Good Supply Chain Management is the Backbone of Well-Run Back Office Operation Business Analytics.
All the functional areas in an organization are essential to driving a well-run and profitable company. Sales and operations or services are what drives profitability. On the other hand, weak estimating, bidding, accounting practices, dysfunctional or non-existent human resource groups, inadequate purchasing efforts, poor logistics, etc., will make any profits you generate evaporate as quickly as earned. Consider that you do not have much value if you have a high-performance engine in great shape, but the electrical system is malfunctioning. The same is true for the different parts of an organization, but this paper focuses on the supply chain functions.
The History of the Supply Chain.
The term supply chain management is relatively new compared to the other terms describing traditional functional areas of a business. Keith Oliver coined the term “supply chain management” in an interview with Arnold Kransdorff of the Financial Times on June 04, 1982. Oliver is a British logistician. Oliver defined it thus: “Supply chain management is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible. It spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption.”1
This initial definition of Supply Chain Management has evolved since 1982 also to include the procurement process and demand. Some companies have even rolled customer service (ordering) and operations under the supply chain management heading because of the close relationship between the incoming materials and business operations. The logistics of material transformation into a finished product, whether manufactured goods or installation of various items at a job site, relate heavily to the supply chain process. The rationale for including customer service is that order takers must know inventory or product outage status to communicate with the customer promptly.
Additional Supply Chain Activities.
Although not universally accepted, these functions can be part of supply chain management: customer service, procurement, receiving & warehousing (incoming), inventory management, planning & scheduling, production, packaging, and logistics (movement of in-process and finished products), either within a business or shipping to a customer.
The advent of integrated computer systems tied these supply management functions together and linked accounting and finance to the process. These systems provide an A-to-Z integrated supply chain operations system for business administration.
Key Success Factors for Supply Chain Management by Functional Area.
Customer service individuals are typically the first point of contact with your customers via e-mail, phone calls, or overseeing online ordering. Your customers must have a seamless and agreeable experience when they place their orders. The unpleasant experiences will far out-way the agreeable ones in a customer’s mind. You must have suitable electronic systems with accurate and up-to-date inventory management, including current inventory or backlog information, so your customer service people can communicate clearly and consistently with the customer. Some knowledge of the technical aspects of your products will help the customer service rep recommend products that will meet the customer’s needs. Quick and accurate responses will keep the customer returning even when you have backorder situations. Hopefully, the latter is not a common occurrence. Following up with the customers on outstanding questions when ordering or just letting them know their order’s status is also crucial to maintain good customer relations.
Procurement & Supplier Relations
The key factors affecting procurement success are systems that accurately reflect chain management, orders, inventory (inputs and finished goods), scheduling, production, and shipments (incoming and outgoing). The information from these systems indicates when and how much material will need to be purchased to keep manufacturing supplied with the right kind and amount of inventory. If manufacturing misses even a minor component, it could disrupt the logistics of the production schedule or even shut down production. It is essential to accurately enter all procurement information into the logistics and supply chain management system.
Another success factor not directly related to well-functioning manufacturing systems is the price of materials purchased. Pricing needs to align with market dynamics and the volume of the products purchased. The best procurement people always have a good sense of the direction in the market for capacities, demand, and pricing. Successful strategies can be based on when to commit to long-term supply contracts with supply chain partners. Partnerships provide fixed or stable pricing when capacity and demand tighten for a material. Alternatively, if you believe the market is softening and demand/pricing will drop, you can reduce the price by not committing to longer-term supplier agreements. Both of these approaches are forms of hedging. However, remember you will never be able to win each time with hedging. The variables affecting supply and demand are unpredictable in the long run.
Receiving & Warehousing (incoming)
Receiving material into a warehouse requires properly checking the bill of lading to ensure that what is received agrees with the materials unloaded, quantities are correct, and none of the materials are damaged. The acceptable material is entered electronically or manually into the information systems for the accurate and effective supply chain strategy. Take proper follow-up actions for all discrepancies in material, quantities, or damaged material.
Once obtained, the material must be moved to its appropriate location in the warehouse and adequately logged for logistics management. Receiving and quickly locating materials are the keys to success, along with properly issuing and recording the transfer of materials.
A preferred way to ensure the items in the warehouse agree with the locations in the computer system is to use the 5S method. Everything has a place, and everything is in its place. Paint the demarcation lines on the floor for storing materials. Mark each location with a code that agrees with what is in the computer system, much like large big box retail stores do to number their isles. Common materials should have permanent locations. This approach does not suggest comingling non-like materials in the same section. You can have some areas designated as spillover locations. The material in a place like this and the site itself must be kept current in the computer system.
For operations management, some manufacturing facilities separate functions into separate warehouses. For example, receiving (incoming materials) and shipping (outgoing materials) from the same warehouse may be divided into respective warehouses. Both approaches can work. Sometimes the separation is made due to the volume of inventories or required to reduce risk management regarding contamination or damage to the finished product.
