTURER.

The global presence of dell with sales offices in 43 countries, sales presence in 170 countries, 6 global manufacturing sites in Brazil, Tennessee, Texas, China, Ireland and Malaysia clearly defines its leading position in the computer systems market. The Dell direct model as discussed earlier focuses on practicing pull control system over its widely spread supplier base and focuses on visualising, preventing and mitigating disruptions as and when they occur over the supply chain (Goel and Jain, 2007).

The competitive advantage of dell lies in the fundamentally different dell direct supply model that differentiates it from its competitors and gives it value added advantages marking a more efficient and profitable organisational presence.

Fig 2.2: Dell's direct approach ; a fundamentally different model.

The dell direct model provides the organisation with a better understanding of customer needs as compared to its competitors. The customers receive their desired customised computer systems and solutions and not a standard solution that lags precision in terms of customer satisfaction. The dell direct model also results in minimized inventory and openness to new and upgraded technology with immediate delivery to customers.

FIG 2.3: courtesy ; Dell Investor Relations 2009 Stockholder Meeting

As researched by Atkinson et al(2009) the dell direct model provides for the following advantages over the closest competitors in the industry and the computer systems manufacturing sector.

Speed

Order-driven processes linked by internal IT and external networks allow only 7 hours of inventory in factory and orders to be filled in 5 days or less

Entire value network linked by EDI, Internet, extranets

Quality

Bar coding allows components to be tracked to suppliers when problems occur, stop production and notify suppliers

Cell assembly allows problems to be fixed on the spot without shutting down production

Cost

Online sales and support saves on call center costs

Supply chain coordination substitutes information for inventory

THEORETICAL MODELS AND FRAMEWORKS TO MAP OUT THE SUPPLY CHAIN RISKS, DISRUPTIONS AND THREATS.

Dell's collaborative relationship strategy revolves around a virtually integrated organisational structure that forms the organisations global strategy.

The virtual integration practice followed by dell , makes all the suppliers and end users or customers come together and interact for needs and requirements over a virtually formulated standalone platform with options , choices and alternatives like none other player in the business.

The following figure provides a broad view of the virtual integration supply chain practice followed by dell computer systems.

VIRTUAL INTEGRATION AT DELL

FIG 3.1: THE DELL GLOBAL STRATEGY OF SUPPLIER-CUSTOMER VIRTUAL INTEGRATION.

The most significant characteristics of the dell direct(virtually integrated) model are as follows:

BTO: Build to Order, customer pays first which gives financial stability, no or minimum forecasting required, helps in planned operations

JIT: Minimizes operational costs and inventory costs

Collaborative relationship: Buyer and supplier help each other in planning, operations and information exchange and customer services.

Customer Orientation with mass customization provides excellent flexibility to customer in order to select product of their requirement with maximum possible options.

3.1: SUPPLY CHAIN RISKS AND THEORETICAL MODELS TO EVALUATE DISRUPTIONS AND PROVIDE RECOMMENDATIONS:

In order to develop an understanding of the types of disruptions possible in a supply chain and aspects of risk management in a supply chain context a framework prepared by Manuj and Mentzer(2008) has been reviewed.

The diagram representing the framework at study is as follows:

Anything that affects the flow and supply of raw materials, components, sub components and finished goods can be categorised as a supply chain disruption. As defined by Craighead et al (2007) a supply chain disruption is an unplanned and unanticipated event within or outside the boundaries of the supply chain that disrupts the normal flow of goods and materials within a supply chain. Gaonkar and Vishwanadham(2007) classify a supply chain disruption under 3 major subheads, namely :

DEVIATION : can be defined as a finite variable which tends to occur when cost or demand or both tend to stray from their expected or mean value.

DISRUPTION : can be defined as an occurrence that radically transforms the entirity of the supply chain system.

DISASTER : can be defined as an irrecoverable temporary shutdown of the supply chain activities.

Supply chain disruption impacts can be severe and can imply over the cost, operational and service aspects of an organisation.

