Tag Archives: supply chain

How Information Technology changes global supply chain?

The outsourcing trends started with manufacturing in 1990s and then this trend happened to software industry. This trend helped the software industry grow really fast, creates a lot of entrepreneurs that can only have a small fund to invest. Through freelancers and outsourcing websites, small entrepreneurs can cut cost and outsource parts of their projects to China, Vietnam or India to get their work done with almost the same quality.

 

And now, this trend has been back to manufacturing industry, where small companies and entrepreneurs can outsource the works of manufacturing to China. Do you have a good idea? No problem, you outsource to China to produce some amount of the products, as small as hundred or thousand products for a tiny cost. There is no need to have a factory and the inventory. You only need them when you have the customer orders.
This new trend will bring more innovation from anybody within the U.S., as long as you have a good idea.
Easier to access the workers
In the past, to get your idea implemented, you need to have at least hundreds of thousands dollar initially. It is also much more risky when you have to order at least tens of thousands of products so that the factory can start manufacturing your products. Lots of people fail when they do not have enough money to start or they could not sell all of their products.

Now, things have changed. Based on sites like alibaba.com, U.S. entrepreneurs could get access to a pool of talented manufacturers. These manufacturers accept to work on anything, ranging from a small contract of 100$ to 10,000$ and they could deliver your products quickly. This lowers down the barriers of entry for new entrepreneur and creates more chances for people to step in.

Alibaba business-to-business model has been a huge success, with around 500 companies do their business in alibaba.com. The revenue of the company has grown from 48 million USD in 2004 to 183 million USD in 2006 and it still keeps growing up. The platform of Alibaba allows U.S. companies to hire any Chinese manufacturer they need for a tiny cost. An instant translation service will help both of them communicate with each other accurately.

Lowering down the cost
This not just helps the entrepreneurs but also the small and medium enterprises as well. This lowers down the cost as well as the risks for any companies to invest into their new ideas.

Bdier, a graduate student at M.I.T Media Labs, quitted her job to become a new-age manufacturer. She designed a protocol for making electronic components into Lego-like bricks that could be used by anybody. She then gave the protocol design to the Chinese manufacturer to make it for her.

There are more case studies that people can work on their garage has a good design and then send it to a Chinese manufacturer to make the actual product. This could save these entrepreneurs a lot of money and they can finally create what they love.

Easier to sell and do marketing
Due to the nature of the Internet, it is now easy for a good product or idea to spread out. Facebook, Twitter, Gmail and Youtube now help companies to do viral marketing with a very small cost. People observed the success of many small companies that have cool products and do not need to spend much money on marketing.

Google, Alibaba, and then Dropbox has been successful in the same way. They make good products and then give it out for the world to try it. Then people will tell their friends, and the product grows by word-of-mouth.

References

-Why the Chinese web portal is giving up its stockmarket listing, So Long, For Now, The Economist, viewed on March 6, 2012 <http://www.economist.com/node/21548253>

- Secret of Alibaba’s success is team work, sense of mission, Monster and Critics, –Business News, viewed on March 04, 2012

<http://news.monstersandcritics.com/business/news/article_1371368.php/Secret_of_Alibaba_s_success_is_team_work_sense_of_mission>

- Giridharadas, N, 2011, The Kitchen-Table Industrialists, The New York Times, viewed on March 3, 2012

Does ERP and SCM Actually Save Money?

Enterprise Resource Planning (in short, ERP) is an organization management system that uses software application to corporate different aspects of the organization, automate and utilize the information between different departments of the organization to make it perform better.  These departments include finance, customer support, supply chain management, distribution, accounting, inventory management…
In our supply chain management, we mostly focus on 3 macro processes of the supply chain framework: Customer Relationship (CRM), Internal Supply Chain (ISCM) and Supplier Relationship (SRM). These 3 supply chain frameworks help the organization to manage its customer, its own process in supply chain (inventory, tagging and accounting…) and its supplier relationship. These macro processes run on a basic framework called Transaction Management Foundation, which include basic components for finance, accounting and human resources… Figure 1 depicts how these 4 frameworks work together.

