Supply ?hain Management: The Way to Increase Company Competitiveness
Management Consulting Department, Deloitte
Supply Chain Management (SCM) concept – the new approach to improve business processes that came along with global technologies. Today Kazakhstani companies have shown great practical interest in SCM. The local leaders realize that in order to maintain their competitive advantages on the local market and grasp opportunities to succeed overseas, the companies have to pay great attention towards supply chain. The importance of the modern SCM-oriented business strategy is substantiated by the fact that management structure of the most Kazakhstani companies now includes top managers who are responsible for supply chain development. In the last years the topic of SCM has been on the agenda at the most business conferences, expert seminars and been reflected in specialized business publications.
The idea of SCM emerged in the early 1980's. The accurate definition of SCM concept has not been settled yet and has many variations to it. Majority of specialists in order to simplify the essence of SCM relate to the following formula: "The right product at the right time in the right place – with low costs and high service level to the customer". At the same time, it is clear that we are not only talking about logistics. The idea is that SCM does not mean moving something from a location A to a location B. The objective of the system – optimization of purchases, production, distribution and logistics, in addition to revenue and profit increase, which is achieved by effective collaboration of suppliers, producers, distributors and sellers, and more importantly the end consumers of this supply chain. Thus, SCM for manufacturing companies comprise production and distribution processes, for commercial companies – inbound logistics, storage, distribution and/or retail.
It is necessary to note that SCM operations have huge impact on financial performance and competitive advantage of companies. Therefore, there is a direct relationship between the speed and effectiveness of the way supply chain is organized and the increase in turnover and profits. As a result, it leads to the increase in shareholders value. At the same time, it shall be noted, that it is much easier to increase profitability of a company by cutting their costs rather than reducing purchase price from suppliers, or increasing retail price for finished products and services.
The company benefit from optimization of SCM processes is reflected in the increased sales. SCM optimization – does not only mean reducing operational expenses but also implies that processes are aligned with company goals and strategic objectives at most. Consequently this leads to improved level of customer service. Once the company is recognized as being the best supplier in terms of quality and fulfillment of obligations, the market share of the company is naturally increased.
Supply Chain Management: Analysis of Global Practice
In the last decade the concept of supply chain management became highly popular among western managers and grown to be almost a synonym to the organizational excellence. In 2003 professional services firm Deloitte has launched a global benchmarking survey aimed at supply chain analysis of different companies. At present more than 800 companies from Europe, Asia and North America took part in this survey. Industry profile of survey participants is as follows: Automotive, Process/chemicals, Pharmaceutical/medicine, FMCG, High Tech and Manufacturing companies.
The survey revealed that global company leaders significantly reduced their operational costs while focusing on the following SCM aspects:
· Improving demand forecasting by means of modern software applications. This, in turn, helps to reduce the level of material inventory, increase inventory turnover, and as a result, helps to free up capital and decrease warehouse expenses.
· Reduction of purchase prices that was achieved through suppliers' collaboration and information interchange on the planned volume of orders.
· Optimization of warehouse operations by means of adopting modern IT-technologies/applications.
· Simplification of purchase processes by implementing e-procurement solution.
· Reduction of inventory costs by use of standardized raw materials. This also reduces the set-up time for the particular technological processes.
· Improving the product quality and reducing non-conformation rate.
· Implementation of clean manufacturing techniques aimed at reducing waste level.
· Optimization of logistic operations that result in reduction of transportation costs.
Effective SCM operations cannot be possible without modern IT-technologies. Technologies that have been widely used globally and became an indispensable condition for conducting the business nowadays are listed below.
PDM (Product Data Management) – database that includes product specification and enables supply chain partners to collaborate in a product development environment starting from product concept development phase through manufacturing. The main objective is to gain maximum benefit from concurrent engineering (CE) and minimize time-to-market for the new products.
PLM (Product Lifecycle Management) – the principal concern of this system relates to CE in the early stage of new product development; the main emphasis is placed on cost control and sequence of operations.
EDI (Electronic Data Interchange) – electronic data (documentation) interchange. Research has shown that expenses on processing purchase requisitions may account for $70 or more, at the same time EDI expenses are only $1 or less. Moreover, implementation of EDI system leads to shorter processing time of purchase requisitions and smaller number of mistakes.
