Small Business Management in st the 21 Century
Small Business Management in st the 21 Century David T. Cadden and Sandra L. Lueder © 2012, published by Flat World Knowledge 1
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Chapter 11 Supply Chain Management: You Better Get It Right © 2012, published by Flat World Knowledge 3
Learning Objectives 1. Understand what is meant by the term supply chain management. 2. Understand the four components of supply chain management. 3. Understand the “bullwhip” phenomenon. 4. Recognize the benefits for a small business in adopting supply chain management. © 2012, published by Flat World Knowledge 4
Learning Objectives 5. Learn about the importance of developing new types relationships with suppliers and customers. 6. Businesses need to strive toward win – win scenarios with their supplier partners. 7. Understand the need for accurate metrics to evaluate the performance of the supply chain management system. © 2012, published by Flat World Knowledge 5
Learning Objectives 8. Understand the major benefits to be derived from adopting a supply chain management system. 9. Understand the challenges of creating such a system. 10. Understand the technical and managerial risks associated with supply chain management. 11. Recognize the benefits for a small business in adopting supply chain management. © 2012, published by Flat World Knowledge 6
Learning Objectives 12. Understand how customer value is enhanced by supply chain management. 13. Understand how cash flow can be increased, in the long-term, by using supply chain management. 14. Understand the various computer programs that make up a supply chain management program. 15. Recognize the risks that can stem from adopting single supplier program. © 2012, published by Flat World Knowledge 7
What is a Supply Chain? • • Different professional organizations have different definitions for the term supply chain management. We will use the following definition: It is a systematic and integrated flow of materials, information and money from the initial raw material supplier through fabricators, manufacturers, warehouses, distribution centers, retailers and the final customer. Its ultimate objective is the improvement of the entire process, which means an increase of economic performance of all participants and an increase in value for the end customer. © 2012, published by Flat World Knowledge 8
What is a Supply Chain? © 2012, published by Flat World Knowledge 9
What is a Supply Chain? • Supply chain management is not limited to the flow of goods and materials. • The successful supply chain requires consideration of both financial flows and information flows across the entire chain. • This consideration must not be limited to the immediate suppliers and immediate customers. • Firms should take into consideration suppliers’ suppliers and their customers’ customers. • In order to be able to do this they must expand the flow of communication and information. © 2012, published by Flat World Knowledge 10
What is a Supply Chain? © 2012, published by Flat World Knowledge 11
Reasons for the Growth of Supply Chain Management • The increasing importance of globalization: – The promotion of free trade and large multi-national trading blocs has lead to a tremendous rise in global trade. • Changes in consumer demands: – Consumers are becoming progressively more demanding. There is an expectation of better quality products with more options and at a low cost. This results in a great need for new products which, in turn, require some significant reduction of life cycle development times. © 2012, published by Flat World Knowledge 12
Reasons for the Growth of Supply Chain Management • Organizations that have recognized the need to change: – Firms recognize that old models may no longer function. They no longer wish to own/control all aspects of operations. Firms are more willing to outsource activities. • Technical innovations: – Today’s approach to supply chain management would be impossible without technological revolutions in the fields of communication and computer software. It would be impossible to operate in a global supply chain without the presence of the Internet. © 2012, published by Flat World Knowledge 13
Key Elements of a Supply Chain • Although different authors identify different components or elements of a supply chain, we will use a simple list that includes four core elements – 1. 2. 3. 4. Procurement Operations Distribution Integration © 2012, published by Flat World Knowledge 14
Key Elements of a Supply Chain © 2012, published by Flat World Knowledge 15
Key Elements of a Supply Chain • Procurement: – Starts with the purchasing of parts, components or services. – However, it does not end with the issue of purchase. – Procurement must assure that the right items are delivered in exact quantities at the correct location on the specified time schedule at minimal cost. – That means that procurement must concern itself with the determination of who should supply parts, components and services. © 2012, published by Flat World Knowledge 16
Key Elements of a Supply Chain • Operations: – Once it has received raw materials, parts, components, assemblies or services from suppliers, the firm has to transform them and produce the product or services that meet the needs of its consumers. – It has to conduct this transformation in an efficient and effective manner for the benefit of the supply chain management system. – A key element in improving operations is inventory control. – This may be done through the use of MRP (Materials Requirement Planning) software or the institution of a Just-in-Time program. © 2012, published by Flat World Knowledge 17
