As a human being, we all consume products and/or services all the time. This morning you got up and ate your breakfast, e.g., eggs, milk, bread, fresh fruits, and the like. After the breakfast, you drove your car to work or school. At your office, you used your computer, perhaps equipped with 27” LCD monitor. During your break, you drank a cup of coffee and played with your iPhone. So on and so forth. You probably take it for granted that you can enjoy all of these products. But if you take a closer look at how each of these products can be made and eventually delivered to you, you will realize that each one of these is no short of miracle. For example, which fruit do you like? Consider fresh strawberries. In order for the strawberries to be on your breakfast table, there must be numerous functions, activities, transactions, and people involved in planting, cultivating, delivering, and consuming strawberries. Moreover, all of these functions, activities, transactions, and people are connected as an integral chain, through which physical products like strawberries themselves and virtual elements such as information and communication flow back and forth constantly. By grouping related functions or activities, we have a supply chain, comprised of four primary functions such as supplier, manufacturer, distributor, and finally consumer. A supply chain is essentially a value chain. For the society or economy as a whole, the goal is to maximize value, i.e., to create satisfactory value without spending too much. In order to create the maximum value for the strawberry supply chain, every participant in the chain must carry out its function efficiently. In addition, all of the members must coordinate with each other effectively in order to ensure value maximization. We have to face the same issues for almost all the products and services we take for granted in our everyday life, e.g., cars, hamburgers, haircuts, surgeries, movies, banks, restaurants, and you name it! In this course, we want to understand fundamental principles of value creation for the consumers or the market. We try to answer questions like how the product or service is made, how the value-creating activities or functions are coordinated, who should play what leadership roles in realizing all these, and so on. As our course title hints, we approach all of these issues from a learning perspective, which is dynamic in nature and emphasizes long-term capability building rather than short-term symptomatic problem solving.
Designing Factors - Structural Dimension Part 2
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Supply Chain Strategy I: Structural and Infrastructural Dimensions
In order to optimize the supply chain performance, the firm must design its supply chain effectively. In this chapter, we will talk about how to design the effective supply chain and look into the designing factors of supply chain management in detail.
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Bowon KimProfessor
KAIST Business School
Okay, let's continue our discussion on inventory, and we already
mentioned that the importance of in, inventory in supply chain
management, can be explained by, first of all the cost implications.
Inventory management cost is single large element usually
in, in any company's income statement balance sheet.
And therefore inventory is important because of it's cost implications.
What about some other implications?
Another importance of in, inventory, it can explain in terms of innovation.
Innovation
speed.
For instance let's say, there are two companies
in the same industry, in the same market.
And they are pretty much comparable.
Except for, the amount of inventory they have.
Lets say the company A, and company B, and
company A has, one month sales of inventory.
In other words the company has, inventory which is
almost equivalent to the company's one month sales.
Okay.
One month's sales.
And now let's think about, company B,
and company B has inventory, much higher inventory.
And let's say that the company has
really high level of inventory
and say this is two month.
Two month sales.
Supposed that these two companies, developed a new product at the same time.
In other words the company wants to, sell their new product.
Company A, and also company B.
Then, how do we tax, how do we tax before
each company can introduce the new product to the market?
How long does it take, to introduce the new product?
It's not difficult to think about that fashion.
Company A would take one month, in other words it must it must wait one month.
In order to, sell all of this inventory before company A introduce a
new product to the market, whereas company B probably either
take at least two months before
the company would be able to sell its new product in the market.
So as you can see, if you have large inventory
then it takes longer for you to introduce your new product to the market.
And therefore, inventory, as inventory increases, as inventory
increases the company's innovation speed will go down.
And in that sense inventory plays another very
important role, which is very closely related to innovation.
And now, let's think about the last point.
Problem solving.
What do we mean by problem solving?
When a people.
You know, who actually developed the concept of doing that production system.
They, thought about this zero inventory production system
or, as a lean manufacturing system, or JIT system.
Or let's say zero inventor resistant.
When they tried to develop this, this concept, what they
had in their minds was a little bit you know complicated.
Let me just give you an analogy here.
Let's say, there is an ocean.
Or there is a sea.
And then you are on the ship.
And now, you can see some of this blocks.
Some obstacles here.
Here and there.
And it seems like it's not a big deal.
These are very small blocks, okay.
And these are actually the things you can see.
But what about this, although the visual part, the
visual part of this block are very small, but what about.
It beneath this, beneath the surface.
There is a huge block there, a huge sea mountains there, okay.
Let's say that is the case, then.
These are the root causes.
Fundamental causes, right?
And, this one which you can observe above the sea level.
This is just the symptoms.
[BLANK_AUDIO]
Symptoms, so if we make analogy saying that
what about this seed error, seed error.
This is your inventory, this is your inventory.
So, if you have really high level
of inventory there, inventory actually covers up.
Very serious problems, root causes of fundamental problems.
And because of that inventory cover-up, the
only thing you can see are just symptoms.
And therefore, you cannot diagnose the problem correctly.
And, because of that long diagnosis, you solution would be
long as well.
So, when the, when, you know, researchers, when, you know,
people who tried to develop this so-called [UNKNOWN] operative system.
They said that in order to tackle, in order to tackle thes, these direct
causes, the fundamental causes of problems, we have to reduce the inventory.