Figure 1: Frameworks for Supply Chain management

Requirements of a good SCM system
In today competitive world, a good ERP and SCM system has to support the organization with high quality information to quickly make good decisions. To achieve this goal, the information and the system must satisfy multiple requirements:

  • Information must be accurate: it is not necessary for information to be 100% correct but the general picture must be represented truly.
  • Information should not be out of date in a specific period: when managers need information the most, they should have the up-to-date information that can help them make decisions.
  • Information should be in the right format that managers can use it to quickly make the decisions. For example, information might need to be aggregated to help managers know the general state of the supply chain system.
  • Information should be shared between involved managers that help them to understand the same picture.
  • The information system should be updated whenever the business requirement changes, that helps the organization to have the correct and necessary information.
  • The system should be easy to use and requires little training for the staff to work with the system.
  • The system should run with few bugs, always available when the staff or managers need them.

These requirements do not look too hard for an organization to have its own SCM system. In practice, 75% of ERP implementations were considered a failure. This gives us a big question about why an organization could not achieve its goal in designing and implementing an ERP system.
Reasons for failures of ERP system

It is hard to measure a real success of an ERP system. The question is if the benefits the new ERP system brings is much higher than the cost and the risk that the organization has to invest in. There are multiple problems, the lack of the communication between business and IT manager, poor planning to deal with hidden cost, the lack of understanding about the risk and complexity of an IT system.

Risk and Complexity

Business managers usually underestimate the risk and the complexity of a SCM system. A current version of a simple ERP system now consists of millions of lines of code. This is too complex for any small team of people to understand the whole system.

Complexity goes along with a big number of bugs. These bugs cause a risk that managers could not see and estimate it clearly. If the system is down for a couple of hours, it is already millions lost for the company. As in Foxmeyer, 1996, the SAP’s SCM deployment did not expect to handle this level of volume of orders. “We ran some simulations but not with the level of data we have in the operating environment”, one company executive said. Foxmeyer tried to solve this problem by sending hundreds of workers to work around the issues but the underlying software kept failing in middle of the process. Totally, this bug costed Foxmeyer tens of millions of dollars.

Hidden Cost

There are many hidden costs in designing and implementing a new ERP system for the organization that managers usually do not plan for. This makes up the total cost for the implementation to be much higher than the benefits gained from the implementation. According to Jarn, M.2002, there are 5 main costs that managers usually overlook:

  • Training Cost: people usually underestimate this cost. It usually takes a while for staff to adapt from the old system to the new system, for the changing of the old process to the new process.
  • Variety forms of data: data in SCM system is usually not in a standard format. The data come from multiple suppliers and the order requests come from multiple retailers and distribution centers. This makes it very difficult for any firm to standardize this data and match same items from different suppliers. The same iPhone case can be given different descriptions, specifications when it comes from different suppliers from different countries.
  • High Consulting Cost: this usually be overlooked by the consultant and the companies. The consultant may not have enough experience to plan for the project and the project may require longer time to finish or more payment to the consultant.
  • Integration and Implementation: Consultants want to test with the real dry-run to see how it affects the system, but usually the firms don’t want people to touch in their valuable data. This makes the integration, implementation and test process much harder than it is planned.
  • Managers fail to keep the project deadline. Because it is too difficult for consultants to give a correct estimation, most of the SCM projects fail to meet their deadline.

Slow to adapt to new business requirement

Although the companies spend millions dollar on the ERP projects, they also complain that it is too difficult to modify these systems to match their new business requirements. The risks and the complexities of the systems prevent developers and consultants to move quickly with any new business changes

References

<http://www.enterpriseacquisitions.com/articles/89-a-service-oriented-approach-to-cost-cutting-on-customizing-sap>

  • Brennan, J. 2012, Lean and Mean…There is a way of doing more with less…, Awards BA, viewed on February 26, 2012,

<http://www.bds.ie/blog-brentech-data-systems-blog/lean-and-meanthere-is-a-way-of-doing-more-with-less.533.html>

