This report provides a guideline on how the group of investors in the given scenario would make decision regarding the structuring and organization of supply chain in the firm. It provides detailed information on how they should approach the operations management aspects of the production facility, as well as operations issues related to the success of the entire supply chain that they should consider and attempt to influence in their role as a major and critical component of the supply chain.
The starting point: adopting vertical integration supply chain
The group of investors seeks for a supply chain management strategy that achieves synergetic results and provides sustainable dominant competitive advantage. The investors are also concerned about a supply chain strategy that ensures various business units have the right amount of the right product, in the right place, at the right time and at the right cost. The need to increase intensity of competition and have a cost effective system of business leads to the recommendation of a vertical integration strategy. Every individual function in the firm has to be integrated into key processes of the supply chain. The vertical integration strategy will ensure that information is shared between partners in the supply chain. The strategy does not only focus on the highly efficient operations within the supply chain but also helps in networking needed for the creation of sustainable and customer oriented supply chain. Having a sustainable strategy of supply chain in the firm generates sustainable competitive advantage.
Since the investors are intending to venture into the manufacture and marketing of power hand tools the firm first needs to develop a competitive strategy. The supply chain strategy and its sustainability will then have to be integrated to the competitive strategy. Keiretsu network or a vertical integration strategy connects the suppliers, manufacturers, and distributors within the industry. Since the investors are willing, they will be required to own several other supplying companies in order to benefit the parent company. This is primarily one of the basic aspects about vertical integration used in supply management.
Measuring the performance of supply chain
There are various methods which can be used to provide an overview of the performance of supply chain in terms of all the key aspects involved. The metrics do not only have to measure cost and expenditure incurred in the supply chain process, but also measure operational aspects and key supplier information. In order for the firm to meet its strategic goals, the use of the metrics will be helpful in keeping track of the progress. The supply chain strategy used has to assist the firms in meeting its general requirements. Some of the areas to be considered when evaluating the performance of supply chain in the firm include: delivery, cost, forecast accuracy, quality of products, defects in products, stock outs, and productivity.
Delivery of the products to the customers is a crucial measure of supply chain. If the firm can be able to make on time delivery of goods, this will provide an indication that supply chain management is performing well. Cost can also be used as a metric and it involves making a variance analysis of the predicted cost and the actual cost. There is need for the firm to make accurate forecasting of the needs for products to be supplied. The accuracy is important in order to avoid problems down the line and to ensure that supply chain operates effectively. The organization can make on time delivery but quality of products is substandard. This therefore makes quality and defects to be an important metric for measuring the performance of supply chain. The number of rejected deliveries of the power hand tools has to be kept at an acceptable level. Stock out is another indication for better or worse performing supply chain. If the number of stock outs is frequent, this will affect the firm negatively. It will incur costs with regards to transportation and also have poor delivery of the products. Therefore the firm needs to ensure that the stock outs are kept at minimum level. The final metric is productivity. This mainly entails the output of the firm with regards to its internal staff within the production facilities. It can also be perceived in terms of increase or decrease in purchase order.
Issues that will complicate the development of vertically integrated supply chain
Local optimization is the first issue that will complicate development of an integrated supply chain. It involves focusing on the cost minimization and local profit based on lack of knowledge. The batch order phenomenon is a perfect example of local optimization in supply chain. For instance, when the company orders raw materials in bulk, the cost involved is cheaper than ordering in small amounts. The suppliers normally would offer discounts when orders are in bulk. However, there are certain moments when the company would only order aggregate orders and hold back orders. Such a behavior worsens demand forecasting. This is because information about demand is very little in such instances. At the same time, the batch order phenomenon is also related to the bullwhip effect.
The second issue is large lots. This issue creates complications in the sense that it provides low unit cost but fails to reflect on sales. The large lots will allow the company to manage high economy of scale. However, in case purchasing is in large lots and consumers manage small lot consumption, the company will witness an increased inventory. ‘Large lots’ is also related to the bullwhip effect. The bullwhip effect will commonly be observed when the company wishes to forecast distribution channels. As demand changes, the company will witness large swing trends in inventory response. The company will have to make the demand forecast in order to be able to have inventory and other resources well positioned.
‘Incentives’ is the third issue that complicates development of integrated supply chain by pushing merchandize before sale. The company will have to align incentives to supply chain and this involves giving promotions, quotas, quantity discounts, and sales incentives. The areas in the organization which will be subjected to incentives include: sales, marketing, finance, and operations. Incentives will be necessary for inventory levels, on-time delivery, supply chain cost, inventory obsolescence, forecast accuracy, and manufacturing lead time. The reason why incentives are important is that sometimes there are certain factors which make tasks difficult. These factors draw the need for incentives. The factors include: high demand uncertainty, high level of integration with other firms, high inventory turns, and high product complexity. Performance will tend to be high if incentive use is high, and vice versa.
Concepts and methods for effective management in an integrated supply chain
Managing the supply chain in the firm is critical for its success and sustainability. Integrated supply chain management covers various areas. The concepts and methods for effective management of supply chain mainly deal with decisions in supply chain management. The concepts and methods can be classified into two broad categories: operational and strategic. Operational decisions entail the day to day activities while the strategic decisions focus on long term activities. Despite the day to day or long term perspective, concepts in effective management of integrated supply chain strategy will include the following: transportation, inventory, production and location.
