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1 SUPPLY CHAIN MANAGEMENT (SCM) PRACTICE TOMY ANAK AUGUSTINE PAKA This project is submitted in partial fulfillment of the requirements for the degree of Bachelor of Engineering with Honours (Mechanical Engineering and Manufacturing Systems) Faculty of Engineering UNIVERSITI MALAYSIA SARAWAK 2006

2 For my beloved family.

3 ACKNOWLEDGEMENT Thanks to God as the author had managed to complete his final year project successfully with the help from several people. The author would like to express his first gratitude and great appreciation to his supervisor; Pn. Magdalene Andrew Munot for his excellent guidance, supervision and full support throughout the completion of this project. The author also would like to thanks the lecturers and staff of the Faculty of Engineering of Universiti Malaysia Sarawak for their guidance and advice in completing this project. Finally yet importantly, the author would like to thanks his colleagues, friends and beloved family for their support and encouragement from the beginning until this project is finished. i

4 ABSTRACT Manufacturers are facing intensifying challenges from both local and international competitors in the marketplace. In order to survive, manufacturers must be able to manage the dynamic market variables and satisfy their customers better than their competitors. One of the alternatives that seek to leverage manufacturers' ability to compete is developing a high standards relationship starting with their customers and ending with their vendors, which defines the term Supply Chain Management (SCM). Yet, effective management of supply chain is not easy to accomplish because of few constraints. The objectives of this study are to investigate the factors causing poor SCM and effects of poor SCM. In this study, one company has been selected as a sample selection. A few methods were used in this study to figure out the problems or factors causing poor SCM and its effects to the company. The methods are survey questionnaire, observation and personal interview. As a result, six problems that cause poor supply chain in the company was identified. The problems are storage problem, fluctuation of raw materials price, late shipment of raw materials by the suppliers, late delivery of finish products to the customers, wrong information distribution during the production and manpower shortage. The company experience effects such as high production cost, severe backlog, poor customer service, loss sales and customers and delay in production from the problems face. In this report, few recommendations are listed for the company as a guideline towards a successful SCM practice. 11

5 ABSTRAK Dalam era ini para pengilang menghadapi persaingan hebat daripada pesaing tempatan dan pesaing antarabangsa dalam pasaran. Untuk kekal dalam persaingan, para pengilang perlu berupaya mengendalikan perubahan yang dinamik dalam pasaran di samping memenuhi keperluan pelanggan dengan jayanya berbanding dengan para pesaing. Salah satu alternatif yang berupaya meningkatkan daya saing pengilang ialah melalui pembentukan hubungan yang kuat dan standad bermula daripada pelanggan hingga ke pembekal. Hubungan yang standad ini dinamakan sebagai `Supply Chain Management (SCM)'. Pengurusan yang efektif tidak dapat dicapai dengan mudah kerana terdapat pelbagai halangan dalam pengurusan rantaian bekalan. Tujuan kajian ini adalah untuk menyelidik faktor-faktor yang menyebabkan SCM menjadi lemah dan kesan-kesan yang dihadapi ekoran daripada pengurusan yang lemah. Untuk kajian ini sebuah kilang pembuatan telah dipilih untuk dijadikan sebagai sampel kajian. Dalam kajian ini beberapa kaedah telah digunakan untuk menyelidik faktor-faktor yang menyebabkan SCM yang lemah dan sterusnya mengkaji kesan-kesan yang dihadapi oleh kilang akibat daripada SCM yang lemah. Kaedah-kaedah yang digunakan ialah soalan soal selidik, tinjauan dalam kilang dan temuramah. Kajian ini mendapati enam masalah yang menyebabkan SCM yang lemah iaitu, masalah gudang, kenaikan harga bahan mentah yang tidak menentu, penerimaan bahan mentah yang lewat daripada pembekal, penghantaran yang lewat kepada pembekal, informasi yang salah sepanjang produksi, dan kekurangan tenaga pekerja. Di dalam kertas laporan ini beberapa cadangan diberikan sebagai panduan untuk SCM yang efektif clan berjaya. 111

