Storekeeper Vacancy in Dubai

Prashant N. Shirodkar P.O. Box 49994 Dubai U.A.E MOB +971503962189 Email_ shirodkarp@rediffmail.com / prashant@m2group.ae

OBJECTIVES To be Successful, with affirmative approach to handle my responsibility with hard work, dedication and the full applicat of my knowledge that I possess to work as a team and stand up to the expectation of the Concern. SUMMARY Working on RETAILSOFT & GALLANT SOFTWARE Job responsibility is maintaining Warehouse. Having 7yrs in Gulf & 3yrs in indian experience in handling Warehouse. Had experience in textile Brand name like DSQUARED, VICINI, GALIZIO TORRESSI, GIEATANI NAVNARRA, ANTONIO MORRAS, GIANNI BARBATO, ENERGIE etc... etc.

ATTITUDE o Understanding the concept to teamwork. o Adaptive to situations. o Ability to work in cut-off timing. o Good Communications skills. o Ability to initiate things & work in pressure. GULF EXPERIENCE

Organization : M2 GROUP Dubai ( U.A.E.) Reporting to : Stock Controller Position held : Storekeeper Duration : November 2003 To Up till Date.

JOB RESPOSIBILITIES TECHNICAL SKILLS Entering Items code in Item master. Via Dial up Transferring Data to HO and all Outlets. Daily Tracking on Transfer of every Outlets. Submitting daily Sales report to Accounts Departments. Upgrading daily movement Stock in Retail Soft and in Excel sheet. Printing Barcodes Tickets. Checking cost against invoices and purchase order

 Take Physical Inventory Checks & Prepare Reports WAREHOUSE CONTROLLER Responsible for overall operation of Warehouse. Receiving Shipments from cargo has per Deliver Order. Receiving stock has per Packing list/ Performa Invoice & Tracing for Stock Damage/ Discrepancies/ Discarded Items. Putting Barcodes to Items according to Item Code/ Sizes/ Colors. Removing Samples from the Items and keeping ready for Merchandising. Scanning Items and Transfer as per Location. Responsible for ensuring all Dispatches are made properly as per Order Schedule. Keeping Track on fast, slow & non-movable Items record & issue to stoke controller. Inspecting & Preparing Damaged report items received from outlets & submitting to Stock Controller.

Organization : ORBIT ELECTROMECHANICAL Abu Dhabi ( U.A.E.) Reporting to : Storekeeper Position held : Store Assistant Duration : June 1999 to August 2002 JOB RESPONSIBILITIES Store keeping & perform all Store and Stock activities assigned from time to time. Helping Store keeper to receive goods as per Invoice/ Packing list. Labeling stickers to different type of materials like Pump, Valves & many others Technical Items. Helping store in Stock taking /order executions. Arranging items in proper place. Entering data in Dimension Software. Receiving Emails/ Faxes, Invoices/ Packing list of orders & submitting to Storekeeper. Preparing items as per various customers requirement & preparing D/O & Packing List. Maintaining the record in Excel sheet. Maintaining all Files & Documentation.

INDIA Organization : LEON ELECTRONICS Reporting to : Store Manager Position held : Store keeper Duration : July 1996 to April 1999 JOB RESPONSIBILITIES Receiving Items from Suppliers as per Order form like Televisions/ Refrigerators/ Washing machines & many other Electronics Devices. Checking if any Discrepancies/ Damages in Items. Sending Items to Showrooms as per Orders. Maintaining all Documentation, Stationeries, and Faxes etc. Updating Data time to time in Excel sheet. Submitting Daily movements Items records to Store Manger. Preparing Monthly/ Yearly Reports & submitting to Store Manager. PROFESSIONAL QUALIFICATION Basic Computer Course in the year 2001 from City Computer Company, Abu Dhabi, U.A.E.

 Typing Course in the year 1994. from Abreu Lobos Commercial Institute Mapusa, Goa. Business Correspondence and Secretarial Duties in the year 2003. from Abreu Lobos Commercial Institute Mapusa, Goa. Telephone Operation cum Receptionist Course in the year 2003, Goa. Diploma in Book Keeping in the year 2003, Goa. Diploma in Accountancy in the year 2003, Goa. EDUCATIONAL QUALIFICATION Passed S.S.C. in the year April 1992, from Goa Board of Secondary & Higher Secondary Education.

PERSONAL DATA Date of Birth : 19th May 1974. Nationality : Indian. Marital Status : Single. Sex : Male. Passport No. : E 6395688 Visa Status : Employment. Languages Known : English, Hindi, Konkani & Marathi.

CV Writing Tips
Your CV is an employer's first impression of you and it must leave a favorable and lasting impact. A successful CV is one that will appear in the most searches and generate the most interviews. The CV Builder will guide you through the CV building process step-by-step providing you with tips and examples along the way. We have also provided you with a list of action verbs that we recommend you refer to and use to ensure the strongest, most concise delivery.

Target Job Title

Here is where you define who you are in relation to skills and experience. This is a critical part of your CV as it is the first section a potential employer reads and it should portray you in the most relevant and professional light.

Examples:
Marketing Manager Senior Corporate Tax Accountant Advertising Executive

Financial Analyst Pediatric Nurse Sales Representative Concierge

Tips:
Include words that highlight your skills and area of expertise Include keywords of the actual position you are seeking

Objective
Your Career Objective is a brief and focused statement of what you can do and what you are looking for. As your Career Objective is featured prominently on your CV, employers will look here first before proceeding onto the rest of your CV.

Examples:
Seeking new challenges in (occupation) which effectively utilizes (professional experience). Looking to join a progressive organization that has the need for (a type of occupation) and offers opportunities for advancement. To gain first hand (type of experience), using my analytical skills and commitment to perform quality work. To obtain a position in a (type of target company) using my administrative and programming skills. To secure an internship with a (type of organization) specializing in (area of expertise) (Title) with (background) and a passion for (type) pursuing a career with (target company). Skilled at building strong team environments and developing open communications.

Tips:
Describe the job you are seeking. You can include your experience and skill level. Be focused - vague objectives are less likely to attract an employer. Emphasize what you can bring to your prospective employer. The Objective should be one sentence - two sentences if needed, but not longer.

Work Experience
Unless you are a fresh graduate, your Work Experience is the most important part of the CV. Highlight your skills and assigned responsibilities in each previous job.

Examples:
Managed a team of (number) that established (name of project goal or result). Successfully launched and marketed (name of project). Participated in the creation of a (name of product or production) that resulted in (a positive outcome). Extensive involvement managing client relationships at all levels. Wrote feature stories and conducted interviews for (type of press); edited copy of other writers. Trained new interns in (type of department). (Number of years) of (system) integration experience and implementing solutions to help clients succeed. Successfully managed and staffed not only business start-ups,but also periods of rapid, sustained corporate growth. (Number of years) of management experience on industrial projects. Installed different operating systems, software and hardware. Compiled and edited comprehensive quality control reports.

Tips:
For each position describe your responsibilities, duties, the challenges faced and accomplishments achieved. Use specific examples e.g.. Increased car sales turnover by 200%or saved department $100,000 by redesigning performance measurement system. If you had multiple positions with the same company, remember to list dates of positions to show the prospective employer of your rapid progress and quick learning abilities. If you have not had much work experience, try including temporary, holiday or voluntary jobs. Remember to keep it short, positive and use action verbs.

Education
List your academic background; degrees, certifications and training received.

Examples:
Continuing education classes in (Name of courses). Licensed (name of certification), (City/Year). Thesis: (Title of Thesis). Additional course work in Computational Mathematics, Kuwait University.

Work towards CPA qualification. Series 7 and series 63 registered.

Tips:
Include your Grade Point Average or General Ranking if it is impressive (Excellent, Very Good). Mention any Honors, Awards, Scholarships, Internships, and Dissertations received. Include any information that might be appropriate to your job search. Fresh graduates should include relevant courses,extracurricular activities, scholarships, honors, and GPA (if it is good). Allow your educational credentials to emphasize your strengths and qualifications. Do not be misleading, as employers will check. It could be awkward and quite difficult to verify a false educational statement made on your CV.

Memberships
List any professional affiliations, associations or memberships of interest to employers.

Examples:
Active member (name of association). Speaker/Treasurer (name of association). Appointed to serve as (position). Past Chairman/President. Elected to serve as (position).

Tips:
Being part of any association shows a potential employer your interest and involvement in a related professional field. Adding this information is completely optional, but it may help show a potential employer things about you that may not be clear from the rest of your CV such as your hobbies and your eagerness to participate in contributing to and developing your society. This is particularly relevant and important for fresh graduates or candidates seeking to make a career switch. Use action verbs.

Skills
Use this section to show a potential employer your overall work-related skills and abilities including languages and technical skills. Please note that your skills are one of the KEY search criteria in Employer searches so make sure you include all technical, analytical, professional and other skills.

Examples:
German- Intermediate. Microsoft Office software & the Internet- Expert. MS Word, Excel, Access, Power Point, MS Project, Project Workbench and Lotus Notes- Expert. C, Cobol, Fortran and SQL - Expert. Quantitative Analysis- Expert. Creative Skills- Expert.

Tips:
Focus on skills that match your target job and target company. Use this section to include industry keywords that match an employer's keyword search. For example: Knowledge of encryption theory Describe your interpersonal skills, (an experienced presenter/ public speaker / sales person, organizer or teacher). Use action verbs

References
Listing references is optional but it is always a good idea to include them. List the name and contact information of references.

Tips:
Include the details of your professional acquaintances. It may be your ex-supervisor, manager or a co-worker. It is best to include contacts from an industry related to the one you are in. If you are a fresher with limited or no experience you may include the name of your professor, or a family friend.

Action Verbs
Back A abstracted, achieved, acquired, acted, adapted, addressed, administered, advised, aided, allocated, analyzed, anticipated, approved, arbitrated, arranged, assembled, assessed, assigned, assisted, attained, attended, audited, authored B

balanced, budgeted, built C calculated, centralized, chaired, changed, checked, clarified, classified, coached, collaborated, collated, collected, communicated, compared, compiled, composed, computed, conceived, conceptualized, condensed, conducted, consolidated, constructed, consulted, contracted, contributed, controlled, converted, convinced, cooperated, coordinated, correlated, corresponded, counseled, created, critiqued, cultivated, customized D debated, decided, defined, delegated, delivered, demonstrated, designed, detailed, determined, developed, devised, diagnosed, directed, discovered, documented, doubled, drafted, drove E earned, edited, educated, effected, eliminated, enabled, enforced, engineered, established, evaluated, examined, executed, expanded, expedited, experienced, experimented, explained, extrapolated F facilitated, figured, financed, followed through, forecasted, formed, formulated, founded G gathered, generated, guided H handled, headed, helped, hired I identified, illustrated, imagined, implemented, improved, improvised, increased, influenced, informed, initiated, innovated, inspected, inspired, installed, instituted, instructed, insured, integrated, interpreted, interviewed, introduced, invented, investigated, issued J justified

K keynoted L launched, lectured, led, licensed M maintained, managed, marketed, mastered, mediated, mentored, merged, met deadlines, minimized, moderated, monitored, motivated N negotiated, nominated O observed, obtained, operated, organized, originated, overhauled, oversaw P participated, performed, persuaded, pioneered, planned, prepared, prevented, prioritized, problem solved, processed, produced, programmed, projected, promoted, proved, provided, publicized R recommended, reconciled, recruited, reduced, referred, reorganized, repaired, reported, represented, researched, resolved, retrieved, reviewed, revitalized S scheduled, selected, separated, served, set goals, setup, shaped, simplified, solved, sparked, specified, spoke, staffed, strengthened, submitted, succeeded, summarized, supervised, surveyed, systemized T tabulated, tailored, taught, tested, tracked, trained U

upgraded, utilized V validated

Stores Management - Presentation Transcript

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

4.

 5.

THE FINANCIAL VIEW CONSIDERS STORES AS AN OVERHEAD I.E. A COST WITH NO RETURN. THIS ALL THE MORE HIGHLIGHTS THE NEED FOR ECONOMIC OPERATION AND EFFICIENT STORES MANAGEMENT. STORES MANAGEMENT NECESSITY OF STORES THE COST OF STORES CAN BE CATEGORIZED INTO A CAPITAL COST COMPONENT AND REVENUE EXPENDITURE COMPONENT. THE CAPITAL COST CONSIST OF THE SUNK COST IN LAND BUILDING, ROADS, YARDS, MATERIAL HANDLING EQUIPMENT AND RELATED FACILITIES. BECAUSE OF THE VERY IRREVERSIBLE NATURE OF THIS COST, PROPER PLANNING OF STORES CAN GO LONG WAY IN REDUCING THIS CAPITAL EXPENDITURE THAT MAY ALSO HAVE A BEARING ON THE REVENUE EXPENDITURE IN THE STORES. THE REVENUE COMPONENT OF STORES EXPENDITURE CONSISTS OF SALARIES AND WAGES OF STORE PERSONNEL, MAINTENANCE COST, STATIONARY COST, COMMUNICATION EXPENSES, AND INVENTORY CARRYING COST STORES MANAGEMENT NECESSITY OF STORES

6.

ONE MUST ALWAYS REMEMBER THAT EFFICIENCY IN STORES OPERATIONS CANNOT BE BUILT OVERNIGHT BUT HAS TO BE THOUGHT OF RIGHT FROM THE INITIAL PLANNING STAGE. STORES MUST BE VISUALIZED AS AN INTEGRAL PART OF THE PURCHASING MANUFACTURING MARKETING LINK. UNFORTUNATELY, STORES MANAGEMENT IS LOOKED DOWN UPON BY MANY AS AN OPERATIONAL CLERICAL FUNCTION AND FAILS TO ATTRACT APPROPRIATE TALENT BECAUSE OF ITS UNDERDOG NATURE . ONE HAS TO BEAR IN MIND THAT THE STORES MANAGER HEADS THE SINGLE LARGEST GROUP OF CURRENT ASSETS AND HIS PERFORMANCE IS THE KEY TO SMOOTH PRODUCTION AND SUBSEQUENT MARKETING. MANY DECISIONS RELATED TO STORES HAVE A DRAMATIC IMPACT ON THE OPERATIONAL EFFICIENCY OF THE PRODUCTION DEPARTMENT AND PROFITABILITY OF THE ENTIRE ORGANIZATION. EVEN SEEMINGLY ROUTINE DECISIONS SUCH AS SELECTION OF RACKS, SHELLS, BINS, MATERIAL HANDLING EQUIPMENT, SAFETY PRACTICES, INSPECTION PROCEDURES ETC. ARE REFLECTED IN THE OPERATIONAL EFFICIENCY. ONE MUST APPRICIATE THE ROLE OF STORES IN MAINTAINING OPTIMUM INVENTORY AND HIGHLIGHTING EXCEPTION CASES THROUGH BUILDING UP OF PROPER MIS BY MAINTAINING ACCURATE RECORDS. STORES MANAGEMENT FUNCTIONS OF STORES

7.

THE FOLLOWING ARE THE PRINCIPAL FUNCTIONS OF A STORE; TO RECEIVE RAW MATERIALS, COMPONENTS, TOOLS, SPARES, SUPPLIES, EQUIPMENTS AND OTHER ITEMS AND ACCOUNT FOR THEM. TO PROVIDE ADEQUATE, PROPER AND EFFICIENT STORAGE AND PRESERVATION FOR ALL THE ITEMS. PHYSICAL CHECKING OF ALL INCOMING MATERIALS AS PER THE DELIVERY CHALLAN / INVOICE AND PROPER MAINTENANCE OF DAILY GOODS RECEIPT REGISTER OR RECORDS. ARRANGE FOR INSPECTION OF INCOMING MATERIALS. ENSURE THAT GOODS INWARD NOTES (GIN) ARE RAISED AND DISTRIBUTED WITHOUT DELAY ISSUE MATERIALS TO THE CONSUMING DEPARTMENTS AGAINST AUTHORISED REQUISITIONS AND ACCOUNT FOR THE SAME.

 8. 9.

MAINTAIN ACCURATE AND UP TO DATE RECORDS OF MATERIAL RECEIVED, ISSUED, REJECTED, DISPOSED, AND QUANTITY ON HAND OF ALL THE ITEMS. STORES MANAGEMENT FUNCTIONS OF STORES THE FOLLOWING ARE THE PRINCIPAL FUNCTIONS OF A STORE; ENSURE THAT ALL DOCUMENTS RELATING TO RECEIPTS AND ISSUE ARE SENT TO STOCK CONTROL, ACCOUNTS AND OTHER CONCERNED DEPARTMENTS. UNDERTAKE STOCK VERIFICATION AS PER APPROVED PROCEDURE. TO HIGHLIGHT STOCK ACCUMULATION, DISCREPANCIES AND ABNORMAL CONSUMPTION AND INITIATE APPROPRIATE CONTROL ACTION, WHEREVER NECESSARY. TO MINIMISE OBSOLESCENCE, SURPLUS AND SCRAP THROUGH PROPER CODIFICATION, STANDARDIZATION, PRESERVATION AND HANDLING. TO ENSURE GOOD HOUSEKEEPING SO AS TO MINIMISE THE NEED FOR MATERIAL HANDLING. TO MAKE AVAILABLE A BALANCED FLOW OF MATERIALS SO AS TO ECONOMISE ON CAPITAL TIED UP IN INVENTORY. TO ACCEPT AND STORE SCRAP AND OTHER DISCARDED MATERIALS. DEPENDING UPON THE NATURE OF BUSINESS (I.E. MANUFACTURING, TRADING SERVICES, ETC,) ONE OR MORE OF THESE FUNCTIONS MAY GAIN PRIMACY OVER THE REST. STORES ORGANIZATION ORGANIZATION IS A VEHICLE TO ACHIEVE THE PREDETERMINED OBJECTIVES. IT IS A FRAMEWORK OF TASKS, RESPONSIBILITIES, AUTHORITIES, AND ASSCIATED PERSONNEL. THE TYPE OF ORGANIZATION MUST BE GEARED TO ACHIEVE THE DESIRED OBJECTIVES EFFICIENTLY AND ECONOMICALLY. ORGANIZATION IS BASED ON COMMONALITY OF CERTAIN TASKS AND SPECIALIZATION OF WORK. IT IS AN INDISPENSIBLE MEANS TO GOOD MANAGEMENT. A FAULTY ORGANIZATION STRUCTURE CAN SERIOULY HAMPER ITS PERFORMANCE.

10. STORES ORGANIZATION STEPS IN ORGANIZATION; IDENTIFY THE ENTIRE GAMUT OF TASKS TO BE PERFORMED GROUP AND RE GROUP THE TASKS ACCORDING TO CERTAIN WELL DEFINED COMMON CHARACTERISTICS. DEFINE AND DELEGATE RESPONSIBILITY AND COMMENSURATE AUTHORITY. ESTABLISH REPORTING AND STRUCTURAL RELATIONSHIPS BETWEEN ALL POSITIONS. STORES ORGANIZATION MUST COMPRISE OF THE FOLLOWING: OUTLINE AND COMMUNICATE TO ALL CONCERNED, THE PRIMARY AND OTHER OBJECTIVES OF THE STORE FUNCTIONS. DEFINE CLEAR - CUT RESPONSIBILITIES. BESTOW APPROPRIATE AUTHORITY AND PRACTICE DELEGATION OF POWER TO ENABLE FULFILLING THE GIVEN RESPONSIBILITIES. ESTABLISH PROPER COMMUNICATION CHANNELS ALLOCATE TASKS TO QUALIFIED PERSONNEL. IN SHORT, STORES ORGANIZATION CAN BE DEFINED AS THE SYSTEMATIC COORDINATION AND COMBINATION OF EFFORTS IN A FASHION THAT RESULTS IN AN OPTIMUM EFFICIENCY AND MINIMUM EXPENDITURE.

11. STORES ORGANIZATION TRADITIONALLY STORES FUNCTION HAS BEEN VISUALISED AS A PART OF PRODUCTION DEPARTMENT AND WAS NEVER GIVEN THE ATTENTION AND IMPORTANCE IT RIGHTFULLY DESERVED. THE CONVENTIONAL PRACTICE IS TO LOCATE THE STORES NEAR USER DEPARTMENTS SO AS TO MINIMIZE MATERIAL HANDLING COST AND ENSURE TIMELY SUPPLIES SO AS TO ALLOW SMOOTH PRODUCTION. THE MATERIALS DEPARTMENT IS SELDOM CONSULTED IN ASPECTS SUCH AS STORES LOCATION AND LAYOUT.

12. STORES MANAGEMENT CENTRALISED & DECENTRALISED STORES THERE ARE BOTH ADVANTAGES AND DISADVANTAGES ASSOCIATED WITH A CENTRALIZED OR DECENTRALIZED STORES. A VERY BIG ORGANIZATION HAVING A PORTFOLIO OF NUMEROUS PRODUCTS MAY HAVE A HUGE MAIN STORE ALONG WITH NUMBER OF SMALLER DECENTRALIZED STORE SECTIONS. THIS ARRANGEMENT DOES AWAY WITH DUPLICATION OF EFFORTS IN COMMON ACTIVITIES. ALL ITEMS OF COMMON USAGE MAY BE STOCKED IN A CENTRAL STORE TO KEEP THE INVENTORY AT OPTIMUM LEVELS. ALSO RECEIVING CAN BE DONE CENTRALLY SO AS TO HAVE EFFECTIVE COMMUNICATION LINKS WITH THE PURCHASE DEPARTMENT AND VARIOUS SUPPLIERS. THE PROBLEM OF CENTRALIZATION OR DECENTRALIZATION IS A VEXED ISSUE AND ONE CANNOT LOOK FOR THUMB RULES TO DEAL WITH THE SAME. IT IS MORE A MATTER OF CONVENIENCE AND SUITABILITY TO THE OPERATING ENVIRONMENT THAN A QUESTION OF CHOICE OF ONE STRUCTURE OVER ANOTHER. HOWEVER THE GUIDING PRINCIPLE HAS TO BE THAT THE OVERALL STORES CONTROL HAS TO BE UNIFIED IN THE HANDS OF A CHIEF STORES OFFICER FOR EFFECTIVE COORDINATION WITH OTHER INTERFACING DEPARTMENTS AND PROPER INTERNAL CONTROL OF STORES.

13. STORES MANAGEMENT CENTRALISED & DECENTRALISED STORES ADVANTAGES OF CENTRALIZED STORE : OPTIMUM LEVEL OF SERVICE TO USERS DEPARTMENT. BETTER INTERNAL CONTROL, ECONOMY IN STORAGE SPACE AND MATERIAL HANDLING. SINGLE POINT DELIVERY AND SINGLE POINT INSPECTION. SPEEDY COMMUNICATION WITH PURCHASE DEPARTMENT AND VARIOUS SUPPLIERS. PROVIDES OPPORTUNITIES FOR STANDARDIZATION, PROBABILITY OF OBSOLESCENCE IS REDUCED DUE TO HIGHER INVENTORY TURNOVER, USERS DEPARTMENTS ARE PROVIDED WITH A WIDE VARIETY OF MATERIALS. AVOIDS DUPLICATION OF EFFORTS .

14. STORES MANAGEMENT CENTRALISED & DECENTRALISED STORES DISADVANTAGES OF CENTRALIZED STORE : MAY CREATE BOTTLE NECKS IN MATERIALS RECEIPT, INCOMING INSPECTION AND ISSUES THE BASIC FUNCTION OF ANY STORES, IT MAY NOT BE SENSITIVE TO THE NEEDS OF INDIVIDUAL USER DEPARTMENTS, MAY NOT BE LOCATED AT THE OPTIMUM LOCATION AND THUS RESULT IN INCREASED MATERIALS HANDLING AND TRANSPORTATION COSTS.

IMPROPER MIS AND CONTROL PROCEDURES MAY RESULT INACCURATE SHORTAGES AND UNANTICIPABLE PERFORMANCE. REQUIRES MORE INTERNAL DOCUMENTATION, RISK IS ACCENTUATED IN CASE OF NATURAL OR MANMADE CALAMITIES SUCH AS FIRES.

15. STORES LOCATION AND LAYOUT GUIDING PRINCIPLES OF STORES LOCATION THE FOLLOWING DECISIONS ARE A PART OF THE LOCATION DECISION ONE STORE OR MANY STORES? SHOULD IT REPORT TO THE PRODUCTION DEPARTMENT OR TO THE MATARIALS DEPARTMENT ? WHAT TRANSPORT FACILITIES ARE TO BE USED ? IS THERE A CHANCE OR NEED FOR FUTURE EXPANSION ? WHAT IS THE NUMBER AND VARIETY OF MATERIALS USED IN THE FIRM ? GUIDING PRINCIPLES OF STORE LOCATION : BASIC OBJECTIVE OF STORES IS TO MAXIMISE SERVICE TO USER DEPARTMENTS AT OPTIMUM OVERALL COST. PRIORITY MUST BE GIVEN TO MINIMUM MATERIAL HANDLING AND TRANSPORTATION EXPENDITURE. INCORPORATE IN BUILT FLEXIBILITY TO DEAL WITH FUTURISTIC REQUIREMENTS, ADEQUATE COMMUNICATION LINKS MUST BE ARRANGED FOR. ADEQUATE SAFETY MEASURES MUST BE AVAILABLE AT HAND, PREPLAN ABOUT THE NATURE, QUANTITY OF MATERIALS TO BE DEALT WITH. FACTOR IN THE NUMBER OF END USERS AND SUPPLIERS.

16. STORES LOCATION AND LAYOUT GUIDING PRINCIPLES OF STORES LAYOUT GUIDING PRINCIPLES OF STORES LAYOUT: THE DETERMINING FACTORS OF A PROPER STORES LAYOUT ARE ECONOMY AND EFFICIENCY. AN UNDERUTILIZED WAREHOUSE IS INDICATIVE OF WASTAGE OF CAPITAL AND ONE THAT HOLDS TOO MUCH REPRESENT WASTAGE OF TIME AND LABOUR. THE OBJECTIVE MUST BE TO ENSURE A CONTINUOUS UNHINDERED WORKFLOW THROUGH THE STORES SO THAT IT CAN OPERATE CONTINUOUSLY AND PROVIDE OPTIMUM SERVICE.

17. STORES LOCATION AND LAYOUT GUIDING PRINCIPLES OF STORES LAYOUT GIVEN BELOW ARE SOME THUMB RULES FOR PROPER STORES LAYOUT. MAXIMUM STORE SPACE UTILIZATION SUBJECT TO MINIMUM MATERIAL HANDLING AND MAXIMUM SPEED OF MOVEMENT, A STRAIGHT FLOW IS THE SIMPLEST AND MUST BE USED IN VARIOUS COMBINATIONS TO FORM U , E, T ETC FLOW. ARRANGE FOR SEPARATE, DEMARKATED AREAS FOR INCOMING, OUTGOING MATERIAL, MATERIALS RECEIVED BUT YET TO BE INSPECTED, MATERIAL RECEIVED - INSPECTED - AND REJECTED, TOXIC OR HAZARDOUS MATERIAL, SCRAP AND OBSOLETE MATERIALS ETC. AN ITEM MUST BE LOCATABLE WITH MINIMUM EFFORT AND EXPENSE OF TIME, ADEQUATE LIGHTING, VENTILATION, AND PROPER COLOUR SCHEMES MUST BE DEVISED, PROVIDE FOR HEATING, COLD STORAGE, AIRCONDITIONING, AND OTHER ENVIRONMENTAL REQUIREMENTS AS AND WHEN NECESSARY. KEEP SAFETY APPLIANCES SUCH AS GOGGLES, APRONS, HAND GLOVES, ETC, AT ACCESSIBLE PLACES,

SCREEN THE STORES DEPARTMENT FROM UNAUTHORIZED ACCESS TO OTHER PARTIES.

18. STORES SYSTEMS & PROCEDURES THE STORES FUNCTION DEALS WITH THREE MAJOR ACTIVITIES : RECEIPT STOCKING ISSUES

19. STORES SYSTEMS & PROCEDURES THE RECEIPT SECTION THE RECEIPT SECTION : THE RECEIPT FUNCTION IS THE LAST STEP IN THE PURCHASING ACTIVITY AND THE FIRST LINK IN THE STORES FUNCTION. THIS DEALS WITH THE FUNCTION OF RECEIVING AND PHYSICALLY HANDLING DELIVERED MATERIALS, AND VERIFYING THAT THE DELIVERIES CORRESPOND EXACTLY AS TO THE NATURE AND QUANTITY AS PER SPECIFIED IN PURCHASE ORDER. INSPECTION OF INCOMING MATERIALS RANGES FROM SIMPLE COUNTING TO ELOBORATE LABORATORY TESTING AND STATISTICAL TESTS. ALL INCOMING SUPPLIES ARE RECEIVED, CHECKED AND DULY INSPECTED BEFORE FURTHER PROCESSING OF STORAGE OR USE. THIS SECTION IS ALSO CALLED AS GOODS INWARD SECTION.

20. STORES SYSTEMS & PROCEDURES THE RECEIPT SECTION GENERALLY THE INCOMING GOODS MAY BE FROM ONE OR MORE OF THE FOLLOWING SOURCES : SUPPLIERS THROUGH RECEIVING SECTION ON GOODS INWARD NOTE (GIN). USER DEPARTMENTS THAT RETURN SURPLUS STOCK, OBSOLETE STOCK AND SCRAP ON MATERIAL RETURN NOTE. TRANSFER FROM OTHER STORES ON STORE TRANSFER NOTE. EQUIPMENT RECEIVED AFTER MAINTENANCE AND REPAIRS ON STORE CREDIT NOTE OR COMPLETION SLIP. GOODS REJECTED BY CUSTOMERS OUTSIDE PARTIES, OF SUB CONTRACTED GOODS

21. STORES SYSTEMS & PROCEDURES THE RECEIPT SECTION FUNCTIONS OF RECEIVING SECTION : THE BROAD FUNCTIONS OF A RECEIVING SECTION CAN BE OUTLINED AS FOLLOWS : RECEIVE INCOMING MATERIALS, PHYSICALLY CHECK RECEIVED MATERIALS ARRANGE FOR SPEEDY AND PROPER INSPECTION, RAISE GOODS INWARD NOTE, NOTIFY USER DEPARTMENTS ABOUT AVAILABILITY OR NONAVAILABILITY OF MATERIALS REQUISITIONED BY THEM, INFORM PURCHASE SECTION REGARDING EXCESS SUPPLY, SHORTAGE, OR DEFECTIVE SUPPLY, DELIVER MATERIAL TO APPROPRIATE STORES FOR STORAGE, PREPARE RECORD KEEPING.

22. STORES SYSTEMS & PROCEDURES THE RECEIPT SECTION

THE TASKS OF GOODS INWARDS SECTION STARTS EVEN BEFORE THE MATERIALS ENTER THE STORES. WHEN A PURCHASE ORDER IS PLACED, ONE COPY OF THE SAME IS SENT TO STORES. THE COPY INFORMS THE STORES INCHARGE ABOUT THE ITEM DESCRIPTION, THE QUANTITY, QUALITY / GRADE / TYPE, AND DELIVERY DATE, SUPPLIERS NAME ETC. IT IS THE TASK OF THE RECEIVING SECTION IN CHARGE TO CLASSIFY SUCH PURCHASE ORDERS AS PER A SUITABLE BASE / BATCH SUCH AS TYPE OF ITEM, SUPPLIER, DELIVERY DATE ETC. THIS COPY OF THE PURCHASE ORDER HELPS TO PREPLAN FOR LABOUR TO RECEIVE AND UNLOAD THE MATERIAL, MAKE ADEQUATE ARRANGEMENTSW FOR SEPARATE SPACE AND INFORM INSPECTION DEPARTMENT ABOUT PROBABLE SCHEDULE OF INSPECTION.

23. STORES SYSTEMS & PROCEDURES THE RECEIPT SECTION ONCE THE SUPPLIERS DESPATCH THE GOODS THROUGH THEIR CARRIER THEY ARRANGE TO SEND AN ADVICE NOTE TO THE RECEIVING STORES. SUCH AN ADVICE NOTE PROVIDES INFORMATION ABOUT DATE OF DISPATCH, CARRIER DETAILS, DESCRIPTION OF CONSIGNMENT, PACKAGING, LABELING, HANDLING INSTRUCTIONS, VALUE OF THE CONSIGNMENT, REFERENCE OF THE CORRESPONDING PURCHASING ORDER ETC. THE ADVICE NOTE IS SENT IN SUFFICIENT ADVANCE TO HELP MAKE SUITABLE ARRANGEMENTS AND EXPEDITE CLEARANCE OF GOODS AND RELATED DOCUMENTS. ON RECEIPT OF GOODS, THOSE ARE PHYSICALLY VERIFIED AND TALLIED WITH THE CONSIGNMENT NOTE SENT BY THE CARRIER. THUS, THE THREE DOCUMENTS, VIZ. PURCHASE ORDER COPY, ADVICE NOTE, SENT BY THE SUPPLIER, CONSIGNMENT NOTE SENT BY THE CARRIER, MUST TALLY WITH EACH OTHER AND WITH THE RECEIVED CONSIGNMENT

24. STORES SYSTEMS & PROCEDURES THE RECEIPT SECTION TYPE OF RECEIVING SECTIONS : RECEIVING SECTION CAN BE OF VARIOUS TYPE. THE PROMINENT TYPE ARE DISCUSSED BELOW: CENTRALIZED RECEIPTS: THIS IS A PART OF A CENTRAIZED STORE SET UP WHERE ALL MATERIALS ARE RECEIVED, PHYSICALLY CHECKED, INSPECTED AND EITHER STORED FOR DISTRIBUTION TO USERS OR ARE DIRECTLY DISPATCHED TO VARIOUS SUB STORES ALONG WITH THE GOODS INWARD NOTE. SEMI CENTRALIZED RECEIPTS : IN THIS ARRANGEMENT THE RECORD KEEPING PART IS CENTRALIZED AND SPECIAL, HIGH VALUE MATERIALS ARE RECEIVED CENTRALLY. MOST OF THE OTHER INCOMING MATERIAL IS DIRECTED TO RESPECTIVE STORES AND IS CHECKED AND VERIFIED AND GOT INSPECTED BY THE RESPECTIVE STORES RECEIVING SECTION STAFF. THIS ARRANGEMENT PRECLUDES THE POSSIBILITY OF BOTTLENECKS DUE TO A HEAVY WORK LOAD ON THE RECEIVING SECTION. IT ALSO SAVES ON TRANSPORTATION COSTS FROM CENTRAL STORES TO SUB STORES AND THEN TO THE USER DEPARTMENTS. THE CENTRAL STORES CARRIES OUT TASK OF PREPARING AND RECORDING GIN. DECENTRLIZED RECEIPTS : THIS ARRANGEMENT ATTACHES A RECEIVING SECTION TO EVERY STORES. THIS IS USUALLY USED WHEN THE VOLUMES OF INCOMING MATERIALS IS USUALLY HIGH AND USERS DEPARTMENTS ARE SPREAD OVER A WIDE GEOGRAPHICAL AREA. GINs ARE PREPARED SEPARATELY AT EACH RECEIVING SECTION

25. STORES SYSTEMS & PROCEDURES THE RECEIPT PROCEDURE ALL INCOMING MATERIALS MUST NECESSARILY PASS THROUGH THE RECEIPT SECTION AND IN NO CIRCUMSTANCE GO DIRECTLY TO THE USERS DEPARTMENT. THE RECEIVING INCHARGE MUST COMPLETE ALL DOCUMENTATION AND PAPER WORK AT THE RECEIPT STORES BEFORE THE DISPATCH OR STORAGE OF GOODS.

ON RECEIVING THE CHALLAN AND OTHER DOCUMENTS FROM THE CARRIER, THE CONSIGNMENT IS UNLOADED AND IS CHECKED AGAINST THE PACKING LIST. APPROPRIATE ENTRIES ARE MADE ON THE DELIVERY NOTE AND A COPY OF THE SAME IS RETURNED TO THE CARRIER. IF THE DELIVERY NOTE IS RETURNED SIGNED, WITHOUT ANY QUALIFYING STATEMENTS THEN THE CONSIGNMENT IS DEEMED TO BE IN PROPER CONDITION.

26. STORES SYSTEMS & PROCEDURES THE RECEIPT PROCEDURE WHEN MATERIALS ARE RECEIVED FROM SUPPLIERS AN ENTRY IS MADE IN THE DAILY GOODS RECEIPT REGISTER. THE CONTENTS OF THE DAILY GOODS RECEIPT REGISTER ALSO CALLED GOODS INWARD REGISTER ARE AS FOLLOWS : DATE AND TIME OF RECEIPT NAME OF THE SUPPLIER NAME OF THE CARRIER CHALLAN NUMBER AND DATE ITEM DETAILS AND DESCRIPTION QUANTITY AND VALUE OF ITEMS PURCHASE ORDER REFERENCE CARRIER DETAILS (RR NUMBER, LORRY NUMBER ETC.) GOODS INWARD NOTE REFERENCE REJECTED MEMO REFERENCE RECEIVED BY INSPECTED BY

27. STORES SYSTEMS & PROCEDURES THE RECEIPT PROCEDURE ON FILLING UP THESE DETAILS THE NEXT STEP IS PHYSICAL VERIFICATION BY COUNTING, WEIGHING OR MEASURING AND TALLYING THE OUTCOME WITH THE CHALLAN OR DELIVERY NOTE. THE SAME IS ALSO TALLIED WITH THE PURCHASE ORDER. NORMALLY RANDOM SAMPLE CHECKING OF PACKAGES IS DONE. THE RECEIVING SECTION STAFF DOES CHECKING BUT IT MAY BE FOLLOWED UP BY SECOND CHECK CONDUCTED BY THE INSPECTION DEPARTMENT. THE TASK OF THE INSPECTION DEPARTMENT IS TO CONDUCT A DETAILED INSPECTION IN RESPECT OF QUALITY AND NATURE / TYPE OF GOODS. THE TIME ELEMENT IS IMPORTANT IN THE SENSE THAT ANY UNCALLED DELAY AT THIS STAGE LOCKS IN MATERIALS THAT MAY BE OTHERWISE REQUIRED FOR USE BY USER DEPARTMENTS. THE SHORTAGES MUST BE CLAIMED IMMEDIATELY AS THEY ARE TIME BARRED AS PER STANDARD PURCHASE CONTRACT. ANY DISCREPANCIES PRESENT HAVE TO BE NOTIFIED WITHIN A TIME FRAME SO AS TO INFORM THE SUPPLIERS ABOUT FOLLOW UP ACTION.

28. STORES SYSTEMS & PROCEDURES GOODS INSPECTION NOTE GOODS INSPECTION NOTE : ONCE THE GOODS ARE CERTIFIED AS ACCEPTABLE BY THE INSPECTION STAFF AN INSPECTION REPORT (GIN) IS PREPARED. THIS REPORT FORMS THE BASIS OF GOODS RECEIPT NOTE.

THE GIN IS A CERTIFICATE TO THE ACCOUNTS DEPARTMENT FOR CLEARING PAYMENT OF GOODS WHENEVER DUE AND FOR DEBITING THE STORES WITH THE VALUE OF GOODS RECEIVED. IT IS ALSO AN INFORMATION TO PURCHASE SECTION REGARDING THE RECEIPT OF GOODS, AND AN ADVICE TO THE STORES TO TAKE THE MATERIALS INTO ITS CUSTODY AND RECORD THEM IN THEIR BOOK.

29. STORES SYSTEMS & PROCEDURES GOODS INSPECTION NOTE GIN TYPICALLY GIVES THE FOLLOWING INFORMATION : DATE OF PREPARATION OF GIN, DATE OF RECEIPT OF MATERIALS, CONSIGNOR SUPPLIERS NAME AND CHALLAN NUMBER OR INVOICE NUMBER PURCHASE ORDER REFERENCE MODE OF TRANSPORT STORES TO WHICH MATERIALS ARE TO BE SENT CLASS AND CODE NUMBER, DESCRIPTION OF MATERIALS QUANTITY RECEIVED UNDAMAGED AND NUMBER OF PACKAGES QUANTITY ADVISED, RECEIVED, ACCEPTED, REJECTED ETC. TRANSPORT AND RELATED CHARGES PAID / TO PAY DAMAGE / SHORT / EXCESS REMARKS INSPECTION REPORT OR REJECTION NOTE OR DISCREPANCY REPORT NOTE NUMBER SIGNATURE OF INSPECTOR SIGNATURE OF RECEIPT CLERK THE GIN MUST ACCOMPANY ALL THE MATERIALS SENT FOR STORAGE, RECORDS OR DISPATCH TO USERS DEPARTMENTS. PRE PRINTED MULTICOLOURED GINS MAY BE USED FOR SPEEDY IDENTIFICATION AND RECORDS

30. STORES SYSTEMS & PROCEDURES INSPECTION INSPECTION : PHYSICAL VARIFICATION IS FOLLOWED BY DETAIL INSPECTION. WHILE PHYSICAL, QUANTITATIVE CHECKING IS A SEMI SKILLED TASK, INSPECTION IS A SKILLED OPERATION AND CALLS FOR THE ARRANGEMENT OF SPECIALIZED TRAINING OF PERSONNEL, PROPER TESTING FACILITIES AND METHODS. GOODS MUST BE INSPECTED FOR QUALITY TO ENSURE THAT THEY ADHERE TO SPECIFICATIONS AS DESCRIBED IN THE PURCHASE ORDER. THE FIRST TASK IS TO ENSURE THAT THE MATERIAL DELIVERED ARE THE SAME AS THOSE ORDERED, OF THE RIGHT QUALITY DIMENSIONS, CHEMICAL CHARACTERISTICS, ETC, AND ARE IN PROPER CONDITION. THE INSPECTION IS PARTICULARLY NECESSARY IN THE CASE OF RAW MATERIALS AND COMPONENTS THAT GO INTO THE FINAL PRODUCT. ONE OR MORE INSPECTORS OF THE INSPECTION DEPARTMENT THAT MAY BE A PART OF THE MATERIALS DEPARTMENT GENERALLY CARRY IT OUT. HOWEVER IT IS DESIRABLE TO HAVE INCOMING INSPECTION DONE BY INDEPENDENT INSPECTORS SO AS TO GIVE AN UNBIASED VIEW ON THE QUALITY OF MATERIAL PURCHASED. AT TIMES THE USER DEPARTMENT MAY CARRY OUT INSPECTION.

31. STORES SYSTEMS & PROCEDURES INSPECTION

INSPECTION : ------------------------------------------------------------------INSPECTION MAY BE PERFORMED IN THE RECEIVING SECTION OR IN A PLACE SPECIFICALLY DEMARCATED FOR INSPECTION. INSPECTION IS ALSO CARRIED OUT AT SUPPLIERS PREMISES IF SPECIFIED IN THE PURCHASE CLAUSE, OR IF PAYMENT IS TO BE MADE BEFORE DELIVERY, IF DURING MANUFACTURE OF OUT SOURCED COMPONENTS QUALITY HAS TO BE ASCERTAINED, AND TO AVOID LAST MINUTE REJECTIONS. QUALITY OF RAW MATERIALS SUCH AS IRON, ALLOY STEEL MAY BE VERIFIED IN A METALLURGICAL LABORATORY. COMPONENTS, SUB ASSEMBLIES, SPARES ARE CHECKED WITH RELEVANT DRAWINGS AND INSPECTION EQUIPMENTS.

32. STORES SYSTEMS & PROCEDURES INSPECTION THE USUAL INSPECTION METHODS ARE AS FOLLOWS: VISUAL - A VERY RUDIMENTARY METHOD FOR CHECKING STATIONARY ITEMS, GROCERIES, ETC. BY TOUCH APPLIED IN CASE OF TEXTILES FABRICS, AGRICULTURE PRODUCE ETC. BY SMELL - CHEMICALS, POWDERS, OILS, ARE TESTED BY THIS METHOD. BY COMPARISON WITH SAMPLES GIVEN BY SUPPLIERS DURING NEGOTIATIONS FOR AWARDING CONTRACTS BY ACTUAL TESTING BY METROLOGICAL EQUIPMENT. ISI TEST. STATISTICAL QUALITY CONTROL AND RELATED CONCEPTS SUCH AS ACCEPTABLE QUALITY LEVEL (AQL) MAY BE USED FOR INSPECTION.

