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Signed: Fari Rahmatullah
MODULE TITLE: Supply Chain Management
MODULE CODE: ES972-10 02SC
MODULE DATE: 29th October - 2nd November 2012
NAME: Fari Rahmatullah
Supply Chain Management
Table of Contents
Explore the emerging concepts of Lean Supply Management based on what can be referenced in concurrent literatures
To understand the many concepts of Lean, first define the meaning of Lean itself. Lean Manufacturing defined by (1) is the production of goods using less of everything compared to mass production. While others (2) defined Lean as a systematic approach to identifying and eliminating waste. Equally (3) thinks lean as a team-based form of continuous improvement that focuses on identifying and eliminating waste. From this three definitions of lean there is one word that always been repeated, that is waste. Therefore lean can be safely defined as an approach or an improvement that has a main objective of doing more with less resource. Therefore to understand more about lean, there is a need to identify waste. From this three sources they all have seven forms of wastes, those are:
Inventory will caused extra handling, extra cost, extra storage room etc. It is something that is necessary at the right amount however it can become a burden if it is not in the right amount.
All things that need to be redone reprocessed are a form of waste, because it will take time to process, checked again and then be delivered again.
All companies will want their orders to be delivered at the right time, right amount right quality. Therefore if there is an overproduction it is a form of waste and must be reduced.
Motion is the flow of men, if the process flow does not have an adequate design to smooth people flow it can lead to injuries time wasting and another waste that is need to be reduced.
Lead time can cause under-utilisation of people, if can waste fixed cost because most of the time somewhere someone is not doing anything. Most of the time, it is because of bottleneck.
When transporting goods there is always a risk of damage and there will be an increased work in progress.
This again will increase production time and consumes more resources.
With an extra of 8th waste that is under-utilisation of people. These seven plus one wastes, is what Lean supposed to reduce and eliminate if applied correctly. The other opposite objective of lean is adding more value to the customer showed by the figure below.
The figure above shows that if waste is reduced then there will be an added value or increasing value. If value for the customer increase in respect to Lean then there must be changes which means the waste has decreased.
In accordance to understanding Lean concept, second question that needs to be answered is why Lean so important? Every improvement that has been made comes from the same reason that is wealth. The driving force of a company such as Toyota is not making process such as Lean; the biggest reason for improvement is to increase wealth and profit. Every process that is related to supply chain decision counts up to eighty per cent of the company's operation cost, therefore it is understandable that there is a need to reduce cost rather than focusing on increasing sales. This is not to say increasing sales is a bad thing rather if a company can step back and think about their process in the supply chain processes it can generate the same amount through waste reduction.
Moreover in the information and globalization era, consumers are getting more volatile, with a shorter product life cycle in most products these days. This phenomenon will affect the company in its ability to adapt in the market rapidness of change; there is a need to be responsive to the market. All of this factors add up to the fact that many company need to employ Lean concept. However Lean can be easily misunderstood as a magical tool that can make everything better, with more profit and less cost. There is no instant way to implement Lean; Lean will work at the maximum benefit if only it is applied properly with a full commitment from everybody, this will be explained later on the third section in this question.
Discuss the critical imperatives of efficiency and effectiveness that the lean approach can bring about
There are a lot of impact that Lean can bring about in terms of efficiency and effectiveness. It will align with the type of strategy that organizations want to apply, such as: Just in Time (JIT), Made to order, late customization, etc. This strategy has different outcomes, although it is based on Lean concept. Strategy will vary as much as the business has various target customers.
In terms of efficiency there are many ways a company can maintain a high level of efficiency. An example that will be discussed here is Total Preventive Maintenance (TPM). According to (4) TPM is continuous improvement program that specializes in a change of culture through behaviour and skill of the shop floor. It is usually controlled and reviewed by the reliability of equipment, waste and safety statistics. There is one company that applied TPM in 1991 the Utsonomia plant that is having problem because the poor reliability of equipment and the lack of maintenance for equipment. After applying the TPM and doing all the approaches necessary, the company succeeds in increased efficiency from 54 to 64 per cent for high speed soap lines and from 63 to 80 per cent for liquid filling lines.
