Supply Chain Management of Outokumpu - Assignment Example

Supply Chain Management of Outokumpu Table of Contents Introduction 3 Supply Chain Management of Outokumpu 3 Objectives of the operational process ofOutokumpu 5 Kanban Inventory System 7 Conclusion and Recommendation 9 Reference List 10 Introduction Outokumpu is a high performance stainless steel manufacturer, headquartered in Finland. With a production capacity of 4 million tonnes per year, the company has become the global leader in stainless steel industry. It operates in more than 30 countries, including Finland, Sweden, UK, Germany, US, Mexico and China and mostly caters to business customers (Outokumpu, 2015a). The supply chain of Outokumpu is focused on achieving high performance in delivery, optimized inventory management and stable and shorter lead times. 80% of the total produced stainless steel is used to make daily household items and equipment for commercial use. 20% of it is used to manufacture internal components and industrial products. These features allow the company to develop sustainable competitive advantage and prospective growth in the near future (Outokumpu, 2011). This paper is focused on Outokumpu’s approach to global supply chain, the advantages and disadvantages faced by them, and the detailed study of their supply chain process. Supply Chain Management of Outokumpu The supply chain management is one of the vital parts of the operations management of a company. The operations strategy of Outokumpu looks at a long term prospective of the company. It underpins the organizational vision regarding the operational activities.The operations management in the other hand encompasses the entire production process including procurement of raw materials, processing them into final goods, taking care of logistics, managing the supply chain and meeting the demands of the customers in minimum possible lead time.It is mostly short term in nature and deals with the daily activities that helps the organization to reach its goals. The supply chain management of Outokumpu is overseen by the group level. The company constantly monitors the market to make accurate demand forecasts and it modifies its operational activities based on the market scenario and current demand level in the industry. Every business unit is operated by its own supply chain management system, which is overseen by the group level (Outokumpu, 2011). The supply chain management of Outokumpu ensures that it follows the five business imperatives which are, cost, opportunity, flexibility, quality and speed. The company specializes in producing at lower cost, by resource optimization thereby increasing profitability and offering a lower price. The company also ensures that its supply chain process is efficient enough to be dependable and flexible enough to respond to the sudden changes in the market demand by effective throughput. It also ensures high product quality to maintain its brand valuation. The efficient supply chain management of Outokumpu allows it to deliver its promises to the customers. Living up to the expectations of the customers is one of the key features of Outokumpu’s supply chain. The company takes deep care to maintain good customer relation to ensure customer retention. This is achieved by adhering to the five business imperatives (Outokumpu, 2015b). Outokumpu’s operational system is a combination of both operationally responsive and operationally efficientsystems.The full time systems which form the head of the operational process are efficient and are moved closer to the customers thereby creating a highly responsive system as well. This as a result allows the company to be both efficient in supplying at a low cost and responding rapidly to the changing market demand (Outokumpu, 2015c). The efficient system which takes care of the resource optimization deals with advanced equipments that use low resource to produce maximum amount of stainless steel. On the other hand, the responsive system uses low cost equipments that connect the efficient system with the customers’ demands, thereby reducing the lead time. The inventory management system employed by Outokumpu is also broken into efficient and responsive systems. The efficient system ensures that the raw materials are moved quickly for processing, thereby minimizing the inventory volume in the total supply chain. On the other hand, the responsive system deploys buffer stocks, which mostly constitutes of the finished or semi-finished products, which can be easily converted and sold to the customers. The company ensures that the inventory in the responsive system moves as fast as possible, because if the inventory stock of the finished goods is halted, then the company might face severe downturn in profitability. The company also makes necessary amendments in the supply chain to create product differentiation. Product differentiation is often tailored to customer’s specific needs. Simultaneously, Outokumpu maintains a balance between high product differentiation and performance productivity. This as a result allows the company to develop a competitive advantage in the industry and gain increased brand preference (Outokumpu, 2012). The manufacturing process of Outokumpu is composed of several dependable processes; one dependent of the other like a chain of events. Each of the processes is of variable nature and depending on that variation, the output of the production plant can be determined or controlled. The process layout is imperative to the efficient production of the plant. The plant layout of Outokumpu is sequential in nature, where the layout is mostly static and cannot be changed easily owing to the massive stature of the equipment. As opposed to the sequential process, the other kind of process is the “jobbing” process, where a group of activities are clubbed together to yield specific products. Objectives of the operational process of Outokumpu The