Trading Exchanges – solutions to provide companies the possibility to trade goods and services online on a virtual B2B marketplace operations for online trading. It functions normally as a neutral trading point and can come in many sorts from catalogue based systems to directly linking suppliers and customers (selling/purchasing auctions, inquiries & offers).
eProcurement – internet enabled purchasing of pre-defined suppliers and products (chosen during a sourcing exercise) for the purpose of data transfer on company needs and purchase process.
ERP (Enterprise Resource Planning) – the system includes the following functionalities: accounting, Human Resources (HR), filling customer orders, purchases, inventory management, production processes, task completion.
Demand Planning – distinct application or module of ERP system used for demand planning of company goods. The system is based on the following factors: demand for the previous period, goods production/supply time, marketing and advertising campaigns, economy situation, planned product discounts, competitor campaigns.
QMS (Quality Management System) – complex system for supplier assessment (time, quality of supplies, service level), complaints tracking, control and management of implemented improvements.
WMS (Warehouse Management System) – IT systems to support warehouse design and configuration, inventories, day-to-day operations and resource management (people, equipment)
TMS (Transportation Management System) – TMS used to facilitate companies transportation operations, when shipments are arranged in accordance to schedule, designed in accordance with requirement for deadlines and minimum transportation expenses.
CRM (Customer Relationship Management) – the system for customer relationship management includes the following aspects: inquiries management, organization of campaigns to stimulate sales, development of customer call centers and centers for technical assistance.
SCM – Kazakhstan Trends
Deloitte estimates the effect of supply chain optimization to result in the increased level of inventory turnover, reduced logistic costs, and reduced planning time from days to minutes. There is also an evident increase in freight and storage visibility.
How realistic is it for local companies to expect such outstanding results from implementing SCM principles in managing their business? On one hand, Kazakhstan has already formed a solid base for such advanced technologies as SCM. Many local manufacturers and distributors are already facing the increased competition from international companies that entered the local market, rise in storage and transport logistics expenses and high pressure to maintain close collaboration between suppliers and customers. The global leaders exercise SCM in order to gain competitive advantage over players of the second and third rank. Taking this into consideration, leading Kazakhstani companies closely look at SCM as an effective method for growing highly competitive business for overseas markets. The automation level is already high for many companies, especially in such industry sectors as manufacturing of consumer products, retail trade and distribution. The majority of such companies have developed a modern corporate network that bonds central office with regional subsidiaries and branches.
On the other hand, building an effective supply chain is still a very challenging objective due to Kazakhstani conditions. The reasons are obvious: the level of trust among local companies and potential partners in the supply chain is still very low; customs legislation hinders the effective organization of goods relocation, and management of holding companies with high geographical spread rarely captures such operational objectives as purchases, logistics and distribution. All of the previously mentioned issues hamper the collaborative development for supply chain of the business that also includes third party suppliers and distributors, and as a result, fields for SCM concept implementation is narrowed only to few vertically-integrated Kazakhstani holding companies that mainly have their own distribution and logistic chains.
Practical Observations and Case Specific Recommendations
The research of Deloitte has showed that Kazakhstani companies generally view further industry market growth and economic turnaround, as the main basis for revenue growth. This vision is build upon the tendencies of the past, the period of weak competition whereby the demand for goods exceeded the supply. However, nowadays saturation of the market makes this approach to be inappropriate and forces to bring internal reserves to the foreground. The majority of global companies that operate in highly competitive conditions consider the following factors to drive the revenue growth: entering new geographical markets, developing new retail channels for goods and services. Undertaking efforts in this direction and executing corresponding reorganization of the whole supply chain may lead to substantial revenue growth opportunities for local companies.
