Improving supply chain performance through an integrated planning concept

Contents

Chapter 1 Introduction
1.1. Problem statement
1.2. Objective formulation
1.3. Structure of Thesis

Chapter 2 Supply Chain Management (SCM)
2.1. Fundamentals of SCM
2.1.1. Definitions
2.1.2. Building blocks of SCM
2.1.2.1. Customer Service
2.1.2.2. Integration
2.1.2.3. Coordination
2.1.3. Origins of SCM
2.1.4. Objectives and Potential of Supply Chain Management
2.1.5. Types of Supply Chains
2.1.5.1. The Demand Side
2.1.5.2. The Supply Side
2.1.5.3. Supply chain strategies
2.1.6. Inter-organizational concepts of SCM
2.1.6.1. Just in time (JIT)
2.1.6.2. Quick response (QR)
2.1.6.3. Continuous replenishment (CR)
2.1.6.4. Vendor Managed Inventory (VMI)
2.1.6.5. Efficient consumer response (ECR)
2.1.6.6. Collaborative Planning, Forecasting and Replenishment (CPFR)
2.1.7. The Supply Chain Operations Reference Model
2.2. Supply Chain Analysis
2.2.1. Analysis of Supply Chain Typology
2.2.1.1. Functional attributes
2.2.1.2. Structural attributes
2.2.2. Inventory Analysis
2.2.3. Performance measurement and analysis
2.3. Supply chain planning
2.3.1. Planning methods and principles
2.3.2. Planning tasks along the SC network
2.3.2.1. Long-term planning tasks
2.3.2.2. Mid-term planning tasks
2.3.2.3 Short-term planning tasks
2.3.2.4. Coordination and Integration

Chapter 3 Advanced Planning Systems (APS)
3.1. Features of an APS
3.2. Structure of an APS
3.2.1. Strategic Network Planning (SNP)
3.2.2. Demand Planning (DP)
3.2.3. Master Planning (MP)
3.2.4. Materials Requirements Planning (MRP)
3.2.5. Production Planning (PP)
3.2.6. Production Scheduling (PS)
3.2.7. Distribution Planning (DSTP)
3.2.8. Transportation Planning (TP)
3.2.9. Available-To-Promise (ATP)
3.3. Functional modules for Collaborative Supply Chain Planning
3.3.1. Demand collaboration
3.3.2. Procurement collaboration
3.3.3. Inventory collaboration
3.3.4. Capacity collaboration
3.3.5. Transport collaboration
3.4. APS vendors and market evolvement
3.5. Architecture of selected APS
3.5.1. i2 Technologies – Five.Two
3.5.2. J. D Edwards – One World Xe Advanced Planning
3.5.3. SAP - APO
3.6. Implementation process of an APS
3.6.1. Process assessment
3.6.2. Project definition
3.6.3. APS selection
3.6.4. Blueprint phase
3.6.5. Application designed
3.6.6. Go-live preparation
3.6.7. Project closure

Chapter 4 Current state analysis of SCM at RAX
4.1. Company profile of RAX International (RAX)
4.2. Environmental analysis of supply chain relevant parameter of global chocolate industry
4.3. RAX Global Supply Chain configuration
4.3.1. Supply Chain integration
4.3.2. Supply chain typology
4.4. Supply chain planning processes
4.4.1. Global process description
4.4.2. Sub-process Market planning
4.4.3. Sub-process Transhipment point planning
4.4.4. Sub-process Factory planning
4.4.5. Sub-process Global Supply Chain monitoring
4.4.6. Sub process Capacity planning
4.5 Supply chain systems
4.5.1. Overview on supply chain systems within RAX
4.6. Supply chain performance evaluation

Chapter 5 Designed of future state Supply chain planning concept
5.1. Supply chain planning objective and strategy
5.1.1. Strategic dimension supply chain integration
5.1.2. Strategic dimension planning efficiency
5.2. Future state planning processes
5.2.1. Designed principles
5.2.2. Parameter optimization
5.2.2.1. Calculation of optimal production frequencies
5.2.2.2. Segmentation of products
5.2.2.3. Definition of stock policy
5.2.2.4. Optimization of production sequences
5.2.3. Weekly planning process
5.2.3.1. Sales Forecasting
5.2.3.2. Mid-term planning
5.2.3.3. Production scheduling
5.2.3.4. Allocation to distribution centre
5.2.3.5. Transport planning
5.3. Supply chain system objective and strategy
5.3.1. Functional scope definition
5.3.2. System selection
5.3.3. System integration strategy
5.3.4. Implementation strategy
5.3.5. System requirements
5.4. Key Performance Indicators (KPI)
5.4.1. Introducing an integrated KPI System
5.4.2. KPI Definitions
5.45.3. KPI Dashboard

Chapter 6 Evaluation of performance improvement
6.1. Supply chain performance improvement
6.1.1. ROCE dimension
6.1.2. Cost dimension
6.1.3. Responsiveness dimension
6.2. Implementation costs
6.3. Financial analysis

Chapter 7 Conclusion

Chapter 1 Introduction

‘Incipe; dimidium facti est coepisse. Supersit

Dimidium: rursum hoc incipe, et efficies.’

(Begin; to begin is half the work.

Let half still remain; again begin this,

and thou wilt have finished.)

- Decimus Magnus Ausonius (310 – 395)

1.1. Problem statement

In recent years enterprises are facing a dramatic change in the way that they do business. Rapid advances in technology and increasing regulatory freedom have changed the rules and nature of competition. Enterprises are now competing globally and traditional barriers between industries are breaking down. To cope with these changes and achieve superior performance, business leaders are moving towards new business paradigms that allow their companies to work more closely with their traditional and new business partners to adapt to the rapidly changing marketplace. This improved integration is the very essence of Supply Chain Management. Supply chain leaders are reconsidering the linkages, not only between functions within their own company, but with organizations up and down the supply chain.

