Best Practices in Supply Chain Management

¶ … Transitioning of the Defense Transportation System Toward Complementing Best Practices in Supply Chain Management Efficiently and Securely

Distribution managers need to appreciate that management of defense supply chains is a rapidly-growing global phenomenon, with an overlap existing in management levels; right from the strategic national-level stakeholders to lower sustainment units at the activity levels. Strategic distribution changes have the potential of immensely impacting tactical implications. This paper aims to help absorb a few important precepts required for globally receptive logistics decisions. Distribution and material managers ought to review and internalize defense supply chains early on in the course of their career. The process of distribution is complex. Thus, material distribution management must include electronically sustainable supply-chain information systems for realizing true synchronization. After all, defense transport systems are CASs (complex adaptive systems) integrating comprehensive, dynamic components, and aim at discussing complex supply-network systems together with their co-evolutionary, dynamic processes. The CAS approach is capable of providing hints for understanding the co-evolution of supply network and its dynamic nature, as the approach incorporates built-in systems therein and their complexity. The overall contribution of this paper will be towards strengthening the theoretical argument of research works that have dealt with CAS and other supply chain subjects. Analyzing broader levels such as supply chain systems can be useful, since supply networks' evolutionary active nature may be considered similar to CASs. One can highlight the fact that it is necessary for practitioners to consider the complicated logic surrounding the management of supply networks.

In this context, System Dynamics, 'reverse logistics', and feedback mechanisms may prove quite useful. Further, the deployment of such tools has become easier due to advances in the computer aided simulation facilities that can now explore interaction and outcomes of each system on the other. This would not only help evolution to adapt to dynamic forces affecting logistics globally, but also aid swifter decision- making to support smoother operation at the execution levels.

Transitioning of the Defense Transportation System

Table of Contents

1. Introduction 1

1.1 Problem statement 1

2. Literature Review 2

3. Discussion of the problem 4

4. Discussion of new solution(s) to the problem 9

4.1 Stimulation of mechanisms promoting interactions 9

4.2 Encouraging autonomy within networks 9

4.3 Understanding the fact that learning is dependent on autonomy and interaction levels 10

4.4 Recognizing edge of chaos or creative space 10

4.5 Development of capabilities for influencing positive emergent effects 10

5. Conclusion 11

6. References 13

1. Introduction

Currently, the situation with security policy is threatened by Arab revolutions and changes in several Arab nations' regimes, giving rise to novel institutional, ethical, and political challenges. Therefore, states face external threats necessitating national security production and preservation (SIPRI, 2012). Subsequent tasks include war fighting, nonessential evacuation plans, peacekeeping and peace enforcement, as well as humanitarian tasks like disaster relief and humanitarian aid. According to German constitutional law (Article 87 a Grundgesetz (GG)), this complex range of responsibilities is mandatory upon militaries, and may be considered a service obligation in the purview of defense portfolios (Essig, Mohr & Tandler, 2014). Since armed forces come under public sector organizations, national governments finance them.

European Defense Agency's estimations revealed that, in the year 2009, the EU's (European Union's) 26 member nations spent 194 billion Euros in total on defense; this amount represents a large share of EU national budgets. 16.77% (i.e., 32.53 billion Euros) of these 194 billion Euros was devoted to defense procurement. In view of this colossal expenditure towards national security maintenance, national armies are, for many years now, facing increased pressures to reduce expenses (SIPRI, 2011; Essig et al., 2014), as well as to utilize resources efficiently.

Towards simultaneously safeguarding operational effectiveness and ensuring efficiency, defense forces must focus on their respective core competencies, whilst employing contemporary forms of financing and cooperation. The above trend is manifested through realization of a number of PPPs (private-public partnerships) or Public Finance programs, which have grown in number in the past few years (Hartley, 2002). The market for defense equipment, as has been mentioned previously, has considerable potential. In spite of relevant cost-cutting potential, militaries lack suitable management tools to guide acquire long-term links that traditionally characterize the defense equipment market.

1.1 Problem statement

An analysis of literature pertaining to traditional SCM (supply chain management) indicates a few steering tools, offered chiefly for private sector organizations. However, considering militaries' specifics, one cannot vouch for non-reflected application of existing management tools concentrating on business supply chains (Essig et al., 2014). Therefore, this paper's key aim is bridging this theoretical gap by creating a suitable management tool to utilize in supply chains for defense transport, thus enabling militaries to successfully guide long-term links that are dominant in the marketplace for defense equipment. To serve this purpose, an exposure-capacity-portfolio is selected, which permits thorough defense supply chain analysis as well as offers suitable recommendations with regard to what strategic action can be taken.

