Running head: SUPPLY CHAIN PERFORMANCE MEASURES 1

SUPPLY CHAIN PERFORMANCE MEASURES 6

Supply Chain Performance Measures

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Supply Chain Performance Measures

Introduction

Modern day's business environment is very complicated and tough, especially due to the intense competition that is tremendously rising by the fact that more brands, goods, and services are being introduced at a global level. Coyle calls globalization as one of the major forces to shape economies and supply chains (Coyle, 2017). With Additionally, consumers are also becoming more aware in regard to existence, production, and consumption of products and services. Therefore, the battle seems to shift from individual company performance to a supply chain performance as one of the critical requirement for managers to survive competition (Gunasekaran, Patel & Tirtiroglu, 2001). Basically, supply chain performance is the extended activities in supply chain aimed at meeting the end-customer needs and desires which includes the availability of products and services, timely delivery, as well as all other necessary components of inventories and delivery capacities. Supply chain performance is inclusive of most boundaries of an organization ranging from raw materials, processing, finished goods and the distribution of these goods and services through a variety of channels to the end users. Given its nature and the dynamicity of the business environment, the supply chain performance needs continuous improvement, and in order to accomplish this, there is the need to have measures in place that purposefully support and promote global supply chain improvements.

Definition and Objectives of Supply Chain Performance Measurement

According to Neely et al. (2002), supply chain performance measurement is a dynamically balanced system which supports processes in decision-making by critically gathering, elaborating and also analyzing all kinds of supply chain-related information. This definition has further been elaborated by other interested academic authors who assert that performance measurement system is regarded as balanced largely because they incorporate different organizational perspectives and measures that provide a holistic viewpoint of the organization. On the other hand, the dynamicity nature of the system is associated to how the measures review the priorities and measures of an organization instead of just focusing on the internal and external environment of the business. In a simple definition, supply chain performance measures are the metrics employed to quantify the effectiveness and efficiency of an organizational action. From the definition, it can be deduced that the primary objective of supply chain performance measures is to enhance and facilitate effectiveness and efficiency of supply chain management by incorporating frameworks and (Panjehfouladgaran, Yusuf, Hong & Homayouni, 2010) models that aid management to measure, analyze and improve efficiency in business operations through improved decision-making processes.

Reasons for Supply Chain Performance Measures

Some of the industry note that the success of most businesses is closely associated with the performance of its supply chain. Hence, for a business to succeed, there is the need to ensure the supply chain performance is successful. Also, the business environment is under constant evolution implying, the environment decades ago is not the same as the modern business environment and will certainly be the same business environment in future. There is, therefore, the need to monitor and evaluate supply chain performance using effective measures for purposes of aligning it to the needs of the business and the entire environment (Gunasekaran, Patel & McGaughey, 2004). The following are the reasons for supply chain performance in an organization:

I. Supply Chain Management Improvement – supply chain performance measures are essential consideration for the whole supply chain management improvement. Companies are required to continuously learn and effectively innovate to guarantee their existence in the competitive business environment (Gunasekaran, Patel & McGaughey, 2004). Therefore, companies need to continuously improve their processes by redesigning their products and services through continuous measurement and evaluation.

II. Financial Benefits – profitability is achieved by ensuring sales are as high as possible with costs being kept at the least attainable levels. Performance measures, especially the financial-centered measurements help an organization lower its costs significantly to attain higher profit margin. Financial performance of the supply chain activities, or rather benefits, are highly dependent on the supply chain performance measurements.

III. Information Flow – to ease and make information flow from suppliers to the end customers, there is the need to improve the processes and systems in supply chain management. The performance measurement plays an important role towards the improvement of the process which enhances information flow between different stakeholders of the organization.

IV. Motivate Organizational actions – organizations have vast actions and activities aimed at actualizing their goals and objectives. Performance measurement act as motivation for some of these actions such as partnerships, sourcing, sales and marketing, production and so on. (Gunasekaran, Patel & McGaughey, 2004)

V. The basis for decision-making – the continuous and constant improvement of the supply chain performance through adaptive measures/metrics provide the basis for organizational profit-centered decision-making process.

Growth of Supply Chain Performance Measurement

According to Sink and Tuttle (1989), one cannot manage what they are unable to measure. The historical aspect of the supply chain performance measurement (SCPM) takes its root in the early systems of accounting. According to Hamid Kazemkhanlou and Hamid Reza Ahmadi (2014), the evolution of performance has been experienced through two phases with the first phase being in the 1880s and the second one in 1980s. The initial phase was closely associated with orientations in cost accounting where it aided managers to evaluate all relevant operational costs of their firms and mainly incorporated financial measures like return on investments and profits. However, this approach was later criticized in the 1980s which were the main reason for the second phase of the evolution. Businesses started looking at the business from a global growth perspective instead of focusing on cost accounting orientations (Gunasekaran, Patel & Tirtiroglu, 2001). Consequently, the late 1980s saw the introduction of frameworks and models that provided a broader view of supply chain management. The table below illustrates the growth of SCPM before 1980 all through to 200s.

Supply Chain Performance Measurement Categories

Supply chain performance measures are broadly categorized into two groups – qualitative and quantitative measures. The quantitative measures such as the lead time, resource utilization, flexibility, etc. assess the performance and compares or tracks product or service performance. On the other hand, the qualitative approach focuses on aspects such as product quality and customer satisfaction.

A. Quantitative Category

The quantitative category is further sub-classified into financial and non-financial measures. The difference between the two is that one of the measures is primarily centered towards all the monetary transactions of the firm with the other method focusing on assessment methods that are not based on finances.