Supply chain networks are becoming more efficient and more responsive to the need of increasingly demanding customers, driven by competitive pressures and supported by developments in information technology. Hereby integrated supply chain planning approaches play a major role in efficiently matching demand of the market place with supply capabilities of inter-organisational networks. Driven by major success stories of supply chain performance improvements, almost every company is nowadays considering the integration of its supply chain entities to yield better business performance. Two of these shining examples are Hewlett Packard that saved 25% of their distribution costs by optimizing inventories and transports as well as IBM Personal Computers that achieved a cash flow release of 750 Mio. US$ by reengineering planning processes for direct materials and finished products. These impressive gains show the potential of coordinating organizational entities and integrating information flows and planning efforts along a supply chain. Which company can afford not to present such substantial gains in improving competitiveness?

However, this picture may be shattered by looking behind the shining curtain of well marketed supply chain management concepts to the real state in industry. According to a research study of Mc Kinsey&Company only 32% of multinational companies, running major supply chain projects, claim that their performance has significantly increased.^[1] Furthermore Gartner Group states that more than 70% of all advanced planning system implementations, supporting the supply chain management concept, have an extensive cost and time overrun and do not lead to the expected results in business practice.^[2] Considering both sides of the coin, the fundamental question is whether an integrated supply chain planning solution can practically improve the performance of a company up to a high or even best-in-class performance level or if they are bubbles of theory that may explode in the challenge of practical appliance.

1.2. Objective formulation

The problem statement that has been presented above leads to the following research question this thesis will answer: Does the implementation of an integrated planning concept improve the supply chain performance of a company? In order to base the above question on a business environment with real industry insights the multinational company RAX International has been taken as the focal company. However it is important for the author to highlight that today’s challenges in supply chain management are applicable for total industries and that the thesis can be a successful reference for the entire chocolate industry and for a majority of fast moving consumer goods (FMCG) companies.

Supply chain performance improvement at RAX follows the long-term objective to reach a world-class level in Supply Chain Management (SCM) to fulfil customer demands in a responsive way within the integrated supply chain network and to contribute through efficiency gains to cost and working capital savings of the company. The overall supply chain objective can be broken down into three dimensions including the reduction of supply chain costs, the increase of return on capital employed (ROCE) and responsiveness. The dimension cost reduction includes the improvement of supply chain process designed to plan more efficiently along the integrated network and to achieve synergies by sharing information and avoidance of double work of different organizational entities within the chain. The objective to increase ROCE is linked to a more efficient utilization of resources along the RAX supply chain network. This includes the optimization of inventories throughout the supply chain from supplier to customer as well as a high asset utilization of production and logistic resources. Responsiveness as a third objective aims at increasing speed in the supply chain by reducing lead times from supplier to customer. Shorter reaction times ensure higher product availability and improved customer

The objective of this thesis is to introduce a state-of-the-art supply chain planning concept for RAX international to improve along the above objective dimensions and to evaluate the performance improvement. This includes, based on the current state, the definition of a strategic framework for supply chain planning and modelling of supportive planning processes, system and control indicators. In order to assess the business success of the future state planning concept performance benefits are measured against realization costs. The financial analysis of income and expenditure streams concludes on the profitability of investing in the proposed supply chain concept.

1.3. Structure of Thesis

The next chapter introduces the basics of Supply Chain Management, which includes definitions, objectives, types and concepts of SCM. Furthermore, it presents supply chain methods and principles as well as planning tasks along the supply chain.

Chapter 3 describes the general structure and feature of Advanced Planning Systems supporting supply chain planning tasks. Planning modules and system solutions of different vendors are introduced. Moreover APS vendors and the market evolution are assessed.

Chapter 4 provides an in-depth analysis of current state supply chain at RAX International. This includes the description of the external market place and the configuration of current supply chain including the description of current planning processes and systems. The chapter ends with a SWOT analysis of current state supply chain performance.

Chapter 5 introduces the future state integrated supply chain planning concept at RAX. This chapter is the ‘heart’ of the thesis and forms the foundation for supply chain performance improvement. Based on the business objectives a strategy for supply chain planning is derived and planning processes and system modelled accordingly. A dedicated section on key performance indicators ensures the traceability of performance improvements in the deployment phase.

Chapter 6 presents an evaluation of performance improvements derived from the concept and compares them against costs for realization. It ends with a financial analysis to conclude on realized performance gains based on the pilot implementation in Czech Republic and the analytical verifications with RAX key markets.

Chapter 7 concludes this thesis by highlighting interesting results, contributions, and sketching future work.

Chapter 2 Supply Chain Management (SCM)

‘The battleground of the next decade will be supply chain

Versus supply chain.’

- Warren Hausman, Standford University, 2001

2.1. Fundamentals of SCM

2.1.1. Definitions

The object of Supply Chain Management (SCM) is the supply chain which represents, according to Christopher, ‘a network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer’.^[3]

As Figure 2-1 shows, a network usually does not only focus on flows within a single chain, but usually will have to deal with divergent and convergent flows within a complex network resulting from many different customer orders to be handled in parallel.^[4] In order to reduce complexity, an organisation may concentrate only on a portion of the overall supply chain.

For example, an organization may focus its supply chain activities from the downstream direction of the customer to the upstream direction of the component or raw material supplier.

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Figure 2-1: Example of a supply chain network

As Supply Chain Management evolved from logistic theories, some authors don’t distinguish between Logistics and Supply Chain Management and define Supply Chain Management as ‘a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.’^[5]

Many definitions on the concept of Supply Chain Management have been provided in the literature and it seems there are only slight variations of the definitions. The major difference in definitions is the level of integration between supplier, manufacturer, logistics provider and customer. Some older definitions which evolved from logistics clearly set the integration cut at the company border and focus on the intra-organisational flow orientation, whereas newer definitions focus on the inter-organisational optimization. One of these older definitions is provided by Werner, who defines Supply Chain Management as the integrated company activities of delivering, disposal and recycling including the financial and information flow.’^[6] All newer definitions imply that a supply chain consists of separate organisations which are linked by material, information and financial flows. These organisations are normally firms that produce parts, components and end products, logistic service providers and the (ultimate) customer himself.