2. Literature Review

Melnyk and coworkers (2010) believe a successful SCM system ought to comprise of at least one of these strategic outcomes: cost, responsiveness, resilience, security, innovation, and sustainability. Investments made by companies are initiated by the outcomes desired. These outcomes are employed in a majority of supply chains at multiple levels. Supply chains of defense organizations are unique compared to other general organizations, and their primary outcomes are generally centered on responsiveness, or the supply chain's ability and capacity of effectively reacting to alterations in customer location, product mix, and demand. This effectually maps defense units' main objective -- readiness. Van Wassenhove and Guide (2009) write that analysis in closed loop supply chain systems employs one of the following two critical techniques:

Waste-stream compliance reduction costs or Market-driven profit maximization

These views are true to economic and regulatory realities of a majority of European nations and the U.S., respectively. Further, it has been noted that companies emphasizing solely on profits develop different supply relationships and sourcing patterns (Fleischmann et al., 2001). The above observation differs from that of companies that also abide by environmental regulatory limitations ethically.

This paper will introduce and examine a third goal of closed-loop supply chain systems, defined by military organizations. This goal demonstrates how concentrating on the readiness aspect affects the supply chain's final design. From the military perspective, the term readiness denotes an ability to satisfy national military strategy demands and fight efficiently (U.S. Department of Defense 2010). This aspect necessitates improved manpower capabilities, training, weapon systems, and sustainable equipment. This paper will combine the key strategic outcome and alternative strategic capabilities necessary for achieving this outcome.

Considerable data on closed-loop supply chains arises from military practices which require stocking aircraft-related items. Some are repairable on field itself whereas others have to be forwarded to the central military depot where they are either disposed or repaired (Guide and Srivastava, 1997). Sherbrooke (1968) came up with a system -- METRIC -- for maintaining an air force repair parts inventory. Subsequent research was conducted, which refined the inventor's calculations for a multiple-level echelon system enabling transshipments. Brennan and Fisher's (1986) research considered equipment cannibalization for limited spare parts acceptable under particular conditions. However, total cannibalization is not acceptable.

Presutti and Demmy's (1981) analysis of a multiple-echelon inventory model, where repair finances were limited, clearly revealed they were inspired by Air Force Logistical Command, as well. Additionally, these researches have steered closed-loop supply chain issues in private marketplaces. Bjorkman, Ostlin, and Sundin (2008) performed a broader research on policies, returns, and their effect on overall performance. Vandaele and Lieckens (2012) studied the complex supply-chain plan elements, with regard to collection, production, uncertain supply, and transportation. Unspecified, unclear, or unexpected process times result in quality decline. Issues pertaining to sourcing of manufactured parts and the related investments in repair capacity appear to receive less attention.

By utilizing Van Wassenhove and Guide's (2009) guidelines, this paper will propose an economic methodology for establishing the strategic significance of appropriate supply chain designs and incentives accompanying defense supply chains. It is an established fact that no market competition exists in the military domain. Thus, market-based incentives are irrelevant in this context. Furthermore, the armed forces are responsible for return processes. Hence, spent costs return to base, their point of origin and only then directed to production units. Moreover, armed forces form part of manufacturing processes. Radio Frequency Identification (RFID) Technology has now become a reality for numerous sectors, such as public sector, retail, production, etc.

RFID data warehouses need to possess enough data to be able to influence the decision-making process. Any supply chain is a dynamic business unit. Hence, it may be useful to learn historical information, which normally does not possess optimum important information. The environments characteristically display variables in product demand, product characteristics, existing machine characteristics, production plans, and supply levels (Velasquez et al., 2015). Development of suitable business rules constitutes a central element in making sure this sort of system is implemented effectively. RFID provides data input automation options in existing business processes, but also provides options for creating innovative business models. Common supply chain activities and the capacity of establishing location, time, and reading data off unique items will offer opportunities for pinpointing obstacles and flaws.