Key Elements of a Supply Chain • Distribution – Involves several activities: • Transportation (logistics), Warehousing and Customer Relationship Management (CRM). – The need to efficiently transport goods has led to a hierarchy of logistics providers: • First party logistics are defined as those who wish to ship goods to a particular location. • Second party logistics providers are those businesses that provide the means of transportation. • Third-party logistics providers specialize in offering an array of services to simplify supply chain management transportation. • Fourth party logistics are firms that function as consultants for Supply Chain Management issues. They are "non-asset” based integrators“ - they simply provide consulting services. © 2012, published by Flat World Knowledge 18
Key Elements of a Supply Chain • Distribution: – The customer relationship management (CRM) component of the distribution element represents the attempt to automate interactions with customers and to facilitate the development of sales prospects through software packages. – The ultimate goal of CRM is the easy connections with customers thus providing them with greater value. © 2012, published by Flat World Knowledge 19
Key Elements of a Supply Chain • Integration: – It's critical that all participants in the service chain recognize the entirety of the service chain. – Failure to overcome the myopia of just being concerned with the immediate customer and the immediate supplier can produce significant disruptions in the entire chain. – These disruptions can significantly raise cost and result in loss of customer value. – Failure to recognize the integrative nature of the supply chain can produce what is known as the “bullwhip” effect. © 2012, published by Flat World Knowledge 20
Bullwhip Effect • In a supply chain, each element will have to forecast its anticipated demand determine appropriate levels of inventory. • If demand falls at the end level, the demand likewise will fall further up the chain. • The rate at which demand inventory levels fluctuate is dependent on the lead time at each level in the chain. • The delay between a rise for the end level and the corresponding rise or fall at the upper level will be a function of this lead-time. • The bullwhip effect recognizes that the amplitude of inventory swings increases as one travels up the supply chain. © 2012, published by Flat World Knowledge 21
Bullwhip Effect • This effect occurs because each element of the supply chain is a relatively narrow focus of just trying to meet the needs of their customers. • If forecast for "shared" demand across the entire chain could be made simultaneously or if the lead time could be significantly reduced, then this phenomenon would not be quite as dramatic or problematic. • The bullwhip effect calls for integrating information across the entire supply chain. © 2012, published by Flat World Knowledge 22
Enterprise Resource Planning (ERP) • An Enterprise Resource Planning (ERP) system can successfully integrate information across the entire supply chain. – This an integrated set of computer programs that brings information about a firm’s accounting, financial, sales and operations into a common database. – One also needs a series of metrics that would indicate the overall performance of the supply chain. © 2012, published by Flat World Knowledge 23
Developing New Relations • • • The concept of working closely and sharing information with customers and suppliers does not come naturally to most businesses. They are used to operating with a healthy suspicion of the motives of customers and suppliers. One way of getting firms to see win-win scenarios is through game theory. © 2012, published by Flat World Knowledge 24
Game Theory • Game theory examines competitive situations in which one’s outcomes may be influenced or dictated by the decisions of other players. • It's been applied to worldwide variety domains such as economics, military operations, political science and business strategy. • It has its own very large literature base and work in this field and has been recognized by several Nobel prizes in economics. © 2012, published by Flat World Knowledge 25
Game Theory • In game theory, there are two types of games: – Zero-sum games: the total benefits for all participants adds up to zero. • Baseball, basketball and most football games can be seen as a zero-sum game because there is a winner and a loser. – Non-zero sum games: the possibility for net results being different than zero. • The loss of one player does not directly correspond to the game of another player. • It is possible for all players to win and for all players to lose, along with the possibility that some players win while others lose. • The classic example of a non-zero sum game is known as the prisoners’ dilemma. © 2012, published by Flat World Knowledge 26
Prisoners’ Dilemma • The prisoner’s dilemma hypothesizes that two criminals (prisoner A and prisoner B) are arrested and charged with the same crime. • At the police station, they are separated, and each is given the following option: – if you inform on the other prisoner, you will be set free, while the other prisoner will receive a five-year sentence. • Both prisoners would instinctively recognize that if they both remained silent, the police would have insufficient evidence to convict both of the crime. • At worst, they would be held in the jail for several months. • If, however, both prisoners informed on each other, they would probably receive a two-year sentence. © 2012, published by Flat World Knowledge 27