33. STORES SYSTEMS & PROCEDURES DISCREPANCIES DISCREPANCIES: VARIOUS DISCREPANCIES SUCH AS - LOSS OF PACKAGE, DAMAGED PACKAGES, SHORTAGES, DAMAGES TO GOODS, WRONG ITEMS SUPPLIED, EXCESS SUPPLIES ETC. MAY OCCUR. THESE ARE NOTIFIED TO THE SUPPLIERS IN A DISCREPANCY REPORT ALONG WITH A COVERING LETTER. COPIES OF THE REPORT ARE SENT TO PURCHASE SECTION AND ACCOUNTS DEPARTMENT FOR APPROPRIATE ACTION. LOSS OF PACKAGES : A SHORT LANDING CERTIFICATE MUST BE OBTAINED FROM THE DOCK AUTHORITIES IN CASE OF CONSIGNMENT SHIPPED BY SEA AND AT THE SAME TIME A CLAIM BILL MUST BE SUBMITTED TO THE STEAMER AGENT WITH ADVICE TO THE INSURANCE COMPANY. IN CASE THE PACKAGE WAS SENT BY RAIL, ENDORSEMENT SHOULD BE OBTAINED ON THE RAILWAY RECEIPT AND THE CLAIM SHOULD BE PREFERRED ON THE RAILWAYS. IF A PACKAGE HAS LANDED BUT IS NOT TRACEABLE, A NOT FOUND APPLICATION IS TO BE SUBMITTED TO THE PORT COMMISSIONER WHO WILL INITIATE NECESSARY INVESTIGATIONS.

34. STORES SYSTEMS & PROCEDURES DISCREPANCIES DISCREPANCIES ;---------------------------------------DAMAGED PACKAGES : IN CASE OF DAMAGED PACKAGES A SURVEY SHOULD BE ARRANGED WITH THE AGENT WITHIN THREE DAYS OF LANDING OF GOODS. IF SUCH A SURVEY CANNOT BE ARRANGED, AN INSURANCE SURVEY SHOULD BE CONDUCTED BEFORE COLLECTING THE MATERIAL FROM THE DOCK AND A CLAIM FOR ANY LOSS OR DAMAGE TO ARTICLES SHOULD BE LODGED WITH THE INSURANCE COMPANY.

ALL ORIGINAL PACKING LISTS MUST BE PRESERVED. IN CASE OF ITEMS DESPATCHED BY RAIL, THE PACKAGE MUST BE OPENED IN THE PRESENCE OF RAILWAY INSPECTOR AND THE STATION MASTER AND THE LIST OF LOST / DAMAGED ARTICLES MUST BE PREPARED TO CLAIM THE SAME FROM RAILWAYS OR THE INSURANCE COMPANY.

35. STORES SYSTEMS & PROCEDURES DISCREPANCIES DISCREPANCIES ;---------------------------------------MINOR SHORTAGES AND DAMAGES; SUCH INCIDENTS CAN ONLY BE NOTICED ON OPENING THE PACKAGES. INCOMING GOODS ARE USUALLY INSURED AND INSURANCE COMPANY OR THE SUPPLIER MEETS THESE CLAIMS. AT TIMES, IF THE CLAIMS ARE NOT MET ONE HAS TO WRITE OFF THE VALUE. THE GIN IN SUCH CASES WILL BE ACCOMPANIED BY A WRITE OFF REQUISITION TO ADJUST THE RECORDS ACCORDINGLY. MAJOR SHORTAGES AND DAMAGES; AS THESE INVOLVE HIGHER VALUES THESE MUST BE DEALT CAREFULLY. ALL ORIGINAL PACKAGES, PACKING SLIPS, DELIVERY CHALLANS, MUST BE PRESERVED AND INSURANCE SURVEY MUST BE IMMEDIATELY ARRANGED. A CLAIM WILL BE PREFERRED ON THE INSURANCE COMPANY AND THE CONSIGNOR WILL BE NOTIFIED OF THE SAME. AT TIMES IT MAY HAPPEN THAT THE PACKAGE IS INTACT BUT THERE IS A SHORTFALL IN THE QUANTITY OF GOODS, CLEARLY IMPLYING THAT THE GOODS WERE SHORT SHIPPED BY THE CONSIGNOR IN THE FIRST PLACE. SUCH CLAIMS MAY OR MAY NOT BE ACCEPTED BY THE CONSIGNOR, IT HAS TO BE ROUTED THROUGH INSURANCE COMPANY TO SETTLE THE CLAIM. ANY CLAIMS FOR DAMAGED MATERIALS EXCEPT THOSE DUE TO DEFECTIVE PACKING , ARE USUALLY MET BY THE INSURANCE COMPANY.

36. STORES SYSTEMS & PROCEDURES DISCREPANCIES DISCREPANCIES ;---------------------------------------SHIPPING WRONG ITEMS; THIS IS A RESULT OF SHEAR CARELESSNESS OR OVERSIGHT ON THE PART OF THE SUPPLIER. THIS OCCURRENCE MUST BE IMMEDIATELY NOTIFIED TO THE SUPPLIER AND TO THE PURCHASE DEPARTMENT. THE SHIPPED ITEM MUST BE HELD IN A SEPARATE PHYSICAL SPACE UNTIL FURTHER COMMUNICATION FROM THE SUPPLIERS. EXCESS SUPPLY : AT TIMES SUPPLIERS SEND EXCESS QUANTITY AS AN ALLOWANCE FOR WASTAGE IN TRANSIT THAT IS USUALLY NOT TREATED AS EXCESS SUPPLY. IN CASE OF GENUINE EXCESS SUPPLY THE SUPPLIER AND THE PURCHASE DEPARTMENT MUST BE INFORMED AND THE EXCESS QUANTITY MAY BE ACCEPTED OR RETURNED AS PER THE ADVICE OF THE PURCHASE DEPARTMENT. IN CASE OF EXCESS ITEMS ARE RETAINED THE ORIGINAL PURCHASE ORDER MAY BE AMENDED OR THE NEW ONE MAY BE INITIATED.

37. STORES SYSTEMS & PROCEDURES REJECTION REJECTION : IF GOODS ARE REJECTED FULLY OR PARTIALLY A REJECTION NOTE FORM IS RAISED AND A COPY IS CIRCULATED TO THE PURCHASE SECTION AND TO THE SUPPLIER.

SUCH MATERIAL MUST BE MARKED APPROPRIATELY AND STORED IN A SEPARATE AREA TO AVOID MIXING WITH ACCEPTED LOT OR ENTERING THE NORMAL FLOW OF MATERIALS.

38. STORES SYSTEMS & PROCEDURES THE ISSUE SECTION THE TERM ISSUES IMPLIES THE NORMAL SUPPLY OF MATERIALS FROM STORES TO VARIOUS USER DEPARTMENTS. EFFICIENT ISSUE OF MATERIALS FROM THE STORES IS THE BENCHMARK TO JUDGE THE PERFORMANCE OF STORE FUNCTION. MOST USER DEPARTMENTS JUDGE THE EFFECTIVENESS OF STORES BY THE SERVICE LEVELS OF THE STORES. FOR THE PURPOSE OF ISSUES THE ITEMS CAN BE CLASSIFIED INTO TWO CATEGORIES : ITEMS ISSUED ON REQUISITIONS FOR DIRECT USE, ITEMS ISSUED ON LOAN AND SCRAPED IN DUE COURSE.

39. STORES SYSTEMS & PROCEDURES THE ISSUE SECTION THE FACTORS TO BE TAKEN CARE OFF ; AUTHORISATION OF ISSUES REQUISITIONS MATERIAL INDENT FORMS

40. STORES SYSTEMS & PROCEDURES ACCOUNTING / PRICING RULES GOVERNING ISSUE OF MATERIALS PRICING RULES GOVERNING ISSUES OF MATERIALS; FIRST IN FIRST OUT METHOD (FIFO METHOD) LAST IN FIRST OUT METHOD (LIFO METHOD) AVERAGE COST METHOD REPLACEMENT PRICE METHOD ACTUAL PRICE METHOD INFLATED PRICE METHOD.

41. STORES SYSTEMS & PROCEDURES ACCOUNTING / PRICING RULES GOVERNING ISSUE OF MATERIALS THE MATERIALS STORED IN THE STOCK ROOM ARE ISSUED TO VARIOUS JOBS OR PRODUCTION DEPARTMENTS AGAINST THE AUTHORISED MATERIALS REQUISITIONS. THE ISSUES ARE RECORDED IN THE STORE LEDGER AND THE RESPECTIVE JOBS OR PRODUCTION DEPARTMENTS ARE DEBITED WITH THE PRICE OF THE MATERIAL ISSUED. AS THE TIME OF PURCHASES AND THE TIME OF ISSUES ARE MOSTLY DIFFERENT AND THE MARKET PRICE OF THE MATERIALS TENDS TO VARY, THE PROBLEM OF PRICING THE MATERIALS ISSUED NECESSITATES CERTAIN POLICY FORMULATIONS. IT IS AN IMPORTANT CONSIDERATION NOT ONLY UNDER STORE MANAGEMENT BUT ALSO FOR COSTING AND PRICING POLICIES. THE FUNDAMENTAL CONSIDERATION IS WHETHER TO PRICE THE ISSUES AT HISTORICAL PRICE I.E., THE ORIGINAL PURCHASE PRICE, AT THE REPLACEMENT PRICE I.E. THE PREVAILING MARKET PRICE AT THE TIME OF ISSUE OR AT SOME OTHER PRICE. THE VARIOUS METHODS ARE USED FOR PRICING THE MATERIAL ISSUES WHICH ARE BASED ON DIFFERENT PRINCIPLES.

42. ACCOUNTING / PRICING RULES GOVERNING ISSUE OF MATERIALS FIRST IN FIRST OUT METHOD (FIFO METHOD) FIFO METHOD, AS ITS NAME SUGGESTS, IS GOVERNED BY THE PRINCIPLE THAT THE MATERIALS WHICH ARE RECEIVED FIRST ARE ISSUED FIRST.

THE ISSUES ARE PRICED AT THE COST PRICE OF THE OLDEST CONSIGNMENTS TILL IT GETS EXHAUSTED. AS SOON AS THE OLDEST LOT IS EXHAUSTED, THE ISSUES ARE PRICED AT THE COST PRICE OF THE NEXT OLDEST LOT IN THE SEQUENCE, E.G. THE FOLLOWING TRANSACTIONS OCURRED DURING THE FIRST WEEK OF APRIL 2007: APRIL 1, 300 UNITS PURCHASED @ Rs. 10 PER UNIT APRIL 3, 600 UNITS PURCHASED @ Rs. 15 PER UNIT APRIL 5, 500 UNITS ISSUED TO JOB NO. 1001 THE ISSUE OF 500 UNITS WILL BE PRICED AS UNDER; FROM THE FIRST LOT : 300 @ Rs. 10 = 3000 REMAINING 200 UNITS FROM SECOND LOT = 200 UNITS @ Rs. 15 = 3000 TOTAL PRICE OF THE ISSUE 500 UNITS = 6000 THE VALUE OF THE CLOSING STOCK OF 400 UNITS ( I.E. SECOND LOT 600 UNITS LESS 200 UNITS ISSUED WILL BE COSTED @ Rs. 15 I.E. THE VALUE OF CLOSING STOCK WOULD BE Rs. 6000.

43. ACCOUNTING / PRICING RULES GOVERNING ISSUE OF MATERIALS LAST IN FIRST OUT METHOD (LIFO METHOD) 44. 45. STOCK VARIFICATION THE STORES MANAGER HOLDS THE PHYSICAL CUSTODY OF THE MATERIALS AND IS RESPONSIBLE FOR SAFE UPKEEP AS WELL AS FOR ANY MAJOR DISCREPANCY. HE MUST CONSTANTLY REVIEW THE STOCKS AND RECONCILE THE PHYSICAL AND BOOK STOCKS, WHICH DIFFER IN ALMOST ALL ORGANISATIONS. THE MAGNITUDE OF THIS PROBLEM WILL INCREASE AS THE NUMBER OF TRANSACTIONS INCREASE, BECAUSE MISTAKES MAY BE COMMITTED IN TRANSACTIONS AND THIS CAN ACCUMULATE TO MAJOR DISCREPANCIES. FOR EXAMPLE, IF THE WEIGHING SCALE INDICATES 1 KG LESS EVERY TIME THEY WEIGH, AND THERE ARE 100 WEIGHING IN A PERIOD, THE STORE KEEPER WOULD HAVE ISSUED 100 KG WITHOUT ANY RECORDS AND WILL FIND HIMSELF SHORT WHEN THE PHYSICAL CHECK IS MADE USING THE SAME WEIGH BRIDGE.

46. STOCK VARIFICATION ISSUES WITHOUT INDENTS,IMPROPER CHECK OF RECEIPTS, PILFERAGE, OBSOLESCENCE, DETORIORATION AND DAMAGE DUE TO DIFFERENT CAUSES OF IMPROPER STORAGE, SHRINKAGE, EVAPORATION, SPIILAGE, ETC. ARE OTHER FACTORS THAT HAVE TO BE CONSIDERED IN THIS CONTEXT. IN ORDER TO EXERCISE STRICT CONTROL ON THE ABOVE, THE STORE MANAGER MUST VERIFY THE STOCKS PERIODICALLY. EXPERIENCE INDICATES THAT MANY DISCREPANCIES IN PRACTICE ARE DUE TO IMPROPER DOCUMENTATION, LIKE COMPLYING WITH URGENT ISSUES WITHOUT VOUCHERS, DELAYS IN POSTING THE RECEIPTS AND ISSUES AND ISSUE BY NUMBERS, RECEIPT BY WEIGHT AND ACCOUNTING BY NUMBERS, ETC.

47. PROCESS OF VERIFICATION STOCK VERIFICATION CAN BE DEFINED AS THE PROCESS OF PHYSICAL COUNTING, WEIGHING OR MEASURING THE STOCK OF MATERIALS THAT IS HELD AND MAKING A RECORD OF THESE FIGURES. NORMALLY PERSONNEL FROM THE ACCOUNTS DEPARTMENT ARE GIVEN THIS RESPONSIBILITY. SOMETIMES THE AUDITORS ( OR BANKERS TO WHOM THE STOCK IS HYPOTHETICATED) ALSO UNDERTAKE THE VERIFICATION OF STOCKS ON A SAMPLE BASIS ; IN ORDER TO CHECK THE REALITY OF THE PERFORMANCE STATEMENTS.

A WELL DEFINED VERIFICATION PROCESS, CAN ALSO PINPOINT ANY DRAWBACKS OR SHORTCOMINGS IN THE METHODS OF STORAGE, MOVEMENT OF MATERIALS, HANDLING OF MATERIALS, OBSOLESCENCE, ETC. A REGULAR VERIFICATION PROCESS ENSURES THAT THE SYSTEM AND PROCEDURES LAID IN THE MANUAL ARE ADHERED TO.

48. PROCESS OF VERIFICATION PHYSICAL VERIFICATION OF STOCKS STARTED OFF AS A PERIODIC EXERCISE, USUALLY COINCIDING WITH THE ANNUAL ACCOUNT CLOSING, UNDER THE DIRECTION OF ACCOUNTS DEPARTMENT. THIS PROCEDURE ACTING AS A POSTMORTEM EXERCISE, CAN STOP THE NORMAL FUNCTION OF THE PLANT TOWARDS THE YEAR END, IF THE NUMBER OF ITEMS ARE LARGE. SINCE THERE IS AN URGENCY FOR QUICK COMPLETION, THIS MAY LEAD TO AN INEFFECTIVE VERIFICATION PROCESS. TO OVERCOME THIS DIFFICULTY, MATERIALS ARE CHECKED THROUGHOUT THE YEAR AND VERIFICATIONS ARE SO STAGGERED, THAT ALL MATERIALS ARE COVERED IN A YEAR. IT WILL BE ADVANTAGEOUS TO COVER THE HIGH CONSUMPTION VALUE A ITEMS MORE THAN THE OTHER ITEMS IN THIS PERPETUAL CONTINUOUS SYSTEM. THE VERIFICATION PROCESS, WHETHER PERIODIC OR PERPETUAL SHOULD BE THOROUGH, OR WELL ORGANISED WEIGHING AND THE UNIT OF MEASUREMENTS MUST BE CONSISTENT AND THE MEASURING INSTRUMENTS MUST BE PROPERLY CALIBRATED, SO THAT MEASURING ERRORS ARE MINIMAL. CARE SHOULD BE TAKEN TO AVOID DOUBLE COUNTING, OVERLOOKING ITEMS KEPT AT OLD PLACES, WITH ANCILLARIES AND IN TRANSIT, ETC.

49. PROCESS OF VERIFICATION THE PROCESS OF PHYSICAL VERIFICATION CAN BE COMPLETE ONLY IF NECESSARY FOLLOW UP ACTION IS PLANNED. AFTER TABULATION OF PHYSICAL STOCK, ATTEMPTS SHOULD BE MADE TO RECONCILE WITH BOOK BALANCE, INDICATING OPERATING STOCK PLUS RECEIPT MINUS ISSUES. IT IS VERY COMMON THAT THE TWO SETS OF FIGURES FOR EACH ITEM MAY NOT TALLY AND HENCE THE PROBLEM ARISES IN STORES MANAGEMENT. A DETAILED INVESTIGATION IS CALLED FOR, IF THERE ARE MAJOR DIFFERENCES PARTICULARLY IN HIGH VALUE ITEMS, TO AVOID RECURRENCE OF THE SAME IN FUTURE. USUALLY, ORGANISATIONS FIX UP LIMITS FOR DISCREPANCIES AND DISCREPANCY VOUCHERS ARE SIGNED BY THE APPROPRIATE AUTHORITIES. HOWEVER, STOCK VERIFICATION SHOULD NOT BE PERCEIVED AS A WITCH HUNTING PROCESS AND STORE PERSONNEL MUST BE INVOLVED IN THE EXERCISE. THE ORGANISATIONS WILL GAIN, IF THE STORES PERSONNEL ARE MOTIVATED BY A PROPER DEVELOPMENT OF THE ATMOSPHERE, CULTURE AND VALUE SYSTEMS.

Week 7 Procurement (Purchasing, Receiving And Storing) 2 2552 - Presentation Transcript

1. PROCUREMENT Purchasing, Receiving, Storing and Inventory

Aj. Pavit Tansakul Tel. 2248 Email: tpavit@wu.ac.th Tourism and Hospitality Management Program School of Management, Walailak University Week 7 Objectives

2.

Describe what is involved in purchasing, receiving, storage, and inventory control .

 3. 4. 5. 6. 7. 8.

Understand the different between purchasing and buying State the three areas within which the purchasing agent must work, as well as their importance and relationship Name two reasons that a purchaser must know how the market works List two advantages and two disadvantages of purchasing goods from master and specialty distributors Explain two if the reasons that operations should use purchase specifications Name three items that should be included in purchase specifications Outline Introduction to procurement Purchasing Purchasing from the customers point of view The three area of purchaser familiarity Who does the purchasing? The different between purchasing and buying Method of purchasing The purchase specification: key to effective purchasing Supplier selection Buyer and seller relationships Receiving Storage Inventory Procurement Four steps in Procurement Purchasing Receiving Storage Inventory Control PURCHASING 1 Purchasing Purchasing is an essential function for any foodservice operation. The nature of the foodservice biz, with its unpredictable flow, makes purchasing a difficult task. Operators have to be careful not to order to much it will spoil and become unusable, and , at the same time, they must be careful not to order so little Purchasing Purchasers do not buy only items for the kitchen, they also buy items for the various other departments of the operation. Therefore, they must be in close communication to ensure that they buy exactly what is needed. Purchasing Specifications, or the specific characteristics of the goods needed, must be developed so that both the buyer and the seller understand exactly what is needed. A large portion of goods purchased, such as fresh produce and meat items, are subject to the variations found in nature items

9.

Role of Purchasing Department Purchasing is profit center Better purchasing saves dollars for products, supplies, & services Savings go directly to bottom line Profit center department generates revenues greater than expenses Cost center does not generate profits to cover expenses

10. Purchasing Cycle 1. Issuing Department completes an issue requisition to storeroom. Storeroom issues requested products. 2. Purchasing Storeroom sends purchase requisition to purchasing department. Purchasing department completes purchase order and sends to: Receiving Accounting Supplier

11. Purchasing Cycle 3. Supplier Provides products and invoice to receiving department. 4. Receiving Checks products against delivery invoice and purchase order. Sends delivery invoice to accounting. 5. Accounting Pays supplier according to delivery invoice and purchase order.

(continued) 12. PURCHASING FROM THE CUSTOMERS POINT OF VIEW 2 13. Purchasing from Customers Point of View Purchasing is a functions that occurs behind the scenes of a foodservice operation and out of view of the customers The result of the purchasing function are visible and important to the guests The quality of the product effect on their perceptions of managements commitment to quality An operator that uses the least expensive goods available will be seen as a cost cutter and will, accordingly, have problems in charging top dollar for its goods and services.

14. Purchasing from Customers Point of View Customers expect a brand such as Coca-Cola or Pepsi-Brand which they are familiar-when they request a Cola Drink The substitution of an off-brand will most likely cause problems in the long run.

15. Purchasing from Customers Point of View There is generally a direct relationship between price and quality of goods purchased. Goods at a bottom of the price range are generally inferior to their more expensive counterparts and may eventually cost more for the operation Operators who look for the cheapest item may be losing money in two ways: 1. Customer goodwill (reputation) and business

2. Increased costs resulting from reduced product quality

16. THE THREE AREA OF PURCHASER FAMILIARITY 3 17. The Three Area Of Purchaser Familiarity The role of the purchaser is to find the best-quality product at the best price and to ensure that it arrives at the proper time. 1. Market purchase the goods and services for the operations 2. Operation the establishment for which the purchaser works 3. Customer whose need expectations must be met

18. Three Areas With Which Purchaser Must be Familiar 19. 1. THE MARKET Market medium through which change in ownership moves commodities from producer to consumer Most goods that are purchased go through a chain of distribution from the producer (farmer) to the Processor (or a number of processors) to distributors

20. THE MARKET Farmer or Producer Processor Broker Distributor Customer Processor Processor Foodservice operation Retail Grocery Store 21. Purchasing & the Market Purchasing acquisition of products Right product, in right amount of time, at the right price Knowledge of market involves finding sources of supply & determining which food can be obtained from which supplier Buyers must know market and products, and have general business acumen Rely on sales representatives for advice on purchasing decisions & information on available food items & new products

22. Marketing Channel Buyer has powerful influence on food distribution system Listens to desires of customers Determines what is grown & packaged Understands how items are processed or manufactured, shipped, sold , & consumed Marketing channel indicates exchange of ownership from producer through processor or manufacturer & distributor to the customer

23. Marketing Channel 24. Marketing Channel Five major components: 1. Producers 2. Processors or manufacturers 3. Distributors 4. Suppliers 5. Customers Value & cost added in each component & are reflected in final price

25. 1. Producers Someone who produces raw food to sell Usually farmers or ranchers

Sell to distributors or directly to foodservice operation; product then sold to customers Abundance in food result of applications of advances in science & technology Food produced per acre increased Improvements in production methods, animal/plant genetics, & farm mechanization

26. 2. Processors or Manufacturers Transforms raw food items into packaged products for sale to consumers or foodservice operations Responsible for many forms of food available to customer

27. 3. Distributor Transfer products from processor or manufacturer to supplier Classified as Wholesalers (included super distributors) Brokers Manufacturers representatives

28. 3.1 Wholesalers Purchase from various manufacturers or processors, provide storage, sell, & deliver products to suppliers Full or broadline carry large stock Specialty particular product category Special breed distributors purchasing & product movement specialists

29. 3.2 Brokers Sales & marketing representative who contracts with manufacturers, processors, or prime source producers sells & conducts local marketing programs with wholesalers, suppliers, or foodservice operations

30. 3.3 Manufacturers Representatives Represents a manufacturing company & informs suppliers of products by manufacturer Companies pay flat commission on sales volume Economical because companies do not have sales officials in every area of customers Have greater product expertise than brokers

31. 4. Suppliers Offers products for sale Foodservice manager buys from supplier more often than from wholesaler, broker, or manufactures representative One-stop shopping by dealing with prime supplier (single source supplier) Many prefer to bid out individual line items to receive competitive prices

32. 5. Customers Anyone affected by a product or service Typical person consumes average of 4.2 meals prepared away from home per week Customer satisfaction goal of foodservice industry Purchasing quality food & related products should be first objective

33. THE MARKET

The purchaser must be aware of the advantages and disadvantages of the various links in order to know which can best be bypassed. When some items were available only at certain times of the year and foodservice operations had to develop different menus for the various growing seasons In order to provides the best quality at the best price, THE PURCHASER MUST KNOW THE BEST TIME TO PURCHASE THE FRESH PRODUCE NEEDED.

34. 2. THE OPERATION The role of the purchaser is to buy the food and supplies for the various areas of the operation An operations goal may be to get the best value for the dollar, with quality secondary, or to provide guests with the best that money can buy

35. THE OPERATION A purchaser must avoid judging between two items solely on the basis of price without considering the intended use When given a choice of product, some purchasers may tend to choose the least expensive YOU GET WHAT YOU PAY FOR An item maybe cheaper, but if it is not useable, it represents a total waste of money

36. 3. THE CUSTOMER The key to the success of any operation is to MEET or EXCEED the needs and desires of its customers Customer expect a certain level of quality, which depends on the menu prices and the perceived value of the operations offerings REMEMBER!!! Customers are aware of the quality brands and expect to see some of them when they dine out

37. THE CUSTOMER Example if an operation serves ketchup on the table as a condiment, it will most likely be Heinz ketchup rather than any of the numerous other brands that are available from grocery stores. Note: Pepsi, Coca-Cola, Heinz are not the cheapest brands, but they are the brands used visibly in most operations because customers equate them with quality and have come to expect them

38. WHO DOES THE PURCHASING? 4 39. WHO DOES THE PURCHASING? The size of the operation, as well as whether it is an independent operation or part of chain, can have a dramatic effect on the role and function of the purchaser

40. SMALLER OPERATIONS A possible advantage is that the person who places the order is also the one to receive it, a control problem may arise An unscrupulous person could steal some goods with a driver to defraud the foodservice op. Whenever possible, the person who places an order should not be the person who will receive the goods.

41. SMALLER OPERATIONS Smaller ops cannot justify or afford having a person whose sole responsibility The task of purchasing is usually delegated to the chef to be performed along with his or her other duties An advantage because the user of the goods is the person doing the buying, there is no chance for miscommunication

42. LARGER OPERATION

Usually with in Hotel, hospital and resort, have full time purchasing agent and staff. The role of the purchasing agent is to deal with suppliers, supervise receiving clerk, and manage the storeroom By managing the storeroom area they can monitor the goods and notify the kitchen staff of any slow moving foods that must be used before they spoil

43. CHAIN OPERATIONS The purchasing function done by the corporate or regional office of the company Most chain restaurants serve generally the same menu at all of their locations Because consistency is so important to chains, they usually write up specification for food items and distribute them to their operations Companies have also found that they can generally obtain better prices and services if they negotiate on a regional or national basis, rather than having each property negotiate on its own for the items needs.

44. THE DIFFERENT BETWEEN PURCHASING AND BUYING 5 45. THE DIFFERENT BETWEEN PURCHASING AND BUYING Formal Process, called PURCHASING Informal, considered BUYING Must be aware of this distinction and of the respective Advantages and Disadvantages Although the net effect for the operation is basically the same it receives the good and service it needs-the process of receiving the good (and most likely the price) can differ

46. THE DIFFERENT BETWEEN PURCHASING AND BUYING Formal Process, called PURCHASING Informal, considered BUYING Must be aware of this distinction and of the respective Advantages and Disadvantages Although the net effect for the operation is basically the same it receives the good and service it needs-the process of receiving the good (and most likely the price) can differ

47. FORMAL PURCHASING Is the systematic and planned process of determining what is needed, checking prices, negotiating with suppliers, and obtaining the need goods Written Specifications Check Prices Negotiate with Suppliers Receive Goods Price Delivery Schedules Credit Terms 48. INFORMAL BUYING Less complex then formal purchasing. The op, call one suppliers and orders what the rest needs. Specification not used, Price are not checked with a number of supplier Call Supplier Place Order Receive Goods 49. PURCHASING AND BUYING Formal purchasing is generally used in larger operations that can afford a specialized staff with time to devote to the more complex formal method Smaller operations generally use the informal system; however, combining the purchasing responsibility with a persons other duties may make it difficult to perform both functions well

50. METHOD OF PURCHASING 6 51. Methods of Purchasing Informal price quotes by telephone or personally with salesperson Amount of purchase is small no time for formal purchasing practices

Item can be obtained only from 1 or 2 sources Need is urgent & immediate delivery required Stability of market (& prices) is uncertain Size of operation too small for formal purchasing

52. Methods of Purchasing Formal tax supported institutions usually required to use competitive bidding Culminates in formal contract between buyer & supplier Understanding legal implications of contract buying is important for both parties

53. Independent & Centralized Purchasing Independent purchasing done by unit or department that has been authorized to purchase Centralized purchasing purchasing activity is done by one person or department

54. Centralized Purchasing Advantages Better control & one complete set of records Development of personnel with specialized knowledge, skills, & procedures Better performance in other departments Economic & profit potentials of purchasing, making it a profit rather than a cost center

55. Centralized Purchasing Disadvantages: Each unit must accept the standard item in stock and has little freedom to purchase for its own particular needs Units cant take advantage of local specials Menus are ordinarily standardized, limiting the individual unit managers freedom

56. Group Purchasing Bringing together foodservice managers from different operations for joint purchasing Advantage - volume of purchases is large enough for volume discounts Site is selected, purchasing personnel hired, & managers serve as advisory committee

57. THE PURCHASE SPECIFICATION: KEY TO EFFECTIVE PURCHASING 7 58. THE PURCHASE SPECIFICATION A Purchaser cannot call the produce supplier and order a case of LETTUCE The supplier needs more information-the type of lettuce, size of the case, pack of the case (number of heads), the amount of processing A purchase specification would include all this information and would make the jobs much easier and more efficient.

59. THE PURCHASE SPECIFICATION Purchase specification is a precise written statement of the products characteristics required by a user List of detailed characteristics desired in a product for a specific use Primary safeguard of foodservice quality is adherence to specification

60. THE PURCHASE SPECIFICATION To write the specification will help the control the fluctuation of nature, freshly grown produce and the difference in size and quality of animals

The lack of brand names for a majority of foodservice products also makes the written specification desirable.

61. DEVELOPING AND USING SPECIFICATIONS Written specifications accomplish the following objectives: Communicate the characteristics of products and services needed for the operation, and help eliminate misunderstanding between the buyer and seller Provide the receiver with the product characteristics he or she needs to see before accepting goods delivered to the operation Help to ensure consistency in the items served by the operation by providing consistent product Allow the operation to solicit bids from more than one supplier Facilitate the training of purchasers, and allow other people to step in for the purchaser if the need arises

62. THE CONTENTS OF A SPECIFICATION Specs can vary greatly in length. Items with a recognizes brand name, such as cans of Pepsi-Cola, can have a specification as simple a s the name, size of can, and number of can in a case Specifications for items that do not have brand names, such as apples, require much more detail in order to be effective

63. THE CONTENTS OF A SPECIFICATION The intended use of the product or service The specific, definitive name of the product Packer's or producers brand name U.S quality grades Size or Size range of the items needed Package size Preservation and/or processing method Point of origin Method of packing

64. Example Item: Prime Rib, Bone in, Oven Ready Grade: USDA choice, Upper Half Weight range: 18lb min 22lb Max average 20ib (9Kg) State of Refrigeration: Chilled when delivered Fat Limitation: 0.25-0.75 inch (average 0.5) on outside moderate marbling Color: Light red to lightly dark Quantity requirement: approximately 300 lb per week

65. SUPPLIER SELECTION 8 66. SUPPLIER SELECTION Purchaser have several options when choosing the type of supplier(s) with which whey will deal Supplier can either limit themselves to a few types of goods or they can be master distributors A number of factors must be considered in making selection Within most geographical areas, purchasers have the choice of a number of different distributors in each of the categories of the items they need

Purchaser must be sure to choose the supplier that best suits the operations needs

67. CHOICE OF SUPPLIERS Traditionally, suppliers generally specialized in only one type, such as produce, such as produce, dairy, or seafood, rather than a wide range of goods. Nowadays, the trend in the industry is toward distributions handle a wide range of both food and nonfood items. Foodservice operators should be aware of the advantage and disadvantages with various types of supplier.

68. 1. SPECIALTY DISTRIBUTORS This is similar to the original types of retail stores where customers brought their food Specialty Distributors, who offered only a single type or carried only a limited range of goods ADVANTAGE (+) a limited type of goods, it would gain expertise with those goods DISADVANTAGE (-) purchaser has to contact a number of supplier to suppliers to place an order

69. 2. WAREHOUSE CLUBS Warehouse club allow operators to buy items in LARGER PACKAGES than those available in retail grocery store but Smaller than packages available from the wholesale distributors

70. 3. MASTER DISTRIBUTOR Large distributors can offer a wide range of both food and nonfood items. They carry fresh, frozen, and canned produce. A large-scale distributor may carry as many as 10,000 items in inventory, providing the operator with one-stop shopping service

71. SPECIALTY VS MASTER DISTRIBUTORS Type of Supplier Advantage (+) Disadvantage (-) Master Distributors Increase product offerings Lack of expertise regarding all of the product sold Increase convenience; one phone call, one delivery Lack of competition Specialty Distributor Generally more personal service Limited product offering Increase competitions; can promote better prices and service Possibility of higher prices because of increased costs and reduction of volume Increase product expertise More time spent ordering; receiving, and doing paperwork 72. CONSIDERATION IN SELECTING SUPPLIERS Operators must realize that, for the most part, all suppliers pay much the same prices to obtain the goods they sell; the prices at which they sell the items are fairly comparable. A significant lower price on an item quoted from one supplier may mean that the supplier will have to raise prices on other items to make up for it, or that possibly the product is inferior in some way.

73. CONSIDERATION IN SELECTING SUPPLIERS The following are factors that purchasers should consider when selecting suppliers 1. Credit terms offered 2. Reputation 3. Reliability 4. Substitution Policy 5. Accuracy 6. Delivery schedule 7. Level of technology 8. Lead time 9. Delivery vehicles and drivers 10. Willingness to break case 74. BUYER AND SELLER RELATIONSHIPS 9 75. BUYER AND SELLER RELATIONSHIPS There are some aspect in the buyer-seller relationship of which both parties must be aware entering into a transaction.

Some of these matters are governed by laws and regulation, and others are ethical issues.

76. ETHICAL AND PROFESSIONAL STANDARD Ethics deals with behavior that may not be illegal, but may still be wrong or improper according to commonly accepted practices. All employee who work in a foodservice operation must be made aware of the ethical and professional standards of the company and the industry Purchaser must make sure that their relationship with suppliers are kept strictly professional - not for the personal gain of the purchaser.

77. KICKBACK A kickback is the illegal practice whereby a supplier or salesperson pays back money or goods to a purchaser in exchange for an order This practice is illegal because it gives an unfair advantage to one supplier over other

78. LOW-BALL PRICING Suppliers may offer lower prices on a few items in order to entice the purchaser to buy from them, and then raise prices on other items This practice advertise a few items at or below cost as Loss Leaders to draw customer into a store then hope to make up the lost money with the rest of the groceries Purchaser must be aware to avoid being overcharge in long run.

79. CONFLICTS OF INTEREST Buyers must be sure that they do not benefit personally from their dealing with the operation for which they work Purchasers must be careful to avoid the temptation of accepting loans, gift, items for their personal benefit, or cash in exchange for either giving a supplier an advantage over other company

80. EXAMPLE OF ETHICAL POLICY The following are examples of precepts that should be included in policy governing the ethical standard of purchasers: To treat all supplier equally, and not be swayed by the offering of gift or other consideration for personal benefit of the purchaser To keep the best interests of the company in mind when negotiating all transaction; to conduct all business with others according to company policies To either limit the value of a gift allowed to the given to a purchaser by a supplier, or establishment company policy forbidding the acceptance off all gifts

81. RECEIVING 10 82. Receiving Activity for ensuring products delivered by suppliers are those that were ordered Verifying quality, size, & quantity meet specifications Price on invoice agrees with purchase order Perishable goods are tagged or marked with the date received Consistent & routine procedures are essential Adequate controls to preserve quality & prevent loss during delivery & receipt

83. Elements of Receiving Activity Competent personnel Separate duties of purchasing & receiving basic to check-and-balance system Well trained employees to perform receiving tasks competently

Facilities & Equipment Need enough space to permit all incoming products to be inspected & checked at one time Equipment scales, unloading platform, table for inspection, & some tools

84. Elements of Receiving Activity Specifications Employee receiving order must know standards the supplies must meet Critical controls in receiving Procedures for inspection & standards for acceptance necessary to prevent food borne illness Sanitation Receiving area designed for easy cleaning

85. Elements of Receiving Activity Adequate Supervision Management check security to ensure receiving procedures are being followed Scheduled hours Suppliers should deliver at specified times Security Different person responsible for purchasing & receiving Follow scheduled hours Move products immediately from receiving to storage Do not allow delivery personnel in storage area

86. Receiving Process Inspection against purchase order Inspection against the invoice Acceptance or rejection of orders Completion of receiving records Removal to storage

87. Inspection Against Purchase Order Purchase Order written record of all orders. Includes: Brief description of the product Quantity Price Supplier Ensures: Products were actually ordered. Correct quantities have been delivered.

88. Inspection Against the Invoice Invoice suppliers statement of what is being shipped & the expected payment. Receiving Methods: Invoice checks quantity against purchase order.

Blind records quantity received on invoice or purchase order with quantity column blanked out. Electronic Use of tabulator scales, bar coded cartons & packages, & handheld scanner aid receiving.

89. Acceptance or Rejection of Orders Delivered products become the property when the purchase order, specifications, & suppliers invoice are in agreement. Rejection at time of delivery is easier than returning products.

90. Completion of Received Records Receiving record provides an accurate list of: All deliveries of food & supplies Date of delivery Suppliers name Quantity Price data Provides a checkpoint in control system.

91. Removal to Storage Products should be transferred immediately from receiving to the secure storage area. Marking information about delivery date & price directly on the case, can, or bottle before it is placed into storage. Tagging information such as date of receipt, name of supplier, brief description of product, weight or count upon receipt, & place of storage are written on a tag.

92. RECEIVING KEY POINT IN RECEIVING You Do Not Get What You Expect, You Get What You INSPECT

93. IMPORTANCE OF RECEIVING The Entire Purchasing System can fall apart if a receiver is not careful to check items properly when they arrive from the supplier. Receiver must check three key factors for each items that arrives: Quantity Quality Adherence to company specification

94. IMPORTANCE OF RECEIVING It is important in the receiving function to ensure that all that was ordered is received A distributor charges the foodservice operation for all items on the invoice Nonreceipt of an order items or receipt of a quantity less than that ordered can cause a significant problem if the discrepancy is not spotted at the time of delivery so that it can be rectified

95. PROPER TOOLS FOR THE RECEIVER The person who does the receiving must be supplied with a number of tools in order to perform the job properly. The Knowledge necessary Scales An adequate area in which to work Specification Sheets

The time A list of what was ordered

96. STORAGE 11 97. Storage Holding of products under proper conditions to ensure quality until time of use. Links receiving & production. Storage employees: Check in products from the receiving unit Provide security for products Establish good material-handling procedures

98. Storage Theft premeditated burglary Pilferage inventory shrinkage Storage facility types include: Dry storage Low-temperature storage Nonfood item storage

99. 1. Dry Storage Provides orderly storage for foods not requiring refrigeration or freezing. Should provide protection of foods from the elements, insects, rodents, & theft. Temperature of 50 F to 70 F. Relative humidity of 50% to 60%.

100.2. Low-Temperature Storage Provides storage for perishable foods to preserve quality & nutritive value. Types: Refrigerators designed to hold the internal temperature of food products below 41 F. Tempering boxes units for thawing frozen foods. Steady temperature of 40F. Storage freezers units for frozen foods. Constant temperature of -10F to 0F.

101.2. Low-Temperature Storage Recommended humidity range of 75% & 95% (85%-95% for perishable foods). Low-Temp Thermometers: Remote reading placed outside unit. Recording mounted outside the unit. Refrigerator/Freezer mounted or hung on shelf in the warmest area inside unit. Should be checked at least twice a day.

102.INVENTORY 12 103.Inventory Supported by the actual presence of products in the storage area. Access to storage areas should be restricted. Requires maintenance of accurate records.

104.Issuing Products Issuing process used to supply food to production units after it has been received. Direct purchases or direct issues products sent directly from receiving to production. Storeroom issues foods that are received but not used the day they are purchased.

105.Inventory Records Objectives: Provision of accurate information of food & supplies in stock. Determination of purchasing needs. Provision of data for food cost control. Prevention of theft & pilferage.

106.Physical Inventory Periodic actual counting & recording of products in stock in all storage areas. Involves two people: 1 st person counts the products. 2 nd person records the data on the physical inventory form. One of the people should not be directly involved with storeroom operations as a control measure.

107.Perpetual Inventory Purchases & issues continuously are recorded for each product in storage. Balance in stock is available at all times. Generally restricted to products in dry & frozen storage.

108.Universal Product Code System of identifying food products Code Digit #1 always zero except for meat and produce with variable weight Digits 2 - 6 manufacturers or processors code Digits 7-11 product code Digit 12 check digit

109.Inventory Control Tools Major functions of a control system: Coordinate activities Influence decisions & actions Assure that objectives are met Decision making

110.Minimum-Maximum Method Involves establishment of minimum & maximum inventory levels. Safety stock a backup supply. Lead time interval between requisition & receipt of a product. Usage rate speed at which a product is used; determined by experience & forecasts. Reorder point lowest stock level that safely can be maintained to avoid a stock-out or emergency purchasing.

111.Ethical Considerations

Ethics principles of conduct governing an individual or a business. Personal ethics a persons religion or philosophy of life derived from definite moral standards. Business ethics self-generating principles of moral standards to which a substantial majority of business executives gives voluntary assent.

112.Code of Ethics Set of rules for standards of professional practice or behavior established by a group. Influenced by codes of individuals. Standard the measurement of what is expected to happen.

113.Ethical Issues Ethical dilemmas: Efforts to gain inside information about competitors that will benefit competition. Activities that allow buyers to gain personal benefits from suppliers. Activities that manipulate suppliers to benefit the purchasing organization.

114.Ethics Management By implementing planning, organizing, staffing, leading, & controlling, management can be sure ethics are established formally & explicitly into daily organizational life. Leadership is the principal mechanism for increasing ethical performance in business.

115.Materials Management

2006 Pearson Prentice Hall Introduction to Operations and ... - Presentation Transcript
1. 2. 3. 4. Sourcing Decisions and the Purchasing Process Introduction Why purchasing is critical The sourcing decision Sourcing strategies The purchasing process Multi criteria decision models in sourcing and purchasing Trends in purchasing management Strategic Sourcing Strategic Sourcing is the development and management of supplier relationships to acquire goods and services in a way that aids in achieving the immediate needs of the business Bullwhip Effect Order Quantity Time Retailers Orders Order Quantity Time Wholesalers Orders Order Quantity Time Manufacturers Orders The magnification of variability in orders in the supply-chain A lot of retailers each with little variability in their orders. can lead to greater variability for a fewer number of wholesalers, and can lead to even greater variability for a single manufacturer. Hau Lees Concepts of Supply Chain Management Hau Lees approach to supply chain (SC) is one of aligning SCs with the uncertainties revolving around the supply process side of the SC A stable supply process has mature technologies and an evolving supply process has rapidly changing technologies Types of SCs Efficient SCs

5.

 6. 7. 8. 9. 10.

