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When is a supply chain strategy successful? Many Supply Chain Managers today would emphasis on efficiency - reduce costs, improve efficiencies and reward customers with low price. However, this "lean" thinking makes a vulnerable supply chain. This is similar to people who follow a diet with a one-sided focus on weight loss may lead to a deterioration of health. People are better served by a balanced approach focused on the overall health, which nutrition, exercise and mental effort to be aligned and where people bodied be made to temptation from the environment to resist so that the longer term health is assured. The short- term strategy on cost reduction would simply consider customers that they only revolve around reduced price. However, price is not a major determinant of satisfaction for customers.
A too-narrow focus on costs often leads to a fragile supply chain that is inflexible and the slightest irregularity in the area hardly functional. This brings with it the risk that disgruntled customers will walk away with the result that the turnover eventually falls. The opposite also happens. There are also companies that do everything to improve the customer service: the customer is king. These companies provide the customer exactly what he wants exactly and when he needs it but without asking themselves what the return from that customer really is. Unfortunately, even for these companies, customers go away because ultimately the costs will be high resulting in an unacceptable high price to be paid for the products and services.
Both examples above lead ultimately to a reduction in sales and costs compared to turnover.
In response, this paper tries to describe and analyze the compatibility of efficiency and effectiveness in the supply chain. A successful supply chain strategy should aim at the general health of a business: more sales at lower cost, rather than focus too heavily on such costs or only the customer effectiveness. The focus should be the various demands made by the market, all the activities place in the chain should be aligned.
Supply Chain and Supply Chain Management
When companies struggle to stay competitive in the market, the supply chain is a key operation for them to transform their operations from a static to a dynamic business environment, because the supply chain impacts potentially on every process of the business including the external companies.
A supply chain is the system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to end customer.
Here are some definitions of Supply Chain:
"Supply chain is a set of firms that pass materials forward. Several independent firms are involved in manufacturing a product and placing it in the hands of the end user in a supply chain-raw material and component producers, product assemblers, wholesalers, retailer merchants and transportation companies are all members of a supply chain "-  La Londe and Masters 1994.
"A supply chain is the alignment of firms that brings products or services to market. "- Lambert, Stock, and Ellram 1998
"A supply chain consists of supplier/vendors, manufacturers, distributors, and retailers interconnected by transportation, information and financial infrastructure. The objective is to provide value to the end consumer in terms of products and services, and for each channel participant to garner a profit in doing so." - Shain & Robinson, 2002
In Figure 1, in addition to consumers, there are three different organizations, namely the Supplier, the Manufacturer and Retailer. Each of these organizations has a supplier-customer relationship (shown by arrows) with the following link in the chain. In fact, Figure 1 made a supply chain simplifying. The modern supply network is more complex. Firstly, there are more parties act in the supply chain such as suppliers of suppliers, distributors, purchasing, logistics service providers, etc. Secondly, there are three streams- goods, information flow (orders, schedule information etc.) and financial flow along the supply chain. In all three streams, different actors of the supply chain involve (a bank may role in the financial power while playing no role in the information and goods).
Supply Chain Management
According to the Supply Chain Council (SCC), The Supply Chain Management is "the management of all customer interactions (order entry through paid invoice), all physical material transactions (supplier's supplier to customer's customer, including equipment, supplies, spare parts, bulk product, software, etc.) and all market interactions (from the understanding of aggregate demand to the fulfillment of each order)."
Definition of Supply Chain Management by different authors can be classified into four categories: integration philosophy, business process, collaboration philosophy and systemic, strategic coordination.
Ellram and Cooperï¼Œ1990
"Supply chain management (SCM) is an integrative philosophy to manage the total flow of a distribution channel from the supplier to the ultimate user"
Lambert and Cooper, 2000
"Supply chain management is the integration of key business processes from end user through original suppliersï¼Œthat provides products, services, and information that add value for customers and other stakeholders"
Fawcett and Magnan,
"Supply chain management is the collaborative effort of multiple channel members to design, implement, and manage seamless value-added processes to meet real needs of the end customer. The development and integration of people and technological resources as well as the coordinated management of materials, information, and financial flows underlie successful supply chain management."
