Essay: Illustration of furniture business supply chain

Operations & Supply chain Management

Illustration of Furniture Business Supply Chain

“A company that fails to manage its supply chains at a strategic level is unlikely to meet its business objectives effectively.” – Source: (CPE, 2010)

1.0 Introduction

In today’s modern world, supply chain management is one of the significant and dynamic aims of most companies in order to meet the demands of their customers. The term supply chain refers to the set of activities involved in the flow and transformation of goods and the methodologies which are used to manage this flow of operations are termed as supply chain management (SCM). SCM effectively integrates the key stakeholders such as suppliers, manufacturers, distributors and retailers in order to minimise cost as well as satisfy customer or service level requirements. Supply chain involves a two-way process between the suppliers and customers (Lawrence & Hill, 2001). Corporations identify the significance of supply chain management as a step towards achieving customer’s satisfaction and to compete globally, thereby increasing the bond between its suppliers and customers.

This report focuses mainly on the supply chain design of two operations: (i) furniture business via mail order, (ii) furniture business in flat packs through a store. It starts with an introduction of supply chain, followed by the need for supply chain management in organizations is discussed. It then lists out the comparison of two business operations based on their efficiency, performance and concludes with listing out the technology impact of these operations.

2.0 Components of supply chain

According to Chen & Paulraj (2004), supply chain has three main elements:

Supply – Information about the raw materials supplied to the factory

Manufacturing – Transforming these raw materials into finished goods

Distribution – Delivery of goods to the customers through sequence of networks such as distributors, warehouses, and retailers.

The set of activities between the suppliers and the organization in which internal operations will be carried out such as purchasing, production, and distribution are termed as upstream supply chain or buy-side commerce. And the transactions which are carried out between organization and end customers are termed as downstream supply chain or sell-side commerce (Chaffey, 2002).

As SCM is managing these flows of operations, following are the three main activities of SCM flow (WiseGeek, 2010),

1. Product flow – goods from supplier to customers and customer service maintenance

2. Information flow – includes ordering and delivering information

3. Financial flow – involves payment, credit terms.

SCM includes not only the suppliers and buyers; it also includes the supplier’s supplier and the buyer’s buyer which are termed as first-tier suppliers, second-tier suppliers and first-tier customers, second-tier customers and so on.

Purchasing and supply management refers to the activities that involve in transactions between suppliers and operation’s interface. On the demand side, physical distribution management refers to managing the activity of distributing goods to the immediate customers while logistics refers to the whole distribution. Materials management refers to the flow of materials through the immediate supply chain (Slack, Chambers, & Johnston, Operations Management, 2004).

Supply chain can be related to system theory where resources as inputs, transformation as process through which products and services (outputs) are obtained and delivered to the customers. And SCM provides an opportunity for organizations to continuously improve the internal operations and at the same time integrating different suppliers (reducing operating costs) and customers (increasing customer satisfaction) thereby increasing the profitability of a company (Chaffey, 2002).

3.0 Benefits of Supply Chain management

Some of the key benefits of supply chain management are (Slack, Chambers, Harland, Harison, & Johnston, 1998),

• To reduce bullwhip effect: As high uncertainty prevailed in the furniture market demands, there will be variation in customer orders and hence companies will adopt their own strategies to solve the problem resulting in increased cost and poorer service.
• Rising Cost: – With increasing volume, the cost will increase and hence the labor and other costs rise and hence SCM should be adopted to reduce the cost in all means.
• To manage the complexities involved in the furniture cycle flow as technology advancement has already impacted the business.
• It is tough to manage the returns in the furniture industry when ordering and delivering are inaccurate.
• Inventory handling is vital for furniture retails.

5.0 Illustration of supply chain

Supply chain strategy followed in companies varies according to the industry in which it is operating and based on the products it manufactures. According to furniture industry is a good example of high uncertainty in demand and huge delivery cost since the retailers can offer products of similar types distinguishing based on shape, fabric, and color.

Strategies followed in a supply chain are,

* Pull strategy – Followed when uncertainties in consumer demands are more.

* Push strategy – Followed when the delivery cost are more.

* Combinational – Push-Pull or Pull-Push, Organization decides based on the demand and delivery cost of the business.