The overall objective of Supply Chain Management is to increase competitiveness. Individual companies are not responsible for the competitiveness of its products or services in the eyes of the customer but the supply chain with its network of organisations defines the level of competitiveness. Obviously, this organisational structure requires a win-win situation for all participants in the supply chain in the long run while in the short run it may not be the case for all entities. Important key measurements for competitiveness are quality, cost and time performance indicators. There are two broad means for improving competitiveness of a supply chain. The first is a closer integration of the organisations involved and the second is a better coordination of material, information and financial flows.^[7]

2.1.2. Building blocks of SCM

The house of SCM illustrates many facets of SCM. The roof stands for the ultimate goal of SCM – competitiveness – and the means – customer service. Competitiveness can be improved in many ways, e.g. by reducing costs, increasing flexibility with respect to changes in customer demands or by providing superior quality of products or services.

The roof rests on two pillars representing the two main components of SCM, namely integration of a network of organizations and coordination of information, material and financial flows.

The two main components which incur some degree of novelty will be broken down into their building blocks. Firstly, forming a supply chain requires the choice of suitable partners for a mid-term partnership. Secondly, to become an effective and successful network organization, consisting of legally separated organizations, calls for practising inter-organizational collaboration. Thirdly, for an inter-organizational supply chain, new concepts of leadership aligning strategies of the partners involved are important.

Coordination of flows along the supply chain can be executed efficiently by utilizing the latest developments in information and communication technology. These allow processes formerly executed manually to be automated. Especially, activities at the interface of two entities can be scrutinized and duplicate activities can be reduced to a single activity. Process orientation thus often incorporates a redesigned followed by a standardization of the new process.

For executing customer orders, the availability of materials, personnel, machinery and tools has to be planned. Although production and distribution planning as well as purchasing have been in use of several decades, these functions mostly have been isolated and limited in scope. Coordination plans of several sites and several legally separated organizations represent a new challenge which is taken up by an Advanced Planning Systems (APS).

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Figure 2-2: House of Supply Chain Management^[8]

2.1.2.1. Customer Service

Customer service is a multi-dimensional notation and consists of three elements according to Christopher:^[9]

1. Pre-transaction
2. Transaction
3. Post-transaction

Pre-transactional elements relate to a company’s activities preceding a contract. It concerns customer access to information regarding the products and services of a firm offers, the existence of an adequate link between organizations involved. For standard products ordered routinely (e.g. screws) an impersonal purchase via the Internet may be sufficient. However, large projects will require several, intense personal links between the organizations involved at different levels of the hierarchy. Finally, flexibility to meet individual customer requirements may be an important element for qualifying for and winning an order.

Transactional elements are all activities which contribute to order fulfilment in the eyes of a customer. Availability of products from stock may be one option. If a product or service has to be made on demand, order cycle times play an important role. During delivery times a customer may be provided with information on the current status and location of an order. Delivery of goods can include several additional services, like an introduction into the use of a product or its maintenance.

Post-transactional elements concern the service provided once the order is fulfilled. This includes elements like repairing or exchanging defective parts and maintenance, dealing with customer complaints and product warranties.

For measuring customer service and for setting targets, key performance indicators are used in practice, like e.g. the maximum order lead-time, the portion of orders delivered within x days, the portion of orders without rejects or the fill rate.^[10] (For details see chapter 2.2.3.)

2.1.2.2. Integration

Integration refers according to Stadtler to the special building blocks that cause firms to collaborate in the long-term in the generation of product or service with the aim of improving competitiveness of a supply chain as a whole.^[11]

Integration consists of 3 building blocks:

1. Choice of partners
2. Inter-organizational collaboration
3. Leadership

The choice of partners starts with analyzing the activities associated with generating a product or service for a certain market segment. Firstly, activities will be assigned to existing members of a supply chain, if these relate to their core competencies. Secondly, activities relating to standard products and services widely available on the market and with no potential of differentiation in the eyes of the ultimate customer will be bought from outside the supply chain. Thirdly, for all remaining activities, a partner to join the supply chain has to be looked fro in the curse of a make-or-buy decision procedure.^[12]

Selection criteria should not be based solely on costs, but on the future potential of a partner to support the competitiveness of the supply chain. A suitable organizational culture and a commitment to contribute to the aims of the supply chain will be of great importance. A possible partner may bring in specialized know-how regarding a production process or development competence. For global supply chains, additional criteria have to be considered like taxes, exchange rates, etc.

Inter-organizational collaboration is a necessity for an effective supply chain. A supply chain is regarded as a cross between pure market interaction and a hierarchy. It tries to combine the best features of the two. Ideally, each entity within a supply chain will concentrate on its core competencies and will be relieved from stringent decision procedures and administrative routines attributed to a large hierarchy. Information and know-how is shared openly among members. Competition among members along the supply chain is substituted by the commitment towards improving competitiveness of the supply chain as a whole. These features are assumed to enhance innovativeness and flexibility with respect to taking up new market trends.^[13]

Entities within a supply chain are legally independent but are economically highly dependent on each other. The structure of a supply chain will only remain stable if there is a win-win situation for each member. If this is not achieved in the short-term by usual price mechanisms, compensation schemes must be found for the long-run.

Leadership is important in light of the ideal of self-organizing, poly-centric actors forming a supply chain. Some decisions should be made for the supply chain as a whole, like the cancellation of a partnership or the integration of a new partner. Similarly aligning strategies among partners may require some form of leadership.^[14]

In practice, leadership may be executed either by a focal company or a steering committee. A focal company is a member having the largest power, the best know-how of products and processes or has the greatest share of values created during order fulfilment. A steering committee may be introduced, consisting of representatives of all members of the supply chain, if there is no focal company existing in the supply chain.

