business skills workshop #12 business skills training handbook handout 12 october 2010.pdf ·...

Business Skills Workshop #12Wednesday, October 6, 2010

Business Skills Training Handbook

Livelihood Development via Agro-ProcessingSFA2006 (GCP/RLA/167/EC) Location: Grenada

Dr. Reccia Charles Business Skills Training,

Supply Chain Management

Supply Chain Management, (SCM) is the application of the economic theory of competitive advantage applied to the company level. Companies seek to design business models that meet customer needs better than competitors. Success depends on the ability to design, make, and deliver innovative, high quality, low cost products and services that customers demand. Supply chain management allows companies to focus on their unique skill sets, thereby allowing members of a supply chain to specialize in those activities in which they have a competitive advantage. Supply chain management requires a common understanding of supply chain


objectives and individual roles, an ability to work together, and a willingness to adapt in order to create and delivery the best products and services possible.

Supply chains are broken into tiers based on the relationship of various members from the “focus firm”. When designing a supply chain, you must consider both the downstream movement of the physical material/product and the flow of information upstream from the customer to the suppliers.

The supply chain incorporates all aspects of moving material from the vendor through the manufacturing process to the final customer. The supply chain focuses on vendors, manufacturers, intermediaries, logistical services and the customer. The supply chain is no longer contained within countries borders, but encompasses all nations, whether they are vendors, manufacturers or customers.


Supply Chain Management DefinedThe Institute for Supply Management defines supply chain management as the design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer.

The Bullwhip EffectVariation in demand is exaggerated as information moves upstream away from the point of use. Variation in demand is exaggerated due to infrequent demand and/or inventory level information exchange and order batching. Bullwhip effect costs can be as high as 12 to 25%. Bullwhip can be effectively avoided by: sharing point of sale data, collaborative forecasting, and collaborative future product promotion planning.

Supply Chain Management in PracticeSCM seeks to interconnect the value chains of various firms to make them align with the overall system’s purpose of satisfying some customer demand. Different levels of collaboration are seen in reality:Internal Process Integration: increase collaboration among the company’s functional groups. Backward Process Integration: collaboration with 1st-tier and 2nd-tier (leading companies) suppliers. Forward Process Integration: collaboration with 1st-tier customers. Complete Integration: collaboration from the “suppliers’ supplier to the customers’ customer.”

The goal of supply chain management is to use technology and teamwork to build efficient and effective processes that create value for the end customer. The goal is compromised when processes, value


chain elements, and/or companies work toward local rather than global optimum. A couple of items of note: SCM cuts across the entire organization, requiring the alignment of all functional departments toward a single goal.SCM requires that a firm be properly internally aligned before they seek to align others in their supply chain.

The Information Empowered CustomerToday's customers are empowered with a broad range of product and pricing information. As a result, channel power is shifting down the supply chain toward the end consumer. This is created customers that use their market leverage to constantly demand higher levels of service at lower cost; these customers have been called “high service sponges.” High service sponges soak up their suppliers resources to fuel their own quest for market dominance.


Creating Value to Meet Customers’ NeedsMichael Porter (Harvard University) noted that companies have to develop a distinctive advantage to succeed. Distinctive advantage implies that accompanied differentiate itself from the mind of customers.

QualityQuality includes both design and manufacturing elements. The product must be designed to live up to or exceed customer expectations. Manufacturing must then conform to the design specifications during production. Quality must be designed and built into the company’s products and processes. David Garvin (Harvard University) identifies eight factors that comprise quality of the mind of the end-user:

Performance - the primary operating characteristics of the product.

Features - the “bells and whistles” or extras that distinguish a product from competitors’ offerings.

Reliability - the notion that a product can be counted on not to fail.Conformance - measures how well a product matches established

specifications.Durability - refers to the product’s mean time between failures and

its overall life expectancy.Serviceability - the speed of repair when quality problems arise.Aesthetics - perception of fit and finish or artistic value.Perceived quality - overall perceptions of a product or brand’s

quality reputation


CostGlobalization has increased factor mobility and market access, requiring local companies to match the cost position of global rivals who often possess low-cost labor advantages. Four cost-reduction strategies are widely pursued: 1) productivity enhancement, 2) adoption of advanced process technology, 3) locating facilities in countries with low-cost inputs, and 4) sourcing from the world’s most efficient suppliers. The real measure of cost performance today is “total landed cost.” The entire supply chain must be designed for efficiency. Cost issues drive strategic decisions such as global manufacturing rationalization, outsourcing, and downsizing as firms seek lower labor, materials, and process costs. When cost competitiveness improves, companies can expand market share, increase scale economies, improve profitability, and invest in future capabilities.

