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 Analyzing Your Customers I define a supply chain as “a complex system made up of people, processes, and technologies that is engineered and managed to deliver value to a customer.” Supply chain planning requires that you align plans with the needs of your customers. Each customer is unique, and the better you understand your custom- ers, the better chance you have of ensuring that your supply chain delivers the value they expect. Some customers have specific needs or tastes and are willing to wait  — and pay — for a custom product that’s just perfect for them. These customers would be dissatisfied with a generic product, even if it were cheaper and immedi- ately available. If you have customers like these, you probably need to have an engineer-to-order supply chain. Other customers are more interested in getting the lowest cost, which might lead you to implement a make-to-order supply chain. Still other customers need to have your product immediately, which...

 Aligning Resources with Requirements Supply chain plans are built around goals, or requirements. Anything you use to make a supply chain work is a resource. People are resources. Facilities are resources. Machines are resources. Inventory is a resource. Every resource has constraints — things it can’t do. The constraints may be physical limitations, or they may be limits imposed on the supply chain by financial, safety, and policy rules. Here are some examples of constraints that may exist for your supply chain resources: » Employees can work only 40 hours per week unless you pay overtime. » A machine needs to be serviced after every 1,000 hours of operation. » Operators must be certified on a piece of equipment before using it. » Finished-goods inventory can’t be stored outside during the winter. Each of these factors limits the capacity of your resources, so your supply chain plan needs to take these constraints into account. A plan that assumes a 45-hour workw...

 A SIPOC analysis helps to show the dependencies between the processes in a sup- ply chain. A good way to illustrate a SIPOC is to look at the process of picking orders in a fulfillment center: » Suppliers include the receiving department, which puts inventory into the warehouse, and the warehouse management system, which keeps track of inventory. » Inputs include the products that are stored in inventory, along with instruc- tions about where to find the products in the warehouse. » Process in this case could be “Pick item from inventory.” You could also break the process down into detailed steps, such as “Print pick sheet, travel to first pick location, place item on cart,” and so on. » Outputs could include the item that is picked, where it is delivered, and how long it takes to complete the process. The outputs might also include updating the warehouse management system and creating a packing list for the shipment. » Customers in this case will be the shipping...

  Inventory versus downtime Manufacturing operations focus on maximizing the amount of product that they’re able to make in a given period. Sometimes, manufacturing processes need to be shut down. Planned shutdown times typically are scheduled around the shifts that people work or so that the company can perform maintenance or change over equipment to make different products. Unplanned shutdowns also happen for a variety of reasons, all of which are bad. An unplanned shutdown could be caused by a power outage, a broken piece of equipment, a strike, or a new government regulation. An unplanned shutdown also can be the result of running out of raw materials. You can’t make a product unless you have the components that go into it. One way to prevent unplanned shutdowns due to maintain high inventory levels. But that extra inventory ties up working capital and requires additional warehouse space. Lean Manufacturing techniques can help to minimize the number of unplanned shut...

  Inventory versus customer service Inventory costs money because it ties up working capital, consumes labor and real estate, and depreciates quickly. Many supply chain professionals and business analysts will even tell you that inventory is the enemy. You may wonder why ever- yone doesn’t eliminate all inventory. Wouldn’t supply chain management be a whole lot easier if you didn’t have to deal with warehouses, distribution centers, and stock rooms? That approach has one major problem: Companies make money by selling prod- ucts to their customers, and if they have no product to sell, they earn no revenue. When you think about what customers value — what they’re willing to pay for — the product itself is only part of the equation. You have to consider, for example, whether customers would be willing to pay the same amount for your product if they had to pick it up 100 miles away or had to wait for it for a year. In other words, the placement and availability of a ...