"Supply chain management is the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purpose of improving the long-term performance of the individual companies and the supply chain as a whole."
Table 1. Representative sample of SCM definition
Efficiency and Effectiveness of Supply Chain
Definition of efficiency and effectiveness
Effectiveness and efficiency are terms used to measure and assess the performance of organizations. According to Oxford Dictionary, Efficiency is "the quality of doing something well with no waste of material or money", when using the resources such as money, labor and energy the least possible in producing, it is efficiency. Effectiveness is "producing the result that is wanted or intended, producing a successful result" (Oxford Dictionary). It is the frequency or degree to which the output meets the objective.
Efficiency and Effectiveness of Supply Chain
In order to assess the performance of the supply chain, Neely et al. (1995) proposed that the performance measurement should "center on efficiency and effectiveness". Effectiveness is the "extent to which customers' requirement are met" while efficiency is a cost-related advantage which measures "how economically the firm's resources are utilized when providing a given level of customer satisfaction". A supply chain performs well when it meets the customer demand effectively with great efficiency.
The figure 2 below indicates the main elements of supply chain efficiency and effectiveness.
Figure 2. Elements of supply chain efficiency and effectiveness (Adapted from Eyong Michael E., 2008)
Efficiency of Supply Chain - Lean Supply Chain
The principle of "lean" thinking is to eliminate waste from organizations. The lean supply chain relates to efficiency resource allocation, it focuses on getting the right things to the right place with right quantity.
In a lean Supply chain, because of the efficient lean processes, suppliers can offer material with lower prices. Suppliers are involved in the lean activities of organizations, both sides work together to achieve the goals of increasing the quality and declining the cost continuously.
Lean manufacturing or lean production is another key element of Lean Supply Chain. In essence, Lean manufacture emphasizes on generating more value with less work. The lean manufacturing system produces the tight quantity at the right time with minimum resources. The lean manufacturing is "mostly derived from Toyota Production System (TPS)"and "identified as Lean only in the 1990s" (Holweg and Matthias, 2007). Toyota considers there are seven wastes (Muda) in manufacturing. There are tools like Kanban, poka-yoke and 5S to eliminate the wastes and improve the quality.
1. seiri -"Sort items and keep only what is needed while disposing of what is not."
2. seiton -"A place for everything and everything in its place."
3. seiso - "The cleaning process often acts as a form of inspection that exposes abnormal and pre-failure conditions that could hurt quality or cause machine failure."
4. seiketsu -"Develop systems and procedures to maintain and monitor the first three S's. "
5. shitsuke-"Maintaining a stabilized workplace is an ongoing process of continuous improvement."
Table 2.The 5S Jeffrey K Liker, "The Toyota Way", 2004
The Lean thinking is also implied on warehousing and transportation. A lean warehousing should exam each step of the process in order to eliminate over shipment, over inventories and unnecessary process such as non-value added receiving, picking and packing. The lean transportation includes cross-docking, right size equipment, improving transportation administrative processes, optimizing pooling order and selection mode, etc. By mapping the value stream and creating flow, lean transportation is able to reduce waste in inbound and outbound transportation processes.
The benefits of Lean Supply Chain are obvious. In the lean supply chain, inventory is regarded as waste. Manufacturing can be more efficient with less or even no raw material, work in process (WIP) and finished product inventory.
During lean manufacturing, all quality inspections are taken place within the production process rather than checking production after it is complete. By implying lean manufacturing, products are shipped directly to the next stop of the supply chain right after the truck is full, there is no overproduction since "overproduction cannot be tolerated , no space is designated to store finished goods. The system is not designed to carry them." (Bruce Tompkins, 2006)
2.2.2 Customer effectiveness - Agile Supply Chain
In today's uncertainty and constantly changing environment, the agile supply chain is an integrated and synergistic functioning supply chain which can maximize the value of the market. By controlling of cash flow, logistics, information flow, agile supply chain integrates suppliers, manufacturers, distributors, retailers and end-consumer into a unified, seamless network in order to form a highly competitive strategic alliance.
