Understanding Supply Chain Management - Essay Example

Supply Chain Management Introduction Supply chain management is development of strategy to organize, control, and motivate the resources involved in the flow of services and materials within the supply chain. Within this an important concept is the ‘supply chain strategy’ which seeks to design an organization’s supply chain to meet the competitive priorities of the organization’s operations strategy (Krajewski & Ritzman, 2007). Supply chains penetrate through entire organization. Supply chains must be managed to co-ordinate the inputs with the outputs in a firm so as to achieve the appropriate competitive priorities of the firm’s enterprise processes. A firm must be committed to re-engineer its information flows throughout the organization, especially the customer relationship, order fulfillment, and supplier relationship processes. Irrespective of whether an organization is service or manufacturing oriented, supply chain strategy is essential (Krajewski & Ritzman, 2007). There are several benefits of re-engineering supply chain processes. Supply chain design for a service provider is driven by need to provide support for the essential elements of the various service packages it delivers. On the other hand, a fundamental purpose of supply chain design for manufacturers is to control inventory by managing the flow of materials. However, supply chain processes are very dynamic in nature and thus are highly variable. For minimization of supply chain disruptions, it is required to develop a supply chain with high degree of functional and organizational integration. It includes linkages between the organizations its suppliers and customers. Advantages of Supply Chain at Wal-Mart Wal-Mart is a massive retail. Its leadership status is a result of Customer focus and an efficient supply chain management practices (Shen & Lapide, 2004). Wal-Mart always treats its customers as kings. It is famous for its everyday-low prices (Guruswamy, Sharma & Jos, 2007) and gives its customers the best buy which is the aim of all its internal/external processes and negotiations. It is efficient in providing the right items to right customer at right time and cost and by most efficient means. It supplies to its customers, a wide range of products at the shortest possible time and lowest possible cost. Inherently, Wal-Mart primarily focuses on the needs of its customer’s and reducing its costs through an effective and healthy supply chain management practices. It is therefore able to manage offering a huge range of products at the lowest of costs and at the shortest time possible. The two pillars of its SCM are: (a) Its largely automated distribution centers and (b) Computerized inventory system. Where, its distribution center provides it advantage through significantly reducing shipping cost and time, its computerized inventory speeds up its check out time and transaction recording. It’s well managed and designed Supply Chain as well as its corresponding advantages has been further elaborated as below: Procurement and Distribution Wal-Mart procures goods directly from manufacturers and bypasses intermediaries. They devote considerable time in interacting with vendors, understanding their cost structures and negotiating deals to receive goods at lowest possible prices. Consequently, they establish long term associations with their vendors. They in principle bypassed all intermediaries and purchased goods directly from manufacturers with a skill of negotiation for the purchase and finalization of deal only after ensuring the lowest of price as compared to elsewhere. Also, its strength is its well established network of distribution hubs which ensures stable and seamless flow of products along with optimizing time and reducing the shipping costs (Achtmeyer, 2002). All their employees are well equipped with hand-held computer systems providing real time information on inventory levels and assisting the packaging department, and barcode technologies which proves useful in managing individual centers along with efficient information sharing (Grean& Shaw, n.d.). All had a direct as well as indirect impact on reduction of Wal-Mart’s purchasing costs so as to percolate the benefit down to its customers and thereby offer them the best of prices available. Logistics Management It has a very fast and responsive transportation system involving trucks and experienced drivers who carried goods from distribution centers to retail outlets. A unique feature was an emphasis on the transport for instance the experience of the drivers which reflects on their focus on relationships in SCM. An important process started at Wal-Mart is that of “Cross-docking” where finished goods are collected, sorted and shipped directly from the manufacturer to the customer (Stalk, Evans and Shulman, 1992). This helped in the storage and