 Building the Right Supply Chain There’s really no such thing as a “perfect supply chain” because supply chain performance depends on so many factors. But there are clear differences between a good supply chain and a bad one. A good supply chain will give your customers what they want for a price that they’re willing to pay, while leaving a sufficient profit margin for your company. That definition may sound simple, but actually designing and managing a supply chain that can profitably meet your customers’ expectations is tricky for a couple of reasons. First, the real world is full of surprises that force you to choose whether to spend more money to fill an order or take a chance on disappointing your customers. Second, over time, your customers’ priorities will change, and your business will evolve, so your supply chain will need to adapt to those changes. Four goals can help you evaluate how your supply chain should be designed: capacity, responsiveness, flexibil...

 Designing Supply Chain Systems The most complicated way to understand a supply chain is to look at it as a system. (I think that this perspective is often the most useful.) Like many other systems that we encounter every day, supply chains are made up of intercon- nected components that can behave in surprising ways. Your car is a good example. You expect your car to move you from Point A to Point B. In fact, you probably take for granted that your car will take you to Point B any time you want to go there. But your car is a system, so a dead battery, a broken fuel pump, or worn-out brakes could bring the whole thing to a halt (or, in the case of the worn-out brakes, not bring it to a halt). Supply chains are systems too. The components that make up supply chains are people, processes, and technologies. Each of these components needs to be pre- pared and managed correctly for the system to operate as expected. When you look at them as systems, you begin to see tha...

  A useful exercise for analyzing your supply chain is to list the groups that work together and try to determine the dominant culture of each group. This exercise can help you anticipate conflicts that might emerge when these groups interact and find ways to use differences to your advantage. Here are some examples: » Purchasing departments often have a hierarchical culture, whereas opera- tions departments have a rational culture. The purchasing department may feel frustrated because operations doesn’t follow the rules. Operations may feel frustrated because purchasing is slowing it down. So you could create a small team of expeditors, made up of representatives of both operations and purchasing, to manage urgent orders while ensuring that all the proper policies are followed. » Large companies often have strict rules that lead to a hierarchical culture. Startup technology companies that focus on innovation have an entrepre- neurial culture. To take advantage of the late...

  Connecting Supply Chain Communities If you’ve ever taken a personality test, such as the Myers-Briggs Type Indicator, you know that these tests can reveal important differences in the way that people approach problems and make decisions. It turns out that groups of people have personalities too. These personalities form the culture of a group, and culture matters a lot when it comes to managing a supply chain. Suppose that you work for a company that really values reliability. You would want your suppliers to deliver exactly what was ordered, exactly the same way, every time. The culture of your group — the things that your company values — determines how it judges suppliers. Now suppose that you have a choice between two suppliers: one that’s known for consistent quality and another that’s known for flexibility and innovation. The first supplier would probably be a better cul- tural fit because of the value that your company places on reliability. The impact o...

 Logistics Logistics covers everything related to moving and storing products. This function involves physical distribution, warehousing, and transportation. Inbound logistics refers to the products that are being shipped to your company by your suppliers. Outbound logistics refers to the products that you ship to your customers. Intralogistics refers to moving and storing products within your own facilities. Supply chain professionals refer to intralogistics as happening “within the four walls” meaning that it occurs inside one your buildings. Logistics adds value because it gets a product where a customer needs it when the customer wants it. Logistics costs money too. Transporting products on ships, trucks, trains, and airplanes has a price tag. Also, whether a product is sitting on a truck or gathering dust in a distribution center, it’s an asset that ties up working capital. The goals of the logistics function are to move things faster, reduce transportation ...

 Introducing Five Supply Chain Tasks James B. Ayers is a supply chain management expert who works with manufac- turers, service companies, and government agencies. In Handbook of Supply Chain Management, 2nd Edition (Auerbach Publications, 2006), Ayers says that supply chain managers should concentrate on five tasks: » Designing supply chains for strategic advantage: Consider how your supply chain can help you create value by operating better, faster, and cheaper than your competitors. Think beyond just lowering costs, and consider ways in which your supply chain can help you grow revenue, innovate, and even create new markets. » Implementing collaborative relationships: Consider how you can get teams to work together toward a goal rather than compete for conflicting objectives. If your sales team is trying to improve customer service by making sure that plenty of inventory is available, and your logistics team is trying to reduce inventory to lower costs, both ...

