3. COST AND VALUE vs. AVAILABILITY
One of the key decisions in sourcing and supply is balancing the equations of relative cost and value. However, lack of availability has a detrimental effect on both cost and value, and in some markets, takes precedence
Some costs can be reduced by sourcing from low labor cost countries or from particular types of companies. However, other costs may be increased. .
The value of product availability, quality or innovation may outweigh the cost savings
Unfortunately, ‘value’ is a relatively intangible property and it is difficult to quantify some of its elements. These will vary according to the type of product or market. The decision of where to have goods made and what kind of supply chain structure to adopt depends on identifying the full costs associated with supply and being able to allocate some comparative costs to the value inherent in the product and its availability.
The true cost savings or costs incurred can then be identified, and will vary between products and markets.
4. ASSESSMENTS AND ACCREDITATION
An increasing number of companies are adopting methods of assessing their existing and potential suppliers (and customers) to establish that they can meet the objectives of the supply chain (for example, low prices, fast response, environment friendly, etc.).
Some of the methods used for making such assessments are explored below.
RETAIL ACCREDITATION
Many retailers have developed their own methods of accreditation, identifying a range of issues in which potential suppliers must achieve acceptable standards.
Buyers and quality control departments use such tools to select new suppliers and to benchmark existing suppliers in order to promote improvements or, in serious breach of conditions, to deselect.
The system of gaining retailers accreditation varies. Assessment may be based on:
Self analysis;
A consultant’s visit report;
The retail Quality Controller team’s visit report
Findings often take the form of a grading system, in which companies rated in the middle grades are given improvement targets, and any in the lowest grades risk deselection.
TECHNICAL AUDIT
The accreditation system used by retailers is likely to encompass a technical audit covering the following areas.
Background:
Business structure and turnover, years established, production capacity, customer base, factory capacity and ownership, internal and external facilities, subcontracting, material and component sourcing, lead times
Employment
Numbers of personnel
Evidence of compliance with employment regulations
Skills
Inspection and Quality
Health & Safety approved
Inspection systems
Quality Assurance System
Companies who use subcontractors or outsourcing may be required to use companies from an approved supplier list or to ensure that their chosen factories also comply with the above standards.
SUPPLIER ASSESSMENT
Just as your customers assess you, you could undertake an evaluation of your suppliers to help get the best from your supply chain. The table below gives an example of a supplier assessment tool.
This will help you to decide
Whether your suppliers are giving you the best service,
Which areas could be improved
Whether new suppliers perform better during a trial period.
5. QUALITY AND STANDARDS
In the spirit of partnership, and to save time and cost in the distribution of goods, quality assurance systems are beginning to change. Retailers previously carried out 100% inspections, often within their own distribution centers after delivery of goods. While this practice may have changed, retailers now require suppliers to provide evidence of goods being passed for sale, which may include certification from testing laboratories or quality assurance.
QUICK RESPONSE
– The ability to supply goods quickly from order to shop floor - supports reduced stock holding, lean retailing (reducing supply and inventory costs) and SMART ordering based on demand rather than anticipated sales.
QR enables average order quantities to be reduced and lead times to be shortened. If a product sells well, more can be ordered as replenishment, or a similar style will be ordered to develop the trend.
Manufacturers must to be able to competently and economically produce smaller volume orders, change styles more quickly.
JUST IN TIME
J.I.T. is the method of supplying what is needed, when it is needed and the quantity required. The system relies on small batch production (or goods held in stock by the supplier for long periods of time), regular and effective delivery, preparation of parts to be ready to use and a system of identifying what has been used in order to move goods through the system.
KANBAN
A tool to signal the need for production. This could be an IT monitoring system to indicate the rate of use or a visual control such as a batch or rail, which must be restocked when empty.
Rules of the KANBAN are:
1. No defective goods to be passed on to the next process
2. Parts/ or goods should be pulled by demand or usage, not pushed along the system
3. Quantity made equals the quantity used
4. Nothing is made without demand from the Kanban
5. Each part has its own Kanban
6. Return the Kanban to production when the fist pieces are withdrawn, so production of the part can proceed at the same pace as parts are used.
J.I.T. Production can significantly reduce inventory of finished goods and work in progress, therefore reducing costs. However, J.I.T. also exposes the risk of supply chain failure, as there is no buffer of work in progress or finished stock to fall back on if components suppliers fail to deliver on time. It is, therefore, a tool for use only in established partnerships.
6. IMPROVING BUYER/ SUPPLIER RELATIONS
Supply Chain Good Practice (much of which emanates from Japan) suggests that improvements should be made in small, but continuous steps. This is a process known as Kaizen.
The principles of Kaizen include:
Worker participation – everyone is involved in the process and strives to raise the standard;
Small steps forward– change is almost imperceptible, but the monitoring the benefits should show a continuous improvement;
Teamwork – is an essential element of problem solving, although improvements can happen at individual and company level too, and processes that are running smoothly can still be improved;
Flexibility – supervision, payment systems, organizational structure and company culture must all be flexible enough to encourage worker participation.