Let us consider the two business operations

5.1 Furniture business through retail outlets

With advancement in technology, many companies have initially moved away from push strategy to pull strategy. But in modern world, most of the business which aims for customer satisfaction follows a hybrid strategy (push-pull or pull-push) and in particular furniture industry which does business via retail outlets follows “Pull-Push” model aiming to provide large variety of customizable products.

In a Pull-Push strategy, some stages of the supply chain, typically the production is based on pull strategy while the distribution activities are operated in a push manner (Simchi-Levi, 2010).

Since long-term forecasts cannot be used for making production decision, production strategy of furniture business via retails is based on pull based manner. And economies of scale play significant roles in distribution mechanism and hence it follows push strategy and this is what many furniture retailers follow who does not keep any inventory except the demo piece (Simchi-Levi, 2010).

Basic assumptions made in designing furniture business via retail outlets supply chain are,

• Considering only the key raw materials such as wood, steel, cushion and designing materials. Other raw materials which can also be essential in furniture industry are plastics, adhesives etc.
• Retailers will reassemble the furniture packs at the customer end or the customers can do it on their own as they are delivered flat packs which are easy to reassemble.

As shown in the figure, the upstream, downstream & midstream activities of furniture business via retail outlets supply chain are as follows,

1. Furniture makers upon receiving the orders from distributors (pull strategy) will request Tier1 suppliers for fabrics.
2. Tier1 suppliers will receive goods from Tier2 suppliers for example Timber mills will get the wood materials from forest and reshape it accordingly. Similarly Lathe shop will receive steels from the steel manufacturers and shape it according to the furniture maker’s requirements and all these necessary goods will be supplied to the Tier1 suppliers
3. Furniture makers will then make necessary products and dispatch it to the distributors.
4. Distributors follow a push strategy where finished goods are pushed to the retail outlets. Furniture makers will have a standard delivery schedule based on aggregation of products.
5. Retailers will deliver and reassemble the furniture goods at the customer’s end upon request.

5.1.1 Major Risks

Major risks involved in this type of design are,

• Any change in the cost of raw materials will impact the whole supply chain.
• Bad supplier relationships will impact the manufacturers
• Shortage of raw materials during production will impact the lead time in delivering the requesting goods to the distributors.
• Uncertainty in consumer demands leading to more inventories held at the retailers end.
• Customer’s dissatisfaction in transporting and unpacking the finished goods by the retailers at the customer end.

5.2 Furniture business via mail order

The world in which we live are changing and so the organization which needs to adapts to the new trends in the business as a fact of transitional change. E-commerce is common in today’s business environment and many industries including furniture industry started revolving around this new type (Chaffey, 2002).

Basic assumptions made in designing furniture business via mail order supply chain are,

Considering the medium of business is through e-commerce

Furniture makers has its own warehouse facility

Furniture business via mail order uses a “Pull” strategy in which both production and distribution activities are operated on a pull based manner (Simchi-Levi, 2010).

As shown in the figure, the downstream activities of furniture business via mail order supply chain are as follows,

1. Customers make direct order to the furniture makers either through electronic email or mail services specifying their design requirements of furniture they are interested in.

2. Makers will start their assembling process at the point of order and request for the replacement of used items from the suppliers.

3. Finally packaging and prompt delivery of items to the end customers.

Its upstream activities are,

1. Furniture makers will request raw materials from Tier1 suppliers. For furniture, wood, steel, cushion materials and other designing materials are the key raw materials.

2. Tier1 suppliers will have in stock of all the necessary items which they would have purchased it from their Tier2 suppliers.

5.2.1 Major Risks

Major risks involved in this type of design are,

• Internal computer systems failure
• Slippage of timely delivery of goods
• Handling exchanges and returns

