INNOVATION IN SUPPLY CHAIN MANAGEMENT

215.3 Supply chain management

According to professional organisations representing professionals working in this area (Council of Supply Chain Management Professionals), supply chain management is defined as follows: SCM is an integrated function with primary responsibility for the connection of main trade functions and trade processes across the companies into a cohesive and highly effective trade model. It includes logistics management and the above mentioned activities as well as production operations and manages the coordination of processes and activities across departments for marketing, sales, product design, finances and information technologies.

At present, supply chain management is inseparable from information solutions, including complex methodologies for the implementation of supply, production and distribution processes. These solutions are designed in such a way as to assure the maximization of profit through the optimization of prices for materials, sub-sets, sets, products, etc. whilst simultaneously maintaining minimum levels of stocks to assure the smooth course of the processes.

It is necessary to add that the current level of supply chain management as a key logistics tool is the result of forty years of development. Among the main aims (effects) of supply chain management are: higher level of customer service, stock reduction, minimization of costs along the whole logistics chain, reduction in the lead time of orders, greater ability to react to market changes, dissemination of information between partners in the supply chain.

Based on the official declaration of The Global Supply Chain Forum Sodomka (2012), the comprehensive management of the supply chain is closely connected with eight mutually complementary processes, which are: Customer Relationship Management (CRM), service management, demand management, arranging orders, management of production process, Supplier Relationship Management (SRM), development and sale of products, complaints management.

The comprehensive logistics view of the supply chain follows the whole course of material flows through all the segments of the supply chain, including the supporting information flows which primarily serve management.One of the main reasons for the creation of the concept of supply chain management were problems with stock occurring in various enterprises at all levels of the supply chain.

216.4 Innovation in supply chain management

4.1 Models of inventory management as starting point for innovative logistics technologies

The thinking behind inventory models is to decide at what point in time new supplies are ordered and in what quantities. Inventory models can theoretically be split into static and dynamic types Lukáš (2012).

Under static inventory models, the supply cannot be replenished again when already purchased (i.e. only this supply cannot be replenished), whereby this inventory should satisfy the needs of the enterprise. However, if inventory levels are insufficient, costs are incurred due to a lack of supply. In a similar way, costs are also incurred when inventory levels are too high as a result of the residual quantities after the end of period Plevný (2010). Under dynamic inventory models, replenishing warehouse stock levels is possible during the course of time. Furthermore, the process of ordering supplies can also be changed over the course of time. This is based on a process of continual evaluation, or at defined time intervals, of the level of inventory Jablonský (2007).

EOQ model

Inventory models with a constant supply size - one product and additional pre-conditions - can be dynamic and deterministic. The EOQ model is the best known example of such a model, whereby demand is not interrupted and does not change over time. A literature review also highlights the Harris-Wilson model Lukáš (2012). The basic criterion for optimizing inventory management is that the total cost of the acquisition and maintenance thereof is kept to a minimum. Optimization covers the forecasting needs and a certain rate of risk or variations during the drawing of supplies. The security rate is also the subject of optimization with analogical criterion of cost minimization Kislingerová (2010).

The quantity of optimum supply may be characterized in such a way that total costs are minimized. The optimum supply helps to establish the minimum total cost function. This supply may be characterized by the following equation Vochozka (2010):

Equation 1- Optimal supply



Source: Vochozka 2010

where

q - optimum supply quantity,

N_s – cost of supplies,

N_h – cost of holding 1 pc of stock for the whole period,

Q – quantity of supplied goods for the whole period.

Figure - EOQ model

Source: Lambert, Stock, Ellarm, 2000, p. 125

From the left, from top to bottom: Annual costs (in USD), Lowest total costs (EOQ), Total costs, Costs of maintaining stock, Order costs, Order size

As stated above, demand under a dynamic stochastic model is expressed as a random variable, whereby consideration is given to the demand which is accumulated (aggregated) over the whole period T Plevný (2010). This is best explained with a simple example: assuming an enterprise consumes material, delivered in batches of a constant size, the consumption of the material or product demand is given by the probability and random deviations from the mean value of the real consumption that occurs. There are two ways by which to balance the fluctuating demand (consumption). The first, by changing the frequency of deliveries under their constant size. The second, by changing the size i.e. the quantity of deliveries under their constant frequency. On the basis of this it is possible to distinguish between two systems of warehouse management Lukáš (2012):

• 
  Q-system (fixed – order quantity model);
  
• 
  P-system (fixed – time period model).
  

The Q–supply system works with a constant size/quantity of the ordered material and changes the frequency of orders. The P–supply system has the same frequency of orders but changes their size/quantity. Under the Q–system, the signal level of stock is set as that level of stock that covers consumption during fulfilment of a placed order. As soon as the stock of material drops to this value, new supplies are ordered Lukáš (2012).