Agility is proposed by the American scholar in the early 1990s ,it is a new type of strategic thinking at that time .To make such strategic thinking is mainly directed against manufacturing technology, the objectives is to improve the manufacturing system changes in the external environment adaptability.
Today, competition is increasing and market demand is more and more complex , the more complex the network, it is necessary to apply agile thinking into the entire supply chain management, In essence , agile supply chain emphasizes on the speed of response to the supply chain diverse customer demand by optimizing the integration of corporate internal and external resources. Contrast to the integrated supply chain, agile supply chain includes different characters:
Strategic Objective: The soul of traditional management thinking is high-cost, low efficiency, and this idea bases on the theoretical assumption that consumers is more incline to price and manufacturing quality . Integrated supply chain HYPERLINK "http://translate.googleusercontent.com/translate_c?hl=zh-CN&ie=UTF-8&sl=zh-CN&tl=en&u=http://wiki.mbalib.com/wiki/%E4%BE%9B%E5%BA%94%E9%93%BE%E7%AE%A1%E7%90%86&prev=_t&rurl=translate.google.com&usg=ALkJrhhrGceAZj1paJR2iBX6Cq-zUC1h6w"management does not get rid of the shackles of the traditional enterprise management thinking, quality and price is still its main strategic objectives, while agile supply chain sets the strategic target of transient response to the diverse customer needs.
Resources: an integrated supply chain management also emphasized on the full utilization mining of resources, however, its view of resources is only limited within the enterprise, agile supply chain, on the contrast, extends the production concept and the enterprise's production activities, it embraces the upstream suppliers and downstream customers into the firm's strategic plans and optimize the allocation of resources both inside and outside the enterprise.
Supply chain-driven approach: Relying on traditional methods of production, organization is difficult to produce right quotas with demand because of lacking of immediate production capacity by a single, integrated supply chain. The integrated supply chain can only act in a supply-driven way (supply - production - sales), which results in a large number of stocks in all aspects of the supply chain. With the support of agile manufacturing technology, information technology (IT) ,ERP and CAD, Agile supply chain as an order-driven production organization is able to meet customer needs successfully.
Contracture of organization: the new strategy rests on a new organization; the successful implementation of agile supply chain depends on the construction of virtual organizations, namely: a number of interrelated companies basing on coherence strategic and constitute a dynamic alliance.
the relationship between node enterprises: the concept of integrated supply chain does not go beyond corporate boundaries, it considers the suppliers as a bargaining game opponent and the customer as a target. Agile supply chain breaks through the framework. It re-positions the corporate relationship with the downstream and upstream nodes, suppliers are considered as partners with the same interest, the customer was seen as an important resource for creating value-added products.
Figure 3. The agile supply chain (Martin Christopher, 2006)
Agile supply chain strategy is an important competitive advantage lies in speed. In the traditional business mode, from accepting an order to deliver finished product is a long process. Agile supply chain as an order-driven production organization, with the agile manufacturing technical support, it can response to customer needs quickly. Agile supply chain reflects to the market sensitively, because each enterprise will concentrate on their core strengths, the chain can reduce the production and logistics time, the supply chain can achieve real-time sales, real-time production and real-time supply and minimize the consumer's ordering lead time.
Compatibility of supply chain efficiency and effectiveness
For an organization or the supply chain, improving customer service and reducing the costs for all parties is the ultimate goal. Traditionally, these two objectives considered being in conflict, that is, improvement in one objective is the deterioration cost for the other. For example, holding more (safety) stock to improve customer service (availability of goods increase, reducing the no - sales) but it leads to higher costs. A well-perform supply chain is the one that trade-off the efficiency and effectiveness. This is possible only if all the actors of the supply chain (supplier ,manufacturer and retailer) work together. This section would demonstrate how collaboration can lead to an improvement in both the costs and customer service.
3.1 Construction of efficient and effective supply chain
An efficient and effective supply chain includes the following six distinct components:
Efficient and effective Replenishment
Efficient and effective Operations
Efficient and effective Administration
Efficient and effective Assortment
Efficient and effective Promotion
Efficient and effective Product Development.