The next issue relates to the company's inability to clearly concentrate their efforts and form priorities in the supply chain. As a rule, in the process of SCM optimization, the local companies simultaneously encompass all possible growth directions at once – developing new products, reducing time-to-market entry, improving the work of suppliers, improving the product quality, reducing production time, improving logistic operations and level of customer service. However, at this point it is crucial to assess one's own capabilities. Generally the company is not able to cope with all of these tasks at once. Therefore, western approach is referred as best practice. The global peers determine the most important priorities for their growth and concentrate on that direction. This approach allows to achieve maximum effectiveness for utilization of available resources – labour, financial, physical and temporary resources. Once favorable results are achieved in one direction the company shifts its focus to another aspects.
As seen from global practice the implementation of modern IT-technologies is a key to increase company competitiveness.
Apparently not all of the technologies/applications are suitable for local companies to full extent as it is done overseas. For example, it is still not the right time to discuss such topics as Trading Exchanges and e-Procurement (online trading operations and electronic purchases). However, some IT-solutions have been already adopted in Kazakhstan – almost all of the companies introduced ERP, majority use WMS (warehouse management system) and TMS (transportation management system), also several technologies are still at the early stage of adoption, such that Demand Planning, QMS (Quality Management System).
Client relationship management is still at the very early development stage for most local companies. Observations show some achievement in the area of collaboration for transportation planning, purchases management and its replenishment, however, demand forecasting and planning requires major improvements. The main issue in this regard is the way to obtain visible information from the client. Similar tendencies are also faced with suppliers.
There is an urgent need for optimization of internal information transparency. For example, the majority of Kazakhstani companies cannot achieve visibility of production costs which is in turn necessary requirement for cost reduction. Local companies can solve this problem with the help of activity based costing (ABC) methodology, which has been used globally for a long time.
An encouraging tendency for improving supply chain effectiveness is described by willingness of most Kazakhstani companies to implement initiatives for improving product quality, in particular quality management system of ISO 9001 standard. However, not all of the companies find practical implementation and subsequent application of these procedures. More importantly, the formal approach to this issue does not bring expected results. In this regards the solution can be found in Six Sigma concept which is widely accepted globally. Six Sigma – the approach and methodology aimed at minimizing malfunctions of all processes – including production, financial and operational processes. Moreover, Six Sigma is suitable both for products and services. The majority of global companies refer to Six Sigma as a quality index, which is excellence. In order to reach 6 Sigma the quantity of malfunctions shall not exceed (be greater than) 3.4 per 1 million production units.
Finally, inventory and material turnover rate for most of the local companies is very low. This is mainly caused by low reliability level and long purchase lead times, as well as remote access to producers of raw materials. However, taking into account all of the external factors, Kazakhstani companies still have enough competencies to significantly minimize their expenses
Improving Effectiveness of Supply Chains
CIS market, in particular Kazakhstan, is getting to their saturation phase. Only few years back sales of goods has not been an issue to companies due to the high demand from customers, but now customers pay more and more attention to the product quality and price. Therefore, improving product quality and minimizing production costs are becoming vital for many manufacturing companies.
It is expected that Kazakhstan's entry to the World Trade Organization in 2007 will bring expansion of overseas producers into Kazakhstan market. In order to be competitive with overseas producers, local companies will have to adopt western management practices and reduce operational costs to the level of their global peers.
Besides, local manufacturing companies can assess their operational efficiency of supply chains based on the Supply Chain Indexes developed by Deloitte in previously mentioned global benchmarking survey. The Supply Chain Index indicates the average data for companies in a certain industry group and focuses on the following aspects: strategy and business performance; suppliers and customers collaboration; supply chain visibility; supply chain flexibility; new product development and product innovation.
At present, Deloitte have carried out analysis for the following industry segments: FMCG, Food & Beverages. For the nearest future Deloitte plans to capture Mining and Oil & Gas industry sectors. A company that operates in one of the abovementioned industry sectors may take participation in the survey by applying to Deloitte. The survey allows for comparison of company indexes with their regional and international peers. Upon completion of the questionnaire the Company will be offered a free copy of published results of the survey and get customized recommendations on their performance and opportunities for supply chain effectiveness.
Deloitte is a leading provider of consulting services focused on business processes optimization and enterprise effectiveness of the companies. Deloitte has extensive experience in Supply Chain Management, Lean Manufacturing, Operational Effectiveness, CFO services, Activity Based Costing (ABC), Strategy and ERP Applications (Oracle, SAP).
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