Smart Supply Chain Management: Post Covid-19 Industrial Perspective
Published on : Wednesday 05-05-2021
By : Editorial Team
All success stories are associated with strategy so should be the case with smart supply chains, says Mahesh Hegde.
A new Industrial Revolution is happening post the implementation of IoT and IIoT. Post Covid-19, the world has entered a ‘New Normal’ and the situation has transformed dramatically in terms of industrial thought process, management expectations and inventory controls. Lean concept has assumed more importance after the crisis. VUCA – the acronym for volatility, uncertainty, complexity, and ambiguity – relevant at all times, is even more significant now.
Every sector, every product is becoming smart. Smart watch, smart phone, smart TV and nowadays even smart fans. If so many ‘smart’ things are happening across the world, why not the Smart supply chain? Traditional methods of procurement and supply chain are slowly becoming obsolete. Every field desires to have smartness especially after world pandemic. Lean Six Sigma has many ideas of smartness in the supply chain. Methods like JIT, i.e., just in time, Kaizen, 5S, etc., are still relevant and tend to have more digitisation with the same concept.
Smart Supply Chain Management aims to bring virtualisation/automation, digitisation in place of traditional follow ups with relevant stakeholders like suppliers, logistics and inventory management teams. Smartness will bring awareness for efficient decision-making, by tapping the data gathered by IoT devices and providing detailed visibility of products/items, all the way from manufacturer to retailer.
In the earlier days, one of the proven concepts which few steel plants had adopted was PMA, i.e., Parts Management Agreement, wherein large installations from a supplier for crucial applications shall be kept as inventory within the plant premises without any purchase order between buyer and seller. The payment shall be regularised after the usage against agreed terms and conditions. This is a win-win situation for the buyer & seller. Isn’t it a good old smart concept?!
Let’s see more smartness in this article. A famous book written by David Anderson, Frank Britt and Donavon Favre gives us more clarity on smartness. The following points are few punching lines:
1. Adapt supply chain to customer’s needs and expectations. Make it more customer centric.
2. Alignment of requirements with demand planning across SCM (making annual rate contracts, etc).
3. Differentiate products close to customers for faster delivery (applicable for product based companies).
4. Strategic outsourcing for selected key activities (installation and integration, etc).
5. Develop dashboards with IT support for system based decision making (like MOQ, inventory level, etc).
6. Well organised Logistics Network.
7. Adopt ABC for lean concept (Activity based costing).
One of the important aspects of the project life cycle is to reduce the supply chain life cycle. We can have Standardisation in the opposite polarity of Customisation. Many product based companies have been successful with the concept of standardisation and customisation based on customer requirement. If a customer needs tailor made products, the organisation shall go for customisation, else standard products with fixed features shall be made available at ready market.
If we see Fig 1: Transaction processing pyramid of any organisation, it starts with supply chain management. This pyramid makes organisations an information system.
It consists of three layers: operational support, support of knowledge work, and management support.
1. Operational support forms the base of an information system and contains various transaction processing systems for designing, marketing, producing, and delivering products and services.
2. Support of knowledge work forms the middle layer; it contains subsystems for sharing information within an organisation.
3. Management support, forming the top layer, contains subsystems for managing and evaluating an organisation's resources and goals.
Before initiating the smartness in the supply chain, we need to first set the proper process, people and business environment. This is well explained in PMI – PMBOK 7th edition. In simple words, we need to set the right people and resources at the right place to make the process simpler. Once the process and people are set, it is now challenging to manage the business environment as this is highly volatile and the project dynamics need to be controlled. Project success depends on 3Ms, i.e., Money-Manpower-Materials. But, at the end this will be material-material-material. This requires only smart SCM. Please note, the smartness of supply chain and procurement depends exclusively on completion of the project well within the costing. If we show the smartness here, the bottom-line of the organisation will be secured and margins will be improved. Let us see the same in detail now.
Main drivers of supply chain costs:
1. Information – Initial process of making supply chain request
2. Production – Investment costs.
3. Inventory costs.
4. Location costs.
5. Transportation/logistic costs.
Fig 2 explains well the cost of supply chain driving force.
