SCM210 - Unit 5 Intellipath
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SCM210 – Unit 5 Intellipath– 1.
Total Supply Chain Cost and Performance – This lesson will explore the impacts not on the single firm, but on the competitiveness of the entire supply chain.
Total Supply Chain Costs
No matter the specific classification system used for cost accounting, the basic cost elements remain the same for every company connected in the supply chain: raw materials, labor, and overhead. Each firm will contribute their individual value-added costs (VAC) to the original cost of goods sold (COGS). Add to that the transportation and handling costs as the product is moved between each tier, and the resulting sum will be the total supply chain cost. Notice in the image below that the COGS at each tier does not represent the additive cost, as all of the inbound material costs are already computed in the suppliers’ cost of goods sold. If companies view the total supply chain cost in this way, the trade-offs between companies will become much more apparent. For example, if the imaginary company, Focal Firm, in the figure below implements a new innovation that will save $1 per widget, but the changes to the product configuration will cost their tier 1 supplier an addition $1.20 per widget, then the shifting of costs are not
a gain at all but an increase to the total supply chain cost. This final cost is the prime determinant in end consumer pricing for most industries, so to remain competitive in the marketplace total cost must be the
deciding factor over individual costs.
Total Supply Chain Performance
Just as total delivered cost to the end consumer is the overall cost for the supply chain, the performance features of the supply chain are actually the consolidation of the performance of all the tiers within the supply chain. Here is really where the analogy of a supply chain to a physical chain comes in to play: a chain is only as strong as its weakest link. In the same way, a supply chain’s performance can be severely impacted—or broken—by a single, weak link.
Capability
The overall performance of a supply chain in terms of capability can be measured by the amount of product flowing from the least capable member. It does not matter how much raw material can be dug out of the ground if the manufacturer does not have the capability to transform it all into finished goods.
The same is true with each of the distribution networks; any link can be a bottleneck to the amount of flow in the supply chain. The resulting capability of the supply chain can be measured as the outflow at the final tier of their product or service for sale, and this is limited by either that retailer’s capability (if they are the bottleneck) or by that of the weakest link somewhere upstream in the supply chain. Customers usually do not know (and do not care) where the bottleneck is, only that enough product is available when they need it.
Availability
Similar to capability, the product availability of the supply chain is really just measured at the end consumer. For example, a steel manufacturer may have to close the plant down due to the lack of iron ore; however, if the auto dealerships have 3 weeks’ worth of vehicles on their lots, the consumer is not impacted at all (at least in the short-term of 3 weeks).
Key measures of supply chain availability are the following:
o
Cycle time
o
On-time
o
Order fill rate
o
Flexibility
Cycle time
in the supply chain realm is the total time it takes to process raw materials up until the creation of the finished good. This is critically important if the required capacity of the system goes up (demand rising) or goes down (sales are falling). How long does it take to respond? Similarly, if a new innovation is developed, how long will it take to get the old product out of the system and start selling the new items? Cycle time is critical in evaluating the competitiveness of the time to market.
On-time
delivery of goods is dependent on the distribution system and the order fill rate. If the items just
are not available—sitting on the shelf—then distribution will have to wait until they can start the shipping process. Again, the end consumer does not care if there are huge stockpiles of components, say
rolled steel by the tons, if the new car they want to buy is not on the lot.
Flexibility
is becoming more and more a supply chain differentiator. Take, for example, a consumer with a
new, urgent need. How flexible is the supply chain? Can it expedite the order, considering all of the other
orders that may be already quoted and are in processing? Similarly, customers may need to increase orders to meet new demands. How flexible is the supply chain when reacting to this request? This is when having some excess capacity in each tier of production would be beneficial, but it has to exist everywhere in the supply chain in sufficient quantity to meet the need. The same holds true for the distribution capacity; it does not matter if a company has the product but cannot ship it.
Quality
Most consumers come across a product recalled due to a safety defect. They probably do not care where
in the supply chain the problem originated from, just that the issues get fixed quickly. Product quality is an important feature in supply chain design, but it is even more important during execution of the supply
chain. Flow of goods must match the strategy in terms of cost and quality. Each member of the supply chain contributes to both.
Q:
The overall performance of a supply chain in terms of capability can be measured by what?
A: The outflow at the final service for sale
Q:
The performance features of the supply chain are the
of the performance of all the tiers within the supply chain.
A: consolidation
Q: should show the competitiveness of the entire firm.
A: Key performance indicators
Q:
In most markets, the primary factor in determining retail price is
.
A: total supply chain cost
Q:
A new lean Six Sigma initiative recommends a change in packaging which will reduce the product’s box size saving $0.25 per item and allow for more units to be loaded per truck saving $0.10 per item. How much will the overall supply chain profitability increase if the market price remains the same? $
A: $0.35
Q: The place in the supply chain which limits the performance of the overall system is called a
.
A: bottleneck
Q:
Companies will have a wide variety of key performance indicators that directly relate to what?
A: Products
Q:
If a firm recommends a process improvement initiative that will save $1.00 per item, but it requires an internal $0.50 per item investment plus a $0.20 per item increase in operational costs from its customer, should they proceed?
A: yes
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Q:
To remain competitive in the marketplace,
must be the deciding factor
over individual costs.
A: total costs
Q:
Which of the following is true about cycle time in the supply chain?
A: Cycle time in the supply chain is how long it will take to transition from an old product to a new
product.
Q:
A chain is only as strong as its
link.
A: weakest
Q: There are a number of key measures of supply chain availability. Which of the following is a supply chain availability key measure?
A:
Flexibility
2. Operations Analysis – From Data to Solutions– Flow of the Analysis Method
Operations analysis can be called the science of better. This is where all those strategy documents will be
studied to pull out all the quantitative goals and objectives usually listed as key performance indicators (KPIs). Any great idea should be analyzed before changing a process and especially before investing any money. The general flow of the analysis method is the following:
o
Problem definition and planning
o
Data collection
o
Analysis
o
Recommendations
Many people like to just jump right in and implement their ideas. However, it has been found to be very helpful to wait, really understand what is currently going on, and know why it has been done that way before. Many great ideas have been stopped short because someone with previous experience steps up and comments on how that idea has been tried before. But, the main reason to wait is to understand where the company is now, so that they can know how far they have gone when the job is done. In fact, the first part of problem definition is to clearly state the performance gap––where the company is now and where it should be in the future. In such a way, leadership is making a statement that is saying how much needs to be done before the process is complete.
Planning
Planning
, then, is forming the team, setting a schedule, acquiring necessary resources (training, hardware, or software, among others) and getting ready to start strong. Planning should also clearly list the constraints: budget, manpower, equipment, and policies. Then before the team is turned loose on data collection, several scenarios for a desired future state should be provided. These may not be the final recommendations, but they are a start and will help clarify what kind of data are needed and what the best method of analysis might be. End the planning stage with a detailed schedule of tasks and who is responsible for each task—expectations should be understood by all.