  • Tarn, Yen and Beaumont 2002, Exploring the rationales for ERP and SCM integration, Industrial Management & Data Systems, viewed on February 26, 2012

<http://contaduria.itam.mx/htm/alumnos/sicaof_prim03/ERP-SCM.pdf>

  • Wolf, T. 2011, What is ERP Software?, TMCNet, viewed on February 27, 2012

<http://www.tmcnet.com/channels/erp-software/articles/173165-what-erp-software.htm>

  • Supply Chain Digest, The 11 Greatest Supply Chain Disasters, Supply Chain Digest, viewed on February 28, 2012

<http://www2.isye.gatech.edu/~jjb/wh/tidbits/top-sc-disasters.pdf>

  • Rettig, C.2007, The Trouble with Enterprise Software, MITSloan Management Review.
  • Information Technology in a Supply Chain, Chapter 16, Part IV

 

Rethink about Transportation Cost

The oil price is increasing everyday, the politics corruption in China gets worse, the labor cost of Chinese increases quickly and the natural disaster happened in Japan and Thailand. Suffering all above problems, now is the good time for company to think about one question: Will Outsourcing still save cost?
Will Outsourcing still save cost?
There are some significant changes to the structure of the world in the last 20 years. Firstly, we look at the new cost of global supply chain management with the changes of oil price, Chinese labor cost and natural disaster cost. The next section will discuss about the cost of losing sales, market share and brand name by delay transportation.
Oil Price

Oil Price

Oil Price

Figure 1: The oil price in the last 25 years

http://en.wikipedia.org/wiki/File:Brent_Spot_monthly.svg

Figure 1 shows us how the oil price has behaved in the last 25 years. The best time for outsourcing was 1993-2003, where the oil price is stable and only around 40-50$. However, in the last few years, we have seen a new average oil price which is around 80$ and at sometime, the highest price is 140$, when the war in Iraq and then Libya happened.
Chinese and General Asian Labor Cost

China Labour Cost

China Labour Cost

Figure 2: The GDP per capita for China in the last 7 years

The labor cost in China has increased 3 times since the last 7 years, going from 1500$ to 4500$. This cost has been marked into the cost of good sales for all companies.
Total Landed Cost-Saving
According to McKinsey (2008), the total landed cost for outsourcing to China has changed significantly since 2003 to 2008

2003

2008

Labor savings

100

45

Freight

-7

-28

Shipping Related

-6

-6

Inventory Carrying

-12

-12

Product Returns

-6

-10

Hidden Cost

-5

-5

Total Landing savings (losses)

64

-16

Table 1: The Total Landed savings for midrange server has changed, from a positive to a negative number.

 

These total landed cost has been affected by the increase in annual wage in China, the cost of shipping and energy. Now, company has suffered 16$ lost when outsourcing the midrange server manufacture to China.
The Effects on Sales, Customer Service and Brand
Outsourcing has a problem, you have to ship the components to the assembly line and then ship the completed products back to US to sell it. There is a cost in this delay. Transportation is usually varied and currently, the transportation has become congested that delay is come more usual. This delay leads to various problems:

  • Over stock or out of stock: this could cost the retailers money when they are over stock and have to pay more for inventories. If they are out of stock, the problem can become worse, they can lose the customer and hurt the brand name.
  • The problem of delay manufacturing. If there is a big delay happens to the factory, the workers will have nothing to do for some days and then have to work overtime in other days.
  • The probability of accident and natural disaster: when the disaster happened in Japan and Thailand, the supply chain management is broken and people need to wait for the products to come out.
  • The global gridlock: there is a traffic congestion by train, truck, ship and air recently. This leads to a delay time in transporting the products to the right place. Actually, the company also needs to rethink between cost of air and ship shipping as shown in Table 2.
By Sea By Air
Unit Price

10

10

Asian Manufacturing Cost

-3

-3

Ocean/air shipping cost

-0.2

-0.8

Landside shipping and storage cost

-1.8

-1.6

Accounting Profit

5

4.6

Average reduction in profit due to out of stock or over stock

-3.8

-2.5

Total

1.2

2.1

Table 2: Comparison between Shipping By Sea and Shipping By Air, which leads to a winning for Shipping By Air

  • There are some critical products that could not be delayed, especially health care system of the government. If they could not deliver the vaccine or the drug in the appropriate time, people could die. For example, in case of the heath care vaccine distribution program, the manager said:”It was clear that if a nationwide emergency, such as a bird flu epidemic, put pressure on the vaccine supply, the CDC couldn’t respond the way the public would demand”.