2.1.2.3. Coordination

The second main component of SCM is the coordination of information, material and financial flows.

Coordination comprises according to Stadtler three building blocks:^[15]

1. Information technology
2. Process orientation
3. Advanced planning

Advances in information technology (IT) made it possible to process information at different locations in the supply chain and thus enable the application of advanced planning. Cheap and large storage devices allow to store and retrieve historical mass data, like e.g. past sales. These Data Warehouses may now be used for a better analysis of the customer habits as well as for more precise demand forecasts. Communication via electronic data interchange (EDI) can be established through private and public nets, the most popular being the Internet. Members within a supply chain can be informed instantaneously and cheaply. As an example, a sudden breakdown of a production-line can be distributed to all members of a supply chain concerned as a so-called alert.

Process orientation aims at coordinating all the activities involved in customer order fulfilment in the most efficient way. It starts with an analysis of the existing supply chain, the current allocation of activities to its members. Key performance indicators can reveal weaknesses, bottlenecks and waste within a supply chain, especially at the interface between its members. A comparison with best practices may support this effort. As a result, some activities will be subject to improvement efforts, while some others may be reallocated.

Advanced planning incorporates long-term, mid-term and short-term planning levels. Software products, so-called Advanced Planning Systems, are available to support planning tasks. Advanced Planning Systems (APS) do not substitute but supplement existing Enterprise Resource Planning (ERP) Systems. APS are taking over planning tasks while an ERP system is required as a transaction and execution system for orders.^[16] APS are intended to remedy the defects of ERP systems through a closer integration of planning modules, adequate modelling of bottleneck capacities, a hierarchical planning concept and the use of latest algorithmic developments of heuristics and optimizer functions. Since planning is executed in a computer’s core storage, plans may be updated easily and continuously (e.g. in case of demand changes). Advanced planning allows to realize bottlenecks in advance and to make the best use of them. Alternative modes of operations may be evaluated, thus reducing costs and improving profits. Different scenarios of future developments can be planned for to identify a robust next step for the upcoming planning interval. Furthermore, it is no longer necessary to provide lead-time estimates as an input for planning. This should enable companies using APS to reduce planned lead-times drastically compared with those resulting from an ERP system.

2.1.3. Origins of SCM

The term SCM has first been established by two consultants, namely Oliver and Weber, in the US as early as 1982. Oliver and Weber declared SCM as a top management responsibility because SCM has to balance conflicting functional objectives and requires an integrated system strategy.^[17] In the late 80’s theories discovered the playground of SCM in US where publications were made by Bothe, Christopher, Davis, Ellram / Cooper to name a few. In Germany the term has been established in the mid nineties. The first book on Supply Chain Management has been published by Werner as recently as 2000.

The idea of SCM by integrating company activities was born based on the value chain concept of Michael Porter^[18]. The root of the value chain concept might also explain the focus on supply in the terms of Supply Chain Management. Werner postulates in his first German publication that at least the term ‘demand’ has to be added to create a meaningful description of the topic Supply Chain Management.^[19]

Research into integration and coordination of functional units evolved already before the term SCM in 1982.

Four great contributions are the following:

1. The channel research of Alderson in 1957 stated the advantages of postponement strategies in a supply chain. Postponement serves to reduce market risk, because the product will stay in an undifferentiated state as long as possible allowing to better cope with the unexpected market shifts.^[20]
2. Bowersox showed in his study of collaboration and cooperation in 1969 that different functional units within a company have individual objectives that might counteract the overall efficiency.^[21]
3. The bullwhip effect in production-distribution networks research of Forrester 1958 described the increasing amplification of orders occurring within a supply chain the more one moves upstream even if end item demand is fairly stable.^[22]
4. Hax and Meal have shown in 1975 how to build hierarchically coordinated, solvable models which provide effective decision support for the different decision making levels within a hierarchical organization.^[23]

2.1.4. Objectives and Potential of Supply Chain Management

The global objectives of SCM can be defined based on the definition of SCM and its intra- and inter-organizational concepts. For instance improving customer service, creation of transparency along the supply chain network, global information availability or optimization of complexity can be typical objectives of SCM. Although these objectives are providing a clear strategic focus of an organization, they are not measurable and adequate for performing operative controlling measures. For operative controlling purposes, SCM objectives need to be differentiated into measurable objectives. Following this controlling based definition, the main objective of Supply Chain Management is to gain cost, time and quality advantages.^[24]

Cost advantages SCM are mainly targeted by reducing inventory costs. The transparency of the consumer demand should help to reduce the Bullwhip effect. Through better coordination of demand and supply based on the end-consumer level and an improved inventory control, safety stocks can be reduced and capital is released for value-creating processes. Additional cost advantages can be created by a strategic optimization of the whole supply network. For instance, global and hierarchical supply chain planning or synergies in production, procurement and transports can bring Significant cost reductions.

SCM generates time advantages in two functional areas. First, the time to market of new products can be dramatically reduced by integrating suppliers and customers. Second, the order fulfilment time can be improved by a process-oriented and hierarchically coordinated planning in the area of procurement, production and logistics.

A further objective of SCM is achieving quality advantages. Especially trust among all participants in the supply chain enables a more intense cooperation.

Figure 2-3 shows the weighted objectives of SCM within a survey of fortune 1000 companies.^[25]

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Figure 2-3: Objectives of Supply Chain Management
[in percent of interviewed companies]

The above figures highlight the outstanding importance of Supply Chain Management as means for cost and profit optimization and for improving customer service levels.

Figure 2-4 displays the perceived benefit of Supply Chain Management that justifies investments of up to 10.4% in the consumer goods manufacturers and up to 29.4% in the retailing industry of total investments.^[26]

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Figure 2-4: Perceived benefit of investments in SCM^[27]

Figure 2-4 also shows that the main perceived benefit from SCM can be linked to two main reasons, namely improvements in inventory management and Demand planning. In addition, the overall optimization of the supply chain offers synergistic potentials in procurement, production, distribution and Sales. These synergies can provoke, for instance in the retail industry, a saving potential of 2.5%-3.5% of the turnover according to Philippson et alii.^[28]

2.1.5. Types of Supply Chains

A supply chain can basically be classified by the product it supplies and be split into a demand and supply side.

