(KMBN OM01) Unit 3: Supply Chain Performance

Supply Chain Performance

Supply Chain Performance is all about how efficiently a company's products move from being made to reaching customers. Think of it like a well-organized journey where raw materials are collected, goods are produced, and then sent to stores or directly to customers. When we talk about "performance," we're focusing on how smoothly and quickly this journey happens.

Here's a simple breakdown of what makes a supply chain perform well:

• Speed: How quickly products move through each stage of the journey, from raw materials to finished goods. Faster movement usually means customers get their products quicker.
• Cost: Keeping expenses low is key. A good supply chain finds ways to reduce costs without sacrificing quality, which can lead to lower prices for customers.
• Accuracy: This is about making sure the right products are sent to the right places at the right time. Mistakes, like sending the wrong item or running out of stock, affect performance.
• Flexibility: A strong supply chain can adjust quickly to changes, like a sudden increase in demand or supply issues, so that customers are not affected.
• Customer Satisfaction: Ultimately, a high-performing supply chain ensures that customers are happy with the delivery speed, product quality, and service they receive.

In short, supply chain performance is about balancing speed, cost, and accuracy to get products to customers efficiently and keep them satisfied.

Bullwhip effect and reduction

The Bullwhip Effect is when small changes in demand from customers cause big swings in orders, production, or inventory levels up the supply chain. It’s like a tiny flick of the wrist creating a huge wave on the end of a whip – hence the name "bullwhip." These fluctuations often lead to overproduction, shortages, or even high costs, as everyone along the chain tries to adjust to demand.

Here's how it works:

• Small Changes, Big Impact: Let's say a store suddenly needs a few more products because of increased customer demand. They order a bit extra to be safe.
• Amplified Orders: The wholesaler or distributor sees the store’s larger order and thinks demand is growing, so they order even more from the manufacturer.
• Bigger Orders Up the Chain: By the time it reaches the supplier, they believe there’s a huge increase in demand and produce much more than needed.

This snowballing effect creates a big mismatch between actual demand and supply, leading to overproduction or stock shortages

Example of the Bullwhip Effect

Imagine a store sells ice cream. One hot weekend, a lot more people than usual buy ice cream, so the store manager places a larger order with the warehouse. Seeing this increase, the warehouse thinks demand for ice cream is going up and orders even more from the factory. The factory then assumes it should ramp up production to keep up.

By the time everything is ready and there's lots of ice cream in stock, the weather has cooled off. Now there’s a surplus of ice cream, costing everyone money and possibly resulting in wasted product. This overreaction to a small change in demand is the Bullwhip Effect in action.

How to Reduce the Bullwhip Effect

• Better Communication: If everyone in the supply chain can see real customer demand (like sharing sales data), they can avoid overestimating demand. For example, if the factory knew that demand spiked just because of a hot weekend, it wouldn't produce so much extra ice cream.
• Smaller, More Frequent Orders: Ordering in smaller batches more often helps keep inventory levels stable and avoids big swings.
• Forecasting & Data Analysis: Using better forecasting methods and analyzing data helps predict real demand more accurately.
• Avoiding Promotions That Distort Demand: Sales or discounts often create short-term spikes in demand. If these are limited, demand will stay steadier, reducing the Bullwhip Effect.
• Demand Forecasting: Using accurate, data-driven predictions to plan for future demand reduces guesswork and prevents over-ordering.
• Order Stability: Avoiding sudden, large orders and maintaining consistent order patterns prevents sudden spikes in demand that can trigger the bullwhip effect.
• Smaller, Frequent Orders: Instead of placing big orders sporadically, placing smaller, more frequent orders helps keep inventory steady.

By improving communication, using smaller orders, forecasting accurately, and managing promotions wisely, companies can reduce the Bullwhip Effect and keep the supply chain running smoothly.

Performance Measurement

Performance Measurement in the supply chain is like using a scoreboard to see how well a team is playing. It involves tracking different areas, or "dimensions," to understand how effectively the supply chain is running.

Dimensions of Performance Measurement

These are the key areas (or "dimensions") we look at to measure supply chain performance:

• Cost: How much does the supply chain process cost? Lowering costs without compromising quality is a good sign of performance.
• Time (Speed): How quickly can products move from one stage to the next? Faster delivery to customers is often better.
• Quality: Are the products high quality when they reach the customer? High-quality performance means fewer returns or complaints.
• Flexibility: Can the supply chain adapt to sudden changes, like a rush in orders or a supply shortage? A flexible chain can handle unexpected events without issues.
• Reliability: Is the supply chain dependable? Consistent delivery times and low error rates show a reliable performance.

Each of these dimensions helps give a full picture of how well the supply chain is doing.

