Monday, December 13, 2010

What is a Supply Chain?

It’s the description of all the activities that take place from being a raw material until its delivered to the end customer. For example, in building a computer it starts with the Supplier of raw materials that are used in making parts, assemblies or components that will be part of the computer. It includes a number of steps where value is added to that part, assembly or component. 

Here’s an example:
  • a semiconductor chip its starts with the production of the raw silicon,
  • it goes through a large number of steps /  processes to make a completed semiconductor die,
  • The semiconductor die then goes through a bond, and assembly process to package chip so it can be placed on a circuit board or other assembly
  • It is tested prior to making it available for shipment.
  • That chip could be purchased by an OEM, Contract Manufacture or Computer Manufacturer that will place it on a circuit card.
  • The CM will either use the card in a higher level assembly or ship the card to the Computer Manufacturer
  • If their final product is at the card level the OEM will either sell the product to the Computer Manufacturer or ship it to a manufacturing distribution center. If the card is part of an assembly the OEM will use it to produce their product that the ship to their customer or manufacturing distribution center. 
  • The Computer Manufacturer will either assemble that circuit card into the next level assembly or a completed product that is shipped to a distribution center or customer
  • The customer’s could be:
    • Another OEM that will use that product with their product.
    • A Value added reseller, that will take the product and add value to it for sale to a customer
    • A reseller or distributor
    • An end customer
  • For sales to everyone but the end customer, there could be additional steps in the Supply chain where value is provided to the product is transferred

From this you can see that the potential for cost exists in a number of areas. Every point in the supply chain where inventory is held there is a investment in inventory. Every time an item is transferred from one place to another there are shipping costs and risks of loss or damage. Inventory at all levels is subject to obsolescense, shelf life deterioration, loss or damage

The basic goals of Supply Chain management are to reduce cost and be more responsive. Cost is reduced by reducing the number of points in the supply chain which reduces both inventory and shipments. The shorter the supply chain you have, the more flexibility you should have and the more responsive you should be to the Customer.

Optimizing the supply chain may require:
  • Working with suppliers to eliminate bottlenecks;
  • Sourcing based on lowest landed cost versus price
  • Implementing JIT (Just In Time) or Supplier Managed Inventory techniques to optimize manufacturing flow;
  • Working with Supplier to establish warehouses and stocking hubs to serve you plants and locations
  • Alternative fulfillment models such as direct shipments to customers

There are six types of supply chain risks:
  • There are general supply risks such as supply and capacity constraints,
  • There are independent actions that can affect supply or the cost of supply such as currency fluctuation, changing delivery or import costs and political instability.
  • There are individual Supplier risks that include both there operational performance and financial health.
  • There are risk with changing laws
  • There can be source strategy risks, such as when custom products are used, when commodity products are not dual sourced or where the focus on cost drive you to unproven suppliers or higher risk locations.
  • Demand uncertainty or the inability to forcast accurately when combined with any combination of custom products, extended lead times, and lean inventory stocking level.

In the management of these risks its unrealistic to think that the Supplier can and will be able to manage all the risks. For example, a Supplier with money constraints simply isn’t going to build and stock custom product for the Buyer for the point that the Buyer may need it some time in the future. Another challenge of supply chains is the fact that many of the actual process times are fairly fixed. Sure you could have a semiconductor be processed in an expedited manner but that usually involves premium or expedite costs. Products with long Supply Chains can’t be turned off and on with the expectation that delivery will be instantaneous. The only way you can have instant delivery is by having inventory held. This means that to get the benefits out of managing the supply chain two things are key, effective  communication and the ability to accurately forcast demand. If you can’t or don’t do both things well and you don’t hold inventory, you’ll experience shortages, spend a huge amount of time trying to expedite delivery or wind up paying premiums to get materials from other sources which creates its own set of risks.    

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