Risk-Hedging SCs Responsive SCs Agile SCs

What is Outsourcing? Outsourcing is defined as the act of moving a firms internal activities and decision responsibility to outside providers Reasons to Outsource Organizationally-driven Improvement-driven Financially-driven Value Density Value density is defined as the value of an item per pound of weight It is used as an important measure when deciding where items should be stocked geographically and how they should be shipped Mass Customization Mass customization is a term used to describe the ability of a company to deliver highly customized products and services to different customers The key to mass customization is effectively postponing the tasks of differentiating a product for a specific customer until the latest possible point in the supply-chain network

Sourcing decisions High level, often strategic decisions regarding which products or services will be provided internally and which will be provided by external supply-chain partners Purchasing The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance Focus Sourcing decisions and purchasing activities serve to link a company with its upstream supply chain partners

11. Why Purchasing is Critical I 12. 13. Quality Delivery Ability to exploit new technologies Why Purchasing is Critical III Performance Impact 14. Why Purchasing is Critical Performance Impact - I Supplier A Supplier B Cost per valve % good Delivery lead time Sourcing dialysis machine valves 1 day to 3 weeks Overnight delivery 95% 99.8% $2 $10 15. Why Purchasing is Critical Performance Impact - II Effect of defective dialysis machine valves Interruption in patient treatment Rescheduling difficulties For the average manufacturer, 52.5% of the value of shipments comes from materials Purchasing represents a major opportunity to increase profitability Why Purchasing is Critical II Financial Impact To compete globally, you need to purchase globally Global purchasing efforts are supported by advances in information systems The Changing Global Competitive Landscape

Reduction in the effective capacity for dialysis Possible medical emergencies Estimated cost of a failed valve = $1,000

16. Why Purchasing is Critical Performance Impact - III Supplier A Supplier B Valve costs Failure costs Backup inventory Total costs Sourcing dialysis machine valves (Total Costs) $2,606 $610 3 valves x $2 = $6 1 valve x $10 = $10 5% x 50 valves x $1,000 = $2,500 0.2% x 50 valves x $1,000 = $100 50 x $2 = $100 50 x $10 = $500 17. Insourcing The use of resources within the firm to provide products or services Outsourcing The use of supply chain partners to provide products or services The Sourcing Decision Sourcing decisions are high-level, often strategic decisions that address: Which will use resources within the firm Which will be provided by supply chain partners Make or Buy Decision 18. Advantages and Disadvantages of Insourcing Advantages High degree of control Ability to oversee the entire program Economies of scale and/or scope Disadvantages Required strategic flexibility Required high investment Loss of access to superior products and services offered by potential suppliers

19. Advantages and Disadvantages of Outsourcing Advantages High strategic flexibility Low investment risk Improved cash flow Access to state-of-the-art products and services Disadvantages Possibility of choosing a bad supplier Loss of control over the process and core technologies Communication and coordination challenges Hollowing out of the corporation

20. Factors Affecting the Decision to Insource or Outsource Environmental uncertainty low high Competition in the supplier market low high Ability to monitor supplier performance low high Relationship of product/service to high low buying firms core competencies Factor Favors Insourcing Favors Outsourcing 21. Total Cost Analysis A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options Direct costs Costs that are tied directly to the level of operations or supply chain activities Indirect costs Costs that are not tied directly to the level of operations or supply chain activity

22. Insourcing and Outsourcing Costs Insourcing Outsourcing Direct costs Indirect costs

 23.

Purchasing Receiving Quality control Supervision Administrative support Supplies Maintenance costs Equipment depreciation Utilities Building lease Fixed overhead Price (from invoice) Freight costs Direct material Direct labor Freight costs Variable overhead

Single sourcing The buying firm depends on a single company for all or nearly all of an item or service Multiple sourcing The buying firm shares its business across multiple suppliers Cross sourcing Using a single supplier for a certain part or service and another supplier with the same capabilities for a similar part Dual sourcing Using two suppliers for the same purchased product or service Sourcing Strategies

24. Invoice clearance & payments Records maintenance Receipt and inspection Follow up and expediting Purchase order preparation Supplier selection Supplier identification and evaluation Description Needs identification Is there a preferred supplier? No Yes The Purchasing Process Order cycle 25. The Purchasing Process Needs Identification Purchase requisition An internal document completed by a user that informs purchasing of a specific need Reorder point system A method used to initiate the purchase of routine items. Typically, each item has a predetermined order point and order quantity Needs identification 26. The Purchasing Process Description Description by market grade/industry standard Description by brand Description by specification Description by performance characteristics Description by prototypes or samples The communication of a users needs to potential suppliers in the most efficient and accurate way possible Description 27. The Purchasing Process Supplier Identification and Evaluation - I

 28.

The complexity of the product or service increases The amount of money that is committed increases The length of the proposed buyer-supplier relationship increases The amount of effort increases as: Supplier identification and evaluation Process and design capabilities Management capability Financial condition and cost structures Planning and control systems Environmental regulation compliance Longer-term relationship potential Criteria for supplier assessment: The Purchasing Process Supplier Identification and Evaluation - II Supplier identification and evaluation

29. Supplier selection Preferred supplier Competitive bidding Negotiation The Purchasing Process Supplier Selection - I 30. Supplier selection Preferred supplier A supplier that has demonstrated its performance capabilities through previous purchase contracts and therefore receives preference during the supplier selection process The Purchasing Process Supplier Selection - II 31. Supplier selection The buying firm can provide qualified suppliers with clear descriptions of the items or services Volume is high enough to justify the cost and effort The firm does not have a preferred supplier Competitive bidding is most effective when: The Purchasing Process Supplier Selection - III 32. Supplier selection 33. Purchase order preparation 74% of firms currently have electronic data interchange (EDI) with some part of their supply base Follow-up and expediting Receipt and inspection Invoice clearance and payment Records maintenance The Purchasing Process The Order Cycle Purchase order preparation Records maintenance Invoice clearing and payment Receipt and inspection Follow-up and expediting The item is new or technically complex with only vague specifications The purchase requires agreement about a wide range of performance factors The supplier must participate in the development effort The supplier cannot determine risks and costs without input from the buyer Negotiation is most effective when: The Purchasing Process Supplier Selection - IV

34. Multi-Criteria Decision Models in Sourcing and Purchasing How do we evaluate alternatives when criteria include both quantitative measures (such as costs and on-time delivery performance) and qualitative factors (such as management stability and trustworthiness)? 35. Weighted-Point Evaluation System - I Assign weights to performance dimensions Rate the performance of each supplier with regard to each dimension Calculate the total score Evaluating potential suppliers Tracking suppliers performance over time / ranking current suppliers Purpose: The Process: 36. Aardvark Beverly Conan the Electronics Hills Inc. Electrician Performance Dimension Price Quality Delivery reliability Weighted-Point Evaluation System - II Summary Data for Alternative Suppliers 60% on time 80% on time 95% on time 10% defects 1% defects 5% defects $2/unit $5/unit $4/unit 37. Weighted-Point Evaluation System - III 5 = excellent 4 = good 3 = average 2 = fair 1 = poor Scoring Scheme Criteria Weights W Price = 0.3 W Quality = 0.4 W Delivery = 0.3 reliability 38. Aardvark Beverly Conan the Electronics Hills Inc. Electrician Performance Dimension Price Quality Delivery reliability Weighted-Point Evaluation System - IV Performance Values for Alternative Suppliers 1 2 4 1 5 3 5 3 4 39. Weighted-Point Evaluation System - V Total Scores for Alternative Suppliers Score Aardvark = (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6 Score Beverly = (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5 Score Conan = (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2 Aardvark should improve their quality Beverly Hills should improve their delivery and price Conan is out of the running as a potential supplier 40. Trends in Purchasing Management Long-term Contracts and Consolidation Supply Base Reduction Global Purchasing Supplier Performance Measurement Supplier Technology Information Technology Professionalism in Purchasing

41. Trends in Purchasing Management - I Area of Traditionally In the Future Purchasing Firms more likely to singlesource or dual-source in order to improve performance and reduce costs Suppliers switched often, with many suppliers for each purchased item Number of suppliers Purchases consolidated across business units to leverage volumes and purchasing efforts Products and services purchased by individual business units Purchase consolidation Long-term contracts (> 2 years) with performance improvement clauses Competitive bidding, reviewed annually or semiannually Contract length 42. Trends in Purchasing Management - II Area of Traditionally In the Future Purchasing Cycle times a critical orderwinner; suppliers cooperate in new product development to reduce development time Long cycle times tolerated; little involvement of suppliers in new product development Importance of time Purchasing sees as a way to harness suppliers capabilities Purchasing seen as a nuisance or non-value added activity Top managements perception of purchasing Global sourcing to access the best suppliers in the world Primarily domestic or even local Location of suppliers 43. Trends in Purchasing Management - III Area of Traditionally In the Future Purchasing Increasing levels of performance expected Low standards, if any Supplier performance standards Detailed, formal performance measurement systems to track price, delivery, quality and other measures Random or nonexistent monitoring of suppliers, quality, delivery, and price over time Supplier performance measurement Buying organizations improving supplier performance through supplier development programs Suppliers expected to improve . . . or else! Improvement of suppliers capabilities

44. Trends in Purchasing Management IV Area of Traditionally In the Future Purchasing Increased use of technology for routine activities; more time spent managing key supplier relationships Primarily clerical processing purchase orders Purchasing responsibilities Increasing use of EDI, B2Bs, Cad/CAM, and Web to link supply chain partners Little or none Information systems linking buyers and suppliers Suppliers active in new product/process development Little to none; suppliers expected to deliver exactly what was asked for and no more Reliance on supplier product and process technology 45. Logistics 46. Logistics Logistics defined Logistics decision areas Logistics strategies in action Kraft Foods, page 336.

47. Logistics Planning, implementing, and controlling the effective flow and storage of goods and materials from the point of origin to the point of consumption (CLM) 48. Key Decision Areas Transportation Warehousing (and more generally, location) Packaging Material handling Logistics information systems Logistics service providers (And some would put inventory here as well!)

49. Why the Increasing Interest? Deregulation Globalization Technological breakthroughs Environmental concerns Performance impact

50. Deregulation Transportation providers Elimination of artificial barriers Unrestricted markets Multi-modal solutions Price, schedule, and terms flexibility Buyers have greater freedom Negotiate prices, terms, and conditions Ownership issues BUT

51. Deregulation (continued) With greater freedom comes new responsibilities Key point Logistics has evolved from being a tactical area to a strategic one

52. Globalization (US Statistics) What is driving this activity? +31% +49% Change $917 Billion $670 Billion 1998 $700 Billion $449 Billion 1992 Imports Exports Year 53. Technological Breakthroughs I Information Systems Global positioning systems Bar-coding applications RFID on the horizon as replacement Real-time simulation and optimization Precise coordination of multi-modal solutions

54. Technological Breakthroughs II Transportation Systems Standardized containers for ease of transfer Roadrailers, etc. Multi-modal solutions

Truck Train

Truck

Ship

55. Environmental Concerns Even while certain aspects of logistics have been deregulated, other areas are being controlled more stringently Fuel efficiency Pollution Recovery, recycling, and reuse of packaging, containers, and products

56. Performance Impact I Comparative GDP and Logistics Expenditures (billions of $, 1998) Source: D. Bowersox and R. Calantone, Executive Insights: Global Statistics, Journal of International Marketing , Vol. 8, no. 4, 1998, pp 83-93. 11.7 3,424 29,161 Total 12.9 916 7,080 Other 11.6 652 5,605 Pacific 11.8 941 7,981 Europe 10.8 915 8,495 North America Logistics % of GDP Logistics Expenditure Gross Domestic Product Region 57. Performance Impact II Customer touch points Delivery reliability Delivery speed Delivery tracking Quality

58. Performance Impact III Total time to the customer at WolfByte Computer 75% decrease in manufacturing time, but only 25% decrease in time to customer. Where is the leverage now? 4.5 days 6 days Total Time to the Customer 4 days 4 days Shipping Time 0.5 days 2 days Manufacturing Time 2004 2000 59. The Evolution of Logistics Strategy From functional silos to strategic positioning 60. Strategic Disconnect 61. Who Owns Logistics? 62. Logistics Decision Areas Transportation Modes Formats Pricing

Warehousing Consolidation Cross Docking and Break-Bulk Hub and Spoke Inventory

63. Major Transportation Modes Highway (truck) Water Rail Air Pipeline

64. Modal Shares of Shipments (within US, 1999) 6.7 5.5 5.5 Other/Unknown 17.6 13.7 4.2 Pipeline 0.2 0 2.7 Air 26.7 11.2 4.8 Rail 20.4 11.1 2.5 Water 28.4 58.5 80.3 Highway (trucking, parcel, postal, courier) Ton Miles (%) Tons (%) Value (%) Mode 65. Highway Mode Strengths Flexibility to pick up and deliver where and when needed Often the best balance between cost/flexibility and delivery reliability/speed Can be available 24/7 Weaknesses Not the fastest Not the cheapest

66. Water Mode Strengths Highly cost effective for bulky items Most effective when linked into multimodal system Weaknesses Limited locations Relatively poor delivery reliability/speed Often limited operating hours at docks

67. Rail Mode Strengths Highly cost effective for bulky items Can be most effective when linked into multimodal system Weaknesses Limited locations, but better than for water. Better delivery reliability/speed than water

68. Air Mode Strengths Quickest delivery over longer distances

Can be very flexible when linked to highway mode Weaknesses Often the most expensive, particularly on a per pound basis

69. Question How can businesses design solutions that exploit the strengths of each mode? 70. Transportation Formats Common carriers Published rates and schedules Nondiscriminatory pricing

Chapter 4 - Presentation Transcript

1. 2. Chapter 4 E-Commerce and Supply Chain Management Operations Management by R. Dan Reid & Nada R. Sanders 4th Edition Wiley 2010 2010 Wiley Learning Objectives Describe the structure of supply chains Describe the bullwhip effect Describe supply chains for service orgs Describe the major issues that affect supply chain management Describe electronic commerce Describe global issues in supply chain management 2010 Wiley 3. Learning Objectives cont Describe government regulation issues that affect supply chains Describe green supply chain management Describe the role of purchasing in SCM Describe sourcing issues Describe strategic purchasing partnerships 2010 Wiley 4. Learning Objectives cont Describe the ethics of supplier management Describe supply chain distribution Describe how to implement SCM Describe supply chain performance metrics Describe trends in supply chain management 2010 Wiley 5. Supply Chains & SCM Defined A supply chain is the network of all the activities involved in delivering a finished product/service to the customer Sourcing of: raw materials, assembly, warehousing, order entry, distribution, delivery Supply Chain Management is the vital business function that coordinates all of the network links Coordinates movement of goods through supply chain from suppliers to manufacturers to distributors

Promotes information sharing along chain like forecasts, sales data, & promotions

2010 Wiley 6. Components of a Supply Chain for a Manufacturer External Suppliers source of raw material Tier one supplier supplies directly to the processor Tier two supplier supplies directly to tier one Tier three supplier supplies directly to tier two Internal Functions include processing functions Processing, purchasing, planning, quality, shipping

2010 Wiley 7. Components of a Supply Chain External Distributors transport finished products to appropriate locations Logistics managers are responsible for managing the movement of products between locations. Includes: traffic management arranging the method of shipment for both incoming and outgoing products or material distribution management movement of material from manufacturer to the customer

2010 Wiley 8. 9. A Traditional Supply Chain Information Flow 2010 Wiley The Bullwhip Effect - defined Bullwhip effect - the inaccurate or distorted demand information created in the supply chain Causes are generated by : demand forecasting updating, order batching, price fluctuations, rationing and gaming

2010 Wiley 10. The Bullwhip Effect Counteracting the Effect: Change the way suppliers forecast product demand by making this information available at all levels of the supply chain Share real demand information (POS terminals) Eliminate order batching Stabilize pricing Eliminate gaming

2010 Wiley 11. Supply Chains for Service Orgs Internal Operations External Distributors 2010 Wiley

12. Major Issues Affecting SCM Information technology enablers include the Internet, Web, EDI, intranets and extranets, bar code scanners, and point-of-sales demand information E-commerce and e-business uses internet and web to transact business 2010 Wiley 13. Major Issues cont Business-to-business (B2B) E-commerce b usinesses selling to and buying from other businesses Business-to-Business (B2B) Evolution: Automated order entry systems started in 1970s Electronic Data Interchange (EDI) started in the 1970s Electronic Storefronts emerged in the 1990s Net Marketplaces emerged in the late 1990s

2010 Wiley 14. Major Issues cont Benefits of B2B E-Commerce Lower procurement administrative costs, Low-cost access to global suppliers Lower inventory investment due to price transparency/reduced response time Better product quality because of increased cooperation between buyers and sellers, especially during the product design and development

2010 Wiley 15. Types of E-Commerce Business-to-Consumer (B2C) E-Commerce - on-line businesses sell to individual consumers: Advertising Revenue Model Provides users w/information on services & products; provides opportunity for suppliers to advertise Subscription Revenue Model Web site charges a subscription fee for access to the site Transaction Fee Model Company receives a fee for executing a transaction

2010 Wiley 16. Types of E-Commerce cont Sales Revenue Model A means of selling goods, information, or service directly to customers Affiliate Revenue Model Companies receive a referral fee for directing business to an affiliate Intranets An organizations internal networks Extranets Intranets linked to the Internet for suppliers and customers to interact within their system. 2010 Wiley 17. Major Issues cont SCM must consider the following trends, improved capabilities, & realities: Consumer Expectations and Competition power has shifted to the consumer Globalization capitalize on emerging markets Government Regulations and E-Commerce issues of Internet government regulations Green Supply Chain Management recycling, sustainable eco-efficiency, and waste minimization

2010 Wiley

18. Global SCM Factors Managing extensive global supply chains introduces many complications Infrastructure issues like transportation, communication, lack of skilled labor, & scarce local material supplies Product proliferation created by the need to customize products for each market

2010 Wiley 19. Sourcing Issues Which products to produce in-house and which are provided by other supply chain members Vertical integration a measure of how much of the supply chain is owned by the manufacturer Backward integration owning or controlling of sources of raw material and component parts Forward integration owning or control the channels of distribution Vertical integration related to levels of insourcing or outsourcing products or services 2010 Wiley 20. The Role of Purchasing The purchasing dept plays important role in SCM and is responsible for: Selecting suppliers Negotiating and administering long-term contracts Monitoring supplier performance Placing orders to suppliers Developing a responsible supplier base Maintaining good supplier relations

2010 Wiley 21. The Traditional Purchasing Process 2010 Wiley 22. The E-purchasing Process 2010 Wiley 23. Insourcing vs. Outsourcing Questions to ask before sourcing decisions are made: Is product/service technology critical to firms success? Is product/service a core competency? Is it something your company must do to survive?

2010 Wiley 24. Make or Buy Analysis Analysis will look at the expected sales levels and cost of internal operations vs. cost of purchasing the product or service 2010 Wiley 25. Make or Buy Example Mary and Sue decide to open a bagel shop. Their first decision is whether they should make the bagels on-site or buy the bagels from a local bakery. If they buy from the local bakery they will need airtight containers at a fixed cost of $1000 annually. They can buy the bagels for $0.40 each. If they make the bagels in-house they will need a small kitchen at a fixed cost of $15,000 annually. It will cost them $0.15 per bagel to make. They believe they will sell 60,000 bagels. 2010 Wiley 26. Make or Buy Computation

Mary and Sue wants to know if they should make or buy the bagels. FC Buy + (VC Buy x Q) = FC Make + (VC Make x Q) $1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q) Q = 56,000 bagels 2010 Wiley

27. The Role of Purchasing Purchasing role has attained increased importance since material costs represent 50-60% of cost of goods sold Ethics considerations is a constant concern Developing supplier relationships is essential Determining how many suppliers to use Developing partnerships

2010 Wiley 28. Developing Supplier Relationship A strong supplier base is critical to the success of many organizations Top three criteria for choosing suppliers are: Price Quality On-time delivery

2010 Wiley 29. Critical Factors in Successful Partnership Relations Critical factors in successful partnering include: Impact attaining levels of productivity and competitiveness that are not possible through normal supplier relationships Intimacy working relationship between two partners Vision the mission or objectives of the partnership

2010 Wiley 30. Win-Win Factors in Partnership Relations Benefits of Partnering Early supplier involvement (ESI) in the design process Using supplier expertise to develop and share cost improvements and eliminate costly processes Shorten time to market

2010 Wiley Have a long-term orientation Share a common vision Are strategic in nature Share short/long term plans Share information Driven by end-customer needs Share risks and opportunities 31. Ethics in Supply Management Global Standards of Supply Management Conduct from ISM: Loyalty to your organization Justice to those with whom you deal Faith in your profession

2010 Wiley 32. Supply Chain Distribution

Warehouses involved in supply chain distributions and include Plant warehouses Regional warehouses Local warehouses Warehouses can either be General used for long-term storage Distribution used for short-term storage, consolidation, and product mixing

2010 Wiley 33. Supply Chain Distribution cont Transportation consolidation warehouses consolidate less-than-truckload (LTL) quantities into truckload (TL) quantities Product mixing warehouse value added customer service of grouping a variety of products into a direct shipment to the customer 2010 Wiley 34. Supply Chain Distribution cont Services are offered can improve customer service by moving goods closer to the customer and thus reducing replenishment time Crossdocking or movement of material without storage and order-picking material while still performing the receiving and shipping functions. 2010 Wiley 35. Supply Chain Distribution cont Radio Frequency Identification Technology (RFID) automated data collection technology which relies on radio waves to transfer data between reader and RFID tag Third-party Service Providers ease of developing an electronic storefront has allowed the discovery of suppliers from around the world 2010 Wiley 36. Integrated SCM Implementing integrated SCM requires: Analyzing the whole supply chain Starting by integrating internal functions first Integrating external suppliers through partnerships

2010 Wiley Suppliers Goals Increase sales volume Increase customer loyalty Reduce cost Improve demand data Improve profitability

37. Integrated SCM cont Manufacturers Goals Reduce costs Reduce duplication of effort

Improve quality Reduce lead time Implement cost reduction program Involve suppliers early Reduce time to market

2010 Wiley 38. Leveraging SCM: A List Regularly assess your SC network to ensure continued suitability to your needs Maintain a global view of demand. Decide how to get products to your customers Improve asset productivity. 2010 Wiley 39. Leveraging SCM: A List cont Expand your visibility. Know what happens, when it happens. Design to deliver. Track performance to allow for continuous improvements. Implementing these strategies should reduce operating expenses and result in benefits for members of chain. 2010 Wiley 40. Eliminating Sources of Waste in Supply Chain Overproduction: dont build product before needed Delay between activities in chain: eliminate them Unnecessary transport or conveyance of product: includes both internal and external movement 2010 Wiley 41. Eliminating Sources of Waste in Supply Chain cont Unnecessary movement of people: includes travel or reaching due to poorly designed work space Excess inventory ready and in position: includes early deliveries, excess inventory, etc. Suboptimal use of space: trailer loads, warehouses, etc. Errors that cause rework: billing errors, inventory discrepancies, etc. 2010 Wiley 42. Supply Chain Metrics Measuring supply chain performance Traditional measures include: Return on investment Profitability Market share Revenue growth Additional measures Customer service levels Inventory turns

Weeks of supply Inventory obsolescence

2010 Wiley 43. Supply Chain Performance Metrics cont Customer demands for better-quality requires companys to develop ways to measure improvements Some measurements include: Warranty costs Products returned Cost reductions allowed because of product defects Company response times Transaction costs

2010 Wiley 44. Current Trends in SCM Increased use of electronic marketplace such as: E-distributors independently owned net marketplaces having catalogs representing thousands of suppliers and designed for spot purchases E-purchasing companies that connect on-line MRO suppliers to business who pay fees to join the market, usually for long-term contractual purchasing

2010 Wiley 45. Current Trends in SCM cont Value chain management automation of a firms purchasing or selling processes Exchanges marketplace that focuses on spot requirements of large firms in a single industry Industry consortia industry-owned markets that enable buyers to purchase direct inputs from a limited set of invited suppliers Decreased supply chain velocity due to greater distances with greater uncertainty and generally less efficient. Greening of the supply chain: packaging, distribution, carbon footprints, etc. 2010 Wiley 46. SCM Across the Organization SCM changes the way companies do business. Accounting shares SCM benefits due to inventory level decreases Marketing benefits by improved customer service levels Information systems are critical for information sharing through PSO data, EDI, RFID, the Internet, intranet, and extranets Purchasing is responsible for sourcing materials Operations use timely demand information to more effectively plan production schedules 2010 Wiley 47. Chapter 4 Highlights Every organization is part of a supply chain, either as a customer or as a supplier. Supply chains include all the processes needed to make a finished product. SCM is the integration and coordination of these efforts. The bullwhip effect distorts product demand information passed between levels of the supply chain. The more levels that exist, the more distortion that is possible.

Supply chains for service organizations can have external suppliers, internal processes and external distributors. 2010 Wiley

48. Chapter 4 Highlights cont Many issues affect supply chain management. The Internet, the WEB, EDI, intranets, extranets, bar-code scanners, and POS data are SCM enablers. B2B and B2C electronic commerce enable supply chain management. Net marketplaces bring together thousands or suppliers and customers. Allowing for efficient sourcing and lower transaction costs. 2010 Wiley 49. Chapter 4 Highlights cont Global supply chains increase geographic distances between members, causing greater uncertainty in delivery times. Government regulation affects SCM on several levels. Green SCM focuses on the environment and the processes in the SC that affect the environment. Purchasing has a major role in SCM. Purchasing is involved in sourcing decisions and developing strategic long-term partnerships. Sourcing is critical in establishing a solid, responsive supplier base. 2010 Wiley 50. Chapter 4 Highlights cont Companies make insourcing and outsourcing decisions. These make-or-buy decisions are based on financial and strategic criteria. Partnerships require sharing information, risks, technologies, and opportunities. Impact, intimacy, and vision are critical to successful partnering. Ethics in supply management is an ongoing concern. Since buyers are in a position to influence or award business, it is imperative that buyers avoid any appearance of unethical behavior or conflict of interest. 2010 Wiley 51. Chapter 4 Highlights cont Supply chain distribution requires effective warehousing operations. The warehouses provide transportation, consolidation, product mixing, and service. Implementing SCM usually begins with the manufacturer integrating internal processes first. The, the company tries to integrate the external suppliers. The last step is integrating the external distributors. A company needs to evaluate the performance of its supply chain. Regular performance metrics (ROI, profitability, market share, customer service levels, etc.) and other measures that reflect the objectives of the SC are used. 2010 Wiley 52. Chapter 4 Highlights cont The emergence of net marketplaces has significantly affected SCM. As supply chains become longer, it is likely that supply chain velocity will decrease. It is possible that a more strategic and integrated approach is needed to advance SCM to the next level. 2010 Wiley 53. Chapter 4 Homework Hints 1.a. determine Q that makes the two total costs equal.

) - Presentation Transcript

1.

Chapter 7 Information Technology For Management 5 th Edition Turban, Leidner, McLean, Wetherbe Lecture Slides by A. Lekacos, Stony Brook University John Wiley & Sons, Inc. Enterprise Systems: From Supply Chains to ERP to CRM

2. 3.

LEARNING OBJECTIVES Understand the essentials of enterprise systems and computerized supply chain management. Describe the various types of supply chains. Describe some major problems of managing supply chains and some innovative solutions. Describe some major types of software that support activities along the supply chain. Describe the need for integrated software and how ERP does it. Describe CRM and its support by IT. ERP and Supply Chains It is comprised of a set of applications that automate routine back-end operations: such as financial management inventory management Scheduling order fulfillment cost control accounts payable and receivable, It includes front-end operations such as: POS Field Sales Service It also increases efficiency, improves quality, productivity, and profitability. ERP or enterprise systems control all major business processes with a single software architecture in real time. ESSENTIALS OF ENTERPRISE SYSTEMS AND SUPPLY CHAINS

4. 5.

ESSENTIALS OF ENTERPRISE SYSTEMS AND SUPPLY CHAINS Supply Chain Supply Chain Flows Materials flows are all physical products, new materials, and supplies that flow along the chain. Information flows relates to a ll data associated with demand, shipments, orders, returns and schedules. Financial flows include all transfers of money, payments, credit card information, payment schedules, epayments and credit-related data.

Supply chain refers to the flow of materials, information, payments, and services from raw material suppliers, through factories and warehouses (Value Chain) , to the final consumer (Demand Chain) . It includes tasks such as purchasing, payment flow, materials handling, production planning & control, logistics & warehousing, inventory control, and distribution. When it is managed electronically it is referred to as an e-supply chain. Supply Chains contribute to increased profitability and competitiveness 6. Supply Chain Automotive Supply Chain

7.

Supply Chains Components The supply chain involves three segments: Upstream , where sourcing or procurement from external suppliers occur Internal , where packaging, assembly, or manufacturing take place Downstream , where distribution or dispersal take place, frequently by external distributors. It also includes the movement of information and money and the procedures that support the movement of a product or a service. Organizations and individuals are also part of the chain. Supply Chains Classifications There are several major types of supply chain Integrated make-to-stock Continuous replenishment Build-to-order Channel assembly.

8.

Value Chain Demand Chain Supply Chain 9. Supply Chain Problems Adding value along the chain is essential for competitiveness, however problems exist especially in complex or long chains and in cases where many business partners are involved. These problems are due to uncertainties and the need to coordinate several activities, internal units, and business partners. Demand forecasts are a major source of uncertainties Competition Prices Weather conditions Technological development Customer confidence Uncertainties exist in delivery times Machine failures Road conditions Shipments Quality problems may also create production delays because of poor demand forecasting, price fluctuation, order batching, and rationing within the chain. Even slight demand uncertainties and variability become magnified if each distinct entity, on the chain, makes ordering and inventory decisions with respect to its own interest above those of the chain. Distorted information can lead to tremendous inefficiencies, excessive inventories, poor customer service, lost revenues, ineffective shipments, and missed production schedules. A common way to solve the bullwhip problem is by sharing information along the supply chain through EDI, extranets, and groupware technologies. For example employing a vendor-managed inventory (VMI) strategy , the vendor monitors inventory levels and when it falls below the threshold for each product this automatically triggers an immediate shipment. 11. Supply Chain Solutions Information sharing among supply chain partners ( c-commerce ) sometimes referred to as the collaboration supply chain is one method to overcome problems in the flow. Others are: Optimal Inventory Levels Supply Chain Coordination and Collaboration Supply Chain Teams

10. Supply Chain Problems continued The bullwhip effect refers to erratic shifts in orders up and down the supply chain

Performance Measurement and Metrics Various IT-Assisted Solutions wireless technology optimal shipping plans strategic partnerships with suppliers just-in-time

12. Supply Chain Solutions 13. Supply Chain Collaboration Management Manual methods include; phone, fax, and mail EDI is typically used by large corporations EC PRM functions include: partner profiles partner communications lead management (of clients) targeted information distribution connecting the extended enterprise partner planning centralized forecasting group planning e-mail price lists

Every company that has business partners has to manage the relationships with them. Information needs to flow between the firms and constantly updated and shared. 14. Supply Chain Management 15. Global Supply Chains Companies go global ( disperse the value chain ) for a variety of reasons. lower costs of materials, products, services and labor availability of products that are unavailable domestically the firm's global strategy technology available in other countries high quality of products intensification of global competition the need to develop a foreign presence to increase sales fulfillment of counter trade.

Supply chains that involve suppliers and/or customers in other countries are referred to as global supply chains . Global supply chains are usually longer than domestic ones, and more complex. Therefore, additional uncertainties are likely. 16. Computerized Supply Chains The supply chain process is intertwined with the computerization of its activities. People have wanted to automate the processes along the chain to reduce cost, expedite processing, and reduce errors. Material requirements planning (MRP) essentially integrates production, purchasing, and inventory management of interrelated products.

Manufacturing resource planning (MRP II) , enhanced MRP methodology by adding labor requirements and financial planning. Enterprise resource planning (ERP) further integrates the transaction processing as well as other routine activities in the entire enterprise. Integrations continues along several paths functional areas Combining transaction processing and decision support Business intelligence CRM software

17. Computerized Supply Chains Continued 18. E-Commerce and Supply Chains E-commerce can digitize some products can replace all paper documents can replace faxes and telephone calls with electronic messaging Enhances collaboration and information sharing typically shortens the supply chain and minimizes inventories facilitates customer service introduces efficiencies into buying and selling enables faster, cheaper, and better communication, collaboration, and discovery of information

E-commerce is emerging as a superb tool for providing solutions to problems along the supply chain. Many supply chain activities, from taking customers' orders to procurement, can be conducted electronically. 19. E-Commerce and Supply Chains Upstream Activities improve the upstream supply chain through e-procurement Internal Supply Activities from entering purchase orders, to recording sales, to order fulfillment, to tracking shipments, are usually conducted over a corporate intranet Downstream Activities enhance the activity downstream activities by providing online ordering Vertical exchanges combine upstream and downstream EC supply chain activities. These B2B exchanges , provide a medium where buyers and sellers can meet. A major role of EC is to facilitate buying and selling along all segments of the supply chain. 20. E-Commerce and Supply Chains Continued 21. Supply Chains Benefits There are many benefits to integrating functional systems. Tangible benefits: Inventory reduction Personnel reduction Productivity improvement Order management improvement Financial-close cycle improvements IT cost reduction Procurement cost reduction Cash management improvements

Revenue/profit increases Transportation logistics cost reduction Maintenance reduction On-time delivery improvement.

22. Supply Chains Benefits Continued Intangible benefits: Information visibility New/improved processes Customer responsiveness Standardization Flexibility Globalization Business performance Reduction in duplication of entries controls and reconciliation are enhanced rapid assimilation of data into the organization

S ystems can be integrated internally and externally. Internal integration refers to integration between applications inside a company, whereas external integration refers to integration of applications among business partners. 23. Customer Relationship Management (CRM) Types of CRM Operational CRM Analytical CRM Collaborative CRM

CRM recognizes that customers are the core of a business and that a companys success depends on effectively managing relationships with them. It focuses on building longterm and sustainable customer relationships that add value both for the customer and the company. 24. Customer Relationship Management (CRM) 25. Customer Relationship Management (eCRM) CRM has been practiced manually by corporations for generations. However, Ecrm (electronic CRM) started in the mid-1990s ,when customers began using Web browsers, the Internet and other electronic touchpoints. THE SCOPE OF E-CRM. We can differentiate three levels of e-CRM: Foundational service. This includes the minimum necessary services such as Web site responsiveness (e.g., how quickly and accurately the service is provided), site effectiveness, and order fulfillment. Customer-centered services. These services include order tracking, product configuration and customization, and security/trust. These are the services that matter the most to customers. Value-added services. These are extra services such as online auctions and online training and education.

26. Customer Relationship Management CRM Activities Customer Service on the Web Search and Comparison Capabilities Free Products and Services Technical and Other Information and Service

Allowing Customers to Order Products and Services Online Letting Customers Track Accounts or Order Status Tools for Customer Service Personalized Web Pages FAQs Chat Rooms E-Mail and Automated Response Call Centers Troubleshooting Tools Wireless CRM

27. Evolution Is Continuing 28. MANAGERIAL ISSUES Ethical issues. Conducting a supply chain management project may result in the need to lay off, retrain, or transfer employees. Should management notify the employees in advance regarding such possibilities? And what about those older employees who are difficult to retrain? Other ethical issues may involve sharing of personnel information, which may be required for a collaborative organizational culture. How much to integrate? While companies should consider extreme integration projects, including ERP, SCM, and e-commerce, they should recognize that integrating long and complex supply chain segments may result in failure. Therefore, many times companies tightly integrate the upstream, inside-company, and downstream activities, each part by itself, and loosely connect the three. Role of IT. Almost all major SCM projects use IT. However, it is important to remember that in most cases the technology plays a supportive role, and the primary role is organizational and managerial in nature. On the other hand, without IT, most SCM efforts do not succeed.

29. MANAGERIAL ISSUES Organizational adaptability. To adopt ERP, organization processes must, unfortunately conform to the software, not the other way around. When the software is changed, in a later version for example, the organizational processes must change also. Some organizations are able and willing to do so; others are not. Going global. EC provides an opportunity to expand markets globally. However, it may create long and complex supply chains. Therefore, it is necessary to first check the logistics along the supply chain as well regulations and payment issues. The Customer is king/queen. In implementing IT applications ,management must remember the importance of the customer/end-user ,whether external or internal. Set CRM policies with care. In practicing CRM, companies may give priority to more valuable

SCM- Basics - Presentation Transcript

1. Supply Chain Management [SCM] 1 Understanding the Supply Chain Management Concept of Supply Chain Management Define Supply Define Supply Chain Define Supply Chain Management This can best be done by discussing the general Operating process of organizations with examples from day to day activities. SCM-LN-060213 Operation of an Organization Rando m Fluc tuatio ns Inputs Late Deliveries [Trans fo rme d Re s o urc e s ] Staff Turnover 3. Mate rials Pow / Equipm failure er ent Exte rnal Pro duc ts 4. Info rmation 5. Cus to me rs The Trans fo rmatio n Outputs Cus to me rs Pro c e s s 1. Fac ilitie s 2. Ene rg y & Utilitie s S e rvic e s Inte rnal 3. Technology Government 4. Staff Regulations etc. Inputs Enviro nme nt [Trans fo rming A g e ne ral Input Transformation Process Re s o urc e s ] Output Ope ratio ns mo de l Supply Chain Management [SCM] 2 Process of buying / purchasing Products Computer Raw material Supplier Computer Show Room Distributor Customer Manufacturer [Retailer] Component Supplier Toilet Soap Raw material Soap Supermarket Distributor Customer Supplier Manufacturer [Retailer] Fuel Crude Oil Refinery Petrol/Diesel Pump Customer Supplier [Manufacturer] [Retailer]

2.

3.

4.

Supply Chain Management [SCM] 3 Process of buying / purchasing Services Vehicle Repair Raw material Supplier Vehicle Spares Service Centre Customer Manufacturer Distributor [Retailer] Component Supplier Pest Control Maintenance Raw material Pest control products Pest control products Supplier Distributor Company Customer Manufacturer [Retailer] Electricity Home Water Customer [Nature] Generating Station Distribution Company Commercial [Producer] [Retailer] Customer Fuel Supplier Industrial Customer Supply Chain Management [SCM] 4 Supply The Customer expects that there will be supply of Products / Services whenever the need arises. -Definition of Supply [APICS Dictionary 11th edition] 1] The quantity of goods available for use 2] The actual or planned replenishment of product or component. The replenishment quantities are created in response to demand for the product or component or in anticipation of such a demand. What is a Supply Chain? Customer wants P&G or other Jewel or third Jewel detergent and goes manufacturer party DC Supermarket to Jewel Chemical Plastic Tenneco manufacturer Producer Packaging (e.g. Oil Company) Chemical Paper Timber manufacturer Manufacturer Industry (e.g. Oil Company) Supply Chain Management [SCM] 5 Supply Chain The buying process begins with customer order and ends when the satisfied customer pays for the product / service. It has the following typical entities / stages: Customers Retailers Wholesalers / Distributors Transporters Manufacturers / Producers Component / Raw material Suppliers These entities are connected to each other along a chain. Hence the name Supply Chain system. Objectives of Organizations To meet the needs of various customers and stakeholders. To maximize the overall value generated. Value generated = Worthiness of product Effort the supply chain expends. Value is correlated with supply chain profitability. Value = Revenue from customer Overall cost across the supply chain. Organizations have to acquire many of the materials, equipment, facilities, and supplies from other organizations and or individuals. Thus the performance of an organization depends not only on its own performance but on the performance of other organizations which supply the resources. This makes it clear that an organization cannot exist in isolation. To be successful, organizations have to be interdependent. Cooperation among firms is a must. Supply chain success should be measured in terms of supply chain profitability and not in terms of profit at an individual stage. Supply Chain Management [SCM] 6 Supply Chain Basic Supply Chain Model Information Flow Return of Product Return of Product Supplier Producer Customer Primary Product Flow Primary Product Flow Primary Cash Flow Supplier Producer Customer are connected by Product, Information & Payment Flows Flow of physical materials and services from suppliers through intermediate entities to customers Flow of Cash from customer through intermediate entities to supplier Flow of Information back and forth along the chain Reverse flow of products returned for replacement, repairs, recycling, or disposal

5.

6.

7.

8.

9.

10. Supply Chain Management [SCM] 7 Supply Chain Organizations: Supplier materials / energy / services / components Producer finished products / services Retailer receives finished products and delivers to customers Flows that connect the entities: Physical materials / services Cash from customer Information back and forth Reverse flow of products repair / recycling / disposal / replacement 11. Supply Chain Management [SCM] 8 Definition of Supply Chain The global network used to deliver products and services from raw materials to end customers through an engineered flow of Information, Physical Distribution and Cash. [APICS Dictionary 11th edition] SC involves directly or indirectly, everyone and everything required to deliver products and services from raw materials to end customers SC includes Customers, Retailers, Wholesalers / Distributors, Transporters, Manufacturers / Producers, Component / Raw material Suppliers SC can be viewed as processes marketing data analysis, invoicing, shipping, order processing cutting across entities Outside stakeholders government, public at large, trade associations, universities, competitors etc. 12. Supply Chain Management [SCM] 9 Supply Chain Management The design, planning, execution, control and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging world wide logistics, synchronizing supply with demand and measuring performance globally. [APICS dictionary 11th edition] 13. Some more definitions of SCM Oliver and Webber (1982) SCM covers the flow of goods from supplier through manufacturing and distribution channels to end user. Jones and Riley (1987) SCM techniques deal with the planning and control of total materials flow from suppliers to through end users. Ellram (1991) An integrative approach to dealing with the planning and control of the materials flow from suppliers to end users. Christopher (1992) SCM is the management of a network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer. Ayers (2000) SCM is the design, maintenance and operation of supply chain processes for satisfaction of end users. Sunil Chopra and Peter Meindl (2001) SCM involves the management of flows between and among stages in a supply chain to maximize total profitability.