Data Collection
Data collection
is the second step. Before the company even thinks of solutions, it needs to know exactly what is happening. These are typically process metrics like how long does a bank teller take to serve a customer, how long does the stitching machine take to sew the cover on a baseball, or how often truck deliveries are late. In this way, a company can later analyze the average time required (if using strategic optimization tools), but it can also use the average plus the variance of processing times (if using an operational simulation to model the performance of the system). This step should not be rushed. Make sure the data are accurate and not guess work. It will probably be found that much of the data that are needed is not available. That is ok. The data should just start being collected and adjusted to the schedule accordingly to give enough time to get the data needed (probably 1 month to see weekly variations and monthly swings).
Analysis
Now comes the analysis
. It is not so much a dirty job these days, but putting data into the equations (what is a required re-order point and safety stock levels?), building the optimization using the current and proposed network options, or building the simulation of a current and proposed processes can be messy at times. More help may be needed. There are plenty of consultants who already know how to operate the software. The supply chain’s operations need to be explained to them and they need to be provided with the data and those great ideas.
Recommendations
Recommendations
is the stage where ideas are sold to the upper management. However, one lesson learned from many presentations of analyses is that decision makers do not like a single option (or being told what to do either). At least four options should be provided: the best, the worst, and two in the middle. First, always present the best option first. This analysis should be done with no constraints from budget, personal, or policies. It shows the decision maker what the realm of the possible is; although, this solution is usually not practical (remember those constraints?). Then, give the two options in the middle. Give one as a stretch goal that could be achieved if the company goes all out—huge investment, major upheavals, and lots of risk. Then, give a moderate risk proposal that is closer to a sure thing. Finally, the ending will then be back to the current status. By saving this for last, the decision maker is given a reminder about where the project started—where the company is today and why they do not want to be there. It is also important to save this for last so everyone deliberating on the recommended options will be able to compare the potential benefits from the current situation to each of the possible plans that are on the table. Consider risks and rewards before deciding.
Q: In providing an operational analysis, what should a team include in the analysis process?
A: Key customers
Q: What is included in the last step of the planning stage?
A: Completing a detailed schedule
Q: The second step in the general flow of analysis is data collection that includes what?
A: Looking for variance in the process time
Q: Planning for an operational analysis should include clearly listing your constraints such as limitations due to what?
A: Manpower
Q: In which operations analysis step would you gather accurate existing information about what is happening and establish whether new measures are required?
A: Data collection
Q: Adjust your operations analysis schedule to allow for at least one
of data.
A: month
Q:
Quantitative measures for goals and objectives are termed key
indicators.
A: performance
Q: A recommended solution that requires significant investments in time and resources to possibly achieve a “stretch goal” probably also has significant
.
A: risks
Q:
In which operations analysis step would you gather accurate existing information about what is happening and establish whether new measures are required?
A: Data collection
Q:
A key part of operations analysis is planning that includes which of the following?
A:
Acquiring necessary resources
3. Network Design – Quantitative Alternatives–
Regardless of a company’s size, the connected supply chain is probably global—raw materials, component manufacturing, final assembly, or the retail market— all span numerous countries and several continents. Firms locate in one area primarily due to specialization; access to minerals and natural resources; low labor costs; unique skills; and knowledge. With improvements in logistics services,
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such as large, faster transport ships, world-wide tracking, and customs processing, the benefits of global specialization takes supply chains across borders and across oceans before the finished goods finally lands at the end consumer. Quantifying these complex networks in terms of cost and performance will allow analysis of alternatives to make better business decisions.
Rationale for Globalization
In addition to the general rationale for specialization across the globe (raw materials, labor rates, skills), there are one or more very specific reasons why companies turn to a global supply chain, as seen in the following (Bowersox et al., 2012):
Increased revenues
Reduced direct costs
Achieved economies of scale
Advanced technology
Reduced total tax liability
Reduced market uncertainty
Enhanced sustainability
Network design and the planning required prior to execution encompass logistics decisions for each node in the supply chain. Network design seeks to minimize logistics costs while offering the right level of flexibility to meet service-level requirements. A network design initiative typically requires the quantification of the following four elements:
Inbound flow of supplies
Manufacturing capacity and allocation
Outbound logistics to customers
Return logistics
Decisions are strategic in nature due to the long time horizon necessary for building facilities, procuring equipment, designing the networks, and developing markets. However, with the pace of change increasing each year, along with the advancement in computing power necessary to evaluate all the options, the network decision is becoming more of a near-term, tactical decision for most supply chains.
Inbound Flow of Supplies
Quantitative decisions for most companies center on the simple cost equations. However, total costs must be considered; they include not only the product costs but also the total landed cost to include transportation, customs tariffs, and duties. In addition, leading-edge firms are now realizing that global sourcing not only creates longer lead times, and therefore greater in-transit stocks, but it also creates the
variability in lead times that drive the additional cost of extra safety stock. These lead time data can also support quantitative risk decisions to provide insight into the need for alternate suppliers, back-up suppliers, or even minimal local capacity to provide a more rapid, flexible response to disruptions.
Manufacturing Capacity and Allocation
Whether materials are sourced locally, regionally, or globally, each manufacturing facility will access local
facilities and labor. However, the decision of exactly what they should make and how much of each product should be made is a very complex decision. Typically driven by high fixed costs (building construction, equipment purchases, among others), the fixed and variable costs of production will need to be weighed against the distribution costs to reach the next customer in the supply chain. Think of a single factory in the Midwest of the United States. All products will need to be shipped somewhere, but this single facility will incur large transportation costs and time delays getting to markets on the East and West coasts. Consider the counter example of two facilities––one on each coast. Clearly, the fixed costs will almost double but distribution will be significantly quicker and cheaper to the major markets on the coasts, requiring some shipping from each factory to each the southern, central, and Midwest states. Such a solution may look like the following map that depicts an optimal solution using 3 facilities that connect a couple of dozen regional distribution centers. The solution minimizes total product and logistics costs while meeting capacity limitations and customer demand requirements for responsiveness.
Outbound Logistics to Customers
The last mile is a reference to the last leg of the supply chain that gets the product into the hands of the paying customer. Depending on the channel design—retail stores, direct marketing, Internet-based sales
—this final mile is a quantifiable trade-off between inventory at the various locations and the transportation to the final destination. In addition, this is the link that directly impacts the end consumer,
so the customer service performance of the network must also be quantified; on-the-shelf fill rates and time-to-fill orders are critical metrics at this decision point. To meet these goals, companies are turning more and more to just-in-time logistics to deliver needed items on the day they are needed, not stockpiling inventory beforehand.