Recommendation
With these problems and effects on the business in the long term, this is the time we may need to rethink about the transportation and outsourcing. The real cost is increasing while the hidden cost of brand name and customer experience becomes more important in this competitive world. We need to start thinking about moving the factories out of China and move it back to near the main sales and distribution place. Mexico could be a good place for U.S. market and European Center would be a nice choice for the whole Europe market…

 References

- Barboza, D.2010, Supply Chain for iPhone Highlights Costs in China, The New York Times.

- Winter, 2008, Time to Rethink Offshoring, McKinsey on Business Technology.

- Stalk, G.2009, The Thread of Global GridLock, Harvard Business Review.

- Copeland, M.2008, How the U.S. Centers for Disease Control and Prevention revolutionized the way vaccines are delivered, Smarter Medicine.

- Zappos.Com: Developing a supply chain to deliver WOW!, Stanford, Graduate School of Business.

- Schreibfeder, J.2011, Why Is Inventory Turnover important?, Effective Inventory, viewed on 18/02/2012,

<http://www.effectiveinventory.com/article2.html>

- World Bank Data, viewed on 19/02/2012,

<http://data.worldbank.org/indicator/NY.GDP.PCAP.CD?page=1&display=default>

 

 

The long term problem in low cost

Repetitive jobs at Foxconn

Repetitive jobs at Foxconn

Apple stock is growing really fast and its earning keeps breaking records. However, it is currently famous for labor abuse problems in Chinese factory. The society is requesting the new CEO, Tim Cook, to react quickly to resolve this problem. This problem becomes more important when the cost of manufacturing in China has increased recently. This cost increase puts a new pressure to Apple, Foxconn and other hardware manufacturing companies to strike the balance between low cost and good publicity.

 

 

 

Manufacture in China

Foxconn is one of main manufacturing companies in China that compete to get contracts from all global electronics brand: HP, Dell, Apple, IBM… They are competing to earn a very small profit margin. If they could improve the operational efficiency by 10%, that would be a very big profit return for them already.

They seek these efficiencies by pushing their employees coercively, making them work 10-12 hours per day, giving them too small benefits, hiring teenager workers and applying military techniques to force people to work as if they were robots. These techniques work to some extent and it keeps the manufacturing cost to be very slow for Foxconn.

In some recent research on the new iPhone 4 release, the manufacturing cost per iPhone has a very tiny part from China. The biggest cost per iPhone was the flash memory coming from Samsung, which costs 27$, and the cost to assembly everything in China is less than 2$ per phone.

AppleSlicing

Different contributions from different suppliers

Therefore, keeping the cost low is a compulsory task for Foxconn to earn profit. Apple and other global electronic companies also think the same.

However, time has passed by, and things change a lot recently. This makes the decision to go for low cost in China has to be reconsidered.

Recent changes in China

China’s main competitive advantage over the last decade was a low cost manufacturing system that attracts lots of global companies to put their factories in. However, it does not want to keep this advantage in the long term.

The government has worked over recent working policies to make sure that labor rights are maintained, and also try to push companies to produce high end products like cars, rather than seeking for small profit margin. The value of the Chinese currency has changed as well, which makes import and general labor cost increase significantly.

China has become the third largest labor cost in Asia

 

ChineseCost

China becomes the third highest labour cost in Asia

These things make the tasks of keeping the cost low in China becomes more difficult, require companies like Foxconn to react and become more coercively to push their employees even more, to earn back their lost profit due to policy and economy changes.

