Supply chain operation management collection of methodologies

INTRODUCTION

The supply chain encompasses all activities associated with the flow and transformation of goods as well as the associated information flows.

Supply chain management is the collection of methodologies used to manage this flow by efficiently integrating key stakeholders such as suppliers, manufacturers, distributors and retailers in order to minimise cost as well as satisfy customer or service level requirements.

Supply chains typically involve a two-way flow of information and material and consist of a series of linked suppliers and customers. In a supply chain every customer is a supplier to the next downstream organisation.

It is necessary for every organization to manage inventory and stock out at every step, inorder to reduce cost.

SUPPLY CHAIN MANAGEMENT ISSUES

  • Inventory management - inventory management approaches used by organisations are dependent on a number of factors including customer demand, supplier and customer locations, production patterns, product characteristics and cost.
  • Complexity - When activities and facilities increases for one supply chain then it becomes complex. If an organization produces different product it may have different supply chain for that product.
  • Push/Pull systems - Pull systems refer to a planning and distribution approach where the initial order arises from the end of the supply chain network e.g. retailer, consumer. In push systems, the materiel is produced and pushed through a network when product is ready.
  • Volatility - a number of factors including inflexible production configurations and variable demand patterns can cause volatility in the supply chain. This volatility tends to be amplified upstream of the supply chain.
  • Costs - supply chain management is mostly applied by organization in order to minimize cost. This could be done by saving at different stage of supply chain network. The area of greatest influence must be highlighted.
  • Make vs. buy - in addition to the traditional 'make or buy' decisions on products, organisations are increasingly outsourcing services and even complete organisational functions. Factors that influence these decisions include cost, poor performance, technological changes, strategy and competencies
  • Distribution configuration - many organisations have a multi-plant, multi-warehouse and multi-market chain. The configuration of these attributes to optimise transportation cost, minimise inventory and spare capacity while maintaining service agreements and reacting to market dynamics provides profound challenges.
  • Information management - combination of processes must be shared through supply chain management inorder to get accurate demand signal, forecast, and inventory and transportation information.

BACKGROUND

To accomplish this assignment I went to two supermarkets, LIDL and TESCO to analyse supply chain availability of different product and factors affecting it. I made questionnaire that was filled by supermarket`s manager, this questionnaire helped me to find types of problems that usually occur in supply chain.

To identify which products are running out rapidly, I took a spread sheet to supermarket for making a record of number product picked up by customers per hour. It was a two hours assessment from 11:00am to 01:00pm on Saturday, 14-11-2009.

Five products have been chosen to work on, they are:

  1. Milk
  2. Bread
  3. Readymade Food
  4. Meat
  5. Vegetables (cabbage, eggplant, etc)

The above products supply chain is first analysed in LIDL, and later comparison of the same products is made with TESCO. Before proceeding let's take a look at short profile of these 2 supermarkets.

LIDL:

Lidl is a German word that means discount, the full name of company is LIDL STIFTUNG & Co; its first store was established in 1930 and is now spread in 20 European countries with 8000 stores. Lidl is famous for cheap grocery items.

TESCO:

It is a UK based grocery and general merchandizing retail chain. It was founded by Jack Cohen in London in 1929, and became leading supermarket in 1995. In 2002 Tesco introduced a service that allows customers to buy grocery items on internet; this facility gave rise to Tesco popularity.

DESCRIPTION OF PRODUCTS

MILK

While analysing it was found that almost every second customer arriving in market purchases a bottle of milk, it is because milk is a common necessity of life and everyone drinks milk irrespective of age. A 2.27 litters of bottle cost £0.99, this was an especial offer from Lidl to promote product.

There were plenty of customers mainly due to Saturday and everyone was purchasing in bulk quantity. I asked one of the customers that 'how often you visit Lidl' he replied 'I usually come on Saturday or Sunday and do shopping for whole week'. This shows that Lidl must be ready to meet high demand on holidays.

A time came when milk shelf started getting empty and there was no one to refill it although milk was available in their store. It is due to improper management which created a supply chain gap between customer and retailer. Secondly shelves were untidy, this could have deviated me if I would have been a customer.

Bread

Lidl bakery items include bread, buns, cakes and etc, these items have short life, means have small expiry periods, and therefore especial attention must be given to these items. Usually bread expires in 3-4 days, so it is necessary to supply bread at shelves as soon as possible minimizing lead time. Secondly any product which expires on shelf would be a loss to retailer. Supermarkets are responsible to remove expired product from shelves otherwise it will give a bad impression on customer and may lose customer loyalty.

