Integrating Demand and Supply ChainsPuay Guan GohGM, SembCorp Logistics, Korea
262 P. Guan Goh1. Introduction The evolution in the implementation of logistics and supply chainmanagement has been rapid in the last few years. As companies move fromoutsourcing to offshoring of business activities, the ability to coordinateregional or global operations become ever more important, with implicationsfor collaboration, information sharing, planning, and responsiveness in real-time, far-flung supply chains. At the same time, while many companies have tried to implement someform of collaborative networks, the results from collaboration have beenmixed or dubious up until recently. Especially in Asia, collaboration mayface even more difficulties related to poor IT and telecommunicationsinfrastructure, lack of trust in information sharing, and insufficientmanagement understanding of collaboration concepts. As companies continue to push process transformation and systemintegration inherent in collaborative processes, improvements in sharedprocesses have begun to show. While these efforts may be piecemeal on aproject basis, the scope of such smaller-scale projects is clearly moreacceptable and more easily implementable in companies than big-bangtransformations. As the integration of processes and information between companiescontinue to improve, companies improve on their ability to collaborate andwork on joint company processes in an extended value chain. With thisincreasingly close integration, planning and execution functions are nolonger separate, but become more coordinated. The ability to integrate theplanning and execution functions, close to real-time basis, becomes evenmore critical. In addition, it has become increasingly important that both the demandchain and supply chain perspectives are taken into account in this overallprocess integration. The challenges for companies in balancing the supplyand demand chain perspectives could be many. As companies become morefar-flung in their global procurement, manufacturing, and sales operations,the ability to coordinate smoothly the entire value chain by matchingdisparate customer and supplier bases becomes more challenging, and asource of competitor advantage for companies which can execute well. Thispaper examines different methods for how multinational companies haveimplemented their inventory management strategies in the Asian context.
Integrating Demand and Supply Chains 2632. Challenges in Asia Within the Asian context, such integration poses particular challenges inthe operating environment. The rise of Asia, particularly China in recentyears, in low-cost manufacturing has enabled the global footprint ofmultinationals to spread farther and wider in taking advantage of costefficiencies. However, the growth and improvement of manufacturingcapabilities has not been accompanied by a corresponding improvement insupply chain. Traditionally, logistics has seen as a backend function, and primarilyfrom the view of asset utilization, with warehousing as a means for storage,and transportation by as trucks operated by small companies (oftenindividual owners) with varying levels of capabilities and number of trucks.Often, this is further hampered by the lack of logistics infrastructure such asroads, ports and airports, skilled workforce, and logistics informationtechnology as well as IT infrastructure nationwide. The relative lack ofexperience and sophistication in Asian logistics, especially in supply chain,has meant that the emphasis is placed primarily on transactional, perhapseven opportunistic, execution, rather than on planning and coordination overthe medium and long-term. Political and geographical factors also play a part. Asia comprises anumber of countries with their own language, cultural, taxation, andhistorical barriers, and also varying levels of economic development. Thismakes cross-border coordination more difficult than in the case of largecountries such as the United States or economically and legally integratedentities such as the European Union. Taken together, all these factors have made global coordination difficultto implement seamlessly. Such disparity between Asian operations and theoperations in developed countries occurs in ways such as:• Customers are often based in Europe, concentrating on R&D and US and marketing, while manufacturing sites, or outsourced production, are often based in low cost manufacturing locations in Asia. The ultimate customers of the finished products could be all over the world. This creates challenges in coordination for shipping and logistics, and project management across different geography and time zones.• Customers are global or regional players with sophisticated management and IT systems while suppliers are small players with low capabilities and resources. Suppliers are less capable of planning optimal inventory and supply chain strategies, or having the resources to support vendor management inventory and collaboration programs.