Many evidences gathered from news reports (Johnson, J. 2011) showed that there are 17 suicide happening inside Foxconn since 2007. It is a big number for people to consider the responsibility of the company and its partners. This lead us to one of the main problems for these global electronic companies: publicity.
Publicity of companies

People recently criticize Apple for the poor benefits of their workers, although Foxconn should be responsible for his own employees. This is damaging the reputation of Apple in the long term. One former Apple executives admitted that Apple knew about labor abuse before but then they ignored it.

To make this problem even worse, the CEO of Foxconn admitted “Managing One Million Animals Gives Me A Headache” (Blodget, H. 2012). What kind of CEO think and talk about their employee as animals? These things raise the general awareness about how Apple deals with their suppliers.

Apple is just one of the companies using Chinese factories to keep the cost low. However, due to its visible and good fame in the publicity recently, news and media start criticizing their responsibility over the problems.

Although it is a common sense in capitalism to keep the cost low and a high margin profit, Apple is now under a serve criticism from the news to treat their employees so badly. So, Tim Cook, has to take steps toward solving this problem, by releasing supplier list and joining a fair-labor monitoring organization.

Company’s objective and product design

Disclaimer: This blog post is from my assignment in the Supply Chain Management course. It is copied from here

The long-term strategy of a company will reflect on how product of that company is designed, how people in the company work together to achieve the same goal. This long-term strategy brings the company ahead of other ones, creates innovation inside the company, and makes a huge profit for the company while others still suffer the economic recession.

http://www.onedesk.com/2011/05/product-strategy-tips-for-success/

Cost Cutting Innovation
IKEA
The last year was an economic recession year with unemployment above 9 percent and housing is 73 percent below the 2006 peak. Given the furniture is one of the worst categories of retail sectors, the support from government and Barack Obama in jobs help did not push this furniture sector much. In this difficult time, IKEA finds it easy to cut down the price of its products. In contrast to this move of IKEA, almost all other commodity prices increase.

Based on interviews with IKEA CEO Mikael Ohlsson, the whole company culture focuses to produce cheaper products. They set the target price for the product first, and then, by any means, to achieve that price. By improving the efficiency in product design, factory manufacturing and then distribution and delivery, it can cut a significant amount of cost.

http://noellebullock.posterous.com/?tag=ikea&page=2

However, one of the key factors is via its supply network, when it can try to use the least sustainable materials in this world. This may mean some long-term impact but that is acceptable for IKEA to reach their long-term goal: cut the price.

Tata Nano
Tata Nano has innovated a new “Open Distribution” system. This system operates by a modular design approach. Every product is designed in terms of modules, or components, which can be built and shipped separately to different assemblies around the world. This helps Tata Nano to achieve its goal.

By using this Open Distribution approach, it allows suppliers to compete for better qualities and lower price to bid for supplying. To push this even more, Tata Nano has its own internal suppliers. These suppliers need to compete fairly with the outside suppliers, so the general competition level is increased.

These innovations help these companies to move forward faster, affect all of their product designs as well as the process to manufacture the products and ship them to assemblies.

Environment Safety First

In contrast with the approach to cut the cost by all means, there are companies that focus on making value and meaningful social responsibilities. These companies also gain high returns through social values, which would enable them to follow these values in the long term.

There is a trend in designing, manufacturing and distributing new products with the most sustainable materials. These materials help companies to achieve its environmental goals.

Herman Miller
The goal of Herman Miller is explicitly stated in its website:

We put Herman Miller’s corporate environmental goal quite simply: to become a sustainable business – manufacturing products without reducting the capacity of environment to provide for future generations

That’s clear. It is the goal of all employees and all products of Herman Miller, to create a sustainable business. That is a meaningful value for everybody, so all employees are proud and happy to work at Herman Miller, to create a social value.

An example of this strategy is when they make a decision about choosing between PVP and TUP. PVP is cheaper, easier for suppliers to work on and there are multiple existing suppliers. TUP, though, is more sustainable for environment but is a new thing and few suppliers are able to provide to Herman Miller with low price. They finally choose to implement TUP since the new product, so they do not have to redesign the existing product and they can be proud about this new product.