· Financial Measures

Financial measures gauge a variety of operational and fixed costs that are associated with supply chain management (Beamon, 1999). The significance of this approach to measurement is to enhance profitability by keeping and maintaining supply chain costs as low as possible. There are several costs involved in supply chain performance such as inventories, transportation, facilities, technology, operations, labor, and materials. The following components are taken into account when measuring the financial aspects of supply chain performance:

i. Revenue from costs of goods of sold

ii. Costs on raw materials

iii. Transportation costs

iv. Inventory-related costs

v. Cost of goods returned

vi. Activity-based costs

In summary, it can be concluded that indices in financial performance can be grouped together with the use of modules such as cost in inventory, activity-based, transportation and inter-company financial transactions.

· Non-Financial Measures

Non-financial measures are made up of customer service level, cycle time level, resource utilization, flexibility, flexibility as well as quality. The main dimensions of the metrics, however, include cycle time, customer service level, inventory level, and resource utilization as discussed below:

i. Cycle Time – sometimes referred as the lead time and in simple terms, it is the end-to-end delay in business processes (Beamon, 1999). The lead time can be measured to assess whether a business is efficiently operating or needs improvements. The main types of lead time include the supply chain and order to delivery lead times. The order-to-delivery lead time is the time it takes between a customer placing an order for a product and the actual delivery of the same product. On the other hand, supply chain lead time is how long it takes for raw materials to be converted into finished usable products and services. Knowing how to reduce the lead time especially from the suppliers to the end user is an important consideration in surviving the time-bound competition.

ii. Customer Service Level – this matrix is concerned with the satisfaction level of customers. The main components of the customer level measure are ordered fill rate, backorder level, stockout rate, and the probability of on-time delivery. According to the elements of the metrics, the main objective is to improve customer service level by maximizing the order fill rate, minimizing the backorder and the stockout levels. (Beamon, 1999)

iii. Inventory Levels – there are four different inventory types that can be evaluated with the aim of improving supply chain namely raw materials, finished goods, work-in-progress and spare parts. Notably, each inventory type is held by an organization for different reasons and therefore, it is important to maintain optimal levels of these inventories by gauging the actual inventory levels in accordance with evidential usage of the inventories by the organization for system efficiency.

iv. Resource Utilization – given the nature of the supply chain, organizations used vast types of resources on a daily basis for their activities such as storage, manufacturing, logistics, financial and human resources. Resources need to ultimately used with efficiency in order to maximize profitability, customer satisfaction, reduce lead times, and optimize the inventory levels.

B. Qualitative Category

Quality is also a basis of measurement of effectiveness and efficiency of supply chain performance, but the evaluating the qualitative aspect of the subject matter comes with its share of complications largely because the quality is not a numerical or statistical representation. The use of qualitative measures mainly focuses on the products, processes, services, and performances of different components of an organization (Kazemkhanlou & Ahadi, 2014). The qualitative category is further divided into flexibility, quality, visibility, innovativeness, and trust. Some of the aspects measured using qualitative measures include customer response, lead time, customer satisfaction, and accuracy among others. It is not mainly used because it is perceived not to be as reliable as quantitative approaches which included numbers and statistics.

Conclusion

Performance measurement is a critical step in designing and evaluating a system. As discussed, supply chain management needs continuous improvement for purposes of enhancing the attainment of objectives of a company. Improvement of the supply chain performance can be achieved through incorporation of tools such as the quantitative and qualitative measures. This is a necessary requirement given the role supply chain performance plays in the business management. Notably, supply chain management has undergone evolution since its emergence in organizational management, and it is constantly changing for the better depending on the needs and nature of the business environment.

References

Beamon, B. M. (1999). Measuring supply chain performance. International journal of operations & production management, 19(3), 275-292.

Gunasekaran, A., Patel, C., & Tirtiroglu, E. (2001). Performance measures and metrics in a supply chain environment. International journal of operations & production Management, 21(1/2), 71-87.

Gunasekaran, A., Patel, C., & McGaughey, R. E. (2004). A framework for supply chain performance measurement. International journal of production economics, 87(3), 333-347.

Kazemkhanlou, H., & Ahadi, H. R. (2014, January). Study of Performance Measurement Practices in Supply Chain Management. In Proceedings of the 2014 International Conference on Industrial Engineering and Operations Management Bali, Indonesia (pp. 273-285).

Panjehfouladgaran, H., Yusuff, R., Hong, T. S., & Homayouni, S. M. (2010). Qualitative performance measurement of supply chain management using a fuzzy logic controller. In Proceedings of the 11th Asia Pacific Industrial Engineering and Management System Conference.

CHAPTER 6 OPERATIONS—PRODUCING GOOD AND SERVICES

CHAPTER OVERVIEW

Introduction

Operations focus on the “make/build” portion of the supply chain. They focus on production of goods and services needed to fulfill customer requirements. Production involves the transformation of inputs into outputs that customers demand. In the execution of these processes, production facilities must interact with various supply chain functions and operations create the outputs that are distributed through supply chain networks. All activities in the purchase, production, and delivery of goods and services need to be synchronized to ensure consistent, efficient product and service flow.

The Role of Production Operations in Supply Chain Management (SCM)

Many of the supply chain and logistics activities discussed in previous chapters focus on operations—procurement operations that provide access to materials, transportation operations that support the flow of goods, distribution operations that streamline order fulfillment, and so on. Collectively, they create time and place utilities. However, the potential contributions of goods manufacturing and service production to supply chain effectiveness are often overlooked because they focus on a different, but also important, dimension of economic utility called form utility.

Form utility drives the need for supply chain capabilities (i.e., time and place utilities). It takes a great deal of effort and coordination to run an effective production operation that is supported by and also supports the supply chain. Processes must be effectively designed and flawlessly executed, supply chain tradeoffs must be understood and made, and economies of scale need to be achieved, all while the organization addresses competitive challenges and other problems.

