Configuration and Coordination of Supply Chains - Article Example

Operation Strategy: Compare and Contrast Between Companies 2006 Introduction Configuration and coordination of supply chains have been important aspects of modern-day operation management of companies that have ventured into international operations with suppliers and customers cutting across borders. Configuration of the various actors in the supply chain and coordination between them through information exchange and interaction are the key elements in maintaining the competitive edge (Mahendrawathi & MacCarthy, 2001). In this paper, I will present four case studies – two companies each from the manufacturing sector and two from the service sector – that have strove to gain the competitive edge through international operations and supply chain management. The companies that I have chosen are Toyota and Dell in the manufacturing sector and MacDonald and Easyjet in the service sector. Operation Management in the Manufacturing Sector The eighties were the watershed in global business history when manufacturing companies around the world transformed their operation strategy from building inventories as security to lean manufacturing whereby producers produced just-in-time for dispatch and held minimum inventories. Toyota was the pioneer in the lean manufacturing and greater role of the assembly-line worker, soon followed by other companies including those in the United States (Breen, 2004). Toyota and Dell present two alternate strategies of inventory management whereby Toyota gained on its lean manufacturing practices whereas Dell based its inventory planning on build-to-order model. Toyota Post World War II, Japanese manufacturing companies found opportunity in the massive amounts of materials left behind by the Allied forces and saw opportunity in the American style of production. Toyota began with the Ford-style mass production system in which the worker had no role in innovation but simply had to be part of the assembly line. It was soon found that the system did not coagulate with the Japanese work culture or with a multi-product system. By the 1970s, it was also realized that small batch products and a continuous flow like in an assembly plant, which produced a single product, could be achieved only by reducing the setup time. Toyota’s lean manufacturing model (the term first coined by Womack et al, 1990) fitted the bill of reducing the setup time by defining the “value” of the product as that demanded by the customer. The “lean enterprise” sets up the entire supply chain according to the “value stream” through problem solving, information network and physical transformation (Womack et al, 1996). The customer-oriented business then eliminates all “waste”, defined as "any operation or process that does not raise added value" (Linge, 1991). Towards this aim, Toyota – and later other Japanese car manufacturers – strenuously reduced costs, increased efficiency and productivity. The Toyota production system is a continuously scripted flow of activities yet one that gives sufficient authority to workers to rectify defects thereby eliminating possibilities of rejections and “waste”. As Speare and Bowen (1999), notes, Toyota has developed this work culture through 50 years on the nature of workers’ attributes regarding 1) how they work, 2) how they interact with each other, 3) how production lines are built and 4) how workers learn to improve. As a corollary to the lean manufacturing Toyota production model, the Just-in-Time (JIT) approach developed to determine how material should be processed and output produced in order to be just in time to cater to the customer without any wastage of material or time. It is considered to be a philosophy of production, rather than an operation strategy, to ensure timely delivery, quality and value for money (Linge, 1991). For JIT to be successful, not only should the organization be streamlined down the value chain, the entire supply chain including suppliers, retailers and wholesalers have to be cued in to the process. Toyota ensured that workers became specialized in their production areas as well as multi-skilled so that they could rectify defects along the assembly line, thereby reducing inspection requirements to the minimum. At the same time, the company introduced procedures that enabled improved efficiency by meticulous coordination of tasks. By the “pull system”, each group of workers takes over from the previous group through “parts withdrawal” and “production instruction”, reducing the chances of duplication or defects. Simultaneously, each group while taking over from the previous one ensures that it does not hold more than 10 percent of the required inventory of materials and stocks. Seasonal variations in demand are built in the leveled production stipulations and forecasts regularly updated. To maintain the continuous flow, the major assemblers in the plant work like mini-plants, stipulating the setup times, productivity levels and product layouts (Linge, 1991). Dell Dell Computers was founded in 1984 by Michael Dell, who has been the longest-serving CEO in the computer industry. Over the two decades of its existence, Dell has emerged as the second-largest PC maker in the world and the largest in the United States (Dell & Fredman, 2000). In 2002, Dell was the world’s largest, with 34,800 employees in over 30 countries and selling in 170 countries (Achtmeyer, 2002). The principal weapon with which Dell managed to beat competition was its build-to-order model of production as opposed to the build-to-stock model prevalent in the industry. The direct selling strategy