Return Logistics
Most all of the previous network designs were based on the quantitative data for the forward logistics flow—meaning from the raw material suppliers to the end consumer. But, supply chain should not just stop there. The need by most customers for end-sales support, such as technical support, repair, spare parts, and warranty returns, requires a whole new way of looking at logistics. Rather than sending return
backward through the normal supply network, many companies are deciding to invest in a different, reverse flow. Many retailers now reserve valuable space for vendors to regularly visit each store to inspect returns, even performing minor repairs and refurbishments if the product can be returned to the
shelf for resale either as new (never used but re-boxed) or discounted as used. Other reverse logistics aspects of the network include recycling, capturing of hazardous waste, and re-use of precious metals. Quantifying the reliability of products during initial product design and prototyping will greatly assist logistics in computing the necessary spares and repair personnel needed for the future.
Computational Complexity
As mentioned earlier, there are several mathematical methods for optimizing the supply chain network and for simulating the expected performance of a given design option. The complexity of analyzing a single node of the supply chain is difficult, let alone connecting all the nodes into each a basic supply chain using only the major components of the finished product. Fortunately, there are many software packages available that provide easy-to-use interfaces for data input and eye-catching graphical outputs
to help sell a plan. See one example of a network dashboard below. Of course, the old saying, garbage in-
garbage out, is still alive. Logistics managers must validate input data and verify that the model is working correctly—they do this by using last year’s logistics plan to see if the model’s outputs at least come close to the actual performance last year.
Q:
Outside the logistics function, supply chain management benefits from globalization caused by __________.
A: economies of scale
Q:
Logistics managers must validate input data and verify that the model is working correctly by using
to see if the model's outputs at least come close to the actual performance last year.
A:
last year’s logistics plan
Q:
The number of facilities in a network is typically driven by the
(fixed or variable) costs of facility construction.
A: fixed
Q:
The rationale for global network decisions is strategic in nature. These types of strategies typically necessitate long-term horizons. What necessitates a long-term horizon to be considered for planning purposes?
A:
Developing the markets
Q:
Global specialization takes supply chains across borders and across oceans because of recent logistics improvements such as __________.
A: larger ships
Q: Global sourcing increases operational risks because of __________.
A:
more in-transit stock
Q: Network design decisions are __________ in nature because of the building of facilities, procuring equipment, and developing markets.
A: strategic
Q:
In addition to the general rationale for specialization across the globe, raw materials, labor rates, and skills, there are additional specific reasons that include what?
A:
Achieved economies of scale
Q:
Regardless of a company’s size, the connected supply chain is probably __________ in scale.
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A:
global
Q:
Manufacturing capacity and allocation include what fixed and variable costs?
A:
Equipment purchases
Q:
An aspect of the return logistics or reverse logistics might include what?
A:
Recycling
Q:
Firms locate production facilities primarily based on __________.
A:
low labor costs
4. Strategy Alignment for a Synchronized Supply Chain– Supply chains
are complex networks of companies working together to provide desired products and services to consumers. To produce competitive value, these hundreds, or even thousands, of companies should have strategies that are aligned to that common goal. This lesson will present examples of nonaligned supply chains, along with those that are aligned. It will also give recommendations for creating
that alignment.
Corporate Strategy
A
corporate strategy
is the overall scope and direction of a corporation and the way in which its various business operations work together to achieve common goals.
Business operations
are the internal functions of the company. The goal should be creating competitive value for the customers, and if achieved in a cost-effective manner, the end result is profitability.
This is critical for a company to clearly define in its competitive strategy—both externally to customers and
suppliers, but also internally to all of its employees. Doing so will ensure a common direction. To be competitive, the strategy should have a unique edge—what the niche, or the special skills or knowledge, is that the firm brings to the market. Only by maintaining that competitive edge, will the firm be successful over time.
Supply Chain Strategy
However, a corporate strategy is not a supply chain strategy. Each firm in the supply chain brings unique capabilities to the end product or service, so there is no single corporate strategy that can be overlaid onto all the firms within the supply chain. However, if the focus is on the end consumer, there are clearly unique wants and needs that the supply chain is trying to meet. Therefore, the leaders of key firms within the supply chain should take that focus—the end consumer—and clearly articulate both the value proposition for the end consumers and the unique direction that will allow the supply chain to align toward that common goal.
But is There a Single Supply Chain?
Think back to the supply chain maps from node 2; not only are there hundreds or thousands of firms on the map, but the map intersects with competitors, their suppliers, and with customers who receive items from others. It should be clear from these nonmembers on the map (remember the gray boxes?) that no
supply chain is completely unique. Hence, for all the products and services that a company produces, it will actually be one of many who are in a group of multiple, interconnected supply chains. The company’s partners have other supply chains that they are a part of too. Supply chain strategies will differ between product lines and between markets. Management must be able to integrate these variations with internal flexibility—communication is the key so that the stories are not misunderstood or incorrectly meshed together.
How to Implement a Common Strategy
Once the overall scope and direction is set and agreed upon between supply chain member firms, the best way to implement the strategy is through a common set of processes. Previous nodes presented examples of the supply chain processes. The eight processes from the global supply chain forum come in the following (Lambert, 2014):
Customer relationship management:
This provides the structure for how the relationship with customers will be developed and maintained.
Supplier relationship management:
This provides the structure for how the relationship with suppliers will be developed and maintained.
Customer service management:
This deals with the administration of the PSAs developed by customer teams as part of the CRM process.
Demand management:
This balances the customers’ requirements with the capabilities of the supply chain.
Order fulfillment:
This includes all activities necessary to design a network and enable a firm to meet customer requests while minimizing the total delivered cost.
Manufacturing flow management:
This includes all activities necessary to obtain, implement, and manage manufacturing flexibility in the supply chain and to move products through plants.
Product development and commercialization:
This provides the structure for developing and bringing to market products jointly with customers and suppliers.
Returns management:
This is the process by which activities associated with returns, reverse logistics, gatekeeping, and avoidance are managed within the firm and across key members of the supply chain.
To align the strategy with key supply chain members, the first step is to agree upon a common set of processes and then communicate their meaning and implement their structure. The following is an example of what usually exists when companies first look at their alignment of supply chain processes:
Notice how the horizontal bars—the eight supply chain processes from the global supply chain forum—are well-established for the center manufacturer but are not well aligned with common definitions at the suppliers or customers. In fact, the first tier supply does not really have any processes at all! The objective, then, is to educate the supply chain partners with this common language. Only then can a company organize and execute its goals and supply chains with a common process flow. It’s not easy or quick, but the goal is to have a common supply chain strategy implemented throughout the supply chain by common processes.
Compare the following figure with the disconnected processes above:
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Q:
Corporate strategy helps various business operations work together to achieve common
.
A: goals
Q:
Which management type includes the necessary activities to manage and move products through the plants?
A: Manufacturing flow
Q:
Corporate
is the overall scope and direction of a corporation.
A: strategy
Q:
Which management type includes the process that balances customer requirements with supply chain capabilities?