2.1.5.1. The Demand Side

Fisher divides products primarily on the basis of their demand pattern into functional or innovative products. Functional products satisfy basic needs that do not change over time, have a predictable and stable demand with low uncertainties. Innovative products are characterized by short product life cycles, unpredictable demand and non basic needs that lead to the purchase.^[29]

Lee provides a comprehensive list of demand characteristics that lead to the classification of functional and innovative products.^[30]

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Table 2-1: Demand characteristics

The ability to produce large volumes of individually customized products and deliver them at close to mass production prices is called mass customization.^[31] The concept of mass customization is especially attractive for innovative products that are produced in large quantities. This can ensure high profit margins while having low supply chain costs.

2.1.5.2. The Supply Side

On the supply side, Lee proposes a differentiation between a ‘stable’ and an ‘evolving’ supply process. A stable supply process is characterized by a mature manufacturing technology and a well established supply base which only changes insignificantly. In contrast, an evolving supply process is one where the manufacturing technology is changing rapidly and under continuous development and the supply base might be limited in size and experience. Table 2-2 summarizes the differences between a stable and evolving supply process.^[32]

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Table 2-2: Supply characteristics

In some supply chains, the process uncertainty which relates to the production of the product itself is so important that it is quoted as the third uncertainty in a supply chain. In the above overview, provided by Lee, this risk is subsumed under fewer breakdowns and less process changes.^[33]

2.1.5.3. Supply chain strategies

Before defining a certain supply chain strategy, it is necessary to understand the sources of the uncertainties and explore ways to reduce these uncertainties. According to Lee, there are two types of uncertainty reduction strategies: demand and supply uncertainty reduction strategies. Demand uncertainty reduction strategies could be to improve communication and data sharing along the supply chain to avoid the negative effect of the bullwhip effect.^[34] Supply uncertainty reduction strategies aim at reducing or even avoiding the uncertainties concerning supply. An example for that strategy could be the interdisciplinary use of information in the product development phase or the use of supplier hubs at the producer’s plant. However, not all uncertainties can be removed and therefore supply chains require special strategies according to their demand and supply characteristics. Lee defines four basic supply chain strategies which are visualized in figure 2-5.^[35]

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Figure 2-5: Supply chain strategies for different product and process types

(1) Efficient supply chains utilize strategies aimed at creating cost efficiencies in the supply chain. Cost efficiencies can be achieved by minimizing non value added activities, deploying scale economics and optimization techniques and establishing systems for demand, inventory and capacity exchange.
(2) Risk-Hedging supply chains utilize strategies that hedge the risks in the supply chain by pooling and sharing resources in a supply chain so that the risks in supply disruption can also be shared.
(3) Responsive supply chains utilize strategies aimed at being responsive and flexible to the changing and diverse needs of the customers, such as mass customization and build to order techniques.
(4) Agile supply chains utilize strategies that support being responsive and flexible to customer needs, while the risk of supply shortages or disruptions are hedged by pooling inventory or capacity resources. The applied strategies are similar to the ones in the risk-hedging and responsive supply chains.

2.1.6. Inter-organizational concepts of SCM

Since the establishment of Supply Chain Management in the late eighties, several concepts to synchronize the material and information flow emerged. These concepts vary Significantly from their conceptual core approaches and from the industry focus. The main process-oriented concepts of SCM will be highlighted in this chapter and are summarized in Fig. 2-6.

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Figure 2-6: Inter-organizational concepts of SCM

2.1.6.1. Just in time (JIT)

Just in time (JIT) is a concept that aims at synchronizing the material deliveries in the right amount and quality with the point in time of the demand in production. The objective of JIT is to minimize inventories of preliminary products. The concept first evolved in the car industry when car manufacturers tried to optimize their supply chain upstream with their part and component suppliers.

The fundamental key principle of JIT is the so called ‘pull principle’. The pull principle prescribes that a source (producing entity) in a production system only delivers parts to a sink (consuming entity), if the sink is requesting parts. Special cards, so called Kanbans, are used as information carriers which identify the parts in the Kanban and which trigger an order. The material flow of a source is activated in a Kanban control cycle by the steering information of a sink. The activated source is delivering the demanded parts according to the order.

The JIT concept is a decentralized approach which calls for a constant demand, a limited product variety and it leads to a Significant reduction of inventory, lead time and a synchronized material flow.

2.1.6.2. Quick response (QR)

Quick Response is a delivery or distribution concept between producer and retailer or between producer and supplier. Some authors define it as the further development of the JIT concept for products with highly fluctuating demand.^[36] The purchase order of the downstream organization is triggered in the quick response concept by its existing customer demand.

The Point of Sales data of the retailer is sent directly through EDI technology to the producer who adjusts his production according to the downstream demand and delivers the retailer with the requested goods.

The Quick Response concept focuses on the attainment of short production and delivery times by minimized inventory. Quick Response is widely used in the textile and clothes industry as well as in the consumer goods industry. These industries use the concept to balance material and information flow of seasonal goods with high variants, short product life cycles, long lead times and fluctuating demands. The Quick Response concept ensures the demand oriented delivery of goods to the receiving storage location of the downstream partner, who is in charge of the inventory. Inventory and capital cost reduction as well as flexibility gains of changing customer demands are the main benefits of the concept.

