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Supply chain objectives are rarely fully met because of the individual behavior of decision makers in firms along the supply chain, as their behavior is neither optimal nor rational. Due to the dynamic nature of the supply chain, amplifications and fluctuations occur from suppliers all the way down the chain (Sterman, 1989). What is needed is a robust control system that is flexible enough to counteract any disturbances along the supply chain.
The selection of a logistics provider is critical to supply chain competitiveness (Hensher, D. A., and G. Chow., 1999). Third party logistics plays a pivotal role in the design and provision of an integrated supply chain that responds to the client's needs. In order to help their customers, logistics providers need to behave more like partners of their clients. Not only do logistics providers have to arrange for the transport of cargo and facilitate its clearance through customs, they also need to manage their clients' order processing. This means that logistics providers are involved not only in lowering their clients' costs by reducing waste in ordering operations, but also in integrating their clients' supply chains. The aim is to make the partnerships so tight and seamless that the logistical services provided become part of the clients' own businesses. Figure 1 illustrates how logistics service providers control a global supply chain.
Figure 1: Role Played by Logistics Service Provider in Global Supply Chain
The task of a logistics provider is to facilitate trade to the extent that the trader needs only to produce and sell the goods (or to order the goods, in the case of imports). Once this has been done the logistics provider can take over and provide every subsequent function from factory gate to final delivery. As the distance between the manufacturer (i.e., the exporter) and the distributor or retailer is often quite considerable (and vice-versa for imports), problems relating to both material and information flows are common.
Jorn-Henrik Thun debates the potential of cooperative game theory for SCM, giving a mathematical approach to SCM results. The game theory can be used to evaluate each firm's performance and each process' results inside a supply chain.
This approach was build-up thinking at the SCOR model (Supply Chain Operations Reference Model) developed by Supply-Chain Council - SCC. The model is a way to see supply-chains, rather than an optimization tool. (Stadler, H., Kilger, C.,, 2005)
Figure 2:General processes identified using SCOR [Stadler and Kilger: 2005: 42, Poirier and Walker: 2005: 14, Bolstorff and Rosenbaum: 2003: 5]
Plan covers processes to balance resource capacities with demand requirements and the communication of plans across the supply chain. Source covers the identification and selection of suppliers, measurement of supplier performance as well as scheduling of their deliveries, receiving of products and processes to authorize payments. In the scope of make are processes that transform material, intermediates and products into their next state, meeting planned and current demand. Deliver covers processes like order reception, reservation of inventories, generating quotations, consolidation of orders, load building and generation of shipping documents and invoicing. In the scope of return are processes for returning defective or excess supply chain products.
When Just in Time Stop?
Why is supply chain resilience important? To start with an example, a natural disaster brought most of Japan's automobile manufacturers to a halt for several days. On July 16, 2007, a 6.8 magnitude earthquake in central Japan severely damaged the facilities of Riken Corp., a supplier of automobile components including specialized piston rings. Riken had chosen to locate all of its plants in a single area of Japan to increase efficiency, but this strategic decision combined with Just-in-Time deliveries made the entire production capacity vulnerable to a catastrophic incident (Chozick, Amy, July 20, 2007)
Resilience is defined as the capacity of a system to survive, adapt and grow in the face of turbulent change (Fiksel, Joseph, 2006)
Supply Chain Resilience
All firms rely on their suppliers to maintain smooth operations and their customers for continued revenue. Therefore, a resilient firm is truly only as resilient as its supply chain. Jack Welch, former CEO of GE, wrote in a Business Week segment that resilience should be on every manager's must-have list "because anyone who is really in the game messes up at some point" (Welch, Jack and Suzy Welch, May 14, 2007). He concludes that "the most successful people in any job always own their failures, learn from them, regroup and then start again with renewed speed, vigor and conviction." Anticipating, identifying, reacting and learning are all at the heart of resilience.
Designing Supply Chains
The Role of Logistics Providers
In Asia, supply chain control processes, including production scheduling, shipment of product, and inventory maintenance, are frequently decentralized and remote from each other. The processes usually operate independently of one another and in serial order. Slow feedback from the marketplace causes scheduled production to over or under manufacture in relation to the actual demand. Another issue in the region is the relatively high cost of logistics-the result of inadequate physical facilities and cumbersome administrative barriers, coupled with a legal framework not adapted to modern international business practices (Banomyong, R., P. Cook, and P. Kent, 2008). Limited resources and operational constraints are not unique to logistics provider operations in Asia. In each region or country in the world, various resource limitations and operational constraints exist. It is the duty of Asia-based logistics providers to make the best use of their resources within the existing physical constraints and the limited institutional framework prevalent in many Asian countries (Banomyong, R., and A. K. C. Beresford. , 2001).