A:
Demand
Q:
Corporations create competitive value for the customers, and if achieved in a cost-effective manner, the end result is
for the company.
A: profit
Q:
. The overall scope and direction aligning operations to achieve common goals is
.
A: Corporate Strategy
Q: Supply chain strategies will differ between _________
A:
product lines
Q:
Supply chains are complex networks of
that are working together to provide desired products and services to consumers.
A:
companies
5. Logistics Trade-Offs and Impact on Supply Chain Performance–
Earlier, the marketing mix—or the four P
s of product, price, promotion, and place—were presented. Having the right items at the right place is the connection between the functional realms of marketing and logistics. Logistics’ transportation activities is where companies connect—suppliers shipping to customers. Logistics is the physical link between supply chain members. This lesson will discuss the logistics cost and performance trade-offs in more detail, and how they specifically relate to supply chain management.
The figure below contains a reminder of the marketing mix in the top half of the diagram. The customer service levels that are created by having the right item, at the right place, at the right time connect the marketing mix to the tasks of logistics. Marketing’s goal is to allocate resources in such a manner as to maximize customer satisfaction. Logistics, on the other hand, has the goal of minimizing costs given that standard of performance. This lower area (labeled logistics) shows six key tasks of logistics, each with their own direct trade-off. The resulting trade-offs (or interaction arrows) create what is commonly referred to as the star chart or star diagram. The following will briefly address the major trade-offs as they each relate to logistics, and then to the larger supply chain.
(Stock & Lambert, 2000)
Place Versus Transportation
Having the right product at the right place obviously requires transportation from the origin of the manufacture to the final consumer. Traditionally, this means regular shipments to a local retailer where the consumer shops.
Logistics networks are created using efficient locations for distribution centers where large shipments from manufacturers (bulk shipping to save cost per item) are broken down and later merged with other items to be shipped out in bulk to retail stores (again, bulk shipping saves on unit cost). Whether the items are stored briefly (or for a long time) at the distribution center (otherwise known as a warehouse) or shipped out the same day (cross-docking), the purpose is the same, a trade-off between having the product at the right place and the resulting transportation costs.
Place Versus Inventory
If someone is in urgent need of a cup of sugar, he or she could ask a neighbor or make a quick trip to the local grocery store. This is an example of the store having the product at the right place by holding certain amounts of stock on hand at all times—inventory. A supply chain could instead decide not to hold the inventory at the retailers but in a regional, national, or international distribution center. This dramatically cuts the amount of inventory needed at hundreds or thousands of retailers but is not as nice when someone needs that extra cup of sugar. Having the product at the right place is nice, but the
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cost of purchasing inventory in advance, then holding it for days, weeks, or even months for a customer to make the purchase can be very expensive. Studies have measured inventory-holding costs from 10 to 40% of their value annually. Think of having a credit card carry a balance due at 40% APR (Stock & Lambert, 2000). These inventory holding costs need to be assessed in comparison with the value the customers place on having it in stock where they want it. This is then reflected in the price they are willing to pay for the extra place service. With growing Internet access and decreasing shipping costs because of more efficient distribution networks, not only are online sales made possible, but retailers are tending more and more to provide direct-from-the-warehouse sales. Selling from all channels simultaneously is called omni channel operations
.
Order Processing and Lot Sizes Versus Inventory and Transportation
These trade-offs are directly related. As mentioned earlier, bulk shipping usually reduces the per item shipping cost. These bulk shipments are large orders and are usually the way business-to-business sales are made when dealing with large quantities. Consumers, on the other hand, usually buy in smaller quantities based on their needs (and storage capacity and cash available). When large orders are made, the frequency of ordering is reduced—for example, one truckload per week. If that same quantity had to
be shipped during the week on a daily basis, then the number of orders per week would be 5 (if it was done Monday–Friday) and the order processing costs would increase 5-fold; transportation costs would likely go up too. Inventory, on the other hand, would be significantly reduced with daily shipments. There would probably be only a small safety stock, with literally every shipment selling, so every day the end-of-day inventory would be effectively zero!
Warehousing Versus All Others
Operating a warehouse is not cheap. Building the structure is only one cost—utilities, taxes, labor, and material handling equipment add up fast. When inventory levels rise (like with large, bulk shipments, and
high goals for customer service), the warehouse gets bigger and bigger. Smaller orders in more frequent deliveries will allow the warehouse requirements to decrease. Cost trade-offs are everywhere.
The Supply Chain View
As with everything else management deals with, moving from a company perspective to a supply chain perspective makes these trade-offs more complicated. Fortunately, the logic remains the same. For each trade-off, an evaluation needs to be made when considering the benefits for both companies (the supplier shipping to a customer) and the benefits must be compared with the total costs. Then the evaluation must continue to the next tier upstream or downstream until the supply chain is covered. The decision would not be quite so obvious though, because there will be multiple benefits and multiple costs or savings.
Supply chain strategy will help guide individual decisions and limit the number of scenarios to evaluate. For example, a low-cost and high-volume strategy will have very low margins to compete; therefore, options requiring significant investment in flexible shipping options or expedited order processing probably should not even be considered. On the other hand, a high customer service strategy will require higher fill rates of inventory, so customers are not disappointed when they get to the store—the product will be there and they will pay a premium price for the service (due to higher inventory and warehousing costs).
6. Risk Management – Creating a Balanced Supply Chain – A chain is only as strong as its weakest link. This is true of a supply chain. Companies must engage with their supply chain partners and nonpartner members to create a risk management plan that balances risks against the investments required to best mitigate the risks. In a supply chain system, it does not matter whether it is a supplier who cannot produce necessary goods or if it is a large customer who is out of business and is no longer buying the finished products, either situation results in a systemic shut down that hurts everyone from the raw material supplier to the end consumer.
Previously, the concept of risk management was discussed in terms alternatives in the supply chain. Risk
is typically assessed by measuring (or estimating) the likelihood of a disruptive event occurring and comparing that with expected severity should it actually occur. To assess and then mitigate these risks, an example risk management process was discussed, as shown in the following picture.
Considering the first step—identify risks—with a supply chain focus, there are many strategic factors that
influence production, from raw material suppliers around the globe to the retailer in a small town. The World Economic Forum studies these negative trends each year. A recent compilation of the top 10 trends that are influences on the supply chain risk now, and ones that are even greater in the future, are shown in the table below.
Top 10 Trends of 2015
Deepening income inequality
Persistent jobless growth
Lack of leadership
Rising geostrategic competition
Weakening of representative Rising pollution in the developing world
Increasing occurrence of severe weather events
Intensifying nationalism
democracy
Increased water stress
Growing importance of health in the economy
(Outlook on the Global Agenda 2015, 2014)
Because the goal is sustainability
, a “process by which companies manage their financial, social and environmental risks, obligations and opportunities” (Financial Times Lexicon, 2014), this is not just a long-term view of risks, but a perpetual, enduring goal with no ending time horizon. Strategic plans for a business may be written with 5–10 year visions, but sustainability efforts need to manage risks far beyond that.
