TITLE: POTTER CASE STUDY
1) INTRODUCTION
2) PROBLEMS BEING EXPERIENCED IN SUPPLY CHAIN IN POTTER’S COMPANY
3) PROPOSAL FOR IMPROVING INVENTORY MANAGEMENT
4) CONCLUSION
5) REFERENCES
1) INTRODUCTION:
According to Lummus & Vokurka (1999), The supply chain is a network of suppliers, factories, warehouses, distribution centers and retailers through which raw materials are acquired, transformed and delivered to the customer. Supply chain management is the strategic, tactical and operational level decision making that optimizes supply chain performance. The strategic level defines the supply chain network, i.e., selection of suppliers, transportation routes, manufacturing facilities, production levels, warehouses, etc. The tactical level plans and schedules the supply chain to meet actual demand. The operational level executes plans. Tactical and operational level decision making functions are distributed across the supply chain.
A supply chain includes all the activities, functions and facilities involved (either directly or indirectly) in the flow and transformation of goods and services from the material stage to the end-user (Russell and Taylor, 2000, Handfield and Nichols, 1999). SCM aims to integrate the various structures and processes of the supply chain, facilitating and coordinating the flow of goods and services and the flow of information necessary to provide the value that customers demand.
Effective SCM probably hinges more on an understanding of the business processes that must work together than on the choice of technology. Usually, SCM projects are complex and the required outlays of time and money are great (McCormick, 2001). Many large companies are conglomerations of business units and acquisitions across
the globe (Spiegel, 2001). It may take years to integrate the supply chain of such companies. It is necessary to know how people work together and what kind of information will be exchanged in order to determine which technologies can support these exchanges and the best way to connect them (Ramos, 2001). According to Cox (1997a), a way of thinking that is devoted to discovering tools and techniques that provide for increased operational effectiveness and efficiency throughout the delivery channels that must be created internally and externally to support and supply existing corporate product and service offerings to customers.
2) CAUSES OF THE PROBLEMS BEING EXPERIENCED IN THE SUPPLY CHAIN:
a) DIVERSE PRODUCTS:
Potter supplying diverse products to the customers. It satisfies the customer but it is one of the demerits to do business because if the range of the products selling more, there is a big process started from that point
I. Making contact with the suppliers
II. Selecting the suppliers
III. Making contract with the selected supplier
IV. Making purchase orders
V. Receiving the goods
VI. Cross checking the goods
VII. Storing the goods at right place
VIII. Making the products available for selling
IX. For selling the products advertisement is needed
X. Selling the products to the customer
XI. Transportation
For doing all these process Man power, money, space, equipments, methods and time is required. So if the products range is increasing the more the requirement of man power, money, space, type of methods used ( inventory management and technology used).
b) LARGE CUSTOMERS:
The customers which potter is having are not regular customers. The customers may come again or may not. If the customers are not regular for forecasting the demand of the products are vary. Still potter can estimate the demand but it can be right or wrong. If it is right then there is no problem if it is wrong then there is a chance of unavailability of goods or over stock of goods. If the goods are unavailable the service level is low. If the goods are over stocked it means more investment less profits because holding a goods in the store leads to spoilage, pilferage, stolen and inventory management costs etc. There is chance to over demand or less demand of products. So potter should have some contract with potential home builders, home builder have number of contracts to build the complex or what ever, every time he will come and purchase the products from potter company.
c) OWN TRANSPORTATION:
For delivering the products to the customer potter using own transportation.
Own transportation will give some benefits to the organisation. Those benefits are
- Flexibility of hours for shipping & delivering goods
- More control
At the same time some disadvantages are there more responsibilities, labour cost and maintenance etc.
d) NUMBER OF SUPPLIER:
The supplier is a person who will supply the goods to the organisation. If the number of suppliers are more the more the difficulties are, those are
- different delivery timings
- need to maintain good relation with all the suppliers
- different lead times
- different technology used by each supplier
e) STORE ROOM IS TOO SMALL:
For storing all the products the store room is to small, so potter can use the system of cross docking or for storing the goods store room’s space must increased.