We have to reduce inventory intentionally.
Even
if there are some you know, problems due to low level inventory, but, you know,
forget about all those you know, complicated
chain reactions and so on and so forth.
If our goal is to identify the root causes of the problem and if our goal is
to solve those problems, operations problems or managerial problems,
then, you got to, we got to reduce this inventory.
Okay?
That's what actually happens.
So let's say, you know, we need to, reduce the
inventory so that our inventory is not that high now.
Our inventory is very low.
Very low inventory.
We are going to have inventory this much, okay?
This much invented.
So, we actually reduced inventory levels intentionally.
Or, you know, why don't we reduce even further,
so that we can actually, diverge all the root causes
completely?
And once you can see these root
causes, you become able to solve those problems.
And therefore, you just say that if.
The inventor delivering increases, your problem
solving capability will go down as well.
So, these are the three fundamental laws, plagued by inventory.
That's why it's impo, important to reduce the inventories.
By reducing the inventory, we can reduce the cost and by reducing the inventory.
The company will be able to increase these innovations.
And also the company will be able to increase its problem solving capability.
Now, let's think about really, you know, briefly, inventory deployment strategy.
All right?
And the first strategy is a push strategy.
Let me just give you example.
Now let's say that the system has four processes,
and this is the customer, the market, the custom.
And we have three processes.
P1, P2, P3 push is to be implied to me.
We push from, upship to down ship okay?
So we make the teams and proceed.
The downstream operation, downstream process cannot take that.
You got to have inventory here.
So, between processes we have inventory.
And then we just make things.
By taking into account our own situation.
In other words if we are at process one, then we don't
have to worry about process two, process three, or even the market.
We just make whatever is possible.
And we make whatever we can make.
Because we always have inventory.
That's the buffer, right?
So, we have always inventory.
That is somehow decoupled.
That is somehow decoupled the processes.
In other words inventory will make these processes processes independent.
Now there's the process are, do not depend on each other.
So, the pushes system is, basically make to stocks system,
in other words we make a things and if
it cannot go through the process, then we store that as inventory.
So, physical products flows in that direction.
[BLANK_AUDIO]
And also, there is not much communication backward,
so communication and information also flows the same direction.
So it's the information, communication, so
on and so forth.
So that's the puship system.
Information flows [UNKNOWN] and physical products source of the same
projection, and it copies, it copies the processes, and therefore we would
have excessive inventory, and the system is basically made to stock system.
What about the other the other, the other extreme case?
There is one other extreme case, which is called pull system.
What is pull system?
We don't want to have invented it, because invented
it causes lots of problems, a rise in cost.
Innovation and problem solving, and therefore which
is to get rid of all this inventory.
And, only when the customer places firm order, we start our.
Making processes, so manufacturing processes, okay?
So it's kind, kind of pulled by the market.
And, then is that physical products, as usual, will flow like
this, but information and communication flows backwards.
That's information and communication, so that's the big difference.
And
now the process is tightly coupled, in other words if something long in this
second process, the first process cannot randomly make things.
Because those things can go nowhere.
So if something is wrong in P2, process
two, the entire system, entire processes must stop.
Until they can find the problems and they can solve this problems.
So there are two extremes, push system and pull system and you can see that
there are pros and cons for each, each of these you know, systems.
And now, you got to find out some middle ground, the system in
between system, that takes the advantages of the extreme cases.
And at the same time, that avoids those
disadvantages each of these, you know, systems has.
That we call, let's say, intelligent system or contingent inventory system.
So looks like this, right?
So, we have processes and we learn soon
that inventory is not part of normal process.
But if we know that.
If, if we, if there is something wrong, then we
see whether that, that effect or that problem comes from.
No more, for landum causes or systematic causes.
If something comes from landum causes then, it doesn't
make sense for it to stop the entire process.
Because that's not going to help us to prob, solve any problems.
But if we know that the deviation or the defect coming from,
systematic business and systematic process then, they are stopped into their line.
And try you know, search for the causes, and fix this problem.
So, you know, intelligent or contingent inventory system is something in between.
Something in
between push system and pull system, we don't have to have zero
inventory, at these two we can have, we can keep [INAUDIBLE] entry.
But not too much.
Not excessive inventory.
In other words we regard inventory is not part of a normal operations.
We keep
inventory when there is a systematic problems, so that
we stop the process and we solve those problems.
We do the problem solving.
And that is the, that is the, you
know goal of this intelligent or contingent inventory system.
We don't want to stop the whole process, when in fact, the problem is caused by
some random causes and therefore we cannot you
know, solve this, so many problems at all.
If that is the case then, it is sometimes it's
hugely loss of our productive time and just very inefficient.
Yet at the same time, if the deviation or if the problem,
caused by systematic reasons then we got to stop the line.
And we try to find that the root causes of
the problem and we, we, we better fix those problem.
Unless or, you know, in order to prevent in order to
prevent any more cheaters problems from occurring.
Finally, there is a transportation, logistic decisions.
We already talked about this, the relationship
with inventory decisions unit value versus speed.
Fast transportation usually expensive, and
slow transportation is usually inexpensive.
Okay, so far we've talked about these four elements
in in this structured dimension of a supply chain drawing.
And we compared, this full elements to computer hardware.
And now we, needed to look at software aspect of this supply chain design.
[BLANK_AUDIO]
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