2.1.6.3. Continuous replenishment (CR)

In the Continuous Replenishment concept the producer is in charge of the inventory in the receiving storage location of the retailer. The replenishment of goods is based on the point of sales data of the retailer which ensures a constant and standardized way of delivering goods. The main progress step in the Continuous Replenishment concept in relation to Quick Response concept is that the producer is managing the retailer’s inventory and that inventory and Sales data of the retailer is shared among both partners.^[37]

2.1.6.4. Vendor Managed Inventory (VMI)

In the Vendor Managed Inventory concept the inventory of the customer (producer or retailer), which is located at the customer site, is managed by the supplier. The supplier takes over the responsibility of managing the inventory which allows him an optimized replenishment of the storage location in terms of replenishment quantity and time according to his own optimized resources. The replenishment of goods is based on concrete material flow data of the storage location and not on daily sales figures of the customer. Therefore, the customer and the supplier are agreeing on minimum and maximum stock levels in the storage location. All other parameters like frequency and amount of the replenishment run can be freely defined by the supplier. VMI calls for a high degree of trust between the supply chain partners and the correct factual treatment of shared planning data.^[38]

2.1.6.5. Efficient consumer response (ECR)

The concept of Efficient Consumer Response was developed in 1992 by the American Food Marketing Institute and is based on the combination of logistical concepts and marketing oriented approaches. The concept is mainly applied in the food industry and focuses on the integration of the consumer in the supply chain network.

The key element of the concept is the integration of the information flow between producer and retailer. The exchange of information within a standardized communication platform (e.g. EDI) enables both partners a coordinated material flow and collaborative marketing activities.

The logistical components of the ECR concept are Continuous Replenishment (CR), Cross Docking (CD) and Synchronized Production (SP). Cross Docking is a new approach for structuring the picking process. The producer is in this concept not directly shipping to the retailer, but to a cross docking station. There, full pallets from the producer are picked dependent on the target location and shipped directly to the retailer store. The advantages coming from the CD approach are reduced transportation costs because of full truck loads to and from the cross docking station and the transmission of aggregated data per CD station and not per retail store. Synchronized Production (SP) is related to the fact that the production plan of the producer is synchronized with the real consumer demand and therefore inefficiencies of a pure forecast driven production can be avoided.^[39]

The marketing components of ECR ensure a cooperative optimization of the product assortment and consist of Efficient Production Introduction (EPI), Efficient Store Assortment (ESA) and Efficient Promotion (EP). EPI includes the efficient development and introduction of new products. In the product development phase producer and retailer are working together to define a consumer oriented product designed that fits’ to each others core competencies to enable a competitive development time and a successful market launch. The ESA concept focuses on the harmonization of articles in the retailer stores and on the optimization of assortments to increase a higher efficiency. The assortment consists thereby of mass articles with high turnover relevance, profit articles with high profit contribution and strategy articles for winning a new consumer. EP enables the coordination of promotional activities between supply chain partners which positively contributes to inventory synergies and lower costs of the total logistical system.^[40]

2.1.6.6. Collaborative Planning, Forecasting and Replenishment (CPFR)

The newest of all concepts described in this chapter is CPFR. This concept has its roots in the famous pilot project between the producer Procter and Gamble and the US retailer chain Wal-Mart who decided to exchange Sales forecast data via a standardized internet platform. As early as 1998 a CPFR committee was launched and the first standardized CPFR voluntary guidelines including a standardized process model were issued.^[41]

CPFR is based on the described concepts of JIT, QR, CR, VMI and ECR and aims at eliminating their weaknesses by further integration and enhancement of the concepts. The main benefit from CPFR is a collaboration of all partners in a supply chain network. This includes information sharing throughout the network to provide a Sales forecast based on the real consumer demand, proactive issue solving, improved capacity usage, lower pipeline inventory and high customer service levels.

2.1.7. The Supply Chain Operations Reference Model

The Supply Chain Operations Reference (SCOR) model is a tool for representing, analysing and configuring supply chains. The SCOR model was developed by the Supply Chain Council (SCC), formed in 1996 as an independent non-profit-organisation by AMR Research and the consulting firm Pittiglio Rabin Todd & Mc Grath (PRTM) as well as sixty nine of the world’s leading companies (Compaq, Procter & Gamble, 3M …). Its mission today is to perpetuate the use of the SCOR model through technical development, research, education and conference events. By the end of 2001, the council’s technical community had released five subsequent versions of SCOR, providing updates to process elements, metrics, practices and technology. According to Bolstorff and Rosenbaum, the council has attracted about 750 members worldwide.^[42]

The SCOR-model consists of a system of process definitions that are used to standardize processes relevant for SCM. The council recommends modelling a supply chain from the suppliers’ suppliers to the customers’ customers. Processes such as customer interactions (e.g. order entries through paid invoice …), physical material transactions (e.g. supplies, products …) market interactions (e.g. demand fulfilment …) and post-delivery customer service (as of SCOR 4.0) are supported. Sales and marketing as well as product development and research are not addressed within the SCOR model.^[43]

The SCOR model differentiates between five standard processes in SCM which can be defined as the following:^[44]

Plan: Processes that balance aggregate demand and supply to develop a course of action which best meets sourcing, production and delivery requirements

Source: Processes that procure goods and services to meet planned or actual demand.

Make: Processes that transform product to a finished state to meet planned or actual demand.

Deliver: Processes that provide finished goods and services to meet planned or actual demand, typically including order management, transportation management and distribution management.

Return: Processes associated with returning or receiving returned products for any reason. These processes extend into post-delivery customer support.