Production Process Functionality

Manufacturers, contract assemblers, and service providers all engage in production processes. The production process also uses resources such as facilities, equipment, knowledge, labor, and capital to support the transformation. Feedback of key information is used to make adjustments within the process in an attempt to synchronize production more closely to demand. Ignoring these feedback signals will lead to excess inventory of unpopular products or inventory shortages of hot items. The basic principles of production processes, no two processes are organized exactly alike or perform to the same level.

Process functionality also plays a role in the success of an organization. The ability to perform different processes from those of competitors to create unique products and services can create a competitive advantage. On the other hand, the ability to perform common processes better than the competition can also generate efficiencies and lower costs for the organization.

Production Tradeoffs

One of the most important issues for supply chain professionals to understand is the tradeoffs involved within production operations and between production operations, other supply chain functions, and corporate strategy. All decisions are interrelated and can impact costs, productivity, and quality in other areas. In the next few paragraphs, common tradeoffs are discussed.

Higher volume leads to lower cost per unit of output, according to the long-established economies of scale principle. In situations where production processes have high fixed costs and equipment like chemical production or paper manufacturing, it makes sense to pursue volume. In contrast, processes that can produce a range of products are said to have economies of scope.

Fundamental tradeoffs between responsiveness and efficiency arise when production facility decisions are made. Centralized production facilities provide operating cost and inventory efficiencies, while regional production facilities allow companies to be closer to customers and more responsive. Tradeoffs between production processes for goods and the costs involved in manufacturing them must also be understood. Production and supply chain costs vary for make-to-stock, assemble-to-order, and build-to-order products

Another consideration is whether to conduct your own production operations or to outsource production to external suppliers. The make versus buy decision can be very complex and involves sacrifice whichever way the company chooses to go.

Finally, traditional wisdom suggests that production operations cannot strive to be all things to all people and tradeoffs must be made. When designing and executing production processes, they should focus on the following competitive dimensions: low cost, high quality (features and reliability), fast delivery speed, high delivery reliability, ability to cope with demand change, or the flexibility to offer variety.

Production Challenges

Operations managers face numerous challenges and tradeoffs that must be managed successfully if the organization and supply chain are to achieve their performance goals. Competitive pressures are a major challenge for many established manufacturers and service providers. Customers’ demand for choice and rapidly changing tastes make life difficult for product makers. While mass-production processes (and their economies of scale) are losing relevance in many customer-driven industries, company executives are no less demanding on the productivity and efficiency fronts. Operations managers face many other operations challenges. Labor availability and productivity issues, synchronization of activities with the supply chain, and capital costs are just a few of the additional obstacles that must be overcome.

Operations Strategy and Planning

Production Strategies

A great deal of planning, preparation, and engagement of multiple parties is required for production operations to make a positive contribution to supply chain effectiveness. Over the last 30 years, significant development and shifts have occurred in production strategy. Organizations have advanced from forecast-driven production strategies to demand-driven approaches.

In the era of mass production, operations strategy focused on reduction, efficiency, and scale. The strategy of choice for mass production is a push-based system that relies on long-term forecasts for production planning and decision making. In reality, few companies enjoy perfectly stable demand for their products and the related opportunity to maintain level production that is quickly consumed. More often, organizations must deal with demand variation.

The push-based strategy works well for supply chains that focus on the immediate delivery of off-the-shelf, low-cost, standardized goods. Operating from forecasts that are derived from supply chain partners’ predictions may limit the producer’s responsiveness. Without visibility to actual end-consumer demand, the producer will be slow to react to changes in the marketplace. The result may be continued production of items whose demand is dropping and may soon be obsolete. Alternatively, the producer may fail to recognize changing customer requirements and ramp up production of desired goods. The ultimate impact will be missed opportunities, unrecoverable costs, and/or missed revenues.

Lean production is an integrated set of activities designed to minimize the movement and use of raw materials, work-in-process, and finished goods inventories during production. A principal focus of lean manufacturing is to minimize all forms of waste and to produce quality products without the need for rework and production relies on pull-based systems to coordinate production and distribution with actual customer demand rather than a potentially error-laden forecast of demand.

In a pull system, the producer only responds to customer demand. No action is taken until an order is placed or a purchase is made. One of the main benefits of a lean, pull-based system is the reduction of waste.

There are a few challenges inherent in the pull-based strategy, such as customers who want immediate access to products and don’t want to wait for production and delivery, and it can be difficult to achieve economies of scale in assemble-to-order and build-to-order product operations, making them more expensive to produce. Finally, a lack of technological capabilities makes it difficult to achieve the supply chain visibility and synchronization needed in pull-based systems. Although many companies have made significant gains during the evolution from mass production to lean production processes, perfection has not been achieved.

Flexible manufacturing emerged in the early 1990s in response to the production challenges and the purpose is to build some flexibility into the production system in order to react effectively to change, whether predicted or unpredicted. One type of reactive capability is machine flexibility. Under this strategy, general purpose machines and equipment staffed by cross-trained workers provide the ability to produce different types of products as well as change the order of operations executed on a product.

Another type of reactive capability (there are eight in all) is called routing flexibility, which provides managers with production options and the ability to adapt to changing needs. In its simplest terms, routing flexibility provides managers with a choice between machines for a part’s next operation.

A primary advantage of the flexible manufacturing strategy is the ability to leverage production resources but, the flexible strategy is not perfect. Its main flaw is cost so should the activity be relocated to a contract manufacturer in another country, it is commonly called offshoring. Today, a popular location for offshore production is China due to its low labor costs. The business case for outsourcing varies by situation, but reasons for outsourcing often focus on cost and capacity issues.