6 TABLE OF CONTENTS PAGE NUMBER BORANG PENGESAHAN STATUS TESIS APPROVAL SHEET PROJECT TITLE DEDICATION ACKNOWLEDGEMENT i ABSTRACT 11 ABSTRAK 111 TABLE OF CONTENTS LIST OF ABBREVIATION LIST OF FIGURES iv vii viii LIST OF TABLES ix CHAPTER 1: INTRODUCTION 1.1 Global competition I 1.2 Supply chain management Problems statement Objectives 5 CHAPTER 2: LITERATURE REVIEW 2.1 Introduction Supply chain management (SCM) concept 6 iv

7 2.3 Objective of Supply Chain Management (SCM) Factors for Successful Supply Chain Management (SCM) Problem Associated with SCM Demand amplification (bullwhip effect) Supply Chain Complexity Uncertainty in Supply Chain Management (SCM) 12 CHAPTER 3: METHODOLOGY 3.1 Introduction Sample Selection Data Collection Procedure Data Collection Method 3.5 Data Analysis CHAPTER 4: RESULTS AND DISCUSSION Company Background Survey Questionnaire Data Obtained Through Personal Interview Session Data Obtained Through Observation 29 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 5.1 Conclusion Recommendation 34 V

8 REFERENCES 39 APPENDIX A APPENDIX B SUPPORT LETTER vi

9 LIST OF ABBREVIATION SCM Supply Chain Management CIM Computer Integrated Manufacturing vii

10 LIST OF FIGURES FIGURE PAGE NUMBER I An outline for the research methodology 15 viii

11 LIST OF TABLES TABLE PAGE NUMBER I Observed Problems Related to Supply Chain Management Practice 30 IX

12 CHAPTER 1 INTRODUCTION 1.1 Global Competition Today's global competitive business environment changes much faster than it did twenty years ago, primarily because of advances in the growing global economy (Hayes and Gary, 1994). Global competition is transforming the way products are produced and moved around the world (Prasad and Sounderpandian, 2003). As consequences, every manufacturing and distribution step, from raw materials up to final products, could in principle be included into a "supply chain" connecting material suppliers, manufacturers, distributors and also customers (Villa, 2001). According to Lummus and Vokurka (1999), firms can no longer effectively compete in isolation of their suppliers and other entities in the supply chain. In order survive, manufacturers must be able to manage the dynamic market variables and satisfy their customers better than their competitors (Khaled et. al., 2003). To do this, a supply chain manager must identify and control the factors that influence the performance of the three areas, namely, procurement, processing and distribution (Prasad and Sounderpandian, 2003). I

13 Rainbird (2004) point out that the notion that organizations have supply chains that required active management to maximize efficiency is well recognized". Many companies have identified the logistic or supply chain management process as an area of opportunity to add value, whereby they can reduce costs and increase efficiencies (McMullan, 1996). Industry groups are now working together to improve the integrative process of supply chain management and accelerate the benefits available through successful implementation (Lummus and Vokurka, 1999). 1.2 Supply Chain Management (SCM) Lummus and Vokurka (1999), describes supply chain as the processes from the initial raw materials to the ultimate consumption of the finish product linking across supplier-user companies and the functions within and outside a company that enable value chain to make products and provides services to the customer. While Mark (2004), define supply chain as the integration of business processes from end user through original suppliers that provides products, services, and information and add value for customers. Khaled et. al. (2003), state that in manufacturing this supply chain is the linkage for the physical movement of all materials from suppliers, through transformation and then as finished goods for the customers. According to Ahmed et. al. (1997), the current accepted European definition of SCM is the strategic management process, unifying the systematic planning and control of all technologies, materials and services, from identification of need by the ultimate customer. Lummus and Vokurka (1999), described SCM as an integrating philosophy to manage the total flow of a distribution channel from supplier to ultimate customer. Khaled et. at. (2003) mentioned that SCM is based on the 2

