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As you may have learned in previous business classes, supply chain management refers to the coordination and flow of goods and the raw materials used to make those goods. The coordination and flow of goods means both the flow of raw materials needed to make a product and the coordination and flow of goods to the end user.
Managing a supply chain involves strategic decisions that involve where to source goods, how production will be planned, and how companies manage inventory, transportation, and distribution of goods to the consumer. Supply chain management is highly focused on demand in several ways.
First, supply chain management must forecast demand by consumers for products so they can understand how many products need to be made. Once they forecast customer demand, they must forecast the necessary timing for raw materials to arrive to produce products that meet customer demand. Therefore, supply and demand is an important concept in supply chain management because supply and demand are necessary in every step of the supply chain management process, from procurement of raw materials to make a product to the ultimate distribution of products to customers.
Overall, supply chain management encompasses a critical set of strategic decisions that orchestrate the flow of goods from raw materials to the end consumer. These decisions involve:
Effective supply chain management is critical for organizational success. It optimizes the flow of goods and services, from procurement to final delivery, ensuring timely product availability and reducing costs. This translates to enhanced customer satisfaction, improved responsiveness to market demands, and a stronger competitive advantage. Businesses can minimize disruptions and maximize efficiency, fostering a foundation for sustainable growth by strategically managing suppliers, inventory, and logistics.
Gordon is manufacturing his e-bikes and has experienced some success. He has predicted customer demand for e-bikes, based on the idea people want to be healthier. His goal is to produce 10,000 bikes in the second quarter.
However, he runs into issues with supply and demand. He realizes there is a rubber shortage, which is in part due to climate change and diseased rubber trees. Of course, rubber tires are an important part of his bike! There are 10 fewer suppliers for bike tires than last year because of the shortage. What do you think this means? If you guessed the cost of bicycle tires goes up because the cost of the raw materials has gone up, you’d be right. This means Gordon needs to make decisions on how he will price his bike, given this increase in raw materials supply issue.
Effective purchasing and supplier selection are fundamental aspects of successful supply chain management. This process entails identifying qualified vendors who can consistently deliver the required goods or services at a competitive price.
The initial step involves defining the organization's needs and establishing evaluation criteria. These criteria typically encompass factors like quality, lead time, cost, and the supplier's financial stability and reputation. Following a comprehensive evaluation process, qualified suppliers are shortlisted. Negotiations with these shortlisted suppliers ensure the most favorable terms are secured. Finally, a formal contract is established, solidifying the partnership and outlining expectations for both parties.
For many products, the costs of materials make up about 50% of total manufacturing costs. Not surprisingly, then, materials acquisition gets a good deal of an operations manager’s time and attention. Many businesses have staff dedicated just to purchasing or procurement.
Historically, a purchaser would have to build personal connections to suppliers, but in recent years with technology, many of the relationships occur electronically. Not only does a purchaser use the internet to compare prices and place orders, but the entire payment process is also likely done through electronic data interchange (EDI), the automation of transactions between companies, like ordering, billing, and payments.
However, there is still much for people in procurement to do. As a rule, there’s no shortage of vendors willing to supply parts and other materials, but the trick is finding the best suppliers. Supply chain managers, using technology for supplier research, can then focus more on continuous improvement and streamlining processes. For example, technology allows them to see the movement of goods throughout the process, so they know exactly when raw materials will arrive and can communicate this to their production teams. In selecting a supplier, operations managers must consider such questions as the following:
If a manufacturer runs out of the materials they need for production, then production stops. In the past, many companies guarded against this possibility by keeping large inventories of materials on hand. It seemed like the thing to do at the time, but it often introduced a new problem. Companies were paying for parts and other materials that they wouldn’t use for weeks or even months, and in the meantime, they were running up storage and insurance costs.
Most manufacturers have since learned that to remain competitive, they need to manage inventories more efficiently. This task requires that they strike a balance between two threats to productivity: losing production time because they’ve run out of materials and wasting money because they’re carrying too much inventory.