overriding objectives of the company are underlined by three basic elements, Safety, Cash and Profit (Outokumpu, 2015b). The entire supply chain process is reviewed for its safety measures and are employees are given proper training so that any hazardous incidents can be avoided. Accidents mostly take place because of the employees’ behaviour and negligence. The company ensures that all of its employees are following the safety regulations and the equipment goes through proper maintenance. Hazardous incidents can prove to be counterproductive for the company. The second element is the cash, which is imperative to the firm’s activities. Outokumpu ensures that it can effectively handle its cash flow by efficiently managing the inventory system (Outokumpu, 2015b). The inventory movement, if by any reason gets halted or slowed down, can eventually make the company bankrupt. Therefore, Outokumpu makes sure that as soon as it purchases the raw materials, they are converted to finished products which are quickly transported to the customers. This as a result allows the company to maintain a steady cash cycle. It tries to reduce the time delay between paying for the raw materials and delivering the finished goods to the customers. Thirdly, the profit element suggests that the generation of cash is not enough. The company ensures that its operational activities are efficient enough to break even and pay for the regular expenses and salaries of the employees and it is ready to reinvestment in the business. Reinvesting from the profit allows Outokumpuu to constantly expand its business and maintain a sustainable growth (Outokumpu, 2012). Outokumpu has successfully linked the five business imperatives and three objectives so that the operational process can be run sustainably. The high safety measures leads to low hazardous incidents and thereby increasing productivity and reducing the overall operating costs. Dependability increases the customers brand preference and increases the company’s revenue. Outokumpu considers speed to be of great importance for organizational success. It reduces the lead time, thereby increasing the customer satisfaction level and it also increases flow of inventory thereby allowing the cash inflow. The quality of the product and the operational process also determines the profitability of the company (Outokumpu, 2015b). The throughput of the company is the cash generated by the sale of the finished goods. The inventory can be considered as the cash attached to the business and the operating expense is the cash required to convert the inventory into throughput. Outokumpu’s supply chain management process ensures that all these three factors are interlinked. The throughput is top of the hierarchy and it increases as the operating expenses increases and at the same time it also increases the inventory volume. So, in order to make a harmonious “material flow” in the operational process, Outokumpu makes sure that all the three factors are properly balanced and none of them exceed or is decreased out of proportion with comparison to the other two (Outokumpu, 2012). Unlike other manufacturing companies, Outokumpu has achieved efficiency in production by keeping the manufacturing process and the supply chain as simple as possible. This as a result has reduced complications from the system, enabled better control over the process and clarity to material flow. The company uses the traditional law of demand and supply. This suggests that if the capacity of firm is greater than the market demand then it is a mere waste of company’s capital. On the contrary, if the capacity of the company is less than the market demand, then it is simply missing out on the opportunities to increase its profitability. As held by popular beliefs, as long as the capacity and the demand are in proportion the statistical variations do not matter much for the company. However, the statistical variance does not always averages out and the variance of production and demand gets reflected in the inventory volume of the company. As the inventory get out of proportion, the company incurs loss. Outokumpu stabilizes the statistical variation by controlling the material flow and balance the capacity of the plant. Outokumpu performs this process by identifying the operational bottle neck, which dictates the throughput of the company’s operations (Outokumpu, 2015a). The company goes in to the details of each and every processes in the supply chain and identifies the process that is experiencing a bottle necking. Bottle necking are mostly static and are specific to a particular process. After it has identified the bottle neck, then it is supplied with enough inventor buffers so that it does not run out of activities. The company ensures that it has enough capacity over the bottle neck so that it can make seamless flow of finished goods to maintain a desired inventory volume. The other processes are so designed that it can easily counter the bottle necking of one particular process. This helps the company to maintain its production volume at a desired level. In order to completely remove the bottle neck, the company makes certain changes to the processes, which is mostly done by capital investments. These processes are primarily governed by the market demand. The management of the process bottlenecking is mostly done by the engineers of Outokumpu who makes the necessary changes in the process that compensate for the bottle necking of a particular process (Outokumpu, 2015c). Outokumpu’s success is based on its perspective of a holistic end to end view, which as a result decreases the number of processes to control. Focusing on the bottle neck makes it easier for the management to control the entire operations process. Following the hierarchy of throughput, inventory and operating expense, allows Outokumpu to maintain a steady throughput by controlling the inventory flow and reducing the operating