5.3 Major differences between two operations

	Furniture business through retail outlets	Furniture business through retail outlets
Supply chain strategy	Production is based on Pull and Distribution is based on Push	Pull in both the cases
Coverage	Concentrated geographic location	Wide coverage
Response time	Short, same day pickup possible	Require minimum lead time for manufacturing and shipment
Shipment	Bulk and cost is lower	Parcel and transportation cost is huge
Inventory	Higher , Majorly depends on the forecasting, consumer behavior and market conditions	Well managed
Sales Revenue	Sales through retailers must share some of the products revenue with distributors/retailers and hence lower revenue and margin	Direct sales to customers and hence increased revenue and margin
Facilities	Need huge infrastructure to hold wide varieties and inventories	Less infrastructure needed as products are manufactured and shipped on order request
Product Variety	Lower than other options and not much customizable	Customers have the preference to customize their products based on color, size and other factors through internet facilities
Returns	Easier as customers can approach the local stores for handling returns	Harder and the rate of returns also high in terms of mail ordering since customers are unable to touch and feel at the time of ordering
New product entry	Slow	Much quicker
Customer Experience	Retail stores are open only during business hours	24/7 access through internet

Table: 1 Differences between furniture business via retail outlets and via mail order, derived from (Chopra & Meindl, 2007)

5.4 Efficiency

It is evident from the above table that both models have several advantages and disadvantages. It is a common fact that the decision making process by customers in buying furniture is complex and hence retail outlets have a slight upper hand than the furniture business through mail orders (Oh, Yoon, & Hawley, 2004). But in terms of holding inventory and cost associated with that, business via online is better than the retail outlets. Thus both businesses are efficient in some manner and each needs to follow the best practices in their approach in order to satisfy all stakeholders and to achieve customer satisfaction.

5.5 Make-or-buy

Make-or-buy decisions are related to the choice of selection between producing an item in house or buying it from the outside suppliers i.e. outsourcing. According to Burt et.al (2003) two main factors in making this make-or-buy decisions are cost and production capacity and some of the major elements involved in comparison are,

Make-analysis includes,	Buy-analysis includes,
Increasing Inventory cost	Price of raw materials
Direct labor cost	Transportation costs
Increasing purchasing cost	Receiving and inspection costs
Increasing capital cost	Increasing purchasing costs
Factors favoring in-house,	Factors favoring outsourcing,
Cost, less expensive to make the parts	Cost effective
Better Quality	Lack of expertise
Unreliable Suppliers	Insufficient production capacity
Excess plant capacity in work house	Better inventory handling, using JIT
Confidentiality, secrecy need to be maintained on technology/process	Integration of branded parts
Political, social or economic factors	Internal patent rights and restrictions on making it in-house

Table: 2 Factors and Elements influencing Make-or-buy decisions derived from Burt et.al (2003) and Waller (2002)

Furniture business via retail outlets can themselves be a logistics provider since they will be targeting the local customers within the retail offices. Though outsourcing is possible here but with respect to transaction costs, documentation and other paper works, having own logistics would be a cost effective solution for retailers.

For furniture business via mail orders, outsourcing of web portal development & maintenance and customer service operations are evident. By this means furniture makers believe that the service provided to the customers will be quality oriented and also reduction in the costs as cheap laborers are available in India/China (O2I, 2009). Also the shipping of goods has to be outsourced in this approach and hence strong relationships should be maintained between the manufacturers and logistics provider in order to deal with on-time delivery and handling returns.

5.6 Aggregate planning

The set of process through which companies identifies the idle levels of capacity, production, inventory, stock outs, subcontracting and pricing decisions over a specific period of time. Its major aim is to satisfy demands and thereby maximizing profits. Key operational parameters involved in aggregate planning are (Pan & Kleiner, 1995),

• Production rate
• Workforce
• Subcontracting
• Overtime
• Machine capacity levels
• Inventory holding costs
• Stock outs/Backlogs

Furniture goods which are pushed to the retail outlets by the distributor will be mostly generic or family product which is purely based on long term demand forecasts. In this case forecasts will be appropriate since the aggregation of demand for all of its end products will be the actual demand of the product (Simchi-Levi, Kaminsky, & Simchi-Levi, 2003).

For furniture business via mail orders, ‘postponement’ comes into picture affecting aggregate planning decisions. This means that delaying the product finish until its sale has been triggered through online by the customers.

5.7 Globalization

Furniture industry has been a latecomer to the exports (online business case) as furniture can be easily damaged while shipping and cost associated with transporting were also high. Also manufacturers have to deal with political and legal constraints while exporting. But later companies started shipping the goods in a flat packs manner where goods are assembled at the customer end by themselves. One such company is Swedish furniture company IKEA which sells furniture through online (ECS, 2009).