Prisoners’ Dilemma • There are four possible outcomes to this scenario: 1. Prisoner A informs on prisoner B while prisoner B remains silent. This is a win for prisoner A and a loss for prisoner B. This is a win-lose outcome. 2. Prisoner B informs on prisoner A while prisoner A remains silent. This is a win for prisoner B and a loss for prisoner A. This is a win-lose outcome. 3. Both prisoner A and prisoner B inform on each other. This situation essentially represents a loss for both prisoner A and prisoner B. This is a lose-lose outcome. 4. Both prisoner A and prisoner B trust each other and remain silent. This results in both prisoners doing a minimal amount of time. In effect, this is a win-win for both individuals. © 2012, published by Flat World Knowledge 28
Finding the “Win-Win” Strategy • Building trust between two organizations is not easy. • It will require significant changes in one or both parties. • Best induced when it is clear to all participants that there was top level management support for the new ways of doing business. • Top management needs to articulate the shared vision between the two organizations. • They need to clearly identify the objectives and metrics to be used by both the supplier and the customer. © 2012, published by Flat World Knowledge 29
Managing Information in New Ways • When evaluating the business’ supply chain is a great need to carefully consider what metrics should be employed. These should include some of the following factors: – Total supply chain cost: All the operational expenditures of a cost associated with the requisite information systems. – Cash-to-cash cycle time: Measures the time between when an organization purchased raw materials and when they are paid by the customer. – Delivery: Percentage of orders that are delivered on or before customer due dates. – Flexibility: The amount of time required to handle a significant ramp up in production. © 2012, published by Flat World Knowledge 30
Managing Information in New Ways • For those seriously committed to maximizing the benefits from successful supply chain management there is the Supply Chain Operations Reference (SCOR) model. – It was developed in 1996 by the Supply-Chain Council in conjunction with others. – The purpose of developing SCOR was to provide methods to measure and benchmark the performance of a business’ supply chain management system. © 2012, published by Flat World Knowledge 31
SCOR • It's predicated upon three major components: 1. process modeling 2. performance measurement 3. determination of best practices © 2012, published by Flat World Knowledge 32
SCOR • The SCOR process modeling component begins with five essential processes that link together the supply-chain: 1. 2. 3. 4. 5. Plan Source Make Deliver Return • The SCOR model attempts to be as inclusive as possible with respect to these five major processes. • This program then goes on to identify specific metrics for almost all of these items. © 2012, published by Flat World Knowledge 33
Benefits of Successful Supply Chain Management • • A small business committed to the development of supply chain management system should understand that it is no small undertaking. It will involve the commitment of significant financial resources to the acquisition of appropriate software. Policies and procedures will have to be changed in accordance with the needs of the new system. Personnel will have to be trained not only in how to use the new software, but also how to adapt to new ways of doing business. © 2012, published by Flat World Knowledge 34
Benefits of Successful Supply Chain Management • Silo Busting: – Supply chain management systems improve communication across all functions within the business. • Improve Communications with Suppliers and Customers: – Enhances the overall value provided to customers. – Leads to longtime relationships with customers which yields significant economic benefits. – Improves the overall operational efficiency with suppliers, and also leads to reduced costs and improved profits. © 2012, published by Flat World Knowledge 35
Benefits of Successful Supply Chain Management • Supplier Selection: – Help businesses evaluate prospective suppliers and monitor the performance of current suppliers. – Can lead to strategic sourcing and significant cost savings plus improvement of the when and where needed variables. • Improvements in Purchasing: – Automation of purchasing reduces errors and improves the economic efficiency of the purchasing function. – Disciplined purchasing can allow for the full exploitation of available discounts. © 2012, published by Flat World Knowledge 36
Benefits of Successful Supply Chain Management • Reduction of Inventory Costs: – Can produce significant cost savings across all levels of inventory. – Improved forecasting and scheduling will lead to increases in inventory turns and corresponding reduction of costs. • Improvements in Operations: – Improved quality control reduces scrap rate which, in turn, can have significant cost savings. – Better production scheduling translates into producing what is needed when it is needed. – The business does not have to spend additional money trying to expedite production of particular orders to customers (which reduces the cost of goods sold. ) – Leads to better utilization of plant and equipment. © 2012, published by Flat World Knowledge 37
Benefits of Successful Supply Chain Management • Reduction of Errors: – Automating processes can produce a major reduction in billing errors and errors associated with purchasing and shipping quantities. – Not only saves money, but improves satisfaction with both suppliers and customers. • Improvements in Transportation Operations: – Accurate deliveries reduces returns and associated costs. – Sophisticated shipping models can reduce the overall cost of transportation. © 2012, published by Flat World Knowledge 38
