Just in Time supply chains
Dr. Arpita Khare, Faculty, IIIT Allahabad
There have been many new ideas and concepts in management over the last thirty years or so, some of which have endured and others discarded. Perhaps one of the most significant principles to become widely adopted and practiced is that of just in –time . JIT is a philosophy, which emphasizes that wherever possible no activity should take place in a system until there is a need for it. Essentially JIT is a “pull” concept where demand at the end of the pipeline pulls products towards the market and behind those products the flow of components is also determined by that same demand. This contrasts with the traditional “push system”, where products are manufactured or assembled in batches in anticipation of demand and positioned in the supply chain as “buffers” between the various functions and entities. JIT is a philosophy where the entire supply chain is synchronized to respond to the requirements of operations or customers. It is characterized by:
- Close relationships with a few suppliers and transport carriers.
- Information that is shared between buyers and suppliers.
- Frequent production/purchase and transport of goods in small quantities with resulting minimum inventory levels.
- Elimination of uncertainties wherever possible throughout the supply chain.
- High quality goals.
Evolution of supply chain can be traced back to the work of Forrester (1958) who introduced a theory of distribution management that recognized the integrated nature of organizational relationships. Because organizations are so intertwined, he argued that system dynamics could influence the performance of functions such as research, engineering, sales, and promotions. In today's business management, the change that has become most prominent is that individual business can no longer compete as solely autonomous entities, but rather as supply chain.
As companies around the world attempted to adopt Japanese manufacturing techniques like JIT, they realized that plant reorganizations are only part of the program. These techniques demand changes throughout the supply chain. In fact the effectiveness of streamlining efforts such as JIT depends to a great extent on the quality and nature of linkages along the supply chain- the relationship that organizations share with their supplier companies.
Driving Out Inefficiencies:
Business management has entered the era of inter-network competition and the ultimate success of a single business will depend on management's ability to integrate the company's intricate network of business relationships. To survive in competitive environment, companies are realizing that cutting cost and delivering more value to customers has become an essential ingredient for success. Competition is no longer based merely on efficiency and cost but time and quality. And as a by-product of this new competition, supply chain management has escalated from a support function to a core competence that cuts across the entire company.
Modern manufacturing has driven most of the excess time and cost out of the production process, so there is little advantage to be gained on the shop floor. The new competition is supply chain versus supply chain. Business managers face the challenge of integrating the assets and suppliers, so that they can create maximum value. Customers are increasingly time sensitive. To the supplier who fails to recognize the importance of time as a competitive variable or whose systems cannot meet the needs of fast changing markets, the cost can be considerable. In 1994 Compaq Computers, the world's leading manufacturer of personal computers estimated that it had lost between $ 500 and $1 billion in sales that year because of stock outs on its laptop and desktop computers. Such errors in forecasting demand can cost enormously to the company and the management would like not to commit such mistakes.
While General Motors views vehicle assembly and global logistics strategy as core competencies, it wasn't convinced that it had to continue doing the analysis and management of supply chain flow internally. Further the company felt that having an outside specialist perform these tasks could lead to new opportunities for further scale economies. The company decided to enter into a partnership with CNF, and the joint venture was called Vector SCM, created in 2000 with CNF having a majority share. The objective was that Vector SCM would design, implement, and manage supply chains for components, WIP and finished vehicles. While General Motors was Vector's first customer, the plan was to commercialize the service for other major accounts as well. With this business Vector became one of the first firms to actually implement the concept of fourth-party-logistics provider (4PL). As a 4PL the company collaborates with other companies to provide strategic consulting, process reengineering and, optimized operations.
With Cisco's help Ford is working with other major automotive OEMs to design an end-to-end infrastructure that enables an online, centralized marketplace connecting the automotive industry supply chain. Called Convisint, this electronic forum enables a collaborative approach to procurement, information exchange and product development.
Technology has enabled companies in creating information visibility and continuously sharing information with the supply chain partners on line.
Throughout the 1990s, Laura Ashley retail chain suffered severe financial pressure as a result of supply chain failures where paradoxically the company often had too much inventory at the wrong locations and times leading to significant mark-down in price.