FlexibilityFlexibility is the capability to adapt to new, different, or changing requirements. Flexible organizations operate was short lead times, are responsive to special customer requests, and can adapt rapidly to unexpected events. Flexibility requires investment in information and automated production and logistics technologies. Following are critical to creating a flexible culture:

Make cycle time a priority throughout the organizationMap processes to make them visibleIdentify key time-related activities/decisionsBenchmark against customer requirements and competitors’

capabilities Cross-train workers and organize work in multifunctional teamsDesign performance measures to value fast-cycle capabilities


Develop information systems to track activities and share information

Build learning loops into every process throughout the organization

DeliveryCompeting on delivery means consistently delivering on time and in the correct quantity. Fast, reliable delivery requires the reduction of order cycle time in the elimination of variability. Delivery capability is cross-functional by nature, requiring coordinated efforts by sourcing, operations, and logistics. Operations and logistics often represent 90% of total order cycle time

InnovationInnovation creates new markets and changes industry standards. Early Supplier Involvement (ESI) is a key element of innovation strategies. Products introduced on-time but 50% over budget, realized only a 4% reduction in profit. Products introduced on budget but six months late experienced a 33% decrease in profits.


The End CustomerThe end customer is the only one who puts money into the supply chain and is therefore focused of all activities. Successful companies share information that helps the chain focus on the end customer. Customer fulfillment strategies seek to address:

What are the real needs of our immediate customers?What are the real needs of our customers’ customers?What are the real needs of our supply chain’s end customers?What information must be shared up and down the supply chain to

meet these customer needs?What capabilities must be developed up and down the supply chain

to meet these customer needs?How can we help other supply chain members improve the overall

chain’s customer fulfillment capabilities?


Matching Fulfillment Strategies to Customer NeedsThree types of analysis are needed to effectively tailor supply-chain service levels to specific customers:

Customer Analysis - identifies customer needs, helping managers segment customers (identify unique groups of customers).

Supply Chain Analysis - identifies and customer needs and the capabilities that must exist to meet those needs. This is used to find customer success factors, the capabilities that first-tier customers need to satisfy their downstream customers.

Competency Analysis - core competency is something that a company does so well that it provides a competitive advantage. True core competencies are usually cross functional.


Supply Chain Design

Supply Chain Design, Process mapping is a tool to chart how individual processes are currently conducted and help lay out new, improved processes. Value stream mapping is a type of process mapping that visually depicts the product’s or service’s “current” and “ideal” flow of information and materials throughout the supply chain. It specifically focuses on reducing waste throughout the system. SC mapping provides a picture of the dynamics that govern


how an organization’s supply chain works today, and provide a roadmap for the future.

The Importance of Supply Chain DesignSupply Chain Management is the design of seamless value added processes across organization boundaries to meet the real needs of the end customer. Failure to proactively design a Supply Chain results in (1) poor coordination of effort, (2) incompatible information systems, (3) long cycle times, (4) communication problems, (5) customer service issues, (6) excessive waste and environmental degradation, (7) relatively high inventories for the level of customer service achieved, (8) lower the optimal profit.

Process MappingA process is defined as an activity that transforms or changes input into new output. A process map is a graphic representation of the system and contains a sequence of steps that are performed to produce some desired output. The primary goal behind process mapping is to make complex systems visible.


The steps in developing a process map are to: 1.Determine the purpose of the process map which helps to establish level of detail and system boundaries.2.Determine who has the required information or experience.3.Analyze the process through observation and interviews; document each step.4.Draw the map5.Have the people who are involved in the mapping process as well as others (including those who actually perform the process) review the map for clarity and completeness

Process AnalysisProcess analysis is used to identify non-value added or redundant activities. 1.Begin process analysis by examining the time, cost, resources, and people involved in each step.

Identify the steps that consume the most time or resources.


Identify processes that take too long or vary greatly in time.Identify points of delay.Estimate the value added by each step and judge against the cost.Consider the reasons for problems and how to improve specific

activities or processes.2.Re-examine each decision symbol to determine if the decision is necessary and adds value and consider combining decisions or moving them to another point in the process to create more value.3.Check each rework loop. A rework loop involves iterative processes, like repeatedly checking a cake until it is done baking. Here, consider how rework can be reduced, eliminated, or combined with another step.4.Finally, look at each process step again. Verify that steps add more value than its cost. Judge if a step is redundant. Consider how steps could be recombined for greater efficiency.