In a supply chain––the complex, global networks of firms creating goods and services for the end consumer—there are so many nodes (firms) and so many links (distribution services) that it is amazing there are not daily disasters somewhere in the world. In fact, there are—every day. Fortunately, most firms have built-in buffers to prevent any number of problems (factory fire, icy roads, union strikes, among others) from causing an immediate and direct impact on the consumer. These buffers are typically excess inventory of products or excess labor for services. Supply chains are systems. The primary goal of supply chain risk management is to avoid systemic risks that result in the breakdown of the entire system, as opposed to breakdowns in individual parts without disrupting the output of the system (Kaufman & Scott, 2003).
Systemic risks are characterized by the following (Goldin & Mariathasan, 2014):
Modest tipping points combining indirectly to produce large failures
Risk sharing or contagion, as one loss triggers a chain of others
Hysteresis, or systems unable to recover equilibrium after a shock
To assist in the identification and assessment of risks to prevent systemic breakdowns, focus on specific categories one at a time. Form specific teams to address each category and choose experts from a variety of functional areas for each team; however, keep their planning within their objective area. Consider the following risk categories (World Economic Forum, 2014):
Economic
risks impact the fiscal nature of business and government. These risks encompass the cash-flow solvency of firms needed to continue to efficiently continue trading. Impacts from currency fluctuations to interest rates have direct implications. Other factors, such as oil prices and commodity futures, will also have immediately influences on the economy and businesses. Longer-term impacts result from changes to labor employment rates and the resulting flow of cash due to consumption (consumer spending) and government cash flow from taxation (income, sales, and property taxes plus corporate taxes).
Environmental impacts are due to natural and man-made disasters. These risks include growing weather events like earthquakes and storms, but they are also more gradual climate changes. Systemic disasters in this category are typically regional or national (Hurricane Katrina in New Orleans) but can very quickly become global as supply chain nodes are shut down and the
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disruption ripples downstream (the 2011 tsunami in Japan coastal impacts tickled down the supply chain even to U.S. assembly plants).
Geopolitical
impacts come from governments and other influential groups. Laws and regulations influence business decisions in short-term operations and long-term strategic planning. Organizations such as the United Nations and terror groups can have positive and negative impact on trade and prosperity worldwide. Disputes over resources can lead to civil unrest and war—neither supportive of production, consumption, and free trade.
Societal
are impacts that affect the general population on cultural and prosperity issues. Problems can arise between ethnic groups, economic classes, and special interest groups. Health
concerns of general well-being or greater pandemic crises, such as the recent Ebola outbreaks, can drain an economy or even cause a complete stop in trade and travel.
Technological
impacts are from the loss of equipment and communication. As societies and industries become more and more efficient and effective because of mechanical automation and
open information exchange that spans the globe instantaneously, whole economies become threatened by the loss of data flow. Cyberattacks, or just accidents such as digging into a fiber optic trunk line, can have global ramifications at the speed of light.
Once risks are analyzed, teams need to develop mitigation plans that involve each member of the supply chain. Where should safety stock be held? Where can production be expanded or accelerated? Where can distribution be re-routed? Where can transportation be expedited? These cross-functional, inter-firm
teams can then create an efficient balance between investments and acceptable levels of risks. There should be no linkage between two firms because this would be overly risky. There should be no linkage wasting funds by duplicating capabilities at both ends. Risks will never be completely avoided, but the goal is to mitigate at every tier in the supply chain.
Q:
Risks that result in the breakdown of the entire system—product deliveries to the consumer
—are characterized by what?
A:
modest tipping points combining indirectly to produce large failures
Q:
Risk is typically assessed by measuring or estimating what?
A:
Likelihood OR impact
Q:
Sustainability is a process by which companies manage which of the following?
A:
Environmental risks
Q: What is an example of an environmental risk?
A:
earthquakes
Q:
Risks can take many forms. Which of the following is an example of a risk?
A:
Factory fires
Q:
. Strategic risk plans should consider
years in the future.
A: 5-10 years
Q:
In a global supply chain, risk can manifest in which way?
A:
A supplier being unable to produce the necessary goods
7. Collaboration to Maintain Strategic and Operational Alignment – For most of business history—from the agricultural society through the industrial revolution—
management has focused on internal, functional improvements to reduce costs, improve products, and gain an overall competitive edge. However, in recent years striving for internal excellence is now only equal in emphasis with external, collaborative improvements to the supply chain.
Functional Aggregation
The movement toward external collaboration actually began with the aggregation of functional silos into more integrated, but internal, mergers. The move began in the 1950s as the tasks of transportation, inventory management, and purchasing found its own integration into the board room with its own vice president for logistics, a position now no longer under the reigns of manufacturing. These types of mergers within the corporation continued slowly until the 1990s when the term supply chain management began to take root. This resulted in further aggregation of functions by integrating all planning and execution of logistics and related services connecting supplier relations (purchasing) and sometimes even customer relations (marketing and sales) into the C-suite as chief supply chain officer (CSO), now being on equal footing with the chief operating officer (COO), chief financial officer (CFO), chief technology or information officer (CTO or CIO) and chief risk officer (CRO). This elevation of status has allowed corporate-to-corporate relationships to formalize, rather than existing only at the informal, function-to-function level.
Development of Collaborative Relationships
Many inter-firm collaborative relationships started with logistics integration where suppliers began connecting with purchasing agencies. Customers began connecting not only with sales and marketing, but also with order processing and outbound transportation. However, the previous functional relationships were based primarily on informal agreements because a strong, common language (lexicon) existed between like-minded functional experts on both sides of the corporate veil. Now, as multiple functional areas under the new process-orientated supply chain management constructs came together, a more formal collaboration was required to effectively communicate not only the functional terms, but also to communicate the interactions between functions who are participating within each process team.
Collaborative Relationships
Collaborative relationships
rely on open communications. In this information society, operational data are everywhere, and sharing that data from retailer to distributor to wholesaler to manufacturers is key
to operational effectiveness. The commonly used visualization of the has-been method of communicating between firms and the new supply chain way is the bow tie versus the diamond. This means an out with the old; under the old functional silos, the only real inter-firm communication that was allowed was between the sales representative and the buyer on the other side. Each of these two individuals filtered messages from their respective internal functional experts, creating the bottleneck in the middle of the bow tie shown below. In the ages before the information revolution, this was the only way to consolidate the various signals coming from within the plant and use a single point of contact to assimilate and distribute necessary information. The problem was that much of the data were lost either in interpretation by the nonexpert (production specifications or transportation capabilities by the sales rep) or in a conscious decision not to share potentially embarrassing facts (late deliveries, quality defects).