handling of finished goods thereby making the involvement of distribution centers and stores largely insignificant. Another major advantage that cross-docking has is that rather than making the retailers push the product into the system, an avenue for the customers to pull the products as and when required by them was made possible. Inventory Management It has a fully developed IT and communications system to track its merchandise movement across stores. It also encouraged individual stores to manage their merchandise requirement rather than a centralized decision for all stores. This helped in reducing unproductive inventories. These stores use radio frequency technology and bar coding systems to manage inventories. All these cater to the disparate individualized requirements of the stores. This can be done through empowering the stores to manage their own stocks and reducing package sizes, price manipulations so as to finally reduce the overall unproductive inventory.(Stalk, Evans and Shulman, 1992) In summary, its competitive advantages due to its integrated supply chain management processes are, it has reduced lead time and faster inventory turnover; accurate forecasting of inventory levels; Increased warehouse space and reduction in safety stock; Better working capital utilization and elimination of loss due to goods stock out; Reduced dependency on inventory management personnel and Reduced training cost and error; Better customer service; and Reduced labor costs. Disadvantages due to Inappropriate SCM at Cisco The second example we will look at is that of Cisco. The case study based on the supply chain of Cisco has become a very popular classroom example. It provides perfect example for both a good and a bad supply chain. At one time in history, Cisco was growing at their projected rate of growth of 30 to 40 percent and looked like it would become world's first trillion dollar company, wielding the revenue and market cap of that of GE. (Attri H. 2006) Cisco had the advantage of its extended enterprise model of supply chain which played a critical role in the success of the company. Right from the time the company was established, the company started utilizing its power of networking and the advantages of its strength. This is reflected from the fact that the company operated more than 40 manufacturing locations, out of which the company owned only 2. The company also demonstrated its strength of managing its partners, suppliers and distributors and to do flawless networking. The company did not own the distribution network which was used to deliver the equipments and products to the customers. The network of the partners, distributors and suppliers was managed so effectively by Cisco that it became an integrated part of the supply chain. (Ravi Kalakota & Marcia Robinson, 2001) Cisco was performing very well in the market of its time, but at the same time, the supply chain lacked agility and flexibility. The company was unable to see the dynamic nature of the industry and by the season of mid 2001, it started to face the problem from its piling up inventory. To deal with this problem, company had to take decision of writing-off the stock having value in excess if excess of $2 billion in the month of April 2001. The extent of this damage can be depicted by the fact that this massive figure amounted to the largest write-off of the inventory in history. The problem was clear, the company was unable to scale up and scale down its capacity in short span. Many scholars believed that the same model of outsourcing which bought the company so much success, was posing the problem for the company. (Attri H. 2006) It appeared that the basic principle of outsourcing used by Cisco was perfect; it was how it was implemented created the problem. The company totally ignored the fact that in the volatile market which was present in most sections of the society, the product life cycle was becoming shorter by the day. The customers became more and more aware and understood the companies based on capabilities, performance and the risk-taking ability. Cisco's supply chain failed to forecast properly and produced such large quantities that the inventory started building up in the system. (HL Lee, S Whang, 2003) The company unknowingly got trapped in the vicious cycle of artificially inflated projections since they had to honor the contract with their suppliers. The company had to inflate the demand for the key spare parts procured from the suppliers, which increased the cost and hampered the communication across its supply chain network. Due to these reasons the key health indicators of the company like inventory cycle increased from 53 days to 88 days. Cisco's phenomenal growth in recent past was because of its continuous zeal for growth, but it failed to model the outcomes and plan if the growth was not as per the forecast. Because of it’s beefed up