14 integrated planning, control and monitoring of information and production flows along the whole supply chain, from the first vendor to the end customer and vice versa. According to Lourenco(2001), supply chain consists basically on the following elements: suppliers, manufacturing centers, warehouses, distribution centers, transportation systems, retail outlets, and customers; raw material, work-in process inventory, finished good and information that flow between the different elements. While Joshi (2000) state that supply chain consists of a number of units beginning with suppliers, who provide raw materials to factories or manufacturing plants, which manufacture products and send them to regional distributors or wholesale dealers, who ship them to retailers. The end of a traditional supply chain is usually the customer, who buys products from the retailer. In addition Joshi (2000) simplify that every company performs five basic activities in its supply chain which is buy, make, move, store and sell. According to Khaled et. al. (2003), considering material comprises a large component of the sales dollar, companies can reap large profits with a small percentage reduction in the cost of materials and this is one reason why SCM is becoming a key competitive weapon. Indeed across a number of industries, including retail sector, supply chain efficiency has become dominant corporate paradigm, driving firm"s business models and at least in the short term delivering improved profitability (Mark, 2004). In addition, Spekman et. al. (2002) highlight that in an 3

15 integrated supply chain, benefits range from reduces costs, to improved process to better quality. 1.3 Problem Statements Demand amplification is a well known phenomenon in the supply chain. According to Banamyong et. al. (1999) demand amplification or known as bullwhip effect is created by the misinterpretation of feedback by decision makers in the supply chain. It causes cycle of excessive inventory and severe backlogs, poor product forecast, unbalanced capacities, poor customer service, uncertain production plans and high backlog costs, or sometimes even lost sales. According to Hoole (2005), complexity simply evolves over time from the cumulative outcome of many seemingly unrelated functional decisions. Often this complexity comes through product and brand proliferation, but this it also can come through the organizational structures and management processes that have grown up over time (Christopher, 2000). With respect to complexity of external organizational systems, the number of suppliers is often identified as a factor contributing to the complexity of the supply chain (Milgate, 2001). In addition the complexity of the dynamics of the supply chain has led to the isolation of many different sources for this distortion such as flows of information between and within companies, material flow between companies (Power et. al. 2001). 4

16 According to Milgate (2001), uncertainty exists at every echelon in the supply where uncertainty can be manifested through late deliveries by suppliers or poor quality of the incoming materials and parts. This statement supported by Yu et. al. (2001), where uncertainties are caused by delayed of deliveries, machine breakdowns, order fluctuation, etc., which necessitate increased inventories. In addition, productivity and supply chain performance is decreased by the uncertainty in the supply chain (Vrijhoef and Koskela, 2000). 1.4 Objectives This study aims to help manufacturing company to be more competitive in global market through the implementation of SCM. The objectives of this study are: 1. To investigates factors causing poor SCM practice. 2. To investigates effects of poor SCM practice. 3. To provide guideline for good SCM practice. 5

17 CHAPTER 2 LITERATURE REVIEW 2.1 Introduction The supply chain encompasses all activities associated with the flow and transformation of goods from raw material stages through to the end users, as well as the associated information flows (Lourenco, 2001). According to Khaled et. al. (2003) supply chain management seeks to synchronize a corporation's operation and those of its suppliers to match the flow of materials, services and information with customer demand. 2.2 Supply Chain Management (SCM) Concept SCM is a set of approaches utilized to efficiently integrated suppliers, manufacturers, warehouses and stores; so that merchandise is produced and distributed at the right quantities, to the right location, and at the right time, in order to minimize system wide costs while satisfying service level requirements (Lourenco, 2001). According to Disney and Towill (2003), a supply chain is a system consisting of material suppliers, production facilities, services and customers who are linked together via the downstream feed-forward flow of materials (deliveries) and the upstream feedback flow of information (orders). 6