In terms of effectiveness which relates to a good flow of operation, it is suitable to use Just in Time. This method requires a smooth flow from material to end consumer. It is used aligned with the Kanban pulled system where the demand pulled the production so there are no unnecessary stocks piling up in the storage area; all of the stocks have already had a buyer. There are important things to be achieved using this system, that is low buffer stocks, bottlenecks capacity are to be reduced heavily and the process time should be balanced between each other. This is one of the tools that are used for elimination of waste. A popular waste form is excess inventory so this is always been the place where it has to be reduced in order to be lean yet companies still have twenty-five per cent more inventory than they supposed to have. Just in Time is the first step towards elimination of waste, it can also be combined with enterprise resource planning and quick response manufacturing.
According to (4) QRM is based on two principles, first is to not operate at one hundred per cent capacity, it will only target for seventy until eighty per cent capacity and then the measurement of lead times so that eventually it can be reduced.
Propose a general approach with adequate level of details for an organization to initiate, develop and sustain lean supply management
After understanding the definition, objective, driving force and what can Lean bring about to the process structure. The final puzzle to be solved is how it should be applied. According to (5) there are two types of approach that can be chosen, a high risk but fast and low risk but slow approach. A high risk approach has the benefit of rapid change and fast improvement being attained quickly, however there is a possibility that the culture will only be temporarily be changed because it will skip some of the process that needs to be done. This does not mean that the low risk will not face any problems, it too will face problems however because of the preparation that has been done and careful planning this may reduce the risk therefore reducing the size of the problem.
According to (6) there are six initiatives to develop Lean to the supply chain those are:
Education and Awareness
Creating an appropriate organizational structure
Value Stream Mapping
Evolutionary Development of Supply Chain Strategy
This part of the planning process is just as important as any other. This will be the guideline for the first Lean to be applied so that it then can be applied through any other products or processes in the company or external partners. This is the first initiatives according to (6) which are education and awareness. Therefore before any of would be managers thinking that they are smarter than the employee in the company, it is wise to educate and change the culture within the company itself, because it is an low risk and slow approach therefore there is no need to implement a complex system if the employee does not support and understands what needs to be done. The objective of education is to give a basic understanding of supply chain management, the principles of Lean and Value Stream Mapping. Awareness is for participants to apply what they have learned so that the change can begin. The outcome of this initiative should be that all layer of management know what are they expected to do regarding Lean approach especially for middle and senior management because they will reaffirm the employee below them of their knowledge of Lean concept.
Waste Analysis, creating organizational structure, value stream mapping, and incremental improvement will be the process of developing the actual Lean concept into the organization. The process will start with waste analysis which aims to identify waste in a value stream that results in a way to decrease waste. The outcome should be waste that is easy to be eliminated should be eliminated first and in areas which it cannot be eliminated it should be thoroughly analysed again to gain more data about the process to reach the objective of reducing waste. The process then continued to establishing teams in the process which are divided into three groups according to (6): Senior management, Lean Champions and Lean action teams. The aim of this process so that everyone get a fair share of the work and there is a control team that manages when the Lean process is getting out of track, reassuring the objectives and relaying orders to all of the members of the group. This will build teamwork and changing culture will be easier with a top down and bottom up approach that includes everyone. The process is to be stepped up by value stream mapping using the data gathered by waste analysis; it then needed to be emphasized in terms of value stream, which part is adding value. It can be done using tools such as the seven value stream mapping tools; the value of each company will be different from each other. After the data has been gathered it then conveyed to the Lean champion they will coordinate the groups to take action using the approach that has been thought to them before. The last part of incremental improvement is aligned with value stream mapping by the Lean champion as they will again and again identify root cause, eliminates waste, using the improvement that do not require significant investments, if there is a need for investments then it will be done after all the Lean approach has been appropriately applied to all the sectors.
