Operations Management: Supply Chain Management

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An integral part of operations management is the supply chain ("Supply Chain Management - SCM"). The supply chain is the process through which materials, information and finances flow from their source to the manufacturer, wholesaler, retailer and ultimately to the end user. Supply chain partners work in tandem to provide the highest level of satisfaction to the customer in the least expensive way. The process includes creating the order, taking the order and fulfilling the order. Many businesses attend to this process loosely, but successful businesses take their partnerships seriously and invest in ensuring that they function smoothly because they are a source of competitive advantage. Every product that is sold in the marketplace is a result of the actions of numerous component organizations which are constituents of the supply chain.

The Supply Chain – The Long Road to Creation

Apple manufactures iPhones and other technology devices we love. But it all starts in the mines. Tungsten, tantalum, tin and gold are the primary minerals needed to make computers, phones and other devices (Browning). Artisanal miners, otherwise known as subsistence miners, are small scale operators who work independently and generally do not have sophisticated equipment or tools. These miners support their families and community through the sale of minerals to foreign buyers. In addition to the artisanals, are the larger, corporate mining companies, both extract minerals needed to support the creation of iPhones. The three largest suppliers of tungsten in the world are China, Russia and Bolivia ("Periodic Table - Tungsten"); the three largest suppliers of tantalum are Brazil, Rwanda and China ("Periodic Table - Tantalum"); the three largest purveyors of tin are China, Indonesia and Peru ("Periodic Table - Tin"); and the three largest suppliers of gold are China, Australia and the United States ("Periodic Table - Gold"). After the mining process, the minerals are then shipped to the smelting factories, located in China, Japan, India, the U.S., Brazil, Germany, Russia, Austria, Estonia and Kazakhstan, for refining. Smelting is the process of stripping a metal from its ore. Once extracted, the metals are then processed into component parts ready for assembly into the devices we recognize.

Ethics Supply Chain Management

An ethical issue that has arisen in the Apple supply chain and that of other technology device manufacturers is conflict minerals (Browning). Conflict minerals come from the Democratic Republic of the Congo, where armed groups, rapists and warlords hold miners hostage and strip them of their profits for their own gain (“The Crisis”). Many women and girls are raped in an effort to control the villages, the workers and the mines. In 2012, the U. S. Securities and Exchange Commission (SEC), established a regulation requiring that publicly traded companies, such as Apple, disclose if they are obtaining conflict minerals for use in their products. As a result, Apple created its Supplier Responsibility Standard which is a part of its Supplier Code of Conduct. The standard requires Apple’s supply chain, composed of suppliers, subcontractors, and lower tier suppliers, who provide goods or services, to engage in due diligence to determine where their minerals are sourced.

In its 2016 disclosure report to the SEC, Apple said: Apple is committed to responsible sourcing, and working to ensure that the minerals in its products do not finance armed conflict is an important part of its dedication to operate a responsible supply chain. As of December 31, 2015, after five years of devoted effort, 100% of the identified smelters and refiners in Apple’s supply chain for current products were participating in an independent third party conflict minerals audit (“Third Party Audit”) program. Apple believes that this effort has driven awareness and improved sourcing practices across a wide base of smelters and refiners that supply the industry well beyond Apple ("Form SD Specialized Disclosure Report”).

Unlike its competitor, Dell reported that it is too hard for them to trace conflict minerals: the mining of these minerals takes place long before a final product is assembled, making it difficult, if not impossible, to trace the minerals' origins. In addition, many of the minerals are smelted together with recycled metals, and at that point, it is virtually impossible to trace the minerals to their source (Browning).

Perhaps this is why Apple is the most profitable company in the world, with total revenues of $182.8 billion (McIntyre and Frohlich). The dichotomous responses of Apple and Dell, show the distinct paths that the two major companies have taken in managing their supply chain. It also shows to some degree, how ethical management of the supply chain can, at least in part, lead to enviable profits. A survey conducted by Intel shows that ninety seven percent of millennials feel that companies should be held accountable for acting in ways that benefit the world as a whole, in addition to holding themselves accountable for selecting and supporting companies that make the effort (Penn Schoen Berland). Many millennials expect and respect Apple’s efforts toward eliminating the conflict minerals problem, and Apple has been rewarded on their bottom-line. 

The purchases made during the early stages of the supply chain process can be quite expensive, so it serves companies well to develop solid relationships with their suppliers and to attempt to work hand-in-hand towards reducing costs, and increasing innovation and design (Heizer and Render). When partnerships are successfully forged, resulting in improved product to the customer, the suppliers and the manufacturer can both achieve a competitive advantage. Overall, the goal is to have a symbiotic relationship that withstands the test of time.

