Careful management of the Supply Chain critical to keeping an organization’s production and distribution costs low, especially important in these times of economic crisis.
Effective management of the supply chain is a core issue of management in any industry these days. Inadequate production results in low profits and overproduction results in excess stock which is not demanded. Success thus depends upon finding the balance between demand and supply and this is where management of the supply chain plays a critical role.
The supply chain involves activities starting from the purchase of raw materials to the distribution of end products to customers. Supply chain management achieves cost minimization by better utilization of resources such as distribution and production abilities while controlling costs incurred by inventory, transportation and production (Harrison and Lee, 75). Shifting production to an area of lower wage rates and production costs does not result in cost cuts, timely distribution and inventory management are also required. For this purpose, supply chain management is very critical. For example, General Motors follows a supply chain management model known as Planets for efficient production and distribution to cut costs (Harisson and Ganeshan, 01) as they distribute cars all over the world which are produced in more than five countries.
Today, when the global economy faces a crisis, supply chain management is the key to cost minimization. An efficient supply chain brings production facilities closer to the market. Multinational companies especially rely on efficient management of production and distribution costs in order to make profits. Transportation cost alone for example can wreak havoc for companies if managers do not carefully plan which mode of transportation to use. Similarly how much stock to hold in inventory is another important decision nowadays because the more inventories one keeps, the more is the cost to keep them. Companies have low liquidity and thus cannot afford additional costs.
Nearly all Supply Chains are global. The implications for Supply Chain management
The world today is facing rapid globalization and organizations have reached beyond borders. Companies look for viable manufacturing facilities to cut down labor and production costs and at the same time buy cheap raw material. When an organization has customers all over the globe and production facilities scattered, then the need of the day becomes building global supply chains.
The supply chain has to be global when production and distribution operations are located around the world. Communication takes place twenty-four hours a day, problems can occur at any hour, finished goods have to be delivered on time and collaboration and coordination between business units is required every moment (Krivda, 02). All this cannot happen without a global approach to the supply chain.
The challenges offered by globalization are now affecting corporate decision-making concerning the supply chain. Companies have already started planning investments in supply chain visibility, forecasting of demands, technological advancements, operational and sales planning, etc. synchronization of business units is an important implication of the supply chain and if this issue is not catered to then there can be serious problems. Building effective competencies, enhancing performance, managing change and culture, meeting customer and supplier requirements are all the topics related to the changing context of supply chain management (McPherson, 10).
Forecasting is important for the successful management of the Supply Chain. Pros and cons of the different methods for demand forecasting
Demand forecasting is calculating the quantity of a product or good that a customer will buy. There are basic two types of demand forecasting; qualitative and quantitative. Qualitative forecasts use factors such as intuition, emotions, value systems, etc. The quantitative approach includes methods that employ mathematical models (Heizer and Render, 107).
The quantitative methods are based on historical data. Even though the calculations are mathematical, one cannot rely on historical data as past trends are not 100% predictors of future trends. A clothing company cannot rely on quantitative methods of forecasting only. Similarly, qualitative methods involve the understanding the impact of factors such as technology, market data, and environment, etc on the sales of a company (Heizer and Render, 111). This is good but exact estimations can never be made. For example, changing seasons have to be forecasted for the demand for clothes as summer clothes cannot be sold as much in winters as they can be in summers.
Qualitative methods rely upon intuition and emotions. Techniques such as Delphi and consumer market surveys have been popular methods of demand forecast. Taking customer views before forecasting about a product gives important insight into the demand of the product or the liking of the product. It also what kind of people would buy a certain product. Though, relying solely on the view of people as preferences and buying behaviors vary from person to person. Such techniques are more helpful in designing and planning a product than forecasting sales (Heizer and Render, 107).
Question 4: Why is it important for the managers in the Supply Chain to coordinate their activities closely to minimize their costs?
Coordination among business units is an important factor for cost minimization in the supply chain. A supply chain is composed of partners that are related to each other financially. Coordination and collaboration are a source of competitive advantage for firms (Haghight, 01). Communications are swapped constantly, procedures and associated troubles happen around the clock, and clarifications are required at every moment. A previously distinct supply line has converged, stressing the necessity for collaboration and coordination. A simple example to illustrate the importance of coordination is ordering activity. If the production unit produces less of a product, the sales unit will be unable to meet customer demand. If the production unit overproduces the product, it will result in inventory costs. Similarly deciding how to send the goods produced in Mexico to England is an important decision. Air cargo costs more but safety is guaranteed. Shipments cost less but safety is compromised. Timely delivery is another related issue. Thus miscoordination of businesses can cause extra costs and loss of customers resulting in waste of goods or products. If a customer does not get what it ordered, he won’t buy it.
Thus what is required is the rapid exchange of information between all units in order to achieve efficiency and effectiveness. Ongoing communication results in a reduction of errors which eventually lead to cost-cutting and raised profits.
Heizer, J. and Render, B. Operations Management. 7th edition. Published by Prentice Hall. 2002.
Lee, H. and Harrison, T. The practice of supply chain management. Illustrated Edition. Published by Springer, 2003.
Haghighat, F. The Impact of Information Technology Coordination Mechanisms of Supply Chain. World Applied Sciences journal 3. 2008. Page 01.
Krivda, C. The global supply chain. Business Week. 2005. Page 02.
McPherson, A. Corporate Directions in Supply Chain Management: Implications for SME Competences and Inter-Organisational Relations. 2001. Web.
Ganeshan, R. and Harrison, T. An Introduction to Supply Chain Management. Page 01. Web.