Tools of Performance Measurement

There are several tools to measure supply chain performance. Here are some simple ones:

• KPIs (Key Performance Indicators): Specific measurements that track important areas, like "order accuracy rate" or "on-time delivery percentage."
• Dashboards: A visual tool that displays all performance metrics (like a car dashboard). It allows managers to see, at a glance, how the supply chain is doing.
• Benchmarking: Comparing your performance against industry standards or competitors. It helps identify where improvements are needed.
• Surveys and Feedback: Gathering input from customers and partners about their experience can also reveal performance issues.

These tools help companies monitor and improve their supply chain operations.

SCOR Model (Supply Chain Operations Reference Model)

The SCOR Model is a popular framework for managing and measuring supply chain performance. It breaks down the supply chain into five main steps:

• Plan: Creating a strategy to balance supply and demand, set production goals, and ensure resources are available.
• Source: Selecting suppliers for raw materials or products and making sure materials arrive on time and in good condition.
• Make: Turning raw materials into finished products through manufacturing, assembling, or processing.
• Deliver: Getting the finished products to the customer on time. This includes warehousing, transportation, and distribution.
• Return: Handling returns from customers or defects from suppliers efficiently.

By following these steps, the SCOR model helps companies break down their supply chain operations, identify weak spots, and make improvements to increase efficiency and customer satisfaction.

In short, performance measurement in supply chain is about tracking key areas (dimensions), using tools to get clear data, and employing models like SCOR to structure and improve the entire process.

Demand chain management

Demand Chain Management is like planning a party based on what your guests want. Instead of just guessing how many people will come or what they’ll like, you ask in advance and prepare exactly what they need. In business, this means understanding customer demand first and then organizing your production and supply chain around it.

Here’s how Demand Chain Management works:

• Understanding Customer Needs: It starts by closely studying what customers want, how much they’re likely to buy, and when. This could mean looking at trends, surveys, past purchases, or even customer feedback to get a clear picture.
• Planning Accordingly: With this demand information, businesses can plan what products to make, in what quantity, and when to make them. This helps avoid overproduction (making too much) or shortages (making too little).
• Coordinating with Suppliers: Demand chain management involves working closely with suppliers to ensure they have the right materials ready. This makes it easier to meet customer demand quickly without delays.
• Delivering Efficiently: Finally, by focusing on customer demand, businesses can deliver products in a way that meets customer expectations. This could mean faster shipping times, better availability, or more tailored products.

Let’s imagine a demand chain management example with a popular coffee shop:

• Understanding Customer Needs: The coffee shop notices that during winter, people order more hot drinks, while in summer, they prefer iced options. They also see that around the holiday season, there’s a demand for special flavors like pumpkin spice and peppermint.
• Planning Accordingly: Based on this demand information, the coffee shop decides to stock up on more ingredients for hot drinks in winter and extra syrups for holiday flavors. For summer, they prepare extra ice, cold brew, and cups for iced drinks. They also adjust their schedule, bringing in more staff during busy times and special events.
• Coordinating with Suppliers: The shop works with suppliers to ensure they get enough coffee beans, syrups, milk, and other essentials, based on the predicted demand. By ordering ahead and in specific amounts, they avoid running out of ingredients or having too much leftover.
• Delivering Efficiently: With everything in place, the coffee shop can quickly meet customer demand. Customers don’t have to wait long or hear, "Sorry, we’re out of that." The right drinks are ready when customers want them, which boosts satisfaction and makes them more likely to return.

So, instead of just stocking up randomly or guessing what might be needed, the coffee shop uses demand chain management to focus on exactly what their customers want. This keeps things efficient, reduces waste, and makes customers happy.

In simple terms, Demand Chain Management is about making sure every step of the process – from suppliers to the final delivery – is designed around what the customer actually wants. This leads to happier customers, less wasted resources, and a smoother, more efficient process.

Global Supply chain

A Global Supply Chain is like a network that connects companies and suppliers from all over the world to produce and deliver products. Instead of sourcing everything locally, companies buy raw materials, parts, or finished goods from different countries, each contributing something unique or cheaper. For example, a smartphone might have parts from Japan, assembly in China, and sales in the United States.

Challenges in Establishing a Global Supply Chain

Creating a global supply chain can make things more efficient and affordable, but it comes with unique challenges. Here’s a look at some of these challenges in simple terms:

• Complexity in Coordination: With parts or materials coming from different countries, it takes a lot of careful planning to keep everything moving smoothly. One delay in any part of the chain can slow down the entire process. Coordinating between time zones, languages, and different business practices makes it even trickier.
• Longer Delivery Times: Since products or parts are traveling over long distances, it takes more time to get items from suppliers to the company and then to customers. This means companies need to plan well in advance to avoid running out of stock.
• Currency Exchange Rates: Prices for goods and materials can change based on currency values. For example, if the dollar strengthens against the currency of a supplier’s country, the cost of goods may go up. This can make managing costs unpredictable.
• Political and Legal Differences: Every country has its own laws and regulations about trade, taxes, and labor practices. Some countries might have stricter labor laws, while others may have high tariffs on imports. Changes in trade policies, tariffs, or even political stability can impact the global supply chain.
• Environmental and Natural Risks: Global supply chains are exposed to natural disasters, weather conditions, and even pandemics. For instance, a hurricane in one country could disrupt shipping routes or damage factories, affecting the entire chain.
• Quality Control: With parts coming from various sources, ensuring consistent quality can be tough. One low-quality component from a supplier can impact the overall quality of the final product.
• Cultural Differences: Differences in business culture, language, and communication styles can lead to misunderstandings. For example, the way people negotiate or handle deadlines might vary, which can create delays or friction.
• Sustainability Concerns: Customers are increasingly interested in eco-friendly products, so companies need to consider the environmental impact of their global supply chain. Long transportation distances and differing regulations on sustainability can make it hard to meet these expectations.

In short, while global supply chains help companies tap into resources and cost savings worldwide, they also bring challenges related to coordination, time, cost fluctuations, legal compliance, risks, and cultural differences. Successfully managing a global supply chain requires careful planning, flexibility, and the ability to respond quickly to unexpected changes.

Let’s look at a global supply chain example with a clothing brand:

Imagine a clothing company based in the United States that designs trendy outfits. To produce these clothes, they use a global supply chain:

• Raw Materials from Different Countries: The cotton for the fabric is sourced from India, where cotton production costs are lower. The dyes are imported from a supplier in Germany, known for high-quality and eco-friendly dyes. Each supplier brings something specific and often cheaper or better than what could be found locally.
• Manufacturing in a Different Country: Once the materials are ready, they are shipped to a factory in Bangladesh, where labor costs are lower, and the factory has expertise in large-scale clothing production. The clothes are cut, sewn, and finished at this facility.
• Packaging in a Third Country: After manufacturing, the clothes are sent to a warehouse in Vietnam for packaging. Vietnam’s proximity to global shipping routes and lower packaging costs make this a practical choice.
• Distribution and Retail: Finally, the packaged clothes are shipped by sea or air to various stores and warehouses across Europe, the United States, and other countries, ready to be sold.

Challenges Faced in This Global Supply Chain

• Delays in Production: Suppose there’s a delay in the shipment of dyes from Germany due to a customs issue. This could delay the entire clothing line, causing potential loss in sales if items don’t arrive in time for the season.
• Currency Fluctuations: If the value of the Bangladeshi taka rises against the U.S. dollar, the cost of manufacturing in Bangladesh increases, making it more expensive for the clothing brand.
• Quality Control Issues: Managing quality standards across multiple countries can be challenging. If the factory in Bangladesh uses a lower-quality fabric by mistake, the final product could suffer, leading to customer dissatisfaction and returns.
• Political and Trade Policies: A sudden change in trade policies or tariffs between countries could impact the costs. For instance, if the U.S. imposes higher tariffs on imports from Bangladesh, the company may need to pay more to get the products into the U.S.
• Natural Risks: A typhoon or flood in Vietnam could disrupt packaging operations and delay shipments to retail stores, impacting the company’s ability to stock shelves on time.
• Cultural and Communication Differences: Differences in work practices between the design team in the U.S., suppliers in India, and factory workers in Bangladesh could lead to miscommunications, causing delays or product mismatches.

In this example, a single clothing item involves suppliers, manufacturers, and distributors from multiple countries. This global setup allows the brand to get quality materials and cost-effective production, but it also requires managing complex challenges across borders, time zones, and different legal systems. The company needs to carefully coordinate each step, anticipate risks, and stay adaptable to ensure that their products reach customers on time and at a good price.

Factors that influences designing Global Supply Chain Network

Designing a Global Supply Chain Network is like planning a complicated road trip around the world. You need to think about the best routes, stops, and costs to ensure everything goes smoothly, efficiently, and without unnecessary delays. Several factors play a big role in deciding how to design this network, so let’s break them down.

1. Cost of Production and Labor: Companies look for places where production and labor costs are affordable but still provide good quality. Example: Many companies set up factories in countries where labor costs are lower, like Vietnam or Bangladesh, to save money on manufacturing.

2. Proximity to Suppliers and Customers: The location of suppliers (who provide raw materials) and customers (who buy the products) influences where companies place factories and warehouses. Example: A smartphone company might set up a factory close to its parts suppliers to save on shipping time and costs. Similarly, placing distribution centers near major customer areas reduces delivery time.

3. Transportation and Shipping Costs: Shipping materials and products between countries costs money, so companies look for ways to keep these costs down. Example: A clothing brand might choose to manufacture clothes near a port city to reduce the cost and time of shipping goods internationally.