Other reasons for production outsourcing include the following:

• The ability to focus on core competencies by getting rid of peripheral ones

• Lack of in-house resources

• Getting work done more efficiently or effectively

• Increased flexibility to meet changing business and commercial conditions

• Tighter control of budget through predictable costs

• Lower ongoing investment in internal infrastructure

• Access to innovation and thought leadership

While outsourcing has proven to be a valuable strategy whose popularity has grown dramatically, it is important to conduct a full analysis of the benefits and drawbacks of offshoring. Moving production offshore raises transportation costs, inventory carrying costs of goods in transit, customs costs, and some hidden expenses. As production spreads out among multiple facilities in different countries, it becomes more difficult to maintain visibility and synchronize activities. Finally, companies may lose control over quality, intellectual property rights, and customer relationships. Given these challenges, many manufacturers are pursuing the concepts of on-shoring and nearshoring. On-shoring seeks to return production to the home country while nearshoring focuses on production in nearby or neighboring countries.

A relatively new development in the evolution of production strategy is adaptive manufacturing. The goal of this strategy is to provide companies with the ability to replace planning and replanning with execution based on real-time demand. Technology is a key driver of the adaptive strategy. The main concern regarding adaptive manufacturing is limited adoption of the strategy.

Production Planning

This section briefly discusses two types of planning: capacity planning and materials planning. Three planning timeframes are covered: long-range, intermediate-range, and short-range. Long-range plans, covering a year or more, focus on major decisions regarding capacity and aggregate production plans. Medium-range plans span 6 to 18 months and involve tactical decisions regarding employment levels and similar issues. Short-range plans, ranging from a few days to a few weeks, deal with specific issues and the details of production, quantities of items to be produced, schedules, and sequences. Capacity planning focuses on determining the appropriate production levels that the company is capable of completing. Capacity is the maximum amount of work that an organization is capable of completing in a given period of time.

Resource requirements planning (RRP) is a long-run, macro-level planning tool. It helps the operations leaders determine whether aggregate resources are capable of satisfying the aggregate production plan.

The next step is to create a rough-cut capacity plan (RCCP) to check the feasibility of the master production schedule.

Capacity requirements planning (CRP) is used to check the feasibility of the materials requirement plan. This short-range capacity planning technique determines, in detail, the amount of labor and equipment resources required to accomplish production requirements.

The aggregate production plan (APP) is a long-range materials plan that translates annual business plans, marketing plans, and forecasts into a production plan for all products produced by a facility.

The master production schedule (MPS) is a medium-range plan that is more detailed than the APP. The MPS breaks down the APP, listing the exact end items to be produced within a specific period.

The materials requirement plan (MRP) is a short-range materials plan that converts information regarding end-items in the MPS into a set of time-phased component and part requirements.

MRP to provide effective planning knowledge, the following three sets of information are needed:

1. Independent demand information

2. Parent-component relationship

3. Inventory status of the final product and all components

Production Execution Decisions

The production strategy and planning outcomes, along with product characteristics, influence the execution methods used for day-to-day operations. Organizations must also establish facility layouts and production flows that are well matched to the demand volume and product variation.

Assembly Processes

Earlier in the chapter, we alluded to products that are built either according to plan or demand. Their production occurs via one of four manufacturing methods: make-to-stock (MTS), assemble-to-order (ATO), build-to-order (BTO), and engineer-to-order (ETO).

MTS is the traditional production method where end-item products are usually finished before receipt of a customer order.

ATO production commences after receipt of a customer’s order. The finished ATO product is generally a combination of standard components and options or accessories specified by the customer. ATO production commences after receipt of a customer’s order. The finished ATO product is generally a combination of standard components and options or accessories specified by the customer.

The BTO (also called make-to-order) production approach also delays assembly until a confirmed order is received for the product. The end-item finished product is generally a combination of standard and custom-designed components that meet the unique needs of a specific customer. It differs from ATO in the higher level of customization and lower volume level of production. The main advantage of the BTO approach is its ability to handle variety and supply customers with the exact product specification required.

ETO production focuses on the creation of highly tailored products for customers whose specifications require unique engineering design or significant customization. In this manufacturing environment, no two products are identical, and each order requires detailed cost estimates and tailored pricing. Also known as project manufacturing, successful ETO initiatives depend on effective collaboration between all supply chain participants.

Given the widespread proliferation of products, a number of manufacturers take a hybrid approach, where some items are built to stock and others are built to order. Delayed differentiation is one hybrid strategy in which a common product platform is built to stock.

Production Process Layout

One of the key drivers of how production activities will be carried out is facility layout. Facility layout involves the arrangement of machines, storage areas, and other resources within the four walls of a manufacturing or an assembly facility.

An appropriate, successful layout is one that does the following:

• Reduces bottlenecks in moving people or materials

• Minimizes materials-handling costs

• Reduces hazards to personnel

• Utilizes labor efficiently

• Increases morale and ease of supervision

• Utilizes available space effectively and efficiently

• Provides flexibility

• Facilitates coordination and face-to-face communication

Production process layouts generally fit into a spectrum that moves from projects to continuous processes. Projects consist of a series of discrete steps that lead to a unique product, like building a bridge.

As firms move from project to continuous process layout, the following may occur

• Labor skill requirements decrease.

• Material requirements become better known.

• High capacity utilization becomes more important to controlling costs.

• Product flexibility declines.

• Ability to adapt rapidly to changing market conditions diminishes.

A project layout is a fixed location layout where the product remains in place for the duration of production.

A workcenter is a process-focused layout that groups together similar equipment or functions. The materials move from department to department for completion of similar activities and tasks. This layout provides flexibility in that equipment, and personnel can be used where they are needed, lower equipment investment is needed, and supervisors gain expertise in their functions. The downsides of the workcenter layout are related to the materials-handling and movement costs, worker idle time between tasks, and the cost of training and developing a highly skilled workforce that can move between areas.