18 In addition, SCM is an integrative approach for planning and controlling the material flow from suppliers to end-users (Banamyong and Nair, 1999). 2.3 Objective of Supply Chain Management (SCM) According to Banamyong and Nair (1999) the goal of SCM is to meet customer service objectives while simultaneously minimizing inventory and associated costs. In Joshi (2000) point of view, SCM goal is to meet customer demand for guaranteed delivery of high quality, low cost, customized products with minimal lead-time. In addition, SCM is a key strategic factor for increasing organizational effectiveness and for better realization of organizational goals such as enhanced competitiveness, better customer care and increased profitability. 2.4 Factors for Successful Supply Chain Management (SCM) Khaled et. al. (2003) point out that successful SCM requires a high degree of functional and organizational integration. According to Spekman et. al. (2002), successful SCM has been linked to communications frequency and quality. Success in SCM usually derives from understanding and managing the relationship between inventory cost and the customer service level (Waller et. al. 2001). A look into the requirement for successful implementation of these software and requirements of supply chains of today points of real time information visibility as one of the crucial factors for efficient SCM (Joshi, 2001). Five critical performance levers have the greatest impact on supply chain performance: 7

19 configuration; management practices; external relationships; organization and system (Hoole, 2001). In addition, the key success of SCM may lay in the system's integration, i. e. requires emphasis on integration of activities, cooperation, coordination and information sharing throughout the entire supply chain. 2.5 Problem Associated with SCM Demand amplification (bullwhip effect) Demand amplification is a well known phenomenon in the supply chain. According to Banamyong et. al. (1999), demand amplification is created by the misinterpretation of feedback by decision makers in the supply chain. It causes cycle of excessive inventory and severe backlogs, poor product forecast, unbalanced capacities, poor customer service, uncertain production plans and high backlogs costs, or sometimes even lost sales. The bullwhip effect is referred to the phenomena where orders to the supplier tend to have larger variance than sales to the buyer, and the distortion amplifies upstream in the supply chain (Amours ei. al. 1998). The source of such fluctuation and amplification of order and inventory is mainly due to the lack of sharing of production information between enterprises in the supply chain (Lau ei. al. 2002). In other words, the bullwhip effect occurs when the demand order variability in the supply chain are amplified as they moved up the supply chain (Lee et. al. 1997). These distortions are amplified from one level to another level in a supply chain and are considered to be one of the biggest causes of inefficiencies in a supply 8

20 chain. Disney and Towill, (2003) state that there are five fundamental causes of bullwhip; non-zero lead-times, demand signaling processing, price variations, rationing and gaming and order batching. Solution to demand amplification According to Verwijmeren (1996), networked inventory management takes away the amplification of demand and supply between organizations in the supply chain, because the integrated decision system exploits the dependence between the stock points in different organizations. The author stated that networked inventory management information system is networked information systems which are applied to networked inventory management. Each networked inventory information system provides for a part of the information processing that is needed for the decision system in the networked inventory management. The role of freight forwarders in the international supply chain has become more important in recent years as they have expanded and diversified their operations worldwide (Banamyong et. al. 1999). The advent of containerization and information technology has led them to increase their responsibility toward SCM. It is their duty to make the supply chain competitive and to improve the efficiency of their clients' logistics function. In theory, if a firm is able to provide a fully integrated logistics service, it will be able to effectively gain competitive advantage. This is due to the fact that the integrated firm will be able to control the sourcing process, the manufacturing or assembly process and the distribution process. This can be done with the help of the freight forwarders. The challenge for the freight forwarding industry is to have a more cooperative relationship with their customers 9

