Logistics and
Supply Chain
Management
TOPIC 12: COMPLEXITY: SUPPLY CHAIN-RELATED RATIONALISATION IN OPERATING NETWORKS
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MS. BING HAN
Learning Objectives
1. Articulate the challenge of complexity in SC design.
2. Identify and discuss the sources of SC complexity.
3. Define SC rationalisation, identify the key areas of the supply chain that must be rationalised, and discuss supply-base optimisation as an example of the rationalisation process.
4. Define role shifting, discussing its benefits and threats. Explain how role shifting improves the competitiveness of an individual company the entire supply chain.
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Complexity
Complexity characterises the behaviour of
a system or model whose components interact in multiple ways and follow local rules, meaning there is no reasonable higher instruction to define the various possible interactions.[1]
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Simple systems – examples
AN A PENDULUM A WHEEL AN ORBITING OSCILLATOR PLANET
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An example of a complex system – bird swarms
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Complex systems – examples
• Governments
• Families
• Human body—physiological perspective
• A person—psychosocial perspective
• Ecosystem of the world
• Business organisaitons
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Chrysler’s Supply Chain
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Characteristics
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Characteristics of complexity
Numerousness Variability
Interdependency
Uncertainty
Source: , Complexity in Supply Chains
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Challenge of Complexity in Supply Chains
Complexity increases:
Confusion
The probability of counterproductive decision making and diminished competitiveness.
Complexity may be necessary to drive the value proposition.
Cost of complexity can not outweigh the value.
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Sources of Complexity
1. OrganisationalStructure
2. Value-AddedProcesses
3. TheOperatingNetwork
4. StockKeepingUnits(SKUs) 5. TheSupplyBase
6. TheCustomerBase 7. TheLogisticsSystem
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Organisational Structure Issue: decision-making authority
Centralised – leverages scale to reduce cost
Decentralised – leverages local knowledge to build relationships and promote rapid response
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Centralised vs. Decentralised Structure
Increases leverage Reduces duplication Facilitates standardisation Enables specialisation Greater control
Knowledge of local needs Better local relationships Greater responsiveness
Centralised Structure
Increased bureaucracy Reduced flexibility
Can lose touch with reality
Decentralised Structure
Reduces leverage
Leads to duplication
Is relatively inefficient
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Team-based structures Policies to promote centre-led,
decentralised organisation
Measurement systems that promote cooperation, support local autonomy and accountability
Modern communication and database technologies
Organisational Structure – Solutions
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Value-Added Processes
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Processes add complexity because they:
◦ involve a number of people from different functions;
◦ consist of a large number of distinct activities;
◦ employ a variety of capital equipment;
◦ design, produce, or deliver a wide range of products.
Value-Added Processes – Solutions
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Standardisation
Error Proofing
Synchronisation of Material Flows
Operating Network
Operating networks add complexity because of the number of distinct facilities that must be coordinated.
Efforts to “optimise the supply chain” using sophisticated mathematical models often fail over the long term because:
operating networks evolve over time;
acquisitions complicate network design;
macroeconomics and political stability influence network design.
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Operating Network – Solutions
Managers should analyse the supply chain in terms of the following questions:
1. How many facilities do we really need to achieve desired service levels?
2. Where should they be located?
3. What activities will be performed at each?
4. How will the value-added activities be coordinated and controlled?
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Company SKUs
Product proliferation adds to SC complexity.
Breadth complexity
◦ Wide range of products
◦ Low profit margin
◦ Relies on inventory turns and efficient operations
Depth complexity
◦ large number of options for the products carried
◦ High profit margin
◦ Relies on customer service and distinctive products
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Company SKUs – Solutions
Managers wishing to reduce complexity due to product proliferation should:
Proactively manage the breadth versus depth decision Using total cost analysis, eliminate unprofitable SKUs Institute policies to reduce proliferation
Use postponement strategies
Use database and data mining tools
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Impact of Options on the Complexity
Product Characteristic
Colour: Charcoal, Field Khaki, Khaki, Cognac, Brown, Olive, Steel, Navy, and : blended 60% cotton/40% polyester or 100% cotton
Front: pleated or plain
Rise: long, regular, short, big/regular, and big/tall
Waist Size: 30, 31, 32, 33, 34, 35, 36, 37, 38, 40, 42, 44, 46, 48, 50, 52 inches
Length: 27-38 inches Bottom: cuffed or plain
Total SKUs
Simplified SKUs via Postponement: Simplified SKUs via Data Mining:
Number of Options
9x2x2x5x16x10x2 = 57,600
9x2x2x5x16x1x1 = 2,880 1,300
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The Supply Base
Traditionally, American manufacturers have sourced parts from multiple suppliers to hedge against disruptions and create leverage to drive down costs.