264 P. Guan Goh• Competition is mainly on price due to the pressures of low-cost competition in Asia. As a result, suppliers tend to give lower priority to service levels or quality. At the same time, customers are demanding on service levels (as well as pricing). Service levels for product availability through better inventory, give way to immediate transactional requirements such as price variances between suppliers, creating insufficient focus on joint long-term goals.• In typical manufacturing environments for end products, the number of input SKUs (Stock Keeping Units) and suppliers are much larger than the number of output SKUs and customers, making inbound logistics into the factory (more probably in Asia) more difficult to coordinate compared to outbound logistics to the end customer.3. Supply Chain Strategies While the challenges are many, the problems are not insurmountable.In order to cope with such disparities between the supply chains and thedemand chains, companies must have clear strategies for demand-supplyintegration and synchronization. We shall now look at three different strategies that companies in Asia haveembarked upon. From there, it may be possible to see different levels ofintegration, depending on the business needs of the companies, and a logicalprogression of the extent of integration. The extent of integration woulddepend on the strategic objectives of the company for supply chain andinventory management, the level of involvement with the supplier base, aswell as the level of involvement with the customer base. Especiallyconsidering the Asian context that infrastructure and supply chain knowledgeand practices could be lacking, it is more important to focus efforts on areaswhere the payoffs for investments into capabilities, and for transferringknowledge, might be the greatest. Furthermore, the use of information technology and other logistics-relatedtechnologies is often a key cornerstone of such integration initiatives. Onlywith information sharing, companies can start to build on the information forplanning and coordination, and this is critical to the successful implementationof these strategies.
Integrating Demand and Supply Chains 2654. Segmentation of Supplier Base for Different Extent of Integration Not all suppliers are equally important to the operations of the company.The supplier integration effort may be consuming on both time andresources, and analyzing the differences in supplier importance and suppliercapabilities enables companies to focus their efforts on the appropriate levelsof integration effort for different segments. How might such segmentationstrategies be implemented? In the case of a major semiconductor manufacturer (MSM),40 segregationof its supplier base is key to effective inventory management. The companyis a provider of advanced semiconductor solutions. Its DRAM (DynamicRandom Access Memory) and Flash components are used in advancedcomputing, networking, and communications products. The PCBA (Printed Circuit Board Assembly) Operations Division ofMSM in Singapore deals with the assembly of RAM chips using TSOP(Thin Small Outline Package), DRAMs, PCBs (Printed Circuit Board) andother discrete components. A typical module consists of a number ofmemory components that are attached to a printed circuit board. The gold ortin pins on the bottom of the module provide a connection between themodule and a socket on another larger PCB. There are also some capacitorsand resistors soldered onto the PCB. Raw materials supplies come from external sources and a single internalsource for TSOP. The materials from external sources are broadly classifiedinto two types: generic and customized parts. Generic parts such as capacitors, resistors, and other discrete componentsare purchased as consignment goods and there are two main vendors forthem. These two suppliers both manufacture and function as trading housesthat purchase commodities from other suppliers and manufacturers. Thus,even if they themselves lose production capacity, they can still purchasefrom other manufacturers to fill in the order, ensuring that supply is stable. For these goods, auto-replenishment is conducted through supply chaininitiatives like negative inventory and VMI (vendor managed inventory).This relieves MSM from the burden of taking care of inventory forconsigned goods, leading to large amounts of cost savings. Materialavailability for these suppliers can be easily seen as they are stored in thesame system as MSM. This allows downstream components to view thisinventory and plan for output. Monthly conferences are setup between thecorporate planning and local planning teams to ensure that suppliers aregiven the demand forecast.40 Name has been disguised by request of management.
266 P. Guan Goh For specially designed parts, there are five different sources to supportglobal operations, giving a stable supply base for unexpected contingencies.For order processing, the purchase order has to be firstly issued to suppliers.Subsequently, another delivery signal is sent through real-time electronicmeans, which ensures that deliveries are well-planned and coordinatedbetween supplier and buyer. Its close integration with MSM’s internalprocurement system helps to facilitate timely information flow and improvethe overall performance. In other words, integration and collaboration is concentrated on thespecially designed parts, while responsibility for commodity parts is shiftedas far back the supply chain as possible to the suppliers. In that way,inventory costs and administrative costs (and also MSM’s control over theprocess) are reduced for generic products, while ensuring that specializedproducts receive more attention and process control commensurate to theirimportance in the production.5. Supplier Aggregation Companies can go a step further in integrating their key suppliers. Atsome point in time, global sourcing and key supplier initiatives will reach alimit in streamlining the pool of suppliers. In such cases, grouping ofcomponents into modules to facilitate modular manufacturing can furtherhelp to reduce the complexity of work at the final assembly line. Suchmodularization of components has been