The manufacturing cell is another process-focused layout that dedicates production areas to a narrow range of products that are similar in processing requirements. Setting up a manufacturing cell involves four activities: (1) identifying families of parts with similar flow paths, (2) grouping machines into cells based on part families, (3) arranging cells so materials movement is minimized, and (4) locating large shared machines at the point of use.

An assembly line is a product-focused layout in which machines and workers are arranged according to the progressive sequence of operations need to make a product. An assembly line can begin as many different lines, each devoted to a different component of a product, with the lines converging upon one another, becoming fewer until only one line is left for the final product.

Continuous process facilities are similar to assembly lines, with product flowing through a predetermined sequence of stops. The main difference is the continuous, rather than discrete, nature of the flow.

Packaging

As product comes off the assembly line, the handoff from production operations to logistics begins. Packaging plays important roles in the smooth transfer of finished goods and design issues can affect labor and facility efficiency. Well-designed packaging facilitates efficient handling and shipping of the products, keeping landed costs in check. Package design impacts an organization’s ability to use space and equipment. A major packaging concern is the ease of handling in relation to materials handling and transportation. Handling ease is quite important to the production manager, whose labor must be used to place the goods in the packages.

Another primary concern is protecting the goods in the package. Packaging plays a key role in providing information about the package contents. Barcodes, RFID tags, and other auto-ID tools can be attached to or built into the packaging to make product information more readily accessible. When selecting packaging materials, companies today must consider environmental protection as well as product protection and transportation efficiency. Consumer advocates and government regulators are pushing manufacturers to alter their packaging practices.

Sustainability in packaging is being driven by increased awareness about environmental hazards related to disposal and recycling of packaging wastes, government initiatives to minimize greenhouse gasses, and stringent regulations. According to the Sustainable Packaging Coalition, sustainable packaging meets several criteria:

· It is beneficial, safe, and healthy for individuals and communities throughout its lifecycle

· It meets criteria for performance and cost

· It is sourced, manufacture, transported, and recycled using renewable energy

· It optimizes the use of renewable or recycled source materials

· It is manufactured using clean production technologies and best practices

· It is made from materials healthy in all probable end of life scenarios

· It is physically designed to optimize materials and energy

· It is effectively recovered and utilized in biological and/or industrial closed loop cycles

Production Metrics

The use of measurements and key performance indicators (KPIs) that do not support operational strategies, organizational objectives, or customer requirements should avoid the following mistakes when establishing production metrics for the organization:

· Using KPIs that are too narrow—Limit the use of metrics that focus on discrete events and isolated points as indicators of overall success of the process.

· Encouraging wrong outcomes—Eliminate measurements that promote activity rather than needed output.

· Focusing on issues that are not key priorities—Avoid the development of internally focused, myopic production goals that are disconnected from the overall strategy of the organization.

Total Cost

The most meaningful measurement of total cost is on a cash basis. All money spent on manufacturing must be summarized and the total compared to the previous period, rather than to a flexible budget or a plan.

Total Cycle Time

Total cycle time is a measure of manufacturing performance that is calculated by studying major purchased components and determining the total days on hand of each one.

Delivery Performance

Delivery performance is the percentage of customer orders shipped when the customer requested them to be shipped.

Quality

The definition of quality will vary by company, but it must focus on quality from the perspective of the customer.

Safety

The standard metrics of accident/incident frequency, severity, and cost are important to monitor, with continuous improvement (i.e., reduction) as the goal.

Production Technology

The enterprise resource planning systems don’t provide detailed visibility within the four walls of the production facility or ensure that operations are being managed proactively. World-class manufacturers understand the importance of sharing real-time information across their extended manufacturing and supply chain network. Firms are employing a new generation of manufacturing execution systems (MES) that link to ERP and supply chain applications to ensure that operations are being managed in real time.

The MES is a control system for managing and monitoring work-in-process on a factory floor. It keeps track of all manufacturing information in real time, receiving up-to-the-minute data from robots, machine monitors and employees.31

MES derives its name from its inherent purpose of providing intelligent process control through an electronic system designed to execute instructions to control manufacturing operations. The goal is to supply a continuous flow of meaningful instructions, and most importantly, for those instructions to be carried out correctly and reliably. The primary functions of MES include:

• Resource Allocation and Status • Operation/Detail Scheduling

• Dispatching production Unit • Document control

• Data Collection • Labor Management

• Quality Management • Process Management

• Exception management • Maintenance

• Management • Product Tracking and Genealogy

• Performance Analysis32

A supply chain solutions provider suggests that MES can make strategic contributions to the organization beyond the factory floor. This will only occur if the following improvements are achieved in the near future:

· MES must become more agile and capable of dealing with product and process customization to the shop floor level than is possible today.

· MES must be capable of orchestrating suppliers across a global industry landscape.

· MES must optimize resources and constraints far beyond the four walls of the manufacturing plant to drive more rapid time-to-market and better cost controls.

· MES needs to scale up and support multi-site, globally deployed production planning, supplier coordination, compliance and quality management initiatives that span the entire value chain.

· The MES-level data must support the extraction of metrics that drive overall business performance and profitability.34

SUMMARY

The key concept from this chapter is the critical and codependent link between production operations and logistics. Just as your heart and arteries need to work together to move blood through your circulatory system, production and logistics must work in concert to move product through the supply chain. For their part, production managers must coordinate demand information, inputs, and resources to transform them into outputs (products and materials) that are desired by customers. The faster and more flexible the transformation processes are, the more responsive the production operation can be to changing conditions and disruptions. This in turn makes the supply chain more dynamic and competitive.

Additional topics from the chapter include the following:

· Production operations include all activities and processes involved in changing the composition of a good or service—component fabrication, product assembly, and service request execution—for the purpose of creating form utility.