Cross docking: According to Kinnear (1997), cross docking can be defined as receiving product from a supplier or manufacturer for several end destinations and consolidating this product with other suppliers’ product for common final delivery destinations. The key to the process is transshipping, not holding stock. Equally important is the process of turning expensive delivery consignments into economic loads through consolidation and resource sharing. Key cross-docking elements were apparent: integrated resources, no stockholding, and sequenced operational process. When this cross docking system is works efficiently are same fixed delivery timings for all suppliers, arranging fixed delivery timings for all the customers. By following this cross docking system whether the store room is small also no problem for the potter because there is no need to hold the products in the store, there is a minimum space is required to store the safety stock. Still there is a problem it is very difficult to manage the same delivery timings to all customers, because some customers order the products and ask the products immediately, some may order in advance. For doing cross docking effectively updated information is needed.
The advantages of following cross docking are
a) Increase profits
· Sales increases
· Increased pricing
· Productivity increases
b) Reduces operating costs
c) Reduces working capital
· Less Inventory management
· Reduced property (space)
· Less equipment is needed
· Less time spend on controlling the inventory
· Reduce debtors
d) Increased cash flow
LACK OF INVENTORY CONTROL SYSTEM:
Potter facing a problem of lack of inventory control like sometimes they don’t know whether the product is available in the store or not, the product is there in the store but they are thinking it is not there. They can solve this problem by using the proper information technology system and by using bar code systems. For example any product delivered in the store, immediately bar code should give to that product and entered in the system so that they can know easily how much stock they have. If they got any order of that particular product and they delivered it. It is easy know that whether how many units of product they have and how many units they have to make a purchase order.
For any business there are three types of products, one is fast moving products which will sell fast, second one is medium moving products which will sell averagely and third type is slow moving products which are sell very rarely. So while making inventory or purchase orders it should be kept in a mind that what type of product we are ordering. It is necessary to order slow moving products because any customer
generally needs sand, bricks and concrete along with that he need hardwood timber, if sad is available and hardwood timber is not available, then he need to go to another store to purchase so it may lead to customer dissatisfaction or customer retention because he will go the store where he can get two items.
Each store should plan properly for storing the products like store is divided in to compartments of fast moving products, medium moving products and slow moving products and each product should have bar code so that it is easy to control the inventory. Main drawback for potter supply chain is unavailability of important products in the store it can be solved by proper control of inventory. There are three ways to reduce the cost of inventory (www.2)
a) Reduce Transportation Lead Times
Perform a geographical analysis of suppliers and should know how close to you geographically. How far away the key suppliers are located if they are less than one hour’s drive or two days lead time, if they are close to you then it is not necessary to maintain a safety stock. Consider reducing safety stocks and implementing a ‘just in time’ delivery service for key items when unusual spikes in demand occurs it is not a major problem to solve. So lead time will effect indirectly selection of the supplier and it will benefit the company to reduce the cost. So it is important to select the supplier who is located geographically close.
b) Reduce Order Quantities
In accordance with just-in-time principles, reducing the lot size will also reduce inventory levels. This means that the delivery frequency will increase. Care must be taken to understand the trade-offs in other logistical areas such as warehousing so costs do not increase overall. For example, material handling costs may increase more than the inventory cost savings for certain items.
c) Ensure Accurate Forecasting
The main challenge is to get access to ‘clean’ data. Promotions, specials and one-time events ‘cloud’ the data from the normal weekly demand for items should keep in mind while doing the forecast. Invest in systems and processes to ensure that getting an accurate forecast as possible. Once if you got an accurate forecast it is possible to manage other levers such as transportation lead time to reduce safety stocks.
PUSH SUPPLY CHAIN:
According to Lysons & Farrington (2005), a push strategy is when products are manufactured in anticipation of demand and production is based on long-term forecasts and therefore, uncertain. Push based supply chains are associated with high inventory levels and high manufacturing and transportation costs, due to the need to respond quickly to demand changes. But there is another system which will works effectively compared to push supply chain system is called pull supply chain system. Pull strategy is when products are manufactured to specific orders rather than forecasts. Thus, demand is certain and inventory is low or non-existent. Because information about the customer demand is quickly transmitted to the various supply chain participants, the bullwhip effect is avoided.