This kind of information is especially valuable in guiding delivery priorities under circumstances wherein resources are limited. If one is able to establish a product's exact location at a particular time, numerous issues will be resolved, including shortening product recall time, retracting outdated item, etc. Moreover, the ability of locating product inventories aids in shortening time between conveyance points from the factory floor, warehousing unit and showroom. RFID proves valuable in clustering small consignment data from multiple sources guided along the same path in the initial distribution stages, or even automating rerouting despite change in travel-condition data (Liqin, 2014).

A clear challenge is managing system changes. Planning and organizing of RFID messaging, whilst simultaneously reviewing IT support system and business processes is no easy task. Balancing innovation and effort, together with seeking strategies for attaining an edge over competition is, from the management's viewpoint, a central issue. The costs linked to handling RFID-generated information will be substantial, whereas gains depend on data collection quality. These will mostly be intangible, but are later recovered within the defense business cycle. Also, organizations focused aggressively on business process rendering and analysis find that improvements attempted will be extremely difficult to attain or even almost impossible to execute (Liqin, 2014).

3. Discussion of the problem

A logical framework centered on a complex and comprehensive perspective can aid this goal (Dagnino et al., 2008). The CAS approach gathers aspects for understanding the contradiction between supply network emergency and control (Choi et al., 2001). Thus, this theoretical paper will endeavor to address supply networks in the form of CASs. For achieving this objective, the methodology comprises of a thorough reflection of these approaches. The design works well in conjunction with studies aimed at broadening or deepening discussion pertaining to a certain subject.

CAS is a complex system theory. A complex comprises of systems having multiple interactions between agents or entities (Humphrey & Schmitz, 2001). Several issues, including anticipating global trade changes, understanding markets, preserving ecosystems, and stimulating economic innovation, may be tackled using CAS. For example, McCarthy (2003) applied CAS for explaining a theory of technology management, while Wilfingal, Rammel, and Stagl (2007) employed it for developing a natural resources management plan.

As defense organizations deliver goods, services, or armaments that successively influence public good (i.e., national security) production, their supply chains may be categorized under public-sector supply chains of a special kind. Generally, one can differentiate between defense and military supply chains in terms of how many tiers are involved (Figure 1). Military supply chains concentrate exclusively on delivering an army unit deployed in some particular mission with goods or armaments. When carrying out this task, one can support it through private logistics agents. In contrast, defense supply chains' focus extends beyond that of military missions to private industries. As per Mentzer and colleagues' (2001) differentiation, three kinds of defense supply chains may be identified, namely, basic, ultimate, and extended. In view of the wide range of concepts utilized for describing defense supply chains, the working definition illustrated below provides a clear, common comprehension:

Figure 1. Overview of the types of defense supply chains (adopted from Essig, Mohr & Tandler, 2014)

Agents, interaction, learning, and autonomous actions are the components of a CAS. One can find the above four components within supply networks. Agents refer to companies or a collection of companies collaborating through alliances or partnerships wherein they share economic advantages and rules (Choi et al., 2001). Companies may be suppliers, retailers, manufacturers, or clients, each having its own distinctive role within the system. These companies produce an atmosphere of deep interaction inspired by exchange of information, knowledge, material, and funds. These exchanges emerge from pursuing individual companies' goals (Wycisk, McKelvey, & Hulsmann, 2008).

Firms represent entities with relative autonomy of operation in markets and sectors. In supply networks, firms and their respective sub-entities have independent levels via decentralization and delegation, in the areas of planning and decision-making (Wycisk et al., 2008). Yet, complete autonomy is not enjoyed, as these organizations are bound by legal and contractual obligations, in addition to sectorial forces; for instance, the unequal power existing in a buyer-supplier relationship.

Within the inter-organizational interactional context, supply networks' learning capacity can enable exchange of existing capacities and valuable knowledge, as well as co-produce novel capabilities and knowledge (Dagnino et al., 2008). In the supply networks domain, the concept of learning has not been explored much; however, it has the potential to increase organizational competitive advantage and durability.

One can perceive CAS activities with co-evolution, self-organization, and complexity within supply networks. Powerful organizations like Toyota run a few supply networks. However, a majority of supply networks lack control organs (Wycisk et al., 2008) that exercise governance and are responsible for coordinating network activities. These activities will then self-organize based on interactions. Their motivation stems from individual firms' interests. In case of supply networks, self-organization actuates as certain companies accept the parameters established by other parties in the network. Further, institutional mechanisms and inter-organizational relationships also exist through which chain activities' non-market-centered coordination is achieved.