a key aspect of industries that usemany small and complex parts, such as the electronics and automotiveindustry. Ironically, this will create intermediate steps or specializedintermediate players whose job it is to produce these specialized componentmodules. Hyundai Mobis, a subsidiary company of Hyundai Motors, provideshigh-end automotive systems and parts ranging from modules to airbags anddriver information systems. Starting in 1999, as a result of the restructuringimperatives from the fallout effects of the Asian financial crisis in 1997 onKorean business conglomerates, Hyundai Mobis began to restructure itsbusiness into the core business of automotive parts. It divested of its rail cars division, heavy machinery business, and auto-mobile division. Hyundai Mobis then focused on pursuing the integration ofsystems and took on the charge of design, development manufacturing andassembling of all chassis and cockpit modules. In so doing, by focusing onconvenience and cost reduction, it has also achieved reduction in weight and
Integrating Demand and Supply Chains 267number of parts, promptness of assembly, effective inventory managementand cost savings.41 As a result, Hyundai Mobis has achieved much success in the last 2 yearsin the automotive parts market, beyond its initial role as a key supplier toHyundai Motors. In 2004, the company signed a KRW180 billion contractwith Daimler Chrysler to provide it with complete chassis modules, whilealso building a new plant in Alabama for supplying to Daimler Chrysler andother customers in the United States.42 When customers order a new Hyundai car, they can choose fromdifferent options, such as the cockpit material and the number of air bags.When the choices are made, a list of code numbers for the necessary parts issent to the Hyundai Mobis module plant for assembly into the appropriatemodule.43 In the era of mass customization, the proliferation of options gives rise tomore SKUs, more parts to manage, and more manufacturing line changeovers.While catering to the needs of customers for more options to customize thetype of vehicle that they want, Hyundai Motors is able to control its owncorresponding increase in the complexity of parts and production managementthrough the effective use of an intermediate supplier. By using modules, it canavoid defects resulting from assembling thousands of small parts. The moduleprovider guarantees the quality of all parts used in the module, reducing thequality assurance and compliance requirements for car assemblers, and thushelping to streamline quality control and manufacturing processes. In July 2005, it was announced that Hyundai Mobis had embarked on aninitiative to track its car components for export using RFID. In a simulatedproject, car components were tagged with RFID, and tracked from its Ansanfactory, export via Busan port, to its final destination in Dubai. This is toenable real-time track and trace of their products, and is expected to be moreefficient and cost-effective compared to the use of traditional bar-codingsystems.4441 Extracted from Hyundai Mobis corporate website, http://www.mobis.co.kr/eng/42 “Mobis Aims to Control Chinese Market”, Na, Jeong-ju, Korea Herald, 1st May 2005, http://times.hankooki.com/lpage/biz/200505/kt2005050117300511910.htm43 “Hyundai Mobis leads auto-technology market”, Kim, So-hyun, Apr 2, 2005, Korea Now, http://koreanow.koreaherald.co.kr/SITE/data/html_dir/2005/04/02/200504020017.asp44 “Launch of RFID in Logistics”, So, Seong-Hun, Jul 1 2005, ZD Net, translated from Korean, http://www.zdnet.co.kr/news/network/rfid/0,39031109,39137633,00.htm
268 P. Guan Goh6. Active Synchronization of Supply to Demand The final strategy might involve synchronizing the demand and supplyparts of the value chain. This ability to control both the demand and supplyparts of the value chain can lead to significant cost savings and value-addedcapabilities to customers. Bossard is a global distributor of fasteners and other small componentparts (such as screws, bolts, nuts, and rivets), that provides comprehensiveengineering and inventory management solutions to equipment manufacturersworldwide. Some of its major customers include ABB, Siemens, John Deere,IBM, Adaptec, Bang & Olufsen, Bosch, Nokia, Celestica, and Flextronics. In order to serve its customers in their manufacturing expansion in Asia,especially China, Bossard has set up its operations in these countries as well.To meet the customer cost requirements for low cost manufacturing, Bossardhad localized its supplier base, many of which are typical small, family-runcompanies. Bossard sees its ideal customers as those which see fastener products aseither “Uncritical,” or “Bottleneck,” according to the Kraljic purchasingmodel.45 Such customers are more willing to purchase from an aggregatorsuch as Bossard, which simplifies and streamlines the entire process forthem. Most of their big customers have short lead time requirements, such as1 week, while their suppliers may have longer lead time requirements, suchas 6 weeks, due to their limited capabilities. The onus has thus fallen onBossard to hold inventory and assume the risk, in order to serve itscustomers.46 Country business units, with accountability for P&L, mainly do their ownplanning and procurement individually. As the number of customers, and thenumber of SKUs handled grew rapidly in its business expansion in the last5 years, the business units found the lack of visibility with overall demanda potential liability in their inventory management. Due to the lack ofvisibility between sales, planning and purchasing, purchasing personnel mayplace orders for large quantities in order to enjoy volume discounts, whilesales personnel may quote volume discount prices while ultimately selling onlysmaller quantities. As a result, Bossard faces the risk of inventory obsolescenceand excessive inventory provisioning in order for its sales people in localbusiness units to cater to the needs of customers.45 “Purchasing Must Become Supply Management”, Kraljic, Peter, Harvard Business Review, September–October 1983, pp. 109–111.46 “Supply Chain Management: A Concise Guide”, Goh, Puay Guan, Pearson Prentice Hall 2005.