BULL-WHIP EFFECT:
A well-known example of supply chain dynamics is the bullwhip effect, a term first
coined by the logistics executives of Procter and Gamble (Lee et al., 1997). It is so-called because small order variability at the customer level amplifies the orders for upstream players, such as wholesalers and manufacturers, as the order moves up along a supply chain.
When consumer sales show relatively constant demands, the demand/order placed by a retailer to a wholesaler is likely to fluctuate more than the actual demand perceived by that retailer. The wholesaler’s order to the manufacturer and the order of the manufacturer to the supplier fluctuate even more. This increase in the variability of orders at each stage in a supply chain is often called the bullwhip effect (Bagchi & Skjoett, 2007). Bullwhip effect causes excessive swings in different demand or inventory-stocking points throughout the supply chain. This swing is also likely to be wider upstream in the supply chain.
Owing to the excessive swings and the amplification of demands, the bullwhip effect is a major concern for participants involved in a supply chain. The increased variability and uncertainty requires each member of the supply chain to increase the level of stocks in order to maintain established service levels causing increased inventory holding costs due to overstocking throughout the supply chain, and leads to inefficient use of resources, and eventually results in poor customer service and profitability. Because the bullwhip effect has the detrimental impacts on the performance of the whole supply chain, many researchers have attempted to identify possible causes of the bullwhip effect.
Lee et al. (1997) discussed four possible causes of the bullwhip effect: demand forecast updating, order batching, price fluctuation, and rationing and shortage gaming. Demand forecast updating suggests that demand amplification occurs due to the safety stock and long lead time. As orders are forecasted and transmitted along the
Supply chain, the safety stocks are built up, and thus the bullwhip effect occurs. Material requirements planning or economics of transportation require companies to order goods at certain times. This periodic batching causes surges in demand at a particular time period, followed by the periods of time with no or little orders, and other time periods with huge demands. Price fluctuation, which usually results from price discount or promotion, also distorts buying pattern and creates bigger variability of demand and demand lumpiness. Finally, when demand significantly exceeds supply, manufacturers often ration products to their customers based on what they order.
Recognizing this rationing policy, the customers place orders larger and more frequently than what they really need with a hope of getting more products. This tendency is similar to excessive ordering without fully considering the orders that have been placed before but not yet received, resulting in distorted demand information. The arguments of Lee et al (1997) are different from those of the two previous researchers in that they no longer blame the irrational behavior of decision makers for the bullwhip effect. Rather they think that the bullwhip effect is a consequence of rational behavior given the supply chain structure and its related processes.
HIGH SERVICE LEVEL V MINIMISING COSTS:
According to MARTIN (1998) Customer service is to provide time and place utility in the transfer of goods and services between buyer and seller. According to CROCKER AND EMMETT (2006) Service is concerned with continually meeting the customer needs as the market changes and involves support available, product availability, flexibility, reliability, and consistency Customer service level is variable and each customer variable has a cost associated with it. Customer service level can be increased by many aspects of the total service offering. Those aspects are delivery and availability of goods, but also quality of the goods, cycle lead time, cost and service levels. Quality, cost, service and lead time are all interlinked. How they are interlinked means providing good quality of goods to the customer at right time, at right place and at right form leads to good service. So the goods can be given to the customer at right time means because of right lead time and the cost of the product is right and reasonable means it can be achieved because of good supply chain management.
The business is about selling the goods for minimum costs or less cost with right quality, at right time, at right form. If company want follow this they should concentrate on supply chain management because in this area any company save the value added costs. So providing high service level with minimum costs can be achieved by
ERP/ EXTRANET:
ERP means Enterprise Resource Planning. The Enterprise Resource Planning is a software package (applications) integrating the whole company management. These applications have been designed in order to model and computerise most of the basic processes within a company, from financial management to manufacturing, and to unify all the software (applications) of an organisation. Logistics is about Monitoring of sales, distribution, management of materials and/or products, warehousing and transport management, purchase management and order, inventory stocks, etc. so if the potter company is computerised then it is easy to transfer the data about supply or demand to the suppliers (www.3).
An Extranet is an Intranet open to those who do not belong to the organisation owning the Intranet (customers, suppliers or distributors) that provides security and confidentiality warranties. It can therefore be defined as a part of an Intranet that can be accessed by other companies through the Internet or as a tool that makes possible co-operation between different organisations (Berger & Gattorna, 2001). Only those members collaborating with the company owning the Intranet can access the shared information.