It was observed that there were 5 types of breads, and every type has a different demand, mostly people were buying brown bread therefore its shelf was getting empty quickly. Different types of breads were in different baskets, I think they should increase number of baskets of high demand bread inorder to get rid of filling it again and again. While talking to manager he told that sometimes breads arrive at stores just one day before expiry date. In this case they do accept the inventory but blame their supplier and after expiry date the remaining bread is send back to supplier, in this case supplier bear loss. Sometimes store overlook the demand and order late for stock which causes stock out. It is better for store to have excess inventory than stock out.

Ready Made Food

Readymade food has similar issues as bread because it also has short life; on top of it its transportation is more sensitive than bread. These foods are transported in refrigerators at standard temperature and same atmosphere is maintained in store. Lidl in which I went for supply chain assessment is near to students' accommodation therefore mostly students come here. Most students do not know cooking and prefer readymade food, therefore store must have full variety of foods along with enough inventories to tackle demand, but this was not seen in Lidl, there was fever variety with less quantity. According to manager it is difficult to anticipate demand for readymade food mainly because of varying mood of student that's why they do not keep more quantity. This shows that they are unable to find demand, which restrict them to order required quantity to supplier.

Meat

A large quantity of meat along with variety was seen like complete chicken, only breast pieces, boneless, ham slices, minces. I found its price less than other stores and there was no gap between supply chain of customer and retailer, there was also a deal of buy 2 packs and save £1.5 on boneless chicken. This was an attracted offer and shows impulse behaviour of customers. The inventory was enough to meet high demand and supply was smooth.

Vegetables

There were almost all types of vegetables in bulk quantity; the quantity was more than demand which cause high inventory and relative increase in cost. Here inventory management is needed to resolve problem.

SOLUTIONS TO PROBLEMS

Problems occurred in supply chain of milk, bread, vegetables, meat and readymade food can be resolved by implementing on following suggestions.

  • Appointing skilled managers who can make a note of any shortfall in advance and must see either are filled regularly or not.
  • Measure accurate shelves capacity before ordering, this is done to prevent from ordering excess and cut down inventory cost, this would manage capacity management.
  • Operation scheduling must be carried out to facilitate a smooth flow of goods to customer while reducing bottle neck.
  • Food-miles is one of the important factor in minimizing the cost, it is defined as total distance travelled by a food product between its primary form and arriving at customer. Foodmile can be reduced by choosing a location of store nearby most of suppliers or vice versa.
  • Variation in demand gives challenge of maintaining inventory to avoid stock out this problem is complicated as demand is uncertain but can be resolved by inventory management. Inventory management plays a vital part in minimizing cost. Some of the method to manage it, are using re-order level or economic order quantity equation (i.e. the required quantity at minimum inventory cost),

RE-ORDER LEVEL =

Where

  • L is lead time
  • d is average daily demand
  • SD is the standard deviation of daily demand
  • Z is a constant associated with the specified service level

Economic order quantity (Q) =

Where

  • D is annual demand (units)
  • Co is cost of placing an order
  • CH is carrying cost per unit per year

Vendor managed inventory (VMI) is a unique approach that must be used between Lidl and its suppliers; this specifies delivery quantity sent to customer through distribution channel using data obtained from EDI (electronic data interchange). VMI give following advantages.

  • Reduce stock out
  • Reduce inventory
  • Shorten supply chain
  • Centralize forecasting

Bullwhip effect is known as unmanaged supply chain due to variable demand. This problem must address inorder to avoid poorer service and high cost.

  • As store is crowded on weekend, extra workers should be hired.
  • Customers' complaint must be recorded and considered to improve and any lacks in servicing should be consulted immediately.
  • Supermarket must choose to set operating target for, availably, order size, on time delivery and delivery frequency.
  • Instead of an efficient supply chain, store must work out as effective supply chain.
  • Using Real Time Integrator (RTI) it is discussed in detail on next page.

Not only in Lidl but these suggestion would help every supermarket to reduce stock out, manage inventory, improve customer service and consequently reduce cost.

CONCLUSION

It was a very first time I found myself indulged in this type of an activity. I enjoyed going to supermarkets for supply chain analysis and having bit of words with employees, then giving own solution to the real world problems, it has been a good experience roaming out for this assignment.

I realised that in grocery business, consumers are choosy and competition is tough and for retailer it is important to keep shelves stocked reduce cost and satisfy customers. Nevertheless, it has been managed greatly by most of UK`s supermarkets and striving to improve every day.

BIBLIOGRAPHY

  • Dr.D. Adebanjo lectures notes
  • * http://www.quickmba.com/ops/scm/ [Viewed on 19-11-09]
  • * www.sysrepublic.com (Customer case study on Tesco) [Viewed on 18-11-09]
  • http://www.lidl.co.uk/uk/home.nsf/pages/i.home Lidl profile [Viewed on 18-11-09]
  • http://www.tesco.com/ Tesco profile [Viewed on 18-11-09]

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