Improvements – Kaizen improves motivation and intangible rewards, improves quality, lowers costs, improves safety and reduces lead-times.
Involves all – Kaizen must be prepared for at all levels, and all should be involved:
- Directors incorporate Kaizen into strategy and give authority to employees;
- Managers provide environment and resources needed;
- Supervisors motivate workforce, lead and train workforce and ensure implementation
- Workers volunteer ideas for individual and team activities.
7. GOODS TO MARKET
The process of getting goods to the market place, complete and on time has become increasingly important, as retailers have reduced their stock-holding capacity. This strategy, while reducing costs, can lead to out of stock situations if failure to deliver occurs. The following activities are key to ensuring that goods reach their final distribution channels.
INVENTORY MANAGEMENT
An increasing number of companies manage inventory using IT systems. Some retailers have reduced inventory to virtually nil, other than goods on the shop floor. Other
end-users, notably the automotive industry, demand goods to be delivered on a Just-in-Time basis
Manufacturers in turn are under pressure to reduce inventory of components, work in progress, and finished goods although this is not always easy if there is the possibility of supply failure, or inflexibility to purchase small volumes of materials as the range of components required increases.
LOGISTICS
It is defined as the process of planning, implementation and controlling the efficient, cost effective flow and storage of materials, in process inventory, finished goods and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.
The logistics industry has grown considerably in recent years with a growing number of companies developing specialist logistics facilities for clothing and textile products.
The 2 major developments in the sector (globalization and quick response) both require ever more sophisticated logistics and distribution services to succeed.
These include:
Logistics - planning, co-coordinating and monitoring the movement and storage of goods;
Communications - receipt of point of sale information, picking instructions, tracking progress of goods in transit and co-coordinating delivery schedules;
Distribution services - collection (in some cases from overseas depots) transportation, delivery to warehouse and redistribution to individual stores or regional distribution centers, freight forwarding for importers, exporters or outward processing, electronic tracking and proof of delivery.
Warehousing - storage, bonded warehousing, picking and repackaging. Warehousing also includes breaking bulk consignments of specific products and re-grouping into store
or regional consignments of many products.
Additional services - re-processing, Quality Assurance and product testing etc.
8. IT & ERP in SCM
A number of IT developments that are particularly significant to supply chain development.
Electronic Data Interchange (EDI) has been used as a link between manufacturers and their customers for over 20 years. EDI is defined as technology for the direct exchange of standardized data between computers using telecommunications and without human intervention.
Typically EDI installations are used for:
* Exchanging orders and invoices;
* Manufacturing contracts, call-offs, production schedules, availability checks and stock
confirmation, forecasts and specifications;
* Distribution and dispatch advice, advance shipping notice and shipping instructions;
* Credit notes, VAT listing and remittance advice;
* The transfer of Electronic Point of Sale (EPOS) data to manufacturers to help with
forecasting, production and distribution planning and, ultimately, improve service to the end consumer.
The costs of implementing and maintaining EDI, however, are high, due mainly to the necessity for Value Added Networks (VANS) and can therefore alienate smaller companies.
The Internet, or EDI communications on the Internet, provides a cheaper alternative.
Tracking Systems – used to monitor the progress of orders throughout the supply chain, e.g. assembly, and dispatch. Recent developments include hand-held tracking for monitoring goods in transit and communicating proof of delivery.
Role of Internet and ERP in Supply Chain Management
If you don’t think e-Commerce is that big of a deal, think again. Consider that e-Supply Chain Management is digitally connecting the entire world into one big (very big) network of supply chains. Trillions of dollars a year of business-to-business commerce is being conducted on the Internet, which is many times the amount of business-to-consumer transactions. The growth estimates for the next few years for business-to-business e-commerce are astounding.
Web-based marketing and catalog sites have become very familiar communication mechanisms between prospects, customers and suppliers. But the fastest growing and highest volume by far is business-to-business transactions in supply chains. Internet capabilities already have, and will continue, to fundamentally change business-to-business supply chain models.
Effectively integrating the information and material flows within the demand and supply process is what Supply Chain Management is all about. In most companies, however, two major and very interdependent issues must be simultaneously addressed. The first deals with delivering products with customer-acceptable quality, with very short lead times, at a customer-acceptable cost - while keeping inventories throughout the supply chain at a minimum. The second issue, which tends to be less understood and accepted, is the need for high quality, relevant and timely information that is provided when it needs to be known. For many customers and manufacturers, business processes and support systems will not measure up to the task of quickly providing planning and execution information from the marketplace to production and onto vendors so that the customer’s objectives are consistently met. The fact is, most information supplied is excessive, often late and frequently inaccurate.
The e-Supply Chain
High speed, low cost, communication and collaboration with your customers and suppliers are critical success factors to more effectively manage your supply chain. Then, the e-Supply Chain is very likely in your future. The very essence of Supply Chain Management is effective information and material flow throughout a network of customers and suppliers. The potential for improved productivity, cost reduction and customer service are enormous. Of course, the benefits are based on effectively employing the right processes and supporting information technology. This is a higher priority than ever before. Providing the right amount of relevant information to those who need to know it, when they need to know it is, in fact, effective Supply Chain management from an information point of view.