.1 Efficient and effective Replenishment
When the frequency of orders goes up significantly, the quantity per order and considerably below the speed of delivery must be increased substantially. If this is achieved, which means the right product at the right time to right place at minimal cost, it is efficient replenishment
The objectives of efficient replenishment are: low inventories, high reliability and fast delivery. It must be noted that transport costs are likely to increase, but this is amply compensated by lower inventories in the chain. Besides the cost aspect a perfect, it is also important to correct the improve service levels (less deficient or no sales) which can be achieved by better and faster response. An added benefit of reduced inventories and shorter lead times result in an increase of the so-called shelf-life: the period of one product on the shelf at the retailer can stand before the expiration date elapsed. This is particularly important for perishable products in the food sector. A longer shelf-life results in a better service and lower costs because fewer products need to be marked down or written off
A number of options which can be shaped Efficient Replenishment are:
â€¢ Cross-docking: Within this concept, a DC is not used for storage but mainly for transshipment. The only thing that should occur in the DC is that the orders from various different manufacturers together are collected and then transported to stores.
â€¢ Standardization of packaging: In order not to waste time (and money ) on repackaging of articles, a joint standard of packaging is required. The idea is that the items from the supplier can be packed and deliver to the customer immediately.
â€¢ Reduction of unnecessary operations: Redesigning the entire process of ordering and delivery can duplicate or unnecessary operations are avoided.
A necessary condition for achieving Efficient Replenishment is that the actors of the supply chain are working closely together. Indeed, the supplying company can only deliver on time if the information received from the buyer is correct; the low-stock target of buyer depends on the on-time delivery of the supplier. The interface thus requires a partnership between the companies.
3.1.2 Efficient and effective Operations
By working together, both parties can improve their own operations. The opportunities arise if the various parties exchange information. For example, if the manufacturers are provided with the demand data collected by the Retailers, they are able to plan their production more efficient, leading to lower costs and improved availability of the product. For Retailers, this means that the number of no-sales will fall and thus a higher profit can be achieved. In short, cooperation leads to more efficient operations for both parties.
The cooperation can take several forms. Vendor Managed Inventory (VMI) is one of it. Within the concept of VMI, the supplier takes full responsibility for maintaining inventory basing on the information provided by the buyer. A 3PL provider involves sometimes to assure the required level of inventory.
3.1.3 Efficient and effective Administration
Besides the logistics flow, supply chain has two other streams, namely an information (mainly orders and scheduling information) and a financial flow. There are also benefits to achieve efficiencies in the administrative streams.
â€¢ Purchasing: An efficient purchasing process is based on the selection of best supplier and best price negotiation. Moreover, to generate a more efficient ordering procedures by better and faster communication between the various parties in the supply chain, the cost per order decreases. The immediate effect is that the total administrative costs will drop.
â€¢ Fewer errors: By using POS data, AOS, EDI and EFT are fewer mistakes in the handling orders. The result of fewer errors is less "fighting fires", less urgent orders and therefore less cost.
3.1.4 Efficient and effective Assortment
Manufacturers and Retailers can work in the field range of consumer choice to improve service level. The concept of category management (CM) means that manufacturers and retailers work together on the brands of one product to match customer needs and desires effectively. Category management is a continuous, dynamic and iterative process that manages a defined category of natural products.
category management is different from traditional purchasing. In traditional relationships, a buyer tried to buy for buying (for example a desired margin at a certain volume) and then push the products to the market; the category managers buy what to sell in a pull situation. Category management considered managing the category as a strategic business unit, where the primary emphasis was on managing individual stock keeping units.
3.1.5 Efficient and effective Promotions
| Trade marketing | Retail marketing |
| Consumer marketing |
Figure 4. The marketing areas and their consistency
In Figure 4, the various marketing areas are brought into relationship. It is essential that retail marketing and consumer marketing are coordinated to fulfill consumers demand. This might indicate integrated marketing communications with the explicit objective of maximizing the overall effectiveness of sales promotions in the supply chain.
In collaboration, both the retailer and manufacturer get greater return from their marketing funds. Cooperation can also take new forms when many traditional used forms of communication such as thematic advertising tobacco and alcohol, which is regulated or restricted by the government or restricted. The disappearance of such instruments can be offset by new or innovative combinations. In collaboration with other members of the chain, one can be obtained competitively advantage over competitors who do not or not adequately do.
