Supply chain is a connection of retailers, distributors, warehouses, transported and supplier that involve in the production, delivery, and sold the product to end user or customer as it known as a wider concept covering all business processes between organizations (Lambert, Cooper & Pagh, 1997). Supply chains also define as a global connection to deliver products and services from raw material through technology and information, distribution and cash (Ayers, 2006).
Moreover, supply chain process includes elements such as raw material, production, procurement, order processing, inventory management, warehousing, distribution and transportation, develop of these operation is known as supply chain management. Today, supply chain management becomes a routine part of production (www.lotsofessays.com).
Source: Sheffi & Caplice
The diagram above is the network of supply chain, the suppliers show above is the organization that provides raw materials to manufacturers to produce end user products. While distributors are companies that take inventory in bulk from manufacturer and deliver the product to customers. Lastly, customers or consumers are any organization that purchases and consume the product.
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There are three key elements in the supply chain. First is supply, this refer to raw material that supplier have and how they focus on it. Next is manufacturing, is how they turn the raw material into a finish product. The last but not least is that distribution, how the finish product reach to the customer (http://www.wisegeek.com , 2010). Supply chain management is that the process of all input such as services and material and transform into output and delivery to customer (Heizer & Render, 2008). Raw material such as a small component after the supply chain management process it becomes finish good and delivery to customers.
Supply chain management is planning, coordination and control of all activities and process in the supply chain to deliver value to the supply chain to satisfy requirement of other supply chain member (Vorst, 2004). Hence, the cycle of decision making processes, material, financial and information flow have to manage accordingly to meet customer requirement as the supply chain management is take place in different supply chain stage.
Outsourcing and purchasing are the activities include in the supply chain management with having good relationship with distributors and suppliers are important function to increase logistics efficiency, flexibility, quality and enhance productivity (Kaeli, 1990). Therefore, organization will have stronger market position, customer satisfaction and better responsive from their customer according to (Goldhar & Lei, 1991).
2. The important of supply chain management to organization.
2.1 Competitive advantage
Efficient supply chain management is the essential to being able to satisfy market demand and to do so in a way is profitable (Hugos, 2006). Supply chain management of the organization that enables them to deliver the best value to their consumers will generate a strong demand for the organization product or services. When information is shared in between supply chain networks, it can result a more efficient flow of goods and services (Anand & Mendelson, 1997), reduced inventory level, and lower costs (Yu, Yan & Cheng, 2001), which benefits the overall network.
Moreover, organization that has the effective supply chain management will gains value and get access to business information that allow the members of the supply chain have the power to make decision and speed up there responsiveness as well as efficiency toward customer problem (http://www.cisco.com). Besides, effective management in the supply chain has been recognized being importance to achieving and sustaining a competitive advantage in the market (Hsiao, Purchase, & Rahman). Thus, inventory move faster in the supply chain which will reduce inventory carry cost, product's overall cost, customer receive products faster and shorter the production cycle time which will increase the market share of the organization that lead to competitive advantages.
Hence, the organization also can do mass manufacturing and mass customization that will offer competitive advantages given that the product life cycle of the product is improve because the organization will offer variety of product to different market segment and consumers preference. For example, Dell became the largest producer for personal computer in the world after they implemented the supply chain management to change their strategy by adopting a direct sales strategy, building every personal computer to order and shipping it directly to the customer (Klinker, Terrell & Mahfouz, 2006).
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Communicate with other organization within the supply chain management that controls their critical resources allow them to compete effectively in their environment (as cited in Samaddar, Nargundkar & Daley, 2006).Supply chain management allows members in the supply chain communicate freely, honest communication among the members will establish trust among them and information will share openly (Fawcett & William, 2004). Furthermore, trust will build commitment among the members of the supply chain network (Kwun & Suh, 2004).