The standard processes are divided into three hierarchical levels: 5 process types, 22 process categories and process elements. Level One defines the number of supply chains and how their performances are measured. It consists of five elementary process types: source, make, deliver and return, coordinated by the process type plan. Level Two defines the configuration of planning, execution and enabling processes in material flow, using standard categories like make-to-stock, make-to-order and engineer-to-order. The five process types of level one are divided into 22 process categories, including five enable process categories for each process type. Level Three defines the process elements used to transact sales orders, purchase orders, work orders, return authorizations, replenishment and forecast. Detailed metrics and best practices for these elements are part of the SCOR model. Furthermore, most elements provide an input stream (information and material) and / or an output stream. The process elements are decomposed on the fourth level. Companies implement their specific management practices at this level. Figure 2-7 provides an overview of the levels and the schematics of the SCOR model.^[45]

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Figure 2-7: Levels and schematic of the SCOR model^[46]

The SCOR model supports performance measurement on each level. Level One metrics provide an overview of the supply chain to evaluate management. Level Two and Three include more specific and detailed metrics corresponding to process categories and elements. The metrics are systematically divided into the five categories reliability, flexibility, responsiveness, cost and assets. Reliability as well as flexibility and responsiveness are external (customer driven), whereas cost and assets are internal points of view.^[47]

2.2. Supply Chain Analysis

2.2.1. Analysis of Supply Chain Typology

The supply chain typology is a tool to analyze, visualize and discuss the structure of a supply chain by a set of attributes. It enables the formulation of structural changes and strategies to improve the supply chain performance.^[48]

The typology categorizes different supply chain network according to functional attributes describing the focal organization and structural attributes analyzing the relations among its entities.

2.2.1.1. Functional attributes

Functional attributes of a supply chain entity can be grouped into four categories:

1. Procurement type
2. Production type
3. Distribution type
4. Sales type

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Table 2-3: Functional attributes of a supply chain typology^[49]

1. Procurement type: relates to the number and type of products to be procured, the latter one ranging from standard products to highly specific products requiring special product know-how or production process know-how. The following attribute depicts the sourcing type, better know by its properties: single sourcing, double sourcing and multiple sourcing. Sourcing contracts with suppliers are usually valid in the medium-term (e.g. the product’s life cycle). The flexibility of suppliers with respect to the amounts to be supplied may be important. Amounts may either be fixed; have a lower or upper bound due to given contracts with suppliers or may be freely available. Lead time and reliability of suppliers are closely related. The lead time of a supplier defines the average time interval between ordering a specific material and its arrival. The shorter lead times are, the more reliable the promised arrival dates are. The life cycles of components or materials have direct impact on the risk of obsolescence of inventories. The shorter the life cycles are, the more often one has to care about substituting old materials with newer ones.

2. Production type: is formed by many attributes. The two most important attributes are the organization of the production process and the repetition of operations. Process organization and flow lines represent well-know properties of the production process. Process organization requires that all resources capable of performing a special task are located in the same are. Usually a product has to pass through several shops until it is finished. A flow shop exists if all products pass the shops in the same order. A flow line exists in case resources are arranged next to each other corresponding to the sequence of operations required by the products to be manufactured on it. Usually capacities within a flow line are synchronized and intermediate inventories are not possible.

The attribute repetition of operations has three broad properties, mass production, batch production and making one-of-a-kind products. In mass production the same product is generated constantly over a long period of time. In LTIch production several units of a given operation are grouped together to form a batch and are executed one after the other. Several batches are loaded on a resource sequentially. At the start of a batch a setup is required, incurring some setup costs or setup time. When making one-of-a-kind products which are specific to a customer order, special care is needed to schedule many operations for a single order.^[50]

The influence of setup costs and setup times is specified by the attribute changeover characteristics. If setup costs or times even vary with respect to sequence of the Batches, sequence dependent changeover costs are given. If production capacity is a serious problem, the attribute bottleneck in production tries to characterize the reason. In a multi-stage production system, the bottleneck machines may be stationary and known, or shifting depending on the mix of the demand. One way to increase capacity is to provide more working time. The capability and lead times to adapt working time to changing demand pattern are described by the attribute working time flexibility.^[51]

3. Distribution type: consists of the distribution structure, the pattern of delivery, the deployment of transportation means, and possible loading restrictions. The distribution structure describes the network of links between the factory and the customers. A one-stage distribution structure exists if there are only direct links between a factory and its customers. In case the distribution network has one intermediate layer (e.g. central warehouse or regional warehouse) a two stage distribution structure is given.

The pattern of delivery is either cyclic or dynamic. In a cyclic pattern, goods are transported at fixed intervals of time. A dynamic pattern is given if delivery is made depending on demand for transportation. As regards the deployment of transportations means one can distinguish the deployment of vehicles on routes and a given transportation capacity on individual links in the distribution network. Loading restrictions like the requirement of a full truck load may form a further requirement.^[52]

4. Sales type: depends largely on the relation to its customers. One extreme may be a downstream entity in the supply chain while the other extreme may be a pure market relation with many competitors. This attribute is closely related to the availability of future demands. These may be known or have to be forecasted. The existence of reliable demand forecast is best described by the length of the forecast horizon. Besides the general availability of demand information, the shape of the demand curve is of interest. Demand for a specific product may, for example, be quite static, sporadic, or seasonal.

The typical length and the current stage of a product’s life cycle Significantly influences appropriate marketing, production planning and financial strategies. As regards the products to be sold one should discriminate the number of product types offered and the degree of customisation. The latter one may range from standard products to highly specific products. In the light of mass customization some way in the middle becomes more and more important: constituting customer-specific products from a variety of product options and alternatives being offered. The attribute bill-of-materials (BOM) shows the way that raw materials and components are composed or decomposed in order to generate the final products.^[53]

2.2.1.2. Structural attributes

Structural attributes of a supply chain are grouped according to table 2-4 into two categories:

1. Topography of a supply chain
2. Integration and coordination

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Table 2-4: Structural attributes of a supply chain typology^[54]

1. Topography of a supply chain: describes the material flows from upstream to downstream entities which are serial, convergent, divergent, or a mixture of the three. The degree of globalization ranges from supply chains operating in a singly country to those with entities in several continents. Global supply chains have to take into account tariffs and impediments to trade as well as exchange rates varying over time. The decoupling point^[55] may differ between product groups, varying from an engineer-to-order over a make-to-order to a make-to-stock strategy. The attribute major constraints gives an impression what the main bottlenecks of the supply chain as a whole are. These may, for example, be limited production capabilities of some entities or the limited availability of some critical material.
2. Integration and coordination: concerns the attributes legal position, balance of power, direction of coordination and type of information exchanged.