The main advantage of an Extranet is that it uses the Internet as communication technology, so that a mere connection to the Internet allows access to an Extranet and communication with the owning company. Moreover, the Extranet provides a package of communication and integration services useful to both small and large companies. So the advantages of extranet is one of the tool of advertisement, providing information to suppliers, distributors and bringing real time visibility of information to the customer.
ECR promotes efficiency initiatives in four areas: promotion, product development, product replenishment and store assortment. The ultimate objective of ECR is thus to reform a supply chain in such a way that products can be brought smoothly and continuously from manufacturer to consumer, as a result of timely, accurate and paperless information flowing from consumer back to manufacturer.
INTEGRATED SUPPLY CHAIN:
According to Jan, Tage & Herbert (2003), the Integrated Supply Chain Management (ISCM) project addresses coordination problems at the tactical and operational levels. It is composed of a set of cooperating, intelligent agents, each per-forming one or more supply chain functions, and coordinating their decisions with other agents -this is called a Logistical Execution System (LES) (www.1). By following the integrated supply chain system potter can get the important updated information by agents.
THIRD PARTY LOGISTICS:
Generally Logistics management consists of three core functions: transportation management, inventory management, and value added services. Third party logistics is defined as when a third party is brought in to help manage these functions. A TPL provider is an independent economic entity that creates value for its client. A trucking company, a warehouse operator, and a contract manufacturer can all be considered third parties. Some of the benefits include reduced need for personnel, reduced transportation and distribution cost, improved customer service, improved cycle time and freed up capital in manufacturers and marketers non-core areas. TPL can leverage tremendous freight volumes in contract negotiations with carriers to receive rates lower than what an individual shipper could obtain (Cooke 1998).
By the 1990’s TPL saw the consolidation of both warehousing and transportation organisations to offer logistics support to logistics. TPL provide an opportunity to reduce costs and through value-added services provide higher levels of customer satisfaction via third party logistics (Tompkins 1999) and international distribution networks (Bask, 2001). Potter is facing the problem of low customer service so by implementing the system of TPL they can improve the customer service. The most often-cited risks are associated with loss of control over the logistics function and loss of in-house capability and customer contact (Ellram and Cooper, 1990).
4) CONCLUSION:
Potter company having the very good resources to do business, but for improving the customer service, the company should concentrated on integrated supply chain management, inventory management, selection of the suppliers, store management, using cross docking system, avoiding bull-whip effect by following the pull strategy system, using TPL, dividing the products ( fast, medium & slow moving products), making contracts with home builders, they should use the ERP/Extranet to update the information about the availability of products so then it is easy to understand how much quantity is required, even by using the extranet the suppliers can know how much the requirement of products, what are they etc. in so many ways potter can improve supply chain management to improve high level service and minimising the costs.
5) REFERENCES:
Cooke, J. (1998). “To outsource or not to outsource?” Logistics Management
& Distribution Report. 37, pp.57-60.
Crocker B, Emmett S. (2006), “The Relationship-Driven Supply Chain”, creating a culture of Collaboration throughout the chain, Gower publishing limited.
Cox, A. (1997a), Business Success, Earlsgate Press,
Ellram, L.M., Cooper, M.C. (1990), "Supply chain management, partnerships and the shipper-third party relationship", International Journal of Logistics Management, Vol. 1 No.2, pp.1-10.
Kinnear E. (1997), “supply chain management”, Is there any magic in cross-docking, Vol. 2, No 2, pp. 49-52, MCB university press.
Jan. M, Tage S. and Herbert K. (2003), “Exploring the contours of Supply Chain Management”, Integrated Manufacturing Systems, Vol. 14, No.8. pp. 686-695.
Syed M.A. (2003), “How to Choose an Effective Third Party Logistics Provider”, Vol. 26, No.7.
Lee, H.L., Padmanabhan, V. and Whang, S. (1997), “The bullwhip effect in supply chains”, Sloan Management Review, Vol. 38 No. 3, pp. 93-102.
www.1-- http://www.eil.utoronto.ca/iscm/index.html