In both business approaches, raw materials imports for making furniture have been practiced from last decade. Manufacturers used letter of credit for purchasing inventories in olden days and currently many new methods of purchasing inventories from overseas like bank drafts has been practiced (TMCNews, 2007).

5.8 Strategic alliance

Maintaining strong relationship with supply chain partners will ease the operations of the company. In order to maintain an effective relationship with supply chain partners, one must has to identify the value chain and benefits associated for both within the relationship. For both the business approaches since furniture makers cannot involve in so called ‘make in-house’ of raw materials, they should maintain a strategic partnership with their suppliers for continuous supply of raw materials.

Since the furniture business via email orders needs minimum lead time to deliver the products, it is better for them to adopt a just in time (JIT) raw materials and inventory purchasing and supplying mechanism from its suppliers. It can also have an alliance with online providers for promoting and marketing their products.

5.9 Technology impact on furniture industry

Today, there is a tremendous increase in usage of technology in the supply chain management which serves a major key for maintaining supplier-maker-customer relationships. There are three major phases of IT involvement in the supply chain management (Hill, 2005),

Phase1 Mainframes

Mainframe computers were widely used in supply chain management in earlier days. Applications include Materials Requirement Planning (MRP) and Manufacturing Resource Planning (MRPII) through which companies effectively manage the manufacturing process.

Phase2 Software Applications

There are various software applications exists in today’s world to ease the actions of supply .chain management. Microsoft’s word processor and excel spreadsheets are widely used in making planning decisions. Also other third party vendor software such as ERP, CAD, CRM and many are available today in the market to ease the functions of furniture designing, customer management, purchase ordering process, inventory management and supplier management (TEC, 2010).

Phase3 E-Commerce

Networking computing between the suppliers/customer applications through electronic data interchange (EDI), ordering through emails, online bidding is getting increased day by day. The ordering mechanism is done through online or electronic mail thereby eradicating the distributors and retailers totally from the supply chain.

Phase1 and Phase 2 are widely applicable to furniture business which runs through retail outlets whereas Phase3 is totally applicable for the furniture e-business. Both the business has been benefitted from technology advancement. Furniture business through online make use of the software models for designing and virtually displaying the goods which gives end customer a great look and feel effect. In terms of distribution web tracking and advance ship notices are common in online business while tracking of drivers through GPS is used in both the business (Terry, 2007).

5.10 Improvement

Furniture business via retail outlets: Recommendations for furniture business which sells through retailers are,

• Focus on virtual integration rather than vertical integration. Establish informal relationships with the suppliers/customers by making use of technology advancement.
• Manufacturers can allow retailers to participate in the e-business by including kiosks in the stores allowing customers to customize their intended models if they are not satisfied with the existing models displayed on the stores. By this way retailers and manufacturers can strengthen their existing channel relationships (Chopra & Meindl, 2007).

Furniture business via mail orders: Recommendations for furniture business which sells through online are,

• Since the customer’s decision making process is complex in furniture industry, involving them at the design process would ease the chances of making more customizable and customer-oriented products.
• Online web portal should be a two way interactive process where furniture makers should have an informed design of goods to the customers and in turn receive the feedbacks from the customers. This would help the furniture makers to identify the designs which are frequently getting rejected and so not to indulge in making them thereby saving costs through minimizing inventory and distribution (Oh, Yoon, & Hawley, 2004).

6.0 Conclusion

SCM is a significant technique in the world of business, when it followed promptly, improvement in quality, cost, and flexibility of the product and services are evident. It is clear from the evidences cited above that both approaches: (i) furniture business via mail order and (ii) furniture business via retail outlets have unique merits and de-merits. Furniture business which runs its business through online has used pull strategy, maintaining low inventories, and outsourcing the distribution activities to gain a competitive advantage over the traditional business. On the other hand, traditional furniture business is widely accepted by the customers all over the globe due to the visibility and flexibility it provides. Furniture makers like IKEA has well demonstrated the SCM concept in its business and waved the path to success and hence irrespective of the type of business, every company has to identify and adapt the best suitable supply chain management practices in their day to day business to compete in a global environment.