that it adopted eliminated the retailers and allowed the company to reach customers in the shortest possible time and at the same time operate on negligible inventory, thereby reducing costs by a phenomenal level. In the 1980s, when Dell came into existence, the market environment was in the midst of a transformation. First, the corporate customers were growing more sophisticated and, instead of being buoyed by hard-selling by the marketing force, were quality-conscious and adept at negotiating over prices. Both corporate and individual customers were buying their second PCs or replacing their old one hence had grown accustomed to the technology parameters. This allowed Dell to adopt the direct-selling model with minimal customer interaction of the sales force. Over the years, Dell’s selling and advertising costs have been lowest in the industry. Second, most of the parts of PCs, like the monitor, keyboard, hard disk, motherboard, software had become standardized. This enabled Dell to venture into outsourcing parts manufacturing and become an assembler. As a result, Dell has been able to focus on design and inventory management while its inventory levels have been lowest in the industry (Achtmeyer. 2002). Typically, other companies – which operated in the build-to-stock model – produced computers based on the industry forecasts, stored these in the warehouses and dispatched to the wholesalers, retailers and other intermediaries who added 20-30 percent margin on the costs of the products. As a result, the manufacturer had control over the production process and could only economize at this stage. On the other hand, the intermediaries earned the selling margins, aided by location access to products, cross selling of brands and the general feel and touch advantage. Dell trashed this model by eliminating the intermediaries in the product chain completely, taking orders over phones – and since the late 1990s over the Internet – and aligning the supply chain closely to the assembly factories and the order-taking system (Achtmeyer, 2002). Over the years, Dell has grown sophisticated in streamlining the entire process of order-taking from customers, buying and assembling the components from its vendor network traversing the world and dispatching to the customer on time. With a minimum requirement of plants, equipment and R&D, Dell has transformed the manufacturing process to a service mechanism. The direct-selling model has worked for Dell primarily because it has been able to align the supply chain intricately with its selling mechanism. The company, which assembles 80,000 PCs a day, does not have any warehouse. Its factories hold inventories for a maximum of two days while the entire operation inventory is a maximum of 72 hours (Breen, 2004). Cutting down inventories have meant that Dell has a financial advantage to its competitors. Dell receives payments from its customers immediately online or through the credit card. The company places order on the component vendors and proceeds on the assembly but pays to the suppliers only 36 days after the product is shipped to the customer. As a result, the cash-conversion ratio for Dell is negative 36. On the other hand, other PC makers pay suppliers immediately for the components, assemble them and receive payment from customers on delivery. The process takes roughly 30 days hence the cash-conversion ratio is typicall positive 30 days for the other PC-makers. The challenge in the entire process is that the Dell assemblers as well as the suppliers have to be inordinately efficient in delivering on time. Along with inventory-management, Dell has also strove to make its marketing network sophisticated. It keeps detailed databases on the customer profiles so that it can predict a repeat purchase and be ready to deliver before the customer actually places the order. Comparison Between Toyota and Dell Both Toyota and Dell have developed the art of inventory management in their own way to retain the competitive edge. While Toyota’s lean manufacturing with JIT allowed the company to have a production process geared to customer demand, Dell’s build-to-order model intricately linked the supply chain to the demand. However, Toyota did not dispense with the intermediaries like Dell did. Instead, Toyota integrated the chain of intermediaries – suppliers, wholesalers and retailers – in its supply and distribution network. On the other hand, Dell, working in the telephone and internet-driven module, eliminated the selling intermediaries completely while working with a intricate supply chain in which its own factories worked as assemblers of components sourced from around the world. Dell has imposed strict delivery schedules and product qualities on its assembly plants and supply contractors while Toyota, while defining detailed production procedures, allowed and encouraged workers to become multi-skilled and productive decision-makers. Operation Management in the Service Sector In the service sector, companies that have succeeded, particularly over the last two decades, are the ones, which have been able to provide value for money. Commoditization of services and cost advantage has been crucial in the dog-eat-dog market. McDonald, which since the 1960s have sold hamburgers and french fries to Americans have of late made inroads not only in countries with similar food habits, like in Europe, but also in dramatically different culture in the eastern hemisphere. In the process, not only has the company refined its supply chain enormously it has also differentiated its products according to local tastes. Similarly, the European airline, Easyjet, has