· Numerous tradeoffs must be made regarding production: volume versus variety, responsiveness, or efficiency; make or outsource; and focusing on a few versus many competitive dimensions.

· Intensified competition, more demanding customers, and relentless pressure for efficiency as well as adaptability are driving significant changes across many manufacturing industry settings.

· There have been significant developments and shifts in production strategy. Organizations have advanced from forecast-driven mass production to demand-driven, lean, flexible, adaptive, and smart manufacturing approaches.

· Capacity planning and materials planning are used to balance inputs, capacity (resources), and outputs so that customer demand can be fulfilled without creating waste.

· Most manufacturers use a combination of make-to-stock and make-to-order production methods to satisfy demand for their products.

· Within the make-to-order method, companies can leverage assemble-to-order, build-to-order, or engineer-to-order options, based on product complexity and uniqueness.

· Facility layout involves the arrangement of machines, storage areas, and other resources within the four walls of a manufacturing or an assembly facility.

· Facility layout is influenced by the product characteristics, production strategy, and assembly process employed by the organization.

· Packaging plays important roles in the smooth, safe, and economical transfer of finished goods from the plant to the distribution center and customer locations.

· Sustainability is a key consideration in packaging selection, and companies are turning to recyclable and reusable materials for exterior and interior packaging.

· Production KPIs must be linked to corporate goals and objectives, customer requirements, and overall performance of the production operation.

· Critical production KPIs address total cost, total cycle time, delivery performance, quality, and safety.

· Manufacturing execution systems software solutions improve an organization’s ability to manage production operations and make them more responsive to disruptions, challenges, and changing marketplace conditions.

Individual Essay- Please submit a typed 8-10-page paper (not including front and back matter) on any of the topics identified-I will not read more than this. Your objective will be to pick a topic that interests you from the list below; research information on the topic, and then write the results of your findings in an essay format. All essays will be posted in the assignments thread prior to October 9, 2017.  Each Student will submit an Outline of the proposed Essay (with a least three levels down) NLT September 15, 2017.  The Outline’s submission represents 6% (9 pts) of the Essay.  

CHAPTER 5 SOURCING MATERIALS AND SERVICES

CHAPTER OVERVIEW

Introduction

Logistics and supply chain managers are looking for ways to drive more value from their purchasing and procurement operations. As a result, the topics of purchasing, procurement, and strategic sourcing are all receiving considerable attention as organizations try to improve the overall efficiency and effectiveness of their supply chains.

· Purchasing: The transactional function of buying products and services.

· Procurement: Refers to the process of managing a broad range of processes that are associated with a company’s need to procure goods and services.

· Strategic sourcing: Essentially, the strategic sourcing process is broader and more comprehensive than the procurement process, and it represents a very useful means to make sure that procurement priorities are well-aligned and goals and objectives of the supply chain and of the overall organizations

Five examples of ways in which strategic sourcing is different: (1) consolidation and leveraging of purchasing power—to concentrate larger volumes of purchases into fewer suppliers or fewer purchasing transactions; (2) emphasis on value—rather than acquisition cost alone; (3) more meaningful supplier relationships; (4) attention directed to process improvement; and (5) enhanced teamwork and professionalism—to include suppliers and customers, as appropriate.

Types and Importance of Items and Service Purchased

The quadrant technique enables the supply chain manager to assess the importance of each product or service being purchased. The quadrant technique utilizes a two-by-two matrix to determine a procured item’s relative importance on the basis of value and risk. The criteria used to delineate importance are value or profit potential and risk or uniqueness. The value criterion examines product or service features that enhance profits for the final product and the firm’s ability to maintain a competitive advantage in the marketplace. A value risk quadrant and categorizes item importance and classifies items.

Generics are low-risk, low-value items and services that typically do not enter the final product. Items such as office supplies and maintenance, repair, and operating items (MRO) are examples of generics.

Commodities are items or services that are low in risk but high in value. Basic production materials (bolts), basic packaging (exterior box), and transportation services are examples of commodities that enhance the profitability of the company but pose a low risk.

Distinctives are high-risk, low-value items and services such as engineered items, parts that are available from only a limited number of suppliers, or items that have a long lead time. The company’s customers are unaware of or do not care about the uniqueness of distinctives, but these products pose a threat to continued operation and/ or high procurement cost. A stockout of distinctives results in stopping the production line or changing the production schedule to work around a stocked-out item; both tactics increase production costs.

Criticals are high-risk, high-value items that give the final product a competitive advantage in the marketplace. Criticals, in part, determine the customer’s ultimate cost of using the finished product. The procurement strategy for criticals is to strengthen their value through use of new technologies, simplification, close supplier relations, and/or value-added alterations. The focus of critical procurement is on innovation to make the critical item provide greater market value to the finished product.

There are three types of buy situations that may occur: First is that of capital goods that may represent a longer-term investment for an organization that may require significant financial planning. The second is rebuys, which are repeat purchases that may either be identical to historical purchases (standard) or some variation thereof (modified). The third is that of maintenance, repair, operations items that are needed for the continuing operation of the company and its supply chain activities.

Strategic Sourcing Process

“Managing Strategic Sourcing Process” (MSSP) is a strategic sourcing process. Beginning with development of a strategic plan for the strategic sourcing process, this model recognizes several elements, each of which contributes significantly to a comprehensive MSSP process.

To help guide the strategic sourcing process, five core principles are recognized as key drivers to achieve the desired levels of value. These principles are:

· Assess the total value—Emphasis must go beyond acquisition cost and evaluate total cost of ownership and the value of the supplier relationship.

· Develop individual sourcing strategies—Individual spend categories need customized sourcing strategies.

· Evaluate internal requirements—Requirements and specifications must be thoroughly assessed and rationalized as part of the sourcing process.