14. Supply Chain Management [SCM] 10 A generalized SC Model Distribution Tier 2 Distribution Tier 1 Retailer Customer Raw Materials Supplier Supplier Distributor Retailer Customer Tier 2 Tier 1 Manufacturer Supplier Supplier Tier 2 Tier 1 Distributor Retailer Customer Components Retailer Customer 15. Supply Chain Management [SCM] 10A Types of Supply Chain 1 Horizontal (lateral) integration The stages of SC [Physical Supply, Manufacturing & Physical] are carried out by different organizations discussed earlier. 2 Vertical Integration Bringing the SC inside one organization Ford motor company pursued this strategy for their famous model T - car. Ownership Management What Ford practised. Later divested. Marketing / Sales Finance Show Room Ford Customer Distribution Plant Now horizontal integration Component Production is the favoured approach. Raw material Extraction 16. Supply Chain Management [SCM] 11 Evolution of Supply Chain Management Stage 1 Multiple Dysfunction Purchasing Marketing / Sales Customer Supplier Supplier Production Control Customer Supplier Logistics Distribution Customer Materials / Service Payments Lacks clear internal definitions and goals No external links other than transactional ones 17. Supply Chain Management [SCM] 12 Evolution of Supply Chain Management Stage 2 Semi functional Enterprise Information Supplier Customer Production Marketing / Purchasing Logistics Distribution Control Sales Supplier Customer Materials / Service Payments Improving efficiency, effectiveness, quality etc within functional areas No overlap / consulting in decision making from one department to another Department wise Maximising 18. Supply Chain Management [SCM] 13 Evolution of Supply Chain Management Stage 3 Integrated Enterprise ERP Supplier Customer Production Marketing / Purchasing Logistics Distribution Control Sales Supplier Customer Materials / Service Payments Breaks down silo walls and brings functional areas together in processes such as Sales & Operations Planning (S&OP), CPFR Company wide processes rather than individual functions late 1980s to early 1990s. MRP(1950s) MRPII(1960s) ERP(1990s). 19. Supply Chain Management [SCM] 13A Why Process Integration is needed? To make maximum profit a company must have the following objectives: - Provide best customer service - Provide lowest production costs - Provide lowest inventory investment - Provide lowest distribution costs These objectives create conflict among marketing, production & finance departments: Function Objective Implication Marketing - High revenue High - High Product Availability Customer Service Low Production - Low Production Cost Many - High Level Production Production Disruption - Long Production Run Few Finance - Low Investment and Cost High - Fewer Fixed Costs Inventories Low Inventories Low 20. Supply Chain Management [SCM] 14 Evolution of Supply Chain Management Stage 4 Extended Enterprise Networked Information Flow Suppliers Internal Customers Suppliers Customers Suppliers Chain Customers Materials / Service Payments Integration of internal network with selected SCM partners internal network to improve efficiency, quality of products / services. 21. 5.2. The Objectives of a Supply Chain Maximize overall value created Supply chain value: difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customers request Value is correlated to supply chain profitability (difference between revenue generated from the customer and the overall cost across the supply chain) 22. The Objective of a Supply Chain Example: Dell receives $2000 from a customer for a computer (revenue) Supply chain incurs costs (information, storage, transportation, components, assembly, etc.) Difference between $2000 and the sum of all of these costs is the supply chain profit Supply chain profitability is total profit to be shared across all stages of the supply chain Supply chain success should be measured by total supply chain profitability, not profits at an individual stage 23. Supply Chain Management [SCM] 17 Creating Value through Supply Chain Management The primary purpose for the existence of any SCM is to satisfy customer needs, in the process generating profits for itself. Maximise the overall value generated. Value generated = what the product/service worth to the customer the effort SC expends in fulfilling the customer needs. Correlated with SC Profitability (SCP). SCP = Revenue generated Overall cost across SC Value depends on the products utility to the customer. Types of utility: Form Utility - Operation Place Utility Logistics Time Utility - Logistics Possession Utility - Sales During value generation SC has to satisfy all the stakeholders Customer, Investor, Employee, Public at large, Government etc. 24. Supply Chain Management [SCM] 18 Creating Value through Supply Chain Management Financial Value Cost Reduction may be self defeating Gains must be equitably distributed Customer Value Quality Affordability Availability Service Social value Socially Desired and useful product / service Avoiding or reducing negative environmental side effects of activities such as extraction, processing and construction

25. The Objective of a Supply Chain Sources of supply chain revenue: the customer Sources of supply chain cost: flows of information, products, or funds between stages of the supply chain Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability 26. Supply Chain Management [SCM] 19 Importance / Benefits of SCM To achieve economies of scale and scope Costs are significant To improve business focus and expertise Customer Expectations are increasing Supply and Distribution Lines are lengthening with complexity Adds Significant Customer value Customers Increasingly Want Quick & Customised Response 27. Supply Chain Management [SCM] 20 Importance / Benefits of SCM To achieve economies of scale and scope Costs are significant Internal SC functions lack economies of scale when compared with the potential capacity of an independent provider of the same product / service. Eg: Computer Monitor / Chip / Hard drive Attractive pricing volume leverage. To improve business focus and expertise Vertical integration multiplies the complexities of managing disparate businesses. An independent company that focuses entirely on a particular business can develop more expertise than an in-house department Ford divested their Iron Ore company, Steel Mill etc Higher Quality, Attractive Pricing or both 28. Supply Chain Management [SCM] 22 Importance / Benefits of SCM Customer Expectations are increasing - Rapid processing of Customer Request - Quick delivery (shorter Order Cycle Time) - High degree of Product Availability Lower Prices Supply and Distribution lines are lengthening with greater complexity - Cut costs and expand markets Trend towards an integrated world market - Designing products for world market & producing them wherever raw material, labour, components, overhead etc are lower - Political arrangements : European Union, ASEAN, SAARC etc - Globalization of industries depends on logistic performance and cvosts 29. Supply Chain Management [SCM] 23 Importance / Benefits of SCM Adds significant Customer Value - A product or service is of no value to the customer, if not available when required Goods customers want are not produced where they want to consume OR goods are not accessible when customers want to consume Value Through Responsibility Form Converting raw materials Engineering & and components to the Manufacturing required Form, Fit & Function Time Production scheduling & Manufacturing & Logistics moving Place Moving & making Engineering & Logistics transportable Possession Advertising, Pricing, Marketing, Finance & Technical Support Engineering 30. Supply Chain Management [SCM] 24 Importance / Benefits of SCM Customers Increasingly want Quick Customised Response - Customers expect that products / services can be made available in shorter times. Guided by Fast Food, ATM, E-Mail etc. - Improved IS and flexible manufacturing processes have led to mass customisation - One Size Fit all philosophy is not appreciated always - Manufacturers / Suppliers are offering products that meet individual needs 31. Decision Phases of a Supply Chain Supply chain strategy or design Supply chain planning Supply chain operation 32. Supply Chain Strategy or Design Decisions about the structure of the supply chain and what processes each stage will perform Strategic supply chain decisions Locations and capacities of facilities Products to be made or stored at various locations Modes of transportation Information systems Supply chain design must support strategic objectives Supply chain design decisions are long-term and expensive to reverse must take into account market uncertainty 33. Supply Chain Planning Definition of a set of policies that govern short-term operations Fixed by the supply configuration from previous phase Starts with a forecast of demand in the coming year 34. Supply Chain Planning Planning decisions: Which markets will be supplied from which locations Planned buildup of inventories Subcontracting, backup locations Inventory policies Timing and size of market promotions Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon 35. Supply Chain Operation Time horizon is weekly or daily Decisions regarding individual customer orders Supply chain configuration is fixed and operating policies are determined Goal is to implement the operating policies as effectively as possible Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders Much less uncertainty (short time horizon) 36. 5.3. Process View of Supply Chain Management: Cyclic View SC is a sequence of processes and flows that take place within and between different SC stages and combine to fulfil a customer need for a product / service. These processes are divided into a series of cycles (cyclic view), each performed at the interface between two successive stages / entities of SC. Cycles Stage/Entity Customer Customer Arrival Customer Order Receiving Customer Order Cycle Customer Order Entry Customer Order Fulfilment Retailer Replenishment Retail Order Trigger Retail Order Receiving Cycle Retail Order Entry Retail Order Fulfilment Distributor Order Arrival from D/R/C Receiving by D/R/C

Manufacturing Cycle Production Scheduling Manufacturing & Shipping Manufacturer Procurement Order from Manufacturer Receiving at Manufacturer Cycle Supplier Supplier Prodn Scheduling RM / Comp. Mfg & Shipping 37. Push/Pull View of Supply Chains Procurement, Customer Order Manufacturing and Cycle Replenishment cycles PUSH PROCESSES PULL PROCESSES Customer Order Arrives 38. Supply Chain Management [SCM] 24A Process View of a Supply Chain: Push Pull View LL Bean DELL PULL PULL Process Process Customer Order Cycle Cust Order & Mfrg Customer order arrives Cycle Repl & Mfrg Cycle Customer order arrives Procurement Procurement Cycle Cycle PUSH PUSH Process Process 39. Supply Chain Macro Processes in a Firm SRM ISCM CRM Source Strategic planning Market Negotiate Demand planning Sell Buy Supply planning Call centre Design Collaboration Fulfilment Order management Supply Collaboration Field service Purchasing Manufacturing Marketing Supplier selection Production planning Generate demand Supplier evaluation Storage planning Facilitate New orders Demand-Supply placement planning Track orders 40. 5.4. Supply Chain Drivers Drivers of supply chain performance A framework for structuring drivers Facilities Inventory Transportation Information Obstacles to achieving fit 41. Drivers of Supply Chain Performance Facilities places where inventory is stored, assembled, or fabricated production sites and storage sites Inventory raw materials, WIP, finished goods within a supply chain inventory policies Transportation moving inventory from point to point in a supply chain combinations of transportation modes and routes Information data and analysis regarding inventory, transportation, facilities throughout the supply chain potentially the biggest driver of supply chain performance 42. A Framework for Structuring Drivers Efficiency Responsiveness Supply chain structure Facilities Transportation Inventory Information Drivers 43. Supply Chain Decisions: Structuring Drivers Strategy (Design) Planning Operation 44. Facilities Role in the supply chain the where of the supply chain manufacturing or storage (warehouses) Role in the competitive strategy economies of scale (efficiency priority) larger number of smaller facilities (responsiveness priority) Example 3.1: Toyota and Honda Components of facilities decisions 45. Components of Facilities Decisions Location centralization (efficiency) vs. decentralization (responsiveness) other factors to consider (e.g., proximity to customers) Capacity (flexibility versus efficiency) Manufacturing methodology (product focused versus process focused) Warehousing methodology (SKU storage, job lot storage, cross-docking) Overall trade-off: Responsiveness versus efficiency 46. Inventory Role in the supply chain Role in the competitive strategy Components of inventory decisions 47. Inventory: Role in the Supply Chain Inventory exists because of a mismatch between supply and demand Source of cost and influence on responsiveness Impact on material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain throughput rate at which sales to end consumers occur I = RT (Littles Law) I = inventory; R = throughput; T = flow time Example Inventory and throughput are synonymous in a supply chain 48. Inventory: Role in Competitive Strategy If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers If cost is more important, inventory can be reduced to make the firm more efficient Trade-off Example 3.2 Nordstrom 49. Components of Inventory Decisions Cycle inventory Average amount of inventory used to satisfy demand between shipments Depends on lot size Safety inventory inventory held in case demand exceeds expectations costs of carrying too much inventory versus cost of losing sales Seasonal inventory inventory built up to counter predictable variability in demand cost of carrying additional inventory versus cost of flexible production Overall trade-off: Responsiveness versus efficiency more inventory: greater responsiveness but greater cost less inventory: lower cost but lower responsiveness 50. Transportation Role in the supply chain Role in the competitive strategy Components of transportation decisions 51. Transportation: Role in the Supply Chain Moves the product between stages in the supply chain Impact on responsiveness and efficiency Faster transportation allows greater responsiveness but lower efficiency Also affects inventory and facilities 52. Transportation: Role in the Competitive Strategy If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it Can also use

slower transportation modes for customers whose priority is price (cost) Can also consider both inventory and transportation to find the right balance Example 3.3: Laura Ashley 53. Components of Transportation Decisions Mode of transportation: air, truck, rail, ship, pipeline, electronic transportation vary in cost, speed, size of shipment, flexibility Route and network selection route: path along which a product is shipped network: collection of locations and routes In-house or outsource Overall trade-off: Responsiveness versus efficiency 54. Information Role in the supply chain Role in the competitive strategy Components of information decisions 55. Information: Role in the Supply Chain The connection between the various stages in the supply chain allows coordination between stages Crucial to daily operation of each stage in a supply chain e.g., production scheduling, inventory levels 56. Information: Role in the Competitive Strategy Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) Information technology What information is most valuable? Example 3.4: Andersen Windows Example 3.5: Dell 57. Components of Information Decisions Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain) Coordination and information sharing Forecasting and aggregate planning Enabling technologies EDI Internet ERP systems Supply Chain Management software Overall trade-off: Responsiveness versus efficiency 58. Considerations for Supply Chain Drivers Driver Efficiency Responsiveness Inventory Cost of holding Availability Transportation Consolidation Speed Facilities Consolidation / Proximity / Dedicated Flexibility Information What information is best suited for each objective

Order Fulfillment And Forward - Presentation Transcript

1. 2. 3. 4. MD850: E-Service Operations Order Fulfillment and Forward Supply Chain Processes Agenda Background Order Fulfillment in e-Services Supply Chains Supply Chain Components Supply Chain Problems Supply Chain Design Extending SCM Concepts to E-Services Supply Chain Modeling & Evaluation Supply Chain Technology SCM Perspective on Li & Fung Case Background Competition is changing Old: Firm vs. Firm New: Supply Chain vs. Supply Chain

Background Supply Chain Concept of a supply chain is relatively new Prior to 1996, very few management or engineering schools had courses on supply chain management (SCM) Previous stumbling blocks that impeded SC integration

 5. 6. 7. 8. 9.

high transaction costs between partners poor information availability challenges of managing complex interfaces between functional organizations

Background Scope of Supply Chain Topics Customer Facing & Internal Customer Value and SCM Web-centric product design Forecasting and inventory management in B2C Order fulfillment and returns management in B2C

Background Scope of Supply Chain Topics Supplier Facing Coordinated product design and supply chain design Integration of supply chain planning and procurement Logistics network configuration Order fulfillment and returns management in B2B Distribution strategies Strategic alliances Models for B2B exchanges Auctions & analysis of auction properties

Background Scope of Supply Chain Topics IT Related Information technology for SCM Decision Support Systems (DSS) for SCM Web services: frameworks and technologies Microsofts .NET technology Suns J2EE technology Open Source technologies

Order Fulfillment in e-Services Order Fulfillment in e-Services Goals of customer care applications are simple What do online shoppers want? (BCG) Free delivery 95% Free returns if I am unhappy with product 91% Guaranteed delivery time 75% Quicker delivery 69% Site has a store located near me 46%

Proper fulfillment is whatever serves the customer best while preserving adequate profit margins to continue in business at a high level of customer satisfaction

10. Order Fulfillment in e-Services Designing and implementing customer care applications can be another matter Central problems Enterprise information and customer information must be integrated into a unified whole New kinds of customer behavioral information must be captured and processed Customers and employees must share a common knowledge base All organizational functions must have access to a consistent picture of the customer relationship

11. Order Fulfillment in e-Services E-Fulfillment Processes (Bayles, 2001) Notification Process Acknowledgement and confirmation Instantaneous after purchase Information fulfillment of digital service-product attributes Low cost delivery of information Instant gratification for customer

Picking and Packing Delivery Reconciliation/settlement of credit card payment request Post-delivery activities that ensure customer satisfaction Returns Exchanges

12. Order Fulfillment in e-Services Fulfillment Recommendations ( e-Service , Chap. 8) Build an order confirmation system into your service process to ease customer worries Grant customers online access to production order process and shipping data Build (or outsource) warehouse, fulfillment, and product delivery chains that create as much customer contentment on the back end of your service process as on the front end Focus on fast, efficient fulfillment Shipping charges Probably dont want to make them free Perhaps free for Large purchase size above some dollar amount Loyal, high-value customers In-store pickup

13. Order Fulfillment in e-Services Fulfillment Recommendations ( e-Service , Chap. 8) Integrate online bill payment into the fulfillment process Return policies make the return process as easy as the process for buying Synchronize returns between digital and physical storefronts

Supply on-the-spot return authorization numbers Be careful with using purchase information for permission marketing Where possible, employ online post-sale self-help Use post-transaction web surveys to gather customer feedback and continually improve service performance

14. Order Fulfillment in e-Services Fulfillment Tasks for e-Businesses GOAL: Achieve total end-to-end visibility throughout the supply chain Must deal with international pricing/taxation and shipping issues Pricing customized to location of customer Shipping agents to deal with tax issues Local fulfillment center Provide online shipping tools Link web site to package carriers host systems FedEx, UPS online tracking tools with APIs USPS eventually will have tracking tools Integrate shipping, tracking and distribution systems with ERP systems FedEx, UPS systems with APIs for doing so

15. Order Fulfillment in e-Services Fulfillment Outsourcing Potential benefits Speed to market Deploy e-Service quickly No capital investment in fulfillment Level of service provided by outsourcer may be better than a start-ups fulfillment service Scalability Higher when using an large fulfillment service Focus On business competencies, not on shipping Lower costs No need to hire shipping staff Focus on the customer Capitalize on efficiencies

16. Supply Chains 17. Supply Chains What is a Supply Chain? Porters Value Chain Firm Infrastructure Human Resources Management Technology Development Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Profit Margin 18. Supply Chains What is a Supply Chain? Value Chain of Supplier Value Chain of Buyer 19. Supply Chains What is a Supply Chain? Value Chain of Buyer Buyers Virtual Value Chain Value Chain of Supplier Suppliers Virtual Value Chain Profit Margin Profit Margin Profit Margin Profit Margin Information Flow Information Flow

20. Supply Chain Components 21. Supply Chain Components Components of a Supply Chain? Value Chain of Buyer Buyers Virtual Value Chain Value Chain of Supplier Suppliers Virtual Value Chain Digital Content Networks Digital Content Networks Networks of Physical Objects Networks of Service Providers Networks of Physical Objects Networks of Service Providers 22. Supply Chain Components Components of a Supply Chain? Supply chain is a network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer. (Christopher, 1998) Supply chain components Two or more legally separated organizations Material, information, and financial flows Firms producing objects Logistics service providers Ultimate customer

23. Supply Chain Problems 24. Supply Chain Problems Supply Chain Problems Inventory Work of the devil Holding costs Risk of obsolescense Quality problems hidden The Bullwhip Effect

25. Retailer Distributor Wholesaler Manufacturer The Bullwhip Effect Supply Chain Problems The Bullwhip Effect A Small Demand Shift Leads To Huge Variation in Orders and Inventories Huge Variation in On-Hand Inventory and Manufacturing 26. Supply Chain Problems Historical Inventory Management Inventories Independent demand Multiple Period Demands Assume demand pattern. Forecast when you will stock out. At the appropriate time, order some order quantity (or up to some quantity), so that with the amount you receive at a future date -- plus the buffer inventory (safety stock) -- you will have a small probability of stocking out Single Period Demand -- paperboy problem; fashion goods Order to balance costs of overage against costs of underage -- giving maximum profit A/B/C -- some inventories more important or costly than others Monitor costly inventories closely Dont monitor cheap inventories, just hold lots of buffer stock

Dependent demands MRP/MRP II ERP/Extended ERP

27. Supply Chain Problems Drawbacks of Inventory Methods

Inventories Independent demand Multiple Period Demands, Single Period Demand, A/B/C Paper orders Misplaced products Inaccurate inventories Human errors Cycle Counting -- strategies to count everything in warehouse (e.g., 1/N of warehouse at a time, over N periods); facilitates balancing the objectives of different inventory methods Dependent demands MRP/MRP II/ERP/Extended ERP Stacks of paper production schedules Paper order releases Change reports -- to previous schedules System nervousness -- when allowing updating of schedules

28. Supply Chain Problems What The Experts Now Suggest Rocket Science Retailing (Fisher et al., HBR, July/Aug 2000) Retailer objective: right product, right place, right time, right price Historically, the opposite has happened most inventory planning is for long life-cycle products online and offline stockouts increasing markdowns supply chain lead times often are so long, that forecasts of demand only confirm that the product will tank, and nothing can be done about it Rocket Science Retailing create a high-tech forecasting system supported by a flexible supply chain

29. Supply Chain Problems What The Experts Now Suggest Rocket Science Retailing (Fisher et al., HBR, July/Aug 2000) Forecasting Update forecasts based on early sales data Track and predict forecasting accuracy Get product testing right -- make it scientific Use a variety of forecasting approaches Supply Chain Speed Work with supply chain partners Reserve production capacity; hold generic raw-material inventories that can later be developed into finished product Troubleshoot production problems, design for easy manufacturability Make decision making flexible; empower employees

30. Supply Chain Problems What The Experts Now Suggest Rocket Science Retailing (Fisher et al., HBR, July/Aug 2000)

Inventories Need to track stockouts UNFORTUNATELY, no commercial software available to track stockouts Accurate, Available Data Most retailing data inaccurate and inaccessible to employees Store-level sales data usually incorrect Why: (1) clerk scanning one item multiple times to ring up multiple slightly different items, (2) like-for-like returns, without scanning in return and exchange Inventory counts usually off warehouse ships wrong item, supplier shorts, case-pack dimensions change without changing in inventory system Most companies dont keep enough data kills their ability to forecast time-series of demand accurately aggregation of data kills knowledge at SKU level lack of SKU kills ability to customize supply chain and shipments

31. Supply Chain Problems What The Experts Now Suggest Manufacturing for Lean Retailing (Abernathy et al., HBR, Nov/Dec 2000) Historical large order at beginning of period manufacturers treated SKUs within a product line all the same Lean Retailing Manufacturers must replenish retailers stocks on an ongoing basis ; tend to accomplish by holding extra inventory; get stuck with inventory if styles change ; risk of getting stuck increases with product proliferation Solution Need to differentiate between SKUs -- think of product lines as portfolios of distinct goods Need to rethink sourcing strategies, reallocating manufacturing across off-shore sources (high volume, low-variance demands) close-to-market sources (low volume, high-variance demand)

32. Supply Chain Problems IT to the Rescue The Wearable Warehouse, Business 2.0 VISION Turn the supply chain into the warehouse reliable inventory numbers better order fulfillment security: reducing in-transit theft (in turn, improving on-hand data) accurate tracking of goods

Humans (networked objects) provide services to the system Essentially automated Cycle Counting Wireless IS implements strategy for what item should be counted when

Distributed, heterogeneous objects [inventory containers] report what they contain and where they are , to update system information

33. Supply Chain Design 34. Supply Chain Design Research in Supply Chain Design and Management Stretches back to 1940s/1950s Prior to 1990s, most SCM research was for simple material flows and transportation Most complex: optimal policy for a single-product, single-stage, capacitated SC with a stationary demand process Simple multi-stage and/or multi-product supply chain models were computationally intractable First mathematical modeling papers with computational results were published in 1991 Start of modern supply chain management research

35. Supply Chain Design Conceptual Approaches Research in Supply Chain Design and Management Conceptual SCM Research Porters Value Chain Model (1985) Fines Clockspeed (1998) Approach

36. Supply Chains Conceptual Frameworks Clockspeed (Charles Fine, MIT) Biologists study fruit flies because their fast rates of evolution permit rapid learning that can then be applied to understanding the genetics of slower-clockspeed species -- like humans. Managers should study industrial equivalents of fruit flies Fast clockspeed industries Internet services personal computers multimedia entertainment

37. Supply Chains Conceptual Frameworks Clockspeed (Charles Fine, MIT) The ultimate core competency of an organization is supply chain design, which I define as choosing what capabilities along the value chain to invest in and develop internally, and which to allocate for development by suppliers. Fast-clockspeed supply chain characteristics rapidly evolving world designing and redesigning firms chain of capabilities objective is a series of competitive advantages -- often quite temporary

38. Supply Chains Conceptual Frameworks Clockspeed (Charles Fine, MIT) Computer-industry motivated principles about the design and evolution of supply chains Beware of Intel Inside IBM employed modular supply chain design (Intel, MS DOS) power in the chain, and financial rewards, had shifted upstream

since most modern products are largely computer components and electronics, they potentially fall prey to same forces Supply Chain Double Helix oscillation of supply chain structure Three-Dimensional Concurrent Engineering concurrent design of capabilities (product, process, supply chain)

39. Supply Chains Conceptual Frameworks Integral Product, Vertical Industry Modular Product, Horizontal Industry Niche Competitors High-Dimensional Complexity Organizational Rigities Pressure to Dis-Integrate Technical Advances Supplier Market Power Proprietary System Profitability Pressure to Integrate Supply Chain Double Helix (Charles Fine, Clockspeed , 1998) 40. Supply Chains Conceptual Frameworks 3-D C. E.: Supply Chain Overlapping Responsibilities PRODUCT PROCESS SUPPLY CHAIN Performance Specifications Technology, & Process Planning Time, Space, & Availability Recipe, Unit Process Details, Strategy Manufacturing System, Make/Buy Product Architecture, & Make/Buy (Charles Fine, Clockspeed , 1998) 41. Supply Chains Conceptual Frameworks 3-D C. E.: Supply Chain Concurrency Model (Charles Fine, Clockspeed , 1998) PRODUCT PROCESS SUPPLY CHAIN Design Detailed Performance Specifics and Functions Architecture Modular vs. Integral Unit Processes Technology & Equipment Manufact. System Functional Cellular Supply Chain Architect. Set of Organizations and Allocation of Tasks Logistics & Coord. System Autonomous vs. Integrated Technology Architecture Focus 42. Supply Chains Conceptual Frameworks Clockspeed (Charles Fine, MIT) Prediction: supply chain design as a strategic precursor to supply chain management will only increase in the decade to come as industry clockspeeds continue to accelerate, and the half-lives of many capabilities in our existing supply chains need replacement and/or upgrading

43. Extending Supply Chain Concepts to e-Service Operations 44. Supply Chains Conceptual Frameworks Service-Product Process Control Static Dynamic Niche Need Broad Need Static; Mechanization Dynamic; Intelligence Unique Items Common Items (Heim and Sinha, 2001) (Jaikumar, 1994) ? 45. Supply Chains Conceptual Frameworks (Schonberger, World Class Manufacturing: The Next Decade , 1996) Past: Many suppliers/customer flows Flow volumes small and sporadic Coming: Stable, selective supply chain relationships Few suppliers/customer flows (Reliable suppliers, Loyal customers) Large, steady flow volumes Geographic proximity Evolution 46. Supply Chains Conceptual Frameworks Supply Chain Control Static Dynamic Unique Items (MD850, 2001) Common Items Covisint Li & Fung Relationship Relationship + Speedy e-Service Communication Relationship + Speedy eService Communication + Network Design, Control & Management 47. Supply Chains Conceptual Frameworks Business 2.0, Kalakota & Robinson, 2001 First Generation: Communities, Storefronts, and RFP/RFQ Facilitators Second Generation: Virtual Distributors and Auction Hubs Third Generation: Collaborative Trading Hubs end-to-end management of their supply chains Industry Consortiums: Joint-Venture Procurement Hubs Covisint -- automotives Orbitz.com -- airlines

48. Supply Chains Conceptual Frameworks Service-Product Process Control Static Dynamic Niche Need Broad Need Static; Mechanization Dynamic; Intelligence Unique Items Common Items Supply Chain Control Static Dynamic Unique Items Common Items 49. Goods Services Digital Content e-Service 4 9 = 262,144 possible design positions 50. Guiding Principles 51. Supply Chain Some Guiding Principles Align ( a la 3-D Concurrent Engineering) Product Process Supply Chain Reasonable Question: Yes, but how?

52. Conceptual Supply Chain Modeling and Evaluation 53. Supply Chains Supply Chain Structures e-Fulfillment Step #1: Model Supply Chain Process Example: Furniture Industry

Manufacturing Ship to Retail Inventory at Retail Repair Damage Local Shipping Assembly at Home Traditional Furniture Supply Chain 54. Supply Chains Supply Chain Structures Manufacturing Long Distance Shipping Repair Damage Local Shipping Assembly at Home Pure e-Tailer Furniture Supply Chain Manufacturing Ship to Warehouse Inventory at Warehouse Repair Damage Local Shipping Assembly in Home Pure e-Tailers with Warehouses Furniture Supply Chain 55. Supply Chains Supply Chain Structures Manufacturing Long Distance Shipping Repair Damage Local Shipping Assembly at Home Manufacturer Direct Furniture Supply Chain Retailers On The Web Furniture Supply Chain Manufacturing Ship to Retail Inventory at Retail Repair Damage Local Shipping Assembly at Home 56. Supply Chains Supply Chain Evaluation e-Fulfillment Step #2: Back to the Basics (Cost, Quality, Flexibility, Delivery) Analyze supply chain characteristics -- basic operations strategies -- based on knowledge of product and process characteristics in that industry 3-D Concurrent Engineering Determine if there exists a dominant strategic position compared to existing position(s) of incumbents (C dom , Q dom , F dom , D dom ) better than (C x , Q x , F x , D x ) for all design positions X

57. Supply Chains Supply Chain Evaluation e-Fulfillment Furniture Industry

Traditional Retailer Pure e-Tailer e-Tailer w/ Warehouse Retailer on the Web Relative Cost of Returns Cost of Inventory Cost of Repair Cost of Shipping Cost of Order Capture Cost of Quality L M L L H L H L H H M H H M M M M M L M L L H M Possibly Better Possibly Worse 58. Supply Chain Management Technology 59. Background Supply Chain Management Technology Procurement Production Distribution Sales Strategic Network Planning Master Planning Material Requirements Planning Production Planning Scheduling Distribution Planning Transport Planning Demand Planning Demand Fulfillment & Available-to-Promise long-term mid-term short-term Advanced Planning System (APS) Software Modules

60. Background Supply Chain Management Technology Procurement Production Distribution Sales Strategic Network Planning Master Planning Material Requirements Planning Production Planning Scheduling Distribution Planning Transport Planning Demand Planning Demand Fulfillment & ATP Forecast Forecast Configuration Simulation Results Purchasing Quantities Capacity Booking Stock Levels Capacity Booking Distn Quant./Alloc. Due Dates Due Dates Supply Lot-Sizes Lot Sizes Tranportation Quantity/Modes Current Orders Coordination and Data Flows of APS Modules 61. Supply Chain e-Services Technology SCM Technologies J2EE Technologies SAP re-tooled all of its applications to support the J2EE protocol, in addition to its own ABAP technology standards Many examples of using Java for enhanced SCM .NET Technology Doesnt support multiple platforms, which will be difficult for integration of supply chain Supply chain vendors have been trying to convince Microsoft to support J2EE, so they could easily integrate enterprise SCM to the desktop, but Microsoft has refused

62. Supply Chain e-Services Technology SCM Technologies OpenAdaptor.org open source supply chain integration system, made open-source on 1/30/2001 originally developed for financial services developed by investment bank Dresdner Kleinwort Wasserstein (DrKW) already used in global integration 40 projects by DrKW allows the rapid, simple and often code-free integration of any system to any other system, enabling the complete supply chain, plus internal systems, to be integrated while allowing access to the web

63. SCM Perspective on Li & Fung Case Study 64. SCM Perspective Li & Fung Sourcing Characteristics Seasons Past: 2-4 Now: 6-7 fast clockspeed? Customers Past: potentially many, but very slow deals, as translation was the service Now: 350 big customers, potentially 22,800 SMEs might be added Suppliers Past: relatively few Now: 7500 suppliers, 26 countries more than 1 million workers engaged on their behalf (assuming 200/plant)

65. SCM Perspective Li & Fung Supply Chain Control Static Dynamic Unique Items Common Items 1980s: Delivering Manufacturing Programs Present Li & Fung Margin = 6-8% softgoods, 10-30% hardgoods, function of sourcing complexity Breaking up Value Chain Dispersed Manufacturing Rational Kitting of Parts 1910 Interpreter Margin=15% Broker Margin=10, 5, then 3% 1970s: Regional Sourcing Agent

66. SCM Perspective Li & Fung Design Engineering Production Planning Softgoods Textiles USA Textiles ROW Hardgoods Toys Accessories Festive Items Furnishings Handicrafts Home Travel Goods Sporting Goods Quality Control Testing Logistics Front End Back End Raw Material and Component Sourcing Managing Production The Process The Goods and Related Services 67. SCM Perspective Li & Fung Li & Fung Client Design Materials Sourcing Factories Quality Control Logistics Sense Respond Communications 68. SCM Perspective Li & Fung Li & Fung Client Design Materials Sourcing Factories Quality Control Logistics Operational Support System 69. SCM Perspective Li & Fung Li & Fung Client Design Materials Sourcing Factories Quality Control Logistics Cost: $1 Retail Price $4 Margin to Share = $3 70. SCM Perspective Covisint Covisint Ford, GM, et al. Design Materials Sourcing Tier 1 Only Factories Tier 1 Only Quality Control Logistics Tier 1 Only Retail Price $19,000 Margin (Ford, GM) = $3,000 Cost: $16,000? Transaction Fee % 71. Summary Conceptual supply chain frameworks Fine: Two supply chain periods within an industry Fine: 3-D engineering of product, process, supply-chain Guiding principle: link up service-product, service-process, service supply chain Very complex task 3 product components, 3 process components, 3 supply chain types all must work together Many different supply chain models

72. Summary Evaluation can initially (subjectively) be done based on standard operations strategies/metrics

Supply Chain Management.ppt - Presentation Transcript

1. Supply Chain Management - Introduction Say we get an order from a European retailer to produce 10,000 garments. For this customer we might decide to buy yarn from a Korean producer but have it woven and dyed in Taiwan. So we pick the yarn and ship it to Taiwan. The Japanese have the best zippers so we go to YKK, a big Japanese zipper manufacturer, and we order the right zippers from their Chinese plants. the best place to make the garments is Thailand. So we ship everything there. the customer needs quick delivery, we may divide the order across five factories in Thailand. Effectively, we are customizing the value chain to best meet the customers needs. (Interview of Victor Fung of Li & Fung in HBR, Sept-Oct 1998.) Supply Chain Management - Introduction A value chain is another name for a supply chain . A supply chain is a sequence of organizations - their facilities, functions and activities - that are involved in producing and delivering a product or service. Li & Fung is Hong Kongs largest export trading company. It has also been innovative in supply chain management. In the interview example, it can be seen that Li & Fung has created a supply chain for the purpose of meeting a customers needs. In general, this case is more the exception than the rule, but serves to illustrate some of the pieces of a supply chain. Supply Chain Management - Introduction In a supply chain, virtually all of the members serve as both customers as well as suppliers. In the Li & Fung

2.

3.

 4. 5. 6.

example, the Korean yarn producer and the Japanese zipper producer are probably only suppliers and the customers customers (folks like you and me) are probably only customers. Every other organization in the supply chain is both a customer and a supplier. See the figure on slide five (green - supplier, yellow - customer, orange - both). Supply Chain Management - Introduction Supplier Supplier Supplier Storage } Mfg. Dist. Retailer Customer Storage Supplier Supplier Storage } Service Customer Supply Chain Management - Introduction Yarn Zippers Factory 1 Factory 2 Factory 3 Factory 4 Factory 5 The Customer (Retailer) Yarn Dying & Weaving Supply Chain Management - Introduction Supply chain management deals with linking the organizations within the supply chain in order to meet demand across the chain as efficiently as possible. In our example, Li & Fung is creating and managing the links. In non-brokered supply chains, one or more of the chains organizations can provide the management function. Why is supply chain management so important? To gain efficiencies from procurement, distribution and logistics To make outsourcing more efficient To reduce transportation costs of inventories To meet competitive pressures from shorter development times, more new products, and demand for more customization

7.

Supply Chain Management - Introduction To meet the challenge of globalization and longer supply chains To meet the new challenges from e-commerce To manage the complexities of supply chains To manage the inventories needed across the supply chain Why is supply chain management difficult? Different organizations in the supply chain may have different, conflicting objectives Manufacturers: long run production, high quality, high productivity, low production cost Distributors: low inventory, reduced transportation costs, quick replenishment capability Customers: shorter order lead time, high in-stock inventory, large variety of products, low prices Supply chains are dynamic - they evolve and change over time

8.

Supply Chain Management - Introduction Supply chains and vertical integration For any organization vertical integration involves either taking on more of the supplier activities (backward) and/or taking on more of the distribution activities (forward) An example of backward vertical integration would be a peanut butter manufacturer that decides to start growing peanuts rather than buying peanuts from a supplier An example of forward vertical integration would be a peanut butter manufacturer that decides to start marketing their peanut better directly to grocery stores In supply chains, some of the supplying and some of the distribution might be performed by the manufacturer

9.

Supply Chain Management - Introduction

The significance of vertical integration in the supply chain is that the activities that are performed by the manufacturer are typically more easily managed than those which are performed by other organizations Therefore, the degree of vertical integration can have an impact on the structure and relationships between members of a supply chain

10. Supply Chain Management - Introduction Strategic, tactical and operating issues Strategic - long term and dealing with supply chain design Determining the number, location and capacity of facilities Make or buy decisions Forming strategic alliances Tactical - intermediate term Determining inventory levels Quality-related decisions Logistics decisions Operating - near term Production planning and control decisions Goods and service delivery scheduling Some make or buy decisions

11. Supply Chain Management - Introduction Key issues in supply chain management include Distribution network configuration How many warehouses do we need? Where should these warehouses be located? What should the production levels be at each of our plants? What should the transportation flows be between plants and warehouses? Inventory control Why are we holding inventory? Uncertainty in customer demand? Uncertainty in the supply process? Some other reason? If the problem is uncertainty, how can we reduce it? How good is our forecasting method?

12. Supply Chain Management - Introduction Distribution strategies Direct shipping to customers? Classical distribution in which inventory is held in warehouses and then shipped as needed? Cross-docking in which transshipment points are used to take stock from suppliers deliveries and immediately distribute to point of usage? Supply chain integration and strategic partnering Should information be shared with supply chain partners? What information should be shared? With what partners should information be shared? What are the benefits to be gained?

13. Supply Chain Management - Introduction Product design Should products be redesigned to reduce logistics costs? Should products be redesigned to reduce lead times? Would delayed differentiation be helpful? Information technology and decision-support systems What data should be shared (transferred) How should the data be analyzed and used? What infrastructure is needed between supply chain members? Should e-commerce play a role? Customer value How is customer value created by the supply chain? What determines customer value? How do we measure it? How is information technology used to enhance customer value in the supply chain?

14. Supply Chain Management - Introduction How can you assess how well your supply chain is performing? The SCOR model - Supply Chain Operations Reference Model - developed by the Supply Chain Council ( http://www.supply-chain.org/ ) can be used to assess performance SCOR model metrics include: On-time delivery performance Lead time for order fulfillment Fill rate - proportion of demand met from on-hand inventory Supply chain management cost Warranty cost as a percentage of revenue Total inventory days of supply Net asset turns

15. Supply Chain Management - Introduction Creating an effective supply chain Develop strategic objectives and tactics Integrate and coordinate activities in the internal portion of the supply chain Coordinate activities with suppliers and customers Coordinate planning and execution across the supply chain Consider forming strategic partnerships

16. SCM - Inventory Management Issues Manufacturers would like to produce in large lot sizes because it is more cost effective to do so. The problem, however, is that producing in large lots does not allow for flexibility in terms of product mix. Retailers find benefits in ordering large lots such as quantity discounts and more than enough safety stock. The downside is that ordering/producing large lots can result in large inventories of products that are currently not in demand while being out of stock for items that are in demand.

17. SCM - Inventory Management Issues

Ordering/producing in large lots can also increase the safety stock of suppliers and its corresponding carrying cost. It can also create whats called the bullwhip effect . The bullwhip effect is the phenomenon of orders and inventories getting progressively larger (more variable) moving backwards through the supply chain. This is illustrated graphically on the next slide.

18. SCM - Inventory Management Issues Order Size Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998 Customer Demand Retailer Orders Distributor Orders Production Plan 19. SCM - Inventory Management Issues Some of the causes of variability that leads to the bullwhip effect includes: Demand forecasting Many firms use the min-max inventory policy . This means that when the inventory level falls to the reorder point ( min ) an order is placed to bring the level back to the max , or the orderup-to-level . As more data are observed, estimates of the mean and standard deviation of customer demand are updated. This leads to changes in the safety stock and order-up-to level, and hence, the order quantity. This leads to variability. Lead time As lead time increases, safety stocks are increased, and order quantities are increased. More variability.

20. SCM - Inventory Management Issues Batch ordering. Many firms use batch ordering such as with a min-max inventory policy. Their suppliers then see a large order followed by periods of no orders followed by another large order. This pattern is repeated such that suppliers see a highly variable pattern of orders. Price fluctuation. If prices to retailers fluctuate, then they may try to stock up when prices are lower, again leading to variability. Inflated orders. When retailers expect that a product will be in short supply, they will tend to inflate orders to insure that they will have ample supply to meet customer demand. When the shortage period comes to an end, the retailer goes back to the smaller orders, thus causing more variability.

21. SCM - Inventory Management Issues How then can we cope with the bullwhip effect ? Centralizing demand information occurs when customer demand information is available to all members of the supply chain. This information can be used to better predict what products and volumes are needed and when they are needed such that manufacturers can better plan for production. However, even though centralizing demand information can reduce the bullwhip effect , it will not eliminate it. Therefore, other methods are needed to cope with the bullwhip effect .

22. SCM - Inventory Management Issues Methods for coping with the bullwhip effect include: Reducing uncertainty. This can be accomplished by centralizing demand information. Reducing variability. This can be accomplished by using a technique made popular by WalMart and then Home Depot called everyday low pricing (EDLP). EDLP eliminates promotions as well as the shifts in demand that accompany them. Reducing lead time. Order times can be reduced by using EDI (electronic data interchange). Strategic partnerships. The use of strategic partnerships can change how information is shared and how inventory is managed within the supply chain. These will be discussed later.

23. SCM - Inventory Management Issues Other helpful techniques for improving inventory management include: Cross-docking. This involves unloading goods arriving from a supplier and immediately loading these goods onto outbound trucks bound for various retailer locations. This eliminates storage at the retailers inbound warehouse, cuts the lead time, and has been used very successfully by WalMart and Xerox among others.

Delayed differentiation. This involves adding differentiating features to standard products late in the process. For example, Bennetton decided to make all of their wool sweaters in undyed yarn and then dye the sweaters when they had more accurate demand data. Another term for delayed differentiation is postponement .

24. SCM - Inventory Management Issues Direct shipping. This allows a firm to ship directly to customers rather than through retailers. This approach eliminates steps in the supply chain and reduces lead time. Reducing one or more steps in the supply chain is known as disintermediation . Companies such as Dell use this approach.

25. SCM - Strategic Partnering Strategic partnering (SP) is when two or more firms that have complementary products or services join such that each may realize a strategic benefit. Types of strategic partnering include: Quick response, Continuous replenishment, Advanced continuous replenishment, and Vendor managed inventory (VMI)

26. SCM - Strategic Partnering In quick response SP vendors receive point-of-sales (POS) data from retailers. The data are then used to synchronize production and inventory management at the supplier. Although the retailer still prepares and submits individual orders to the supplier, the POS data is used to improve forecasting and scheduling. In continuous replenishment SP vendors again receive POS data and use them to prepare shipments at previously agreed to intervals as well as to maintain agreed to inventory levels. This approach is used by WalMart .

27. SCM - Strategic Partnering In advanced continuous replenishment SP suppliers will gradually decrease inventory levels at the retailers location as long as they can still meet service levels. The result is that inventory level are continuously improved. Kmart uses this approach. In vendor managed inventory SP the supplier will decide on the appropriate inventory levels for each of the products it supplies and the appropriate inventory policies to maintain these levels. One of the best examples of this is the SP between WalMart and Proctor & Gamble . (See summary on next slide.)

28. SCM - Strategic Partnering Source: Simchi-Levi, Kaminsky & Simchi-Levi, Irwin McGraw Hill, 2000 29. SCM - Strategic Partnering Requirements for an effective SP include: Advanced information systems, Top management commitment, and Mutual trust Steps in SP implementation include: Contractual negotiations Ownership Credit terms Ordering decisions Performance measures

30. SCM - Strategic Partnering Develop or integrate information systems Develop effective forecasting techniques

Develop a tactical decision support tool to assist in coordinating inventory management and transportation policies Advantages of SP include: Fully utilize system knowledge Decrease required inventory levels Improve service levels Decrease work duplication Improve forecasts

31. SCM - Strategic Partnering Disadvantages of SP include: Expensive technology is required Must develop supplier/retailer trust Supplier responsibility increases Expenses at the supplier also often increase Third party logistics (3PL) involves the use of an outside company to perform part or all of a firms materials management and product distribution function. Examples of companies that provide 3PL include Ryder Dedicated Logistics and J.B. Hunt . Examples of companies that use 3PL include 3M , Dow Chemical , Kodak and Sears .

TheSupplychainniche + Follow 540 views, 0 favs, 1 embed

Related

E Service Operations 882 views

Order Fulfillment And Forward 1612 views

Order Fulfillment And Forward 753 views

ch11.ppt 2096 views

Overheads 272 views

Supply Chain and 303 views

16-1 Supply Chain Management 481 views

More by user

Supply Chain Management 460 views

Optimization of Stock Management for a Supply Chain Networ 680 views

Microsoft Word - Eurocham_Flyer 329 views

Causes of the Bullwhip Effect - A Study based on the Beer 1089 views

SUPPLY CHAIN MANAGER User s Manual, Feb 2006326 views

2003: INITIALIZING A DISTRIBUTION SUPPLY CHAIN SIMULATION 405 views

Production and distribution policy in a two-stage stochast 340 views View all presentations from this user

About this presentation

USAGE RIGHTS

All Rights Reserved

STATS

0 Favorites 0 Comments 42 Downloads 537 Views on SlideShare 3 Views on Embeds 540 Total Views
EMBED VIEWS

3 views on http://www.slideshare.net
ACCESSIBILITY

View text version

ADDITIONAL DETAILS

Uploaded via SlideShare Uploaded as Microsoft PowerPoint Flagged as inappropriate Flag as inappropriate
Top of Form

Flag as inappropriate Select your reason for flagging this presentation as inappropriate. If needed, use the feedback form to let us know more details.
None Flag

Cancel
Bottom of Form

File a copyright complaint

Tags

green supply chain management green supply chain green supply chain ppt

Follow SlideShare

Twitter Facebook SlideShare Blog 0 tweets 0 shares WordPress Blogger More

16-1 Supply Chain Management - Presentation Transcript

1. 2. CHAPTER 16 Supply Chain Management McGraw-Hill/Irwin Operations Management, Eighth Edition, by William J. Stevenson Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Supply Chain Management Supply Chain : the sequence of organizations - their facilities, functions, and activities - that are involved in producing and delivering a product or service. Sometimes referred to as value chains 3. Warehouses Factories Processing centers Distribution centers Retail outlets Offices Facilities 4. 5. 6. 7. 8. Functions and Activities Forecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service Typical Supply Chains Purchasing Receiving Storage Operations Storage Production Distribution Typical Supply Chain for a Manufacturer Figure 16.1a Supplier Supplier Supplier Storage } Mfg. Storage Dist. Retailer Customer Typical Supply Chain for a Service Figure 16.1b Supplier Supplier } Storage Service Customer

Improve operations Increasing levels of outsourcing Increasing transportation costs Competitive pressures Increasing globalization Increasing importance of e-commerce Complexity of supply chains Manage inventories Need for Supply Chain Management

9.