cost cutting and a sophisticated distribution network as keys to its success. McDonald MacDonald, founded by Ray Krac, now has more than 50,000 outlets in 30 countries form where it caters to 46 million customers annually (Howard, 2003). The fast food chain grew phenomenally in the United States through the 1960s and then in Europe. Over the last two decades, MacDonald has expanded in other countries in Asia and Latin America as well. As a result, it has turned the essentially American food of hamburgers and French fries into mass products targeted at all types of population. However, the company has attempted to cater to different tastes in other countries by adopting the local ingredients in accordance to tastes. MacDonald has affected other cultures so much so that terms like “MacDonaldization” have developed to refer to cultural imperialism by the multinational company (Watson, 1997). MacDonald states its operation strategy as “To provide unmatched consistency in operations in support of high product quality. This must be accomplished with adequate speed, low cost, and process innovation to accommodate changes in consumer taste” (bc.edu). MacDonald has grown its revenues through enlarging its franchise base, which it has chosen carefully. However, the company has made sure that the outlets are identical, with the same facilities, décor and menu as well as similar level of service that it ensures through careful planning of the supply chain. A high degree of process innovation and a systemic integration of its supply chain has enabled MacDonald to become the largest fast food chain worldwide. Although the franchises are essentially independent, the company keeps meticulous control over the supplies and speed of delivery by using sophisticated technology in procurement, storage and delivery of food supplies. The stores have developed sophisticated systems of delivery whether to the restaurant guests or the drive-in customers. At the same time, the company takes care to manage the supply chain closely so that there is a very small inventory of perishable commodities at the end of the day. Easyjet Easyjet, founded by Stelios Haji-Ioannou in 1995, is Europe’s low cost, no frill airlines operating from Luton in England. Beginning with two routes to Glasgow and Edinburgh, Easyjet now flies 64 aircrafts to 89 routes from 36 European airports (bized). Its only competition in the low cost airline industry in Europe is Ryannair. It has acquired its other main competitor, Go Air. The dramatic growth of Easyjet is to a large extent the result of low distribution costs through paperless retailing that the company does with about 90 percent booking online. It has pioneered the concept of ticketless traveling, in which the passenger is intimated on the booking through the e-mail. This reduces the cost of distribution of tickets at the counters and also the requirement of travel agents as intermediaries. The no-frill service which means that the airline has done away with on-board catering and maximum use of assets leading to lower turnaround time in the airports together resulted in lower operating expenses. Easyjet does not even have the frequent flyer schemes to maintain costs. The no-frills strategy paid off with both business and leisure travelers as the distance of the original route, Glasgow and Edinburgh, as well as the other routes that it flies now, are short and passengers do not really require much service on-board. Comparison Between McDonald and Easyjet Both MacDonald and Easyjet have targeted the mass market for their respective service product. In the process, MacDonald has converted the typically American food to an international menu by adding special touches according to the tastes. On the other hand, Easyjet has focused on a niche market to achieve fast growth. Both companies, however, has shed frills of sophistication and offers a standard product. For both, speed and quality control are the key. Conclusion Although operation management of different companies is different for each, most companies that have grown fast over the recent path have shown some similarities. Most companies, as seen from the four examples that I have just discussed, lay emphasis on speed of production and supply, quality control, low inventories and customer orientation. Whether it is a manufacturing or a service company, customer focus has been important particularly in this age of the internet. Web-based technology has not only increased the customer focus but has also streamlined the operations by reducing the need of intermediaries. 2,444 words Works Cited Achtmeyer, William, F., Dell Computer Corporation, Center for Global Leadership, Tuck School of Business, Dartmouth, 2002, available at http://mba.tuck.dartmouth.edu/pdf/2002-2-0014.pdf bc.edu, Class Notes: Operation Strategy, available at http://www2.bc.edu/~xueme/MD021/class%20notes/operations%20strategy.doc Bized.edu, http://www.bized.ac.uk/compfact/easyjet/easy1.htm Breen, Bill, Living in Dell Time, Fast Company Magazine, Issue 88, November 2004, available at http://www.fastcompany.com/magazine/88/dell.html Dell, Michael and Catherine Fredman, Direct from Dell: Strategies that Revolutionized and Industry, Collins, 2000 Howard, Lisa. “Suppliers.” June 19, 2003, available at http://www.foodservice.com/news_homepage_expandtitle_fromhome.cfm?passid=6951 Kennedy, Michael, N, Product Development for the Lean Enterprise: Why Toyota's System Is Four Times More Productive and How You Can Implement It, Oaklea Press, 2003 Linge, G.J.R, Just-in-Time: More or Less Flexible, Economic Geography. 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