The journey to cost efficiency is always the key to success. As informed earlier in this article, it is better to make ABC, i.e., activity based costing. Irrespective of the industry background, the commonly faced challenges are to evaluate and address external business environment changes for impact on scope. We may have to exercise on following points:
1. Study the changes to the external business environment (e.g., regulations, technology, geopolitical, market).
2. Assess the impact and then prioritise on project scope/backlog based on changes in external business environment.
3. Recommend options for scope/backlog changes (e.g., schedule, cost changes).
4. Continually review the external business environment for impacts on project scope/backlog.
Six Sigma implementation was always the key tool in achieving and bringing success stories for major global players like Motorola, ABB and GE kind of organisations, which are now study material in the reference books of Lean Six Sigma. As many of us are aware, Six Sigma is a mathematical model to remove defects and advise to conclude/decide in an unknown situation. The essence of this article is simple. If we now replace the word ´Lean Six Sigma´ with ´Digital Six Sigma´ smartness has been achieved. The concept of Lean Six Sigma, is crystal clear. To keep the organisation like a lean and fit body. But, it requires lots of smartness under the concept of Top to bottom approach.
Same is with supply chains. If we replace traditional methods of sourcing with digitisation methods including various digital ITTO (Inputs, Tools & Techniques, Output) then smartness can be easily achieved.
What are the main attributes of the supply chain? There are four major elements of supply chain management: Procurement, Operations, Distribution and Integration. Each element relies on each other to provide a seamless path from plan to completion as affordably as possible. Lacuna in understanding each element will result in inventory. This inventory is sometimes a boon J and many a times, a sin L.
The following are the four different types of inventory that are commonly used in any organisation:
1. Raw Material
2. Work-In-Progress (WIP)
3. Finished Goods
4. Maintenance, Repair, and Overhaul (MRO), mostly for plants and end user /manufacturing firms. In OEM terminology, MRO is replaced by Asset.
When we are aware of the type of inventory that we have in our kitty, we can make better financial decisions for the supply chain. The above 4 points can ruin a financially healthy organisation to ash, if the duration monitoring is not done properly. Is it making sense?
Intelligent supply chain is the transformation of a conventional supply chain into a digital supply chain by re-imagining the various processes and infusing them with intelligent technologies.
Time frame between raw material receipts to finished goods delivery will always make a benchmark in the success of project management. The longer the duration between raw material receipt to work in progress to finished goods and creation of dead inventory, more is the cost to the company and will call for higher risk to the organisation.
Additional time for each activity will hit the bottom line of the organisation in a passive manner. Normally this will be ignored un-intentionally by management. This can be smartly managed by practicing operational excellence.
As you can see from Fig 2, logistic management and supply chain management always go hand in hand. The main difference between Logistics and Supply Chain Management is that Logistics management is the process of flow and storage of goods in an organisation, whereas SCM is the coordination and movement of supply chains of an organisation. Supply chain is the implementation of the procurement strategy. Supply chain is the entire flow that brings a product or service to sale. Logistics is a segment of that, focused on the transportation and storage of goods.
Ex works price and FOR price is always having cost difference. Common mistake committed by every sales guy while bidding/taking the order from a buyer is submitting almost the same price for Ex work with a thumb rule of 2% as freight cost..! This is an absolutely wrong concept. We have to consider actual freight cost to safeguard organisational interest. When we are selling a product and if we need to source the raw material for the same, then the sourcing is also associated with the logistic cost. This cost should never be omitted from the input cost. Else, the profit margin of the organisation will be reduced after calculating actual cost of the project. If this is making sense, then the purpose of the paper has reached its goal.
Reverse logistics is a nuisance in the supply chain. To avoid logistic problems, we need to take care of 4 Rs. Please refer to Fig 3.
For this, we need to have proven operational excellence methodologies in place. It should be a collective approach and everyone’s responsibility across the organisation.
It is seen that few organisations suddenly disappear from the market, when they do not tend to change as per market conditions and according to ever changing taste of the customer. This can be better illustrated with corporates like Nokia, Konica, and Kodak kind of well-established organisations. How did investment come into picture now?? Investment needs to be made in the proper way as it can be volatile if the same is being made in the name of diversification. Say for example, we can see a famous Oil & Gas sector giant and India’s pride, Reliance Industries Ltd (RIL), is successful in the telecom sector. This success is preliminarily due to able leadership, right talent at right place and undoubtedly focussed team work for common goals. In the same way, a Karnataka based coffee giant is struggling for its existence due to many negative factors. This is now case study material in management books. Ultimately, investment cost especially for diversification needs to be made in the right direction under firm decision and able leadership. If the organisation is unable to source the material after taking an order from a buyer, then brand image, organisational name will be at stake. Invest wisely with the EOQ model instead of MOQ. This is a smart method.