expense. The company pays more focus on the throughput because it is more effective than increasing the operating expense and the inventory volume (Outokumpu, 2011). Kanban Inventory System The Kanban system was developed by Toyota in Japan. The primary objective behind this system was to achieve a seamless material flow within the production process. It increases the productivity of the operational process and provides a clear insight of it, which includes flow of raw materials and the changing inventory levels (Henryford, 2010). This process has been further improved so that it can also be used as a means to achieve just in time (JIT) inventory management system. It is also used as a control mechanism for the production volume and as an information system for monitoring the supply chain process (Sugimori et al, 1977). The push system helps to determine the time until which the work centres needs the work orders so that it can meet the desired master production schedule. On the other hand, Pull system monitors and controls the production process from the perspective of the finished goods. Based on the demands and requirements of the customers the production process is controlled. The Kanban system represents a Pull system as opposed to serving the materials requirements planning (MRP) which is a characteristic of the Push system (Henryford, 2010). Kanban system is so designed that only the requirements of the end products is only exposed to the final assembly line. As a result, it controls the total production volume. Since the final assembly line contains the production schedule, it can easily stop and restart the feeding of components whenever necessary. The production volume is maintained in such a manner that the inventory which has just been cleared out is replaced by a new batch of finished goods. This as a result allows the management to control the inventory stock thereby controlling the cash flow in the company (Germain, Claycomb and Droge, 2008). In order to achieve this task the engineers need to control the input of the feeder stations. Thus an upstream chain reaction is started in the work centres which requires components withdrawing at the required time and required amount. This as a result enables the supply chain system to control the flow the materials which is in synchronization with the required production rate. Thus it helps to support the Just in Time inventory management in the supply chain management. The Kanban system has introduced Kanban cards which are used mostly of two types, withdrawl kanban and production kanban. The withdrawal card states the quantity to be withdrawn from the process. These cards are circulated only between two workstations so that the withdrawal amount can be communicated to the preceding workstation. The production kanban on the other hand states the required amount of finished goods that is has to be produced to compensate for the components removed. In order to use the kanban system, the management needs to strictly adhere to the operational procedure. The strict regulation is centred on the well documented process flow (Henryford, 2010). The kanban system acts as a signalling mechanism, which provides necessary information regarding the production process, thereby providing full control over the production system. Although the kanban system is advantageous for efficient operations management, it has certain disadvantages as well. The disadvantages of Kanban system is as follows. With the change in market demand, maintaining the kanban in a resized form can be challenging and time consuming. The kanban cards can get easily lost, which can pose as hindrance to the operational activities. In order to compensate for this issue, several companies have implemented electronic systems. Following the kanban system prevents the management to plan ahead of the pre designed schedule. Small or randomly placed orders cannot be addressed by the kanban system (Sugimori et al, 1977). Conclusion and Recommendation The proper management of the supply chain of a firm is imperative to its operational success. It determines the cash flow of the company and it also dictates the profitability. The three primary objectives of supply chain are to maximize the throughput and while maintaining the inventory level at an optimum state and reducing the operating cost. The supply chain management of Outokumpu is efficiently managed by emphasising on the market demand and improving its dependability and product quality. Owing to the strong financial stability, the company has the potential to give more focus on the bottle necking of the production process, which as a result should improve the productivity of the company. Moreover, it should also diversify into other metallurgical businesses by making horizontal integration, which will further improve the profitability of the company. Reference List Germain, R., Claycomb, C. and Droge, C., 2008. Supply chain variability, organizational structure and performance: the moderating effect of demand unpredictability. Journal of operations management, 26, pp. 557-570 Henryford, 2010. Kanban Inventory System. [online] Available at: [Accessed 12 February 2015] Outokumpu, 2011. Supply Chain Management. [online] Available at: [Accessed 12 February 2015] Outokumpu, 2012. Operational and financial risks. [online] Available at: [Accessed 12 February 2015] Outokumpu, 2015a. Outokumpu - global leader in stainless steel. [online] Available at: [Accessed 12 February 2015] Outokumpu, 2015b. Sustainable operations –the industry leader​​. [online] Available at: [Accessed 12 February 2015] Outokumpu, 2015c. Risk management. [online] Available at: [Accessed 12 February 2015] Sugimori ,Y., Kusunoki , K., Cho, F., And Uchikawa, S., 1977. Toyota production system and Kanban system: Materialization of just-in-time and respect-for-human system, International Journal of Production Research, 15(6), pp.553-564. Read More