In relation to location, the sourcing point, stocking point, and production facilities have to be located strategically for long term planning. This will enable a smooth flow of the products through to the customers as well as having an easy access to the market. In addition location matters for the company because it will increase service level, cost, and revenue. The company will also be required to make decision regarding production in order to effectively manage integrated supply chain. The company may decide to have different production plants to produce different power hand tools. Therefore it will have to make appropriate decisions regarding what product to produce at which plant. This would further imply that different suppliers will be allocated to different production plants and the plants will be allocated to different distributing companies. Similarly, the distributing companies will be allocated to different customer markets.
Inventory is another important area that requires proper decision making for effective management of supply chain. Every stage of the supply chain require inventory management. This can either be in the form of finished goods, semi finished goods, or raw materials. In this area of inventory, proper management requires setting of target goals and working towards meeting the goals. The final concept in integrated supply chain management is transportation. The mode of transportation required at any level of the supply chain is what matters most. The geographic location and the level of customer service are the two determinant factors for the mode of transport selected.
Mitigating risks in supply chain management
Mitigating risks in supply chain management is important to reduce potential disruptions in the future. Disruptions can occur in the following areas: process, control, and environmental. Mitigation of risks is therefore handled through putting in place a risk management program which addresses all these three areas.
Environmental risks mainly relate to the external environment upon which the firm works. An example of environmental risk includes political instability in a region. Mitigating this environmental risk might require the firm rethinking the location of its suppliers and the production unit.
Process risks are mainly internal and an example includes change in technology. This can bring down the operations especially when the company’s competitors use the most advanced technology in their production. Mitigating change in technology will require that the firm updates itself in terms of being informed of the latest trends in production technology and going a step further acquiring the most effective and efficient form of technology in the market.
Control risks are also internal to the organization and a good example of control risk is information breakdown. The systems used to aide in communication can breakdown. Mitigating system information breakdown requires that the firm closely monitors its operations and internal business environment in order to reduce uncertainty.
Manufacturing facility: functional organizational structure
Being a large manufacturing plant, the engineering department is separated from the maintenance department. Activities within this department are run by business managers and not the engineers. This is because of the difference in perception towards operations. Maintenance department will help support function such as storage and inventory management.
This organizational structure will assist the manufacturing facility to function effectively since it will help everyone know what they are required to do. It has split the major tasks in the manufacturing facility into categories and allocated the individuals different tasks. Employees within the manufacturing facility are expected to work together for the overall output of the facility. This will be achieved due to the defined system, scope of authority, functions, and roles summarized in the organizational structure.
Organizational components to be included in the operational function include: division of labor, departmentalization, and the decision making authority. Tasks and responsibilities are divided into titles. Similar job functions are grouped into departments and officials selected to lead the departments. The organizational components are important for effective allocation and delivery of tasks.
Strategic management operational decision
The organization could use strategic management operational decisions to support the implementation of its mission and strategy. The first decision is one the design of goods and services. This decision requires that the organization determines costs, quality, and human resource. It also requires the organization to lower the limits on costs and increases the limits of quality. The second decision can on be on the quality of product. With regards to quality of products, the organization will help to determine the expectations of the customers and establish policies and procedures of achieving quality. The third decision focus on process and capacity design. This decision helps to determine technology, human resource, and cost of the infrastructure.
The fourth decision is selection of location. The decision is crucial in determining the success of the organization. If errors are made in the choice of location, other efficiencies in the organization can be overwhelmed. Another important strategic decision is the design of layout since it is critical for inventory and technology requirements. It is also critical for personnel levels, capacity needs, and material flow. Another strategic decision should be on human resource and job design. Workers are very important in the organization and there is need to improve productivity and build talent. Efficiency of human resource improves reduces cost in the organization.
Supply chain management is another critical area where that requires strategic operational decisions. Decision in this area will determine what the organization needs to purchase, procure, and produce. Other crucial area for strategic management decision making include: maintenance, scheduling, and inventory.
The management of the company should adopt a consumer focused mass customization process in it strategic decisions. Since the supply chain process is customer oriented, the organization needs to base its decisions on customer satisfaction. This brings benefit to both the company and its customers. Convenience is of the essence to customers and the consumer-focused mass customization process address this need directly. Customers can make orders directly at the firm and request for customization of the power tools.
Actions to improve cost effectiveness
1. Supply chain
Improving cost effectiveness of the supply chain is essential for effective performance. As mentioned earlier, the supply chain has complexities and risks involved in it. Amidst the complexities involved, supply chain should focus on increasing coordination among the various levels involved (Heizer, 2010). The company needs to develop an approach to supply chain management which is driven on measurements. The metrics used in measuring performance have been described and the company needs to conduct regular monitoring of its operations. Supply chain management is also faced with numerous risks which can cause the company to incur hefty costs. Risk management programs should be in effect helping the company to identify and mitigate risks, and to make accurate forecast.
Performance management is another strategy to improve cost effectiveness in supply chain. This requires the supply chain to know how the finances are doing, what is happening in the manufacturing department, and develop strategies to increase sales. In the process of performance management, one can measure the order fulfillment and the supply chain management cost. With regards to supply chain management cost, it is important to further measure the order management cost, material acquisition cost, and planning and finance cost (Heizer, 2010). Other important metrics in performance management include: the cost of customer service, finished goods, outbound transportation, fuel, and express freight.
2. Manufacturing facility
Cost effective measures in the manufacturing unit of the company can improve the effectiveness of supply chain management. The cost effective measures for improving operations in the manufacturing facilities include: ensuring delivery of finished products on time, effective management of inventory, ensuring availability of materials, reducing the rate of defects, and improving plant utilization. Another point of concern is that all these requirements are competing and the company is expected to balance all of them at the same time reducing risks and checking costs. The most effective way of ensuring this balance is to integrate all the function of the business for easy flow of information.
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