This environmental safety first also puts them ahead of other competitors. Due to the strict environmental regulation rules of the governments in product manufacturing, their competitors find a hard time to follow what Herman Miller does.

http://www.hermanmiller.com/about-us/things-that-matter-to-us.html

It also helps Herman Miller to get the best employees for their business, which put them in a competitive advantage position comparing to other companies. The Youtube video clearly demonstrates how Herman Miller could make their employees proud of what they are doing.

These examples give us a broad view of how the company’s long-term strategy and objective affects all their business: from product design to decision-making process to the culture of the company. IKEA has chosen the price to be their competitive difference, and then ignore the environmental side of their works. However, Herman Miller focuses on building sustainable products and business. Both long-term strategies put the ahead of their competitors and make a difference in their business.

References

1. Tutle, B.2011, Everything at IKEA is getting cheaper, MoneyLand, viewed on 06/02/2012

2. Hamilton, S.2011, IKEA cuts price of US shelves as outlook dismiss, Bloomberg, viewed on 07/02/2012

3. King, B.2011, IKEA cut shipping costs with switch paper pallets, Sustainable Brands, viewed on 06/02/2012

4. What matter to us, Herman Miller, viewed on 06/02/2012

http://www.hermanmiller.com/about-us/things-that-matter-to-us.html

Shifts and Trends in Supply Chain

The Latest State
The supply chain has changed significantly in the last decade. Demand is changing due to new business model with global trends and market. Information Technology then creates the opportunities for companies to serve this new business needs.

The shift in business focus

There is a new shift from an individual company to a whole view of a supply chain, cross multi companies in the network. The old thoughts about supply chain are to fulfill the orders, in other words, to deliver the right products in the right time. However, this new shift has made an impact. Now, supply chain strategy involves from product design, introduction, promotion, fulfillment and recycling.

This trend has shifted the business focus to new things: from cross-functional department to cross-enterprise, from supply focus to demand focus, from single-company work to collaborative and concurrent works from different companies. One key of this shift is to change the focus of a business from cost reduction to best value creation for customers. This not only includes better customer service or product design but also tailored offerings and new business models to serve customers better.

New Supply Chain Process

Figure: The New Supply Chain Process
Source: The Supply-Chain Management Effect, Kopczak L., Johnson M.

Required Attributes for Companies
To make this shift successful, Ketchen, D 2008 (Best value supply chains: A key competitive weapon for the 21st century) analyzed that there are 4 aspects: speed, quality, cost and flexibility. The competition game between companies is to try to balance these 4 aspects to attempt for the best value supply chains. One critical example is the competition between K-Mart and Wal-Mart in the late 1990s. K-Mart tries to challenge Wal-Mart by a price competition but then it failed soon after that. Wal-Mart has a very powerful and sophisticated supply chain and logistics network that helps them to withstand the war and win K-Mart.

Moreover, there are some key concepts that managers in supply chain need to understand and apply successfully: agility, adaptability, alignment, strategic sourcing, logistics management, information system and relationship management. If the companies can make a good system with these attributes, the company can maintain a good supply chain network that offers the best value.

How it applies in reality

In reality, there are human and natural disasters that affect strongly these supply chain networks.


Figure: Chip Manufacturing in Japan
Source: http://www.spacedaily.com/images-lg/chip-tech-spix-lg.jpg

The latest earthquake and then nuclear disaster was an example. Right after these disaster happened in Japan, managers immediately go into the meeting room and consider what the impact can be in their supply chain.
Japan plays a vital role in the semiconductor industry, chips and lightweight flash memory used in smartphone and tablets. Therefore, the impacts on any company’s supply chain were big and there was no certainty when these Japanese factories reopened.
However, HP and Apple reacted quite quickly to the situation with their own big inventories that can help them survive for the short time. In the long time, they have switched the suppliers to their backup suppliers in some few days. This helps these companies to survive this “Global Stress Test”.