According to Towill (1996) decision makers need to depend the overall of the process so they can manage the supply chain as one single company, to minimum uncertainty updated feed forward and feedback information flow coupled with optimal decision making. Therefore, organization that trusted the supplier willing to communicate and allow information free flow among them to ease their businesses. High trust with supplier and customer in the supply chain has a great competitive advantage toward the organization (Lynch)
Moreover, supply chain management built on a foundation of trust and commitment among the supply chain members (Lee & Billington, 1992). Commitment of partnership in the supply chain management will dedicate their resources to achieve the goal of the supply chain and their performance (Chen & Paulraj, 2004). Organization is more and more rely on their trusted supplier to improve the product quality, produce the product faster and reduce the product price so they can compete with their competitors (Liker & Choi, 2006). Other than that, trust makes it possible that the supplier to share cost with organization, the result in a joint effort to reduce supplier's cost through a mutual sharing ideas (Monczka, Handfield, & Giunipero, 2009).For example, Dell developed a strong relationship with both suppliers and the customers allow it to ensure those computer components are available from supplier to meet customer demand (Taylor, 2005).
2.1.3. Long-term relationships
Supplier will become part of the supply chain and have a long relationship on the competiveness of the process of the supply chain with a good supply chain management (Choi & Hartley, 1996) .Moreover, information sharing is an important aspect on incorporation and joint inter-organizational relationship (Huang, Lau & Mak, 2003).Long-term relationship will create opportunity to capture the synergy of intra and intercompany integration and management (Lambert et al., 1997)
Limitation of information in the supply chain will lead to Bullwhip effect such as unnecessary inventory investment, poor customer services, wrong capacity allocation, reduce revenue and missed production (Lee, Padmanabhan, & Whang, 1997). Plan along the supply chain and coordinating information can control Bullwhip effect and improve their supply chain relationship and performance (Lee et al. 1997).
According to Fiala, (2004) information exchange is a very important issue for coordinating actions. If member of the supply chain have free flow information it can reduced their lead time of information such as orders, demand and capacity forecast, point-of-sale data for the whole supply chain. (Lee, So & Tang, 2000) find that the benefits of sales information sharing and identified the drivers that have significant impacts.
Organization that have long term relationship from the supplier will obtains larger inventory or cost reduction when the demand is highly associated if the lead time is long. Eventually customer will receive a higher quality, cost-effective product in a shorter amount of time. For example, Chrysler Corporation cut their supplier base in half and brought the remaining supplier in on the design of a new generation cars and develop long term relationship based on trust. The long term relationship has helped the organization increase in profit (Braun, Guthrie, McCampbell, & Sit).
2.1.4. Reduce cost
Supply chain management system can influence the organization cost for administrative personnel and information purpose to plan and control the flow of inventory (Jonsson, 2008). Moreover, supply chain objective is to reduce cost by eliminating all non value added activities in the flow of goods from raw material supplier to end customers (Vorts, 2004).
So the efficiency of supply chain management can reduce the organization inventory and stock cost (Steckel, Gupta & Banerji, 2004). The efficiency of the supply chain management allows the organization having the right good at the right time in a right place (Ketchen & Hult, 2007).
Therefore, organization can deliver their product according to agreement so it can reduce the shortage cost, delay cost arise when late delivery occur to compensate the customers. Other than that, it enables organization to reduce the cost of goods sold, shorten lead-times for orders and reduce inventory costs (Li, Ragu-Nathan, Ragu-Nathan, & Rao, 2006).Besides, organization does not need to hold inventory can reduce their cost of storing their inventory at their warehouse. Without using warehouse organization can save the transportation cost from the warehouse to the organization. Moreover, the cost reduction of the production organization can create customer value by reducing the price of the end users product (Ketchen & Hult, 2007). For example, Apple Computer is making lose in 1997; Steve Jobs do some changes in the supply chain management has saved the organization by reducing the cost of inventory (Taylor, 2005)
3. Challenges of Supply Chain Management
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Appropriated plan of the supply chain management can get advantages, improperly handled will lead to tragic (Taylor, 2005). Accurate planning is important but planning error will lead to dramatically change in plans (Stadtler, 2004). Furthermore, transportation schedules, production schedules and distribution needed to plan adequately, if not it will lead to complexity (Stadtler, 2004). The complexity is created from the additional of separate transport amount due to improper planning. For example, Kmart Corporation have planning error that the organization crippling its ability it match the price offered by Wal-Mart, the worse is when the organization able to lure back the customer but the supply chain not able to deliver to them in time. Due to the wrong forecast and planning Kmart is now bankrupt (Konicki, 2002).
3.2. Supplier attention
Supply chain challenges include lack of supplier attention. While lack of supplier attention will cause late placed orders due to conflicting objectives and goal. Potential issues of vendors, late delivered and wrong delivered is the great obstacles in to supply chain management. Early obtaining material will minimize risk such as additional cost. Internal procurement issues also subject to supply chain management (Henrie, 2006).