One method of inventory control is maintaining little or no inventory: just-in-time (JIT). Utilizing this production method, the manufacturer arranges for materials to arrive at production facilities just in time to enter the manufacturing process. Parts and materials don’t sit unused for long periods, and the costs of “holding” inventory are significantly cut. The costs of holding inventory might include storage costs and costs to insure the products. JIT, however, requires considerable communication and cooperation between the manufacturer and the supplier. The manufacturer must know what it needs and when. The supplier must commit to supplying the right materials, of the right quality, at the right time.
EXAMPLE
Restaurants always essentially have a JIT method because with a few exceptions, inventory quickly loses quality or goes bad.Another method, called material requirements planning (MRP), relies on a computer program both to calculate the quantity of materials needed for production and to determine when they should be ordered or made.
EXAMPLE
You and several classmates are planning a fundraising dinner for the local animal shelter. First, you estimate how many people will attend—say, 50. Next, you plan the menu—lasagna, garlic bread, salad, and cookies. Then, you determine what ingredients you’ll need to make the food. Next, you must decide when you’ll need your ingredients. You don’t want to make everything on the afternoon of the dinner; some things—like the lasagna and cookies—can be made ahead of time. Nor do you want to buy all your ingredients at the same time; in particular, the salad ingredients would go bad if purchased too far in advance. Once you’ve made all these calculations and decisions, you work out a schedule for the production of your dinner that indicates the order and timing of every activity involved. With your schedule in hand, you can determine when to buy each ingredient. Finally, you do your shopping.Though the production process at most manufacturing companies is a lot more complex than planning a dinner (even for 50), an MRP system is designed to handle similar problems. The program generates a production schedule based on estimated output (your food preparation timetable for 50 guests), prepares a list of needed materials (your shopping list), and orders the materials (goes shopping).
The basic MRP focuses on material planning, but there’s a more sophisticated system—called manufacturing resource planning (MRP II)—that goes beyond material planning to help monitor all resources in a company, including staff, space, tools, and anything else that needs to be managed. Such a program can, for instance, coordinate the production schedule with HR managers’ forecasts for needed labor. Some organizations may use it to reserve meeting rooms, parking spaces for guests, copy machines, or any other shared resources.
As we’ve seen, manufacturers make profits by transforming inputs (materials and other resources) into outputs (finished goods). We know, too, that production activities, like all business activities, must be controlled and monitored to ensure that actual performance satisfies planned performance. In production, the control process starts when operations managers decide not only which goods and how many will be produced, but when. This detailed information goes into a master production schedule (MPS). To draw up an MPS, managers need to know where materials are located and headed at every step in the production process. For this purpose, they determine the routing of all materials—that is, the workflow of each item based on the sequence of operations in which it will be used.
In the service industry, master production scheduling is still used, but with a few differences. Similarly to production, scheduling is done based on expected customer demand, and people are scheduled based on that demand. However, other considerations in scheduling include employee availability, team dynamics, and areas of expertise. For example, if you set a restaurant staff schedule, and Saturday night is when you have your highest demand, you will not want to schedule zero servers and three bartenders, nor will you want to schedule all servers and no chefs! To develop a schedule, you need to know how busy it will be and what skills and expertise are needed. You also need to make sure you have the right materials on hand, that the equipment is clean and functional, and that the space is optimized for a hectic time—which in turn means scheduling the right staff to come in and see to those things. In order to schedule more efficiently, technology is usually used, such as inventory management systems (to track raw materials) and workforce management systems to create schedules and track hours worked. These types of systems can also estimate human resource needs based on forecasted demand and historical data.
SOURCE: THIS TUTORIAL HAS BEEN ADAPTED FROM (1) SAYLOR ACADEMY AND NSCC “OPERATIONS MANAGEMENT”. ACCESS FOR FREE AT PRESSBOOKS.NSCC.CA/OPERATIONSMANAGEMENT2/. (2) OPENSTAX “INTRODUCTION TO BUSINESS”. ACCESS FOR FREE AT OPENSTAX.ORG/BOOKS/INTRODUCTION-BUSINESS/PAGES/1-INTRODUCTION. LICENSING (1 & 2): CREATIVE COMMONS ATTRIBUTION 4.0 INTERNATIONAL.
