Supply chain management involves managing a “network of interconnected businesses concerned with the ultimate provision of product and service packages required by end consumers” (Jespersen and Skjott, 2005, p. 17). Supply chain management activities include order processing, transportation and storage of goods which may include work-in-progress and raw materials. It helps companies to create competitive advantages by improving their efficiency, reducing lead time and enhancing product visibility (Jespersen and Skjott, 2005, p. 18). Thus companies must focus on implementing effective supply chain management strategies in order to succeed in the market. In order to achieve this objective, companies must identify a framework for evaluating the effectiveness of their supply chain management strategies (Jespersen and Skjott, 2005, p. 19). It is against this backdrop that this paper analyzes the effectiveness of the strategies used by Toyota and Ford Corporation. The risks associated with the strategies adopted by these companies and how such risks can be avoided will be illuminated.
Supply Chain Stress Testing Analysis
Stress testing analysis involves “evaluating the stability of a given system or entity” (Coyle, Joseph and Langley, 2008, p. 45). The test helps in predicting the effect of potential risks on the operations of the system or entity being tested (Coyle, Joseph and Langley, 2008, p. 45). In the context of supply chain management, it involves evaluating the impact of various factors such as delays or disruptions on the performance of the supply chain. This is often achieved through ‘what if scenario’ analysis which can be explained as follows.
Supplier-related disruptions can be caused by two factors. First, Toyota depends on a very small number of suppliers (Toyota, 2011). Thus if a key supplier stops producing for one month, Toyota’s production will also stop due to lack of car parts. Second, if the output capacity of its suppliers drops overnight by 20%, Toyota’s production level is also likely to drop by the same rate since its production schedule has to match that of its suppliers (Toyota, 2011). At the internal level, Toyota’s sales activities will be disrupted if a “key plant shuts down unexpectedly for one month” (Chopra and Sodhi, 2004, pp. 53-61).
This is because the firm embarks on lean production and thus does not hold emergency stock. It will also not be able to meet existing demand if the capacity of one of its production plants drops overnight by 20%. The customer-related disruptions are as follows. First, the company’s lead time will increase if the demand increases by 20% (Wang, Henry and Chau, 2007, p. 71). This is due to the fact that the firm must take time to increase its production capacity in response to the increase in demand. Second, the firm is likely to produce at less than capacity if demand for all products reduces by 20% since its output level is informed by the existing demand level (Wang, Henry and Chau, 2007, p. 73).
Production below capacity can lead to losses since the firm must pay for the fixed costs even if production level reduces. In order to solve the above disruption risks, Toyota should adopt a hybrid production system characterized by elements of both push and pull production systems. The pull production system will help in avoiding excessive production since it is based on actual demand (Cohen and Roussel, 2005, p. 97). The push system will ensure availability of emergency stock since it is based on forecast demand. Thus in the event of the above risks, Toyota will be having enough inventory to continue its production or enough stock of cars to meet existing demand.
If the suppliers delay in processing purchase orders for raw materials by one month, Toyota’s lead time will increase (Cohen and Roussel, 2005, p. 98). Toyota will have to wait for the purchasing orders to be processed and inputs delivered in order to continue its production since it does not hold emergency stock of raw materials (Toyota, 2011). At the internal level, production costs will increase if distribution orders are delayed by one month. This is because such delays are associated with high storage costs. However, Toyota does not focus on storage since it only produces enough to meet the existing demand. Customer-related delays will lead to difficulties in capacity planning (Caldwell and Howard, 2010, pp. 431-489). Toyota’s production level is determined by the existing demand as reflected by the customers’ orders. This means that if the customers’ orders delay for one month, the company will not be able to determine the optimal quantity of cars to produce.
The above risks can be addressed as follows. Supplier-related delays can be addressed by increasing the level of inventory in order to ensure consistent availability of raw materials (Chopra and Sodhi, 2004, pp. 53-61). Internal delays in regard to order processing can be prevented by significantly increasing responsiveness to customers’ order requests. The company can set its output level based on historical demand records in order to avoid the risks associated with customer-related delays.