The last part is the sixth initiative which is evolutionary development of supply chain strategy. There is a term much associated with Lean that is continuous improvement. Lean does not stop when all the above has been done. It will also need to be updated to the market condition. If now the economy is in the worst crisis it ever been, how the company can prepare for when the demand will come back to the way it before. After Lean can be applied within the four walls of the company, it needed to be expanded to other suppliers and retailers, if a whole supply chain can work as a Lean and integrated it will achieve more than one company. It then can make a whole supply chain strategy for the collaborating supply chains.
Define and explain the concept of strategic outsourcing in the context of designing and reconfiguring supply chain structures
Outsourcing defined by (5) is moving company's recurring activities and decision rights to outside providers, where the process is bind by a contract between both parties. Outsourcing "is the term used to describe when a firm purchases material, assemblies, and other services that were initially done within the company, from sources outside the company" (6). Whereas adding the term strategic beside outsourcing elevates the definition of outsourcing. Strategic outsourcing (5) is much the same as marriage, there is a need for long term strategic and objective, the general outsourcing activities can be done swiftly like a reception and ceremonial of marriage in six to twelve months, however the benefit of marriage will be felt later on in the process and if something goes wrong it is harder to recover from the mistakes. Therefore there is an added value by adding the term strategic to outsourcing; both companies need to have a long term commitment, with long term strategies that suits each other, all of the planning needs to be seen in the current and future state of the outsource, that is the definition of strategic outsourcing.
In the past outsource is an option when the company has lack of capacity, incompetence or any other reason. Even there is a time where a company think that every part of the supply chain can be vertically integrated, as to say that everything a company's need is supplied by the company itself, as an example in the early days of Ford according to (7) tried to provide all the necessary components from iron ore to tires. However a company cannot maintain a good flow with all activities that need to be managed. Nowadays as the market is changing, there is awareness from companies that the most important thing to do is to manage an undivided attention to the core competencies of the company, anything less than core competencies can be thrown to outsource. According to (8) core competencies are the competitive advantages that a company has, reflected throughout the entire culture and skill of a company.
This is what outsourcing changes within the structure of supply chain; vertical integration is not regarded as the best way to deal with anything, because it made the company rigid and hard to adapt, although there is a good example when vertical integration is preferred and has been successfully deployed like in ITT a company under Harold Geneen from 1950s to the 70s. However there is a change in the way market behaved, now the size of the company is seen by the network or market size therefore a more agile and adaptable supply chain is needed because it is easier for a smaller company to change the way they behave rather than a large company with many different cores. Company that only focus on their core competencies has the ability to spread the value that they are selling to each of the employee, bringing a change in behaviour by the employee. Each of the employees now knows what they are contributing to the company. The ability to concentrate all the investments, material, time and energy to the core competencies is the vision of the company and the result a company can have through strategic outsourcing.
Discuss the decision process of outsourcing and influencing factors
First thing any company must decide on whether or not the company should outsource or not. There are many drivers according to (9) on why a company should outsource:
Fixed to Variable
Improve Service Quality
Time to Market
Get rid of problems
Follow the competition
These drivers will help decide on how the company should outsource. Outsource should then be followed by a series of decision on which part of the process should be outsourced and what kind of outsourcing is suitable for the process. According to (10) in order to decide whether to make or buy, we can refer to this table below. This is the guideline in which a company can based their decision on.
Not important to competitive advantage
Outsource or keep internal
Critical to competitive advantage
Invest to perform internally Strategic Outsource
Perform internally and develop or strategic outsource
If it is a competitive advantage then it is best to keep it within the company to keep the secrets of a company internally. From the definition before about strategic outsource and how it is to be used for long term teamwork and collaboration, we can see that in (10) argument is also used to defined a long term relationship, it is slightly different than outsource as the term strategic outsource only used when there is a critical importance to competitive advantage therefore there is a need to establish a long term beneficial relationship. In invest to perform internally is if the company does not have the capability to produce then they have to invest internally and work closely with the outsourcing company so that they may share required skill that is necessary for the company through knowledge based sharing. Other than that the ones that does not have significant importance to core competence, it is best to outsource it. If the company still capable of doing it internally then they may opt to do it internally but most of the time most company will not want to be bothered with what is not their core competence.
