Integrating the supply chain to improve logistics efficiency is the key challenge. Competition today is not between individual companies but between supply chains. Hence, for a supply chain to be successful, it should integrate the three individual business processes of procurement, manufacturing and distribution by consolidating the sub-linkages in each of the above functional areas (see Figure 3.1).
This is one of the major cost drivers in the supply chain. The procurement cost is influenced by the following factors:
- The way procurement decisions are made
- Procedures adopted in the procurement process
- Relationship with the suppliers
- Firm’s credibility
- Market intelligence
Procurement cost can be controlled through long-term relationships with suppliers, by considering the supplier as an extension of firm’s manufacturing facility. The philosophy of co-partnership is based on the sharing of both resources and benefits on a long-term basis. A major step in this process is reduction of the supplier base and induction of a few reliable suppliers in firm’s supply chain who are ready to work for firm and can align with the policy framework and requirements of the firm’s supply chain. The partnership, based on the philosophy of knowledge, experience and benefit-sharing, will result in cost reduction and improvement in operating efficiencies at both ends. The major advantages will be reduction in paperwork, a streamlined procurement process, resolution of problems jointly, reliability in supply, a reduction in supply chain inventory covering both supplier and buyer and a quick response to market fluctuations to reduce the risk element. In Europe, Rank Xerox has reduced its supplier base from 5000 to 300. The company has appointed a few distributors who collect the materials from various suppliers and dispatch them to the manufacturer. As a result, the manufacturer needs to tap only a few sources of supply.
Material requirement planning is a critical element in the procurement process. For an integrated supply chain, material planning will have a cascading effect on the entire supply chain. Hence, in a co-partnership arrangement the material planning process will cover inventory requirements for the entire supply chain, including both the firm and its suppliers. The benefits enjoyed by the supplier will also be shared by the buyer. In the United States, auto giants such as Ford, General Motors and Chrysler engage in online procurement planning with their ancillary suppliers. Due to real-time information sharing, a supply chain operating on the JIT system is flexible enough to take care of any fluctuations in market demand, thus resulting in a lean inventory across the entire chain. In the Indian context Telco, Mahindras and Maruti Ugyog are linking their procurement planning to the supplier’s production schedule and the purchase order schedule of their customers.
Material flow across the supply chain is determined in close coordination with suppliers. The actual shipment is scheduled in accordance with the firm’s production programs. The logistics operation is planned to take care of any eventualities, so as to deliver the material on time and with both reliability and consistency in performance.
Hence, for an integrated supply chain, accuracy in material requirement planning and reliability of scheduled shipping are possible only with the close coordination emerging out of a partnership relation with suppliers.
For developing a lean supply chain the emphasis today is not on curtailing the processing/manufac- turing cost through economies of scale, but on reducing the huge inventory-carrying cost resulting from mass production ahead of demand. In the past, the emphasis was on building mega-capacity factories to produce standard products in millions to reduce manufacturing cost and flood the market with low-priced products. The stress was on focused factories to manufacture standard products for global consumption. This approach resulted in a build-up of a large reservoir of finished goods inventory that remained unsold and almost dead because of its inability to respond to the changing needs of customers. Nowadays firms, instead of banking on cost reduction through economies of scale, plan strategies to reduce the total supply chain cost through manufacturing flexibility in order to rapidly respond to the changing market demands of product volumes and varieties. This is achieved through a new manufacturing technique of mass customization based on rationalization of component design to meet the specific needs of individual customers. It takes into consideration the modular concept in product building. Manufacturing flexibility does not necessarily mean the use of automation or robotics in the process plant, but rather a zero lead time to meet customer requirements with zero inventories.
Traditionally, the role of distribution in the business process is warehousing transportation. However, in the supply chain model the major task of distribution relates to the management of demand, that is to make available the right product at the right place and at the right time and at the least cost. Demand management covers all the activities involving anticipating customer requirements of products and fulfils that requirement against defined customer service norms. Requirement fulfilment is done through a proper distribution network.
The first and foremost task in demand management is to forecast customer requirement accurately. This is possible only if the firm is able to satisfy customers per the service level acceptable to them. Logistics plays a vital role in understanding demand through improved information flow by way of quick response to customer requirements. A quick response will help speed up inventory replenishment, reduce the inventory level across the supply chain, as well as reduce inventorycarrying cost. The latest technologies in information processing and communication are playing a vital role in the logistics process, which is primarily an information-based activity.
Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.