But, as functional silos were breaking down and management control was being consolidated in the C-
suite, the flow of information from each of these functions grew and grew to a point where it could no longer be controlled by a single point. Fortunately, the process mind set evolved simultaneously and now
supports a more efficient and effective flow of information between companies. This involved the surprisingly direct links between firms—functional communications via direct links under the oversight of only the process owners. In particular, the process of customer relationship management (of the supplier) can now be directly connected with the supplier relationship management process (of the customer). These cross-functional teams now have direct link to their counterparts in the cross-
functional team on the other side. Visually, this is depicted below, as the bow tie is now transformed into
the diamond, creating a much more valuable communication asset.
Developing Trust and the Impact of Power
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Most people say that they do not share secrets until they trust the other party. On the contrary, in professional business relationships, Dr. Mike Knemeyer realized during his work developing the Partnership Model with the Global Supply Chain Forum that businesses that openly share information—
providing visibility into their operations to key suppliers and key customers—actually helped create that inter-firm trust that other companies were waiting for. He saw that withholding data stifled the development of trust.
Raw power in business relationships is not as important as the balance of power. Equally powerful collaborators, either both big or both small, will find it much easier to communicate and trust; therefore,
to work together more effectively and efficiently is a possibility. It is interesting to note that over the past
few decades the relative power balance in supply chains has shifted from the manufacturing giants to the retailers. Not necessarily because the retailers are growing in size but because of their control of information. No longer are retailers forced to sell whatever the plant makes (and by necessity adjusting prices to move wanted and unwanted goods). Retailers are using the power of mass marketing and point-of-sale data to feed the manufacturers with real-time data on demand, and this, coupled with more flexible and responsive production lines, results in a more efficient supply chain.
Another not yet universally accepted truth is the benefits of everyday low pricing. Some customers (both
consumers and professional business-to-business buyers) are still in the emotional game of “everyone loves a sale.” On the contrary, with the Beer Game, developed in the 1960s and still used in most every undergraduate logistics programs around the world, not only are batch processing, information delays and shipping lead-times primary causes of the bullwhip effect, but the pricing game is too. This consists of regular prices (MSRP = manufacturer’s recommended retail price) followed by sales, many times on a regular, repeating timeline. Customers take advantage of (or even expect) regular sales and will buy in advance items they need later. This tendency distorts demand signals and causes surges in production followed by slowing production that only serves to raise both production costs and inventory holding costs. Everyday low pricing helps smooth demand patterns, allowing a supply chain to more efficiently produce and ship goods based on a more predictable forecast.
Relationship Management
Previous nodes have stressed the importance of strong business relationships—partnerships—in the right places in the supply chain. The customer usually initiates these deeper relationships. Some need new or better services or product features that drive the initiation, or maybe just price competition in the marketplace, forcing the supply chain to find new ways to cut costs. Either way, the designed relationship should be a win-win to ensure active participations by both sides. Developing the relationship takes effort. Clearly defined outcomes (performance measures) should be initially set and then tracked over time. Regular top-management reviews will help get the word out: what gets measured, gets done is the old saying. Add to that leadership’s commitment on both sides of the relationship to reward the right performance and a new saying will emerge: what gets rewarded gets done better. In this way, relationships that are invested in have permanently assigned team leaders, clear
expectations, and openly publicized reward systems that will be maintained and grown. Regular reviews every fiscal quarter, or even more often, will keep the relationship on the right track as the companies evolve, competition adapts, and markets change.
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Q:
Raw power in business relationships is not as important is it was in the past decades, the relative power balance in supply chains has shifted from the
to the retailers.
A: manufacturers
Q:
Supply chains work to develop collaborative relationships, which require what?
A:
Open relationships
Q:
In the old method of communication, only real interfirm communication took the form of the bow tie, creating a(n)
that limited the flow of information between companies
A: bottleneck
Q:
Supply chains have evolved from focusing on internal excellence to including equal emphasis on external,
improvement approaches.
A: collaborative
Q:
Gary Hammer is often quoted in saying “the integration of business processes between firms
is where the real
is to be found.”
A: Gold
Q:
Raw power in business relationships is not as important as the
of power.
A:
Balance
Q:
Over the past few decades, the relative power balance in supply chains have shifted from the
manufacturing firms to the
.
A: Retailers
Q:
In the 1950s, functions such as transportation and inventory management began internal mergers into the new function of
.
A:
logistics
Q:
Global supply chains develop trust and the impact of power by openly sharing information, providing visibility into their operations to key suppliers and key customers using what?
A:
Collaboration
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Q:
Under the old functional silos, the only real interfirm communication that was allowed was between your sales representative and the
on the customer side.
A: Buyer
8. Risk and Rewards – Sharing takes Supply Chain Cooperation –
Partnerships within a supply chain are “tailored business relationships based on mutual trust, openness,
shared risks and shared rewards that result in business performance greater than would be achieved by the two firms working together in the absence of the partnership” (Lambert, 2014).
These rewards do not start out as tangible assets (money); rather, they start as behavioral components that drive and direct common actions between the two firms toward the common goal: rewards. Because supply chain management seeks to benefit all members, the specific rewards of any particular endeavor should not necessarily be distributed or shared equally but equitably according to the risk burden.
Think of a large company that is investing $1 million and working together with a small but critical supplier that invests $100,000 on a production efficiency project. Should the larger company not take 10 times the savings that are eventually recouped? If the project was a bust, then the losses would clearly be tenfold on the primary investor.
Sharing Profit Gains
Whether a joint project impacts the bottom line by reducing costs or by increasing revenues (or a combination of both), the net gains need to be equitably distributed. The problem is that many companies have a hard time quantifying their contribution—manpower, equipment, cash, time, and intellect—to a project. The first three are fairly easy to track in terms of dollars, but time and intellect are
a bit more difficult. What is the value of accelerating the launch of a new product in 3 months rather than 6? Moreover, an intellectual contribution—that great idea—cannot be directly quantified in advance. Therefore, most companies that collaborate simply take the easy way out: sharing profits equally. This method is perceived as fair when both companies participate, but the actual risk burden is not known. It is also pretty easy to compute: half to each.
One counterexample comes from a common practice when two companies cooperate on a project but one contributes all of the investment, hence the risk. One popular fast-food chain has a policy that says that improvement ideas that start internally and do not require investment from the collaborator will retain rights to all of the savings. This may mean that cost savings at the supplier will be tracked and completely passed on to the company in terms of price reductions (Lambert & Schwieterman, 2012). In other projects where investment is required from the supplier, the savings would be distributed to allow the supplier to recoup its investment, but follow-on savings would still return to the corporation.
Any variation of reward sharing in between is possible but should be negotiated and documented in advance. One quantitative way of computing a non-equal but equitable sharing method is to evaluate the earned value-added (EVA) contributions from each party. Earned value added is the net profit margin
less the cost of capital (in percentage) times the total assets contributed. In this way, a ratio of each
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firm’s EVA can be compared, and savings can be distributed to each according to the contribution (Lambert & Pohlen, 2001).