Leading organizations have recognized that the key to success in supply chain management is the information system. This extension of the information system beyond the classical dimensions of simple planning and control enables time and space to collapse through the ability to link the customer directly to the supplier and for the supplier to react, sometimes in real time, to changes in the market. The Internet provides a perfect vehicle for the establishment of the virtual supply chain. Not only does it allow vast global markets to be accessed at minimum cost and allow customers to reduce dramatically search time and transaction costs but it also enables different organizations in the supply chain to share information with each other in a highly cost effective way. These extranets are revolutionizing the supply chain management. Organizations with quite different internal information systems can now access data from customers on sales or product usage and can use that information to manage replenishment and to alert their suppliers of forthcoming requirements.
Retailer Tesco has build closer links with suppliers by setting up the Tesco Information Exchange extranet to help implement efficient consumer response (ECR) techniques to reduce waste and increase product availability for customers. Tesco, GE Information Services that is one of the biggest information technology suppliers, and foods group St. Ivel have developed an interactive process for management of price promotions which offers better communication with the producer and allows the sharing of basic supply information. Suppliers can gain access to Tesco sales data and can therefore track their products. The early trials with seven suppliers have shown that suppliers gained significant benefits in their day to-day business.
In India also, companies have realized the strategic importance of making the supply chain efficient and responsive to the changing market demands. Deploying technology to make the supply chain efficient on the parameters of time, quality and cost has become a challenge for most organizations. The more awareness the company has about its customers, the better equipped it will be to deal with their needs, but also to be able to manufacture the desired product on time. This requires more flexibility and visibility with the supply chain partners and sharing information on the real time basis.
One of the first Indian companies to go hi-tech, Asian Paints has always kept its competitors at bay by constantly re-innovating its business processes and systems. Asian Paints' adoption of new technology and its implementation of supply chain management systems have been key drivers of company's successful performance. The IT infrastructure the company had, was largely a set of common applications deployed in decentralized fashion in plants and sales offices. The main accounting and reporting applications (customer accounting, vendor payments, and financial statement creation) were centralized but the need to operate with substantial time lag that resulted in delayed reporting. Asian Paints looked at ERP solutions with global ambitions and it custom designed and embedded the processes.
Based on the recommendation of Booz, Allen and Hamilton (BAH), Asian Paints restructured itself and adopted ERP and SCM solutions. The SAP R/3 project was divided into 8 high levels business processes with a team comprising people from various business units and IT units besides the company's implementing partners. SAP was essentially deployed to cover all operations of the company in India. The solutions facilitated open architecture to be integrated with the extended enterprise and other best of the breed applications. While implementing the ERP and SCM solutions, Asian Paints made significant investment in connectivity also, because it operates SAP on a single enterprise client server platform, which is accessed from all 88 locations.
In 2001, Dabur decided to tackle its extended supply chain of over 30 factories, six key warehouses, and 52 stocking points distributing over 1,000 SKUs to 10,000 stockists countrywide. The company needed a system to accurately control distribution and sales forecasting to reduce inventory in the pipeline. An easy-to-use, Intranet-based data warehouse developed in house displays as-of-yesterday's sales, stocks, receivables and banking. Over 5,000 ASP pages meet almost all reporting requirements and make this a single source of information for all levels of decision makers. By integrating its primary and secondary supply chains, Dabur intends to reduce the number of days of inventory carried in the pipeline by four from the 29 days and save Rs. 5 crore in the process. Beyond this the system lets it forecast seasonal spikes in the sales and manufacture accordingly.
Supply chain management encompasses collaborative planning and the control of the manufacturing, distribution and consumption of products and services by the organizations. Today all these activities need to be managed in a manner where the company is able to not only order from suppliers just in-time, manufacture it keeping the market fluctuations and variability in consideration and, ultimately selling the merchandise at the price which is perceived by the consumer as an valuable transaction.
Technology has not only made the whole process more transparent but has also enabled companies in fostering better relationships with their suppliers and distributors. Just in –time supply chain has helped companies reduce operating and inventory costs, and also controlling and coordinating supply chain in an effective manner.