The Supply Chain Risk Management and Resilience Framework used here is one developed by Manuj and Mentzer. The framework is created in view with firms having a global outreach who source from different countries. This framework provided is a comprehensive one with both risk management and mitigation factors incorporated in to it. This framework proved to be ideal for risk management and mitigation in Dell, a truly global firm.

The framework adopts a 5 step approach for Risk Management and Mitigation

1.Risk Identification

The first task is identifying the risks and the framework provides the following major categories: Supply, Operational, Demand and Security Risks

2. Risk Assessment and Evaluation:

Once the risks have been identified, the next step is to assess and evaluate the risks to prioritize them and to adopt suitable risk management strategies.

3. Risk Management Strategies:

Different strategies are adopted for various risks according to their importance and nature. Various strategies are suggested in the framework, such as Avoidance, Postponement, Speculation, Hedging, Control, Risk Sharing/Transfer, Security etc.

4. Implementation of Risk Management Strategies:

Once the various strategies have been decided, plans have to be made for implementing the strategies based on their priority

5. Mitigation of Supply Chain Risks:

Contingency Plans have to be made for risks which are critical and mitigation plans for reducing their impacts have to be put in place.

3.2 : IMPACTS OF DISRUPTION ON THE SUPPLY CHAIN AND THE ORGANISATION:

Sheffi and Rice(2005) opine that there cannot be any one correct way that categorizes disruptions and also define clearly that most disruptions are situational. The most common attributes of disruption as stated by Dietrich et al(2006) can be the level of impact of the disruption. The following matrix from Sheffi and Rice(2005) provides the relationship between the probability and consequences of supply chain disruptions.

Fig 3.1: mapping probability and consequences( from Sheffi and Rice 2005)

On the basis of the severity of impacts and their likelihood or probability of occurrence, the major established attributes of disruption can be classified as follows :

The most vital attribute of disruption is the inherent cause of disruption. For example, Murphy(2006) categorized disruptions into "natural events", "external - man made events", and "internal- man made events." Blizzards, labor strikes, and product recalls would be examples of each category respectively (Murphy 2006).

Another vital attribute is on how many spheres or disciplines of the supply chain have been affected by a given disruption at one time.

The third vital attribute is whether or not the disruption is associated an environmental change. Disruptions that cause an environmental change usually impact some form of the infrastructure for either a long time period or permanently.

The fourth and the final attribute of disruption is the duration of the disruption itself.

The framework tests the supply chain risks based on the above mentioned attributes and classifies them as deviation disruption or disaster, based on the severity of the disruption over the supply chain and the probability of occurrence as a parameter for risk calculation, assessment, prevention or mitigation.

EXPANSION OF THE FRAMEWORK BY MANUJ AND MENTZER AND EXPLANATION OF POTENTIAL SOURCES OF DISRUPTION RECOVERY:

The Global SCRM and Mitigation framework by Manuj and mentzer(2008) was applied on the Dell Value Chain model to analyze and identify its utility.

Risk Identification phase placed the identified risks into various categories. This was followed by the risk assessment and evaluation stage. We quantified Probability and Impact to allocate a Risk priority Number to identify and prioritize the various risks. Once the risks were evaluated, general risk management and detailed risk management strategies were devised to address these risks. Contingency and mitigation plans were created for critical risks.

Probability and impact of disruption were quantified on a scale of 1 to 10, based on the hypothesis on the least severe to be 1 and most severe to be 10. Eventually the least probable to be 1 and the most probable to be 10. As explained earlier a risk probability number(RPN) was calculated based on the above results and identifying the severity of the disruption the risk management strategy and the mitigation strategy was defined.

The academic framework by Manuj and Mentzer(2008) was tested hypothetically over the case of severe supply chain disruption faced by Dell and other computer systems manufacturer, during the time when Taiwan, one of the largest manufacturing base for semiconductor and motherboard production and assembly, suffered an earthquake, which is critically analysed as an unplanned unorganised risk for any functional supply chain in the manufacturing scenario. Noteworthy is the fact that Hinschu industrial park, the home to more than 28 semiconductor fabrication facilities, was based just 68 miles north of the epicentre of the earthquake. The enormity of the economic disruption is clear by the statistics that tell that about 120,000 people became unemployed and $1.2 billion was the aggregated industrial production loss as a major consequence.