To sum up this is how the decision of outsourcing should take in every company. There will always be a influencing factor regarding why the company wants to outsource moving on to the decision of what process should be outsourced and then to choosing vendors carefully and then finalizing by contract for both parties.
Explore what might be the difficulties and barriers in its operational implementation
Same as there are many benefits in outsourcing there will be many barriers and difficulties also, according to (9) there are:
Because of the inexperienced managers or miscalculation that did not include some parts. This may result in a bias that does not exactly deliver the cost reducing that have been calculated beforehand it may even increase the cost rather than the other way around.
Change Management cost
Change in management will result in an increased cost. If the benefit has been calculated properly in the entire change management it should not be a problem however bear in mind that this kind of costs may not as little as it is in the plan and there is always a miscalculation somewhere.
Supply Market Risk
Loss of control and day to day management is the concern because the control is done through contract that applies fines which are still not benefitting anybody in the agreement. Fines may reduce the loss that occurs but it is always better to have things at the right procedure rather than giving fine that the company cannot even pay for.
Outsourcing will force people to communicate heavily on the agreement. Even though it forces people there will always be communication challenges, be there because of culture, language, background etc. Even in its own organization it will have communication challenge between divisions.
Selection, contracting and vendor management
The whole process of selecting and finalizing vendor is the place that all the risk comes from, if this process have not been done properly, maybe there are some illegal transaction involved such as bribery it will result in a very bad way for the company and the fine that have been implemented will not cover the loss of the time and energy lost because of choosing the wrong vendor and applying the wrong fines.
Did not achieve the benefit
This is one of the biggest fears that all company face when deciding to outsource. When they did not achieve what they are planning and even facing massive cost rather than massive reduction in cost.
With outsourcing comes a change in structure of the company. A process that used to be perform internally have to be moved in to external partner, this process will ultimately and definitely face many problem when it comes to implementing it. Even though some of the risks are being reduced by using a contract but not all of it can be entirely eliminated. Such as the risk of not achieving the benefit cannot be implemented in the contract, because nobody will want to pay the sum of money that the company did not achieve.
Summarise the key benefits and potential risks
The one key benefits from outsource is the ability to focus on core competencies and adding skill through knowledge transfer however the biggest potential risk is also losing core competencies through knowledge transfer. This contradictory statement has been stated by (5) and (9), this discussion will emphasize on core competence above all benefit and risk, does not mean that all other is less important. But because this paper has an argument that core competence is to be decided first than it is essential that the benefit and risk are equally considered.
First let us take a look at the benefit of leveraging the core competencies of the company. For an example, in an automotive industry, even though that many major manufacturers has outsource their production but many of them maintained research and development capabilities in their control system so they can respond quickly to changes in technology and adapting to all kinds of changes. This is a benefit that can come through knowledge transfer between manufacturing and automotive company.
Secondly we will look the risk of losing core competencies. A strategic outsourcing enables employee and asset transfer. If the first step of outsourcing has not been prepared good enough, there will be a risk that the company is handing out core competencies that should not have been outsourced in the first place. This will result in a decreased ability to make future innovations. This will result in a dependency towards the vendor, because the company now does not have the necessary knowledge about the process moreover a company may lose its ability to build another relationship with other supplier because the lack of personnel that understands the process in the first place.
This is the benefit and potential risk that must be accountable every time a outsource decision is to be made more than anything else. The reason is that the investment for core competencies is the first thing that must be done; the definition of a company core competence may make or break a company. If they are mistaken to identify their own core competence they may outsource it and giving the edge to the supplier. There should not be a company that outsource any of their core competence, a company that does that will be surely doomed. If there is still a need to outsource this process, there is a way to minimize the risk of dependency towards supplier such as portioning between knowledge and task, a supplier is responsible for all the production matters but the design, improvement and all innovation process will still be conducted in the organization.