Value Stream MappingValue Stream Mapping is a specific application of process mapping based on lean Manufacturing principles. System boundaries typically defined at the macro level. Value Stream Maps generally contains more information then typical process maps in terms of process time, process performance characteristics, information flows, and physical flows.

Supply Chain DesignSupply chain design is a proactive approach to serving the customer rather than chasing after customer needs. The process of supply chain design is:1.Identify the chain’s end customer2.Determine the Supply Chain’s value proposition

Identify the key players at each level and the value they add


Determine where your company is and value it adds 3.Analyze who possesses the power in the supply chain: manufacturer, distributor, retailer, or other party

Determine who has the best linkages with the end customerEstablish the key technologies that drive SC successAssess the core competencies that drive SC success

4.Isolate the major processes required to support the supply chain’s value proposition

Determine where there is a significant amount of time and variability5.Establish what the ideal supply chain would look like

Ascertain the as-is value-added roles of the various supply chain members

Analyze how much control over supply chain activity we want or need

Clarify the should-be value-added roles of the various supply chain members

Design for Supply Chain InitiativesDesign for initiatives attempt to create an atmosphere where designers work with other key players internally or externally to insure critical issues are considered an integrated into design of products and processes.

Design for manufacturabilityDesign for distributionDesign for disassemblyDesign for environmentDesign for supplyDesign for the customer


Approaches to Supply Chain DesignThere are a number of different approaches to supply chain design (SCOR Model, Supply Chain Double Helix, Nature of Product or Service, Product Life-Cycle). Common Elements shared among the various approaches include: (1) Identification of Customer and Value Proposition, (2) Identification of Membership, (3) Structure of Member Relationships, (4) Locus of Control.

The Supply-Chain Operations Reference (SCOR) Model begins with the belief that supply chains are based on a series of linked, planned-source-make-deliver-and-return processes. The steps in the SCOR model are:1.Analyze the basis for competition: what do you need to do well in order to succeed? How can you measure and monitor your progress in these key areas?2.Configure the supply chain as it is and as you would like it to be. Include geographic locations and flows.3.Align performance levels, practices and systems across information and work flows.4.Implement SC processes and systems, including people, processes, technology and organization


Theory of Constraints

The Theory of Constraints, (TOC) is a management philosophy developed by Dr. Eliyahu Moshe Goldratt. According to Goldratt the strength of any chain, process, or system is dependent upon its weakest link. The underlying premise of Theory of Constraints is that organizations can be measured and controlled by variations on three measures: throughput, operating expense, and investment. Throughput is money (or goal units) generated through sales. Investment is money the system invests in order to sell its goods and


services. Operating expense is all the money the system spends in order to turn the investment into throughput. TOC is systemic and strives to identify constraints to system success and to effect the changes necessary to remove them.

The TOC focuses first on increasing income, as its potential is unlimited. (Of course, income has an upper limit, but how many companies have fully exploited and dominated their own markets?) Cutting costs is a secondary priority. The TOC uses throughput, inventory, and operating expense as measures to guide company decisions:Throughput is the rate at which the company's processes create cash for the company through sales of its products or services.Inventory is an investment in tooling, labor, materials, and any other items needed to create goods for sale.Operating expense is the cash spent to convert inventory into throughput.The biggest gains from the TOC technique come from increasing throughput. After that, companies should pay attention first to inventory and last to operating expense. This hierarchy conflicts with the traditional quality concerns of first cutting inventory and labor to improve profits.

The five focusing steps is as follows:(1) Identify the system’s constraints.(2) Decide how to Exploit the system’s constraints.(3) Subordinate everything else to the above decision.(4) Elevate the system’s constraints.(5) If in the previous steps a constraint has been broken Go back to step 1, but do not allow inertia to cause a system constraint.


Types Of ConstraintsThere are a number of constraint classifications, but in reality there are two main types;(1) Physical Constraints(2) Policy ConstraintsA physical constraint, might be a resource, either a person or a machine, or a material of some kind, time or quality, or supply issues. A policy constraint is almost everything else that is non-tangible.

Be careful, don’t be mislead into believing that most constraints are physical – the bottlenecks that everyone seems to know about. Physical constraints merely become the expression of deeper underlying policy constraints. Goldratt considers that (2);"We very rarely find a company with a real market constraint, but rather, with devastating marketing policy constraints. We very rarely find a true bottleneck on the shop floor, we usually find production policy constraints. We almost never find a vendor constraint, but we do find purchasing policy constraints. And in all cases the policies were very logical at the time they were instituted. Their original reasons have since long gone, but the old policies still remain with us."If most constraints are, in reality, policy then this should be incredibly powerful. It means capacity in reality already exists, we are simply holding ourselves back based upon some internally held assumptions or convictions. It should be possible for an organization to change its own policies, and difficult for others to imitate. Such conditions give rise to powerful strategic advantages which we will address in the strategy section.


