Slide 1

Welcome to part 2 on supply chain effectiveness. In this section, we are going

to cover some of the key issues and the risks involved around supply chain
management.

The risks that you will have, may cause uncertainty and concerns around your
supply, for example, not knowing when you are going to receive your goods, if
there is a delay, or if you will need to pay a fee/cost due to a delay. These are
the main points that we are going to cover and talk about in this part.

Slide 2 – It might be worth having an online pop-up whiteboard where they

can list some of their own high, medium, and low categories.

Or you could have some diagrams of low, medium and high risks, and then
low, medium and high severities, and they need to drag them and match
them to the correct answer

As I mentioned previously, assurance and certainty of supply are what we are

aiming for. We don’t like surprises, problems or disruption that cause delay,
and of course, we don’t like that these factors combined can lead to additional
cost. In order to identify some of the things that could occur and go wrong, it
is wise to start off with a risk assessment. This will ensure that you understand
the ‘known’ parts that are likely to or are going to occur, and we can identify
them as possible risks. When we have identified the possible risks, we can then
map those out in the supply chain with a high, medium, and low category for
the possibility of them happening and the severity of them. Once they have
been categorised and identified, we can then put them into a risk register
where we could list them and put a contingency plan in place.

The way that we make a risk register is to divide them into 2 sections. Section 1
is the probability of it happening, and section 2 is the severity. For example, we
all know that if we drive a car or vehicle in a city centre, there is more
probability that we will see an accident. However, due to congestion and a
large amount of traffic, the severity or impact will not be very high.

We can also ensure that our lean, ‘just-in-time’ supply chains, such as in the
automotive industry, are running high on efficiency and low on cost and risks.
As mentioned in part 1, supply chains that rely on perishable goods such as
supermarkets and agriculture will try to get their goods to the consumer as
quickly as possible. By mapping out the supply chain, we can understand our
optimum supply chain and how we wish for it to operate. We could also map
out and list the unknowns or uncertainties, for example, some of the things
that could happen that may pull us off track and cause us problems. We can
then make a plan to try and avoid this from happening, and if it does happen,
we can try to reduce the severity of it.

We can hedge against ‘so called’ bottleneck suppliers, for example, if we have
a situation where goods are being delivered to an island by sea cargo or air
freight, there is the risk of having delays at the ports, customs, and with the
journey itself. However, as these are unknowns and these things do happen,
we can hedge against them by making sure that we have additional inventory
to cover the journey time and leads time. We can build a contingency plan for
these setbacks with our existing inventory holding.

In part 1, we talked about how a low-value item can be highly complex, such as
milk and dairy products. These might not be the highest item in value,
however, if you don’t have stock and are unable to source it soon, this could
cause a line stoppage. This makes a disproportionate cost of the item, and, to
the overall cost and value due to the line stoppage. This is where having more
stock and contingency stock holdings can avoid bigger disasters for us when it
comes to a production line stoppage or delay in construction from just a small
valued item.

You will need to think about many things in your supply chain, such as:
Where do you add value to your supply chain?
Where do the risks occur?
Where do the value chain and the supply chain meet?
Where value and costs are added?
What is done well?

Make sure that if you are building a lean supply chain, you don’t have brittle
links in the chain that can break or cause problems. If you do have these, you
will need to strengthen the links. A good example of this would be to refer to
the low-value item that can cause quite a few disasters if stock and inventory
are low.

Please draw your attention to the diagrams on screen. These are all examples
of low, medium, and high risks that you could be likely to encounter. Please
match them to their category of low, medium, and high. Once you have
completed this task, please do the same with the diagrams for low, medium,
and high severity.

Slide 3 – Again, should this be split into 2 main slides, lean and agile? Here
there is a lot of focus on lean supply chains, but not a lot about agile. You
could put this to the student where there are pictures of 5 different
restaurants/chains and. 4 of them are lean and 1 is agile, they need to click
on the agile one.

This whole slide can be split into so much more – Lean, low margins and high
margins, innovative approaches etc…

Lean:
The first bit of analysis that we need to think about is what are the different
supply chains that exist? Two come to mind quite easily and readily, and that is
the notion of a lean supply chain, where manufacturers are on a fast life cycle
of selling products and goods on a daily basis. These companies will already
have or will want to use a lean supply chain. In a simplistic way, we could think
about this as McDonald’s versus a high cuisine restaurant. McDonald’s is a fast-
food chain and the key point here is in the word, ‘fast’, due to the fact that it is
prepared quickly and it is available to you instantly. This happens due to them
using lean supply chain techniques and approaches. We can relate to this
approach in a similar way to Henry Ford with the Model T, for example, you
can have any food that you like, as long as it is in a standard carton, with
standard sides/dressings, and in some cases, items that are used in more than
one selection on the menu, such as the meat patties.