· Focus on supplier economics—Need to understand suppliers’ economics before identifying buying tactics such as volume leveraging, rice unbundling, or price adjustment mechanisms.

· Drive continuous improvement—Strategic sourcing initiatives should be a subset of the continuous improvement process for the overall procurement and sourcing organizations.

Seven key steps are included in the overall strategic sourcing methodology

Step 1: Develop Strategic Plan – The most effective way to initiate a MSSP process is to take the time to map out a formal plan for the design and implementation of the process itself.

Step 2: Understand Spend – The planning group needs to develop a baseline understanding of what products and services are being procured, what purpose they serve, and the financial implications of these purchases. Included in this step will be the need to refine understanding of the sourcing needs.

Step 3: Evaluate Supply Source - This is a very critical step in the strategic sourcing process, as it involves making sure that all potential sources of supply are identified and that useful mechanisms are in place for meaningful comparisons of alternative supply sources.

Step 4: Finalize Sourcing Strategy - Prior to embarking on the task of supplier selection, it is important to fully develop a sourcing strategy that defines the parameters of the process and the steps to be followed.

The sourcing strategy should include supplier selection criteria and a process for evaluating submissions from multiple suppliers. The selection criteria should relate directly to the previously established objectives to be met by the formal strategic sourcing process.

· Important factors in supplier selection - Typically the most important factor in supplier selection is quality. Over time, several techniques and approaches have been developed that address issues relating to soundness of processes, results achieved, and continuous improvement. A few of the well-recognized approaches are discussed below.

· Total Quality Management—TQM represented a strategy in which entire organizations were focused on an examination of process variability and continuous improvement. This approach was heavily dependent on the use of statistical process control (SPC), and employee involvement to produce desired results.

· Six Sigma—Similar to TQM in its focus on techniques for solving problems and using statistical methods to improve processes.

· ISO 9000 - Started in 1987 by the International Organization for Standardization, a primary objective is to make sure that companies have standard processes in place that follow: “Document what you do and do what you document.”

· Reliability. Time-definite and on-time deliveries are among the top-ranked factors relating to reliability. The importance relates to avoiding production line shutdowns, unavailability of finished products due to lack of materials, and ultimately to successfully fulfill customers’ orders in the marketplace.

· Risk. There are many types of risks, including service reliability. Other types may include potentials for supply uncertainty, lead time uncertainty, and cost uncertainty.

· Capability. This criterion considers potential suppliers’ production facilities and capacity, technical capability, management and organizational capabilities, and operating controls. These factors indicate the supplier’s ability to provide a needed quality and quantity of material in a timely manner.

· Financial. In addition to price, buying firms are wise to consider the financial positions of potential suppliers. Financially unstable suppliers pose possible disruptions in a long-run continued supply of material.

· Desirable Qualities. The types of concerns here may be extensive, but some of those likely to be relevant include: cultural compatibility and supplier attitude; locations of key supplier facilities; packaging capabilities; repair and return services; and others such as availability of training aids, etc.

· Sustainability. This factor is “last but not least,” in the sense that a commitment to sustainability is regarded as essential in many leading supply chains.

Step 5: Implementing Sourcing Strategy - Clearly, the most important part of this step is to choose a supplier (or suppliers, depending on the objectives of the sourcing decision). The choice of supplier also determines the relationship that will exist between the buying and supplying firms and how the mechanics of this relationship will be structured and implemented.

Step 6: Onboarding and Transitioning - Important elements of this step are the finalization of the contractual agreement, planning the transition process, and receipt or delivery of the product or service. This activity commences with the first attempt by the supplier or suppliers to satisfy the user’s needs. The completion of this activity also begins the generation of performance data to be used for the next step in the strategic sourcing process.

Step 7: Collaborative Process Improvement - A very important step in the MSSP process is to establish procedures for regular feedback and communication between suppliers and customers. Once the product has been delivered or the service performed, the supplier’s performance must be evaluated to determine whether it has truly satisfied the user’s needs.

Supplier Evaluations and Relationships

Many successful companies have recognized the key role that sourcing and procurement play in supply chain management and that supplier/ relationships are a vital part of successful procurement strategies. An important factor in achieving efficiency and effectiveness in this area is the development of successful supplier relationships. When suppliers are “partners,” companies tend to rely more upon them to provide input into processes such as product design, engineering assistance, quality control, etc.

Evaluation of suppliers should be done regularly and on a formal basis. Essentially, the three most important question include: 1) did the supplier succeed in meeting the customer’s needs; 2) what elements of the relationship, both strategic and tactical/operational may benefit from modification and improvement; and 3) did the investments by both customer and supplier produce measurable benefits that justified the time and effort of the relationship?

Another important dimension of the supplier relationship is the extent to which the customer-supplier relationship contributes to the competitive advantage of the company, whether the advantage is one of low cost, differentiation, or a niche orientation (using Porter’s generic strategies).

Total Landed Cost (TLC)

This perspective brings into play all of the costs associated with making and delivering products to the point where they are needed. Examples of such costs include life cycle costs, inventory costs, strategic sourcing costs, transaction costs, quality costs, technology costs, and management costs.

e-Sourcing and e-Procurement

Procurement was found to the greatest early application of e-commerce. However, EDI technology has proven to be more costly than desired and requires special technology to implement. The advent of the Internet has eliminated the investment and technology problems associated with EDI and opened the door to increased application of e-commerce techniques to the areas of procurement and sourcing.

e-procurement and e-sourcing will refer to the use of electronic capabilities to conduct activities and processes relating to procurement and sourcing.

Which of These Solutions Should Be Considered

Strategic sourcing solutions should be considered for any entity that has a significant amount (over $50 million total) of spending with outside suppliers. The spend should also be segmented into categories and sorted in descending dollars to identify the top dollar spend.