The number of Toyota’s suppliers is very small (Toyota, 2011). Thus if the order-entry system of a one of the suppliers breaks down for a week, the firm’s production will be interrupted due to lack of inventory. The firm uses oracle e-business to manage its entire ordering process. Consequently, it will take longer to fulfill an order if the order-management system goes down for one week. This will lead to an increase in storage costs (Seifert and Comas, 2010, pp. 31-47). A breakdown in the firm’s inventory system by one week is likely to have negative impacts on preparation of production schedules. This is because there will be no information on available inventory. If the customers’ order entry-system breaks down for one week, the firm’s production will be interrupted as it waits for orders from customers.
If credit card information is stolen from the firm’s e-commerce system, the sales activities are likely to be interrupted. This is because Toyota mainly uses e-commerce system to trade with its partners. Hence if information is lost in the system, transactions must be delayed to facilitate investigations and modification of the system to prevent future losses. The above risks can be prevented in two ways. First, a backup system should be established to prevent the risks associated with system breakdown (Zequeira, Valdes and Berenguer, 2008, pp. 686-696). Second, losses resulting from a breakdown in supplier’s order management system can be avoided by increasing the level of inventory of raw materials.
The company will face two problems if its suppliers reduce supplies by 20%. First, it will have to look for alternative sources of supplies to off-set the 20% reduction in regular supplies. Second, Toyota will not be able to fulfill all orders if demand increases while suppliers reduce the supply of inputs. However, the company is likely to overproduce if suppliers “increase minimum order size by 20%” (Chopra and Sodhi, 2004, pp. 53-61) since all its supplies must be used immediately to eliminate storage costs. At the internal level, if the firm’s order size changes significantly due to discounts; the suppliers will not be able to make correct demand forecasts. This will result into either a surplus or shortage of inventory.
When this happens, Toyota will either overproduce or under-produce since its production capacity will be informed by the suppliers instead of the customers. Changes in customers’ order levels on the other hand will complicate the process of capacity planning (Thonemann, Seifert and Haussmann, 2008, pp. 781-799). Under such a situation, Toyota will not be able to correctly predict demand in order to plan effectively for production. Since adjusting production capacity as demand changes is not always easy especially in the short-term, the above challenges can be best addressed by holding emergency stock or inventory. This will help in maintaining consistent supplies even if demand changes drastically. The firm can also introduce storage systems to enable it take advantage of trade discounts.
The price of Toyota’s cars will immediately increase by 20% if suppliers increase the prices for key parts by the same amount. The firm does not hold emergency inventory to enable it adjust its price over time in response to increase in prices of inputs (Toyota, 2011). An overnight increase in transportation cost will lead to either disruption in production as the company arranges for cheaper means of transportation or an increase in car prices. Suppliers are likely to stop delivering their goods if they are not paid for one month (Lehtivaura, Gordon and Vollmann, 2004, pp. 64-68). Under such a situation, a company can only continue its production if it has a backup-stock of raw materials.
However, Toyota uses all its stock of raw materials as soon as they are delivered. Thus if key suppliers stop delivering raw materials due to delay in payment, the company’s production will be interrupted. These challenges can be addressed as follows. First, holding adequate stock of raw materials will enable Toyota to avoid interrupting its production in the event of inadequate supplies (Chopra and Sodhi, 2004, pp. 53-61). Second, increasing production capacity beyond existing demand will enable it to hold emergency stock. This can be used to fulfill existing orders when production is temporarily stopped. Finally, it should have many suppliers in order to increase the chances of getting supplies especially during financial difficulties.
Since Ford Corporation holds emergency stock, its production is not likely to be disrupted in the short term if the suppliers reduce their capacity overnight by 20% (Ford, 2011). However, in the long-term Ford’s production capacity is likely to drop especially if alternative sources of supplies can not be found. If a supplier of a key part stops producing for month, Ford’s productivity can only be adversely affected in the long-term because it holds emergency stock of inputs. If one of Ford’s production plants shuts down for a long time such as one month, the effect on its supply chain will depend on the level of stock of completed cars. The company will not be able to fulfill all orders if its stock of completed cars is inadequate.