According to Wycisk and co-workers (2008), a self-organized process occurring within a logistical system would have a boundary between chaos and order, in what is called the "edge of chaos." Supply networks' activities will operate within such a dynamic between chaos and order. Networks represent organizational forms between hierarchy and markets. By comparison, 'chaos' represents evolving coordination through market forces and dynamics, whereas order denotes complete asset internalization. These opposites (or extremities) will be unattractive to supply chain agents but, in the chaos/order space, supply chain agents might lower transaction costs as well as avail themselves of opportunities of learning from one another, and thus, complement co-evolution.

In management, 'creative space' is another term used for the aforementioned "edge of chaos." In fact, this deals with the levels of control and rigidity. If any supply network's parameters, rules, and forms of acting and thinking are quite rigid or, by contrast, overly flexible, creative space will be limited through either collapse or stagnation. This creative space forms the "locus" or center for inventive ideas with regard to products, services, and process.

Co-evolution transpires as a sort of behavior within supply networks, located in the creative space mentioned above. Here, the firms, environments, and networks are recursively modified, as a process of continuous evolution. For example, if an acquiring firm develops a parts supplier as one supplier system, this action will successively generate a new group of second-level suppliers, delivering parts to the new system of that supplier (Choi et al., 2001). Co-evolution results from agents' progressive interaction and learning; for instance, buyers aid suppliers for directly implementing quality standards or implementing them through introduction of service providers.

With regard to effects, supply networks themselves correspond to an emerging result, since a network's structure relies on the corresponding choices of companies (Choi et al., 2001). One possible supply network goal is the knowledge of how choices can be matched for achieving efficient emerging activities (Wycisk et al., 2008). Subsequently, by comprehending how effects surface within a given supply network, one can efficiently coordinate choices. In the context under study, the emergent effects reviewed were butterfly effect, adaptation, path dependence, nonlinearity, holism, and systemic hierarchy.

The component of adaptation in the dynamic system process changes over time with the objective of self-conformance and conforming to the environment. The time may be short or long, and this depends on stimulus. Two fundamental problems exist: 1) identifying the actions and rules that work well, so as to sustain them; and 2) determining which actions and rules give rise to problems, enabling their elimination. This is because, adaptation results from a complex series of interactions occurring within a specified space and time (Hartley, 2002).

Supply networks typically adjusted to their corresponding environments for long. That is, they molded their structures, as well as excluded or added inter-agent relationships (for example, associating with novel supplier firms and becoming their new customers). Additionally, they usually changed their physical capabilities (for example, they implemented new technologies), as well as effected strategic changes (i.e., modified their behavioral processes) (Wycisk et al., 2008). In this way, supply networks interact with demands in their environments and modify the environment to suit themselves, their member firms, and their rivals (Choi et al., 2001).

Non-linear effects can occur in the adaptation context. Facing constant adaptations, CASs can present unpredictable nonlinear effects. Hence, the outcomes will also be irreversible. That is, one cannot erase them following their production, nor can one try to return constituents to their initial state.

Cost reduction endeavors of a large supply chain buyer might bring about random results. In case of supply chains that possess nonlinearity, one cannot control the network's operations, essentially, through deterministic methods. The term "deterministic" is used to refer to the idea that supply networks' ultimate management goal is total control of a network. Still, a management objective can potentially mix agents' autonomy and control for bringing about improvements (Choi et al., 2001). A combination of these items increases the likelihood of a network's reaching the "creative space" existing between chaos and order.

Supply chain butterfly effect is a type of nonlinear effect. CASs may display butterfly effects incorporating extreme occurrences instigated by small behaviors. The effect may stem from nonlinear behaviors and a number of interactions of negative or positive feedbacks by chain agents, among other little occurrences included in the supply chain (Wycisk et al., 2008), and hence, prediction becomes difficult.

Bullwhip effect in the context of supply networks may be explained as follows: the actions of some organizations within a given supply chain may have an effect on the other firms, owing to the interdependency between them. "Bullwhip" defines how little initial changes (like market demand variations) can lead to extreme and chaotic events along a supply network, via nonlinear processes (Wycisk et al., 2008). Rungtusanathamal, Choi, and Dooley (2001) explain this in a different way, suggesting that a minimal downstream supply network change is capable of causing amplified effects upstream. Supply chain bullwhip effects are linked to four key causes, namely: bulk purchases spurred by discounts; fluctuations in price, by promotions and other such events; demand forecast update; and scarcity, (i.e., when supply is less than demand), making vendors ration products downstream.