Managing supplier relationships is an important part of operations management and ultimately the bottom-line (Heizer and Render). There are many moving parts in the supply chain management process. Management includes handling transportation companies, payment transactions, (in either cash or credit form), suppliers and/or distributors, accounts payable and receivables, inventory and warehousing management, and order fulfillment.

Supply Chain Risk

It is important for a company to have a strategy for dealing with supply chain risk (Heizer and Render). Risk with respect to the supply chain can come in many forms. At one point or another in every major company’s life cycle, there has been an unforeseeable event that knocked the company to their knees for a period of time. The point of supply chain risk management is to limit the risks that can occur when an organization relies on other companies to fulfill its raw material or supply needs.

In the case of Apple, Tim Cook, the CEO, and former Chief Operations Officer, believes that inventory is evil (Lu). His theory is to manage inventory as though it is milk. If the inventory gets past the date marked on the container, you have issues. Quality inventory control is reflected in the ability of an organization to turn the inventory over within a short period of time. When compared to Dell, Apple turned their inventory over twice as fast, in the case of Hewlett Packard, five times as fast. The faster inventory is turned over, the better.

How Did Cook Achieve Great Inventory Management?

Supply Chain Management Strategy. Cooks philosophy on supply chain and inventory management was to reduce the number of suppliers, and make them compete against one another to remain in the supply chain (Lu).  So each aspect of the supplier’s responsibility, they had to demonstrate an ability to do better than their competitor, in order to remain in the loop. Using this strategy, Apple went from one hundred suppliers to twenty fours suppliers. In addition, Cook reduced Apple’s warehouses from nineteen to ten, so that their stock-on-hand was only six days worth as compared to having one month’s worth of stock-on-hand prior to implementing his strategy (Lu).

Every company will have its own strategy for addressing their supply chain needs. There are a number of strategies, including Tim Cook’s double strategy of reducing suppliers and forcing them to compete to stay in the game. There is establishment of a joint venture, where resources are joined to develop a component, long-term partnering, where a company teams up with a few suppliers, but more on a permanent basis (Russell and Taylor). In this strategy, the company is not looking for the lowest cost, necessarily, but is looking for reliability and a commitment to the long term. In this situation, because of the time investment and the benefit of economies of scale, suppliers are more willing to engage in design innovations, just-in-time deliveries, and are better able to adapt to the evolving needs of the organization. Another option is multi-supplier negotiation with intra supplier competition (Trowbridge). In this strategy, the organization seeks responses to their request for quotation. The suppliers each present their best bid, and the company selects the lowest and best offer. There is vertical integration, where the primary organization buys the supplier (Jurevicius). In this case a company might find it most beneficial to incorporate a supplier into their business, so that they no longer have to find suppliers for the particular component, because they now make the component themselves. Kieretsu utilizes a limited number of suppliers in combination with vertical integration (Aoki and Lennerfors). Often the company and supplier is joined through cross-shareholding. Typically, the primary organization will invest in training and working with the supplier organization for the combined good of both entities. Finally, there is the online strategy, which is generally on an as-needed basis.

Toyota is an example of a company that employs kieretsu (Aoki and Lennerfors). The company’s relationship with its suppliers is more transparent, worldwide, and focused on cost-cutting. The company and its suppliers develop a sense of trust over the long haul. As a result of increased trust, they collaborate more, and Toyota provides educational support for the innovations it might be seeking in the future. The integrated supplier has the time to learn by way of a learning curve. The Toyota kieretsu system is beneficial for both company and integrated supplier. 

Luke’s Lobster is an example of a company that employs vertical integration (Buchanan). The strategy impacts both quality and price in a very positive way. Luke Holden, the owner of Luke’s Lobster, handles the restaurants, while his father handles their Cape Seafood processing plant. The plant supplies all of his restaurants which seem to be increasing in number by the day. There is a Luke’s Lobster in Maine, New York, Washington, Boston, Philly, Las Vegas and Maryland (Buchanan).

No matter which strategy is selected, the supply chain is a system subject to serious inefficiencies (Heizer and Render). In order to forge success between the organization and its suppliers, there needs to be a meeting of the minds on goals, the companies must have mutual trust, and there needs to be cultural compatibility. All entities must appreciate if the customer is not happy, no one will be happy, so the customer’s happiness must always be in the forefront of everything that the companies engage in. In order to develop mutual trust, all components in the relationship must share information, communicate, bear the risks and engage in mutual information gathering for the good of the group. Cultural compatibility is essential because there needs to be an alignment between those that are purchasing and those that are supplying. The two entities do not always have compatible perspectives (one wants to save money and one wants to make more money) and it is important to work towards the goal of joint objectives to the extent possible (Heizer and Render).

Works Cited

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