  Controlling quality and variability Think about your imaginary fast-food restaurant and how your customers might describe the quality. Here are a few things that customers probably value in your French fries: » Ingredients that are clean and safe to eat » Food that is fully cooked » Consistent portion sizes (neither too big nor too small) » Reliable availability (prepared quickly and served hot) To meet your customers’ needs, you need to deliver high quality French fries every time someone places an order. Customers might forgive cold fries once or twice, but if they keep getting poor-quality products from you, they’re going to stop coming to your restaurant. You can measure the quality of a product  — and how much variability you have in a process to make a product — through quality control (QC) and quality assurance (QA). Quality control involves testing and measuring the outputs to make sure they’re acceptable. QC might involve pulling a few product...

  Operating a continuous manufacturing process Lots of manufacturing processes don’t involve individual items. Breweries, chem- ical manufacturers, gasoline refineries, food-processing plants, and even electri- cal power plants that burn coal or natural gas are examples of businesses that use continuous processes. With a continuous process, you feed material into one end and get a steady stream of product out the other end. When they’re running, continuous manufacturing processes tend to be highly efficient, because the capacity of each step in the process can be sized for the same rate of material flow, or throughput. Starting and stopping continuous processes, however, is often slower and more expensive than starting and stopping discrete processes. Another common challenge in continuous manufacturing is that there is a mini- mum amount of flow required for the process to work. It’s like a car engine that stalls out if it falls below a certain minimum speed. Also, in...

  Creating a production schedule After determining your demand goal, you break that sales goal down into a master production schedule (MPS). In other words, building the MPS is how you to decide what you’ll need to make each day to meet the MDS goal. Creating an MPS forces you to look more closely at the materials you need and when you need them. It also drives you to look at the people and equipment you have available to make your products. As you build your MPS, you begin to uncover production constraints, which are bot- tlenecks or problems that may interfere with production. You may not be able to order as much of the raw materials as you want because your suppliers don’t have enough capacity, for example. Or perhaps your manufacturing equipment can’t produce the materials quickly enough. In the example of a fast-food restaurant, two obvious constraints that the MPS will need to address are space and time. You have a limited amount of room to store buns, meat patties,...

  Selecting payment terms The terms that govern when you pay a supplier for the things you purchase can have a big effect on the financial performance of your supply chain. Of course, suppliers want you to pay them as soon as possible. But the longer you can wait before paying your suppliers, the better it is for your company’s finances. A major concern for any supplier is that a customer won’t pay an invoice, which is called a default. Payment terms come in four main types: » Payment in advance: Some companies want to have your money in their hands before they provide you with a product or service. This eliminates the risk of default, » Payment on delivery: A company may ask its customers to pay as soon as it delivers a product or service. With payment on delivery there’s a small risk of default. » Net payment terms: Suppliers may be willing to wait for you to pay them. This is a form of credit called net payment terms. For example, a supplier may ship an order and...

 Insourcing, outsourcing, and offshoring It’s hard for a company to be successful when it tries to be a jack of all trades. Instead, each company needs to figure out which characteristics make it truly valuable in a supply chain. In the context of supply chain management, your core competencies are the things that your company can do better than others. Core competencies determine your competitive position in a supply chain. Companies usually focus on building their core competencies through research and development and through continuous process improvement. Generally speak- ing, any work that’s directly related to your core competencies should be done by employees working for the company. In other words, this work should be insourced. Some work is important for your company but isn’t a core competency. Other companies can do that same work better, faster, and cheaper than your com- pany can. Because this work isn’t your core competency, you may be better off outsourc...