The legal separation of entities, a so-called inter-organizational supply chain, makes the central coordination of flows much more difficult than an internal supply chain. Also the balance of power within an inter-organization supply chain plays a vital role for decision making. A dominant member in the supply chain can act as a focal firm.

As regards information flows, several attributes may be considered. The direction of coordination defines the vertical and horizontal degree to which information is shared in a supply chain network. Vertical information flows comply with hierarchical planning. Horizontal flows between two entities ensure information sharing of local information (e.g. to overcome the effects of a breakdown of a machine). Also the type of information exchange between members influences planning. For example some entities may not reveal their manufacturing costs but are willing to provide information about available capacities.

2.2.2. Inventory Analysis

The often claimed citation ‘inventories hide faults’ suggests avoiding any inventory in a supply chain. This way of thinking is attributed to the Just-in-time-philosophy, which aligns the processes in the supply chain such that almost no inventories are necessary. This is only possible in some specific industries or certain sections of a supply chain and for selected items.

In all other cases inventories are necessary and therefore need to be managed in an efficient way. Inventories in supply chains are always the result of inflow and outflow processes (transport, production, etc.). This means that the isolated minimization of inventories is not a reasonable objective of SCM, instead they have to be managed together with the corresponding supply chain processes. Inventories cause costs, but also provide benefits, in particular reduction of costs of the inflow and outflow processes. Thus, the problem is to find the right trade-off between the costs for holding inventories and the benefits.^[56]

Inventory decomposes into different components according to the motives for holding inventory. The most important components are highlighted in table 2-5 and will be described in detail in the following paragraphs. The distinction of stock components is necessary for the identification of benefits, the identification of determinants of the inventory level and setting target inventory levels (e.g. in an APS solution).

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Table 2-5: Stock components, determinants, and benefits^[57]

Production lot-sizing stock

The production lot-sizing stock or also called cycle stock is used to cover the demand between two consecutive production runs of the same product. The role of cycle stock is to reduce the costs for setting up and cleaning the production facility (setup or changeover costs). Finding the right trade-off between fixed setup costs and inventory costs is usually a critical task, as this decision may also depend on the lot-size of other products.^[58]

For the inventory analysis of final items in a make-to-stock environment it is sufficient to consider a cyclic production pattern with average lot-sizes qp over a time interval that covers several production cycles. Then, the inventory level follows the so-called ‘saw-tooth’ pattern, which is shown in Figure 2-8. The average cycle stock CS is half the average lot-size: CS=qp /2. The average lot-size can be calculated from the total number of production setups su and the total demand dp during the analysis interval: qp = dp / su

[...]

^[1] See Kuepper et alii (2006): p. 1-15

^[2] See Gartner Group (2003): p. 1-2

^[3] Christopher (1998): p. 15

^[4] See Stadtler (2003): p. 7

^[5] See Simchi-Levi et alii (2003): p. 1-2

^[6] Werner (2001): p. 5

^[7] See Lee (1998): p. 1

^[8] See Stadtler (2003): p. 10

^[9] See Christopher (1998): p. 39

^[10] See Silver et alii (1998), p. 41

^[11] See Stadtler (2003), p. 12

^[12] See Schneider and Bauer (1994): p. 67 - 89

^[13] See Burns and Stalker (1961): p. 121

^[14] See Rockhold (1998): p. 12

^[15] See Stadler (2003): p. 14

^[16] See Drexl et alii (1994): p. 145

^[17] See Oliver, Weber (1992): p. 63-75

^[18] See Porter (1999): p. 12

^[19] See Werner (2001): p. 4

^[20] See Alderson (1957)

^[21] See Bowersox (1969): p. 63-70

^[22] See Forrester (1958)

^[23] See Hax and Meal (1975)

^[24] See Busch et alii (2004): pp. 8

^[25] See Busch et alii (2003): p. 10

^[26] See Baumgarten (2002): p. 15-16

^[27] See Busch et alii (2003): p. 10

^[28] See Philippson et alii (1999): p. 5

^[29] See Fisher (1997): p. 105-116

^[30] See Lee (2002): p. 105-119

^[31] See Simchi-Levi et alii (2003): p. 116

^[32] See Lee (2002): p. 105-116

^[33] See for instance Chopra / Meindl (2004): p. 29-43

^[34] The bullwhip effect describes the increasing amplification of orders occurring within a supply chain the more one moves upstream. See for instance Simchi-Levi et alii (2003): p. 101-110

^[35] See Lee (2002): p. 105-116

^[36] See Christopher (1998): p. 192

^[37] See Werner (2001): p. 55-57

^[38] See Busch et alii (2003): p. 14

^[39] See Seifert (2003): p. 3-5

^[40] See Seifert (2003): p. 11-26

^[41] See ebenda (2003): p. 30

^[42] See Bolstorff / Rosenbaum (2003): p. 2

^[43] See Meyr et alii (2003): p. 46

^[44] See Bothe / Nissen (2003): p. 29

^[45] See Bolstorff / Rosenbaum (2003): p. 2-6

^[46] See Supply Chain Council (2004)

^[47] See Meyr et alii (2003): p. 50-53

^[48] See Rohde (2004): p. 54

^[49] See Meyr et alii (2004): p. 56

^[50] See Silver et alii (1998): pp. 36

^[51] See Schneeweiss (1999): pp. 10

^[52] See Meyr et alii (2004): p. 57

^[53] See Meyr et alii (2004): pp. 58

^[54] See Meyr et alii (2004): p. 56

^[55] The decoupling point is the first stage or location in the material flow where a further processing step or a change in the location of a product will only be executed with respect to a customer order.

^[56] See Sürie and Wagner (2004): pp. 36

^[57] See Sürie and Wager (2004): p. 38

^[58] See Sürie and Wagner (2004): p. 38