Bullwhip Effect Tier 2 Suppliers Tier 1 Suppliers Producer Distributor Retailer Final Customer Figure 16.3 Amount of inventory =

10. Benefits of Supply Chain Management Largest and most profitable retailer in the world Wal-Mart Increased market share from 5% to 29% National Bicycle Doubled profits and increased sales 60% Sport Obermeyer Cut supply costs 75% Hewlett-Packard Doubled inventory turnover rate Campbell Soup Benefit Organization 11. Benefits of Supply Chain Management Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty

12. Elements of Supply Chain Management Table 16.1 Deciding how to best move and store materials Logistics Determining location of facilities Location Monitoring supplier quality, delivery, and relations Suppliers Evaluating suppliers and supporting operations Purchasing Meeting demand while managing inventory costs Inventory Controlling quality, scheduling work Processing Incorporating customer wants, mfg., and time Design Predicting quantity and timing of demand Forecasting Determining what customers want Customers Typical Issues Element 13. Logistics Refers to the movement of materials and information within a facility and to incoming and outgoing shipments of goods and materials in a supply chain

Logistics 14. Logistics Movement within the facility Incoming and outgoing shipments Bar coding EDI Distribution JIT Deliveries 0 214800 232087768 15. Materials Movement Figure 16.4 RECEIVING Storage Work center Work center Work center Storage Work center Storage Shipping 16. Distribution requirements planning (DRP) is a system for inventory management and distribution planning

 17.

Extends the concepts of MRPII Distribution Requirements Planning Management uses DRP to plan and coordinate: Transportation Warehousing Workers Equipment Financial flows

Uses of DRP 18. Electronic Data Interchange 19. 20. 21. 22. Companies can: Have a global presence Improve competitiveness and quality Analyze customer interests Collect detailed information E-Commerce : the use of electronic technology to facilitate business transactions Applications include Internet buying and selling E-mail Order and shipment tracking Electronic data interchange Efficient consumer response (ECR) is a supply chain management initiative specific to the food industry Reflects companies efforts to achieve quick response using EDI and bar codes Increased productivity Reduction of paperwork Lead time and inventory reduction Facilitation of just-in-time systems Electronic transfer of funds Improved control of operations Reduction in clerical labor Increased accuracy Electronic Data Interchange EDI the direct transmission of interorganizational transactions, computer-to-computer, including purchase orders, shipping notices, and debit or credit memos.

Efficient Consumer Response

E-Commerce

 23.

Shorten supply chain response times Realize substantial cost savings Create virtual companies Level the playing field for small companies

Advantages E-Commerce Customer expectations Order quickly -> fast delivery Order fulfillment Order rate often exceeds ability to fulfill it Inventory holding Outsourcing loss of control Internal holding costs

Disadvantages of E-Commerce 24. Successful Supply Chain Trust among trading partners Effective communications Supply chain visibility Event-management capability The ability to detect and respond to unplanned events Performance metrics

25. SCOR Metrics Table 16.4 Total inventory days of supply Cash-to-cash cycle time Net asset turns Assets/utilization Supply chain management costs Warranty cost as a percent of revenue Value added per employee Expenses Supply chain response time Upside production flexibility Flexibility On-time delivery Order fulfillment lead time Fill rate (fraction of demand met from stock) Perfect order fulfillment Reliability Metrics Perspective 26. CPFR C ollaborative P lanning, F orecasting, and R eplenishment Focuses on information sharing among trading partners Forecasts can be frozen and then converted into a shipping plan Eliminates typical order processing

27. CPFR Process Step 1 Front-end agreement Step 2 Joint business plan Steps 3-5 Sales forecast Steps 6-8 Order forecast collaboration Step 9 Order generation/delivery execution

28. CPFR Results Nabisco and Wegmans 50% increase in category sales Wal-mart and Sara Lee 14% reduction in store-level inventory

 29.

32% increase in sales Kimberly-Clark and Kmart Increased category sales that exceeded market growth

Develop strategic objectives and tactics Integrate and coordinate activities in the internal supply chain Coordinate activities with suppliers with customers Coordinate planning and execution across the supply chain Form strategic partnerships Creating an Effective Supply Chain

30. Supply Chain Performance Drivers 32. 33. Lot-size-inventory Bullwhip effect Inventory-transportation costs Cross-docking Lead time-transportation costs Product variety-inventory Delayed differentiation Cost-customer service Disintermediation Barriers to integration of organizations Getting top management on board Dealing with trade-offs Small businesses Variability and uncertainty Long lead times Challenges Quality Cost Flexibility Velocity Customer service

31. Velocity Inventory velocity The rate at which inventory(material) goes through the supply chain Information velocity The rate at which information is communicated in a supply chain

Trade-offs

34. Trade-offs Bullwhip effect Inventories are progressively larger moving backward through the supply chain Cross-docking Goods arriving at a warehouse from a supplier are unloaded from the suppliers truck and loaded onto outbound trucks Avoids warehouse storage

35. Trade-offs Delayed differentiation Production of standard components and subassemblies, which are held until late in the process to add differentiating features Disintermediation Reducing one or more steps in a supply chain by cutting out one or more intermediaries

36. Supply Chain Issues Quality control Production planning and control Inventory policies Purchasing policies Production policies Transportation policies Quality policies Design of the supply chain, partnering Operating Issues Tactical Issues Strategic Issues 37. Supply Chain Benefits and Drawbacks Table 16.5 Less variety Able to match supply and demand Shorter lead times, better forecasts Variability Loss of control Reduced cost, higher quality Outsourcing Cost Quality Less variety Fewer parts Simpler ordering Modular Large number of parts May not be feasible May need absorb functions Quick response Delayed differentiation Disintermediation Long lead times Traffic congestion Increased costs Reduced holding costs Smaller, more frequent deliveries Large inventories Possible Drawbacks Benefits Potential Improvement Problem 38. Purchasing is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service. Purchasing 39. 40. Identifying sources of supply Negotiating contracts Maintaining a database of suppliers Obtaining goods and services Managing supplies Duties of Purchasing 41. Purchasing Interfaces Figure 16.5 Purchasing Legal Accounting Operations Data processing Design Receiving Suppliers 42. Purchasing Cycle Requisition received Supplier selected Order is placed Monitor orders Receive orders Develop and implement purchasing plans for products and services that support operations strategies Goal of Purchasing

Purchasing Legal Accounting Operations Data process- ing Design Receiving Suppliers 43. Value analysis Examination of the function of purchased parts and materials in an effort to reduce cost and/or improve performance

Value Analysis vs. Outsourcing 44. 45. 46. 47. Product or service changes Reputation and financial stability Lead times and on-time delivery Other accounts Factors in Choosing a Supplier (contd) 48. Evaluating Sources of Supply 49. Vendor analysis - evaluating the sources of supply in terms of Price Quality Services Location Inventory policy Flexibility Vendor analysis : Evaluating the sources of supply in terms of price, quality, reputation, and service Quality and quality assurance Flexibility Location Price Factors in Choosing a Supplier Choosing suppliers Evaluating sources of supply Supplier audits Supplier certification Supplier relationships Supplier partnerships Suppliers Centralized purchasing Purchasing is handled by one special department Decentralized purchasing Individual departments or separate locations handle their own purchasing requirements

Centralized vs Decentralized Purchasing

Evaluating Sources of Supply 50. Supplier as a Partner Table 16.9 Nearness is important Widely dispersed Location Relatively high Relatively low Flexibility High May be low Volume of business At the source; vendor certified May be unreliable; buyer inspects Quality High Low Openness High May not be high Reliability Moderately important Major consideration Low price Long-term May be brief Length of relationship One or a few Many Number of suppliers Partner Adversary Aspect 51. Ideas from suppliers could lead to improved competitiveness Reduce cost of making the purchase Reduce transportation costs Reduce production costs Improve product quality Improve product design Reduce time to market Improve customer satisfaction Reduce inventory costs Introduce new products or services

Supplier Partnerships 52. Critical Issues Strategic importance Cost Quality Agility Customer service Competitive advantage Technology management Benefits Risks

53. Critical Issues 54. Additional PowerPoint slides contributed by Geoff Willis, University of Central Oklahoma. CHAPTER 16 55. SCM Performance Measures SCOR (Supply Chain Ops Reference) Model Plan, Source, Make Deliver, Return SCOR addresses Product from suppliers 2 to customers 2 Purchasing function Increased outsourcing Increased conversion to lean production Just-in-time deliveries Globalization

SCOR does not address Sales, Marketing, R&D, Support

56. Level 1 Performance Metrics Reliability delivery performance, fill rate, perfect fulfillment Responsiveness order fill lead time Flexibility SC response time, ops flexibility Cost warranty cost, productivity, CGS, SCM cost

Transforming U.S. Army Logistics: A Strategic "Supply Chain ... - Document Transcript
1. 2. 3. No. 54 SEPTEMBER 2005 Transforming U.S. Army Logistics: A Strategic Supply Chain Approach for Inventory Management Greg H. Parlier, PhD, PE Transforming U.S. Army Logistics: A Strategic Supply Chain Approach for Inventory Management by Greg H. Parlier, PhD, PE The Institute of Land Warfare ASSOCIATION OF THE UNITED STATES ARMY AN AUSA INSTITUTE OF LAND WARFARE PAPER The purpose of the Institute of Land Warfare is to extend the educational work of AUSA by sponsor- ing scholarly publications, to include books, monographs and essays on key defense issues, as well as workshops and symposia. A work selected for publication as a Land Warfare Paper represents research by the author which, in the opinion of the editorial board, will contribute to a better understanding of a particular defense or national security issue. Publication as an Institute of Land Warfare Paper does not indicate that the Association of the United States Army agrees with every- thing in the paper, but does suggest that the Association believes the paper will stimulate the thinking of AUSA members and others concerned about important defense issues. LAND WARFARE PAPER NO. 54, SEPTEMBER 2005 Transforming U.S. Army Logistics: A Strategic Supply Chain Approach for Inventory Management by Greg H. Parlier, PhD, PE Colonel Greg H. Parlier, U.S. Army, retired, is a graduate of the United States Military Academy at West Point, where he was commissioned a Second Lieutenant of Air Defense Artillery in 1974. His operational assignments included nearly eight years with the 82d Airborne Division, and he directly participated in or supported four combat and deployment operations in the Persian Gulf and Panama. In 2002 COL Parlier assumed a critical Army Acquisition Corps position in his fifth Operations Research/Systems Analysis (ORSA) assignment as the Director for Transformation and Principal Assistant Deputy to the Commander for Systems Support, U.S. Army Aviation and Missile Command (AAMCOM). Prior to that he served on the Army Staff in the Office of the Chief of Staff as chief of the new Resource Planning and Analysis Division, which he formed to support the Quadrennial Defense Review in 1996. His organization adapted dynamic strategic planning to the Armys Planning Programming Budgeting Execution System, pioneering the implementation of Dynamic Strategic Resource Planning to develop strategic resource plans and chart a viable, fiscally responsible path to ensure the Army meets the needs of the nation in the early decades of the 21st century. COL Parlier earned a masters of science in ORSA engineering from the Naval Postgraduate School and a masters of arts in National Security Studies from the Walsh School of Foreign Service at Georgetown University. He was a National Defense Fellow in Defense and Arms Control Studies at the Massachusetts Institute of Technology (MIT). He has a PhD in Systems Engineering from the University of Virginia. He is a Distinguished Graduate of the Marine Corps Command and Staff College and a graduate of the Army War College. This paper represents the opinions of the author and should not be taken to represent the views of the Department of the Army, the Department of Defense, the United States gov- ernment, the Institute of Land Warfare, or the Association of the United States Army or its members. Copyright 2005 by The Association of the United States Army All rights reserved. Inquiries regarding this and future Land Warfare Papers should be directed to: Director, ILW Programs, AUSAs Institute of Land Warfare, e-mail sdaugherty@ausa.org or telephone: (toll free) 1-800-336-4570 or (direct dial)703-841-4300, ext. 226. ii Introduction ................................................................................................................... 1 Background ................................................................................................................... 1 Persistent Challenges ............................................................................................... 1 Purpose ................................................................................................................... 2 Scope ...................................................................................................................... 3 Project Overview .......................................................................................................... 3 BackgroundThe Immediate Problem ..................................................................... 3 Conceptual ApproachCurrent Logistics

4. Contents Foreword ...................................................................................................................... v

Structure ................................................. 6 Application of Supply Chain Concepts Analytical Foundation for Improving Logistics System Effectiveness ..................... 8 Multistage ApproachAnalysis of Systemic Challenges ................................................ 12 Readiness Production Stage .................................................................................... 12 Operational Mission and Training Demand Stage ..................................................... 14 Retail Stage ............................................................................................................ 17 Retrograde/Reverse Logistics Stage ........................................................................ 20 Wholesale/Depot Stage .......................................................................................... 22 Acquisition Stage .................................................................................................... 28 Summary ................................................................................................................ 33 Multistage Approach Integration for Efficiency, Resilience and Effectiveness ................ 35 Achieving an Efficient Integrated Multiechelon Inventory Solution ............................. 35 Designing a Resilient, Adaptive Logistics Network ................................................... 39 Improving Logistics Effectiveness: Pushing the Performance Envelope ................. 40 iii 5. An Analytical Architecture to Guide Logistics Transformation .............................. 45 Strategic Management Concepts ................................................................................. 49 Organizational Redesign ........................................................................................ 50 Contributions of (Transactional) Information System Technology and (Analytical) Operations Research ............................................................. 54 Strategic Management Concepts and the Learning Organization .......................... 56 Performance-Based Logistics for EffectsBased Operations .................................... 60 Logistics Transformation and Disruptive Change ...................................................... 63 Conclusion ................................................................................................................... 66 Endnotes ...................................................................................................................... 69 iv Foreword Fully engaged in the Global War on Terrorism, the U.S. Army also is committed to a comprehensive and ambitious transformation. However, without an enabling transformation in logistics there can be no Armywide transformation. This paper introduces and presents a systems approach guiding an ongoing project that addresses many of the significant challenges confronting logistics transformation. The focus is on inventory management policy prescriptions illuminated through the prism of an enterprisewide supply chain analysis emphasizing Army aviation systems. This paper starts with a summary of recent trends for background, then presents a multistage conceptual model of the logistics structure and explains supply chain concepts in terms relevant to logistics transformation. Major sections focus on analysis, synthesis and integration, design and evaluation, and management. The multistage model is used to systematically analyze major organizational components of the supply chain, diagnose structural disorders and prescribe remedies. Next, integration challenges are addressed using cost-benefit perspectives which incorporate supply chain objectives of efficiency, resilience and effectiveness. A section on design and evaluation proposes an analytical architecture consisting of an engine for innovation and four complementary modeling approaches, collectively referred to as dynamic strategic logistics planning to guide logistics transformation. Finally, a thematic approach is used to address key strategic management challenges associated with transformation: organizational design, management information and decision support systems, strategic alignment for a learning organization and workforce considerations including human capital investment needs. The author concludes that as the U.S. Army transitions toward a readiness-focused force, the logistics piece of the force likewise needs to transition. Currently, it does not know how to transition because it has not sufficiently measured the true effectiveness of the inventory and supply system. This paper provides not only an argument for pursing such measures and a resulting transformation, it also provides a framework in which to achieve both. GORDON R. SULLIVAN General, United States Army Retired President September 2005 v vi Transforming U.S. Army Logistics: A Strategic Supply Chain Approach for Inventory Management Introduction Fully engaged in the Global War on Terrorism, the U.S. Army is simultaneously committed to the most ambitious and comprehensive reengineering endeavor in its history. The early intellectual stages of this effort, universally known by the ubiquitous term Army Transformation, clearly revealed a crucial need to transform logistics concepts, organization, technology and culture to improve strategic response, force projection and sustainment. Thus, as the organizations then- top logistician noted, the Armywide transformation of organizations, processes, doctrine and culture demands a corresponding transformation in sustaining those organizations.1 Fundamentally, without a transformation in logistics there can be no Army Transformation. Background Why am I still throwing billions down this black hole called spares? General Eric K. Shinseki, Chief of Staff, U.S. Army2 Persistent Challenges In January 2005 the Government Accountability Office (GAO) identified the Department of Defense (DoD) supply chain management as one of 25 activities across the entire federal government that is at high risk and in need of broad-

6.

7. 8.

based transformation.3 This is not a new observation. Indeed, since 1990 GAO has identified DoD inventory management as high risk because management systems and procedures were ineffective and wasteful [and] the military services each lack strategic approaches and detailed plans that could help mitigate spare part shortages and guide their many initiatives aimed at improving inventory management.4 This clearly has been a long-term persistent problem, especially for the Army, and is directly attributed to an inability to link investment in spare parts inventories to weapon system readiness. Consequently, the Army is not capable of reporting to Congress how additional investments in spare parts would increase readiness. The Army contends that it cannot do so because no direct correlation exists between spare parts investment levels and the resulting impact of those investments on system readiness due to other factors such as maintenance capacity and training requirements.5 1

9. This persistent inability to relate strategic resource investment levels to readiness-oriented outcomes continues to
have serious consequences for the tactical warfighting Army. Recent operational experience further asserts an urgent, compelling and chronic need for improvement. After-action reports (AARs) from Operations Enduring Freedom (OEF) and Iraqi Freedom (OIF) indicated the hierarchical stovepipe supply system was too slow and inflexible to adequately support operations. Demand forecasts were determined by an inflexible and outdated requisition process that relied upon World War II-era wartime and even current peacetime consumption rates. One Army AAR stated that OIF success stemmed more from luck than design.6 Michael Wynne, then Principal Deputy Under Secretary of Defense responsible for logistics policy, stated, Whether push or pull, our current logistics are reactive. . . . [We have] an industrial age vendor struggling to satisfy an information age customer. Reactive logistics the old logisticswill never be able to keep up with warfare as we know it.7 The Armys chief logistician acknowledged we werent as effective as we could be, while GAO estimated that at least $1.2 billion worth of supplies were lost during the deployment and follow-on operations.8 The Army, through its new Single Army Logistics Enterprise (SALE) project, is also investing heavily in an effort to fully capitalize upon the enterprisewide promise offered by information technology (IT). The scope of this enterprise resource planning (ERP) effort is believed to be the largest and most complex undertaken so far. Although enormous sums have been invested by the corporate world in IT-based enterprise resource planning, these investments have had mixed results.9 Emerging evidence suggests dramatic improvements in performance and competitiveness can be achieved, but this success has been limited to those companies that have applied IT to an existing foundation of mature, efficient and appropriate business processes. Simply procuring information systems alone, especially ERP solutions, cannot overcome the lack of such a foundation. In fact, the evidence suggests that such attempts not only fail to achieve any performance increasedespite large and lengthy investment effortsbut actually result in reduced performance for those companies pursuing an IT-centric strategy.10 Purpose Our transformation process focuses not only on technological innovations; we are looking equally critically at changes to current doctrine and organizational processes that will enable Transformation. Change must occur quickly, and accelerating change requires extricating ourselves from antiquated cycles and processes. 11 General Paul J. Kern, Comanding General, U.S. Army Materiel Command Although countless great ideas and technology initiatives have been offered to support Army logistics transformation,12 the task for the analytical community supporting the Army is to recognize and fully comprehend the fundamental nature of this challenge, then develop and offer a strategic approach and supporting analytical architecture that will guide the Army through this transformative period. This paper introduces and summarizes a comprehensive systems approach guiding an ongoing project addressing significant challenges confronting logistics transformation.13 Conditions that motivate this research and analysis include: 2 10. the changed nature of the geopolitical landscape resulting in the Armys transition to an expeditionary, capabilitiesbased, globally deployable force; the opportunity to consider, adapt and extend, where appropriate, integrating supply chain design, management and analysis concepts and principles driven by increasing competition in the corporate world; a clear understanding of the enabling potential offered by information systems technology and socalled IT solutions; the recent DoD mandate to adopt performance-based logistics (PBL), a major change in defense logistics management philosophy; and an obvious and compelling need presenting a unique opportunity to develop and implement an analytical architecture, in conjunction with a newly emerging strategic management paradigm, to guide logistics transformation within a resources-to-readiness framework. Scope Currently sponsored by the Army Aviation and Missile Command (AMCOM), this project involves several supporting organizations both within and outside the Army and DoD. Although the project initially focused on aviation-specific Class IX (spare parts and components) inventory management as a test bed, its goal is to develop a prototype that will provide the foundational analytical architecture that would guide and accelerate Army logistics transformation. The Armys global logistics operation is a tremendously complex and dynamic system, and a central component of even larger DoD and joint logistics operations. This system consists of a wide variety of highly variable product flows, extensive management information systems, considerable maintenance and supply infrastructure, globally dispersed transportation assets, several command and management agencies, countless vendors, suppliers and original equipment manufacturers (OEMs), and supporting financial management processes that track tens of billions of dollars annually.14 Despite the

initial euphoria over remarkably successful combat operations in OEF and OIF, symptoms of ailing and inadequate logistics support operations have become increasingly apparent. This paper does not dwell on these symptoms, which are outlined and detailed in several official and public reports, but rather endeavors to address, or diagnose, the underlying root causes and associated effectsthe illnessthat are manifesting in these symptoms now that this crucial but complex system has been substantially stressed. While acknowledging the numerous, interacting dimensions to this endeavor, the focus of this project is primarily, although not exclusively, on inventory management policy prescriptions illuminated through the prism of an enterprisewide supply chain analysis. Project Overview BackgroundThe Immediate Problem Despite exponential growth in both spare parts requirements and investment over the preceding five-year period, unfunded requirements (UFRs) and associated back orders had been growing 3 11. dramatically. In fact, at the beginning of Fiscal Year (FY) 2003, prior to OIF, the cumulative UFR for aviation spares alone was in excess of $1 billion (figure 1). Readiness reports had been relatively steady, though slowly declining. However, skepticism in the accuracy of these reports was growing. For example, during FY 2001 while randomly inspecting units reporting 90 percent readiness or better, the U.S. Army Forces Command (FORSCOM) Inspector General (IG) found actual readiness in these units to be 30 percent to 50 percent lower than reported.15 Figure 1 4 12. Although tactical-level work-arounds in the field were also known to be increasing, it was not clear what impact fully funding the growing spares budget shortfall might have in terms of an incremental increase in actual readiness. Long depot repair cycles and procurement lead times are associated with many of these components, and both obsolescence issues and diminishing sources of supply characterize increasingly aging Army rotorcraft fleets. At the same time another worrisome pattern seemed to be emerging as, increasingly, major weapon systems across the Army were being rated non-mission capable due to a lack of relatively inexpensive spare parts. The Army was engaged in OEF in Afghanistan at the time. The growing fear, just a few short months prior to initiating OIF, was that significant additional stress on helicopter fleets could result in dramatic and sustained readiness deterioration in terms of aircraft operational availability (Ao). The combined effect of these trends, at worst, portrayed an organization facing the proverbial death spiral: decreasing performance in the face of rapidly escalating costs at a time of potentially devastating consequences. At best, the actual point of efficiency in a tradespace measuring cost versus performance was simply unknown (figure 2). Despite the uncertainty in the existing logistics operating environment, magnified then by the anxiety of anticipated additional combat operations, an awareness was growing that these trends could not be sustained was growing. Figure 2 5

13. Major AMCOM concerns, expressed in the fall of 2002 when these conditions existed, were, How much should we
be investing on spares at the wholesale level to meet Army aviation fleet readiness goals? and Are we spending our resources on the right things? Conceptual ApproachCurrent Logistics Structure This paper presents a systems framework that is guiding the project. The purpose here is to present a conceptual multistage logistics model, explain the purpose and interdependencies of these particular stages, and summarize emerging analytical insight and supporting recommendations from various participating analytical organizations. This multistage model, a graphical simplification of the Armys complex logistics structure (figure 3), consists of the following stages: a unit stage representing Army tactical organizations where readiness production actually occurs; a demand stage representing training requirements and operational missions; a retail stage representing installation and tactical supply support activities providing direct or general support to specific units; a wholesale stage consisting of the aggregate continental United States (CONUS) repair and supply depots managed by Army Materiel Command (AMC) and the Defense Logistics Agency (DLA); a reverse logistics stage representing the retrograde pipeline for depotlevel repair components (DLRs), including, for example, turbine engines, transmissions and rotor blades for aviation systems; and an acquisition stage representing original equipment manufacturers and suppliers responding to the procurement and sustainment needs of the Army. This multistage conceptual perspective, coupled with basic knowledge about the current state of logistics, reveals initial insight into the potential cause of challenges that have been Figure 3 6 14. accumulating over time. For example, unlike the corporate sectorwhere consumer demand is well defined at the end of the supply chain and product consumption can be measured precisely and forecasted accuratelythe customer here is unit readiness needed to meet operational mission requirements. What does not exist is a welldefined, empirically derived production function, or readiness equation, especially for Army aviation systems, that relates capital investment (including spares) and labor (maintenance support) to various aircraft performance standards necessary to meet training and mission requirements, i.e., the customer demand. Without it, efforts to forecast logistics requirements have been inaccurate and largely reactive, leading to uncertainty and variability induced into the larger logistics system at the point of consumption. Another example is the existence of a reverse logistics or retrograde stage. Rare in the business worldwhere products normally are consumed by the market this stage constitutes the value recovery effort to maintain, repair, overhaul, upgrade and return large subassemblies and replaceable units that are not consumed but used as capital assets. Although these items

constitute only about 25 percent of the number of demand requisitions, they also represent more than 75 percent of total requisition value. Nonetheless, an underlying theory for retrograde operations has never been established to guide performance standards for the reverse pipeline and, as a consequence, the organizations responsible for the forward supply chain also are responsible for the reverse. Until recently, ability to measure delay time in the reverse pipeline did not exist, reflecting the lack of importance and priority this aspect of logistics operations historically received within the culture. Yet, this multistage conceptual model reveals the importance of viewing the retrograde stage, from a systems control theory perspective, as a feedback loop with obvious impact upon unit readiness. For every reparable component delayed in an unresponsive reverse pipelinedelay times are now measured in averages of several monthsanother like component must exist elsewhere within the forward supply chain or the retrograde feedback loop will degrade readiness output. Finally, the multistage model also suggests configuration of the current logistics structure as a series of independently operating organizations, frequently with differing agendas and conflicting goals, struggling to manage the adjacent interfaces among them (figure 4). Various supply performance metrics have evolved over the years to manage these interfaces. However, these organizations did not have a clear view of their effect upon readiness production and could not relate their interface metrics to a readiness-oriented outcome. Consequently, they could not effectively correlate resource investment levels and coordinate policy decisionsboth within the stages and across themto achieve readiness goals. At best, the decisions within these organizational stages, which functioned as structural constraints on the overall supply chain, yielded only locally optimal solutions. Each of these organizations is, by definition, clearly dependent upon others; yet, paradoxically, they have not traditionally cooperated with one another in a closely coordinated manner. In addition to operational inefficiencies, these organizational constraints also induce counterproductive behavior due to cognitive limitations on the part of logistics managers, who naturally tend to undervalue elements of the supply chain they cannot see or control.16 It is, therefore, not surprising that the existing logistics structurelargely a legacy system from an industrial age environment where buffers of stock were created to accommodate uncertainty, variability and organizational structurewas never designed to 7 15. Figure 4 adequately address these growing AMCOM concerns expressed by the commanding general in 2002. Application of Supply Chain ConceptsAnalytical Foundation for Improving Logistics System Effectiveness The academic development of theory and subsequent practical implementation of supply chain management concepts in the corporate world offer valuable insight into Army logistics challenges. Two key concepts will be offered here. First, enabled by transportation planning and materiel management, logistics has traditionally been defined as the forward flow of materials from suppliers through a series of production and distribution stages to customers. More recently, supply chain design concepts and management theory expanded to incorporate two other flows through these logistics stages as well: demand information and cash flows back through the structure. This view of multiple information and physical flows interacting across templates (figure 5) then led to the second concept, now known as the bullwhip effect. This bullwhip effect illuminates the enormous consequences of these independently operating stages and interacting templates on the system. Actual consumer demand is magnified at successive stages as a consequence of incomplete and delayed information rippling back through the supply chain, thereby causing amplification, oscillation and time lags of the original demand signal. Known to management scientists since the early 1960s, this amplification of the fluctuation phenomenon in multistage systems has also been recognized in production systems.17 However, 8

16. Figure 5 this induced, cascading variability, which necessitates greater inventory levels to accommodate such
volatility, has only recently been quantified in the theoretical academic literature. Enterprisewide variability grows geometrically as the number of independent stages in the supply chain increases. By contrast the value of information sharing, access to centralized databases and collaboration across the stages also has been quantified and shown to dramatically reduce system variability and associated requirements for buffer inventory while actually improving performance by reducing stockouts (out-of-stock inventory).18 Shared information and collaboration have the effect of collapsing several independent stages into only a few virtual stages. One example of implementing supply chain collaboration is referred to as vendor managed inventory. In the commercial sector when a company faces pressures of excessive inventory, degraded customer service, escalating costs, declining profits or a poor return on assets, its supply chain may be out of control. Similarly, if a company is moving into new markets or new technologies, its supply chain must be appropriately aligned for new business opportunities, challenges and uncertainties. Despite the many new design concepts and management approaches intended to exploit the advantages of the Internet and IT, successful companies realize that an appropriate supply chain strategy must be tailored to meet the needs of its particular customers and market conditions. For example, a product with stable demand and a reliable source of supply should not be managed the same as one with highly unpredictable demand and an unreliable source of supply. A model to assist in selecting an appropriate supply chain strategy consistent with demand- side variability characteristics was initially developed by Marshall L. Fisher, then later extended by Hau Lee to incorporate supply-side variability characteristics as well. 9

17. This uncertainty framework (figure 6) illuminates the potential improvement in supply chain performance by adopting both demand uncertainty reduction strategies and supply uncertainty reduction strategies. The goal is to adopt techniques and policies that will reduce as much as possible aggregate variability in lead-time demand and choose an appropriate design to effectively accommodate resulting supply chain characteristics. In the business world, efforts to reduce the effects of demand uncertainty have focused on information sharing and supply chain collaboration. This provides enterprisewide visibility of actual customer demand and thereby reduces pernicious bullwhip effects. Methods to reduce supply-side uncertainty have included collaborative relationships, longer-term contracts with suppliers and the creation of supplier hubs to cut down supply risks in manufacturing lines. Lee has defined four resulting supply chain strategies that should then be aligned to product uncertainties (figure 7): efficient supply chainsstrategies aimed at creating the highest possible cost efficiencies by eliminating non-value-added activities, pursuing economies of scale and optimizing capacity utilization in production and distribution; risk-hedging supply chainsstrategies that pool and share resources to reduce risks and increase safety stock to hedge against supply chain disruption; responsive supply chainsstrategies designed to be responsive to the changing and diverse needs of the customer, including build-to-order and flexible, high-order accuracy mass customization processes; and Figure 6 10

1. agile supply strategies that combine the strengths of responsive and risk- hedging, characterized as agile
because they are responsive to unpredictable customer demand, but also minimize risks of supply disruption.19 The existing aviation logistics structure is indeed vulnerable to the bullwhip.20 System dynamics modeling provides significant explanation regarding these death-spiral conditions characterizing the current environment. The analytical challenge now is to better understand Army logistics system hysteresis by first segmenting the logistics structure into stages, then identifying, understanding and attacking each of the root causes contributing to uncertainty, variability and inefficiency within each stage and across the system of stages. The stages can then be linked using network optimization methods, thereby relating resource investments to readiness-oriented outcomes with greater confidence. For example, Readiness-Based Sparing (RBS) uses a marginal analysis approach to generate a cost-constrained retail stock policy that optimizes the link between the retail stage and a desired readiness production level at the unit stage. By reducing uncertainty and improving efficiency within each stage and linking the stages using multiechelon optimization methods developed for large-scale, complex systems, logistics performance is moving toward the efficient frontier in a cost-availability tradespace as illustrated in figure 2 on page 5. Analytical demonstrations, field experiments and testing are being used to quantify these major efficiency gain initiatives: development of a readiness equation for the unit stage; implementation of PBL concepts, including availability-based sparing and centralized risk pooling in the retail stage; use of empirically derived, operation-based forecasts for the demand stage; and, Figure 7 11 2. reduction of the delay time in the retrograde stage for DLRs. Then, working backwards through the supply chain from the point of readiness production, the stages can be linked together, conceptually using multiechelon optimization to leverage the links between stages so that resources-to-readiness investment decisions can be made with dramatically improved accuracy.21 Return on investment (ROI) estimates then can be reliably performed, for the variety of proposed initiatives and cost-benefit assessments would enable this analytical architecture to guide an ambitious logistics transformation, consistent with a strategic plan for implementation by pushing the envelope of continuous improvement. However, the great challenge for the Armys unique supply chain strategy, referring back to Lees framework above (figure 7), is that it needs to not only be both efficient and effective, but also agile, responsive, adaptive and robust to accommodate both surges in demand and disruptions across the supply chain. What is needed is a logistics network that is efficient, effective and resilient. This project endeavors to assist the Army in achieving such a result through logistics transformation. Multistage ApproachAnalysis of Systemic Challenges Readiness Production Stage Logistics can no longer be thought about as an annex to our operations plans. . . . It must be inherent in the plan . . . not a wake-up call. General Paul J. Kern22 Readiness reporting trends from the field were becoming increasingly worrisome by Fall 2002. Overall, short-term aviation readiness seemed to be holding, although longer-term trends suggested a slow yet noticeable decline. This apparently healthy state of tactical aviation units was partly illusion with controlled substitution masking a deeper readiness problem. Aviation commanders were increasingly resorting to controlled substitution to maintain acceptable readiness rates while compensating for an inventory system that could not keep up with the growing demands of aging aircraft fleets.23 Nonetheless, the rate of non-mission capable (NMC) aircraft was persistently attributed to repair maintenance downtime (non-mission capable maintenance, or NMCM) rather than a shortage of spare parts (non-mission capable supply, or NMCS). These reported trends were not consistent with an already large and growing backlog of spares for aviation alone the shortfall was nearly $1 billion at that timesuggesting that the actual NMCS rates were considerably higher than reported. Another indicator for comparison was the fixed-wing aircraft NMC rates for both the Navy and the Air Force, nearly 50 percent of which was due to spares shortages compared to only about 10 percent reported for Army rotorcraft. These inconsistent trends are partially the consequence of an inadequately

understood production function for Army aviation readiness. In typical, large commercial-sector supply chains, products are created in accordance with a well-defined and highly refined production function describing the manufacturing process. Subsequent distribution occurs through international or national wholesale centers, then regional 12

3. retail distribution centers and ultimately to customers who consume the product. In military spare parts supply chains,
the consumption process also involves another production function the creation of militarily capable and ready units available to execute the National Military Strategy. For Army aviation systems this production function, or readiness equation, is not yet well understood, in terms of traditional economics relating labor and capital to desired readiness production levels. These readiness levels are typically defined by aircraft Ao percentages (figure 8). Figure 8 Consequently, because capital in the form of spare parts investments cannot be optimized to an unknown or uncertain readiness production function, numerous work-arounds occur that tend to substitute labor for capital. For example, increased maintenance man-hours are routinely incurred to compensate for requisition delays or shortages of parts by resorting to controlled substitution or cannibalization (figure 9). Emerging research results indicate this is occurring about 25 percent of the time across the Armys aviation fleet. This additional labor-intensive work-around demand, induced by spare parts shortfalls, exacerbates an already stressed existing labor supply of tactical-level mechanics. Army regulations specify manpower requirements for mechanics based upon maintenance standards.24 Nonetheless, recent FORSCOM data clearly shows that the number of mechanics assigned to units and the amount of maintenance man-hours available are too low to meet these field-level maintenance requirements. This manpower shortfall equates to about $300 million of annual unexecutable organic maintenance, of which 20 percent is accommodated through civilian maintenance contract support agreements, an increasing trend.25 13 4. Figure 9 A final condition that further clarifies and illuminates the compelling need for a production functiona readiness equation for Army aviationis the universally acknowledged inadequacy of existing tactical-level databases to capture meaningful aviation maintenance and supply data.26 Obviously, regardless of the sophistication and fit of mathematical models, any sincere effort to align Class IX demand forecasting to readiness targets is critically dependent upon supply and maintenance consumption data accuracy. As the Army seeks to improve its field data collection systems, especially for aviation, care should be taken to ensure that consumption data is not only captured to enable readiness production analysis and trends, but also processed in such a way that resupply can automatically be triggered, similar to point-of-sale collection and inventory reorder triggers in the consumer products industry. Operational Mission and Training Demand Stage We must operationally link logistics support to maneuver in order to produce desired operational outcomes. Les Brownlee, Acting Secretary of the Army, and General Peter J. Schoomaker, Chief of Staff, U.S. Army27 Operations Research has also gradually lost much of its original empirical focus; modeling is now chiefly a deductive undertaking, with little systematic effort to test deductive claims against real world evidence. Stephen Biddle28 14 U.S. military strategy is evolving from the Cold Wars threat-based force planning concept, with globally extended and forward-deployed, CONUS-reinforced forces, to an expeditionary capabilities-based, power-projection concept consistent with the changing geopolitical environment. This Modular Force structure is designed to conduct various types of operations, simultaneously and overlapping, across a wide spectrum of anticipated and unanticipated missions. Resources including sustaining assets such as Class IX repair parts and components, associated combat service support organizations and doctrineshould be aligned to support these desired capabilities. Aligning resources with desired capabilities starts with a clear understanding of how resource usage factors for various expeditionary operations and locations differ from standard peacetime, home station training requirements. Currently, tactical operations planning involves deploying with a logistics support package optimized for peacetime training conditions or, in some cases, multiplying a standard peacetime quantity by a subjectively derived factor. At the strategic level, long-term resource forecasting to support program development usually involves averaging past demands over time (several years), location and mission types and extrapolating those average results as an estimate for future investment budgets. Clearly, a great deal of potentially useful information is not being considered in forecasts that aggregate averages across time, location and missions. This lack of an empirically derived, operation-based forecasting process also contributes to the large safety levels of stock incorporated into wholesale supply requirement objectives. Demand forecasting refers to the quantitative method used for predicting future Class IX demand for spare parts generated by training requirements and operational missions. Reducing both demand uncertainty and variability at the point of consumption where readiness production occurs, and providing both understanding of causes and knowledge of effects, is crucial to reducing systemwide aggregate variability in lead-time demand. Theoretically, both average demand and variability in demand are confounded with supply-side effects that together interact to magnify system variability, thereby driving up the need for additional safety stock. Even though demand may be perceived as an uncontrollable variable, simply ignoring it and concentrating only on supply-side variance reduction efforts throughout the rest of the upstream supply chain will not achieve the dramatic

5.

performance improvements that are possible. Currently, however, the Army does not know what real demand actually is, partly due to the lack of a readiness equation described earlier. As a recent GAO report on defense logistics in OIF notes: The logistics effort was weakened by long processing times for supply requisitions, which resulted in the loss of confidence and discipline in the supply system, the abuse of the priority designation process, and the submission of multiple requisitions.29 As recent comments from a former senior Defense logistics policy official suggest, this blindness to true demand results in a high cost of low trust.30 In the AMCOM supply chain project, the major initiative in this stage is focused on improved forecasting by borrowing concepts from market segmentation research and population polling statistics. Stratified sampling is a powerful variance reduction technique that enables accurate and precise estimates without the need for larger, more costly sample sizes typically required when using random sampling of a large and diverse heterogeneous population. Stratified sampling achieves these results by capturing and using more of the information in targeted homogeneous 15

6. subpopulations, or market segments. Not only can subpopulations offer more accurate and precise forecasts, but
overall parameters for the entire, more diverse population can be more accurately predicted with far greater confidence (reduced variation).31 In the AMCOM application we are focusing initially on those intuitively derived factors (explanatory variables) that can or should be expected to affect Class IX consumption. These include weapon system type, training or operational mission category, geographic location and environmental conditions and system parameters including such factors as aircraft age. For example, the survey may find that aggregate flying hours contribute toward predicting spares demand in a training environment, but in certain types of operations flying hours do not contribute as much to the forecast as might the actual number of missions flown (sorties). We also will determine whether these factors are captured by existing data collection systems and to what extent, if any, they are incorporated into current mission and resource planning factors. We have developed a large experimental design to identify those significant cost and readiness drivers that either dominate or differ significantly across operational missions and geographic locations and how they may vary from peacetime training. Our major hypothesis states: If empirically derived Class IX usage patterns, profiles and/or trends can be associated with various operational mission types, then both operational planning requirements and resource forecasting can be significantly improved to support a capabilities-based force. Fundamentally, this is an effort to capture the statistically significant factors influencing future demand using all of the empirical evidence of recent experience. We are optimistic because of the successful effort to dramatically improve casualty forecasting during the past decade. Previously, for example, medical planning factors were derived from attrition-based, theater-level campaign model casualty projections. However, when compared with actual empirical evidence from recent experiences of modern warfare, including the Persian Gulf War, these projections were over-predicting aggregate casualties, thereby creating unaffordable requirements for medical support force structure. Recent extensive, comprehensive analyses into the nature of modern warfare,32 and the structure and patterns of casualties that result,33 are yielding major improvements in forecasting accuracy and in designing more responsive, effective support requirements that, in many cases, reduce force structure investments. Both of these analyses, which challenged traditional views and standard practices, have been validated and corroborated by recent experiences in both Afghanistan and Iraq and are now being further refined and extended. Similarly, through a systematic and analytically rigorous evaluation of the empirical evidence of past events, we intend to identify and verify patterns of use that will have significant predictive power for the future. Successfully developing this empirically derived, mission-based forecasting capability could lead to even more dramatic improvements in reducing demand uncertainty and variability. Research has shown that demand lead times behave in a fashion that is exactly the opposite of supply lead times. In effect, an increase in demand lead time improves the system performance exactly like a reduction in supply lead time.34 This insight, coupled with the concept of feedforward control from adaptive control theory, suggests that system output (e.g., Ao) can be positively affected a priori. Whereas conventional feedback processes can reduce the effect of a disturbance on output, it can do so only after the effect of the disturbance is seen. The concept of feed-forward, an anticipatory response oriented on predicting failure, is centered 16 7. on counteracting disturbances before they can impact output. These implications are significant even beyond the sparing to mission capability outlined above. For parts that are either failure prone or known to be nearing the end of their useful life, this suggests repair and replacement prior to executing a particular mission. This would enhance mission success by preempting failurein a sense inoculationthereby improving and extending Ao. In fact, this theoretical observation has been routinely practiced for many years by the 82d Airborne Division as they prepare and cycle their Initial Ready Company (IRC), Division Ready Force (DRF) battalions and Division Ready Brigades (DRBs) through a no-notice, global deployment alert process (N- hour sequence). Retail Stage We cannot afford to plan for future logistics by segmenting the logistics planning from the overall operations planning. . . . Customized packaging based on actual and operational needs enables responsiveness to future challenges. General Paul J. Kern35 The retail stage in this multistage logistics network model consists of globally dispersed Supply Support Activities (SSA) containing hundreds of Authorized Stock Levels (ASL) typically located near their supported battalion and brigade

tactical units. Historically, the Army manages supply parts in ASLs based upon an item-level, demand-based stock policy: during a given period of time, if a minimum quantity of a particular part was ordered to meet an add/retain threshold, the part could be stocked at the prescribed level; in general, all parts were stocked according to the same rules, and no special considerations were given to either part cost or part impact on readiness.36 In recent years the Army has transitioned to a modified policy that does consider parts costs, although the categories used in this dollar cost banding policy are arbitrarily designated. This new stock policy resulted in steady improvement where it has been implemented.37 Nevertheless, metrics used to assess this effectiveness are still supply performance focused, including satisfaction rates, accommodation rates and fill rates, rather than readiness metrics, including Ao. Consequently, developing consistent cause-effect relationships between retail investment levels and readinessoriented outcomes continues to be almost impossible with no specific, objective function to optimize using either of these two currently mandated Army stock policies. The fundamental purpose of any military inventory system is to sustain the supported force, in this case with aviation items. The true measure of inventory system performance should be the ability of that system to produce mission-capable aircraft, specifically maximizing aircraft availability. Traditional supply performance standards have focused on interface metrics (figure 4, page 8), especially fill rate, to gauge inventory system performance. This can yield misleading indications. Fill rate measures only what happens when demand occurs, whereas back orders also measure the duration of the shortage. Since back-order durations are not considered, the trade-off between short versus lengthy back-order durations is not measured. Nor does fill rate consider aircraft complexity, yet more complex aircraft require a higher fill rate than simpler aircraft to achieve a given Ao.38 While a high fill rate may suggest healthy supply support, it is not directly related to the inventory systems impact on end-item readiness. Conversely, a more 17