Benefits of Successful Supply Chain Management • Additional Financial and Benefits: – Such systems can improve the collections process, which impacts customer relations, reduces bad debts, and improves cash flow. © 2012, published by Flat World Knowledge 39
Risks Associated with Supply Chain Management • In Porter’s Five Forces Model, if a force is powerful in an industry it tends to reduce the profit margins of a firm in that industry. • He argued that suppliers are powerful when: – They are concentrated. • When an industry is dominated only a few suppliers, suppliers generally have a greater ability to dictate terms to their customers. – The size of supplier is larger relative to buyers. • Suppliers are powerful when they a large and they are selling to a set of fragmented buyers. – Switching costs are high. • Suppliers have power when the cost of switching to alternative is expensive. © 2012, published by Flat World Knowledge 40
Customer Value • Supply chain management improves customer value in the following ways: – Reduced inventory: • Customers will be receiving orders when they need them. Better communication and better scheduling may enable the supplier to produce the item exactly when it is needed. – Improvement in accuracy of orders: • When orders are shipped, customers have the right items in the right quantity. This doesn't disrupt the production of the customer and eliminates product returns which results in economic benefits for both the customer and the supplier. © 2012, published by Flat World Knowledge 41
Customer Value – Reduced cycle time for product development: • Both parties will begin to better know each other and each other's needs and capabilities. As this evolves the supplier is in a better position to help the customer develop new products far more rapidly. – Financial benefits: • Relatively modest improvements in inventory reduction, reduced safety stock size, reduce stockouts yield surprisingly large financial benefits to both the company and customer. – Peace of mind: • Having a supplier that one can trust to accurately deliver items in a timely low-cost fashion, and who has developed contingency plans to cope with potential problems is relatively unique and provides the customer with a high level of comfort. © 2012, published by Flat World Knowledge 42
Cash Flow • There is great potential for significant improvements in cash flow from minor improvements generated by supply chain management systems. – One area where this occurs is when supply chain systems improve the percentage of correctly filled orders. © 2012, published by Flat World Knowledge 43
Influence of Technology, E-commerce and E-business • It is obvious that contemporary supply chain management cannot be conducted through “paper and pencil” procedures. • The backbone of today's supply chain management is software. Initially, it would be impossible to think of developing such systems without Electronic Data Interchange (EDI). • Today the Internet serves as the basis for sharing communication between suppliers and customers. © 2012, published by Flat World Knowledge 44
Influence of Technology, E-commerce and E-business • Supply chain management requires several types of software packages and the need to successfully integrate them. • Supplier Relationship Management Programs – Involve planning and controlling the actions with upstream suppliers. These programs cover many aspects of procurement – supplier analysis, order execution, payment, and performance monitoring. • Customer Relationship Management (CRM) Software – Handles all interactions with customers. © 2012, published by Flat World Knowledge 45
Influence of Technology, E-commerce and E-business • Enterprise Resource Planning (ERP) Package – Handles the necessary integration of all data. – ERP coordinates data flows from finance, accounting and operations to provide management with a seamless overview of the business’ performance. – May also have a decision support system, which allows for data manipulation or the use of analytical modeling tools to provide a better decision-making environment. – May involve using mathematical programming models to optimize decisions. © 2012, published by Flat World Knowledge 46
Supply Chain Management Information System © 2012, published by Flat World Knowledge 47
Influence of Technology, E-commerce and E-business • Software providers now recognize that small and midsize businesses represent a tremendous market for supply chain management software. • It was estimated in 2008 that the demand for business enterprise software applications for small and midsized businesses would grow at a nearly 11 percent annualized growth rate until 2012. • Several factors can be attributed to this rapid growth use in small to midsize businesses. 1. Many of the software providers were willing to offer inhouse installation at predictable cost. 2. The increasing move to cloud-based software. © 2012, published by Flat World Knowledge 48
Influence of Technology, E-commerce and E-business • Cloud-based Software: – Software resides on an external server. – Businesses connected with via the Internet. • Provides a number of substantial benefits to small businesses: – – – Lower software and hardware costs Installation is significantly easier Maintenance and training costs are lower In some cases, free upgrades Use of Internet-based systems also makes it easier to maintain lines of communications with one’s suppliers and customers. © 2012, published by Flat World Knowledge 49
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