The same will apply if the production capacity of one of its plants drops by 20% (Chopra and Sodhi, 2004, pp. 53-61). An increase in demand for all its products by 20% is likely to cause an increase in lead time. This is because Ford’s production schedules are based on historical order levels. Thus it can not adjust immediately to changes in demand. If demand reduces by 20%, the firm is likely to have excess stock of cars and this can lead to increase in storage costs. The above disruptions can be avoided by matching production to existing demand (Ayers, 2006, pp. 143-167). The firm can also increase its inventory level in order to avoid interrupting production in the event of short supply of car parts.
A delay in “purchase order of key parts” (Chopra and Sodhi, 2004, pp. 53-61) by a month is not likely to affect production negatively in the short-term. However, in the long-term production level will decline as the stock of raw materials or key parts get depleted. If processing of distribution orders are delayed by one month, the storage costs will rise. This is because it will take longer to deliver the cars to the distributors and this can necessitate longer storage period. A delay in customers’ orders by a month will have negative effects on capacity planning. Ford uses records of past orders to forecast its demand (Ford, 2011).
Thus if customers fail to place their orders by a month, the firm will not have accurate information to inform its demand forecasts. In order to address the above challenges, the firm should increase its responsiveness in order to avoid delaying deliveries due to a slow order processing system (Katz, Pagell and Bloodgood, 2003, pp. 291-302). Errors made when forecasting demand can be reduced by adopting a system that focuses on error correction instead of the likely level of demand.
A breakdown in supplier’s order entry-system by one week is not likely to interrupt Ford’s production since it can use its existing inventory to support production. However, its production will stop until the suppliers repair their order entry-system if the inventory runs out in less than seven days. At the internal level, a breakdown in customers’ procurement system will cause an increase in lead time (Katz, Pagell and Bloodgood, 2003, pp. 291-302). More time will be needed to fulfill orders as the firm repairs the procurement system. A breakdown in the inventory system can result into either over-stocking or under-stocking of inventory. This is due to the fact that the company will not have accurate data to match its demand and inventory.
If customers’ order-entry system fails to function for a week, the level of stock will exceed the desired level since Ford’s production is based on a push system. If credit card information is lost, the sales transactions will be negatively affected. This is because Ford depends on e-commerce to trade with its suppliers and distributors (Ford, 2011). In order to avoid losing transaction information, the firm should establish an effective information back-up system and introduce security protocols in its e-commerce system (Katz, Pagell and Bloodgood, 2003, pp. 291-302). It can also increase its level of inventory to avoid disrupting production when suppliers’ order-entry system breaks down.
Ford will experience a shortage of supplies in the long-term if rationing of supplies persists for a very long time. This will particularly happen if all or a majority of its suppliers decide to reduce supplies by 20%. If the minimum order size is increased by 20% or 100%, the storage cost will increase (Ayers, 2011, pp. 143-167). Besides, it can lead to overproduction as the firm tries to eliminate the excess inventory. Taking advantage of trade volumes will enable the firm to reduce costs and hold enough stock of raw materials. However, it can limit availability of supplies if suppliers’ ability to forecast demand is affected. Significant changes in customers’ order sizes will complicate Ford’s demand forecasting processes (Chopra and Sodhi, 2004, pp. 53-61).
Inconsistent changes in quantity demanded will make it difficult to predict demand based on past order records. Consequently, inaccurate demand forecasts will be made which may result into either overproduction or underproduction. The risks associated with significant changes in demand can be avoided by basing production on existing demand rather than past order records (Ayers, 2011, pp. 143-167). The risks associated with rationing supplies can be reduced by increasing the number of suppliers for various raw materials or car parts. Reducing the frequency of making orders can help in eliminating losses resulting from an increase in minimum order size.