  Establishing Inventory Ordering Policies Trying to keep the right amount of inventory on hand is a tricky business. Keep too much inventory, and you’re wasting money by tying up working capital. Keep too little inventory, and you’ll miss out on revenue because you won’t have any- thing to sell to your customers. Two of the most important decisions you can make are when to order more inventory and how much to order. The approach you use to make that decision is called your inventory policy. Start with the question of when to order more inventory from your suppliers. You may need to place an order when your current inventory levels drop below a cer- tain level, in which case the current inventory level is the trigger for your inven- tory policy. Or you may want to order inventory on a set schedule, such as once a week, in which case your inventory policy is built on periodic orders. Triggering orders based on inventory levels is usually more efficient than periodic orders. B...

  Yard management An important, often-overlooked aspect of managing a distribution facility is yard management, which is the process of tracking the trailers in your parking lot. It can be easy to forget about inventory when it is hidden inside a trailer. Yard man- agement starts with understanding the two approaches that are used to deliver and pick up your freight: » Live load and unload: A carrier shows up, unloads your freight from its trailer, and then leaves. Another carrier backs up to your loading dock, puts your cargo on its trailer, and carries it away. The good part of live loading and unloading is that it keeps your freight moving. The bad part is that the truck has to sit and wait while it’s being loaded. If your loading dock is slow or busy, the truck may charge you detention fees. » Drop and hook: With drop and hook, when a truck arrives at the destination, it drops off the trailer and leaves. Or. you can pre-load another trailer and have it ready for the t...

 TYPES OF TRAILERS The three types of trailers that are most common in the United States are dry vans, flat- beds, and refrigerated trailers. Dry vans are basically big aluminum boxes with wheels on the bottom. You can ship vir- tually anything in a dry van as long the cargo fits inside and isn’t too heavy. Because the doors are in the back of the trailer, you have to load from front to back; you can’t get to the cargo in the front of the trailer until you unload everything behind it. Flatbeds are a good alternative for long cargo like pipes or heavy items like bricks, because these trailers are easier to load and unload from the side. When the cargo on a flatbed needs to be protected from the elements it can be covered with tarps. For perishable foods, you need refrigerated trailers (or, as we say in the biz, reefers). Reefers are similar to dry vans except they are insulated and have a refrigeration unit mounted in the front that cools the air inside. It is more expensive t...

 CONTAINER SHIPPING There are two kinds of dry goods cargo: bulk and break bulk. Bulk dry goods are com- modities such as coal and iron ore that can be poured into the ship’s storage area, called the hold. Break bulk dry goods are placed in containers. In the old days, shippers put break bulk cargo in barrels, buckets, bags, and just about every other kind of custom-made packaging that you can imagine. A huge amount of manual labor was involved in loading a ship with individual packages, which created many jobs for long- shoremen and stevedores. Since the 1950s, a growing amount of break bulk freight has been transported by container ships in standardized 20- and 40-foot sea containers (see the following figure). These sea containers can be loaded and unloaded quickly by means of gantry cranes, greatly increasing the speed and efficiency of global supply chains. If you ship an entire container from one destination to another, the transportation mode is called full containe...

 Digital Supply Networks Many consultants describe digital transformation as the process of moving from an analog supply chain to a digital supply network (DSN). A DSN is essentially a supply chain in which all of the suppliers are connected and all of the processes are automated. DSNs function based on programming and sensors, and react to changes using AI. The book, Digital Supply Networks: Transform Your Supply Chain and Gain Competitive Advantage with Disruptive Technology and Reimagined Processes by Amit Sinha, Ednilson Bernardes, Rafael Calderon, and Thorsten Wuest (McGraw Hill; 2020), highlights six key capabilities for a DSN: » Digital development: Designing products using tools like computer aided design, and building prototypes using 3D printing. » Synchronized planning: Ensuring goals and constraints are shared across business functions, and with supply chain partners. » Intelligent supply: Automatically ordering only what is needed, from the right supplier...