After the step wise approach of finalising the framework and implying and expanding it over a real time already occurred situation of crisis it was inferred that severe supply chain disruptions have a great impact on the firm. They can cause loss of sales to customers and lead to changes in the design and strategy of the supply chain.

With respect to the risk prevention and mitigation framework by Manuj and Mentzer , the supply chain disruption at dell , in case of an unplanned natural risk to a supplier, eventually affecting dell's supply chain can basically be covered by deploying the risk an resilience framework as discussed earlier . The key points of consideration to mitigate further damage caused by the supply chain disruption would effectively cover the recommendations as follows:

TRANSFER OF RISK: The transfer of risk primarily encompasses a risk sharing strategy in case of a severe supply disruption by sharing it with 3rd party suppliers and allies.

RISK MITIGATION/INSURANCE: In case of risk occurrence and supply disruptions, follow up through insurance policies to ensure a speedy recovery of occurred damage.

EMERGENCY SUPPLIES: Activation of the standby/emergency/backup supply plan as per the most cost effective solutions at hand.

DEMAND MANAGEMENT: Effective price hike and cost reduction catering to the product/peripheral/component in crisis/abundance respectively.

CONCLUSIONS, RECOMMENDATION, IMPLICATIONS FOR FUTURE RESEARCH:

CONCLUSION :

After a close analysis of the Dell direct value supply chain system considering the impact that a natural calamity( the Taiwan earthquake) had over the supply chain of various computer systems manufacturers including Dell , the proposition is finally based on the framework by Manuj and Mentzer(2008) . The overall objective of Manuj and Mentzer(2008) model is to "reduce the impact of disruption" by supporting the development of supply chain design strategies that, taking into consideration the determinants of supply chain resilience discussed above, result in reduced impacts on total supply chain performance as well as in shorter recovery times should a disaster occur. Thus, this framework can allow the decision maker to display how different supply chain resilience strategies work and to compare the results. Such analysis ultimately can be used to propose recommendations for the design of supply chains in view of attaining network resilience.

RECOMMENDATIONS:

As recommendations to a highly lean and agile supply chain with respect to risk mitigation and resilience the adoption strategies should proactively include the following characteristics:

POSTPONEMENT OF PROCUREMENT TIME IN CASE OF RISK IDENTIFICATION, DETECTION OR MITIGATION: this implies that parts should be procured only after the customer places the order in order to provide better cash flow and low inventory costs.

HEDGING: implies a highly proactive, globally distributed network of suppliers ensuring multiple sourcing and conveying a backup opportunity in case of an unplanned disruption.

RISK TRANSFER/RISK SHARING: implies transfer of risks through flexibility of contracts, price reductions, supplier base locations and variability of credit periods with respect to exchange rates.

SECURITY: implies security of goods over the supply chain pipeline through techniques like CTPAT, RFID, GPS and location and position mapping.

SCOPE FOR FUTURE RESEARCH:

Much of the research that has been done surrounding disruptions has focused on anticipating and planning for disruptions and is incorporated into the risk management literature. This has occurred because empirical research is inherently difficult in regard to disruptions. First, disruptions are normally unpredictable in their timing. Few disruptions have more than several hours or days warning (Murphy 2006), meaning that it can be difficult to place a researcher in the right place at the right time to gather any desired variables. Second, disruptions are also unpredictable in their frequency. A firm might allow researchers to have access to disruptions, but no one can guarantee how many disruptions will occur and what their attributes are. Hence the most prompt area of future research in supply chain disruption mapping should ideally be a framework, practice, method or technique that provides for the minimum dispersion among qualitative, modelling and empirical research and suggest more methods of risk prevention over a supply chain like Dell , wherein most of the emphasis is on risk resilience and mitigation because of the JIT methodology of supply chain practice.

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