production capacity, the company was unable to cut costs and the capacity when it was required the most. (HL Lee, S Whang, 2003) After realizing the problems and losing a substantial amount of money, a team for re-engineering its business model was formed. The team suggested putting in place the eHub system currently used by Cisco. This system uses internet technology and links all the partners, suppliers and distributors to provide the customers with the best possible service. (Attri H. 2006) One significant advantage of the eHub system was that it provided real time data to all the supply chain partners, which facilitated better decision taking and fewer assumptions. (Ravi Kalakota & Marcia Robinson, 2001) A useful learning which can be derived from the example of Cisco is that outsourcing is not wrong, given the company pays proper attention while implementing the model and processes. The communication and cooperation between the supply chain partners is the key to achieve the goal of being successful. Service level agreements must be made and adherence to them should be monitored and evaluated so that the supply chain does not get out of control. Conclusion As is evident from the two broad examples illustrated above, Supply chain management can be a boon to the organization in the many ways depending upon the capacity and the efficiency of an organization to interpret its various elements and implementing the same properly and accurately. As in case of Wal-Mart, the proactive nature of Wal-Mart in maintaining its relationship with its suppliers and vendors through the various procurement and distribution supply chain processes has enabled it to reap its benefits in the many ways which makes it the king of retail giants. However, going along same lines, Cisco ceased to be flexible and responsive in terms of its supply chain processes. A rigid and stubborn outlook hampers its supplier relationships which is a weak link in the integrated network of supply chain. Also at the same time where Wal-Mart excelled in its inventory management practices, Cisco suffered from huge inventory pile up and therefore the resulting sluggishness in its supply chain. Apart from the above, the implementation of certain SCM processes were not as determinedly followed as Wal-Mart did, as a result of which Cisco failed to analyze and forecast the market which demanded products with shorter time span. Conclusively, it has been seen that although SCM practices add value and improve the efficiency of an organization. But, the successful interpretation and implementation of these practices vary from organization to organization and hence the need to study and understand its several nuances with reference to the industry and the company’s operations is essential so as to extract the best fit supply chain strategy for any firm. Reference List Krajewski, L. J. & Ritzman, L. P 2007, Operations Management: Process and Value Chains, 8th edition Shen, T. & Lapide, L. (2004). “Proceedings of the Supply Chain 2020 Project’s European Advisory Council Kickoff Meeting”. 8 September. Available at: http://ctl.mit.edu/public/sc2020_kickoff_3q04_eac.pdf [Accessed 16 October 2009] Guruswamy, M., Sharma, K. & Jos, M. M. (2007). “FDI in Retail – III: Implications of Wal Mart’s Backdoor Entry”. Centre for Policy Alternatives, February Issue, pp. 13. Available at http://www.indiafdiwatch.org/fileadmin/India_site/Implications-backdoor-entry_of_Wal-Mart.pdf [Accessed 16 October 2009] Achtmeyer, W. F. (2002). “Wal-Mart Stores, Inc.”. Tuck School of Business at Dartmouth, 2 (13), pp. 1-2. Ram, N & Jayaram, J 1998, ‘Reengineering Service Operations: A Longitudinal Case Study’, Journal of Operations Management, vol. 17, no. 1, pp. 7-22. Grean, M. & Shaw, M. J. (n.d.). “Supply-Chain Integration through Information Sharing: Channel Partnership between Wal-Mart and Procter & Gamble”. Available at: http://citebm.business.uiuc.edu/IT_cases/Graen-Shaw-PG.pdf [Accessed 16 October 2009] Stalk, G., Evans P., & Shulman L.E. (1992). Competing on capabilities: the new rules of corporate strategy, Harvard Business Review, 70, pp. 57-69. Wal-Mart.com: The physical giant goes virtual 2001, Red Herring Magazine, viewed April 26 2009,. Available at: http://www.redherring.com/Home/9287>. [Accessed 16 October 2009] Schmenner, R. W 1995, Service Operations Management, Englewood Cliffs, Prentice Hall, New Jersey. Attri, H 2006. Extracting value from difficult supply chains. Available at: http://www.emsnow.com/newsarchives/archivedetails.cfm?ID=13679 [Accessed 16 October 2009] Ravi Kalakota & Marcia Robinson, 2001. E-business 2.0: roadmap for success‎. Supply Chain Management, Cisco and suppliers. Available at: http://www.cisco.com/web/about/ac227/ac111/cisco_and_suppliers/ supply_chain_management.html [Accessed 15 October 2009] HL Lee, S Whang, 2003. 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