Supply Chain Strategy

A. Supply Chain Strategy: I recommend the Keiretsu networks as the correct supply chain strategy for the power tool company. The three main strategies are the Keiretsu network, virtual company, vertical integration. All of them have their advantages and disadvantages. In a Keiretsu network the manufacture will combine the best features of all three methods, it is part collaboration, using fewer suppliers and some vertical integration. An example of this style of Keiretsu network would be that the tool company can work closely with one supplier, such as a parts maker but not by buying out the company.

Here the commitment to a long term business relationship promises continued mutual growth. They collaborate with each other and share expertise to improve their production. A virtual company is a network of independent companies—suppliers, customers, competitors, that are joined by information technology or intranet to share expertise, labor, costs, & access to each other’s markets. Such companies are normally formed on the basis of joint venture agreement with little or no organizational chart.

This fluid style reduces the impact of the agreement on the individual organizations and facilitates adding new players with new skills and resources. Such deals can be temporary and the dissolved once the business objectives are met. A virtual company is rarely associated with a brick and mortar identity of itself. In vertical integration the power tool company owns all aspects of the supply chain. The company would purchase or have the resources to manufacture all of the internal parts of the power tool equipment. The manufactures would buy out the distributor or the supplier.

There could be backward integration where the manufacturer decides to build its own parts for the power tools. Forward integration would be purchasing a manufacturer that makes the finished products. In this model it is difficult to do everything by itself. I recommend using the Keiretsu network. This keeps the cost lower than a vertical integration. As this business is long term and a virtual company would not be appropriate. While the vertical integration strategy would be effective in managing our supply chain, the cost in buying the supplier will e very high compared to the Keiretsu network (Heizer ; Render 2011).

B. a. Inventory Turnover: This is the number of times the power tool inventory turns over per annum. It is one of the most commonly used Supply Chain Metrics for manufacturing type of business. Turns can be viewed using Cost Value, Retail Value or Units. Method: A frequently used method is to divide the annual cost of sales by the average inventory level. Example: Cost of Sales = $49,000, Average Inventory = $7,000, $49,000, / $7,000,= 7 Inventory turns Also Inventory Turnover can be a moving number.

Example: Recurring 12 Month Cost of Sales = $24,000, Current Inventory = $5,000, $25,000, / $5,000,= 5 Inventory turns Projected Inventory Turns: Divide the total cost of 12 month sales by the total cost of goal inventory. Example: The total cost of 12 month sales is $40,000 total cost of goal inventory = $8,000 $40,000, / $8,000,= 5 projected turns Retrieved from http://www. supplychainmetric. com/inventoryturns. html The answer is the number of inventory turns – in the tool company is 5 or 7, that means that the tool company sells all of its inventory 5 or 7 times depending on the above method each year.

To determine if this turnover is good it has to be compared with other power tool companies. If for example the competitor’s rates are higher then the question would arise as to how much more should be invested in maintaining ready stock. It could also be said that tool company’s turnover is lower but has a stronger financial strength. The number of days a company should be able to sell its inventory varies by industry. Retail stores and grocery chains for example have a much higher inventory turn rate since they are selling products that generally inexpensive.

Companies that manufacture tools are going to have a much lower turn over rate since each of their products may sell for $200 plus. In comparison a department stores has much higher turn over. Using Inventory Turnover to Calculate Average Days to Sell a Product. Once the inventory turn rate is calculated then calculating the number of days it takes for the power tool company to clear its inventory is 365 days divided by inventory turn rate of 5 times per year, take 365 ÷ 5. The answer 73 is the number of days it takes to go through its inventory. This method can also be used for benchmarking against companies in the same business.

This will help compare the inventory turnover rates. B. b. Perfect order measure/fill rate: This method measures the error-free rate of each step in the supply chain. Error occurs when the customer has an unsatisfactory experience with the power tool they purchased because of errors and delays in the supply chain. The complexities of an extended supply chain make the odds against fulfilling a perfect order challenging. The number of defective pieces that are received by customers can be a measurement of perfect orders. An error code can be developed for faulty power tools.

The following percentages can also be used: Parts entry 99% correct Delivered on time 89% Shipped without damage 87% All three can be added to calculate the 275/3 = 91%. Therefore, 91% would be the fill rate. Fulfilling a perfect order depends on the journey through the supply chain, it is filled with constant movement and activity, and each step holds the potential for delays, wasted money, and errors. This is a measurement defined as the percentage of orders delivered to the right place, with the right product, at the right time and with the right documentation.

Failure to meet any of these conditions results in a less than perfect order. The requirements for a perfect order can be daunting; yet despite the challenges, companies can achieve high perfect order rates. The perfect order rate has become an important indicator in measuring supply chain performance. Imperfect orders lead to increased labor costs for shipping, the need to provide replacement product, and lower revenue due to lost sales and customers. By minimizing imperfect orders, companies can achieve greater efficiencies and increase customer satisfaction.

Whether problem areas are isolated to a particular region, a specific process, or even an individual location, supply chain visibility applications can deliver vital information to help companies make the most effective decisions. For example, if on-time delivery performance has slipped, the ability to view the vendors with the lowest on-time performance can lead to understanding root cause relationships. Identifying the factors that contribute to performance measurements are key to prioritizing the actions to take for continual improvements.

This will give a better experience to the customer in terms of quality, expedited shipping, replacement of products etc. As soon as companies act to improve their problem areas, they can monitor the supply chain and track the improvement initiatives. Whether in the form of a dashboard, email, or mobile devices, information is readily available to capture current supply chain performance and trends over time. This results in tracking orders and improving systems in place to ultimately satisfy the customers needs in fulfilling an order for a saw or power tool. Retrieved from http://www. inboundlogistics. om/cms/article/perfect-order-fulfillment-getting-it-all-right/ B. c. Lead Time from Order to finished product: This is the amount of time it take from an order to a complete product. This includes the time it takes to build the product to the time the product is ready for shipment. The steps are order confirmation and testing of the finished power tool. Retrieved from https://www. pmgbenchmarking. com/public/info/SupplyChain/metric. asp B. d. Work-In-Progress (WIP) is an important measure for a tool manufacturing business, since it shows how many parts are held within the manufacturing system.

These may be bulky, small or expensive parts as needed to maintain an adequate supply of parts to build a finished power tool. The build up of WIP is a sign of inadequate logistic supply chain measurement When parts spend a lot of time on the factory floor without being used immediately. This measure can be taken every 24 hours, for each manufacturing sequence and each output. Retrieved from http://www. vivaceproject. com/showcase_html/internal%20logistics%20simulation/metrics. html C. Local optimization: Local centers or branches make short term decisions that keep in mind immediate profit and reduction of costs.

When these decisions are taken locally the branch or the local center does not have the experience that the main company or head office has in terms of trends, forecasts and predictions. Local businesses in a franchise can end up overcompensating for a lack of a certain ingredient, by ordering too much. Similarly, too little may be ordered for a lack of understanding of how much is really needed. Incentives: When there are local promotions, discounts or quotas in place then this can spur an oversupply of merchandise for sales that have not taken place.

Large Lots. This is a trap that a logistics manager can fall in. Large lots help bring the cost of the item down by reducing cost of freight for large lots. Economies of scale help bring the individual price down thereby helping the profit margin. Due to fluctuations in the distribution system, between the wholesaler and manufacturer the costs associated with the inventory, transportation, shipping and receiving can go up. The bullwhip effect occurs when the demand of the product changes from the time it was ordered.