Increase Productivity or Cut Costs?A more attractive alternative is to increase productivity. That is to increase output at constant investment, manpower, and machinery. Variable costs such as raw material will increase in proportion to output, but operating expenses should remain the same. Therefore the contribution to the total profit from each additional sale is leverage against the previous unit allocation for operating expense.

A 20% increase in the productivity of a typical manufacturing company with 30% raw material cost, 40% operating expense (all labor and all fixed expenses) and 30% profit will produce a 46½% increase in operating profit!

A 20% increase in productivity results in a 46½% increase in profitability!

Does that seem a little far-fetched? Let’s go through the mechanics so that we are sure that we all understand. Firstly we have a 20% overall increase in sales. Some of this is used to pay for the increase in raw materials. The increase in raw materials is 20% of 30% or 6%.


So now we have an overall increase in income of 20% - 6% = 14%. Let’s see what the relative increase in profitability is. It must be 14% / 30% = 46.66%. We rounded that to 46½%.

Cost CuttingLet’s examine the popular alternative for raising profit – cost reduction. What is the effect of a 10% across-the-board reduction in operating expense at the current output of 100%? Attaining 10% across-the-board would be a significant cost saving – correct? Operating expense is 40% of the total, 10% of 40% is 4%. Therefore we save 4% of our costs and the profit increase is therefore 4% / 30% = 13%. Let’s draw that also.

Now we have a choice, a 13% increase in profit due to a significant cost-cut, or a 46½% increase in profit due to a significant productivity gain. Which would you prefer?

Of course if we chose the cost reduction way, we would have to be quite sure that our reduction didn’t actually harm some critical function of the system in some way.


Preferences aside, which offers greater potential for continuous improvement? Sure we can continue to cut costs, but how much next time, another 10%? That’s unlikely. Maybe 5%. Within a round or two the potential for further improvement is essentially nil. And what if sales pick up after a couple of cost-cutting rounds?


CasesThe PQ Factory The objective of the exercise is to make a decision as to how best to maximize the profit of this process. There are 3 raw materials and one purchased part which are used to make the two end products – P’s and Q’s. One unit each of raw materials 1 and 2 combined with one purchased part constitutes the chain for product P. One unit each of raw materials 2 and 3 constitutes the chain for product Q.

RememberThe selling price for P’s is $90 each and the market demand (which is accurately known to the last unit) is 100 units per week. The selling price for Q’s is $100 each and the market demand is 50 units per week.


In addition:The operating expense for the whole process is $6000 per week. In this ideal situation resource availability is; 60 minutes per hour, 8 hours per day, 5 days per week, or 2400 minutes per week. There is never any waiting, when one step is finished; the next step is immediately ready.

Note however, there is no multitasking. Resource A, B, C, D can only do their nominated jobs. In processes where you might visualize the resources as people, then its not uncommon for managers to assume, for the purposes of this exercise, that the resources can multitask – even though in real-life they are happy for their own resources to do the same job year in – year out.

Let’s also remind ourselves that;Profit = throughput – operating expense, andThroughput = selling price – material costs.

Given this information, the question then is; how much profit can we generate per week from this process?


CasesFishing Bait MakersDaufel Enterprises is a small business that produces hand-tied fishing flies. A fishing fly consists of feathers, furs, and synthetics placed on a hook and seamed with thread. The fly tier constructs these flies to represent aquatic organisms upon which fish feed.

Quality and speed are two issues that conflict in the fly-tying industry. The faster a tier can construct a fly, the more profitable. However, if speed is the only focus, quality will suffer. In the book, Patterns, Hatches, Tactics, and Trout (Vivid Publishing, 1995), popular fly fishing writer Charles Meck wrote the following about Daufel Enterprises:Doug and Dan Daufel have tied flies commercially for the past five years. The young age of these identical twins from Dayton, Ohio, belies their tremendous fly-tying ability. They tie some of the best patterns I have seen in my forty-plus years of fly fishing and tying flies. They have tied flies for more than ten years and now tie commercially some of the finest flies I've ever seen.

In essence, the Daufel brothers must personally tie the flies or quality will suffer. In their business, therefore, the brothers' time is the constraint factor.