Hence, lack of supplier attention will create inefficiency and ineffective in the supply chain and the organizational cost will increase (Byrnes, 2003). Due to this problem, company cannot managing well as when the material arrive, when the material should be purchase, and how many quantities should be purchase and when the material should be delivered.
Moreover, the suppliers in the supply chain deliver their business information and raw material late will create bullwhip effect (Lee et al., 1997). Consequently, the organization need to wait the raw material to be process, worker need to work extra time to produce the product and extra cost need to be pay. For example, NASA Company had experience this problem because the project will face shrinkage costs, breakage and additional cost for warehouse (Galluzzi, Zapata, Steele & Weck).
3.3. Customer value
Customers always change the value perception toward a product, so the organizations will response to the change or predict the change (Flint, 2004). Hence, finding ways to meet ever-rising customer expectations at a manageable cost is very challenging. Therefore, organization need to response toward the challenge by doing research on how the value perception of the customer change and improve their prediction and planning process. Competitive advantage can be gain if organization can predict their customer perception of the end user product (Slater, 1997).
Ducati the Italian motorcycle maker had improved their company's supply chain and create a big success to the company. Ducati revamped its supply chain in "operation turnaround" by using the principles such as kaizen, TQM, Six sigma, just-in-time inventory control and others. This few principles had help the company to decrease production cost, product cycle time, increase the manufacturing quality and production volume.
Ducati was founded in 1962 in Bologna, Italy, as an industrial component manufactures, by 1970 the company became famous for making stellar racing bikes. In 1999, the company wanted to eliminate all non value adding activity, eliminate waste and improve their racing bikes quality because of the challenges the company had to make changes in their supply chain.
The improved of the work and implementing a predictive maintenance system for all the factory equipment had decreased the machine downtime and increased productivity. Pellerey, Ducati's top manager said that those changes had reduced the hourly cost of process.
Furthermore, the new supply chain management process of Ducati had allowed the company to gained control its inventory and can respond quickly to their customer's preference that will reduced life cycle time of a particular motorcycle model.
1. What lessons can other companies learn from Ducati's experiences of reworking its supply chain?
Supply chain contributes a good brand image to customer. Toyota Company use Toyota Production System (TPS) to gain its reputation for quality, increase sales and to reduce the waste of inventory (Ayers, 2006). Lesson that Toyota Company had learn is that by using supply chain management can reduce the cost of production by reduce the excess of inventory. Supply chain management that is not effective and efficiency will increase organization cost, product cycle time, reduced product quality and the production volume will decrease as well (Kaeli, 1990). This mean that company use high cost to produce a low quality product. The inefficiency of the Supply chain management can cause an organization to bankrupt such as Kmart (Konicki, 2002). Kmart Company was bankrupt due to their wrong planning in their supply chain management. Besides that, Kmart company also facing liquidity problem. AMR Research cited a study by A.T. Kearney in October that estimated $40 billion, or 3.5 percent of total retail sales, are lost annually because of supply-chain inefficiency (Kemp, 2010).
Furthermore, SABMiller, the global brewing giant has revamped it supply chain management system (Goodwin, 2009). The company rework it supply chain to reduce their stock out cause by it efficiency supply chain management. SABMiller has used the advance supply chain management system that allow the company to collect information from their resource planning system and financial system to generate useful information for production schedules, raw material orders and financial forecast to increase their flexibility to meet changes in demand(McGettrick, Sewell, & Sivills).
Moreover, IKEA also had revamps its own company supply chain with JDA. IKEA was trying to change their supply chain strategy by cutting back on suppliers, and more concern on low cost country (www.logisticsit.com, 2006). JDA call "Customer-Driven Value Chain", it has a unique market position and it offer a complete supply and demand chain industry specialized suite with capabilities necessary (http://www.jda.com/solutions, 2010). JDA was software that use by IKEA Company to revamps their supply chain strategy, by using the JDA software can lead to high performance in business process (www.logisticsit.com, 2006). IKEA Company using the JDA software can achieve the goal that they set, cutting back on supplier and more focus on low cost country.