This comes into standardization, and we can think about if every single
McDonald outlets are using the exact same cartons, paper bags, fries, size, and
quality standards, then they will become a very strong negotiator with their
supply chain producers. They can then buy all of the goods they need for all of
their stores, as they will have a central procurement function that gets a very
competitive cost and price, whilst keeping the total cost of ownership
relatively low.

If we look at the predictable demand, again, using McDonald’s as an example,

they will know the kind of footfall that comes and the kind of traffic that comes
through that specific restaurant, whether it is a drive-through, family
orientated, or near a football stadium. From these predictions, they will know
roughly within 10-20%, the kind of traffic and footfall that it gets on the
weekdays and weekends. So we can see that they have a pretty good plan,
cost, and forecast of what they expect to spend, and the quantity they need in
order to reduce waste.

You can see that with McDonald’s we have a mature product. This means that
is not a variable and it is pretty standard i.e. it has been around a long time. It
has a long history to gather data about it and do analysis on and it has been
well tested in the market place. It doesn’t change very much, and sometimes,
the component parts get re-arranged and re-organised so that the meal deals
or the way in which they are marketing the products can be slightly adjusted.

Overall, the variety and options are pretty low and standardised when you
think about the fries, the meat and the side order. We know the demand that
we are going to get from the location of the premises. These are usually in well
sought out areas such as in shopping malls, near stadiums and near roadside
position. We have clear categorisations of food and drinks and what types
there are. It is important that we can not only see these categorisations from
the consumer point of view, but also in the supply chain, where we can
manage these categories in the best possible way by considering them as
possible bottlenecks and finding out what our most prominent category is.

In fact, a report says that McDonald’s are more focused on estate

management and the location of their restaurants and associated buildings
than they are on actually making and selling the food. They make more money
on estate management. We also need to think about these categorisations and
the IT technology that goes into ordering the items as well. Different categories
require a different approach, such as partnering, bottleneck, leverage, or
indeed a non-core. A non-core approach means that we are not going to put as
much effort into some of these categories as we would in our collaborative
partnering.
Low margins:
Let’s talk about low margins, now, low margins are going to be tight because
we are probably not going to have a lot of profit in there to make them
competitive. However, we aim to move high volumes to get our gross revenue
and drive some big numbers. Keeping errors, risks, mistakes, and waste to a
minimum are essential because the more we know, the more we can predict
demand, outcome, and planned certainty.

Innovative approach and agile

Let’s talk about the innovative approach and the early life cycle. We always
want to be the first to go to market and receive some high profiling in the
sense where we are getting a lot of marketing around what we are doing, and
we are seen as being in the design and architect stage.

Functional and lean supply chains (because of the low product variety) are
probably are not going to be changing the life cycle a lot. We can see this in the
case of VW and the Beetle because they have been with us for generations and
they have not changed a lot over the years. So, we are not looking at a lean
supply chain in the early part of the life cycle stage, however, in the agile or the
innovative supply chain, we are going to see a lot of new addition and early
entrants. We are going to see high product variety and lots of new ideas, for
example, in restaurant terms, having new options on a menu. We might also
see some unpredictable demands due to seasonal adjustments, but in the case
of agile and innovative, we are going to have to like surprises.

Due to the new way of working and the innovative approach in the supply
chain, there are going to be a lot of new product categories to go with the new
things that are coming up. This means that we are not going to have this
established, category management approach, but instead, we are going to
have what is called ‘unprecedented categories’ and ‘unprecedented change’.

High margins:
The good news is that from this, we can obtain high margins, especially if it is
something which people want. We can then make sure that we charge the
appropriate price and cover the uncertainty in our costs. We can build in
contingencies and make sure that we turn over a nice profit and margin for
having this effective service. Due to all of the new entrants, high product
variety and the different categories, it is likely that there is going to be quite a
high forecasting error.