We are moving towards a convergence where technology would provide organization not only with profits but would also enable them in having better understanding of their customers and markets. It would mean integrating operations in different countries and managing supplier networks in a manner, which would ultimately reap benefits to the customer. Competition has taken a new dimension and technology has made it possible for companies to integrate their supply chains so that they are able to provide maximum value at the minimum cost.
Restructuring the Organizations:
The challenge today for organizations is to develop systems and ideologies that would be equipped to face the onslaught of competition. The new face of competition has brought forth a number of issues; integrating technology with the traditional business structures, equipping personnel with the technological innovations so that they are able deal better with adverse situations and, adapting to the customer who has become focused about the value dimension. Competition has created urgency for the organizations to cut down cost and focus on quality. Manufacturing has taken a backseat, and the thrust areas of today's battles are supply chains. Creating efficient networks that would not only cut down the cost at all levels of manufacturing and would also make information available to the company on a real time basis. Supply chains have become the most critical strategic tool, which must match with not only the organizational goals but with the business objective.
For most companies, it has become imperative to remodel their existing organizational structure in a way that it can fulfill not only the quality and cost considerations of the company but also satisfy the customers. As customer satisfaction gains more predominance in the business operations, managing suppliers and networks also becomes essential. Present technology has to be integrated to suit the needs of the organization and supply chains have to designed and coordinated to effectively cater to the market. Organizations are now engaging the services of the consultants and software companies to not only reallocate the resources but also create better visibility in the supply chains, which would enable the management to better, integrate information. In India most of the companies have upgraded their traditional structures and processes to combat the onslaught of foreign companies and competition. Technology has enhanced the decision making process and made it easy for companies to understand and interpret the needs of the customer and market in a better way. As most of the multinationals were already equipped with better technology and supply chain solutions they were able to manage their distribution channels in an efficient manner. Competition has taught companies to cut down their operating costs. Indian companies also woke up to the realization that to function efficiently it was important to manage their supply chains in a better manner. Technology cannot be taken as a panacea of all evils; strategies have to be designed to better integrate the business processes.
Wal-Mart is thriving on the use of extranets and private hubs with its world-renowned retail link system. In the late 1990s, creating the New Retail Link Private Hub, which allows more than 10,000 Wal-Mart suppliers to log into a Web portal, peruse databases, and find out which store sold how much of its products. With a latency of a mere six hours from transaction to analysis, Wal-Mart's supply chain management system also enables buyers and vendors to forecast how much of the product has been sold each month during previous years which allow vendors to forecast how much inventory to have ready for a given period.
Cisco has created a network of component suppliers, distributors, and contract manufacturers that are linked through Cisco extranet. This helps form a virtual, just in-time supply chain. Their system starts when a customer orders a typical Cisco product, a router that directs Internet traffic over a company network through Cisco's website, the order triggers messages to contract manufacturers of printed circuit board assemblies. Distributors, meanwhile, are alerted to supply the generic components of the router. Next the system looks around in order to verify everything is going okay. A bar code is then put on the product, the product is checked and verified and only then can the product taken to floor.
The new perspective involves:
- Developing strategies that would enable organizations to adapt to the technological and managerial changes to combat to competitive business environment.
- Designing organizational structures that ensure timely and efficient flow of information.
- Strategically selecting the right partners, software solution providers and suppliers.
- Evolving supply chain networks that closely correlates with the type of product the company is manufacturing.
- Identifying processes and functions, which require greater transparency and information sharing.
- Developing a business model, which involves the customer and the supplier in product design and development.
The company that creates the most responsive and effective supply chain network is bound to succeed. The wide spread use of advanced manufacturing approaches like JIT have enabled organizations to operate with very low levels of inventory. Unfortunately, this makes operations vulnerable to supply disruptions due to factor such as poor quality. These disruptions have a greater consequence for companies, which no longer carry inventory. Therefore quality capabilities of vendors are critical in the vendor- manufacturer relationships. Customer and supplier organizations are increasingly working together to upgrade value-adding capabilities across the chain to eliminate potentially costly supply problems.
Better coordination between suppliers and manufactures can to a certain extent ensure creating networks that help organizations to be closely attuned to the customer needs. JIT supply chains have to be focused in gratifying the needs of the customers and providing him with the best value proposition. Information technology is just driving out the inefficiencies and delays from the organizations.
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