The history repeats itself over and over again.
During the last year the world has experienced a global economic crisis affecting companies from different sectors, such as: manufacturing. Back in 2010 was the mortgage crisis and now market downturn and pandemic caused by covid19.
This situation has caused losses in organizations, such as money, material and people. Therefore it is more complex to carry out operations within this environment.
The present article explains:
- The importance of the supply chain management in relation with the last global recession. Also the good and bad points about the management techniques that companies have to deploy in order to compete in a globalized world.
- Also this paper begins with a presentation of the concepts that affect the supply chain management and how they are related to the global recession.
Definition. Supply chain management. According to Slack et al, (2001), it is the management of the interconnection of organizations which relate to each other through upstream and downstream linkages between the different processes that produce value in the form of products and services to the ultimate consumer.
This applies to different areas defined by Harrison and Van Hoek, (2008) such as: raw material supply, manufacturing, packaging and distribution to the end-customer.
Based on Wilding, (1998) there are 3 concepts that affect supply chain management:
- Demand amplification
- Deterministic chaos
- Parallel interactions
How do these concepts (mentioned above) work related to SCM? Let’s explained them with more detail.
Demand amplification
This one explains that due to the supply chain uncertainty, the decision makers do not know definitely what to decide as they are indistinct about the objective (Towill and Childerhouse, 2004). At the end, variations in the demand are made by just one element in the chain, which is the final customer. To explain the factors about why the demand is never going to be certain, Wilding (1998) presents the following 4 concepts:
- Demand forecasting
- Order batching
- Price fluctuations in the marketplace
- Rationing and shortage gaming
However, based on Slack et al, (2001) knowing what customers request on a product is never totally certain. Therefore concerning future demand, attempts to put the resources in place which can satisfy the demand and attempts to respond quickly if actual demand does not match the forecast.
That is why Towill (1992) suggests that companies then carry buffer inventories and yet further additional overheads in the shape of expediters and schedulers. Basically, each level or echelon in the supply chain carries additional inventory because companies in the chain get together to develop an integrated systems approach. Consequently, everyone holds buffer inventories against the very same contingencies, by Towill, (1992). Also, it is important to mention the “Bullwhip effect”, a term used in supply chain management, to reflect the oscillating effect of inaccurate information or improper forecasts can have on inventories levels, by Lynch (2009).
Deterministic chaos
What is chaos? According to the Webster Dictionary (2010), it is the inherent unpredictability in the behavior of a complex natural system and in relation in a modern usage, chaos denotes a state of disorder and irregularity based on Schuster and Just (2005).
In supply chain systems, Wilding (1998) explains that the decision making process related to adjustment policies in driving inventory down to low levels can result in distress due to stock outs, rapid and erratic re-ordering and poor customer service levels.
All these risks in the decision making processes cannot be banned, due to always is going to exist a level of confidence. However, according to Christopher and Lee (2004) this lack of confidence can be reduced if two points are attacked: Visibility and Control.
- This one describes that due to the length of supply chain systems there is no detailed knowledge of what goes on in other parts of the chain, as finished goods inventory, material inventory, work-in-process, etc. The solution here, is to share information among the members of the supply chain, this is because shared information reduces uncertainty and thus reduces the need for safety stock.
- It describes the situation that even if information is shared and a manager knows the scope of the process, sometimes it is hard to control the different operators related to the supply chain, due to these operators are out of his/her hands like suppliers, weather, unflexible production lines or production schedule changes are not feasible, etc. (Christopher and Lee, 2004).
Parallel interactions
Defined by Wilding (1998) as the interactions that occur between different channels of the same tier in a supply network, like for example a vendor supplying material or a finished part for a customer. It has to be remembered that supply chains are dynamic systems and that at any point of time, hundreds of activities and decisions are happening somewhere in the chain, according to Slack et al (2001).
But even among all these number of decisions, there are concepts that can help to reduce the parallel interactions. Fernie, (2009) explains that at an organizational level trust and commitment, can be related to the relationship lifecycle.
Also, Cousins and Stanwix (2001) establish that trust has a role to play within and between inter- and intra-organisational relationships. However, according to the game theory, Binmore (1994) explains that much negotiation in real life is concerned with sharing information with a view to estimating the size of the potential surplus, in this case, of the power given by sharing or not the information.
Therefore, to control parallel interactions is a complex case, in an ethical point of view, trust is necessary to develop business relationships, (Cousins and Stanwix, 2001) but hard to achieve. In an operational point of view, parallel interactions can be reduced by buffering with inventory, however even for large buffers, interactions do occur but less frequently (Wilding, 1998).
Barriers or Drivers?
It is important to remember that the aim of this paper is to understand better all the factors related to supply chain management in order to keep the advantages of the positive concepts but also, to be aware of the dangerous practices, both of them during the overcoming of the global recession.
Getting theory into practice
In order to take care of uncertainty, Courtney et al (1999) suggest that any strategy requires a choice to shape the future, adapt to it or stay in the business without making a great commitment in the market. For example, in 2008 Microsoft invested more than €430 million in research and development in Europe (Microsoft, 2008), with this operation, the company looks to play a leadership role and shape a better future for them.
However, not all the companies have enough resources to invest, especially now, after overcoming the global recession. Burke (2009) argues to take advantage from the social-networking technologies such as instant messages, blogs and social networks web sites, by soliciting input from partners, suppliers, and end users can help organizations reduce costs and stay competitive during the upturn, and identify future business opportunities (cited in Oracle, 2010).
How to estimate the demand forecast
It is true that predicting sales based on historical data is nothing new (Garretson, 2009), but Lasserre (2003), explains that the central element of the global logistics system is the forecasting function in order to determine a central demand to specify which products go where and when.
Companies such as Tesco, C&S and many in retailing are working to apply a series of complex algorithms to determine how other factors, such as current events and weather patterns, might also affect sales (Garretson, 2009). That is another reason to improve forecasting accuracy in upturn times. But with so many variables to consider, historical analysis alone is insufficient as a guide to the future.
The most reliable forecasting process incorporates three different perspectives in a discipline called “triangulated forecasting.” This approach integrates:
- Field assessments
- Real-time pipeline assessment
- Historical trend analysis to compare snapshots of opportunities and forecasts over time
(Oracle, 2010).
Order batching
The next factor to consider is the order batching, due to customers tendency to order goods at certain times during a period, these periodic batching of processes result in surges in demand at certain points in time (Wilding, 1998). However the demand will not always be the same. Slack et al (2001) establish that the replenishment of inventory depends on the uncertainty of demand, as the level of safety stock is influenced by the variability of both demand and the lead time of supply.
Price fluctuation
Finally, the next concept is the price fluctuation. Jessop and Morrison (1994) suggest a list of prices that the stores use to facilitate material costing, such as: supplier’s prices, trade discounts, quantity discounts, transport charges, insurance fees, customs duty, non-returnable packages and returnable packages. This results in bigger variations in demand patterns in price fluctuations (Wilding, 1998).