Multiple redundant suppliers, add complexity to the supply chain.
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Single or Multiple Suppliers
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The Supply Base – Solutions
To reduce complexity, supply-chain managers may seek to reduce the number of suppliers and aggregate purchasing.
ABC Classification Systems
Supplier Certifications
Long-Term Partnership Style Relationships
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Supply Base Optimisation Process
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ABC Suppliers Classification
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Supply Base Optimisation Process
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Supplier Selection Process
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Supply Base Optimisation Process
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The Customer Base
Customers generally have greater power in supply chain relationships.
Customers use this power to demand consistently higher levels of service without additional compensation.
Customer proliferation may result in suboptimal profits.
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The Customer Base – Solutions
Managers may seek to address an unwieldy customer base by:
ABC Classification Systems
Customer Relationship Management (CRM)
software to segment customers
Sophisticated cost analysis to evaluate customers
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Logistics System
Logistic systems are complex due to:
◦ The number of transportation modes available ◦ The number of different facilities involved
◦ Geographic dispersion
◦ Product proliferation
◦ Variation in demand
◦ Variation in customer requirements
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Logistics System – Solutions
Managers may seek to address logistics system complexity by:
Adopting advanced technology – ERP, DRP, CRM systems; database management; data mining.
Outsourcing – third-party logistics Insourcing – on-site third-party logistics Innovative practices
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SC Rationalisation
Supply chain rationalisation is the process of systematically evaluating the company’s operating network, suppliers, customers, and product offerings to find and eliminate inefficiencies and redundancies.
The goal is to efficiently allocate scarce resources to a company’s most profitable and strategically important activities and relationships.
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Chrysler’s Supply Chain
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Rationalisation at Chrysler
Analysis of the supply chain to eliminate unnecessary or wasteful activities.
Step 1 – Identify and eliminate redundant suppliers. ◦ Result: Fewer SKUs and fewer and higher-
performing suppliers
Step 2 – Classify remaining suppliers on the basis of importance.
◦ Result: Discovery of potential threats and ability to focus resources on collaborative relationships with key suppliers.
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Shifting Roles Among Members
Traditionally, roles for individual members of the supply chain were well defined.
Today, roles are far less certain.
To insure survivability, supply-chain participants must add unique value.
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Role Shifting
Role shifting enhances supply chain efficiency thereby enhancing the value proposition.
Functional shiftability – allows firms with unique capabilities to undertake additional roles.
Dis-intermediated – a company that is shifted out of the supply chain, replaced by a more capable firm.
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Role Shifting – Second-Tier Sourcing Contracts
Supplier Certification Vendor-Managed Replenishment Supplier-Integrated Manufacturing
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Second-Tier Sourcing Contracts Coordinated purchasing with first-tier suppliers.
Allows for aggregation of purchases. Leverages purchasing power to reduce cost.
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Supplier Certification
Supplier certification is the formal process of working with selected suppliers to evaluate and improve supplier quality.
“Dock to Stock” – incoming shipments no longer are inspected, they go straight to inventory or the point of use.
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Supplier Certification Process
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Vendor-Managed Replenishment
Suppliers actively manage inventory for customers.
Suppliers benefit due to improved demand information and improved ability to allocate productive resources.
Customers benefit from lower labour and inventory costs, improved item availability.
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Supplier-Integrated Manufacturing
Customer firm invites suppliers to establish manufacturing facilities at the customer’s location.
Suppliers provide their own specialised equipment, manage their own inventory, and hire and train their own workers.
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References
1. Johnson, Steven (2001). Emergence: The Connected Lives of Ants, Brains, Cities. : Scribner. p. 19. ISBN 3411040742.
2. Fawcett, Ch 10.
3. Christopher, M., Ch 8.
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