In either case, chain management and accurate inventory record-keeping are needed to support project management, manufacturing, and customer service. Also, missing or damaged inventory while being warehoused can cause disruptions in scheduling and delays or shutdowns of production. Further, damaged or missing finished goods will affect the customer directly if customer service has committed these goods to specific customers.
Supply Chain Planning & Scheduling
Bringing all of the functions noted above together is planning & scheduling supply chain activities. Supply chain planning needs accurate information in the systems to function correctly. Logistics management also needs to know how the product manufacturing details. From the bill of materials (BOMS), recipes, order of additions, machine process times, indirect materials or chemicals used in the manufacturing process, the relationship between any products and by-products from the production process to the amount and type of labor for each manufacturing process. The logistic analyst doesn’t need to be an expert in all these areas, as do the technical people, but they need to have a general understanding of them.
In a manufacturing facility producing several products, some depend upon manufacturing other products. Only the most experienced people can keep the plant running and in balance without a planning and scheduling system. In this situation, somebody may make mistakes or less-than-optimal production decisions. Labor is another factor affecting the schedule. Other disruptions can be caused by a need for suitable materials, as mentioned above, or critical customers who force changes in planning & scheduling. The old saying “your emergency is not my emergency” does not always apply.
Purchasing good supply chain analytics software can manage most of the issues mentioned above. They are called either Enterprise-wide Resource Planning (ERP) or Material Resource Planning (MRP). The ERP systems are more extensive and include the critical component of accounting & finance for profit management. Determine their effectiveness by the complexity level of your processes, the interrelationships of your products, the availability of qualified labor, performance metrics, and material reliability and availability. Successful supply chain planning and accurate scheduling support operations management to manufacture and ship all products promptly and meet deadlines.
Production and Demand
The production department follows the directions from the scheduler. The scheduler’s project management decides what products to produce and the time needed to complete each order. Communicate any deviations or delays immediately to the scheduler. New estimated completion dates are then input into the program, and the supply chain process is updated. The best way to keep on top of production and communicate appropriately with an organization and customers is to have daily production meetings with the scheduler and other lead representatives of the various departments.
Enter the final production numbers into the computer system once complete. In a chemical or mineral processing plant, there will likely be small underages or overages in production. If the end product is unique to a customer, then customer service should see if there is the possibility of an adjustment to the original order so the customer receives all products produced. If the material produced is common to other customers, then any excess should go into the finished goods inventory control.
This section on production is not extensive as it relates to supply chain management but does not diminish the importance of timely output for the production process to work smoothly.
Packaging of the product is sometimes considered part of production or a shared function with warehousing. Ensure the right products are packaged in the proper containers and labeled appropriately on the container with the correct shipping documents. All of these instructions should reside in the computer systems. Any error with this could mean the customer rejects the product, and the sender must pay for return shipping. Additionally, errors of this degree often reduce the company’s credibility in the eyes of the customer.
Logistics is a specialized discipline. There are many modes of transportation to ship products to customers.
- Rail: Box cars (boxes or bags), tank cars (liquid, including gasses), hopper cars (dry material), flatbed cars (odd-sized items), refrigerated, etc.
- Truck: Dry van, container (used for shipments by sea), tank (liquids, including gasses), hopper, flat bed, low boy (low riding flatbed for tall loads, refrigerated, etc.
- Intermodal: Products loaded on systems described in the truck section above can be disconnected from the truck and loaded on a ship or a large cargo airplane.
- Sea: Bulk Carrier (dry bulk), Container (Conexes), General Cargo Ships (bulk bags or loose-fitting cargo [not conexes], Reefers (refrigerated), Tankers (oil, gas, chemicals), Livestock, Heavy-Lift Ships (substantial items unable to transport in other manners), and Ro-Ro (roll-on/roll-off ships for vehicles)2
- Air: all of the above within size restrictions.
Incoterms® (international commerce terms) published by the International Chamber of Commerce (ICC) are internationally recognized terms for shipping. Variations in terminology for domestic shipping between companies shipping within the US can exist. If you do not recognize a supplier or customer quoted shipping term, get clarification since shipping costs and transfer of ownership of goods depend on these terms. By registering on their website, you can download free listings of current Incoterms, like the wall chart in Appendix A.3
Overview of the Supply Chain Logistics.
A QuickBooks system can perform many of the ERP or MRP functions described above. As a manufacturing company grows, it may outgrow the capabilities of QuickBooks and need to look at alternatives via an internet search. One should carefully explore capabilities that fit with their business, the software’s cost, time, and implementation. Unless a strong systems person is on your payroll, use consultants for proper execution.
It is key with any supply chain management system that all departments communicate electronically and via meetings to drive success and positive profitability.