Developing Profitable Customers
Other than cost reductions from the elimination of waste in operating costs, a very successful profit enhancement method is to develop those most profitable customers. The first step in this phase of supply chain management is to ensure that there are customer profitability reports. It is strange that most companies do not already have those key financials. For example, in a discussion with a major chemical company about reactions to potential disruptions, the company did not know which of its customers were more profitable to the company. Remember the old saying, “The customer is always right.” This might be a great marketing slogan, but why would a company want to go in the red just to keep a losing customer on a payroll even if he or she thinks that he or she is in the right?
However, those profitable customers are the ones to develop and grow. The following chart shows four distinct combinations of profitable customers and profitable products. The clear winner can be seen in the upper right portion: the combination of a highly profitable customer selling highly profitable products. Here is where both will invest just about whatever it takes to avoid disrupting the flow of goods because they are the cash generators for both sides. The opposite quadrant (lower left) should be the time and place to challenge a customer and ask whether the two should even be together. Consider dropping the product altogether with that customer and focus on the other products that he or she could be moving at a higher margin. Another option is increasing the prices to the customer to cover the lower margins; if the customer wants to continue to be a customer, he or she will find a way to make up the difference.
The remaining two blocks along the diagonals marked selectively manage
are more difficult. Highly profitable customers who want to continue to sell less-than-desirable products (in terms of profitability) should continue to be serviced and managed closely. Because they are highly profitable, they must be doing things right in other areas (e.g., markets, marketing, and cost control, among others), and hopefully, these skills will eventually transfer to other less profitable products. In the final block (lower right), there is the good-selling product overall. However, this particular customer is not doing it justice. His or her operating costs or overhead costs are probably too high compared to the other customers who are moving this product. The company should decide whether it wants to continue to invest time and product with this customer in the hope that the customer will improve the current positioning and become a cash generator in the near future. The only other option is to move the product elsewhere, transferring the limited capacity to a customer who can more profitably sell the goods.
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Q:
In the supply chain, sharing profit gains needs to be equitably distributed in what area?
A: Manpower
Q:
One quantitative way of computing a non-equal but equitable sharing method is to evaluate the
contribution from each party.
A: earned value added
Q:
Rewards do not start out as tangible benefits. They start as
components that drive and direct common actions toward the common goal.
A: behavioral
Q: Partnerships within the supply chain can be described as
.
A: based on mutal openness
Q:
When you selectively decide to continue manufacturing a low-profitability product for a highly
profitable customer, you are doing so in hopes that the customer’s __________ will turn your product around.
A:
marketing skills
Q:
Rewards in business can take the form of __________.
A: increased revenues
9. Supply Chain Resilience – When Risk Management Fails –
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The traditional risk management process of identification, assessment, planning, training, and implementing preventative measures falls short when the following basic assumptions about the risks do not apply (Zavitz et al., 2010):
Not all risks can be identified in advance
Probabilities and severities are hard to quantify in advance
Adaptation from competitors is impossible to predict
Adaptation from within the supply chain may be necessary
In any of these situations, the traditional process of risk management does not provide a means to an end. For example, the first bullet makes all of the risk management steps completely useless if the risk cannot even be listed in the first place. Therefore, a supplemental program is necessary to fill in the gaps.
An additional process is needed to increase the assurance that the flow of goods and services will not be interrupted.
Resilience
In recent years, the concept of resilience has come into business theory to fill this gap. Coming from foundations in ecology, phycology, and engineering, the basic ability to bounce back from adversity is exactly what is needed for a supply chain when the risk management rules do not apply. In ecology, it is the ability of nature to survive change: a forest fire starts regrowth of ground cover within 6 months, and
most all diversity of plant and animal life is returned within 10 years (Folke et al., 2004). In psychology, the ability of young children in particular to recover from traumatic events is necessary just to remain sane (Gorman et al., 2005). Engineering even has equations to compute the ability of a material to recover its size and shape after a deformation. These concepts were integral to the business world when creating a definition of an enterprise to “survive, adapt, and grow in the case of turbulent change” (Fiksel, 2006.).
For a supply chain as a business enterprise to sustain operations for the long haul, it must first survive a disruption. If the event bankrupts a corporation, then it clearly cannot survive. Adaptation is required for
a business and its connected supply chain to improve over time: learning from mistakes and improving after disruptions. Growth is the goal of for-profit businesses: gaining market share from competitors and expanding into new markets. Resilience is a supplement to risk management that is needed.
Putting resilience into practical terms means creating a balance between the vulnerabilities––the fundamental factors that make an enterprise susceptible to disruptions—and the business’ capabilities—
the attributes that enable an enterprise to anticipate and overcome disruptions (Pettit et al., 2010). As shown in the figure below, the right balance of vulnerabilities and capabilities avoids erosion of profit and over exposure to risk. Whether scoring low low or high high or anywhere near the green diagonal, a company—or its complete supply chain—will be profitable in the long term.
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Operationalizing these concepts requires assessment of the individual factors that contribute to vulnerabilities and capabilities in the supply chain. To do this, each element must be quantified, as follows (Pettit et al., 2010):
Vulnerabilities
Turbulence:
Environment characterized by frequent changes in external factors beyond an organization’s control
Deliberate threats:
Intentional attacks aimed at disrupting operations or causing human or financial harm
External pressures:
Influences, not specifically targeting the firm, that create business constraints or barriers
Resource limits:
Constraints on output based on availability of the factors of production
Sensitivity:
Importance of carefully controlled conditions for product and process integrity
Connectivity:
Degree of interdependence and reliance on outside entities
Capabilities
Flexibility in sourcing:
Ability to quickly change inputs or the mode of receiving inputs
Flexibility in manufacturing:
Ability to quickly change the quantity or type of outputs.
Flexibility in order fulfillment:
Ability to satisfy customer demands using alternate methods or quickly change the mode of delivery
Capacity:
Availability of assets to enable sustained production levels
Efficiency:
Capability to produce outputs with minimum resource requirements
Visibility:
Knowledge of the status of operating assets and the environment
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Adaptability:
Ability to modify operations in response to challenges or opportunities
Anticipation:
Ability to discern potential future events or situations
Recovery:
Ability to rapidly return to the normal operational state
Dispersion:
Broad distribution or decentralization of assets
Collaboration:
Ability to work effectively with other entities for mutual benefit
Organization:
Human resource structures, policies, skills, and culture
Market position:
Status of a company or its products in specific markets
Security:
Defense against deliberate intrusion or attack
Financial strength:
Capacity to absorb fluctuations in cash flow
Product stewardship:
Assurance of sustainable business practices throughout the product life cycle
Implementation of resilience in the supply chain requires deliberate development of a firm's portfolio of capabilities (like a financial portfolio that diversifies against risk by holding a mix of stocks, bonds, gold, and cash) based on an assessment of the supply chain’s pattern of vulnerabilities (like a risk assessment of personal tolerance to future financial uncertainty; for example, young college graduates may be very open to high-risk international stocks, as they have a long time before retirement, but hope for great rewards over time and are not concerned with day-to-day or even year-to-year volatility). A fast-paced, high-tech supply chain would have a very different resilience design than a network of companies producing a tried-and-true product (Pettit et al., 2013).