8. relevant and insightful indication of inventory system performance relative to a readiness-oriented outcome is the
relationship between back orders (supply shortfall) and NMCS (Ao degradation due to supply shortfalls): as inventory system responsiveness improves over time, back-order rates should decline and both Customer Wait Time (CWT) and NMCS decrease accordingly with a positive effect upon readiness. Historically, however, data scatterplots associating NMCS ratings with back-order rates are indeed scattered, showing essentially no relationship between the two, although fill rate metrics are, at the same time, within acceptable limits. It has been difficult to establish a correlation between back-order rates and readiness. Crucial parts that incur long delivery delay times, thereby impacting readiness, tend to be resolved at the tactical level through various work- arounds that increase maintenance labor workload. Recent evidence shows that as CWT increases for unscheduled repair at unit level, work-arounds likewise increase which, in turn, masks what otherwise would have been declining readiness. This compensating action at unit level is isolating readiness results from wholesale supply system performance rather than illuminating supply system ability to effect Ao. Consequently, managing the supply system to fill rate interface metrics actually precludes identifying and implementing meaningful cost-effectiveness choices within an investmentperformance (readiness) tradespace. This must be corrected. To both illuminate this managerial shortcoming and identify a better, outcome-oriented approach, the most important initiative in this stage has been the analytical demonstration and subsequent field testing of a retail stock policy focused on weapon system readiness for aviation performance rather than supply performance. For each repair part, this policy considers cost, frequency of use and contribution to readiness, then uses a marginal analysis approach to determine a minimum-cost ASL to achieve a desired system readiness goal. This method has been variously referred to as multiechelon technique for recoverable item control (METRIC), sparing to availability (STA) and RBS. The key difference between this method and others that focus on managing individual spare parts is the ability to adopt inventory policies focused on the end item, such as aviation rotorcraft, and readiness goals needed for those end items. This enables a systems approach that incorporates the differing contributions of all components across the entire supply chain rather than focusing on individual item supply performance interface metrics such as fill rate. RBS enables the development of efficient solutions and establishment of relationships between ASL costs and weapon system availability. Relationships between resource investments and readiness outcomes can then be determined. Thus, in terms of the resources-toreadiness challenge, this is a crucial first step in optimizing the supply chain. If the initial link between the retail and unit stages has not been optimized to achieve tactical aviation readiness production goals, then the potential benefits of improving many other, more costly and inefficient upstream logistics network stages will not be fully realized. Although the item level approach may be simpler and easier to implement within existing ASL and wholesale supply control study procedures, it is not possible to know whether individual item decisions will achieve an acceptable level of readiness within budget constraints. Additionally, the item approach historically tended to use the same protection level (safety stock) regardless of costs, yet dramatic improvements in system performance have been demonstrated when these other factors are included.39 18 9. Although the Army has experimented with RBS starting more than a decade ago, it has never adopted the policy for routine use beyond initial spares packages for newly fielded systems. Additionally, the testing and experimentation was limited to ground-based systems. Our own RBS analytical demonstration first used UH-60 aircraft in the 101st

Airborne Division (Air Assault), as shown in figure 10, and is currently a large-scale field test at Fort Rucker, Alabama, where nearly a third of the Armys flying hours are executed at the Army Aviation School using several different aircraft types. This test clearly demonstrates the significant advantages of implementing RBS in the retail stage of the aviation supply chain. Extrapolating these results across all Army division-level retail ASLs, the Army Materiel Systems Analysis Activity (AMSAA) estimates the requirement objective (RO) would be reduced by several hundred million dollars, yielding potential savings that could then be applied, for example, against the growing backlog of back orders. An additional benefit obtained from RBS is a significant reduction in footprint, the weight and volume of ASLs that must be deployed to provide Class IX sustainment for supported units. This has several positive impacts, including reducing both deployment lift needs for supporting units and theater closure times for the deploying force during the initial phase of an operation, as well as improving sustainment during follow-on phases. Over the past decade, the original military-focused, theoretical inventory management models developed and refined in academia (e.g., Wharton, Stanford) and the federally funded research and development centers (FFRDCs) such as RAND and the LMI have since spun off into Figure 10 19 10. commercial firms. Several commercial off-the-shelf applications now fully capitalize on the use of STA/RBS algorithms and are applying them increasingly to support the proliferation of PBL contracts in the military, other government agencies and corporate customers such as commercial airlines and global service support providers (e.g., Caterpillar). These commercial applications have been successfully applied to complex supply chainssome in conjunction with ERP implementationsand are now competing in a growing market. The current focus is on accelerating computer processing times through heuristics and so-called greedy algorithms to achieve approximate solutions. For example, the Navy recently conducted an FFRDC-hosted RBS Olympics, inviting several commercial firms to demonstrate their respective capabilities to adapt and apply their software and algorithms to Navy-unique supply chains. A second major effort is the incorporation of risk-pooling, or centralized stocking, to realize the benefits of reduced costs and improved supply performance through inventory pooling, especially for high-value but relatively low-demand DLRs. This potential was recently demonstrated with M1 Abrams tank engines for III Corps armor and mechanized units dispersed across five states near Fort Hood, Texas.40 By transitioning from a hierarchical, arborescent logistics design (tree-like branching structure with serial, vertical supply channels) to a supply network incorporating responsive lateral supply linksespecially for the many forward-positioned locations within the retail stagerisk-pooling coupled with improved asset visibility will enable the eventual attainment of a much more efficient, responsive and resilient demand-driven supply network (DDSN). RBS should be expeditiously implemented as retail stock policy. Then, further enabled by risk-pooling (for low-demand but expensive spares), responsive lateral supply between ASLs and SSAs, and mission-oriented demand forecasting described in the previous section, Army inventory management policy could then transition from an archaic rule- and mandate-based support concept, which is neither mission- nor readiness-based, to a more flexible DDSN to be discussed in greater detail in the section Multistage Integration for Efficiency, Resilience and Effectiveness. Major benefits of such a policy include the ability to better anticipate the likely Class IX mission demand, then react and adjust more responsively according to the changing operational environment. Within the retail (forward-located) theater distribution system, the key enablers to achieving DDSN for a capabilities-based force are operational mission-based, empirically derived demand forecasts and RBS. Retrograde/Reverse Logistics Stage The reverse logistics stage, or retrograde supply pipeline, constitutes the Armys value recovery process for reparable spares and includes nearly 80 percent of the value requisitioned at the unit stage. From theoretical perspectives, both system dynamics and control theory suggest the responsiveness of this retrograde stage should have considerable impact upon readiness, the output of the system: it is clearly a feedback loop in the supply chain (figure 3 on page 6).41 For these reparable items, the cycle created by the sequence of unit stage, then retrograde stage, then wholesale (depot repair) stage, then retail stage and back again to the unit stage forms a closed-loop supply chain. DLRs needing repair are turned in for retrograde by the unit, repaired by the maintenance depot, then returned through the forward supply chain back to the unit for 20

11. reuse to continuously generate readiness. Operating within the larger logistics structure, this closed-loop chain
creates an internal dynamic system that can be altered through feedback to regulate the output variable of interest, which is readiness. However, opportunities for more cost-effective supply chain operations using a synchronized, closed-loop DLR processing cycle have not yet been fully appreciated.42 From a practical logistics network perspective, the more DLRs that are delayed in the reverse pipeline awaiting evacuation for repair, the more inefficient and unresponsive the reverse pipeline becomes, increasing the overall RO for those DLRs. For every DLR in retrograde, another similar, serviceable DLR is needed somewhere in the forward supply pipeline thereby increasing systemwide RO for that DLR. Or, if the DLR is not available, then customer wait time for a back order increases and impacts readiness at the unit. 43 Although not well recognized yet, this is characteristic of a tightly coupled system that can have potentially disastrous results without warning. An operational environment inducing greater stress on weapon systems may, for some parts, cause higher failure rates than normal. In the case of obsolescent DLRs that can no longer be quickly procured or repaired through commercial supply sources, they must

be retrograded to AMC-level depots for repair, then returned for serviceable issue again through the forward supply chain. The responsiveness of the reverse pipeline then becomes crucial to support sustained operations when such higher-than-expected failure rates occur, resulting in temporary spikes or sustained surges in demand. This situation occurred during OIF, for example, in the case of wave guides for deployed Patriot Missile Systems. Near-heroic intervention, necessary to compensate for lack of visibility into an unresponsive retrograde process, was required to avert an extremely dangerous, acute situation that could have otherwise resulted in disaster.44 Despite these theoretical and practical implications, Army logistics regulations, processes and culture historically have not fully recognized the importance of this portion of the logistics network. The traditional Army supply system has placed little emphasis upon expediting or prioritizing DLR returns. For example, logisticians had no way to differentiate between types of return transportation usedsurface or airor the priority of a returning item. So Patriot Missile System wave guides, M1 Abrams tank engines and broken musical instruments all have, by default, the same lack of visibility and priority in retrograde even though their respective contributions to battlefield outcomes are dramatically different. Furthermore, since return in- transit visibility did not previously exist, unserviceable DLR returns could not be anticipated and repair depots could not accurately forecast workload. A final retrograde challenge, which significantly impacts the financial system, has been a disparity in DLR returns and issues to tactical units. Prior to OIF, the trend had been more issues than returns; but that has now reversed with more returns coming from OIF than issues. Recent data analysis indicates that the ratio of issues-to-returns across deployed units is highly variable, ranging between 40 percent and almost 100 percent. Furthermore, less than 20 percent of unserviceable DLR returns from deployed units currently can be traced to a final disposition.45 LOGSA is beginning to focus on identifying, measuring and quantifying delay times for DLRs awaiting retrograde in the reverse pipeline. These total retrograde time (TRT) values vary considerably across the overseas theaters, but are generally measured in months, not days 21 12. or weeks. Additionally, return times to various sources of repair (e.g., OEMs and depots) have been extremely variable, ranging from a few hundred to several thousand per month.46 Efforts are now under way to create and capture reverse logistics (RL) data, measure TRTs for the various theaters, and estimate the value of reparables delayed in the RL pipeline. However, no study has focused on defining and quantifying both the potential reduction in aggregate DLR inventory requirements (RO) and the effects of reduced DLR CWT on improved readiness that could be achieved by synchronizing RL flow and depot operations with the forward supply chain. For example, U.S. Transportation Command (TRANSCOM), the new DoD Distribution Process Owner, recently announced improved retrograde operations. But the metric used was exclusively oriented on transportation cost reduction by shipping greater retrograde quantities by surface means (98 percent now) rather than more expensive air transport.47 However, the value of the reverse logistics stage is not found in estimating the total price of DLRs delayed within it or minimizing reverse pipeline transportation costs, but rather DLRs contribution to readiness, through cost-effective and responsive value recovery (figure 3, page 6).48 Once these various DLR network links and flowsincluding reverse pipeline flow, depot production, scheduling operations and forward supply chain floware connected and made visible through in-transit visibility (ITV), the Armys enormous investment in DLR assets can be reduced. Plus, through better management within a synchronized, closed-loop supply chain, readiness will improve. Those assets that would no longer be required due to reductions in overall RO could then be used to create a variety of mission support packages comparable to Cold War prepositioned war reserves. These mission support packages would augment DDSN and better support a capabilities-based force. This would be especially valuable for aviation DLRs, which have limited war reserve stock but instead rely upon enhanced depot repair capacity to meet higher repair and replacement demand rates. A case in point is the recent experience for the T700 engine that has achieved an RO reduction estimated at nearly $70 million as a result of reduced depot repair cycle time. Wholesale/Depot Stage For Army Class IX spares, the wholesale stage incorporates two major functions. First, maintenance depots repair and rebuild end items (major weapon system platforms) and their major assemblies or subassemblies (engines, transmissions, blades, etc.). These components and end items, arriving through the RL pipeline at the depot for rebuild or modification upgrades, are considered reusable capital assets rather than consumable parts or items; hence the term depot-level reparable. These various repair depots belong to AMCs subordinate commodity commands. Second, the national inventory control points (NICPs) control distribution for consumables, many of which are items and parts common to multiple services, and are managed by the DLA. As mentioned previously in the reverse logistics stage, in-transit visibility for DLRs in the reverse pipeline has not existed until recently. Consequently, depots could not accurately anticipate the quantity, quality or timing of returns for repair to manage depot workload and synchronize returns of serviceable DLRs back into the forward supply chain. This lack of visibility and useful information further magnifies uncertainty and variabilitythe bullwhip effectfor DLRs, 22 13. which are also the most expensive spares, further driving up the aggregate systemwide requirement objective. Turnaround times (TAT) for repairs are further affected by obsolescence, diminished manufacturing sources of material supplies and, especially, depot parts stock that historically has been managed to a standard Armywide 85 percent wholesale supply availability target. Recently, AMC incorporated Lean and Six Sigma manufacturing

concepts into depot management practices with measurable success in reducing process variances and rebuild times. One clear example at the Corpus Christi Army Depot (CCAD) has been the success of the T700 engine line. A manufacturing concept originally pioneered, developed and refined by Toyota in Japan, Lean synchronizes process flow to reduce work-in-progress (stagnant inventory) and waste leading to a just-in-time approach to meet the pull of customer demand. In contrast, Six Sigma focuses on reducing defects to improve product quality by reducing variation, the proximate cause of product defects within the manufacturing process. However, significant additional improvements can now be obtained by adopting synchronized manufacturingalso known as optimized production technology from the theory of constraints (TOC)for depot repair management. TOC enables realization of significant effectiveness gains, as opposed to efficiency gains, within a truly synchronized closed-loop supply chain for DLRs (figure 11). Unlike Six Sigma, which uses statistical methods to uncover flaws in the execution of an existing process without actually challenging the process itself, TOC views the process as potentially flawed, an approach Figure 11 23

14. generally referred to as identifying weak links in the chain. Increasingly, those companies following their Lean/Six
Sigma efforts with this process redesign approach are finding more success redesigning whole processes, improving weak links and reducing or eliminating constraints to improve cost effectiveness and productivity.49 An example of such dramatic improvement using TOC within the military depot system is the U.S. Marine Corps (USMC) Maintenance Facility in Albany, Georgia, where costs, work in progress and repair cycle times have been reduced, resulting in increased throughput and improved scheduling. For the MK-48 engines, the depots averages and variances for both repair cycle time and labor hours per engine have been cut in half, and engine output per month has more than quadrupled.50 Depot maintenance activities historically have experienced delays in obtaining consumable parts for repair and overhaul. This is partly due to the 85 percent target used by the wholesale system for supply availability. It also is, increasingly, attributed to obsolescence issues, especially wiring, avionics, corrosion and dynamic component degradation caused by aging aircraft and subassemblies. However, as retrograde efficiency and responsiveness improve, the combination of near real-time ITV and emerging on-board diagnostic and prognostic systems can provide anticipatory, feed-forward information for depot repair before the component actually arrives through the reverse pipeline. Hence, particular or unusual parts can be ordered before components and end items arrive for repair induction rather than after, further reducing depot repair TAT and aggregate systemwide reduced RO. A recently completed Navy initiative, the Intelligent Collaborative Aging Aircraft Parts Support (ICAAPS) project, explored the value of such an anticipatory ability, illuminating the potential for reducing these forecasting lag effects, especially on consumable parts needed in maintenance repair. Because current projections for depot-level consumable part requirements are based on historical data, a considerable delay exists between actual need, particularly for aging aircraft, and when these same parts are incorporated into future requirement projections. The ICAAPS project successfully established correlations and relationships between depot-level discrepancies and consumable parts usage, as well as operating environments and field maintenance activities that could be expected to affect future depot-level maintenance requirements. The power to more accurately anticipate parts usage requirements and ensure that necessary parts were available upon induction for repair rather than atsome later time cut the growing gaps between baseline usage rates and actual usage by more than 50 percent for many consumable parts. Consequently, by expanding the maintenance planning horizon to include all relevant information gathered during the entire operating cycle before the aircraft arrived at the depot for repair, ICAAPS was able to significantly reduce forecasting lag, improve part requirement forecasting accuracy and reduce depot repair cycle time.51 One of the great challenges in better synchronizing depot repair operations is being able to see all of the potentially useful information in multiple, geographically dispersed locations that could contribute to better forecasting. No single, integrated knowledge base exists to combine aircraft on-board data, potentially relevant unit-level operational information and programmed depot maintenance (PDM) data. Recognition of this limitation recently led to a joint initiative between the U.S. Air Force (USAF) Oklahoma City Air Logistics Center, which overhauls KC- 135 tankers, and the Department of Energys Pacific Northwest National Laboratory (PNNL). 24 15. Using visualization techniques originally developed by PNNL for the U.S. intelligence community, several disparate data types and sources are linked and transformed and then presented on large computer graphic displays. These multidimensional spatial mappings use complex visual patterns that humans can interpret more easily than standard graphics, data tables or text. Known as the Visualization of Logistics Data (VLD) project, the analysis of trends, patterns and relationships in a large maintenance knowledge base enables logistics managers to capitalize on and exploit the human brains visual processing capabilities to rapidly perceive and absorb visual representations of large amounts of data in a manner not possible through listening or reading. This capability provides for a consistent and integrated picture of the health of the aircraft fleet, better parts forecasting and reduced depot repair time and enables more informed decisions for PDM workflow, scheduling and resource forecasting.52 When combining the capabilities offered by both ICAAPS and VLD, the potential for improvement appears enormous. When used in conjunction with an improved reverse logistics stage, these capabilities could pave the way toward a truly synchronized retrograde

process, enabling a responsive closed-loop supply chain with both RO and improved readiness. To accommodate surge requirements for a theater warfighting scenario, the Army has established prepositioned stocks to support early demands for ammunition and other classes of supplies, including medical supplies, end items and spare parts. These stocks provide additional capacity until the industrial base can ramp up production to meet higher demand rates. No prepositioned stocks exist in the case of the additional demand for aviation DLRs, however. Instead, the additional depot repair capacity needed to support higher repair and return rates is provided through four Aviation Classification Repair Activity Depots (AVCRADs) operating under the Army National Guards Aviation Depot Maintenance Roundout Unit (ADMRU). In peacetime, these units are regionally located within CONUS and operated by reserve component Soldiers to support National Guard aviation units within their respective regions. When activated to support an operational theater, an AVCRAD mobilizes for deployment attached to AMCOM to increase capacity needed for initial surge and sustained aviation repair requirements. By design, when deployed and operational in theater, the AVCRAD reduces retrograde requirements by providing repair in-theater capability for DLRs, thereby improving deployed aviation readiness. In practice, however, several organizational challenges emerged in support of OEF and, subsequently, OIF. The AVCRADs already were operating at or near capacity in their peacetime roles supporting their regional National Guard aviation units and providing overload relief to CCAD. When requirements for weapon systems needing overhaul exceed depot repair capacity, this backlog is deferred to future years as unexecutable deferred maintenance. By the end of FY 2002, more than 50 percent of Army aviation-related depotlevel maintenance requirements had been deferred and therefore not funded. Additionally, in 2002 AMCOM was short $1.4 billion for DLR repair that was already approved for current-year PDM. As a result, no additional DLR surge capacity was available either at CCAD or in the AVCRADs by late 2002.53 Consequently, despite the mobilization and ongoing rotations of the regional AVCRADs to Kuwait to support in-theater repair demand in Iraq, the gap in overall capacity relative to higher repair demand requirements is still growing. This is, of course, the opposite result of what the AVCRADs were designed to achieve, but the consequence of insufficient slack capacity to 25

16. accommodate surge requirements in the current organizational design. Resolving this challenge, reversing this trend
and developing additional maintenance capacity is crucial due to the converging effects of three trends that are combining to dramatically increase aviation maintenance, repair and spare demand rates: the continuing stateside demand, especially for National Guard units, for Operation Noble Eagle; the continuing demand to support overseas global operations, including OEF and OIF; and the growing demand of continually aging aircraft fleets, which are near or within their original design wear-out regions, with average fleet ages now increasing at a ratio of one year per calendar year due to the lack or cancellation of modernization programs. Two major programs will stress wholesale supply availability as well. The Recapitalization Program (Recap) affects several weapon systems across the Army, both ground and air, and is intended to compensate for extending life durationsthe useful lifecaused by the absence or cancellation of major acquisition programs to replace these aging systems. This is a service life extension program using upgrades and component replacement or rebuilding to delay the systems entry into wear-out status when growing sustainment and repair costs become prohibitively expensive. The second, more recent program, initiated as a consequence of three war years worth of extreme wear and tear and higher consumption rates, is referred to as the Reset program. Reset, unlike Recap, is intended to return equipment and systems to normally accepted conditions of maintenance and repair to achieve intended equipment operational readiness. In many cases, Reset is needed to rapidly return equipment to a ready-to-fight condition for the next rotation back to operational theaters. The FY 2005 supplemental budget estimates a total of $9.2 billion for Reset, Recap, in-theater sustainment, depot maintenance and battle loss/damage replacement. An additional requirement of $7.5 billion is considered unexecutable because repair capacity does not exist to expend these funds within the FY 2005 supplemental timeframe.54 The consequence of these additional wholesale spare demands is to dramatically increase the aggregate overall RO for Class IX within the Armys supply planning system. In the case of aviation Class IX, as cited in figure 1 on page 4, this funding requirement had already been growing substantially even before OEF and OIF. Overall, the AMC RO in 2002 was estimated at just under $11 billion and is now believed to be in excess of $20 billion (the Army budget, for comparison, is now about $100 billion). The various elements that contribute to this aggregate RO and their differential growth rates can be identified, measured and associated with each of the various stages in the Armys multistage logistics model. Additionally, safety stock must also be included in this aggregate RO computation. This buffers against various sources of uncertainty within the demand and unit stages and variability across the supply stagesthe bullwhip effectwhich historically have not been isolated, measured and quantified. However, this wholesale safety stock cannot currently be related in any meaningful way to a readiness-oriented outcome. This is a consequence of both the existing lack of integration across the logistics stages (to be discussed in detail later) and also, as emphasized earlier in the retail stage, a persistent inability to relate downstream retail investment levels to readiness outcomes because RBS has not yet been adopted. Moreover, this inability is reflected in the 26

17. interface metric the Army has traditionally used to measure this protective buffer or safety level. The term safety level actually confounds two distinctly different inventory management metrics: one, safety stock which represents the inventory investment (budget) in protection and, two, service level which measures the degree of customer satisfaction in terms of a meaningful output metric (figure 4, page 8). By confounding metricssafety stock and service level into safety levelthe only means to improve customer satisfaction (Ao) is to increase wholesale safety level, although the actual effect on Ao is unknown. Consequently, AMC should adopt both safety stock and a readiness-focused metric (e.g., back orders) as management objectives for wholesale operations rather than safety level. Measuring safety level and supply availability as wholesale management objectives (interface metrics), which is the current practice, does not permit assessments of improved logistics network efficiency. As with the case of fill rate in the retail stage discussed earlier, managing the supply system to these interface metrics precludes identifying meaningful and cost-effective initiatives, programs and policies within an investment-performance tradespace. Other actions, especially work-arounds at the unit level, have persistently compensated for poor wholesale supply performance and masked actual wholesale stage contributions to readiness. Regarding the second major function performed by the wholesale stagenational supply inventory managementrecent LMI research sponsored by DLAs Aging Aircraft program has focused on consumable inventory characterized by highly irregular demand patterns. These encouraging results have significant implications for the Armys wholesale system as well, especially for aviation fleets. Across all services, specific repair parts in this category are infrequently demanded yet must be stocked because they are essential to sustaining aerospace weapon system readiness and safety standards. Traditional DLA practice has classified demands into two basic categories: Parts garnering at least four requisitions with a total quantity of 12 during the previous year are stocked under replenishment policy requisition objectives governed by standard inventory management models; and Low, infrequently demanded parts that do not meet the above requisition threshold are ordered under a numeric stock objective (NSO) policy. Their sporadic demand makes for difficult decisions about when to buy these items and in what quantities. This NSO policy has failed to produce good results at reasonable costs for more than 30 years. DLAs new business modernization ERP does not provide an improved capability, either. Nonetheless, as systems become more reliable and infrequent demand patterns increase due to reduced failure rates, these sporadic demand parts are expected to grow. LMIs studies for both DLA and the Federal Aviation Administration (FAA)large organizations that manage huge inventories for repairing complex systems across vast distances have shown that this new peak ordering policy reduces both delivery delay times and back orders for these particular consumable parts. Additionally, experimental results for a range of aircraft (C-5, E-3, E-2C, F/A-18 and AH-64) are proving that this new peak policy can substantially reduce both inventory levels and procurement workload shortly after implementation. These results are significant because DLAs sporadic demand inventory is currently worth more than 27 18. $1.6 billion with annual sales to the services of more than $400 million. This peak ordering policy, which now enables DLA (and the Army, if adopted) to make three-way trade-offs between service levels, inventory investment and frequency of procurement actions, is estimated to reduce overall delay times by 50 percent, the number of procurement actions by 35 percent, and the value of the sporadic demand inventory by 15 percent. By simulating the distribution of back orders for aviation units operating under this peak policy, LMI has been able to estimate the reduction in NMCS and Ao improvement for these sporadic demand parts. In the specific case of the Armys AH-64, experimental results show this new policy, relative to the current baseline NSO, reduced delay times by 25 percent and DLA procurement actions by 40 percent during the period 2001 to 2003, while improving both on-hand inventory and fill rates by 10 percent for these sporadic-demand items. After five years of development, experimentation and review, this new methodology is now considered mature to implement as DLA policy for aircraft parts.55 LMI currently is working on assessing peak policy effects for both sea- and ground-based systems and examining the policys applicability for sporadic-demand DLRs. The Army, following DLAs lead, should consider adopting this policy and also supporting LMIs current investigation into peak policy implications for DLRs. In addition to adopting readinessoriented metrics (including Ao and back-order rate) and managing the entire inventory system focusing on equipment readiness (ER) results rather than on traditional interface metrics, inventory should also be assessed for quality as well as contribution to readiness. Quality is typically captured in commercial supply chains with inventory turns. Military spares inventories are more complex, however. For example, DLRs such as transmissions and engines are multi-item and multi-indenture as well as multiechelon, and also have obsolescence and aging challenges associated with long life cycles. Hence, a possible new but simple metric that may be considered as a means of capturing inventory quality is 1 - [excess inventory + obsolete inventory]. Acquisition Stage Without a significant effort to increase resources devoted to recapitalization of weapon systems, the force structure will not only continue to age but, perhaps more significantly, become operationally and technologically obsolete. QDR Report 200156 The acquisition stage in our graphical, multistage supply chain model (figure 3, page 6) represents OEMs and their supporting multitiered labyrinth of more than 100,000 suppliers for DoD. Collectively, they constitute the manufacturing capacity within the larger defense industrial base that responds to the procurement and sustainment

needs of the Army. Though furthest removed from the readiness production function stage, this acquisition stage impacts supply chain responsiveness and, ultimately, readiness in two major ways: relatively short-term operational availability of spare parts, components (line replaceable units or LRUs) and end items that can have a direct, immediate impact on readiness at the unit stage; and 28

19. longer-term operations and maintenance (O&M) support costs contributing to life cycle costs (LCC) over the
extended duration of system use, typically several decades after research, development, test and evaluation (RDT&E), procurement and initial fielding. The aviation supply chains acquisition stage is fragile, vulnerable to price and lead-time escalation. It includes an increasingly higher proportion of sole-source suppliers which, in many cases, are sole sources to several different military and commercial OEMs. The Army seems to have little visibility into its second- and third-tier vendor base, which may be another root cause of supply lead time and stock availability problems. As a result of this lack of visibility, and with lead times of 300 to more than 500 days for many critical components, the only solution is high inventory at the wholesale level, again contributing further to the bullwhip effect. However, many of the high-strength alloy metals and aerospace steels used in helicopter turbine engines and transmissions are in tight supply and subject to dramatic price increases. Price and supply are cyclical and volatile, varying more than other industrial sectors. This volatility is partly due to the combination of limited original sources for strategic materials used in these alloys and steels, and partly due to the aerospace industry, which itself is vulnerable to cyclical market dynamics, representing about 70 percent of global demand for these materials.57 These aerospace supply chain dynamics are not new and have been studied extensively by commercial airplane manufacturers, who account for 40 percent of this demand. Boeing, for example, monitors these strategic materiel price fluctuations and cyclical relationships and their impact upon aircraft manufacturing capacity. Using system dynamics and discreteevent simulation to better understand cause-effect relationships, they have modeled their supply chain to quantify the impact of better-positioned inventory, improved collaboration and coordination, and reduced inherent delays within their supplier base. These dampening effects provide a more stable, cost- effective source of acquisition supply.58 It is not surprising, then, that a recent, ongoing study by the University of Alabama-Huntsville (UAH) for the Armys Cargo Helicopter (CH-47) Program Managers (PM) office has encountered these same cyclical effects within the Armys aviation acquisition stage. Lead times are ranging from eight to 13 months for transmission gears and eight to 12 months for bearingsall from sole-source suppliers, many of whom are sole source to other Army helicopter program offices, too, as well as to the commercial sector. Market prices for materials needed to create the special alloys and steels used for these components have grown exponentially over this past fiscal year.59 These conditions are occurring at a time when the acquisition stage already is overwhelmed with growing demand to support Recap and Reset requirements generated from an Army at war. This is another example, as was the Patriot wave guide retrograde issue described in earlier, in which the interactions between an unresponsive retrograde stage, a disconnected wholesale depot repair stage and an inefficient and unaware acquisition stage can directly and immediately affect readiness at the unit stage, potentially constraining the readiness needed to achieve demand stage requirements for operational missions. This is an increasingly dangerous situation confronting Army aviation logistics readiness, and it appears to be widespread. This is not the first time the U.S. military has confronted these particular supply chain challenges.60 One of the strategic materials used in aerospace steel recently afflicted by rapidly growing market price is cobalt, which has a limited source of supply mined in central Africa. 29 20. Around 1980 F-16 turbine engine blades were in high demand for production by the OEM. At the same time, not only were cobalt prices increasing but supply access was completely disrupted by rebels who controlled a crucial railroad in Zaire. Because the impact on readiness could not be tolerated given Cold War tensions at the time, the Air Force flew C-141s into central Africa in an effort to reconnect the supply chain by hauling cobalt back to the United States for commercial OEMs. For professionals who have experienced and understand the consequences of these dynamics, the current perception is that these cyclical trends in the military are getting worse. This is largely a consequence of the contraction and consolidation of the defense industrial base in the post-Cold War era. Fewer suppliers are now facing greater demands from multiple customers. Potential solutions include the use of long-term, performance-based logistics (PBL) type contracts, which have built-in product surge capacity provisions. Examples of such contracts include the Armys M1 tank and the 30mm + an incentive to adopt supply chain management concepts to achieve readiness requirements specified by the contract, but must do so profitably. This is surely one reason why commercial STA/RBS providers, especially those with feasible multiechelon, multi-item, multi-indenture software capabilities, are beginning to flourish in partnerships with OEMs and service program managers, especially for complex military aircraft.62 The second, longer-term impact of the acquisition stage is on life cycle costs, primarily those associated with growing O&M support costs as a consequence of aging aircraft fleets coupled with the lack of modernization programs, which historically have constituted weapon system recapitalization. The primary focus of this paper, so far, has been on improving logistics performance using supply chain and inventory management concepts to derive efficiencies and improve readiness. This emphasis, using figure 8 (page 13) as a guide, has been on reducing MLDT. Obviously, other design factors also affect the operational readiness production function, notably

maintainability (mean time to repair, or MTTR) and reliability (mean time between failures or MTBF). Maintainability and reliability are complementary aspects of aircraft availability and mission-generation capacity: reliability keeps an aircraft operational while maintainability enables an aircraft to undergo rapid repair and return to operational status when a failure occurs. The implications of both MTTR and MTBF on O&M sustainment costs, although recognized from a theoretical design perspective, are now becoming operationally significant and increasingly expensive due to the unprecedented length of service for aging fleets. Previously, this had not been a major concern due to the normal 20- to 25-year acquisition cycle for modernization programs. Two issues are briefly highlighted here: one, the previous failure to credibly incorporate reliability and maintainability design considerations into total system life cycle costs, which are now severely impacting todays downstream O&M costs; and, two, the failure to recognize and correct for deviations between original design MTBF parameters and subsequent actual MTBF (or MTBR) empirical evidence derived from operational experience. Regarding the first issue, reliability design to readiness, significant work undertaken by the Institute for Defense Analyses (IDA) focusing on U.S. Air Force and U.S. Navy/U.S. Marine Corps fixed-wing aircraft, suggests that relationships among these design factors (MTBF and MTTR), operational availability goals and life cycle costs can be quantified. Furthermore, despite the lack of standardized cost estimating relationships (CERs) for reliability improvement, analysis and modeling using actual aircraft data revealed that increasing investment in reliability and 30

21. maintainability can significantly improve availability and reduction in life cycle costs. Traditional maintainability
concepts that improve availability have included line-replaceable modules, accurate fault isolation and detection, and commonality. Among recent emerging concepts are condition- based maintenance (CBM), which capitalizes on prognostics and health monitoring systems to detect potential failure modes and thereby anticipate and preclude failure from occurring in the first place. Three major potential benefits accrue from this increase in aircraft availability: Life cycle costs are reduced as a result of O&M savings; Procurement quantities can be decreased without sacrificing the number of effective aircraft; and For ground systems, land combat modeling and simulation results suggest that higher reliability and availability lead to improved loss-exchange ratios across a range of scenarios, according to a recent study for the Army by RANDs Arroyo Center.63 IDAs work also reveals that the more complex the aircraft the greater the potential savings from this reliability design to readiness cost benefit approach.64 Regarding the second issuefailing to correct and adjust for actual MTBF operational experiencerecent work at the Naval Postgraduate School focusing on the F/A-18 emphasizes that reliability is the single most dominant life cycle cost driver and is the key enabler of acceptable cost-effective operational availability.65 This particular case study, examining one of the aircrafts actuators, reveals the impact of failing to periodically review recent trends and recomputing spare support requirements in light of actual operational experience. Patterns of failure were found that exceeded provisioning stock levels by more than tenfold. Although experience clearly had shown that reliability declined over time, inventory support computations had not been updated nor requirements adjusted to accommodate those changes. This resulted in under-budgeting logistic support, cannibalization and its costs, increased workload on maintenance personnel, potential safety risks and most significantly an operational readiness potential that was unrealized.66 Without modernization, time and age will eventually degrade operational readiness and increase demand on repair resources as aircraft inevitably progress from useful life into the wear-out phase (figure 12). In the absence or delay of modernization programs, which is the situation now for Army manned rotorcraft systems, various service life extension programs (SLEPs) have been used to further extend useful life, particularly for major components. More recently, with entire fleets beginning to enter the wear-out phase, the Army has had to develop extensive, comprehensive Recap programs for 17 major weapon systems, including UH-60s, AH-64s and CH-47s. Given the extensive nature of Army Recap and the chronic need to mitigate the effects of aging, knowledge of rebuild and procurement costs, differential failure rate and remaining useful life patterns for various DLRs and subsystems should help program managers optimize their Recap programs.67 In so doing they should heed the lessons learned from the two issues highlighted above: The goal should be to select for replacement/upgrade those DLRs and subsystems that minimize total program costs (including future O&M) subject to extending and achieving system availability goals; or 31 22. Figure 12 If faced with a fixed Recap budget, DLRs should be selected and prioritized to maximize their contributions to overall system availability. Recap is, in essence, a reliability design-to-readiness program in which additional reliability is built into a platform within the useful lifeor even wear-out phase, as with M1 tanksinstead of the traditional design phase of the system life cycle. Recently, the Center for Systems Reliability at Sandia National Laboratories (SNL) demonstrated an impressive but, so far, underappreciated optimization methodology using the AH-64 Recap program as a demonstration. With genetic algorithms and artificial neural networks, the labs modeling and simulation methodology identified several specific DLRs and other cost availability drivers. Then, using current mean time between replacement data and marginal analysis (similar to the RBS methodology), it developed optimal solutions that identified a range of Recap investment costs with associated O&M savings. The analysis identified where additional Recap effort yielded diminishing marginal operations and support (O&S) savings. This powerful and

insightful methodology demonstrated an ability to significantly reduce Recap costs by evaluating a wider range of potential DLRs to prioritize while also nearly tripling the availability improvement that had been projected for the baseline case. An additional benefit of this approach was realization 32 23. of a threshold beyond which Ao could not be increased regardless of the Recap investment level. This highlighted the importance of reviewing other potential sources of readiness improvement, including phase maintenance requirements and inventory management policy.68 SNLs capability is portable, transparent and fast running, adaptable to other Recap programs and exhibits potential to evaluate future alternative prognostic and health monitoring concepts, as well. The various Army Recap programs should expeditiously adopt and implement its use. Savings generated can be used to further improve selected system Ao and support the growing demand for Reset programs, as well. Summary Army logistics, particularly for aviation systems, suffers from several persistent disorders. These disorders, which are both systemic and chronic, have been illuminated throughout this section using inventory management theory, supply chain concepts and principles and logistics systems analysis as key sources of diagnostic power. To summarize, disorders and their respective effects include: lack of an aviation readiness production function, which induces both uncertainty and variability at the point of consumption in the supply chain, resulting in inappropriate planning, improper budgeting and inadequate management to achieve readiness objectives; limited understanding of mission-based, operational demands and associated spares consumption patterns, which contributes to poor operational and tactical support planning and cost-ineffective retail stock policy; failure to optimize retail stock policy to achieve cost-efficient readiness objectives, which results in inefficient procurement and reduced readiness; failure to proactively synchronize and manage reverse logistics, which contributes significantly to increased DLR RO, excess inventory, increased delay times and reduced readiness; inadequately organized depot repair operations that may be creating a growing gap in essential repair capacity while simultaneously precluding the enormous potential benefits of a synchronized, closed-loop supply chain for DLRs; limited visibility into and management control over disjointed and disconnected OEM and key supplier procurement programs that are vulnerable to boom-and-bust cycles with extremely long lead times, high price volatility for aerospace steels and alloys, increasing business risk to crucial, unique vendors in the industrial base resulting in diminishing manufacturing sources of materiel supplies, and growing obsolescence challenges for aging aircraft fleets; independently operating, uncoordinated and unsynchronized stages within the supply chain creating pernicious bullwhip effects, including large RO, long lead times and declining readiness; fragmented data processes and inappropriate supply chain measures of effectiveness (MOEs) focusing on interface metrics that mask the effects of efficient and effective alternatives 33 24. and further preclude an ability to determine readiness return on net assets or to relate resource investment levels to readiness outcomes; lack of central supply chain management and supporting analytical capacity results in multiagency, consensus-driven, bureaucratic solutions hindered by lack of an Army supply chain management science and an enabling analytical architecture to guide logistics transformation; and lack of an engine for innovation to sustain continual improvement for a learning organization. The existing aviation logistics structure is, indeed, vulnerable to the bullwhip. While endless remedies have been adopted over the years to address apparent visible symptoms, the fundamental underlying disease has not been adequately diagnosed or treated, much less cured. The analytical challenge is to better understand and then attack the root causes that contribute to variability within each stage and volatility across the system of stages. By improving demand forecasting and reducing supply variability within each of the stages, logistics system performance is moving toward an efficient frontier in the costavailability tradespace. The first step in suppressing the bullwhip effect is to isolate, detect and quantify the contribution these inefficiencies within each stage contribute to AMC systemwide aggregate inventory RO. Since Army inventories are managed to these computed ROs, reducing the value of the RO is a critical first step in eliminating unnecessary inventory. As prescriptions for improved performance recommended throughout this section are implemented in each of the stages (see figure 3, page 6), their respective contributions to reducing RO while sustaining or actually improving readiness performance can be measured, compared and assessed in a rational costperformance framework (figure 13). Then, for example, as retrograde operations become more responsive and contribute to a synchronized closed-loop supply chain, it becomes possible to reduce RO for specific DLRs by reducing both their back orders and associated safety stock while increasing readiness. The logistics system becomes Figure 13 34 25. more efficient: RO (safety stock) is reduced while performance (back orders and Ao) is increased, thereby moving toward the efficient frontier in the spares investment-readiness performance tradespace (figure 2, page 5). Multistage ApproachIntegration for Efficiency, Resilience and Effectiveness Achieving an Efficient, Integrated Multiechelon Inventory Solution In addition to reducing demand uncertainty, identifying the causes and reducing the effects of supply and demand variability within each logistics stage, the stages must also be integrated and linked together to ultimately identify credible cause-and-effect relationships between Department of the Army resource allocation

investment levels and readiness-oriented tactical outcomes. Although its recognition provides important insight into Army logistics, merely acknowledging that the aviation supply chain is vulnerable to the bullwhip does not automatically solve the problem. These effects can be avoided only if long-term organizational behavior and management processes are changed. Another major AMC business function is the requirement to position and effectively manage a large, globally distributed inventory with millions of parts in hundreds of locations. The challenge is further magnified by these locations being situated in different tiers of the supply chain. One of the major difficulties in managing a multiechelon network is achieving an enterprisewide inventory optimization solution. Multiechelon inventory optimization is difficult for at least two reasons: replenishment policies are applied to a particular echelon without regard to the impact of that policy on other echelons, and higher-echelon (in this case, wholesale-level) replenishment decisions tend to be based on specious or unreliable demand forecasts. Failure to achieve an integrated solution results in several inefficiencies and degraded performance: The supply network carries excess inventory as redundant safety stock; Customers face shortages even when inventory exists elsewhere in the network; Shortfalls and back orders occur yet interface metrics between echelons (e.g., fill rates and safety level) appear to be acceptable; Upstream suppliers receive distorted and delayed demand projections and cannot deliver reliable performance; and Short-sighted internal allocation decisions are made for parts with limited availability. Commercial enterprises characterized as multiechelon typically have used one of two approaches to address this inventory positioning challenge: one, a sequential application of the single-echelon approach; or, two, distribution requirements planning (DRP), an extension of materials requirements planning (MRP) used in manufacturing. Both approaches (figure 14), however, result in excessive inventory without necessarily improving performance levels. This occurs because an optimal solution for the entire network has not been achieved: total inventory has not been minimized subject to an outcome-oriented result such as customer service 35 26. performance objectives. Inefficiencies occur due to lack of visibility both up and down the supply chain: the retail stage has no visibility of the wholesale stage inventory balance, and wholesale lacks visibility into retail demand. Independent demand forecasts among the stages result in greater demand variation between them, leading to bloated but undifferentiated inventory levels, especially at wholesale. Furthermore, total network costs are difficult to assess, and the enterprisewide implications of new initiatives or strategies cannot be accurately evaluated because this sequential approach can only focus on their impact one stage at a time. Similarly, DRP, which uses a deterministic approach, cannot rigorously compute safety stock for the wholesale stage because retail stage demand variability has not been incorporated. As with the sequential approach, there is no link between safety stocks in the two stages. In complex supply chains, a recurring management challenge is determining where and in what quantities to hold safety stock to protect against variability and ensure that target customer service levels are met. In an effort to improve supply chain efficiency, an appreciation for the interdependencies of the various stages is required to fully understand how inventory management decisions in one stage or location impact other stages throughout the supply chain. Consequently, an integrated, multiechelon network, if achievable, offers several opportunities for supply chain efficiency: Multiple, independent forecasts in each of the stages are avoided; Variability in both demand and lead time (supply) can be accounted for; The bullwhip effect can be observed, monitored and managed; Various root causes can be identified and their effects measured, corrected and tracked; Common visibility across the supply chain stages reduces uncertainty, improving demand forecasting and inventory requirements planning; Order cycles can be synchronized (this has special significance for DLRs in the retrograde and depot repair stages); Figure 14 36 27. Differentiated service levels (e.g., Ao targets for different units) can be accommodated; and Action can be taken to reduce unnecessary inventory and operational costs while simultaneously improving outcome-oriented performance.69 Efficient results are then possible and the organization can have greater confidence that it is operating on the efficient frontier within an investment-performance tradespace (see table below). Within DoD and its supporting FFRDCs, the mathematical theory for multiechelon, multi- indenture, multi-item optimization supporting military inventory systems has been developed and refined over recent decades. Much of this pioneering theoretical work, primarily focusing on ground-based land combat systems, was accomplished by scientists and mathematicians at the Army Inventory Research Office (IRO) in Philadelphia, which was abolished in the early 1990s, 37 28. and much of the original talent at IRO retired or was reassigned. For military aircraft, experience has shown that DLRs most directly relate to aircraft performance and, in general, minimizing the sum of DLR back orders is equivalent to maximizing aircraft availability.70 Significant effort has also been placed on determining optimal stock levels and locations for reparable components in a multiechelon system. While the subsequent extension of this theory has been widespread,71 the focus of practical implementation within DoD has been on fixed-wing aircraft in the Navy and the Air Force rather than rotary-wing aircraft in the Army. Another structural constraint which previously precluded an integrated multiechelon approach for Army supply systems was the Army financial management systems use of separate stock funds for retail and wholesale operations. In recent years, these funds were combined into one revolving fund, the Single Stock Fund (SSF) within the Army Working Capital Fund (AWCF).