Figure 2: Q-system inventory model
Source: Emmet, 2008

4.1 Supply management by the supplier

The Vendor Managed Inventory model (hereinafter referred to as VMI) transfers the responsibility for stock levels to the supplier. Based on information provided by the customer, the supplier decides on the quantity of goods and the frequency of supplies. Under this model, the customer (producer or distributor) must continuously analyse sales and determine the optimum size of its orders.Several definitions of the process of inventory management by VMI exist:

1. 
   VMI is the process by which a supplier generates orders for its customer based on information supplied by the customer.
   
2. 
   VMI is a system of planning and management not being directly connected with inventory ownership.
   
3. 
   VMI is a means by which to optimize supply chain benefits based on accepting responsibility for the correct level of stock by the supplier. The producer thereby has access to information about the customer′s inventory and is responsible for generating customer orders Ciesielski (2009).
   

This process has been used in practice by retail trade organisations since the beginning of the 1980s. Its application is typical for those goods with a quick turnaround time (food, drinks), whereby the aim is to involve suppliers in the improvement of inventory management processes and assure the availability of goods. The model is also advantageous for those products with predictable consumption whereby the cost of maintaining stock is the most significant element (not the cost price) and whereby the producer requires long-term contracts with the supplier. VMI was quickly adopted by the retail trade because at that time retail traders did not have information technologies at their disposal for automatized data collection, prognoses and the replenishment of product lines. They had to rely on the specialist knowledge of product suppliers.

The result of VMI is that inventories are replenished in various parts of the supply chain, for example between the warehouse of the supplier and the distribution centre of the retail trader, or the distribution centre and the retail trade network. VMI technology can also be supported by logistics operators who can preserve the stock ordered by the customer in a consignment warehouse. It is important to note that the goods in a consignment warehouse are owned by the supplier. The goods are only paid for after the actual delivery of the goods to the producer and an invoice is raised and issued.

4.1.1 VMI types

In reality several forms of VMI have been implemented by enterprises. It is the opinion of the authors that this represents the individual stages of VMI development within a particular supplier.

The first form of VMI involves regular visits by an employee of the supplier to the customer (e.g. daily), whereby the employee replenishes the inventory with a quantity of goods determined in advance. The second form of VMI is probably the most widespread among the interested partners of the supply chain. The aim is to replenish inventory based on immediate information on retail sales provided through EDI or the internet. The pre-condition for the third form of VMI is the existence of a consignment warehouse. The stock is paid to the supplier only when consumed for production or sold to the customer. The fourth form of VMI involves a supplier′s employee becoming a direct member of their customer´s organisation. The supplier´s employee monitors the quantity of inventory and replenishes it in time. They also participate in the development of new products, including the launching thereof on the market and involvement in promotional events in order to be able pro-actively modify supplies depending on current needs.

4.2.2 (Dis)advantages of VMI application

The quantification of the advantages of the application of VMI for suppliers as well as customers is given in Table 1 in the form of average percentage effects.

Table 1. Advantages of VMI for suppliers and customers

Advantages for suppliers	Typical improvements
Decrease in inventory		30%
Decrease in transport costs		10%
Shortened delivery term		50%
Decrease in storage costs		13%
Increase in service level		>10%
Advantages for customers		Typical improvements
Increase in rate of return for shelf space		5-8%
Decrease in inventory		10%
Increase in sales		8-10%
Decrease in logistics costs		3-4%
Source: Modified according to (usluno.cz)

VMI technology has been adopted by multinationals such as Procter&Gamble, Nestlé and Coca Cola. Among the most important operators providing VMI services on the domestic market is the multinational DHL dhl.cz (2016).

4.1 Collaborative planning, forecasting and replenishment

CPFR (Collaborative Planning, Forecasting and Replenishment) is another technique for optimizing inventory and improving cooperation in the supply chain. In the professional circles this is seen as being part of a small group of e-business solutions. It is based on deepening the cooperation on the forecasting of demand, planning and decisions on replenishment between enterprises in the supply chain. In practical terms it is closely linked to the application of VMI. The method obliges the supplier to manage inventory with the collaborative involvement of customers and other partners. Data exchange (not EDI) by means of the internet has meant that CPFR technology has become a considerably cheaper and more attractive solution to implement. The lower costs associated with the introduction of CPFR enable partnerships in the economic sphere to be established easier. The concept of CPFR differs from other methods because of its focus on the inter-connections in the chain from the raw material supplier to the producer. For successful inventory management, the optimization of the processes taking place between these chain segments is decisive, especially if a pressure strategy prevails.

The communication between the individual cooperating enterprises may take place, for example, on the basis of a direct peer-to-peer connection Sodomka (2012), whereby each of the business partners works with the CPFR application of its choice. The peer-to-peer communication in CPFR is based on reports of the same type, same method of transfer and important safety measures. Although there is no need for the partners to have the same software, it is necessary to share common data in a standardized format. The exchange of data and information enables forecasts to be made on the future development of business units, business plans and production activities to be drawn up, and the statistical evaluation of historical data to be conducted. In view of the fact that the data in the databases may be different, it is necessary to set certain criteria for exceptions which will be obligatory for both business partners. These criteria can either be defined identically for both CPFR applications, or only one application can bear their definition and the other one must respect them.