Exhibit 1 illustrates the contribution margin (throughput per dozen) for the five most popular flies constructed by the Daufel brothers. In addition, the brothers have quantified the labor constraint for each fly to determine the throughput per labor hour. As indicated by Exhibit 1, all flies have the same sales price and shipping cost, but differ in the material cost per unit and the time required to tie the flies. Exhibit 2 compares the apparent profitability of the various flies based on traditional contribution margin analysis with the profitability of the various flies based on constraint analysis.


To perform the constraint analysis, the brothers had to monitor their own time spent working on each type of fly. They intuitively knew the Thorax Dun required more time than the others to tie. They also knew it had the lower contribution margin, so they were not surprised when the results indicated it had the lowest throughput per labor hour. However, they were surprised by other results of the throughput analysis. The Compara Dun, which has the highest contribution margin, ranked next to last based on throughput per labor hour because it required the second highest amount of the brothers' time. The Woolly Bugger, which had the next to lowest contribution margin, had the second highest throughput per hour.

Because of the high quality of their work, the Daufel brothers are able to sell essentially all of their production of any model of fishing fly. Prior to performing the constraint analysis, the brothers had concentrated on Compara Duns and Pheasant Tails. The constraint analysis indicated that the brothers should switch their productive efforts from the Compara Dun to the Woolly Bugger.


To meet the needs of their best customers and continue with their own creativity, the brothers desired to continue producing all of the current models, while increasing their profitability. With this objective in mind, it was suggested that the brothers explore the possibility of increasing the price of the less profitable flies.

Constraint analysis can be used to determine the sales price required so that each model of fly would have the same $29.39 throughput per labor hour. This analysis reveals that the required prices for the Thorax Dun ($20.72 per dozen) and Compara Dun ($16.64 per dozen) were higher than customers would probably be willing to pay.

The required prices for the Hare's Ear ($14.11 per dozen) and Woolly Bugger ($12.53 per dozen) would probably not substantially decrease demand. This additional analysis suggests that the Daufel brothers should consider raising the price of the Thorax Dun, Compara Dun, and Hare's Ear to $14.00 per dozen and the price of the Woolly Bugger to $12.50 per dozen. Exhibit 3 shows the throughput per dozen based on the new sales prices.


Sales and production records for Daufel Enterprises prior to performing the constraint analysis were not detailed enough to allow them to accurately determine the expected profit increase as a result of the proposed changes. However, simply switching 500 productive hours per year from the Compara Dun to the Pheasant Tail would result in increased profitability of over $4,600 per year. The other proposed changes in production and price would also likely have positive effects on Daufel Enterprises' profitability.

Use of Constraint AnalysisDaufel Enterprises' constraining factor is, like many small businesses, the time of one or a few key individuals. This is certainly true in most service businesses. Like the Daufel brothers, owners or managers of small businesses normally have an intuitive feel for which products are more profitable. Often a simple constraint analysis will allow them to quantify their intuitive feel and make precise adjustments.


CasesThe Beer GameDeveloped by MIT to simulate a simple 6-tier single product supply chain. The game is played in a series of periods; each period corresponds to one week. Each order has a two-week delay and each shipment has a two-week delay.

Layout

General InformationThere is cost associated with having too much inventory (i.e., inventory carrying costs) and too little inventory (i.e., backlogs, lost sales, lost customers). To hold a unit of inventory for one week costs $1.00. Each unit of backlog costs $2.00 per week. Inventory and backlog levels are tracked during the game on a form.


Game Order:Receive Inventory and Transport Orders – products in shipping delay boxes are advanced one position on the game board.

Look at and Fill Incoming Orders – receive incoming order and ship the requested number of units (plus any existing backlog), if possible, into the empty shipping delay box that was created during step 1. If you don’t have enough inventory, ship as much as you can and add any unfilled orders to your backlog.

Record Inventory or Backlog Levels – count your inventory or calculate your backlog and record it.

Place an Order – decide how many units to order from your immediate supplier. Advance your previous period’s order from the order placed box into the supplier’s incoming order box and place your new order in the order placed box. Place orders face down so they cannot be seen by your supplier.

Game Rules:You may NOT communicate with your supplier or any other tier in the supply chain. The only communication that takes place between the is through the order cards that are passed face down along the supply chain.

Customer demand is determined in advance. Retailers are not allowed to share this information with other tiers.

Each step in the game sequence must be completed by each of the tiers for the current period before the next period can be started.


business skills workshop #12 business skills training handbook handout 12 october 2010.pdf ·...

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