In theory, this should both facilitate and encourage adoption of an integrated multiechelon approach. For example, at AMCOM, the wholesale stage now has both visibility into the retail stage and more control over stock policy in the wholesale and retail stages, which it previously did not have for aviation and missile Class IX. Upon achieving milestone III for the SSF program, AMC would be able to incorporate a multiechelon optimization model and enable wholesale stock levels in addition to retail RBS solutions, to be directly related to readiness (figure 15). However, in practice so far, although AMC owns these retail stocks under this new SSF program, ASL and SSA stocks are still being managed by retail organizations as in the past. Figure 15 38

29. The key enabler for improved efficiency in all Army weapon system supply chainsand the more complex the
system, the more crucial the enableris adopting multiechelon RBS. This is an essential precondition for meaningful logistics transformation in the Army. Designing a Resilient, Adaptive Logistics Network We cannot forget the lessons we have learned. Our wars have not been one size fits all, and neither have our logistics. We need to remain flexible in planning for future logistics. . . . [Now] in an age of network-centric warfare, we need to sense, anticipate, respond, and do logistics better. General Paul J. Kern72 The intent is certainly not to blindly adopt the corporate worlds latest management fad, but rather to consider adapting proven concepts to the unique needs and challenges the Army now faces. For example, the idea of integration, when achieved by reducing slack or waste in the system, does not necessarily enable greater flexibility. The opposite result could occur with just- in-time methods. Lean manufacturing concepts have certainly helped firms become more competitive through the application of just-in-time principles, which exchange industrial age mass for information age velocity. Furthermore, many of the original lean manufacturing concepts, especially the focus on reducing stagnant inventory within a company, have been successfully adapted for supply chain management (SCM) across the entire value chain, which includes the customer who is pulling value through the supply chain. Nonetheless, just-in-time manufacturing concepts, although a powerful inventory reduction method, need stable, predictable supply chains for maximum efficiency. Even when enabled by IT, lean supply chains can be fragile, vulnerable to disruption and unable to meet surge requirements for an immediate increase in demand. In fact, recent official documents describe exactly such a condition for Army logistics in recent years. Greater duress and the compounding stress of ongoing wars on the military logistics system has resulted in a lean supply chain without the benefit of either an improved distribution system or an enhanced information system.73 A more appropriate analogy for Army logistics is a flexible, robust logistics networknot a serial chain or hierarchical arborescence, but rather a network spider web enabled by a strong analytical foundation with supporting information technology to achieve an integrated, flexible, efficient and effective logistics capability. These adaptive network concepts are driven by an overarching DoD transformation program coordinated by the Office of the Secretary of Defense (OSD) Office of Force Transformation (OFT). For logistics, one of six major battlespace functional area groupingsothers are fire, maneuver, protection, command, control and communications (C3) and information/surveillance/ reconnaissance (ISR)this visionary adaptive enterprise capability is referred to as Sense- and-Respond Logistics (S&RL).74 The basic foundational theory for S&RL is derived from the autonomous nervous system in biological systems which, in conjunction with the sensory perceptions of sight, smell, taste, hearing and touch, enable reactive and anticipatory protective responses. This S&RL concept builds upon IBMs autonomic computing initiative in which machines use on-board diagnostic sensors to assess and monitor system health, forecast and predict system and component level failure using prognostics, then employ automatic identification technologies to alert maintenance and logistics managers and engineers to problems before they 39 30. become visible. S&RL further extends this autonomic logistics platform-level concept to the larger logistics support network, thereby providing the capacity to predict, anticipate and coordinate logistics support wherever and whenever it is needed across the battlespace. Conceptual documents currently describe S&RL as a network-centric, knowledge-driven, highly adaptive, self-synchronizing, dynamic and physical functional process [which] achieves effects-based operations and provides a precise, highly agile, end-to-end, point-of-effect to source-of-support network of logistics resources and capabilities.75 These adaptive network concepts have evolved from pioneering work performed at the Santa Fe Institute focused on understanding how immensely complicated networks, made up of large numbers of interacting agents that cooperate and compete, regularly arrange themselves into complex organizations that are efficient, adaptive and resilient though the various agents are pursuing their own interests. According to this complexity theory, efficient, self-organizing systems like this emerge only at the edge of chaos, somewhere between a prescribed rigid order that is unresponsive to new information (including threats) resulting in paralysis, and a system so overloaded with new information that it dissolves into chaos. These so-called complex adaptive systems become self-organizing by responding to external conditions while maintaining an internal integrity that keeps them together and cohesive. This results in a higher level of order that enables the system to adapt in ways that continually benefit its member agents. Accurately predicting the future for such a complex adaptive system is not possible. Therefore, the optimal solution cannot be engineered in advance. Research is showing that some of the greatest improvements occur when these self-organizing systems are forced to respond to random or unexpected events and thereby discover creative solutions. This ambitious S&RL vision endeavors to replicate, albeit in a highly

accelerated fashion, these evolutionary, nonlinear biological concepts rather than linear mechanical engineering systems that have been the traditional province of large-scale systems design. Nonetheless, our ability to actually implement these concepts, especially at the theater and tactical levels for Army and joint logistics distribution, may be much closer at hand now than was previously recognized. The DDSNwhich includes operation-based forecasting on the demand side and RBS, lateral supply and risk-pooling (especially for DLRs) on the supply sideprovides the foundational basis for such a versatile, adaptive, agile and resilient network web (figure 16). Through both theoretical development and recent field tests, this DDSN concept has also been shown to attain improved effectiveness (Ao) plus more efficiency as total asset visibility (TAV) and ITV IT-based technologies are incorporated.76 Such a theaterand tactical-level DDSN is not only effective and efficient but also resilient and adaptive and will enable a rapid transition away from the traditional hierarchical arborescent structure toward an adaptive network design consistent with S&RL. Improving Logistics Effectiveness: Pushing the Performance Envelope So far, using supply chain concepts and the graphical Army multistage logistics model (figure 3, page 6), this paper has isolated and identified several challenges and opportunities both within these several stages and across them. However, it has not explicitly differentiated between efficient and effective solutions within the investment-performance tradespace. This section 40 31. Figure 16 41

32. clarifies and illuminates these distinctions using the graphical tradespace construct that has been a consistent theme
throughout the paper. Then, using additional analytical methods and concepts, this section further endeavors to develop and offer an analytical architecture to guide logistics transformation for the Army. By efficient we refer to those methods (whether policies, techniques, procedures or technologies) which, if adopted, reduce uncertainty or variability within any particular stage as well as across the system of stages that comprise the multistage logistics enterprise. The results of these methods would have the effect of moving toward the efficient frontier in the costavailability tradespace (figure 17). Achieving an efficient solution implies the best possible use of existing resources within the constraints of the current system design and business practices, and therefore results in operating on the existing efficient frontier. Figure 17 A more effective method is one that actually shifts the existing efficient frontier to a different operating curve, thus suggesting that current business practices are actually being changed. Cost-benefit analyses can be performed on various initiatives that yield improved but different results (figure 18). The relative magnitude of each of these cost-benefit alternatives, however, depends upon knowing the location on the current efficient frontier and the expansion trace of the new, improved frontier of an existing efficient operation that, through organizational redesign, business process changes or other forms of reengineering, becomes a more effective operation. The obvious graphical goal is to sustain continual improvement and progress over time through innovation in all of its various forms (figure 19). This is the essence of productivity gain, and in 42 33. Figure 18 Figure 19 43 34. competitive markets it differentiates those commercial firms that successfully compete and flourish over extended periods from those that do not. A noncompetitive governmental activity needs an engine for innovation to compensate for the lack of competitive marketplace pressures typically driven by consumer demand and customer loyalty. The most obvious engine for a military organization is imminent or evident failure on the battlefield. Failure in battle, especially if sufficient to cause the loss of a major war, clearly constitutes an unmet military challenge that is one of several key historical prerequisites for a revolution in military affairs (RMA).77 However, the U.S. military, especially the Army, has been extraordinarily successful in recent operations, despite several acknowledged logistics shortcomings. The current issue, then, is whether these real, persistent and serious logistics inadequacies are sufficiently compelling to warrant the necessary attention, resources, sustained intellectual support and extended commitment required for change. Indeed, a fundamental question is will, or even can, a so-called logistics transformation actually occur, especially with the nation at war? So far, however, the actual experience of more than a decade and a half of both Logistics Transformation and the Revolution in Military Logistics that preceded it offers a resounding no to this fundamental question. As a U.S. Army War College Strategic Studies Institute thesis states: Every Army Chief of Staff, Chairman of the Joint Chiefs of Staff, and Secretary of Defense in the last 15 years has stated unequivocally that a true transformation of the U.S. Army cannot occur without significantly changing the way we conduct logistics. The premise is that logistics is clearly the one area that absolutely must be transformed if the Armys vision of the future force is to be realized.78 As with many large commercial firms, the Army appears to be paralyzed by an innovation trap. The consistent pattern has been one of internal cognitive capacity denying the need for change, thus causing an inability within these organizations to commit to large-scale transformation efforts before it becomes too late.79 In the absence of imminent or evident failure resulting in battlefield losses that threaten the nations interests, an alternative engine for innovation is an extensive experimentation capacity providing an ability to see the impact of alternative concepts, policies, procedures, doctrine, tactics and organizational designa virtual environment that can realistically illuminate a better way of doing things and thereby possibly preempt future failure.

This experimentation capacity must also have a receptive organizational climate, including strong, sustained leadership support, mechanisms that actually enable discovery and learning to be derived from these experiments, and the institutional means to incorporate positive results into new or existing policies, doctrine and resource programsin short, a bureaucratic capacity to both encourage and accommodate change. Several illustrative examples exist of successful engines for innovation within the Army that have had influential, positive results. One example with relatively long-term, sustained effects is the transition toward simulation- based training to capitalize upon the emerging power of virtual and constructive simulation technologies. This opportunity was initially forced upon the Army by both increasingly prohibitive training costs and decreasing availability of adequate real estate for live maneuver training areas, largely a consequence of the environmental movement. The resulting revolution in training and training technology has been ongoing for more than two decades. 44 35. A less conspicuous example within a much shorter timeframe concerns the dramatic challenges to the Armys recruiting mission in the late 1990s. After nearly a decade of decline endstrength during the post-Cold War drawdown, the demand to stabilize Army numbers led to increasing recruiting requirements at a time when youth market conditions had become the most difficult and demanding in the history of the modern All-Volunteer Force (AVF). After several years of failed recruiting missions and retention challenges, Army combat organizations were struggling to meet personnel readiness objectives. Facing imminent failure and with the support of the Armys senior leadership, U.S. Army Recruiting Command (USAREC) successfully implemented an engine for innovation that directly addressed the fundamental nature of the challenge. This transformation engine included nationwide testing, experimentation, modeling, market and recruiter surveys, extensive simulation and rigorous analysis, all conducted by newly formed but cohesive, multidisciplinary teams of experienced recruiters, demographers, labor economists, statisticians, advertising experts, military psychologists and sociologists, market research and operations research analysts and systems engineers. Within a span of three years (19992001), USAREC suffered its worst recruiting year, completely reengineered itself while transforming its approach to the youth market, then enjoyed the best year in its 30-year history.80 These examples, though very different in form, duration and content, suggest the power, value and enormous contribution provided by a strong, comprehensive, analytically based engine for innovation as a surrogate for failure to motivate needed organizational transformation. Consensus-driven demonstrations, which the Army has adopted in recent yearsreplacing analytically sound, empirically based experiments and field testing for warfighting concept developmentdo not provide, and are not a substitute for, an adequate engine for innovation. The bad news is that an engine for innovation has not yet been adopted to support logistics transformation, much less accelerate it. The good news is that the U.S. Army, as these two examples illuminate, clearly has the experience and the potential capacity for doing so. An Analytical Architecture to Guide Logistics Transformation Several agencies and organizations have logistics modeling and supply chain simulation capabilities that could be pulled together, just as the new Army aviation-focused logistics readiness project is now attempting to do.81 They must now be integrated, even if loosely, into a more formal research consortium to better coordinate their efforts, reinforce their respective strengths and better facilitate properly sequenced field tests, experiments and evaluation with supporting modeling, simulation and analysis. When this is accomplished, these organizations could form the nucleus of an engine for innovation for logistics transformation. Several commercial and academic applications, concepts and sources of expertise could also be included.82 Another possibility is to create, as the Navy is now doing, a dedicated organization consisting of a partnership with both academia (for creative, cutting-edge concepts) and the corporate world (for existing commercial applications) working in conjunction with a new, congressionally funded logistics readiness research center. A similar partnership recently proposed by UAH is the Center for Innovation in Logistics Systems (CILS). The purpose of this engine for innovation, regardless of the form it might take, is to provide the large-scale systems simulation, analysis and experimentation capacity and expertise needed 45

36. to serve as a credible test bed. This capability would generate the compelling analytical arguments needed to induce,
organize, sequence and synchronize the many changes needed to accelerate transformation for Army logistics. Furthermore, it would offer potential for quantum improvement over the PowerPoint analysis that has become pervasive. The modeling and simulation methodology outlined below, if implemented in conjunction with this engine for innovation, would constitute dynamic strategic planning for logistics transformation. The intent is to avoid the typical project management master plan approach, which prescribes a predefined, set of tasks with tightly specified milestone schedules. Dogmatically following such rigid master plans may be mandated by various DoD regulations and federal contract laws. Yet, these constraints discourage the possibilities of adjusting program initiatives and tasks when necessity requires or opportunities arise through adaptation and experimentation. A more responsive, adaptive planning approach is needed to accommodate doctrinal changes driven by evolving mission needs and operational concepts or to capitalize on emerging results from experimentation, field testing and unanticipated breakthroughs. Operational conditions, emerging testing results or outcomes from previously enacted policy changes may illuminate a clear and compelling need for adjusting the plan at a point in time (most likely several times) by revealing certain project tasks that should be resequenced, accelerated or implemented in a more comprehensive manner. On the

other hand, further testing and evaluation may be needed to resolve key anomalies or concerns, thus causing delays or completely eliminating initiatives that are not sufficiently mature for implementation or have been precluded by better methods. The generation of these options and resulting decisions should be grounded in thorough cost-benefit analyses conducted in a large-scale systems modeling environment for the Armys logistics system.83 This logistics analysis test bed could be patterned after any one or combination of several organizational constructs, including the U.S. Army Training and Doctrine Command (TRADOC) battle lab or a center for innovation such as the proposed UAH Center for Innovation in Logistics mentioned above. The purpose, function and relationships of four key enabling analytical components of this approach are described in the following paragraphs. First, the multistage conceptual model used above to analyze the Armys logistic structure naturally lends itself to the use of dynamic programming (DP) or a comparable problem-solving technique. DP is designed for complex, nonlinear, mixed discrete/continuous problems that can be decomposed into smaller, more manageable parts for analysis and then recombined to yield systemwide optimal solutions. The basic concept that makes DP relatively unique in the field of mathematical programming optimization theory is called the principle of optimality. DP works backward through the several stages of the problem to ultimately derive at an optimal solution using a solution procedure rather than the mathematical algorithm typical of other optimization methods.84 Using figure 20 for reference, aligning four of the six logistics model stages with stages in the DP, the solution procedure moves from stage to stage working backward from the point of consumption where readiness output occurs at the unit stage. At each stage it finds an optimal policy for each state (impacting Ao, in this case) until the optimal policy for the last stage (N) is found. A recursive relationship relates the optimal policy at stage n to the n-1 stages that follow. Once the final N-stage optimal policy has been determined, the N-component decision vector can be recovered by tracing back through all the stages. In this graphical example, the challenge is to determine the optimal allocation of a defined budget across a range of initiatives associated with these several logistics stagesconsidering the various constraints that may be 46 37. Figure 20 imposed within each stage as wellto maximize the overall goal of the system of stages, i.e., Ao. This illustration also reinforces the crucial importance of adopting STA/RBS stock policy concepts, specifically incorporating multiechelon readiness-based sparing to realize further cost- effective improvements to the system. Second, and central to a dynamic strategic planning (DSP) approach, a multiperiod model must be incorporated into logistics transformation to accommodate the extended nature of this enormous undertaking. As events unfold, a mechanism is needed to routinely update the optimal solution which, inevitably, will change over time due to the inability to perfectly forecast future conditions, consequences of past decisions that do not reveal the results expected, and the opportunities provided by adaptation and innovation as they materialize, offering improved solutions requiring new decisions. This DSP approach is, in essence, a multiperiod decision analysis challenge, which also encourages and assists in identifying, clarifying and quantifying risk to the transformation effort. Risk assessment is a precursor to risk management is needed to reduce and mitigate the inevitably disruptive consequences of any transformative effort and all the uncertainties surrounding major change. Unlike most other planning methods that optimize a particular design based upon a set of specific conditions, forecasts and assumptions, DSP presumes forecasts to be inherently inaccurate and therefore builds in flexibility as part of the design process. This engineering systems planning approach, which incorporates earlier best practices such as systems optimization and decision analysis, has now evolved to include adapting real option analysis commonly associated with financial investment planning.85 DSP allows for the optimal solutionmore precisely, optimal policy to reveal itself over time while incorporating risk management instead of locking it in at the beginning of the undertaking. A set of if-then-else decision options evolve as various conditions unfold. This approach yields more robust and resilient system designs that can accommodate a wider range of scenarios and outcomes than can designs narrowly optimized to a set of conditions that, though perhaps easier to engineer and manage, quickly degenerate toward instability when such conditions no longer exist.86 An example of DSP applied to Army 47

38. strategic resource planning in support of the national defense strategy during the first Quadrennial Defense Review
(QDR) in 1997.87 Third, in addition to DSP, a wide variety of analytical methods should be used to reduce risk during logistics transformation. Risk can take on different connotations depending upon the application. Accordingly, we address two concepts here: operational risk faced by the logistics system responding to various shocks, supply chain disruptions and mission requirements that may not have been anticipated; and organizational risk to the Army logistics community, including the combination of investment risk associated with new project undertakings and the larger impact of transformation uncertainties associated with organizational change at a difficult and challenging time. Operational risk, in this decision analysis context, consists of assessing both the likelihood of a particular adverse outcome and the consequences of that outcome. One of the most important steps in this assessment is the quantification of risk. Yet, the validity of the approach commonly usedexpected valueis fundamentally flawed. Expected value metrics fail to represent the true risk of safety-critical systems for which the consequences may be catastrophic, though the probability of such an event may be low. This occurs because the expected value approach equates events of high consequence but low probability of occurrence (extreme events) with those of low

consequence yet frequent occurrence. Thus, extreme events with low probability are given the same proportional importance regardless of their potential catastrophic and irreversible impact. Recent advances in risk modeling, assessment and management have addressed the risk associated with extreme events and the fallacy of the expected-value approach. For example, a much-improved technique, known as the risk filtering, ranking and management (RFRM) methodology, ranks risk elements based upon severity. It then systematically steps through a risk mitigation process using relevant scenario-based analyses in conjunction with risk-reduction methods, including redundancy (backup components to assume functions of those that have failed), robustness (insensitivity of system performance to external stresses) and resilience (system ability to recover following an emergency). Other, more recently refined techniques that should also be considered include the partitioned multiobjective risk method (PMRM) and adaptations of the Leontief input-output model for a comprehensive risk assessment and management framework designed to ensure the integrity and continued operation of complex critical infrastructures.88 To address organizational risk, a variety of virtual, constructive and live simulation methods, especially analytical demonstrations, field testing and experimentation, can identify early on which technologies or methods warrant further consideration. In this context, organizational risk consists of the combined effects of both uncertainty of outcomessimply not knowing the impacts of various alleged improvements on the logistics systemand also the uncertainty of future costs incurred as a consequence of either adopting or failing to adopt particular courses of action. A recent example of this accelerating approach is the sequence of experimentation and testing adopted by the AMCOM project. The project first demonstrated, through rigorous analytical experimentation using the UH-60 aircraft in the 101st Airborne Division, the potential value of adopting RBS as aviation retail stock policy. These insightful, positive results enabled 48 39. further, more widespread field testing with several aircraft types in an operational training environment at Fort Rucker. Confidence and credibility in a new, different method have been gained through experience while significantly reducing the uncertainty initially surrounding the new initiative. Return-on-investment results clearly reveal reduced costs while still meeting or exceeding readiness goals. The Global War on Terrorism has illuminated a wide range of vulnerabilities in existing global supply chain operations. The Army logistics community should actively participate in the ongoing Supply Chain Response to Global Terrorism project recently initiated by the Center for Transportation and Logistics (CTL) at the Massachusetts Institute of Technology (MIT). This project is highlighting the dependence of corporate supply chains on public infrastructure and systems coordinated or affected by the government [that] represents new vulnerabilities for businesses now more heavily dependent on the government than previously recognized. Using assessments from recent terrorism effects on supply chain disruption and several other historical observations, several common failure modes have been identified. The research project is now focused on developing cost-effective methods and classifying various responses for reducing vulnerabilities by improving both the security and resilience of these global networks.89 The fourth and final enabling analytical component includes the development, refinement and use of econometric/transfer function models to assist disentangling investment cause-and- readiness effect for OSD- and Army Headquarters-level resource planners and programmers. As causeeffect relationships are better understood, and as model parameters, decision variables and elasticities are refined to reduce forecasting error and improve model calibration, this capability will help quantify high-impact investments and the differential effects of various logistics drivers on readiness outcomes. As part of this project, an initial modeling capability has been demonstrated for strategic logistics program development.90 Further developed and refined over time, these forecasting models can be used for both readiness prediction and determination of program requirements, and could eventually constitute part of a Logistics Early Warning System contributing toward the DoD mandate for a larger Defense Readiness Reporting System (DRRS). These four modeling approachesmultistage optimization, dynamic strategic planning, risk management and program developmentshould be used in unified and complementary ways to constitute a dynamic strategic logistics planning (DSLP) capability. Taking as input both the empirical evidence of ongoing operations (real world results) and the potential contribution of new opportunities derived from an engine for innovation, they can guide logistics transformation toward an efficient, increasingly effective yet resilient global military supply network. Collectively, they constitute the analytical architecture for logistics transformation. Strategic Management Concepts There is no lack of hi-tech, research and development vendors offering a quick fix, or consultants bombarding corporate offices to sell their services for guiding change. Yet, in todays unsettled environment of confusion and anxiety there is a general lack of understanding of what needs to be done and how to accomplish it. . . . You cannot visualize the future if your imagination is out of focus. Shoumen Datta91 49 40. Strategy is the heart of management.92 Today, however, an honest appraisal suggests existing organizational structures, relationships and logistics processes are, collectively, the product of decades of persistent work-arounds and ad hoc solutions, periodic management fads and, mostly, inertia. As with any complex, large-scale systems challenge, key integrating concepts will be essential to ensuring a successful Army logistics transformation. These organizational, analytical information systems, management concepts and technology should all be guided by a

vision and supporting strategy (figure 21). Ultimately, this strategy must focus the effects of transformation upon capabilities-based, readiness-oriented outcomes. The desired end state, a characterization of the logistics organization and system following the inevitably disruptive period of logistics transformation, is that of a learning organization. Figure 21 Organizational Redesign Institutions are grounded in culture, and culture changes very slowly. Thomas Homer-Dixon93 Nearly 20 percent of the Armys current acquisition workforce already is eligible to retire, and 50 percent will be within the next five years. Furthermore, the psychological effects on the remaining, predominantly civilian workforce of more than a decade of repeated downsizing and realignments cannot be discounted. Common themes expressed in interviews with officials throughout the organization are that work-arounds are endemic, ad hoc by necessity has become routine, and intense management is the standard response to compensate for chronic system 50

41. inadequacies. This surviving, dedicated and hardworking professional workforce is struggling valiantly to compensate
for a system that is increasingly failing them. An honest and forthright postmortem also begs the question of how the state of Army logistics has become what it now is. Two responses are offered here. First, the external factors credited with driving significant change in business world supply chains during the past decade are not apparent to the same degree within the DoD logistics system. These external factors included greater competition resulting from both deregulation of business structures and increasing globalization, the adaptation of information technologies to new business process needs and opportunities, and the increasing empowerment of the consumer, the so-called WalMart effect, causing a shift in the distribution channels toward tailored logistics, value-added services, alliances and partnerships resulting in every-day low prices.94 In contrast, while these same external factors were not forcing DoD to change comparable to the private sector, no compelling internal factors mandated change, either. Following the Cold War and the dramatic, lightning-quick Gulf War, the U.S. military was universally acknowledged as top dog. It had no incentive to change because, until recently, no clear evidence existed of either imminent or evident failure. A second, complementary explanation suggests that, in retrospect, the military drawdown during the 1990s decimated the existing analytical brain trust of logistics-focused, military operations research/systems analysts within AMC. Officer Operations Research/Systems Analyst (ORSA) authorizations (FA 49) declined from 55 in FY 1989, including five colonels, to zero by FY 2000 and have remained at zero since (figure 22). Army civilian ORSA authorization (GS 1515) also took a disproportionate share of cuts, declining from almost half of Armywide authorizations in FY 1990 to less than a third by FY 2002 (figure 23). Nearly all who remain are providing matrix customer support to program management offices as cost analysts. AMCOM had no dedicated resources to support outsourcing logistics systems analysis, research or studies for at least five years before this project was initiated a year ago. Even this effort has been funded through the AWCF and is competing directly with spare part procurement needs. The Army logistics community must organize for success, starting with an appropriate investment in analytical reconnaissance. Certainly, the ongoing effort to merge previously separate acquisition program management offices with AMC sustainment commodity commands into new Life Cycle Management Commands (LCMCs) better supports the asyet-unrealized concept of life cycle management.95 Transforming existing materiel management centers from managing supply levels for individual items to managing readiness for weapon systems would be consistent with implementation of a multiechelon, readiness-based sparing approach. More important, this would realign organizational structure toward the desired goal of relating investment levels and policies at the wholesale and retail levels to readiness-oriented outcomes. The shortfall in DLR surge repair capacity in the existing AVCRADs organizational design and mission concept, discussed previously, is now both evident and recognized. A new capabilities document for a Mobile Aircraft Sustainment Maintenance Capability (MASMC) currently is being processed through Joint Requirements Oversight Council (JROC) validation and approval milestones. This new concept emphasizes the versatility for both a sea-based and land-based capacity to better and more responsively support an expeditionary capability, 51 42. Figure 22 Figure 23 52 43. especially during the initial deployment phase when seaports or airports may not be available. A historical precedent exists for the sea-based concept: USNS Corpus Christi Bay served as a floating aviation maintenance and repair platform off the coast of Vietnam from 1966 to 1975. Resurrecting such a concept today would also be consistent with the militarys evolution toward sea-basing as a practical response to the growing number of nuclear-armed regional powers, whereby mobile off-shore logistics support can be better defended against theater ballistic and cruise missile attacks. As the new MASMC concept is reviewed and evolves, consideration should be given to adopting a force structure for the supporting multipurpose aviation sustainment brigades (the replacement AVCRADs) similar to the U.S. Army Special Forces concept. Active and reserve Special Forces groups are similarly organized, but then tailored, trained and deployed to conduct support operations in specific regions of the world. In the case of the MASMC, the concept of operation would associate each of five MASMC brigades with the five corresponding regional combatant commands: U.S. European Command (EUCOM), U.S. Pacific Command (PACOM), U.S. Southern

Command (SOUTHCOM), U.S. Central Command (CENTCOM) and the newly formed U.S. Northern Command (NORTHCOM). Given the current pace of global operations, this would enable habitual association and command relationships to develop. The Special Forces model also would better suit the special expertise, modified MASMC brigade organization which should be table of organization and equipment (TOE) rather than table of distribution and allowance (TDA) as the AVCRADs were and capabilities peculiar to the operating conditions and special challenges aviation support operations face within each unified command. Both the homeland defense (NORTHCOM) and homeland security (Department of Homeland Security) missions will continue to require National Guard aviation support that have imposed additional demand not anticipated in the original ADMRU/AVCRAD concept of 1979. This MASMC concept of operation would then provide more immediate and sustained support to each of the regional combatant commands and a dedicated brigade to support the increased demand of homeland defense and security. It would also offer additional flexibility and capacity within nondeployed brigades to support sporadic surge requirements or engage in rotational or reinforcing deployments to sustain extended operations. Finally, though particularly urgent, creation of a Chief Knowledge Officer (CKO) and supporting office of resource managers, logistics systems analysts, operations researchers and strategic planners would provide the knowledge and talent base to develop, measure and monitor programs with supporting metrics that link strategy to measurable results. To fully comprehend the effects of promising new technologies and methods upon the existing logistics system, the current systems previous pathdefined by history, organization, process and culturealong with its directional momentum, must be understood. While vision drives organizational goals, objectives and missions, core competencies heavily influence both organizational structure and processes. For Army logistics, this crucial core competency is central to understanding what is happening, what is likely to happen and why. Knowledge must be continually extracted from the systems hysteresis to encourage innovation and sustain organizational improvement.96 Within existing military organizational structures, this source of information collection, analytical capability and knowledge creation is sometimes found in Program Analysis and Evaluation (PAE) organizations and within joint staff (J-8) and Army general staff (G-8) structures. Such a logistics 53

44. systems analysis capability, if viewed as a core competency, could also reside in a separate Army center of
excellence, much as the original Army IRO had until it was abolished in the early 1990s. Similarly, but more recently, the Navy received 2005 congressional funding (HR 4613) to establish a Navy Logistics Readiness Research Center, a partnership with academic institutions and commercial firms focused on resolving many of the long-standing, GAOnoted deficiencies by developing new models, systems and approaches, including implementation of multiechelon optimization applications for the Naval supply system. If, alternatively, logistics systems analysis is recognized as needed but not deemed a core competency and, therefore, appropriate for outsourcing, a third option would be to create a convenient but durable relationship with a consortium of partners and expertise that could be called upon as needed. While many of the structural barriers to integrated supply chain management are organizational, limiting logistics transformation to these planned and suggested redesigns of current organization and force structure will undoubtedly prove insufficient. Both organization and process must follow strategy. Contributions of (Transactional) Information System Technology and (Analytical) Operations Research For many businesses, the scope, flexibility and performance of enterprise planning systems has been far less than desired and implementation unexpectedly difficult. It is crucial to differentiate among the purpose, forms and functions of analytical operations research (OR), which essentially comprise knowledge-based decision support systems (DSS), and transactional IT, which is concerned with acquiring and processing raw data and the compilation and communication of reports. While the effort required to replace a legacy modeling system may be considerable, overcoming barriers to legacy thinking about supply chain decisionmakingthe analytical componentis a more difficult and challenging task because it requires overcoming human and organizational barriers to achieve fact-based decisionmaking.97 Basically, an ERP system is a grouping of software modules that interface with a common database. As numerous case studies have noted, ERP implementations both illuminate and transform organizational processes. All too often, disaster is courted and occurs when ERP solutions are undertaken without comprehensive understanding of these underlying processes. The clear lesson drawn from these many case studies is that an ERP implementation is first and foremost an organizational management challenge to create new business-process designs, and only secondarily to install software systems to support those new designs.98 OR, with its roots in multidisciplinary teams applying scientific methods to military operations, has been defined as the science and technology of decision making.99 It is the discipline of applying advanced analytic frameworks for dealing with complexity and uncertainty, especially in large-scale systems and organizations. Its purpose is to assist managers and executives with their decisionmaking processes by furnishing insight and guidance using advanced analysis. In essence, it is about the creation and management of productivity gain, and thus has been described as the productivity gain engine used to help organizations achieve their full potential. A recent article published by the Institute for Operations Research and Management Science (INFORMS), the professional organization for OR and management science, describes it as follows: 54

45. To raise the question of improvement in an organizations productivity without taking full advantage of all that OR offers would be analogous to pursuing a required improvement in ones health while ignoring the entire medical community. The realm of OR is productivity gain.100 This medical analogy is pertinent in the use of supply chain concepts to help diagnose root causes, the many suggestions and recommendations which, collectively, comprise remedies to alleviate short-term symptoms and, most important, a set of genuine prescriptions to cure the underlying illness and fully heal Army logistics. Recently, the phrase The Science of Better has been adopted by INFORMS. Its professional conferences and workshops continue to focus on a worrisome trend occurring in large-scale, complex organizations. Without reengineering business processes using the analytical, integrative power of OR, the growing obsession with IT may result in increasingly complex systems that exceed the interpretive capacities of the organizations responsible for developing and using theman example of an ingenuity gap described below. IT solutions now have ubiquitous appeal with enormous investment levels to substantiate this growing, widespread trend. Driven by increasing awareness and recognition that effective management of the entire supply chain can lead to sustainable competitive advantages in the corporate sector, the percentage of firms actually achieving such competitiveness is remarkably small.101 One recent major research effort focused on better understanding what might be causing this result and identifying those supply chain transformative strategies that differentiate the few successful firms from the many that are not. Involving case studies of 60 companies and 75 different supply chains, the research attempted to determine whether a direct correlation existed among business process maturity, IT infrastructure and investment levels and supply chain performance. The experimental design was unique in that it enabled empirical results to differentiate cause and effect: could financial performance results be attributed to improvements in business processes, IT investment levels, neither or both? The research indicated that those companies with existing appropriate, mature business processes (directly related to the firms long-term strategy and business objectives) that had invested in IT solutions enjoyed significant operational performance improvements and financial profitability. However, this result occurred in less than 10 percent of the companies evaluated. Those companies that focused on reengineering business processes without implementing associated IT solutions were not nearly as successful as those that did implement IT solutions, yet still improved performance by more than 25 percent. However, those companies that tended to substitute IT solutions for relevant business processes or reengineering to properly align the organization to its business objectives not only failed to achieve returns on their IT investments but also declined in relative performance (figure 24).102 Numerous efforts also are under way to transform supply chains within the government. One partially successful effort over the past 15 years involves the $2.3 billion defense medical logistics community. While earning several accolades, including the Hammer Award in 1998, the effort has also encountered several challenges and documented major concerns as lessons learned. Although business process reengineering was officially a prime objective from the programs inception, it was not clear who had ownership of the effort. According to case study results, many managers tended to allow technology to drive the reengineering effort or were tempted to 55 46. Figure 24 simply automate existing processes rather than improve the process before applying the best technology. Several PMs were pressured to produce results quickly and performed only cursory business process reengineering (BPR) efforts, and risk-averse managers were reluctant to invest in outcomes they would then be obligated to achieve within a bureaucratic organization with diffuse responsibilities. 103 These observations are instructive for AMC today, given the enormous investment in the Army Logistics Modernization Plan (LMP) and the larger Single Army Logistics Enterprise (SALE) initiatives. Driven by various forms of information systems and decision technologies, the accumulating evidence from supply chain transformation experiences is now clear. Process rationalization initiatives (discrete reengineering efforts) and information technology integration, when combined, for example, in ERP solutions, may reduce transaction costs and provide other logistics savings. Conversely, they may also create information glut. Hence, for large-scale, complex organizations, the greatest return on investment is derived from the creation and implementation of new DSS that incorporate OR-based systems planning, forecasting and optimization technologies. Ultimately, this strategy will enable senior leaders and managers to generate knowledge and better decisions from the growing amounts of information made available by advances in information systems technologies. As mounting evidence suggests, the source of real advantage does not lie simply in procuring information technology but in the business model itself and organizational ability to convert information into insight (figure 25).104 56 47. Figure 25 Strategic Management Concepts and the Learning Organization Managing by anecdote is no better than managing by averages . . . [and] managing by averages leads to below average performance. Arnoldo C. Hax, The Delta Project105 Historically in the corporate world, competing, sequentially adopted management philosophies periodically appear, gain popularity, then recede. In contrast, an emerging school of thought suggests an alternative concept fundamentally consisting of three prescriptive, simultaneously operating and complementary approaches. The goal is attainment of an integrated management science where these approaches are placed within a larger, more comprehensive and scientific framework, one that ultimately enables emergence and sustainment of a learning organization. Each of these three serves different purposes within this framework, yet they all relate to the theory of

the firm and should ideally be used in a complementary and unified way. Each approach emphasizes different perspectives on the organization: 57

48. first, a need to evaluate the short-term, internal performance and efficiency of the organizations ability to transform
resources into products or services; second, a more comprehensive perspective that incorporates trends and longer-term dynamic patterns, endeavoring to understand cause-and-effect relationships among the several flows physical, information and financialboth within the organization and in relation to external factors that evolve over time and may subtly effect or abruptly shock the organization; and finally, the need to clearly define purpose, provide goals, nurture culture and encourage growth and improvement while situating the organization within a larger, competitive environment. Supporting each of these organizational performance perspectives are corresponding prescriptive analytical methods: logical yet circumscribed, statistically based techniques, including Six Sigma, Lean and the Theory of Constraints, all of which focus on improved output quality, process and system efficiency within the boundaries of the organization; the domain of systems sciences, including the disciplines of systems simulation and analysis, that focus on analyzing and modeling both internal integration of and external adaptation to dynamic processes and conditions affecting the firm; and the more creative field of strategic planning, which has distinct quantitative aspects requiring metric-based objective hierarchies to establish meaningful performance measures and trends that can be related to the larger objectives, goals and vision of the organization.106 Aligning execution and measures associated with organizational performance to a distinctive strategy illuminates the need for adaptation and change. Such a dynamic strategic plan also provides inherent mechanisms to sense when reacting toas well as creatingchange is necessary. The value of an objective hierarchy within a dynamic strategic plan is multifold and serves several purposes by collectively aligning strategy, processes and metrics (figure 26). Descriptors for good metrics are that they be measurable to drive the collection of objective data, relevant to goals and objectives, and simple. In addition to defining performance, delineating accountability and monitoring progress toward strategic objectives, objective hierarchies also establish feedback mechanisms necessary to change a course of action when needed. Effective metrics also go beyond a narrow instrument of management control by helping to communicate organizational strategy, thereby producing greater organizational cohesion and congruency in workforce tasks. These strategy-related metricsor performance MOEshelp reinforce the pursuit of a common vision for the entire organization. In contrast to companies or agencies that expend effort and energy trying to measure everythinga clear indication that they really do not know where they want to gocarefully selected metrics that relate meaningful performance to a well-developed strategy also provide insight into what an organization is truly willing to change. While aligning strategy to successful execution is essential, these objective hierarchies and supporting metrics should all be designed with the purpose of organizational learning in mind. Recently published results from a long-term, comprehensive business strategy and management 58 49. Figure 26 research effort indicate that executives today, inundated with heavy doses of both anecdotal information and average performance data, nevertheless have inadequate, inappropriate, even irrelevant information at their disposal to fulfill their mandates of improving company performance in increasingly competitive environments.107 With only averages as a guide, it is therefore not surprising that across-the-board reductions result from organizational reengineering efforts. Average data provides little insight into what is actually driving performance, especially in large- scale, complex supply chains subject to uncertainty and variability. Interdependent systems are characterized by information lag effects, feedback delays and nonlinearities, where small changes can amplify with large consequences. Averages mask variability in performance, yet those areas most afflicted by high variability, volatility and uncertainty clearly point to directions for improved performance. Indeed, in the face of extensive systemic and structural variability, managing short-term results to average performance metrics is not only insufficient but can be misleading and counterproductive. Metrics, then, should be identified and selected to detect, segment and exploit underlying and perhaps previously masked variability in outcomes. This approach can then reveal a guide for 59 50. learning processes conducive to action and innovation linked to organizational strategy. This cycle consists of identifying key MOEs, then detecting, understanding, explaining, learning from and taking action based upon variability in performance. For those companies analyzed as part of this long-term management research project, this process of detecting, explaining and acting upon sources of variability was found to constitute an important, and manageable, source of new knowledge108 a phenomenon otherwise known as learning. Not only can meaningful progress and improvement be monitored with an appreciation for underlying cause-and-effect relationships, but also the feedback mechanism inherent in this cycle leads to adaptation and experimentation, which can enable effective, positive and responsive change and continual operational and organizational improvement. Performance-Based Logistics for Effects-Based Operations Despite spending billions on logistics systems improvements in recent decades, the results have always been less than expected and often years later than promised . . . a dramatic, coordinated effort to improve the militarys strategic supply chain planning and execution

capability is badly needed. Roger Kallock, former Deputy Under Secretary of Defense (Logistics and Materiel Readiness)109 Spanning nearly a half-century now, the genealogy of DoD acquisition reform movements is extensive. The many management initiatives focused on improving system support performance and reducing costs include integrated logistics support (ILS), value engineering, design-to-cost, total quality management (TQM), concurrent engineering, CLS and, most recently, focused logistics. While the objective has been fairly constant over the decadesefficient allocation of resources to sustain readiness objectivesmethods for achieving those objectives have been varied but largely unsuccessful. For example, DLAs new Business System Modernization program is the sixth attempt in the past 20 years to change business processes. O&S cost growth has continued to plague all the services, especially the Army where billion-dollar shortfalls in obligation authority have caused component and parts shortages and reduced readiness for many major systems. Tactical user distrust with the supply support system has led to labor- intensive work-arounds and local solutions that, over time, induce even greater complications and inefficiencies. Finally, military logistics supply chains are inherently complex, with overlapping functionsmaterial, information and financial flowsacross independently operating organizational stages that collectively comprise the logistics support structure (figure 5, page 9). With so many organizations and agencies having authority over their various functions and operations, accountability for integrating systemwide performance across all these jurisdictions has been nonexistent. As a former AMC commanding general recently observed, No single manager performs the oversight, anticipatory, integrative role as a fleet manager.110 The following perspective is insightful and relevant to these ongoing challenges: We have gone through Total Quality Management, reinvention and reengineering, downsizing and rightsizing, along with the revolution in information technology. Now people are asking us to take on process improvement, performance management, 60