Systemic hierarchy encompasses creation of operations of different levels adhering to similar rules. A system adaptation's capability will expand if its subsystems are of a quasi-decomposable nature. Different aggregated levels can emerge from independent agents within the system, which, despite being temporarily stable, have an adaptive nature and can recombine to enable increased adaptability to superior levels.

Supply networks, observed vertically, are multi-level by definition, constituting suppliers, manufacturers, distributors, retailers and consumers (Wycisk et al., 2008). The above subsystems can be unstable or stable based on their contract type (short-term or long-term). Further, informal agreements (e.g., unique partnerships) may exist. For example, small company aggregates may self-organize for a specific purpose, like development of a new product/material. The structure can easily be undone upon completion of activities.

Holism is linked to the principle of the holograph, which implies that a sub-system gets printed on the whole, whilst the whole also gets simultaneously printed on the parts. In the context of supply chains, holism relates to the game's rules. For instance, Schmitz and Humphrey (2001) state that the main rules guiding international supply chain companies include: what must be manufactured, how production must be carried out, when it must be produced, what quantity must be manufactured, and what price must be quoted for it. One more example cited by Surana, Greaves, Raghavan, and Kumara (2005), is the evidence of holism, in supply chain contexts, may be perceived if same concerns exist on all of the system's levels (e.g., lower-priced goods, better quality, swifter delivery, and storage). That is, a similar, shared logical printing exists, guiding actions at multiple levels towards one common end. This logic, for companies involved in any supply network, is usually explained as the creation of customer value. All agents belonging to a chain follow these rules, with the penalty of non-conformance being exclusion from the chain. The rules are applicable to individual agents as well as, concurrently, the whole supply chain.

Since each component of the logistics is in a state of constant evolution, either through internal or external factors, they constitute the System Dynamics (SD) -- a vital tool to help authenticate the 'reverse logistics' methods adopted by the military. Employing the SD simulation to Supply Chain management can prove decisive in improving its balance in logistics according to Georgiadis and Vlachos (2004).

The adaptation and interaction process develops, over time, an overlapping series of decisions constituting path dependence and history. The 'path dependence' concept's origins lie in Arthur's (1999) thoughts on the increasing returns concept. According to his ideas, economic systems may have two or more equilibrium points, which may be approached by means of positive feedbacks. Thus, one point will lead to the next, and so on.

4. Discussion of new solution(s) to the problem

4.1 Stimulation of mechanisms promoting interactions

In SCM, the link between agents (downstream and upstream) is a source of potential worth in the form of alliances and partnerships. The ARA (Activities-Resources- Actors) model's applicability is especially relevant in this regard. For instance, supplier-buyer relationships can progress beyond mere contractual supply bonds, and encompass new material (component part or raw material) development. One must consider interactions with regard to funds, material, knowledge and information exchange. One more example is links with rival firms. Organizations need to be ready to share their assets (transportation, factory, distribution centers, etc.), even with rivals (Christopher & Holweg, 2011), when it comes to competitive relationships. Meanwhile, if a supply network fails to encourage interactions, it becomes vulnerable to deterioration and market relationships close their doors to it (in CAS terminology, this implies avoiding the zone of "edge of chaos").

In this context, it is worthwhile to understand the contribution of closed loop feedback system through sustained interaction. These interactions need to be discrete as well as for the entire process. One important military logistics dimension is 'reverse logistics'. This method allows one to ascertain the repeatability of steps involved in execution of any service. According to Georgiadis and Vlachos (2004), System Dynamics' simulation can help understand the system much better and hence be causal to improvements and efficiency.

4.2 Encouraging autonomy within networks

One of the natural characteristics of a system is autonomy, which must be acknowledged and encouraged. Rather than exclusively locking in one supplier, for instance, a firm can consider alternatives for main components and materials (Christopher & Holweg, 2011), enabling suppliers to forge bonds with other businesses. This motivation for autonomy relates to a supply chain's flexibility, as well as to amplification of knowledge and information exchange.

4.3 Understanding the fact that learning is dependent on autonomy and interaction levels