Like with risk management, supply chain partners need to consider their resilience together and not individually. For example, a highly resilient company would not survive if their key supplier is not resilient
and goes out of business after a disaster strikes them. Finding that right mix of resilience capabilities is essential to keep profits going up and when protecting the supply chain from risks.
Q:
Vulnerabilities in the supply chain include the assessment of what?
A:
Threats
Q:
Risk management has been portrayed as the process to mitigate risks and hopefully stop
of the supply chain.
A: disruption
Q:
The implementation of resilience in the supply chain requires the deliberate development of a
firm's portfolio capabilities based on an assessment of the supply chain's
.
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A: pattern of vulnerabilities
Q: Resilience is the process of balancing vulnerabilities and capabilities to avoid erosion of
and over-exposure to risks.
A: profits
Q: Resilience is the tool to use when what condition exists?
A:
Unknown threats
Q: What is an additional risk management process step that is used to ensure the uninterrupted flow of goods and services?
A: Assessing vulnerabilities
Q:
Supply chain resilience should
risk management.
A: supplement
Q: What is an example of a resilient supply chain following a disaster?
A: Customers are pleased with your ability to overcome obstacles quickly.
10. Sustainability for the Future of the Supply Chain - Sustainability—the enduring nature of a system—is not just a future issue. It is critical that logistics and supply chain managers consider sustainability during all phases of the product life cycle, now and in the very far future. At the very beginning, product development in the laboratories must consider the impact
of the product design on the industrial, societal, and environmental systems that it will soon become a part of. Decisions about the material used in the product, how it will be packaged, and how long it will last in use are set during the initial research and development. As the product goes into production, the manufacturing plant must consider energy usage, water contamination, and the exhaust gases that may enter into the environment. Distribution of the product should consider sustainability in the ways the product is handled and transported—more greenhouse gases may be produced during shipping than in production. And at the end of life, how will the product be disposed of by the consumer? In a landfill, or recycled or re-processed for potential recovery of precious and hazardous metals? Whether it is the acquisition of a major system with thousands of components or just a basic good sustainability at each phase of the product life cycle is critical for ensuring proper stewardship.
But, these decisions are not just about protecting the future. Sustainability is also about now—the only way to survive into the future. The following diagram divides the sustainability spectrum into four time-
horizons: security, reliability, resilience, and renewal. Security is the day-to-day survivability of the supply
chain against deliberate attacks, natural disasters, and industrial accidents. Reliability is about how the equipment operates and how the products function on a daily basis. Resilience, as mentioned previously,
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is about surviving the inevitable disruption and adapting to both the changing environment and the changing organization to grow as a profitable business. Renewal is the disruptive innovations that people
create by design: electricity, the automobile, the airplane, the smartphone. These product innovations have revolutionized industries, changed societies, and impacted the environment—for better or worse.
The Problem
Within each time horizon, the sustainability of the supply chains must be considered within the context of each of the systems in which they exist: industrial, societal, and ecological. These systems must work in harmony with each other in the closed-loop system called the Earth.
Industrial
Industrial systems use resources to create. Goods and service created allow societies to thrive and grow. But, these industries must be good stewards of the limited resources available. In addition to producing
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needed goods and services, industrial systems also produce waste. Supply chain designers should consider the types and amounts of waste. They need to also consider the impacts these wastes will have on the other systems: societal and ecological. One growing trend in supply chain design is by-product synergy—taking the waste from one supply chain and using it as necessary inputs for another. Companies are saving millions of dollars while protecting their environment by selling their wastes instead of disposing of them.
Societal
Societies are the consumers of the industrial system. Societies use the goods and services created. Products can be divided into two distinct categories: durable goods and consumables. Durable goods, such as automobiles and appliances, serve useful purposes and if the supply chains can increase their reliability and longevity, their longer life spans will mean that fewer inputs will be needed for replacements as well as fewer outputs put into landfills. Consumables are used and destroyed in the process (food being eaten). These demands for goods and services are not only based on the population of societies, but also the per-capita needs. Energy demands, for example, will continue to rise worldwide
as populations continue to increase, but supply chain designers can reduce overall needs by continuing advancements in efficiencies of products, such as vehicle engines, ship hulls, and building insulation. It is,
however, the demands of societies that place burdens on the limited resources of the planet.
Ecological Systems
These are the systems within which people live on this planet. The societal and industrial systems must operate within this sphere. Ecological systems contain four basic types of stocks: renewable resources (forests), nonrenewable resources (crude oil), environmental media (air, water, and land), and energy sources (solar, wind, tidal, geothermal). The latter may seem endless, but industrial and societal systems must actively manage the media to avoid contamination, the nonrenewables to prevent exhaustion, and the renewables to replenish and avoid extinction. For example, the rich forests of Scotland were once ripe sources of lumber to build growing cities and fleets of ships at the beginning of the industrial revolution. Feeding and clothing the people in the growing cities made sheep farming a profitable industry in these newly de-forested areas. However, the grazing sheep prevented the natural re-growth of the woodlands, and now entire regions are barren. Active management of natural systems is a mandate for supply chains to survive into the future and be sustainable.
The Mandate
Supply chain management requires the design, operation, and growth of sustainable networks of companies to meet consumer needs. Managers must clearly state requirements for products and analyze
not only their initial impacts during production, but also their secondary impacts during use (a car’s fuel economy) and during disposal (amount of recyclable materials). These requirements must be tracked to ensure compliance but also to drive future change if targets are not being met. And finally, verification of
requirements is necessary on a recurring basis to see if the goals that have been set are providing for a sustainable solution. Industrial systems cannot exhaust their nonrenewable inputs. Societal systems cannot outstrip the production capacity of an industry’s products and energy production, nor can they create more waste than can be safe for the environment. Environmental systems cannot have their media polluted, cannot have renewable resources harvested faster than regrowth, and cannot have nonrenewable resources used up without suitable replacements.
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Q:
In achieving sustainability in the supply chain, active management of natural systems is a mandate for supply chains to
into the future and be sustainable.
A:
survive
Q:
One growing trend in supply chain design is
by-product
, which is defined as taking the waste from one supply chain and using it as necessary inputs for another.
A: synergy
Q: The triple value model is being integrated into the U.S. Environmental Protection Agency’s analysis toolkit. Which area is included in the model?
A: environmental
Q:
A:
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