51. balanced scorecards, knowledge management, and who knows what else? We face so many conflicting demands we
need to figure out what our focus and priorities should be. How can we make sure all of this effort is headed in the right direction?111 The most recent official response to this crucial question is a concept known as PerformanceBased Logistics (PBL), mandated by DoD Directive 5000.1 in May 2003. The resulting consequence of the chronic lack of accountability has been an inability to generate an adequate institutional sense of urgency for change. This leads to bureaucratic paralysis. However, this should not be confused with risk-averse behavior frequently attributed to senior officials who have lengthy, significant investments within their institutional environments. By failing to change they are actually incurring greater risk, not less. However, because they do not have the analytical tools needed to generate compelling arguments for change and illuminate the risk, paralysis sets in. This commonly afflicts large, complex, hierarchical organizations and is consistent with bureaucratic inertia, which has proven difficult to overcome or redirect when crises loom and failures, sometimes catastrophic, become imminent. PBL, which encourages outsourcing logistics support functions, endeavors to prescribe and fix accountability to a single system fleet manager (the PM) by focusing on system performance outputs and readiness goals (rather than inputs and interface metrics) and reducing system life cycle costs. Fundamentally, PBL embraces free market economic concepts emphasizing the proposition that the private sector, given appropriate incentives, can outperform government agencies in managing activities that are not inherently governmental. In the private sector, the term product support has been used to describe a similar management philosophy of providing cost-effective maintenance and repair parts support to customers. PBL attempts to engage industry more completely throughout the life cycle of systems by giving industry partners a financial stake and incentive to maintain required readiness at minimum overall cost. DoD and the services may have found a way to fix accountability for performance by having commercial logistics providers work for PMs and implementing performance agreements between the two. In so doing, the goal is to both improve supply chain performance and fix accountability, objectives that have been elusive despite the long genealogy of DoD reforms and initiatives. However, developing appropriate metrics and meaningful incentives for PBL agreements constitutes a new venture for DoD. The challenge is one of aligning incentives for the logistics provider within a CLS contract so that both buyer and seller objectives can be met. The buyerthe Armys PMhas a constrained budget within which readiness performance goals must be met. The sellerthe commercial logistics support provideris obligated to achieve results specified in the contract but also must make a profit. Thus, the CLS provider has a contract-based incentive to maximize profit while the PM must meet or exceed readiness requirements and performance objectives for the weapon system. To accommodate both objectives the CLS providers profit conditions must be aligned with the PMs readiness objectives in the performance agreement specifications. Because profit is maximized for the logistics supplier where total revenues exceed total costs by the largest margin (or where marginal costs equal marginal revenues), the challenge is to align this condition as closely as possible to the required readiness and performance goals. In 61 52. so doing, the gap between profit motive and readiness targets will be reduced. While deriving the cost function, measured in dollars, is relatively straightforward and can be accurately estimated, establishing the production function in terms of readiness and performance is difficult to quantify in dollars. Some method of converting readiness into value that can be equated to dollars is needed. This difficulty is reflected in current PBL performance agreements

in which, typically, complicated scoring regimes have been developed to quantify value as output in dollars. Not surprisingly, the measures tend to reflect traditional practices. Accordingly, heavy emphasis is placed upon interface metrics such as fill rate and safety level. This approach may enable comparisons of PBL contract performance with the base case empirical evidence of supply performance, but it precludes focusing on system output performance needed to capitalize on the promise and inherent advantage of PBL. This disconnect between supplier objectives (profit) and PM performance is a direct consequence of the metrics used in the scoring regime. In an actual case, only 30 percent of the metrics chosen actually related to readiness parameters (NMCS and Ao) while the remaining 70 percent were all related to fill rate supply performance parameters. The CLS did, in fact, achieve the mandated 85 percent fill rate goal, which reflects the preponderance of the scoring regime incentives (the award fee). But, as emphasized earlier, although the 85 percent fill rate yielded maximum profit, the disparity between seemingly good supply performance interface metrics and actual supply system readiness outcomes is truly dramatic: actual readiness performance achieved after contract implementation was less than 30 percent compared to the PMs goal of 90 percent.112 Although the emphasis has been placed upon system readiness as a performance objective in PBL, other key performance objectives include reducing battlespace support footprint and reducing operating and life cycle costs. The lesson for future conflicts, demonstrated in both OEF and OIF, is to limit the physical presence of support forces and materiel. This improves force agility by reducing deployment times, intratheater lift requirements and force protection resources. The desired effect, consistent with effects-based operations, is to minimize the logistics footprint within the battlespace while maintaining effective sustainment. This can best be achieved by adopting demand-driven supply networks that require sparing-to-availability and mission- based, empirically derived demand forecasts. While these methods could explicitly be incorporated into PBL contracts, it is also likely that the logistics provider, given the latitude and encouragement to do so, would adopt such concepts anyway because they are resource-efficient methods of achieving effective results. Recent pressures for cost reduction in the Army have resulted in sustainment engineering funding levels too low to adopt many improvements to increasingly aging fleets. In private industry these improvements would be considered as capital investments with the return on investment being greater mean times between component failure and unit replacement and fewer requirements for component removals and repairs. This paper earlier referred to this concept as reliability design to readiness. However, no such mechanism or incentive is available within the Army due to the current structure of the financial management and appropriations processes and the perception that military technicians and repair mechanics are a free good. 62

53. In the congressional budget process, investment funds consist of RDT&E and procurement. Allocating appropriate
amounts of these funds to sustainment engineering (Systems Sustainment and Technical Support funds) could potentially yield large O&S cost reductions. However, these funds compete in funding categories with other major acquisition programs. In a rational process, these stovepipes would not inhibit capital investments to reduce future costs. Nonetheless, such investments find few supporters because the competition for available investment funding traditionally has favored improved capabilities (new weapon systems) over reduced operations support and manpower costs. Additionally, the Armys existing financial management system the AWCFprecludes rather than encourages efficient behavior. As a result, repair costs have been rising precipitously for a decade, and outrageously high prices have been charged to the customer, adversely affecting readiness. Ultimately, the customerArmy combat organizations bears all the consequences and risks of this dysfunctional system.113 Under the new DoD PBL mandate, PMs shall be the single point of accountability for accomplishing program objectives for total life-cycle systems management, including sustainment. . . . PMs shall consider supportability, life cycle costs, performance and schedule comparable in making program decisions. Supportability, a key component of performance, shall be considered throughout the system life cycle.114 However, while PMs continue to receive RDT&E and procurement funds for acquisition, they have not been given AWCF obligation authority or Operations and Maintenance, Army (OMA) funds for procuring sustainment support. Thus, they do not yet have funding authority commensurate with their new responsibilities. Once this issue is resolved, PBL offers the opportunity to bypass the dysfunctional and paralyzing effects of the current financial management system. PBL also has the potential to overcome confrontational, antagonistic relationships that have characterized contracting between the government and commercial providers. What is now needed to accelerate PBL is a trusted agent, an objective, neutral, mutually respected, analytically based third party who can negotiate performance agreements with confidence. The challenge confronting successful implementation of PBL as a new operating principle and management philosophy is analytically aligning the incentives within the contract to achieve readiness outcomes and performance results. This could lead to a transparent, mutually understood, objectively derived way of generating performance agreement outcomes that link price, cost and incentives to readiness and performance. The analytical methods, logistics models and supply chain simulation capacity are available today, though not currently used by Army logistics analysts or program managers. The Army should adopt this approach expeditiously. Once it has been implemented, PMs will rely upon this trusted third party to generate performance agreements with appropriate metrics and the ability to see the impact on readiness and performance by allocating their resources under different incentive scoring regimes. CLS

providers, likewise, would depend upon a mutually trusted third party to analytically determine best methods and innovative approaches to improve logistics support, meet contract performance goals and maximize profit. This third party thus becomes the honest broker and analytical glue that enables PBL to succeed, proliferate and become a 63 54. dominant, sustained standard practice across the Army and DoDpotentially a first in the long genealogy of defense acquisition reform initiatives. Logistics Transformation and Disruptive Change We want to change the logistics system. Logistics has always been central to the military. But its also been a drag on what the military can do. And right now, its a drag on transformation because so much money and so many people are absorbed in logistics processes, that we need to reach for new constructs. Vice Admiral Arthur Cebrowski115 One military logistics analyst recently noted that supply chains for contingency operations are complicated by the dynamics, risks, and uncertainties of these operations, which make it particularly difficult to establish metrics for logistics functions.116 In addition to the challenges posed by executing contingency operations while also transitioning toward the adaptive network concept of Sense-and-Respond Logistics, accelerating innovation by infusing major new technologies will inevitably lead to disruptive change. Managing expectations for organizational performance during such a period of change requires strong, determined leadership. Common directional understanding throughout the organization must be generated by shared vision and a strategic implementation plan. Change, frequently undertaken without a guiding process, can easily create initiative overload and organizational chaos. Attempting to orchestrate unmanaged change leads to cynicism and burnout as good ideas proliferate and the workforce becomes burdened with increasingly disconnected efforts. In the absence of a change management process, the organization has no ability to subsequently explain the consequences of the many initiatives allegedly contributing to either success or failure. It becomes impossible to disentangle cause and effect, and the gap between work force expectations and actual organizational performance grows. This analytical architecture is needed as a foundation for a credible transformation strategy so that resources can be allocated to meet appropriate expectations. The history of innovation suggests the reality of change is, all too often, a failure to plan resulting in expectations of performance that simply cannot be met. This occurs especially during the period of disruption when historical performance normally declines, although only temporarily for those organizations that are ultimately successful (figure 27).117 An essential but typically undervalued aspect of transformation and organizational reengineering is the investment in and attention to human capital. DoDs current technocentric approach is based upon a presumed information technology-driven revolution in military affairs118 that is reflected in our transformation lexicon: system-of-systems, network-centric operations, smart weapons, space-based total situational awareness enabling an ISR precision strike complex to achieve full-spectrum dominance. One defense analyst described the consequence of this RMA as an ability to bomb any target on the planet with impunity, dominate any ocean, and move forces anywhere to defeat just about any army.119 Nonetheless, whether burdened with disconnected, outdated and inefficient legacy logistics systems that cannot keep up with new operational warfighting concepts or, at the other extreme, challenged by the remarkable ability of our scientific communities to develop sophisticated systems, an ingenuity gap may be 64 55. Figure 27 developing: a growing inability of leadership, management and the larger DoD workforce to fully understand and cope with complex, tightly coupled engineering and information systems.120 As an illustrative and relevant example: One of the key reasons for the failure of distribution-based logistics to work in operations as massive as OIF is the incredible complexity of the system. . . . Failure in any one of the component areas of distribution-based logistics will cause problems. Failure in multiple areas, or in the case of OIF in nearly all areas, can be disastrous. This complexity is manageable, but only if the system is established and is viable.121 This growing ingenuity gap, assuming it does exist although its extent may not be well- defined, is further exacerbated within the military, especially the Army, when placed within the context of the recent decline in the use, influence and appreciation of OR. Following its introduction and operational focus in the early stages of World War II and its broad post-war acceptance, OR was incorporated and institutionalized within a wide range of Army organizations and functions, including resource planning, warfighting doctrine and land combat analyses, force structure and combat developments, manpower and personnel, acquisition test and evaluation, and logistics. OR, in these earlier decades, using the words of one of its most experienced and distinguished contributors, 65

56. relied heavily on experiments, tests and analysis of empirical data to develop a thorough understanding of processes
being modeled . . . [these] experiments were designed for learning. Unfortunately, the Army today does demonstrations, not experiments as they did in [earlier decades]. . . . Relative to 19601995 the Army has now reduced the use of model-based analyses to address system, force design/structure, and operational concept/doctrine issue and is relying more on large field exercises and subject matter experts in a gaming context. . . . It remains to be seen if OR and model-based analyses will play any role in designing the versatile [transformed] force. [emphasis added] 122 Today, for example, the Army is struggling to organize small OR teams to support operational deployments for Army combat units. At the same time OR support to the institutional Army, which includes the Title 10 functions of manning, training, equipping and sustaining (e.g., logistics), has significantly

declined during the past decade. In fact, the most recent state of Army OR article published in a prestigious Army professional journal now excludes logistics systems analysis (LSA) altogether as a domain for Army OR.123 Given the lack of any uniformed military OR expertise within the command responsible for LSA (figure 22, page 52), this would not appear to be an oversight but merely an accurate perception of the dramatic extent of the decline of operations research within the institutional Army. Nor do any compensating trends appear in our logistics professional education and training programs today. For example, professional military education does not currently emphasize strategic logistics,124 and advanced civil schooling programs do not yet include supply chain design, management and analysis concepts.125 Technical courses emphasize the operating mechanics and administrative requirements associated with existing logistics information systems rather than understanding inventory theory, supply chain dynamics and ways to address current challenges in order to improve performance.126 Finally, it is noteworthy that all of the services classify their civilian logisticiansoccupational code 346as an administrative rather than professional category.127 Above all, and despite the uniquely American proclivity for technological solutions, we must continually remind ourselves that a less-skilled military is a greater liability than less- advanced technology.128 Conclusion The purpose of this project is to help ensure logistics transformation as the U.S. Army transitions toward a readiness-focused logistics organization which, averting Path D in figure 27 (see page 65), ultimately follows a historical trajectory along Path C. The future is properly the temporal focus of transformation. However, a major precept of any learning organizationeven more fundamental than the five disciplines that characterize one129 is the ability to actually learn from rather than merely observe the past. Distilled to its essence, simply failing to repeat past mistakes represents the most basic form of human progress.130 Because people naturally tend to see their current problems as unique and overwhelming, historical analogies can be especially helpful. They stretch and broaden our thinking and bring contemporary challenges into better focus through the long lens of history. Out-of- 66 57. the-box thinking today should also include looking into the box of the past to gain understanding and appreciation. Accordingly, consider the following characterization: The system lacked a clear chain of command. Agencies all shared responsibility yet no one was responsible . . . it could not coordinate and standardize [data] to a common language. Each bureau had raw data, analyzed for only its purposes, expressed in its terms, and responsive to its need . . . reorganizations [were] a response to crises and created the illusion of progress while merely producing confusion, inefficiency, and, most seriously, personnel demoralization. . . . Because of continual reorganizations, the bureaus had new difficulty furnishing data. . . . The situation became more complicated when records in one division differed from those in another . . . [he] found the independent, loosely related bureau financial practices a nearly insuperable barrier to consolidation [and] varying interpretations of regulations caused confusion. . . . He believed supply should conform to industrial and scientific principles yet lacked the authority. . . . The Army was pushing an already strained supply system into a state of paralysis . . . an integrated supply system remained a myth . . . by the end of the war he feared the supply system would collapse . . . [after the war, congressional] hearings pinpointed the supply problem. . . . Yet their Act did not unify the system. It institutionalized divided authority, providing enough checks and balances to paralyze action.131 This extract is from Phyllis Zimmermans biography of Major General George W. Goethals, the Army engineer who designed and managed construction of the Panama Canal.132 Today, a century later, this achievement is still recognized as one of the greatest engineering project management feats in modern history. At the beginning of Americas entry into World War I Goethals was recalled from retirement to head the Armys supply organization. While his frustration expressed above may sound as if he were referring to 2005, todays logisticians have one major advantage compared to conditions of almost a century ago. The Power of AnalysisOR, systems analysis, management sciencedid not exist then to help Goethals with his enormous supply chain management challenges. This truly incredible power is, however, at our disposal today. Will we harness it now to full advantage for the Army? Endnotes 1 Paul J. Kern, General, USA, Getting Soldiers What They Need When and Where They Need It, ARMY, October 2004, p. 72. 2 Greg. H. Parlier, Colonel, USA, Enabling a Strategically Responsive, Transforming Army: A Systems Approach to Improve Logistics Chain Efficiency and Effectiveness, briefing, Army Aviation and Missile Command (AMCOM), 2003. This, the final briefing for this original AMCOM project, is available upon request from the author: gparlier@knology.net; (256) 325-1974. 3 High Risk Series: An Update, U.S. Government Accountability Office (GAO) Report (Washington, D.C.: Government Accountability Office, January 2005). 67 58. 4 Ibid., p. 66. 5 The Army Needs a Plan to Overcome Critical Spare Parts Shortages, U.S. GAO Report 03-705, (Washington, D.C.: Government Accountability Office, June 2003), pp. 14. 6 Daniel Goure and Kenneth A. Steadman, From Factory to Foxhole: The Transformation of Army Logistics (Arlington, Va.: Lexington Institute, April 2004), p. 6. 7 Michael Wynne, Principal Deputy Under Secretary of Defense (Acquisition, Technology and Logistics), speaking at the AUSA Logistics Symposium, Richmond, Va., 22 April 2003, quoted in The New Paradigm: Bringing U.S. Army Logistics in to the 21st Century, Torchbearer National Security Report, (Arlington, Va.: Association of the U.S. Army, April 2004). 8 Preliminary Observations on the Effectiveness of Logistics Activities during Operation Iraqi Freedom, U.S. GAO Report 04-305R, briefing to the House Appropriations Committee, Subcommittee on Defense, 6

November 2003, p. 14. 9 An excellent critical summary is the plenary briefing Has IT Made OR Obsolete? by Gerald G. Brown, presented at the Annual INFORMS Conference on OR/MS Practice, Creating Value in the Extended Enterprise, 46 May 2003. 10 Claus E. Heinrich (Member, SAP Executive Board) and David Simchi-Levi (Professor of Engineering Systems, MIT), Is There a Link Between IT Investment and Financial Performance? (Draft). 11 Paul J. Kern, General, USA, Commanding General, Army Materiel Command, ARMY, March 2004, p. 26. 12 For technology-oriented proposals supporting logistics transformation, see, for example, the 84 initiatives developed by the Army Logistics Transformation Task Force (LTTF); for management- oriented concepts, see Army Logistics Transformation, Headquarters, Department of the Army (HQDA) G-4, January 2003. 13 Parlier, Enabling a Strategically Responsive, Transforming Army. 14 In terms of scope, magnitude and complexity, the overall DoD supply chain includes more than 30,000 specific customers (units), 22 maintenance and repair depots, 14 national inventory control points, 22 regional (and international) distribution depots, more than 80 major air and sea transportation ports of debarkation and ports of embarkation, in excess of 100,000 suppliers, and more than 2000 legacy information systems and, according to an OSD senior logistics official, consumes $140 billion of the recent Fiscal Year (FY) 2004 $450 billion annual DoD budget, with $80 billion spent on inventory and $60 billion on maintenance. 15 Office of the DoD Inspector General, Financial Reporting of Deferred Maintenance Information on Army Weapon Systems for FY 2002, D-2003-054, 3 February 2003. 16 Rachel Croson and Karen Donohue, Experimental Economics and Supply Chain Management, Interfaces, vol. 32, no. 5, SeptemberOctober 2002, pp. 7482. 17 Katsuhiko Takahashi and Myreshka, The Bullwhip Effect and its Suppression in Supply Chain Management, Supply Chain Management and Reverse Logistics, edited by Harald Dyckoff, et al., (Berlin, Germany: Springer, 2004), pp. 245266. 18 Simchi-Levi, et al., Designing and Managing the Supply Chain: Concepts, Strategies and Case Studies, (New York, N.Y.: McGraw-Hill Irwin, 2003). 19 Hau L. Lee, Aligning Supply Chain Strategy with Product Uncertainty, California Management Review, vol. 44, no. 3, Spring 2002, pp. 105119. 20 William R. Killingsworth, An Integrated Analysis of the Supply Chain for Army Aviation Spares, briefing (Huntsville, Ala.: University of Alabama-Huntsville, Office of Economic Development, 9 March 2004). 68

59. 21 For an example of large-scale, complex resources-to-readiness modeling and analysis capability consistently
achieving accurate predictive and budget forecasting, see Larry Goldberg and Dennis Kimko, An Enlistment Early Warning System to Prevent the Next Recruiting Crises, IDA Report D- 2720 (Alexandria, Va.: Institute for Defense Analyses, 2003). 22 Kern, Got It? p. 108. 23 Erin Q. Winograd, What About Army Aviation? Air Force, July 2001, pp. 6468. 24 Department of the Army, Army Regulation (AR) 570-4, Manpower Management, 15 May 2000. 25 See Department of Defense IG Report D-2003-054, p. 8. 26 Eric Peltz, et al., Diagnosing the Armys Equipment Readiness, RAND Report MR-1481 (Santa Monica, Calif.: RAND, 2002), p. 78; Steven J. Henderson and Michael J. Kwinn, A Data Warehouse to Support Condition Based Maintenance (CBM), Operations Research Center Tech Report DSE- TR-0509 (West Point, N.Y.: U.S. Military Academy, May 2005). 27 Les Brownlee and Peter J. Schoomaker, Serving A Nation at War: A Campaign Quality Army with Joint and Expeditionary Capabilities, Parameters (Carlisle Barracks, Pa.: U.S. Army War College, Summer 2004), p. 22. 28 Stephen Biddle, Military Power: Explaining Victory and Defeat in Modern Battle, (Princeton, N.J.: Princeton University Press, 2004), pp. 207 208. 29 GAO Report 04-305R. 30 Roger W. Kallock, former Deputy Under Secretary of Defense for Logistics and Materiel Readiness (L&MR), From Factory to Foxhole, Supply Chain Management Review, May/June 2004, pp. 23, 4653. 31 Paul S. Levy and Stanley Lemeshow, Sampling of Populations: Methods and Applications (Hoboken, N.J.: Wiley, 1999). 32 Stephen Biddle, Military Power: Explaining Victory and Defeat in Modern Battle and Afghanistan and the Future of Warfare: Implications for Army and Defense Policy, Army War College Strategic Studies Institute pamphlet, November 2002. 33 George W. S. Kuhn, Ground Force Battle Casualty Rate Patterns: Uses in Casualty Estimation and Simulation Evaluation, Logistics Management Institute (LMI) Report (McLean, Va.: Logistics Management Institute, 30 October 1992). 34 Srinagesh Gavirneni, Value of Information Sharing and Comparison with Delayed Differentiation, Quantitative Models for Supply Chain Management, ed. by Sridhar Tayur et al., (Cordrecht, Netherlands: Kluwer, 1999), p. 444. 35 Kern, Got It?, pp. 68 and 146. 36 Department of the Army, Army Regulation (AR) 710-2, Supply Policy Below the National Level, 8 July 2005. 37 Kenneth J. Girardini et al., Dollar Cost Banding: A New Algorithm for Computing Inventory Levels for Army Supply Support Activities, RAND Report MG-128-A (Santa Monica, Calif.: RAND, 2004). 38 F. Michael Slay, et al., Optimizing Spares Support: The Aircraft Sustainability Model, LMI Report AF501MR1, (McLean, Va.: Logistics Management Institute, October 1996), p. 2-2. 39 Craig C. Sherbrooke, Optimal Inventory Modeling of Systems: Multi-Echelon Techniques (Hoboken, N.J.: Wiley, 1992). 40 Meyer Kotkin, III Corps Stock Positioning (Demonstration of Stock Optimization Model), Army Materiel Systems Analysis Activity (AMSAA) briefing, 17 March 2003. 41 Business Aspects of Closed-Loop Supply Chains: Exploring the Issues, Carnegie Bosch Institute, International Management Series: vol. 2, (Pittsburgh, Pa.: Carnegie Bosch Institute, 2003). 69 60. 42 John Van De Vegte, Feedback Control Systems (Englewood Cliffs, N.J.: Prentice-Hall, 1986). 43 David Dreiner, et al., Value Recovery from the Reverse Logistics Pipeline, RAND MG-238, (Santa Monica, Calif.: RAND, 2004). 44

Colonel Greg H. Parlier, AMCOM Deployment Support Observations (CG Update), AMCOM Memo for Record, 22 May 2003; Operation Iraqi Freedom: Theater Air and Missile Defense History, 32d Army Air and Missile Defense Command, Fort Bliss, Texas, September 2003. 45 Mark Wang, OIF Value Recovery, briefing, RAND Conference on Distribution Management and OIF Logistics Research Review, Santa Monica, Calif., 23 July 2004. 46 John Hall, LOGSA Retrograde Metric Development, (Draft), Army Materiel Command briefing, 24 May 2004; Mark Wang, et al., Retrograde Distribution Management Operations Study, (Draft), RAND briefing to CASCOM, 28 April 2005. 47 U.S. TRANSCOM Distribution Process Owner Update, issue 18, 10 March 2005. 48 John A. Muckstadt, Analysis and Algorithms for Service Parts Supply Chains (Berlin, Germany: Springer, 2005). 49 Michael Hammer, Process Management and the Future of Six Sigma, MIT Sloan Management Review, vol. 43, no. 2, Winter 2002. 50 Theory of Constraints and Lean Thinking, briefing to Deputy Under Secretary of Defense (L&MR) by USMC Maintenance Center, Albany, Ga., 2003. 51 David A. Calderwood, et al., Intelligent Collaborative Aging Aircraft Parts Support (ICAAPS), LMI Report DL1221T1, (McLean, Va.: Logistics Management Institute, October 2002). 52 D. D. Doneen and D. D. McQuerry, Visualization of Logistics Data and Systems Health Monitoring, Pacific Northwest National Laboratory, 5 February 2002. 53 See Department of Defense Inspector General Report 2003-054, pp. 59. 54 Army Due for Major Procurement Funding Boost in FY-06 Supplemental, Inside the Army, 17 January 2005, p. 1. 55 Tovey C. Bachman, Reducing Aircraft Down for Lack of Parts with Sporadic Demand, LMI manuscript pending publication in the Journal of Military Operations Research. 56 Quadrennial Defense Review, OSD report to Congress, 2001, p. 47. 57 Robert Fabrie, Aerospace Supplier Base, memorandum in Evaluating, Managing and Forecasting Readiness for Army Aviation, briefing (Alexandria, Va.: Institute for Defense Analyses, 19 January 2005), p. 2. 58 Dennis Bilczo, et al., Aerospace Supply Chain Dynamics, The Practice of Supply Chain Management: Where Theory and Application Converge, edited by Terry P. Harrison, Hau Lee and John J. Neale, (Dordrecht, Netherlands: Kluwer Academic Publishers, 2003). 59 Ken Sullivan and Bill Killingsworth, Lean Enterprise Initiative Status Briefing (Huntsville, Ala.: University of Alabama-Huntsville, Office for Economic Development, 22 October 2004). 60 The Ailing Defense Industrial Base: Unready for Crises, House Armed Services Committee (HASC) Report of the Defense Industrial Base Panel, no. 96-29 (Washington, D.C. U.S. Government Printing Office, 31 December 1980). 61 For these historical trends and examples of previous crises response solutions, I am indebted to Robert Fabrie, of the IDA Adjunct Research Staff, who has been Special Assistant for Contracting to the Commander, Air Force Systems Command, and Director for Industrial Support at the Defense Logistics Agency. Authors Memorandum for Record dated 3 March 2005, summarizing several extended conversations, February 2004March 2005. 70

61. 62 Among those commercial suppliers that have developed, refined and incorporated STA and RBS algorithms into
complex, large-scale multiechelon inventory optimization decision support systems and are now marketing their software capabilities are TFD Group, MCA Solutions, Manugistics, Caterpillar Logistics, Servigistics and Opus, a Swedish firm used extensively throughout Europe by both aircraft manufacturers and NATO air forces. Typically, these software applications can apply multi-item, multi-indenture, multiechelon RBS to optimize readiness goals globally, by site or location, and by equipment type, model and series. 63 Charles T. Kelley, The Impact of Equipment Availability and Reliability on Mission Outcomes, RAND DB-423-A, (Santa Monica, Calif.: RAND, February 2004). 64 Karen W. Tyson, et al., Support Costs and Reliability in Weapons Acquisition: Approaches for Evaluating New Systems, IDA Paper P-2421 (Alexandria, Va.: Institute for Defense Analyses, July 1990); Matthew S. Goldberg and Karen W. Tyson, The Costs and Benefits of Aircraft Availability, IDA Paper P-2462 (Alexandria, Va.: Institute for Defense Analyses, March 1991); and Kelley, RAND DB-423-A. 65 Donald R. Eaton, Rear Admiral, USN ret., Improving the Management of Reliability: availability isnt everything, its the only thing, Our Aerospace Newsletter, vol. 9, issue B, December 2002, pp. 13. 66 Ibid. 67 Eric Peltz, et al., The Effects of Equipment Age on Mission-Critical Failure Rates, RAND MR-1789 (Santa Monica, Calif.: RAND, 2004). 68 Robert M. Cranwell, Director, Center for Systems Reliability, Readiness and Sustainment Department, Sandia National Laboratories, briefing to the author; Randy L. Haupt and Sue Ellen Haupt, Practical Genetic Algorithms (Hoboken, N.J.: WileyInterscience, 2004). 69 Calvin B. Lee, Multi-Echelon Inventory Optimization, Evant White Paper Series, 2003. 70 Slay, et al., LMI Report; Sherbrooke, Optimal Inventory Modeling of Systems: Multi-Echelon Techniques; and Muckstadt, Analysis and Algorithms for Service Parts Supply Chains. 71 Ibid. See also Simchi-Levi, et al., Designing and Managing the Supply Chain: Concepts, Strategies and Case Studies, and The Logic of Logistics: Theory, Algorithms and Applications for Logistics and Supply Chain Management (Berlin, Germany: Springer, 2005). 72 Kern, Got It? pp. 66 and 124. 73 Army Logistics White Paper: Delivering Material Readiness to the Army, Headquarters Department of the Army G-4, December 2003. 74 Operational Sense and Respond Logistics: Coevolution of an Adaptive Enterprise Capability, OSD Office of Force Transformation Concept Document, 6 May 2004. 75 Ibid., p. 6. 76 See Kotkin (AMSAA briefing) and Muckstadt, chapter 7: Lateral Resupply and Pooling in Multi- Echelon Systems, pp. 150160. 77 Richard O. Hundley, Past Revolutions: Future Transformations, RAND MR-1029DARPA (Santa Monica, Calif.: RAND, 1999). 78 Victor Maccagnan, Jr., Lieutenant Colonel, USA, Logistics Transformation: Restarting a Stalled Process (Carlisle Barracks, Pa.: U.S. Army War College Strategic Studies

Institute, January 2005), pp. 12. 79 Liisa Valikangas and Michael Gibbert, Boundary-Setting Strategies for Escaping Innovation Traps, MIT Sloan Management Review, vol. 46, no. 3, Spring 2005, pp. 5864. 80 Chris Hill, Major, USA, et al., Recruiting Americas Army at the Millennium: Challenges Ahead, Phalanx, September 1999, pp. 67; Colonel Greg H. Parlier, Manning the Army of the Future, 71 62. USAREC briefing by, Fort Knox, Ky., Audiovisual tape #A0515-00-B035, 22 November 1999; Keith B. Hauk, Major, USA, and Colonel Greg H. Parlier, Recruiting: Crises and Cures, Military Review, MayJun 2000, pp. 7380; James A. Knowles, et al., Reinventing Army Recruiting, Interfaces, vol. 32, no. 1, January-February 2002, pp. 78-92; Colonel Greg H. Parlier, Award Presented to USARECs PAE, Phalanx, December 2002, pp. 13, 3334. 81 Currently participating with funding support from the Chief, Command Analysis Directorate at AMCOM are LMI, RANDs Arroyo Center, AMCs AMSAA and Logistics Support Activity (LOGSA), IDA and, at MIT, the Forum for Supply Chain Innovation (FSCI) and the Integrated Supply Chain Management (ISCM) Program in the Center for Transportation and Logistics (CTL). 82 For details on these several options, see Colonel Greg H. Parlier, Project OverviewTask 5, Memorandum for Record, (Huntsville, Ala.: University of Alabama-Huntsville, Office for Economic Development, 19 January 2005). 83 Ideas, including examples of successful implementations, for these large-scale, complex systems simulators are illustrated in Peter M. Senge and John D. Sterman, Systems Thinking and Organizational Learning, Modeling for Learning Organizations, ed by John D. W. Morecroft and John D. Sterman, Systems Dynamics Series (Shelton, Conn.: Productivity Press, 2000). 84 Don T. Phillips, et al., Dynamic Programming, Operations Research: Principles and Practice, (Hoboken, N.J.: Wiley, 1976), pp. 419472. 85 Richard de Neufville, Decision Analysis as Strategy, Applied Systems Analysis: Engineering Planning and Technology Management, (New York, N.Y.: McGraw-Hill, Inc., 1990), pp. 320323; see also the following works by de Neufville: Architecting/Designing Engineering Systems Using Real Options, MIT Working Paper Series ESD-WP-2003-01.09, 29 May 2002; Uncertainty Management for Engineering Systems Planning and Design, MIT Engineering Systems Monograph, 29 March 2004; and Dynamic Strategic Planning for Technology Policy, at http://ardent.mit.edu/real_options. 86 James P. Ignizio, Illusions of Optimality, briefing, INFORMS MAS Conference, Huntsville, Ala., 21 May 1998; and System Stability: A Proxy for Graceful Degradation, Phalanx, March 1999, pp. 6 8, 27. 87 Colonel Greg H. Parlier, et al., Dynamic Strategic Resource Planning: Toward Properly Resourcing the Army in an Uncertain Environment, Resource Planning and Analysis Division (RPAD) Tech Report 97-03, PAE, Office of the Chief of Staff, Army (OCSA), Washington D.C., 1997; Colonel Greg H. Parlier, The Long-term Implications for Analysis of the Quadrennial Defense Review, briefing, 65th Military Operations Research Society (MORS) Symposium, Quantico, Va., 1012 June 1997; Colonel Greg H. Parlier, Resourcing the United States Army in an Era of Strategic Uncertainty, briefing, INFORMS Military Applications Seciton (MAS) Conference, UAH, Huntsville, Ala., 21 May 1998. 88 Yacov Y. Haimes, Risk Modeling, Assessment, and Management, (Hoboken, N.J.: Wiley-Interscience, 2004). Also see the website for the Center for Risk Management in Engineering Systems at the University of Virginia, http://www.virginia.sys.edu/risk/. 89 Supply Chain Response to Terrorism: Creating Resilient and Secure Supply Chains, interim report, MIT Center for Transportation and Logistics, 8 August 2003; James B. Rice and Federico Caniatio, Building A Secure and Resilient Supply Network, Supply Chain Management Review, September- October 2003; see also http://web.mit.edu/scresponse; and Sunil Chopra and ManMohan S. Sodhi, Managing Risk to Avoid Supply Chain Breakdown, MIT Sloan Management Review, vol. 46, no. 1, Fall 2004, pp. 5361. 90 Dan Levine and Stan Horowitz, Predictive Relationships for Army Aircraft Readiness, IDA preliminary draft (Alexandria, Va.: Institute for Defense Analyses, 27 October 2004); Stan Horowitz, 72

63. Evaluating, Managing and Forecasting Readiness for Army Aviation, briefing (Alexandria, Va.: Institute for Defense
Analyses, 24 February 2005). 91 Shoumen Datta, et al., Adaptive Value Networks in Evolution of Supply Chain Management: Symbiosis of Adaptive Value Networks and ICT, edited by Yoon S. Chang, et al. (Dordrecht, Netherlands: Kluwer, 2004), pp. 1 and 58. 92 Arnoldo C. Hax and Dean L. Wilde II, The Delta Project: Discovering New Sources of Profitability in a Networked Economy (New York: Palgrave, 2001), p. 7. 93 Thomas F. Homer-Dixon, The Ingenuity Gap: How Can We Solve the Problems of the Future? (New York: Knopf, 2000), p. 453. 94 John J. Coyle, Transforming the Supply Chain: The Challenge for Change and Supply Chain Management, LTA/Smeal College of Business Conference, Penn State University, 22 June 2004. 95 James H. Pillsbury, Major General, USA, Support of the Soldier: Life Cycle Management at Redstone Arsenal, ARMY, January 2005, pp. 3236. 96 Lester C. Thurow, Future Favors the Bold (New York: HarperCollins, 2003), chapter 9. 97 Jeremy F. Shapiro, Modeling the Supply Chain (Pacific Grove, Calif.: Duxbury Press, 2001). 98 Nicholas G. Carr, Does IT Matter? Information Technology and the Corrosion of Competitive Advantage (Boston: Harvard Business School Publishing, 2004). See also Hammer, Process Management and the Future of Six Sigma, p. 28. 99 Shapiro, Modeling the Supply Chain, p. 22. 100 Lew Pringle, Operations Research: The Productivity Engine, website for the Institute for Operations Research and the Management Sciences (INFORMS), www.scienceofbetter.org. 101 See Heinrich and Simchi-Levi, Is There a Link Between IT Investment and Financial Performance? 102 Ibid. 103 Douglas Chin and William Lucyshyn, Defense Medical Logistics Standard Support: The New DoD Medical Logistics Supply Chain,

Transforming Government Supply Chain Management, edited by Jacques S. Gansler and Robert E. Luby, Jr., IBM Center for the Business of Government (Lanham, Md.: Rowman and Littlefield, 2004), pp. 211228. 104 Glover Ferguson, et al., Evolving From Information to Insight, MIT Sloan Management Review, vol. 46, no. 2, Winter 2005, pp. 5158. 105 Hax and Wilde, The Delta Project, p. 192. 106 Hilda Blanco, Towards An Integrated Management Science, briefing, INFORMS Annual Meeting, Denver, Colo., 27 October 2004. 107 Hax and Wilde, The Delta Project , pp. 192224 108 Ibid., p. 201. 109 Roger Kallock, former Deputy Under Secretary of Defense (Logistics and Materiel Readiness), e-mail to the author, 14 April 2005. 110 William G.T. Tuttle, General, USA retired, Defense Logistics for the 21st Century (Annapolis, Md: Naval Institute Press, 2005), p. 177. 111 John M. Bryson, Strategic Planning for Public and Nonprofit Organizations (San Francisco, Calif.: Jossey-Bass, 2004), p.10. 112 John Millhouse and Robert Butler, PBL Solutions: Issues, Concepts and Methods for Logisticians and Managers, course briefing (Monterey, Calif.: Systems Exchange, Inc., 1315 April 2005), charts 5469. 73 64. 113 Tuttle, Defense Logistics for the 21st Century, pp. 164220. 114 Department of Defense Directive 5000.1, The Defense Acquisition System (Washington, D.C.: U.S. Department of Defense, 12 May 2003). 115 Arthur Cebrowski, Vice Admiral, USN, Director, OSD Office of Force Transformation, Transformation Trends, 22 July 2004, p. 1. 116 Marlin U. Thomas, Assessing the Reliability of a Contingency Logistics Network, Journal of Military Operations Research, vol. 9, no. 1, pp. 3341. 117 Rebecca Henderson, Developing and Managing a Successful Technology and Product Strategy, course briefing, MIT Sloan School of Management, 23 September 2004. 118 Hundley, Past Revolutions: Future Transformations. 119 Max Boot, The Struggle to Transform the Military, Foreign Affairs, vol. 84, no. 2, MarchApril 2005, p. 106. 120 These intriguing (but worrisome) ideas are illustrated through recent examples and evidence addressing trends that suggest increasing potential for technological, engineering and even social system failures. These are attributed to system interactions with inadequate or misaligned human decision support constructs and organizational designs, especially in tightly coupled systems which stress human cognitive abilities. They are expressed in Thomas Homer-Dixon, The Ingenuity Gap: How Can We Solve the Problems of the Future? (New York: Alfred A. Knopf, 2000); Charles Perrow, Normal Accidents: Living With High-Risk Technologies (New York: Basic Books, 1984); and emphasizing military operations, Nancy J. Wesensten, et al., Cognitive Readiness in Network- Centric Operations, Parameters, Spring 2005, pp. 94105. 121 Maccagnan, Logistics Transformation: Restarting a Stalled Process, pp. 1819. 122 Seth Bonder, Army Operations ResearchHistorical Perspectives and Lessons Learned, Operations Research, vol. 50, no. 1, JanuaryFebruary 2002, pp. 2534. 123 David F. Melcher, Lieutenant General, USA, and John G. Ferrari, Lieutenant Colonel, USA, A View from the FA49 Foxhole: Operational Research and Systems Analysis, Military Review, November December 2004, pp. 26. 124 David Schrady, Military Logistics Modeling Tutorial, briefing, 72nd MORS Symposium, Monterey, Calif., June 2004. 125 From several conversations with both civilian and military faculty at the Naval Postgraduate School (NPS), Air Force Institute of Technology (AFIT) and Army Logistics Management Center (ALMC), including the Chair, Systems Engineering Department, and Dean, School of Logistics Sciences. For the Army, ALMC was in spring 2005 beginning to develop the Program of Instruction (POI) for its first Supply Chain Management (SCM) course. 126 For example, the 2002 Defense Acquisition University (DAU) catalog listing of course descriptions and requirements for professional acquisition certification does not include inventory management and specifies supply chain management as a subject in only one course in the acquisition logistics career field. Yet, this course is neither required nor desired for even the highest level of certification (level III) under DoD Directive 5000.52, Defense Acquisition, Technology, and Logistics Workforce Education, Training, and Career Development Program, 12 January 2005. 127 Donald R. Eaton, Rear Admiral, USN retired, Revolution in Logistics Affairs: A New Strategy of Cultural Change, Naval Postgraduate School, Monterey Calif., 1 May 2002. 128 Biddle, Military Power, p. 203. 129 Peter M. Senge, The Fifth Discipline: The Art and Science of the Learning Organization (New York: Currency Doubleday, 1990). 74 65. 130 Using this definition of human progress as a guidesimply failing to repeat past mistakesthe recent public record of Army logistics as a learning organization suggests significant observations but, regrettably and inexplicably, few lessons learned. See Defense Logistics: Preliminary Observations on Logistics Effectiveness in OIF, GAO Report 04-305R (Washington, D.C.: Government Accountability Office, 18 December 2003), p. 4: Failure to apply lessons learned from prior operations, GAO Report 04-305R, p. 19; Operation Desert Storm, GAO/NSIAD-92-258 (Washington, D.C.: Government Accountability Office, 23 September 1992); Conduct of the Persian Gulf War: Final Report to Congress, DoD, April 1992; Kosovo/Operation Allied Force After Action Report: Final Report to Congress, DoD, 31 January 2000. 131 Phyllis A. Zimmerman, The Neck of the Bottle: George W. Goethals and the Reorganization of the US Army Supply System, 19171918, (College Station, Tex.: Texas A&M University Press, 1992). 132 I am indebted to Benson D. Adams, Army Materiel Command Special Assistant to the Commanding General for Transformation Integration, for suggesting the relevance and ironic timeliness of this biography.

TheSupplychainniche + Follow 1015 views, 0 favs, 1 embed

Related

Military Logistics 70 views

FY 2008 Annual Financial Report 200 views

DLA Logistics Transformation 303 views

Purpose of Today's Briefing 590 views

Human Capital Strategy 378 views

Military Logistics Summit June 2009 1451 views

IDGA's Military Logistics Summit 2009 Program Agenda 944 views

Mdiafp10 2351 views

More by user

Optimization of Stock Management for a Supply Chain Networ 680 views

Microsoft Word - Eurocham_Flyer 329 views

Causes of the Bullwhip Effect - A Study based on the Beer 1089 views

SUPPLY CHAIN MANAGER User s Manual, Feb 2006326 views

2003: INITIALIZING A DISTRIBUTION SUPPLY CHAIN SIMULATION 405 views

Production and distribution policy in a two-stage stochast 340 views View all presentations from this user

About this document

USAGE RIGHTS

All Rights Reserved

STATS

0 Favorites 0 Comments 84 Downloads 1,014 Views on SlideShare 1 Views on Embeds

1,015 Total Views

EMBED VIEWS

1 views on http://www.lmodules.com
ACCESSIBILITY

View text version

ADDITIONAL DETAILS

Uploaded via SlideShare Uploaded as Adobe PDF Flagged as inappropriate Flag as inappropriate
Top of Form

Flag as inappropriate Select your reason for flagging this document as inappropriate. If needed, use the feedback form to let us know more details.
None Flag

Cancel
Bottom of Form

File a copyright complaint

Tags

strategic sourcing supply chain b2b supply chain lean supply chain strategic supply chain

Follow SlideShare
Twitter Facebook SlideShare Blog 0 tweets 0 shares WordPress Blogger More

1.