Integrating Demand and Supply Chains 269 In order to reduce its inventory risk, Bossard has embarked on a planningand collaboration platform. Known as Advanced Planning System Plus(APS+), the APS+ system would act as a cost-based and lead time-baseddecision support system to determine the impact of purchase decisions oninventory liabilities, costs, and customer fulfillment capabilities. Over a periodof 2 years, including planning, system scoping, user feedback, prototyping,testing, and phased rollout through various business units, the system is beingimplemented and further refined with new user feedback and learningexperiences. Customer sales orders for products are tracked against correspondingpurchase orders made to suppliers as well as existing inventory holdings,while optimal inventory holding calculations are made through a combinationof sales forecast, lead time, and economic replacement quantities (ERQ). InBossard’s case, ERQ is based on similar calculation to economic orderquantity, but with an adjustment for real-world constraints in batch orderquantities. Through real-time visibility, purchase orders are tracked for their potentialinventory liability if not delivered to customer, and excess inventory is flaggedin management reports for follow-up action. Too many change orders loggedby the salespeople, as well as excessive discrepancy between purchasequantity and sales quantity can be highlighted by the system. In addition, anypurchases that will lead to excess inventory against forecasted demand andERQs for customers, will also be highlighted during the placement of thepurchase order. In certain cases where inventory rules are violated,management approval is required before the order can proceed. This is aseamless process that automates handovers between departments, and shortensthe time and effort for verification of sales and purchase orders prior toapproval. During the implementation period, part numbers are also being standar-dized so that common parts can be more easily identified and made availablefor order fulfillment. This would eventually allow for order aggregation andgroup-based purchasing and order fulfillment for commodity or strategicproducts. The APS+ system is shared across its Asia and US operations under itsTransPacific division, enabling better global visibility and coordinationbetween sales, customer service, and procurement functions. This ensuresthat orders are made at the right levels and safety-stock levels are set moreaccurately, as well as to allow for the transfer of stock holdings allocated toone customer to be used for another customer as the demand situationchanges. Through this initiative, it is anticipated that there would be areduction of Cost of Goods Sold, reduction in inventory obsolescence, andthe ability to respond quickly on pricing and availability to customer queries
270 P. Guan Gohand change orders. It would also lead to reductions in net working capital,with corresponding improvements in balance sheet and value-based financialmeasures.7. Conclusion It is imperative to remember that supply and demand are dynamic andever-changing. Therefore, synchronizing the two are always challenging,and require constant vigilant monitoring and adjustment to match supply todemand as far as possible. Within the context of Asia, this is made evenmore difficult by environmental and business factors. As such, while collaboration and integration between a company and allits suppliers and customers would be ideal, the reality of the ground situationmight give rise to targeted collaborations with a limited number of entities orin environments that are more operationally ready, scaling incrementallywith experience. Such targeted collaborations make do with the existinglimitations, seek to optimize the situation within the current constraints, andyet can be re-visited when old assumptions and constraints change. At thesame time, they also recognize the fundamental reality that not all customersand suppliers are equally important to a company. In this aspect, companies can adopt a number of different strategies forsmoothing over mismatches and variations in demand and supply, especiallyfor their key customers, key product segments, or strategic products. Nomatter which approach is more preferred or more cost-effective, the abilityto create a rapid response to changes in the environment is a critical successfactor. It is impossible to expect that a steady-state can exist for long, andcompanies do well by continually analyzing, adapting, and refining theirsupply chain strategies based on changes and new information.