Other than that, Nike sport had invested $225m to review its supply chain in order to increase its production efficiency in year 2009 (www.procurementleaders.com, 2010). Airbus look at supply chain management for better operational efficiencies and lower cost, this company they plan to revamp their supply chain management to make it production more efficient and can cutting cost (Esposito, 2006). Nike Company and Airbus Company had learned form Ducati company by revamp their supply chain management to increase their company performance.
Besides, supply chain management not just increase productivity it also provide value advantage. Product life cycle can be improved by effectiveness of supply chain management and variety of product can be introduce to different market segments and satisfy customer needs. Toyota production system practiced in Toyota, by using supply chain Toyota Company can identify what is value added activities and what is not. Non value activities like waste, overproduction, excess processing and unnecessary distribution. Step that to reduce waste through kaizen, Kanban, Just-In-Time and also pull and push production. Toyota Production System had revolution its supply chain managements to become meeting towards the end user demands(http://ezinearticles.com/?Importance-of-Supply-Chain-Management-in-Modern-Businesses&id=1240176).
2. To achieve result such as those at Ducati, how important is the free flow of information among members of a company's supply chain? Explain.
Ducati had to involve its supply chain partner in the "operational turnaround" because 92 percent of the cost of a typical motorcycle was come from the company's supply chain. Ducati need to transfer the culture and the technique for creating a lean and efficient supply chain to their supplier. As Ducati consider their suppliers to be an extensions of Ducati which connected them via the web to accelerate the flow of information. To achieve the efficiency in the organization, information free flow involves sharing information across company boundaries with supply chain member is important since organization is unable to generate all their required resource internally (Titus & Bröchner, 2005)
Besides, information sharing enhances the agility of firms while improved the stability and performance of the whole supply chain. Hence, the increase of product quality and speed of responses throughout the supply chain is mainly based on the efficiency of the information free flow in the network (Dimitriadis & Koh, 2005).
According (as cited in Hsu, Chiu, Chen and Liu, 2009) the importance of sensible information and quantified the impact of upstream disorder on supply chain. When received information from other member of the supply chain, everything remain the same except other than receive an order from the previous supply chain member but also receives end users demand for the current period ( Dejonckheere, Disney, Lambrecht & Towill,2004).
Refer to (as cited in Samaddar et al., 2006) information can flow along the supply chain in sequence, within orders posed by each supply chain members or it may be share by them. Free flow information can be achieved by using information and communication technologies based tools which allow supply chain members to get information at the real time with accurate information on the point of sale demand to allow them to forecast replenishment needs inventory need and eliminate under or overestimated orders and inventories (Pendroso & Nakano, 2009). For example, Wal-
Mart shares point of sale information with their suppliers and delivery orders electronically to the relevant supplier when their inventory for an item falls to minimum level of stock
Information sharing allows better planning and coordination of the supply chain (as cited in Welker, Vaart, and Donk, 2008). Moreover, information sharing is an important aspect on assimilation and collaborative inter-organizational relationship (Huang, Lau & Mak, 2003). Ordering process is a function related to the information sharing and it is important to process in the supply chain (as in Welker et al., 2008).Hence, organization can make better decision on the ordering process, production plan and capacity allocation therefore the supply chain dynamics can be optimized (Huang et al., 2003).
Furthermore, information free flow is important because partnership always formed so that individual can share unique information (Hsu et al., 2009). There should be levels of information sharing for mutual benefits and cooperation (Christiansen, Rohde & Hald, 2003). Ducati use the buyer - supplier strategies because information sharing varies depending on the level of intensity of the relationship that Ducati introduce an integration program that involved their employees and supplier to work as a team.For example, companies share data with suppliers to reduce cost and bargaining also increase efficiency.
In addition, Ducati's new supply chain management processes that support information-sharing activities aim to support data sharing and communication between supply chain partners which allow the company reduced the bullwhip effect. Lack of information of raw material quality from supplier will decrease the product quality and customer will not buy from the organization (Towill, 1996).
Therefore, supplier commitment is very important that supplier allow information flow to organization and will reduce the uncertainty.Plan along the supply chain and coordinating information can control Bullwhip effect and improve their supply chain performance (Lee et al., 1997). As order information flow is related to material flows and are important for supply chain to performance effectively, effective supply chain management will help the organization to reduce Bullwhip effect (Pendroso & Nakano, 2009). Information that flow slowly in the supply chains network may interrupt the production lead time and excessive inventory in the organization.