EOQ model Vs MOQ methods
Economic order quantity (EOQ) is the ideal order quantity a company should purchase to minimise inventory costs such as holding costs, shortage costs, and order costs. In inventory management, economic order quantity is the order quantity that minimises the total holding costs and ordering costs. It is one of the oldest classical production scheduling models. We should know, EOQ is always buyer centric and MOQ (minimum order quantity) is always seller centric and advantageous to sellers.
Supply chain integration – Way to achieve excellence and majesty
Supply chain integration (SCI) is a process where all the stakeholders and interested parties involved with the fulfilment of a product or project are integrated into a single system. This requires significant coordination and collaborative alignment in order to ensure everyone is effectively working towards the common goal at all times. This SCI comes with multiple benefits for the organisational betterment. SCI can also help the organisation in the following fashion:
1. Better ability to serve customers.
2. Achievement of cost effectiveness, better RoI, efficient with increased profit margin.
3. Keep up with demand planning and more flexibility.
4. Lesser risk and enhanced competitiveness.
5. Better opportunity for investment when operating with collective power.
6. Advantage of getting early warnings when there is a problem in the supply chain due to information sharing.
7. Reduction in wastage of time due to redundancy in supplier function.
Now refer Fig 4 for more detailed understanding of SCI. Starting from customer analysis to order fulfilment can be easily achieved with the simple concept of SCI.
The following are the five different types of Supply Chain Integration (SCI):
1. Customer integration (customer relationship management)
2. Internal integration (collaboration methodology with internal stakeholders as per agile technique)
3. Material and service supplier integration (to manage supply and demand planning)
4. Technology and planning integration (e.g., MOQ, inventory level monitoring in SAP)
5. Measurement integration (this is a performance review of SCI).
One of my famous analyses and posts that was trending on LinkedIn was all about delivery management. Till the 1990s general management was a hot topic. After this traditional era, a new concept of project management came into picture. But the essence of the future success totally relies upon “Delivery Management”.
If you see the success stories of famous E-commerce businesses launched by Amazon, Flipkart, Zomato, Swiggy, Domino’s and many other players, they are doing only and only delivery management. When we try to adopt delivery management in our businesses irrespective of sectors, success will kiss our feet.
Key lessons to be learnt from delivery management success stories are quite interesting. Below are the key points:
Put yourself in customer’s shoes (always think from customer point of view).
Be focussed. Don’t be distracted by competitors.
Open for improvement on continual basis.
Build the dream team.
OEM, manufacturing firms, EPC, Design & Development, R&D centres, government offices and private sectors/everyone needs attention towards delivery management for sustainable success.
Last punch – More the digitisation into the supply chain, better is the decision making. This means, the current decade is full of data capturing, data analytics, data mining and decision making. It is important and always better to look into the trends (historical data) instead of numbers for achieving effectiveness in conclusions for organisational interest.
Upcomings in smart SCM
Blockchain technology is the latest technical upgradation. This builds strong communication between partners/interested parties. This helps for streamlined processes with shorter lead times, reduced redundancy, fewer delays, and ultimately a leaner supply chain. It also ensures that quality standards are met, giving the seller more control of the production of the product from A to Z.
All the success stories are associated with strategy. Smart supply chains should also be associated with strategic sourcing either in terms of make, buy & lease as applicable to our respective industries. Keeping ethical experts as buyers/sellers is the secret of a smart organisation to achieve a benchmark. Policy on code of conduct in contracts/sourcing/marketing section of the organisation is a mission to excel. Ethical experts are brand ambassadors of the company and one of the key stakeholders of smart supply chain management in all the era irrespective of Covid-19 pandemic.
Mahesh Hegde is an Instrumentation & Control engineer with 14 years of diversified experience of Projects, Procurement, Operational excellence and plant maintenance. He has worked for various organisations like JSW Steel, Chemtrols Industries and Adage Automation. Currently he is working as Manager Projects & Procurement in Sick Sensor Intelligence, Mumbai. Mr Hegde is a pioneer in professional ethics, a versatile team player and known person for series on corporate wellness & leadership at LinkedIn. Passionate about Energy and Environment, he has delivered technical lectures on Industrial Automation and Industry – Institute relationship program at BITS Pilani, Goa as guest faculty. He can be reached at firstname.lastname@example.org