The logistics provider sees its function in the supply chain as that of a distributor. Its main role is to move goods from one end of the supply chain to the other within the constraints imposed by both clients and the commercial environment. "Customer panic" occurs when a client is faced with a difficult situation in the supply chain-usually a stock out-and is unable to rectify the situation. When a break in the supply chain occurs or is going to occur, there is a very strong risk that the whole supply chain will be immobilized, generally for a longer period that it took the break to occur (Hong-Minh, 2000). The industrial revolution and inter-city transport of goods motivated the use of inventory as the primary method of decoupling production from demand and combating the myriad of uncertainties throughout the system. Ford W. Harris' Economic Order Quantity (EOQ) model (Harris, 1913)was later adapted to account for uncertainty in lead time and demand (Whitin, 1954) Adding safety stock to cycle stock extended the use of inventory as the primary buffer against uncertainty for decades.
The era of customer focus in the 1970s brought service to the forefront (Kent, Jr, John L. and Daniel J. Flint, 1997). However, this new dependence on time-definite transportation re-opened old supply chain issues, as safety stocks were dramatically reduced, and supply and demand were more closely coupled. In other words, Quick Response systems increase the brittleness of supply chains by imposing connectivity requirements and reducing inventory buffers (Monahan, Sean, Paul Laudicina and David Attis, 2003). This brittleness may be offset through increased responsiveness based on shorter lead-times; however, in such a highly-constrained system disruptions can be disastrous (McBeath)
Network design method
(Cohen, M. A. and H. L. Lee., 1989) present a normative model for resource deployment in a global manufacturing and distribution network. Global after-tax profit (profit-local taxes) is maximized through the design of facility network and control of material flows within the network. The cost structure consists of variable and fixed costs for material procurement, production, distribution and transportation. They validate the model by applying it to analyze the global manufacturing strategies of a personal computer manufacturer.
(Arntzen, 1995) Provide the most comprehensive deterministic model for supply chain management. The objective function minimizes a combination of cost and time elements. Examples of cost elements include purchasing, manufacturing, pipeline inventory, transportation costs between various sites, duties, and taxes. Time elements include manufacturing lead times and transit times. Unique to this model was the explicit consideration of duty and their recovery as the product flowed through different countries. Implementation of this model at the Digital Equipment Corporation has produced spectacular results --- savings in the order of $100 million dollars.
Clearly, these network-design based methods add value to the firm in that they lay down the manufacturing and distribution strategies far into the future. It is imperative that firms at one time or another make such integrated decisions, encompassing production, location, inventory, and transportation, and such models are therefore indispensable. Although the above review shows considerable potential for these models as strategic determinants in the future, they are not without their shortcomings. Their very nature forces these problems to be of a very large scale. They are often difficult to solve to optimality. Furthermore, most of the models in this category are largely deterministic and static in nature. Additionally, those that consider stochastic elements are very restrictive in nature. In sum, there does not seem to yet be a comprehensive model that is representative of the true nature of material flows in the supply chain.
CHAPTER 3: RESEARCH METHODS
Method of data collection
The sample was chosen on convenient sampling .The sample size for this study is 30 respondents from supply chain and logistics firms. The questionnaire is designed on LIKERT scale and is analyzed through Correlation and Regression technique.
For knowing the effect the critical identification parameters in supply chain management process a lot of efforts have been put in the gathering of data. A sample of 30 experts of SCM has been used to conduct the study. I had got the information within 4 to 5 weeks.
A sample of experts is not more than 30 respondents. I had required the minimal platform for measuring the parameters of supply chain management.
Research Model developed
I have designed the research model in the sense of variables, one of dependent and others are independent variables.
Figure 3: Variables model
Instrument of Data Collection
Validity and Reliability Test
Reliability and validity are mostly found from conducting quantitative method. To measure reliability and validity in qualitative method, it is important not to seek only for frequencies but to focus on meanings or interpretation as well (Kirk, J. and Miller, M., 1985)
In this study, the reliability and validity will be obtained through acquiring and analyzing data from many sources. The data from different sources can help crosschecking the information. At the same time, the reliability will gain during the analysis part when those proved information can be interpreted in the consistent manner.
In this model cost effectiveness is taken as dependent variable. I have designed the five questions that belong to the questionnaire 9 to 13. These questions are covering whole research. Cost effectiveness is the dependent of other factors of supply chain and logistics because if any of one factors fall down due to any condition so overall cost would have effect.
In supply chain and logistics, inventory is the major part and showing the shadow of profits. All factors of supply chain depend on inventory. In model I have designed the five questions that belongs 1 to 5 in questionnaire. Inventory is key to profitability. Inventory velocity turns assets into profits. The faster inventory turns, the greater the profitability.
In this model production is another independent variable and most important one. I have designed three questions that belongs 6 to 8 in questionnaire. Supply chain and logistics firms are totally concern about production because the core business turns into more and marginal turnover. As quick as productivity enhance profit would increase rapidly.