“The creation of the official CPFR model as a concept for serving effective inventory management was supported by the Uniform Code Council (UCC) and EAN International Standards of Management Processes (SMP), which provides the necessary level of credibility and professionalism to CPFR. The involvement of IS/ICT with the aim of supporting collaborative planning supposes in each case first of all the change of the present understanding of trade relationships manifested in the accommodation of enterprise processes and their harmonization with the aims of the whole chain.”

4.1.1 (Dis)advantages of CPFR application

The decisive benefit of CPFR is the creation of a shared information system. This enables the generation of more precise forecasts, clearly defined operative procedures, and provides a defence against duplicity in data. The basis for the forecasts is statistical methods incorporated in the information system. The acquired results are subsequently handed over to all the participating segments of the supply chain which subsequently compare them with the short-term and long-term plans. The collaborative forecast is created according to the precise setup of the CPFR system. The forecast is the basis for the coordination of the activities of all chain segments, enabling them to decrease costs and increase profits. In the future, CPFR may also help in the development and use of new methods for forecasting demand.

The main disadvantage associated with CPFR is the demands it places on the technical equipment and software of the cooperating organisations.

4.1.2 Practical use of CPFR method

The method is often recommended for use by automotive component manufacturers. On the European market it is also applied by construction companies, particularly in Poland by window producers. The aim is to decrease costs due to reductions in inventory, increased levels of customer service and the quicker fulfilment of orders.

For communication purposes, this method requires high quality technical equipment. It is for this reason that CPFR is more likely to be (have been) adopted by large organisations which have sufficient capital to invest in information systems and technologies.

217.Conclusion

The application of progressive models to inventory management in combination with Vendor Managed Inventory or Collaborative Planning, Forecasting and Replenishment can be considered a suitable opportunity for innovation through which to improve the level of supply chain management. Interested enterprises can benefit in the form of reduced inventories, decreased transport and storage costs, shortened order periods, increased rates of return for shelf space in the retail trade and increased levels of customer service.

Prior to implementing the stated methods and technologies, enterprises should take into consideration a number of factors and possible risks. These issues include the: type and quantity of the goods to be delivered; frequency of orders; availability of IS/IT necessary for supporting these methods; suitable enterprise culture; ability to cope with “resistance to change”; and the level of interpersonal and inter-organisational relationships within the supply chain.

218.Reference

Ciesielski, M. Instrumenty zarządzania łańcuchem dostaw. Warszawa: Polskie Wydawnictwo Ekonomiczne, 2009. ISBN 978-83-208-1790-4.

Emmett, S. Řízení zásob. 1. vydání. Brno: Computer Press. ISBN 978-80-251-1828-3.

Christopher, M. Logistics and Supply chain management. London: Pearsoned education limited, 2005. ISBN 0-273-68176-1.

Jablonský, J. Operační výzkum: kvantitativní modely pro ekonomické rozhodování. Praha: Professional Publishing, 2007.

Kislingerová, E. 2010. Manažerské finance. 3. vydání. C. H. Beck. ISBN 978-80-7400-194-9.

Lambert, D., Stock, J., Ellarm L. Logistika 1 Press, 2000. ISBN 80-7226-221-1.

Lukáš, L. Pravděpodobnostní modely v managementu - teorie zásob a statistický popis poptávky. 1. vyd. Praha: Academia, ČMT, 2012, 207 s. ISBN: 978-80-200-2005-5.

Lukoszová, X. a kol. Logistické technologie v dodavatelském řetězci. Praha: Ekopress, 2012. ISBN 978-80-86929-89-7.

Plevný, M., Žižka, M. Modelování a optimalizace v manažerském rozhodování. 2. vyd. Plzeň: Západočeská univerzita v Plzni, 2010, 296 s.

Sodomka P. Plánování a řízení dodavatelského řetězce. SystemOnLine.cz. [on-line 4.5.2016]. Dostupné z: http://www.systemonline.cz/it-pro-logistiku/planovani-a-rizeni-dodavatelskeho-retezce.htm.

Vochozka, M., Mulač P. a kol. 2012. Podniková ekonomika. Praha. Grada Publishing a.s. ISBN 978-80-247-4372-1.
Contact

Doc. Ing. Xenie Lukoszová, Ph.D.

The Institute of Technology and Business in České Budějovice, Department of Economics

Okružní 517/10, 370 01 České Budějovice

14668@mail.vstecb.cz
Ing. Lukáš Polanecký

The Institute of Technology and Business in České Budějovice, Department of Economics

Okružní 517/10, 370 01 České Budějovice

polanecky@mail.vstecb.cz

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