4. Trade Policies and Tariffs: Different countries have different rules for imports and exports, including taxes (tariffs). Companies choose locations where these costs are manageable. Example: If a country increases tariffs on imports, a company might choose a factory in a different location to avoid these extra costs.

5. Political Stability: Companies prefer to set up operations in countries with stable governments. Political issues like sudden policy changes or conflicts can disrupt the supply chain. Example: A company might avoid setting up operations in a country with a history of political instability to minimize the risk of unexpected shutdowns or delays.

6. Availability of Skilled Labor and Resources: Some products need special skills or resources. Companies consider if they can easily find the right workers and materials in a particular location. Example: A tech company might locate its research center in a city with a lot of skilled engineers, while a jewelry company might set up in a region known for precious metals and skilled artisans.

7. Customer Expectations and Delivery Speed: Customers today expect fast delivery, so companies plan their network to deliver as quickly as possible. Example: To meet demand for quick shipping, an online retailer might build several warehouses close to major cities to deliver products faster.

8. Environmental and Sustainability Concerns: Companies are under pressure to reduce their environmental impact. This affects where they source materials and how they ship goods. Example: A company might choose suppliers who follow eco-friendly practices, even if it costs a bit more, to attract environmentally conscious customers.

9. Technology and Infrastructure: Some locations have better technology and infrastructure, like roads, ports, and internet connectivity, which are essential for smooth operations. Example: A company might prefer setting up in a country with strong internet and transport networks, allowing better tracking of goods and easier access to markets.

10. Currency Exchange Rates: Currency values change, which can make costs unpredictable. Companies look for locations where currency fluctuations are stable. Example: If a country’s currency is unstable, a company might avoid placing a large part of its supply chain there to avoid sudden cost increases.

In short, designing a global supply chain network involves balancing many factors: keeping costs low, ensuring materials and skilled workers are available, complying with trade rules, and meeting customer expectations. The goal is to create a network that’s cost-effective, reliable, fast, and adaptable to changes, all while minimizing risks and maintaining quality for customers worldwide. 

Let’s look at an example of a global supply chain network for a laptop manufacturing company:

Step-by-Step Design Decisions Influenced by Key Factors

• Choosing Production Sites (Cost and Labor): The company decides to manufacture the main components in China and Taiwan, where labor and production costs are lower and there are skilled workers for electronics manufacturing. This helps keep overall production costs down while maintaining quality.
• Locating Key Suppliers (Proximity to Suppliers and Resources): Important parts like microchips come from suppliers in South Korea and Japan, close to the main assembly factories. This short distance reduces transportation time and costs, which helps keep the production line running smoothly without delays.
• Shipping Hubs and Distribution Centers (Transportation and Customer Delivery Expectations): To meet the fast delivery demands of customers in North America and Europe, the company sets up distribution centers in the U.S. and Germany. These centers are close to major customer markets, which helps reduce shipping time and costs and ensures quick delivery.
• Considering Trade Policies and Tariffs: To avoid high tariffs, the company does not rely heavily on direct imports to countries with strict tariffs. Instead, it sets up assembly plants in Mexico and Poland. This allows them to assemble laptops closer to their primary markets, bypassing certain import taxes and reducing overall costs.
• Political Stability and Infrastructure: The company avoids setting up significant operations in politically unstable regions, choosing countries known for good infrastructure and stable government policies. For instance, it expands its research and customer support centers in Singapore, where political stability and good internet infrastructure allow them to support customers worldwide effectively.
• Currency Exchange and Cost Control: The company sources some basic parts from India and Vietnam due to favorable currency exchange rates that make purchases there cost-effective. This reduces the risk of sudden cost increases due to currency fluctuations while ensuring a steady supply of low-cost components.
• Sustainability Efforts: To appeal to eco-conscious consumers, the company sources eco-friendly packaging materials from suppliers in Finland, known for sustainable practices. They also plan efficient shipping routes to reduce carbon emissions.
• Technology and Skilled Workforce (Research and Development): For advanced research on new technology, they set up a research center in California, USA, near Silicon Valley. This location has a high concentration of skilled engineers, which helps the company stay competitive in developing the latest laptop technology.

Putting It All Together

By setting up production in Asia, assembly closer to major markets, and distribution centers in key locations, the laptop company has a global supply chain network designed to balance cost savings, reduce risks, and meet customer expectations. They ensure:

• Affordable production costs with reliable quality from regions with skilled labor.
• Faster delivery times by placing distribution centers near customers.
• Reduced tariff and transportation costs through strategic assembly and supplier locations.
• Efficient and eco-friendly shipping practices to maintain a positive brand image.

This setup allows the company to manage costs effectively, deliver laptops to customers quickly, and stay adaptable to changes in demand, ensuring a well-designed global supply chain network.

Unit 2 Logistics | Unit 1: Supply Chain Concepts