In this variable I have designed the four questions that belongs 14 to 17 in questionnaire which are directly hit on cost effectiveness in overall. In supply chain and logistics transportation cost are very significant and flexible. In those countries where transportation cost is high JIT process become fail therefore firms take alternatives to reduce the non-added value activities in inventory.
In this model location is another independent variable that contain three questions that belongs 18 to 20 in questionnaire. In logistics and supply chain firms chose very cost effective place where they can easily move their goods to another at right time.
Researcher used different analysis from SPSS i-e, Mean, median, mode, t-test, regression analysis, correlation. All these analysis confirmed the data from different angles and proved very useful.
A statistical test that establishes a significant mean difference in a variable between two groups.
The Pearson Correlation matrix obtained for the five interval-scaled variables. The Pearson coefficient is appropriate for interval and ratio scaled variables. It is the strength and degree of linear relationship between two variables.
The threat to internal validity that results when various groups in the study have been selected on the basis of their extreme scores on some important variables.
Y = Cost Effectiveness
CHAPTER 4: RESULTS
Finding and interpretation of the result
Table 1: SPSS data results
As we know that dependent variable is cost effectiveness and independent variable are inventory, Production, Transportation and Location.
To check the intensity of links between each independent variable and dependent variable we build the matrix of the correlations. For each estimated correlation coefficient, SPSS program calculated a level of significance (sig.) t test to check whether links exist between variables. It can be noticed that most simple correlation coefficients between independent variables and dependent variable are significant because the level of significance is less than 0.05 (Correlation matrix chart in Appendix)
H0: when inventory is high cost effectiveness is low
Ha: when inventory is low cost effectiveness is high
In above hypothesis the inventory variable tells us that the correlation is positive .290 there is little bit correlation but still relationship is negative because when large amount of holding inventory on hands and difficult to transferring the goods origin to destination according to time then cost effectiveness would less. The t-test value is 1.604 which is relatively less than 2.5 therefore we accept the null hypothesis and reject alternative hypothesis. Secondly R square is 0.084 which indicates that the variation on the dependent variables is explained by the predictor variable which is significantly low. The F value is also very low at 2.573 and falls in the critical region that mean variation of independent variables are unequal.
H0: Higher the production higher the cost effectiveness
Ha: Lower the productions lower the cost effectiveness
In this hypothesis the production variable depicts that the correlation value is .052 that means there is weak correlation between production and cost effectiveness. The t-test value is 0.278 which is less than 2.5 therefore we accept the null hypothesis and reject alternate hypothesis. Meanwhile R square is 0.003 which indicates that 0.3% variation on the dependent variables is explained by the predictor variables which are significantly very low. The F value is .077 which does not fall in critical region and tell us that variation of independent variable is equal.
H0: when transportation is low the cost effectiveness is high
Ha: when transportation is high the cost effectiveness is low
The correlation is -0.024 which indicates that there is negative and weak relation between transportation and cost effectiveness. The t-test value is -.129 which less than 2.5 therefore we accept the null hypothesis and reject alternate. Meanwhile R-square the coefficient of determination value is .001 which indicates that 0.1% variation on dependent variable is explained by the predictor variables which are significantly very low. The F value is .017 which does not fall in critical region and shows that variation of predictor variable is equal.
H0: when location is far the cost effectiveness is low
Ha: when location is near the cost effectiveness is high
The correlation is -.036 which indicates that there is again negative and weak relation between location and cost effectiveness. The t-test is -.193 which is less than 2.5 therefore we accept the null hypothesis and reject alternate hypothesis. Simultaneously R-square value is .001 which indicates again 0.1% variation on dependent varaiable is explained by the predictor variable which is significantly very low. The F value is .037 which does not fall in critical region and shows that variation of predictor variable is equal.
CHAPTER 5: DISCUSSION, CONCLUSION AND FUTURE RESEARCH
Logistics as a business concept evolved only in the 1950s. This was mainly due to the increasing complexity of supplying one's business with materials and shipping out products in an increasingly globalized supply chain, calling for experts in the field who are called Supply Chain Logisticians. This can be defined as having the right item in the right quantity at the right time for the right price and is the science of process and incorporates all industry sectors. The goal of logistic work is to manage the fruition of project life cycles, supply chains and resultant efficiencies.
Supply chain management is a process used by companies to ensure that their supply chain is efficient and cost-effective. A supply chain is the collection of steps that a company takes to transform raw components into the final product. Typically, supply chain management is comprised of five stages: plan, develop, make, deliver, and return.
The first stage in supply chain management is known as plan. A plan or strategy must be developed to address how a given good or service will meet the needs of the customers. A significant portion of the strategy should focus on planning a profitable supply chain.
