2.1.1 Global & Supply Chain challenges
Global economic changes as led to a volatile business environment in which demand changes results in instability of the supply chain, which ultimately results in the supply chain being inefficient and ineffective (Rabeli, Sarmiento & Jones, 2011). There is a general feeling of uncertainty as to what will happen next amongst SC people with the current global economy and difficulties being a source of concern (Daugherty, Gawe & Caltagirone, 2010). These factors have led to organisations looking for quick fixes instead of really fixing the root cause. A successful supply chain is one that is managed in a manner, which breaks down barriers between internal and external stakeholders (Shukla, Garg & Agarwal, 2011). Huang et al (2007) further stated that effective supply chains are those that are able to supply the right product, to the right customer, at the right price and at the right quality. Given the current climate changes that we face the challenge to reduce an organisations carbon footprint is also a key business driver. Due to today’s consumer being more discerning with regards to which brands and organisations they support, organisations have to ensure they understand and satisfy all consumer needs. Social networking also results in customer/consumer behaviour, which results in the supply chain having to be more reactive.
Effective and efficient supply chain management reduces lead times, costs, improves customer service and improves overall competitiveness (Shukla, Garg & Agarwal, 2011). The trend is to integrate the total supply chain resulting in one global platform as well as technological tools to increase organisational effectiveness. Organisations need to be agile to meet the customers changing needs and is a critical requirement in complex global supply chains. The balancing act however is to still be cost effective, agile, adaptable and aligned to the customer.
12 Martinez-Olvera (2008) discussed that current manufacturing competition goes beyond single companies and becomes a challenge for supply chains to become more efficient and effective than their competitors. The service provided to the end customer is determined by the effectiveness and efficiency of the cooperation of all of the companies in the supply chain. Fixson (2005) states that this requires each partner within the supply chain to simultaneously take into account the product and process dimensions and to properly realign their structural elements. This will ensure for a seamless operation both with internal functions and with external partners.
These challenges have resulted in supply chain management receiving ever growing interest (Stadtler, 2005). The reason for this might be that it has so many facets and that the tasks of accomplishing the aims of supply chain management are so demanding that it is more an ongoing endeavour then a single short term project. The ultimate aim of the supply chain and hence the organisation is to improve competitiveness of the organisation as a whole. This is achieved by directing the company into a sustainable, strategic position compared to its competitors (Stadtler, 2005). This can only be done if the entire structure or system is understood properly. Factors that were thought to not be interrelated are often connected and a single cause can be the reason for a large number of varied effects (Goldratt, 2004). The need for understanding of the system is further driven by decision making and policies contributing to instability and fluctuations (Rabeli, Sarmiento & Jones, 2011). Given the need for any organization to meet customer requirements they face a task that cannot be taken lightly, as failure to do would be detrimental to the long term profitability and competitiveness of the organization.
2.1.2 Demand variability challenges
It is often assumed that excess or unsatisfied demand is backordered. This is however far from reality as studies show that unfulfilled demand is lost or an alternative item or product is purchased (Bijvank & Vis, 2011). Gruen et al (2002) stated that only 15% of customers who experience a stock out would wait for the item to be on shelves again. The balance will either buy an alternate product, visit another store or do not make any purchase at all. In a changing world with customers becoming more discerning, the organisation that is able to get their product on shelf in full and on time will inevitably be more competitive, resulting in a higher market share and profitability. In
13 order to accomplish this organisations have to have the ability to accurately forecast customer demand and ensure the supply side of the business is adequately equipped to meet demand requirements. This however is easier said then done, as forecasts are invariably wrong and leads to the organisation experiencing what is known commonly as the bullwhip effect.
Lee et al (1997) established five possible sources that may lead to the bullwhip effect:
1. The use of demand forecasting
Organisations and their leaders have to ensure that they focus its resources towards satisfying customers within a VUCA (Volatile, Uncertain, Complex and Ambiguous) environment with limited resources. To accomplish this the organisation must be able to predict or forecast what the customer wants. Various demand forecasting techniques exist with each having a varying degree of complexity and application. Variability in any process is common place, with an organisation experiencing variability within the demand forecast as well. The amount of variability experienced is largely dependent on the forecasting technique utilised as well as the nature of the customer demand and ordering process that an organisation follows (Chen, 2000).
2. Non-zero lead time
Across the business, there exists a multitude of activities and processes that need to be completed to ensure a product reaches the consumer. Each of these results in a certain amount of time being taken to complete and contributes towards the overall lead time. The lead times that exist has a direct correlation towards the variability experienced, with the longer the lead times the larger the variability observed (Sun & Ren, 2005).
3. Batched orders
Batched orders describes the process of consolidating multiple orders into a single batch for production. This would lead to the lead time for the first order placed being longer then the last order placed from order placement to manufacture. The organisation in which this study has been conducted produces to stock versus following a batched order process and maintains an inventory level that is in line with its inventory holding policy.
14 4. Rationing game under shortage
This general occurs when the customer demand exceeds the supply, which could be constrained for a variety of reasons such as over ordering versus forecast or capacity constraints. In this situation, the organisation attempts to apply some sort of fair share principle in which the available inventory is shared amongst the various customers, resulting in a rationing process. Note however, that the organisations can decide to give a higher weighting to a customer that is deemed more important.
5. Price fluctuations and promotions
It has been found that unforeseen price fluctuations and promotions contributes towards increasing the bullwhip effect. Recent studies has shown that price fluctuations are one of the primary reasons for the bullwhip effect and the inefficiencies that arise as a result (Gavirneni, 2006). The context of this study is set within an FMCG organisation in which there exists a stock holding policy that is dependent on the forecast. Based on this dependency any fluctuations versus the original forecast will result in the incorrect inventory levels being available.
The Sales and Operations Planning (S&OP) process seeks to ensure that an organisation has sufficient capacity and capability to meet the demand requirements of the customer. Given that the demand forecast signal is the starting point, the importance of accuracy cannot be underestimated. Sun & Ren (2005) states that different forecasting methods play a role in supply chain management. The smoother the forecast, the smaller the increase in variability will be.
Uncertain and changing demands further leads to either lost sales or increasing inventory holding to buffer against uncertainty (Kim, et al 2005).
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