3.1.6 Efficient and effective Product Development
In the late 90s, the concept of collaborative product development was proposed. One of the main characteristics of collaborative product development is the nature of the enlarged scope of intervention of the supplier, both in the extent of the physical domain controlled (eg. moving components) and in the depth of his involvement (in addition to the role of component manufacturer, the supplier takes responsibility for part of the technical design, specification of process and organization of the supply chain needed to obtain). Basing on the theory and methods of project management, agile manufacturing as well as concurrent engineering, the actors of the supply chain construct an efficient and effective production platform. Today the product life-cycle is shorter and shorter; the implement of collaborative product development can reduce the lead time of introducing new product to the market.
How to collaborate?
It is suggested that "collaboration should be defined as a firm's culture of working together with other firms toward a common set of goals that bring mutual benefits to a partnering relationship." (Soonhong Min,R. Glenn Richey, Haozhe Chen and Aaron D. Arndt, 2005). The principal of collaboration are including:
Information sharing is the core of collaboration. The shared information covers new forecasting, product development, market planning and shipment schedule, etc. Information Sharing can be taken place formally and informally among collaborative partners. Forecasting is one of the most important shared information, because the forecast data is the trigger of supplier/manufacturer's subsequent activities, it impacts on purchasing, production, transportation as well as inventory management. Today the information is shared by various information technologies like EDI, data mining techniques and internet.
Participants of the supply chain should also work closely to solve the problems in the process of the chain. For example, a manufacturer can work with its 3PL partners to reduce cost by changing the manufacture's requirements and/or 3PL's delivery schedule. Co-problem solving can be realized by a form of "alliance team" which including people from each collaborative partner who represent various functional departments. The team arranges regular meetings to solve problems from production plan, inventory level to distribution schedule.
In the collaborative relationship, each actor expects the outcome of business growth and gaining desired rewards. This expectation includes leveraging the resources of each actor in the supply chain mutually. Leveraging resources can maximize the resources utilization. For example, a manufacturer's supplier can leverage its transportation network with another market reach to deliver non-competitive goods in the local market. Skill as a resource can also be leveraged by training. For example, a manufacturer can train its component suppliers with its quality control standard.
In the discussion above, a lean supply chain as an efficient supply chain can reduce the cost of an organization while an agile supply chain as an effective supply chain is a way of responding to the customer demand quickly. In order to link the lean philosophy and agile philosophy to achieve the goal of both efficiency and effectiveness, collaboration among all partners of the supply chain is need.
Case study: the supply chain of Valeo Service Ltd.
Introduction of Valeo Service Ltd.
Valeo is an independent industrial group focused on the design, production and sales of components and systems for cars and trucks. Among the top automotive suppliers in the world, it serves all major automobile manufacturing companies of the industry.
Nowadays, the group has 121 plants, 61 R&D centers, 10 distribution centers and employs more than 51,200 people in 27 countries world-wide.
Figure 4. Valeo in the world
Valeo concentrates its activity on four business groups offering nine product families:
Comfort and Detection Systems
Valeo Interior Control
Valeo Security Systems
Valeo Engine and Electrical Systems
Valeo Climate Control
Valeo Engine Cooling
Valeo Wiper Systems
Valeo Lighting Systems
Valeo Service Ltd, a branch of Valeo group, offers a wide range of products and high performance services for the aftermarket. Following its goal of improving customer satisfaction, the branch produces not only regular automotive spare parts for commercial and industrial vehicles and trucks, but also innovative post-equipment and complementary assistance products. It is organized within two branches; the first one dedicated to the independent aftermarket (IAM) and the second one, to the original equipment supplier (OES).
The OES delivers the products directly to the customers without an intermediary. Whereas, the IAM operates with 11 distribution platforms each of them strategically located to feed the customers within a specific region.
On its way to customer satisfaction, the logistics excellence within the supply chain plays an important role on the service rate, stock level and delivery methods. The distribution of spare parts in the automotive industry is an even greater contributor to logistics excellence. Figure 2 illustrates the supply chain of Valeo Service.
Figure 5. Supply chain structure of Valeo Service