At the third stage, make, the product is manufactured, tested, packaged, and scheduled for delivery. Then, at the logistics phase, customer orders are received and delivery of the goods is planned. This fourth stage of supply chain management stage is aptly named deliver.
The final stage of supply chain management is called return. As the name suggests, during this stage, customers may return defective products. The company will also address customer questions in this stage.
Supply chain management is a major concern in many industries as companies realize the importance of creating an integrated relationship with their suppliers and customers. Managing the supply chain has become a way of improving competitiveness by reducing uncertainty and improving service. One aspect of successfully managing the supply chain requires that a company understand their logistical strategies and practices.
The above the analysis shows that the cost effectiveness fairly dependent on main variables of supply chain management which are inventory, production, transportation and location. In inventory variable the output of results are linearly and moderate. The correlation is positive but silent relation is inversely. In past the holding large amount of inventory on hand was normal business practice to guard against risk. In the todays, large amount of holding inventory is too costly and risky.
In the case of production variable, if manufacturer increase their production capacity consequently cost effectiveness would high, other variable which is very important variable for shifting goods origin to destination point is transportation.
The results shows that the transportation cost is high therefore cost effectiveness will suffer. In supply chain management we have to use cost cutting strategy for transportation. We have to control over distribution methods, and use JIT (just in time) system. This is last and most fruition variable of supply chain is location. JIT is a chain process for less inventory investment.
Supply chain management is a key concern in many industries as companies understand the significance of creating an integrated relationship with their suppliers and customers. Managing the supply chain has become a way of improving effectiveness by reducing uncertainty and improving service. One aspect of successfully managing the supply chain requires that a company understand their logistical strategies and practices. There are three main steps of creating supply chain management are follows:
To reduce inventory investment
To increase the customer services
To help a build a competitive advantages for the channel
If we talk about transportation, respondents having access to low cost and reliable transportation is important to be a successful supplier. The idea of backhauling is becoming an important concept to make transportation more efficient and less costly. Transportation will suffer in rural areas and it will get worse. SCM or logistics cannot resolve the distance issues. They choose where they want to locate and if distance is a detriment it is the company's own fault.
Location decisions may be the most critical and most difficult of the decisions needed to realize an efficient supply chain. Transportation and inventory decisions can often be changed on relatively short notice in response to changes in the availability of raw materials, labor costs, component prices, transportation costs, inventory holding costs, exchange rates and tax codes. Location decisions are often fix and cannot change in the very short time. For instance Billions of dollar automobile plant is difficult to change their location on customer demands. Inefficient locations for production and assembly plants as well as distribution centers will result in excess costs being incurred throughout the lifetime of the facilities, no matter how well the production plans, transportation options, inventory management, and information sharing decisions are optimized in response to changing conditions. Analysis shows that very amazing results that if location is far from origin so it has an increment impact on cost effectiveness.
Implication and Recommendation
The supply chain management has four main factors of cost effectiveness, Inventory, production, transportation and location. If inventory cost is going to increase and showing the bulk impact on cost so firms have to follow alternate strategy to reduce the inventory cost. JIT is one of the well implemented systems in logistics and supply chain. Inventory is seen as incurring costs, or waste, instead of adding and storing value, contrary to traditional accounting. This does not mean to say JIT is implemented without awareness that removing inventory exposes pre-existing manufacturing issues. This way of working encourages businesses to eliminate inventory that does not compensate for manufacturing process issues, and to constantly improve those processes to require less inventory.
Secondly production is the key issue of manufacturing cost which is directly related with cost effectiveness. If production capacity increases at timely manner simultaneously the cost effectiveness impact would higher but there is fair relation between production and inventory, if we control over production capacity rapidly so inventory must be reduce according to demand and transfer to end consumer then cost effectiveness is higher.
Third variable is transportation which is the key factor of supply chain. Transportation cost differ the routine lubricant problem in country, for instance if fuel cost promptly high on global market then transportation cost also rise. Transportation as a percentage of cost of goods sold has remained stable, with the exception of fuel price increases.
Fourth variable is location which has the relation with transportation if we look upon the situation of transferring goods to warehouse. As the warehouse far transportation cost will be creating cost burdens on cost effectiveness. Warehousing strategy have to be strong in the sense of delivering goods at proper location with time management.
The purpose of this research is to evaluate the critical parameters of supply chain management in logistics firms. As we took the major parameters which are the true picture of cost effectiveness of supply chain management. This study gives us the close relationships. Supply chain management is the most efficient part of business. It manages large amount of inventory in short time. Large scale companies design supply chain system to reduce their investment and cost risks. They focus on most crucial parts like transportation and production. In these study four main parts we discuss and analyze with real data of firms that how to get opportunity cost from cost effectiveness. In addition to that, the current research study will further help to finds the possible ways and proactive tools to mitigate the low cost effectiveness risks within the supply chain firms.