Slide 4

What we are seeing from this diagram is the correlation between if you’ve got
a functional product, then you need a lean and efficient supply chain to cope
with that. So that is where you have this match. Functional products with
certainty and predictability will want an efficient supply chain where every link
in the chain is going to add some value.

With innovative products, we want a responsive supply chain that can handle
uncertainty, can be agile and can deal with the additional cost that goes with
it. It will be a value-added service for our high class or exclusive service that we
might want to offer for an innovative product.

Slide 5 – This is quite boring, any ideas, Demetrius?

Here you will need to click on the screen to show the related text.

Here you will see the complexity versus the uncertainty of supply chains.
Where you have low complexity and some certainty (meaning low
uncertainty), we are going to have the lean supply chain and we are going to
see things that we use every day of the week, referred to as ‘commodities’.

High uncertainty and high complexity are things like big projects, such as big
construction, big infrastructure, big IT platforms and installations. These are
run in project management mode.

Fashion goods and exclusive goods are seen here as low complexity, but with
high uncertainty, and will be referred to as ‘agile’.

Then we have a term that is used when we split between both lean and agile,
this is called leagile. Things that would come under this category are computer
consumables, durable items, and so on. It is worth considering these four
possibilities of what our supply chain is and what analysis are we undertaking
to determine the different types of supply chains that we might have.
Slide 6 – Maybe this whole slide can be made into an interactive part of the
course instead of asking them to write it down on a piece of paper etc?

For example, a multiple choice quiz where they score points?

Slide 7

Here we are going to cover a little bit about market mediation costs. Before we
do this, it is worth noting and understanding that in supply chains, we don’t
really want to focus on the costs. This may sound surprising, but what we want
to understand instead, is the price of the thing that we are being charged for
and the component costs that go into it. As everyday consumers, we already
know about prices when we go to buy things, however, from a professional
point of view, we will focus more on the total cost of ownership for the goods
and services that we are buying for a business. That is not just going to include
the item that we see before us, which would usually be made up of many
different components, and therefore, different costs.

Could start with a video of someone dissembling a mobile phone and have a
pop-up question, such as ‘Why do you think this is important?’
Have a look at this video of this mobile phone being disassembled, why do you
think this is important?

Take your mobile phone for example, when we look at it, we are not just
thinking about one item as a whole, instead, we will think about the hundreds
of different costs that have gone into it, such as, the front screen, the back
casing, the buttons on the side, and the printing. When we open it up, we can
see various components such as the camera and the battery. We then need to
think about the packaging that is involved in the delivery and the logistics of
transportation. So as you can see, something that looks relatively simple, can
actually have many, many additional costs involved. Once we know the total
cost of ownership, then we can start to understand the price better and what
we are going to charge for the goods. We might think about somewhere in the
region of 100-200 dollars or pounds for a low-cost product, and something in
the region of 600-1000 dollars or pounds for a higher-end product.
The market mediation is the additional cost that we don’t always plan and a
cost that might come unexpectedly. We hope to prevent them as much as we
can, but sometimes, they can be completely out of our hands, such as acts of
god where there are terrible weather conditions or fires that may cause delay
and will result in additional costs.

We have market mediation costs where we didn’t really do our inventory

planning well and we have not got any stock of the item. Here we are giving
some context to this ‘so called’ market mediation. This is for things like a
schedule where something has gone wrong, however, if you don’t have a great
deal of competition, then we will use the key phrase ‘so what?’, so what if you
don’t have the stock?

Let’s look at the likes of Apple. If you do not have much competition and your
product is truly innovative, but you do not have any stock, you know that
people will wait to receive the product. During religious holidays and festivals,
the demand will outstrip the supply, and if you do not have another available
choice on the market, customers could even end up being charged more for
the item due to high demand.

Obviously, we don’t like surprises, and if we could prevent this from happening
and we can predict uncertainty, then we can plan better and smooth out the
revenue, making sure that we have a known amount of profit coming into the
business.

Slide 8 –

Here we have got a small case study of Campbell’s soup. It was very iconic and
was painted by the artist Andy Warhol. It has been around a long time and we
can see that it as historic as it is, there has not been a lot of change with this
product and that is why this is a good case study to look at. Campbell’s soup
uses a lean supply chain that is fast-moving, and we can even say it is a ‘just-in-
time’ supply chain as well.