21 in order to maximize the information flow while trying to manage the material flow. The result will be, in theory, the avoidance of demand amplification. According to Spekman et. al. (2002), successful SCM has been linked to communications frequency and quality (e. g. information flows reflected in the quality of information shared and the amount of information). From the studies of bullwhip effect, one of the remedies is to share information along the supply chain (Lau et. al. 2002). It has been reported that the benefit of information sharing is significant, especially in reducing the bullwhip effect and supply chain costs. By using the shared information each supply chain entity can make better decisions on ordering, capacity allocation and production/material planning so that the supply chain dynamics can be optimized Supply Chain Complexity According to Hoole (2005), complexity simply evolves over time from the cumulative outcome of many seemingly unrelated functional decisions. Often this complexity comes through product and brand proliferation, but this it also can come through the organizational structures and management processes that have grown up over time (Christopher, 2000). With respect to complexity of external organizational systems, the number of suppliers is often identified as a factor contributing to the complexity of the supply chain (Milgate, 2001). In addition, the complexity of the dynamics of the supply chain has led to the isolation of many different sources for this distortion such as flows of information between and within companies, material flow between companies (Damien et. al. 2001). 10

22 As the customers' demand shift quickly and the business complexity increases, there is an adverse impact on requirements interpretation, delivery cycle time, flexibility and cost (Lau and Lee, 2000). Thus, the complexity of the supply chain arises from the number of echelons in the chain and the number of facilities in each echelon (Beamon, 1999). Solution to supply chain complexity According to Lau and Lee (2000), different enterprises may run various sectors of business and subsequently the physical supply chains are also dissimilar. In this respect, various business objects should be built in accordance with the dissimilar work natures. With the help of object technology, all kinds of supply chain activities can be represented as objects and incorporated into the supply chain information system. An innovative supply chain management enables the global production of a commodity by customizing the value chain and optimizing each step to meet the customer's needs best. In supply chain management, the focus is related to the managing of suppliers as well as the flow of parts. Smart technology provides the optimum coordination among the partners and monitoring of the parts flow. Smart card contains one or more electronic chips and looks like a regular credit card but can store information and perform functions, such as digital signatures for security purposes or storing value that can be used for purchases. MS Smart Card Operating System (a built-in feature for Windows 2000) is especially designed to work with the processing power of smart cards. Users will be able to configure their own smart card operating system and create applications using the power and familiarity of Visual C and Visual 11

23 Basic 6.0. The smart card will link with the MS SCOS to ensure that data interchange between the card and the computer can be achieved in an effective way Uncertainty in Supply Chain Management According to Milgate (2001), uncertainty exists at every echelon in the supply where uncertainty can be manifested through late deliveries by suppliers or poor quality of the incoming materials and parts. This statement supported by Yu el. al. (2001), where uncertainties are caused by delayed of deliveries, machine breakdowns, order fluctuation, etc., which necessitate increased inventories. In addition, productivity and supply chain performance is decreased by the uncertainty in the supply chain (Vrijhoef and Koskela, 2000). Uncertainty is associated with customer demand, and internal and external supply deliveries throughout the supply chain (Sabri and Beamon, 2000). Product demand variability can be identified as one of the key sources of uncertainty in any supply chain (Gupta and Maranas, 2000). In addition, Yu et. al. (2001) mentioned that there are three distinct sources of uncertainty that affect a supply chain: suppliers, manufacturers and customers. Solution to uncertainty in supply chain management The reason for uncertainties is that perfect information about the system cannot be secured. (Yu ei. al. 2001). While every single member has perfect information about itself, uncertainties arise due to a lack of perfect information about other members. To reduce uncertainties, the supply chain member should cooperate and obtain more information about other members. If the members are willing to 12

24 cooperate, each of them will have more information about others. Therefore, the whole system's performance will be improved. This cooperation among supply chain management can be called a supply chain partnership. According to Childerhouse and Towill (2000), the application of the strategic stock has long been used to buffer against uncertainties. One well known application of the strategic use of stock in supply chain revolves around the use of a physical de- coupling point. The de-coupling point is the point of differentiation between order driven and forecast driven planning. The strategic stock at the de-coupling point is used to buffer against fluctuating customer orders and/or product variety. The application of a de-coupling point before the point of product differentiation is called postponement and reduces the risks of both stock outs and holding excess stocks. 13

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