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Supply chain execution is the process of managing material flow to ensure supplies are received when needed to support manufacturing operations. Effective supply chain management allows organizations to increase inventory turns and revenue while reducing strains on cash flow. Supply chain execution involves the procurement, shipping, and receiving of goods.
Supply chain procurement is the process of buying parts needed to build the final product. During supply chain planning, marketing determines the amount of products expected to sell in a given time frame. The master scheduling group will load the demand into an enterprise resource planning (ERP) system which results in purchase requisitions. A purchase requisition documents the number of components a buyer needs to purchase and also when the components are needed.
The buyer orders parts from upstream suppliers. Many organizations employ a just-in-time (JIT) method of procurement which plans to have the material on site only when needed. This may require daily or weekly deliveries, depending on the manufacturing process. Benefits of a JIT method include less required warehouse space and less cash tied up in inventory. The downside of a JIT method is if there is an unforeseen delivery problem such as weather delays, production will shut down due to insufficient materials available.
Shipping is another process in supply chain execution. Logistics professionals work with the supply chain network to ensure lean supply chain methods are being used. Contracts are typically signed between the company and its suppliers so agreements are in place regarding shipment methods and charges. Total landed cost is considered instead of just the unit price of the component. This ensures the deliveries are made to minimize freight costs.
Total landed cost is a term used to describe true costs to get the part from the supplier to its destination. In addition to the actual unit price of the part, total landed cost includes taxes and duties such as import or customs duties. Total landed cost also includes freight. When determining the best method of supply chain execution, freight is often a large decision factor. For example, shipping air may be the quickest way to receive parts but the cost is often several times more than ocean or ground freight.
Receiving of goods is another step in supply chain execution. When components arrive at the facility, determining where the parts need to be stored is key. To maximize inventory turns, many companies have adopted a vendor managed inventory (VMI) strategy. With VMI components, the parts are actually managed by the supplier but are physically on site.
The vendor typically has a person or group located on site and only receives material into stock when it is planned to be used. This method is especially beneficial to inventory turns and cash flow when expensive material is being used, such as with car manufacturers. For example, when engines are delivered to a car manufacturer using the VMI method, the company does not have to claim the inventory in its books until the engine is actually delivered to the production line.