Transactional procurement systems are typically used to reduce the time and effort associated with the tactical aspects of procurement, such as requisition and purchase order creation, as well as the approval and payment processes.

Advantages

An obvious advantage is the lowering of procurement operating costs. The reduction of paperwork and the associated cost of paper processing, filing, and storing is a major cost-saving area of e-commerce. Another paper reduction innovation that has become a reality with e-commerce is electronic funds transfer (ETF). Paying supplier invoices electronically eliminates the cost of preparing, mailing, filing, and storage of the checks. Estimates of the cost of writing a check vary from a low of $10 to a high of $85, the majority of this cost being the cost of accounts payable personnel.

Reduced sourcing time means increased productivity because a procurement specialist spends less time per order and can place more orders in a given time period. Likewise, the seller utilizing e-commerce can increase the productivity of customer service representatives. Many of the questions asked by the buyer can be answered online, thereby saving time for both the buyer and seller personnel.

Given the real-time nature of e-commerce information, sellers have up-to-date information on demand and can adjust production/purchases to meet the current demand level. This same real-time information enables the buyer to establish controls that will coordinate purchase quantities with requirement quantities and monitor spending levels.

Electronic procurement affords efficiency in the process by utilizing fewer resources to produce a given level of purchases. A significant efficiency factor of e-commerce is improved communications. The buyer can secure information from the supplier’s company—product line, prices, and product availability. The seller can obtain information regarding requests for proposals, blueprints, technical specifications, and purchase requirements from the buyer. Also, the seller can improve customer service by communicating the status of the order, giving the buyer advance notice of any delays in order fulfillment such as stockout situations, transportation delays, etc.

Reduced procurement prices have resulted from the ability of a buyer to gain access to pricing information from more potential suppliers. With more suppliers bidding for the business, the buyers are finding lower prices forthcoming. In addition, the procurement manager has the ability to view online the qualities of different supplier products and services, making comparison much easier. The overall effect of increased comparison shopping and increased number of potential suppliers is lower prices.

Concerns

Although there are some reported concerns about e-commerce, many of them are in the process of being neutralized or eliminated. The most frequently voiced concern about using the Internet for sourcing and procurement activities is that of “cyber-security.” This refers to the increasing threat of the use of electronic technologies to hack into databases and information depositories of all types.

Another problem may the lack of face-to-face contact between the buyer and seller. Buying and selling via e-commerce many times reduces the ability to build close supplier relationships. Other concerns deal with technology. More specifically, there are concerns with the lack of standard protocols, system reliability, and technology problems. Lastly, there is reluctance on the part of some to invest the time and money to learn the new technology. For the most part, these concerns are diminishing daily as new and improved technology is developed and the business community demands the use of e-commerce capabilities.

e-Commerce Model

The four basic types of e-commerce business models used in procurement and sourcing are sell-side system, electronic marketplace, buy-side system, and online trading community. The following comments and examples clarify each of their roles:

1. Sell-side system: Online businesses selling to individual companies or consumers.

2. Electronic marketplace: A seller-operated service that consists of a number of electronic catalogs from suppliers within a market. The electronic marketplace provides a one-stop sourcing site for buyers who can examine the offerings of multiple suppliers at one Internet location.

3. Buy-side system: A buyer-controlled e-procurement or e-commerce service that is housed on the buyer’s system and is administered by the buyer, who typically pre-approves the suppliers who have access to the system, and the process of the suppliers’ products and services that have been pre-negotiated. These systems permit tracking and controlling procurement spending and help to reduce unauthorized purchases. However, the cost of buy-side systems is frequently high due to the cost of developing and administering the system with a large number of suppliers.

4. Online trading community: A system maintained by a third-party technology supplier where multiple buyers and multiple sellers in a given market can conduct business. The difference between the online trading community and the electronic marketplace is that the electronic marketplace is focused on providing information about sellers, whereas the online community permits the buyers and sellers to conduct business transactions.

Overall, electronic procurement is here and is quickly establishing itself as the direction for the future. It will not replace all procurement activities, but it could reach 80 percent or more of a company’s total purchase order activity. Electronic procurement focuses on the processing of orders and maintaining a source of real-time information for better decision making. Procurement specialists focus on selecting suppliers, negotiating prices, monitoring quality, and developing supplier relations.

SUMMARY

· Expertise in the areas of purchasing, procurement, and strategic sourcing is essential to the success of supply chain management.

· Different procurement and sourcing strategies are related to the risk and value or profit potential from needed products and services. Not all purchased items are of equal importance. Using the criteria of risk and value, the quadrant technique classifies items into four importance categories: generics, commodities, distinctives, and criticals. Generics have low risk, low value; commodities have low risk, high value; distinctives have high risk, low value; and criticals have high risk, high value.

· The strategic sourcing process consists of seven steps that include project planning and kickoff, profile spend, assess supply market, develop sourcing strategy, execute sourcing strategy, transition and integrate, and measure and improve performance.

· Keys to effective management of the procurement and sourcing processes include determining the type of purchase, determining the necessary levels of investment, performing the procurement process, and evaluating the effectiveness of the process.

· A number of key factors should be considered in the supplier selection and evaluation process, including certifications and registrations such as TQM, Six Sigma, and ISO 9000.

· Extensive effort should be expended to research and understand procurement price and total landed cost (TLC).

· e-sourcing and e-procurement practices and technologies are helping to enhance the effectiveness and efficiency of traditional buying processes. In addition, a number of e-commerce model types have been developed and are becoming very popular: sellside, electronic marketplace, buy-side, and online trading community systems. Overall, the advantages of e-sourcing and e-procurement include lower operating costs, improved efficiency, and reduced prices.