An increase in the price of key parts by 20% will have negative effects on the price of Ford’s cars in the long-term. In the short term the firm can use its existing stock of car parts to produce cheap cars. However, if it fails to find an alternative supplier it will be forced to purchase parts from the suppliers who have increased their prices. This will necessitate price increases (Lehtivaura, Gordon and Vollmann, 2004, pp. 64-68). The effect of an increase in transportation cost will depend on the level of existing stock of raw materials. If the existing stock of raw materials is little, then more stock will be purchased at high costs due to increase in transportation costs. However, if the existing stock is sufficient then the firm will have enough time to look for cheaper means of transportation.
Failing to pay key suppliers can cause interruption in supplies. Thus if the existing stock of raw materials can not last for a month, the firm will have to stop production until it pays its suppliers in order to get more raw materials. In order to avoid risks associated with cash squeeze, Ford Corporation can negotiate for more flexible terms of payment with its suppliers (Lehtivaura, Gordon and Vollmann, 2004, pp. 64-68). This will enable it to obtain raw materials even if it can not pay for them within the agreed period. It can also hold more stock of raw materials in order to avoid shortages in the event of a sudden increase in prices of either raw materials or transportation services.
Disruption in supply of car parts is likely to have negative impacts on both firms. However, Toyota is likely to be affected in the short-term since it does not hold emergency stock of raw materials (Coyle, Joseph and Langley, 2008, p. 78). Ford is likely to be affected in the long-term if its stock of raw materials runs out. While Ford can be able to fulfill orders in the short-term when its production plant shuts down, Toyota will not be able to do the same since it does not keep any surplus stock of completed cars. Significant changes in demand will adversely affect both firms’ ability to plan effectively for their production capacities due to lack of consistent information on demand.
Delays in processing orders at any level will have adverse effects on each company’s lead time (Coyle, Joseph and Langley, 2008, p. 85). However, Toyota is likely to be greatly affected since its production schedule is based on existing demand. Ford on the other hand can use its emergency stock of completed cars to fulfill orders in the short-term while addressing the causes of order processing delays.
The time needed by both firms to fulfill orders will increase if the order entry-system of one of their partners in the supply chain breaks down. This is because failure to place the orders in time will prevent the firms from obtaining accurate information on existing demand (Cohen and Roussel, 2005, p. 98). Thus they will not be able to produce the optimum quantity of cars.
Lack for consistent information on demand will affect each firm’s ability to plan effectively for its production capacity (Cohen and Roussel, 2005, p. 98). If the two firms significantly change the size of their orders, then their suppliers might not be able to accurately predict demand. This can lead to a shortage of supplies. Significant changes in the size of customer’s orders will make it difficult to predict the level of demand and this can lead to either overproduction or under-production. The effects of a reduction in supplies are also likely to be realized by Toyota in the short-term while Ford is likely to realize such effects in the long-term. This is because the later holds emergency stock of raw materials while the former does not. Increases in prices of key parts is likely to adversely affect Toyota in the short-term while Ford will realize such effects in the long-term since its orders are not placed regularly.
Supply chain management is an integral process in the operation of any business since it helps in creating competitive advantages. However, the benefits of supply chain management can only be realized if sound strategies or policies that support it are put in place (Cohen and Roussel, 2005, p. 67). Apart from formulating the policies, the effectiveness of such policies or strategies must be tested. Toyota uses a lean production system that focuses on meeting only the existing demand (Toyota, 2011). While this helps in avoiding over production and eliminating storage costs, it makes the firm vulnerable to the effects of input shortages.
Besides, the firm can not fulfill emergency orders. Ford on the other hand uses past order records to predict its demand (Ford, 2011). Consequently, it holds surplus stock of both raw materials and completed cars. While this can lead to overproduction and an increase in storage cost, it reduces the risk of disrupting production due to a shortage of supplies. Besides, the firm can easily fulfill emergency orders. It is thus advisable for the two firms to adopt a hybrid production system that incorporates the principles of both push and pull production systems.
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