Good supply chain practitioners know that information should be passed on only to those who need to know it, in the form they need to have it. Demand information, inventory positions, order-fulfillment, supply management and a whole host of other information exchange activities will change how we sell products, supply products and make and receive payments for goods and services. The e-Supply Chain will have customers and suppliers seamlessly linked together, throughout the world, exchanging information almost instantly. The velocity of relevant information flow will be so fast that, as a result, responding to the inevitable changes in expected vs. actual customer demand will mandate demand-driven manufacturing and supporting processes that provide for faster changes in the actual material flow to match demand.
Fast access to relevant supply chain information can pay-off handsomely in lower costs, less inventory, higher quality decision-making, shorter cycle times and better customer service. One of the biggest cost savings is in the overhead activity associated with lots of paperwork and its inherent redundancies. The non-value added time of manual transaction processing could instead be focused on higher revenue creation activities without proportional increases in expense. The result in cycle time compression, lower inventories, decision-making quality, reduced overhead costs, among other benefits makes e-Supply Chain Management a highly desirable strategy.
Supply chain processes can be more streamlined and efficient than could have been imagined just a few years ago. For many companies, more effective Supply Chain Management is where the profit and competitive advantages will emerge and be sustained.
Role of ERP
To make e-Supply Chain Management work seamlessly, we need the software to integrate every aspect of our supply chain. Right from procuring the raw material, manufacturing, packaging, storing, distributing, selling, all these departments need to talk to each other in an integrated fashion. The possible way of implementing this sort of integration in through deploying an ERP solution.
Definition of ERP
ERP is defined as: “a packaged business software system that enables a company to manage the efficient and effective use of resources (materials, human resources, finance, etc.) by providing a total, integrated solution for the organization’s information-processing needs”.
How will ERP help in Supply Chain Management?
By deploying an ERP solution, which is integrated to the overall business activities, the manufacturer no longer needs to speculate about the demands of the customer. It no longer needs to store excessive inventories. The ERP software records every transaction that takes place right from procuring the raw material to selling it to the consumer. But for this to function the ERP package must be properly installed.
Whenever a package is sold or is taken out of the premise, the transaction will be feed in to the ERP software. Software will record all such transactions. As soon as the stock levels are below the prescribed limit, the software will pass an order to the raw material procuring department about the requirement of fresh stock. Thus the raw materials required for manufacturing are procured before the stock is over. The software will also direct the amount of stock to produce, what to produce and when and where to dispatch the fresh stock. This will considerably reduce the inventory levels and maintain optimum level of efficiency. Thus even before the stock is over and without any human intervention, fresh stock is sent to the store. This is how an ERP solution gives an advantage in Supply Chain Management.
9. CASE STUDIES
BENETTON:
Just-In-Time Production and Distribution.
Benetton is arguably the world’s largest retailer with a network of 6000 large stores, smaller branches and franchises in 120 countries, worldwide.
The company trades on the basis of Just-in-Time coloration and finishing to provide flexibility to consumer demand. It supplies men’s, women’s and children’s wear through the brands:
United Colors of Benetton – casuals and knitwear for the whole family
Sisley – smart casuals for the more mature customer
012 – babies and toddler ranges
Playlife and others – sports wear and equipment.
Subcontractors in Italy undertake most garment assembly, but overseas suppliers do produce under license to supply their respective local markets, overcoming distribution costs and trade barriers.
Benetton’s supply chain is regarded as a truly innovative good practice example, largely because of its flexible network of suppliers. However, in the early 1990’s in response to growing competitive pressure on the company, Benetton built 2 new state of the art factories, in Northern Italy, to gain greater control over the production process of sewn products. The company had already invested in rapid response knitting plant and a sophisticated distribution center.
Retailers order from the company’s collections twice yearly, re-ordering regularly as sales progress.
Stock requests are routed to a central computer at the Group headquarters in Ponzano, Italy. It centralizes data, and (for sewn products) instructs the state of the art cutting plant (located a few miles down the road) how many of each component (by color and size) to cut. While the computer drafts pattern pieces and lay plans, cloth for the garments is laid out. Virtually untouched by human hands, the cloth is cut by a machine controlled by the central computer. Each cut piece is assigned to a specific shop and packed in boxes ready for assembly.
Cut pieces are collected by subcontractors, and taken to other parts of the region for sewing and finishing.
Similarly, knitted garments are made-up in greige yarn and, upon receipt of sales data and orders, dyed and finished in response to demand.
Finished products are returned a few days later to the Benetton factory for sorting. The sortation system moves goods automatically along a rail, until they reach a collection point for each particular shop. Once the shop’s order is complete goods are packed and dispatched. Each box is bar-coded and moved by conveyor to the distribution center.
Here a laser bar-code reader identifies boxes according to their destination store. All boxes for each store are collected together by a system of automated handling equipment and shipped by rail.
Within days the goods are on sale. Only the sewing process remains labor intensive.