A ‘just-in-time’ supply chain is a very risky supply chain if you encounter delays.
However, when this supply chain works normally and as planned, it is a highly
effective and efficient end to end process. This starts all the way from the raw
materials, to selling the goods, keeping the costs down, and building in the
known times that things take. From this, we are able to forecast and predict
certainty in that supply chain.

These are some of the bullet points that Campbell’s will adopt. We can
compare Campbell’s soup to Henry Ford in a way where they both reduced
excessive and unnecessary variety, whilst keeping their standardisation very
simple.

Make sure that when you have bottleneck items, that you have an inventory
holding that gives you safety and certainty, such as contingency stock in case
something goes wrong in the supply chain. Obviously, we do have this friction
in terms of withholding stock and making sure that you keep your costs as low
as possible, because someone like Campbell’s, will be competing with the likes
of Heinz and ‘own products’, or ‘home brand’ soups from the supermarkets.

Campbell’s will want to make sure that they are competitive and the way that
they can get the competitive costs and prices for what they are selling the item
for, is by not holding huge amounts of inventory in big warehouses. These
days, warehouses are highly mechanised and digital, with lots of
enhancements. They do not want to be holding on to large quantities of stock
and inventory. This is because the relationship between the inventory and the
end product is very, very critical to avoid in order to help them keep costs
down. Their margins will also be quite low, which means that they will make
their anticipated profit for the end of the year.

Campbell’s will be using lots of forecasting and behaviours of peoples eating

habits, and indicators from market analysis. They will also be standardising and
using lots of commonalities. We can look at Campbell’s and Heinz’s packaging
and tin cans here, where they are using lots of common parts across all of their
canning plants and avoiding lots of differentiation. We want to make sure that
this is a lean manufacturing process that has a very accurate and good
forecasting time, where we can go back to studying behaviours and using
indicators for our ‘just-in-time supply chain.

Let’s have a look at the replenishing side of things. Replenishment of stock

should be little and often, probably on a daily basis. We can do this in the
stores and supermarkets (which are the outlet for someone like Campbell’s) by
using things like electronic data information. This would be to get stock and
known inventory information back so that Campbell’s can replenish the shelves
in the stores. The EDI also helps them to back to their own supply chain for
their materials, liquids, and the ingredients that make the soup. The EDI will
help the farmers and producers of all of the items to ensure that they are able
to manage their part in this ‘just-in-time’ supply chain.

You can see here that by using a ‘just-in-time’ supply chain, retailers
inventories have dropped by 50%. This means that the supermarkets and
retailers have taken stock out of their storage, and so their inventory has
dropped. Campbell’s were able to recognise that they can continue to do
better with the forecasting. For example, the better the information is from the
EDI and the better information from the point of sale, the more accurate the
forecasting demand is.

Here is a video about the baked bean war. Please click on the video to play it.

Maybe here you could have a link that leads to information about the baked
beans war?

Campbell’s do not get into price wars with the retailers, for example reducing
the price. I’m sure you will remember the baked beans wars where they were
highly competitive with each other, such as Heinz and ‘own brands’. In this
situation, they would drive the price down and have price promotions.
Campbell’s feels that their brand is of good quality and they have pitched their
price correctly. Overall, we have got this improved cost base which has fallen,
and a more cost-effective and efficient supply chain because of the known
information and things like EDI.

Slide 9 – A photo of both of these bikes might help grasp a little more
attention

Before we get started on this part, I would like you to have a look at this video
on screen.

Afterwards, we will move onto mass customisation, which will be the last part
for part 2.

We are going to look at national bicycle and some of the lean supply chain
techniques that they use. They can put in some variety and customisation with
customers, and we can see here that customers can choose from two million
options. But, you have to understand that they are using standard parts that
they can aggregate and have prepared. The end product, which is based on
various assemblies, can give them a wide selection.

But don’t get confused between agile and this mass customisation, because
with agile, it is a much deeper offering and there are profits to be made by
offering this highly personalised service. Here we are looking at mass-
production techniques in the mass production process, where fitting the
standard parts in a different sequence to provide a different offering. This can
be very labour intensive. This is still built around a lean process with cost
efficiency, and yes, there are options that can be given, however, the variety
comes based on the different ways in which the bikes are put together.

The same applies to Lutron Electronics, where they have lighting features. Both
of these companies use similar approaches, but they will both be adopting a
production line and facility that comes with having a standard approach in how
they work.

We have now covered all of the necessary information for this part, please
take a break and then click on part 3 of supply chain effectiveness to continue.