Supply Chain Innovation

What is a supply chain?

The sequence of processes and activities involved in the complete manufacturing and distribution cycle is known as the supply chain. This could include everything from product design through materials and component ordering through manufacturing and assembly and onto warehousing and distribution until the finished product is in the possession of the final owner.

Why innovate?

Most manufacturing companies are well aware of the changes that are taking place in the business environment. These include increasing globalisation, savage price competition, increased customer demand for enhanced quality and reliability, etc. At the same time, there are changes in technology which are enabling new forms of working and trading. e-commerce is the obvious example.

Such changes mean that manufacturing organisations need to re-appraise everything they do if they are to remain competitive. They need to manage all aspects of the supply chain to improve customer service levels and/or reduce costs.

The nature of the supply chain and the prioities to be met varies from industry to industry and from product to product.The supply chain for a stable, high-volume product should be engineered to be highly efficient, exploiting economies of scale, Just In Time, strategic inventory, etc. That for a low-volume highly customisable product should be engineered to be highly responsive.

In Type 1 manufacturing, characterised as make and sell the manufacturer determines efficient manufacturing parameters and builds, using long production runs, to create an inventory from which wholesalers and retailers are supplied. The emphasis is on structured planning and scheduling. The alternative, type 2 manufacturing, is sense and respond, where the manufacturer must have detailed information on current, actual demand so that products can be built to order, or to an aggregate of orders.

The rate of change in supply chain management is evidenced by the fact that the major traditional proponents of type 1 manufacturing, the car industry, are increasingly moving towards type 2. Many of the processes and characteristics of type 1 manufacturing stem from the early moves towards mass, flow production within the auto industry. The make and sell philosophy is nowhere better typified than by the phrase “any colour you like, as long as it’s black”. Now car makers get detailed information from their dealers on the actual models that customers have ordered, and tailor their manufacturing schedules accordingly.

Supply chain management and innovation is much more important, and more difficult, for type 2 manufacturing. Synchronisation between the various players in the action is critical and supply chain management is aimed at creating a supply chain network which integrates information and action across organisational boundaries. In the auto industry example, the information from many dealers must be part of the manufacturar’s decision-making process and this information must be collected and aggregated quickly if it is to be of any use.

Electronic Data Interchange (EDI) allows fast, secure communication across such boundaries but it has been adopted by only the largest manufacturers and suppliers they insisted use it to communicate. It seems to have been regarded as being expensive and unfriendly.

Other communication routes are the Extranet, a web-based information service also operating coherently and securely across a number of organisations and the integrated Enterprise Resource Planning (ERP) system.

Many organisations, especially large retail groups, have been experimenting with, and piloting, Radio Frequency Identification (RFID) tags to track the movement of goods. In most cases, such tagging is at the pallet level but as the tags get cheaper, we can foresee the use of tags at the item level, especially on high value items.

For example, in mid-2006, Northern Foods, which is a major supplier to Marks & Spencer, is tagging its supplies. Marks & Spencer, like a number of the larger supermarket chains, has insisted on its suppliers using RFID, and now – since it has over 100 food suppliers it is the country’s leading user of RFID tags with currently about 60% of the pallets that pass through its food distribution centres being tagged. .

It claims significantly better control of its supply chain but also suggests that its suppliers are themselves benefiting. Northern Foods confirms this as it sees the information that the tagging provides driving improvements in a range of business processes.

A modern supply chain network might include a mixture of classic manufacturing software packages together with a web-based catalogue, an e-commerce transaction and payment system and so on.

Examples of innovative approaches to parts of the supply chain include:

• Mass customisation The buyer in a retail store perhaps chooses his/her individual form of the product. The ‘system’ aggregates such individual orders and schedules picking, assembly or production as appropriate.
• Online bidding This is a new model of procurement in which a manufacturer sends a specification and drawing to a number of potential suppliers, perhaps worldwide, and then holds multiple bidding rounds until a mutually agreed price is reached within the parameters of the bidding process. The UK government used this process in March 2000 to auction licenses for the next generation of mobile phone services.
• Shared distribution linked back to production The use of a shared warehouse to supply a number of retailers is common. However, the technology now allows the data acquired at the warehouse as shipments are made to retailers to be aggregated and used to generate automatic replenishment orders to the manufacturer.

Some of the changes that are possible may be encouraged or delayed by the infrastructure, including transport links but also government policy, regulation, legislation, etc. Governments have their part to play in encouraging and supporting supply chain innovation. In a global economy, elements of the supply chain can often be moved elsewhere.

In the UK, there is a serious debate, for example, on the influence of joining or not joining the Euro Zone, and the implications of the decision for manufacturing organisations. The jury is still out as to whether the Euro would trigger supply chain re-configuration or whether its adoption is basically a financial and political event.

Summary

Supply chain innovation is essential if manufacturing organisations are to remain competitive.

An efficient supply chain network can provide:

• an ability to source globally
• online, real-time information networked around the organisation and perhaps wider giving full supply chain visibility
• information management across, rather than only within, organisational boundaries
• an ability to offer ‘local’ products globally
• improved customer response times
• lower inventories
• shorter time to market for new products.

Innovation may take place at the design level, in the kind of supply chain to be adopted, or at the process level deciding how parts of the designed supply chain shall be implemented. Technology may offer opportunities for either or both to be addressed, and supply chains are changing as a result of technology adoption, though perhaps not fast enough in some countries, where over-regulation and an unsupportive infrastructure hinder rather than help.