Projects

Study of MRO supply Chain

Background

Firms are increasingly recognizing that the effective management of supply chains is a primary driver of value creation and long-term performance. The importance of Supply Chain Management (SCM) has emerged as a consequence of the current business environment of global competition, globalization of supply chains, short product life cycles, rapid changes in technologies, the need to provide higher levels of customer service, and the constant pressure to reduce costs and improve asset utilization. Hendricks and Singhal (2000) underscore the importance of effective SCM by empirically showing that firms pay a significant price in terms of shareholder value when supply chains do not work effectively. Their study, which is based 861 announcements of supply chain glitches (i.e., production and shipment delays), indicates that on average glitch announcements are associated with an average reduction in shareholder value of $120 million, which represents almost a 9% decrease in stock price. The economic consequences of supply chain glitches are worse than this when stock price performance is examined from a quarter before the formal announcement of the glitch to a quarter after the formal announcement of the glitch. During this period, glitches are associated with an average loss in shareholder value of about 20%.

While many firms in the automotive, consumer goods, and electronics industries have exploited the value creation potential of SCM, firms in the pulp and paper industry are just beginning to recognize the vast scope of the potential opportunities that exist. McLean (1999) argues that SCM is a critical business issue in the pulp and paper industry that offers tremendous potential for improving customer satisfaction, lowering operating costs, reducing inventory investments, and improving fixed asset utilization. He indicates that current SCM approaches and initiatives in the pulp and paper industry have significant gaps in the areas of demand planning, production planning, scheduling, inventory management, and transportation and distribution planning. However, rather than a comprehensive and systematic analysis of SCM, firms in the pulp and paper industry have reacted to competitive forces by pursuing actions that may be detrimental. For example, as a result of the fierce competitive environment, significant pressure has been placed on suppliers to cut costs. In response, some suppliers are reducing their investments in research and development, equipment upgrades, and quality improvement initiatives. Needless to say, these supplier actions may have a devastating impact on the long-term performance of the pulp and paper industry.

GOALS

The supply chain of the pulp and paper industry can be segmented into the following four sub-chains: 1) fiber procurement which includes all the activities that are required to deliver wood chips to a pulp and paper plant; 2) pulp and paper manufacturing; 3) customer fulfillment which spans order taking, production, and delivering of products to customers; and 4) non-fiber procurement which includes the activities required to manage maintenance, repair, and operating (MRO) supplies. While opportunities exist to improve all four components of the supply chain, our focus in this research will be to study the MRO (or non-fiber) supply chain for paper mills. Typical MRO supplies in the paper and pulp industry include bearings, power trains, pipe valves, electrical components, lubricants, clothing (felt and wires), office supplies, to name just a few.

We have selected this portion of the supply chain as the focus of our research since many in the industry have identified this as a critical area and very limited research has been done in this area. According to Kapoor and Gupta (1997), business specific purchases (includes MRO) account for 15% to 20% of a company's indirect purchases while indirect purchases can account for roughly 24% of the company's total purchases. From discussions with Jim NcNutt (2001), a paper mill spends approximately $60 to $80 per ton of paper on MRO suppliers. Instead of continuing to place pressure on suppliers to reduce these costs, paper mills can benefit from partnering with suppliers to develop processes and products that benefit both the paper mills and the suppliers. Through working with their supplier for mechanical seals, Boise Cascade's International Falls mill realized savings over $200,000 (Williamson, 1999). The Finnish mill, UPM-Kymmene Kuusanniemi invited their supplier, Tamfelt, to help solve problems faced in the paper machine's former. Though their collaborative efforts, a fine bottom fabric and dense surface top fabric were introduced which enabled the mill to run the machine at its target speed and improve the paper quality (Shaw, 2000). Thus, improvements in the MRO supply chain for paper mills can result in significant savings.

In a broad sense, the primary objective of our proposed research is to understand and document opportunities that create value among supply chain partners in the pulp and paper industry. More specifically, in the context of the MRO supply chain for paper mills, we propose the following: 1) to develop an in-depth understanding of current practices of the supply chain including an understanding of the challenges of integrating supply chains across organizations; 2) to gather information on supply chain performance and its primary drivers; 3) to rigorously analyze the information to identify the critical areas providing the greatest opportunity to improve the effectiveness and efficiency of the supply chains; and 4) to identify specific initiatives to improve supply chain performance, quantify the bottom-line impact of these initiatives, and develop approaches to successfully implement the most critical initiatives.

We will examine both the hard and soft factors that drive supply chain performance. For example, we will explore the impact on SCM in relation to hard attributes such as the existing capacity and location, existing process technologies, investments in new technologies, and the information technology (IT) infrastructure. Many have argued that one of the keys to increasing the effectiveness of supply chains is better utilization of information regarding the supply and demand. We propose to examine how this information is captured, analyzed, shared, and made visible in a timely manner among the various participants of the MRO supply chain for the paper mill. In particular, our research will examine the existing IT infrastructure and the mechanisms and extent of information sharing as well as the impact on current supply chain performance.

On the soft side, we will study organizational issues such as the integration across various supply chain partners, collaboration among partners, sharing of information and plans, existing practices for coordination and control of the supply chains, incentives issues, performance metrics used and how they influence decisions and behaviors. In an important study, Davis-Blake and Uzzi (1993) show that several factors play a role in determining the use of temporary (internal) workers and independent contractors (external), and significantly impact employee relationships. Carrillo and Gaimon (2001) demonstrate the importance of linking organizational issues to the behavior of operations managers by showing that organizations pursue different strategies for investment in resource-based core capabilities (which includes the design and operation of a firm's supply chain) depending on their organizational structure and managerial incentives. Also, economic models of SCM that incorporate organizational issues have recently appeared in the literature including Fisher and Raman (1996), Cachon and Fisher (1997), Fisher (1997), Raman (1977), Lee and Whang (1998), Gavirneri, Kapuscinski and Tayur (1999), and Lee, So, and Tang (2000). While some anecdotal evidence of the impact of certain organizational practices on supply chain performance is available, limited objective evidence exists. Furthermore, little research has been done that rigorously links organizational practices in the pulp and paper industry to supply chain performance. A key objective of our research is to develop these linkages and to identify best practices based on careful and rigorous analysis of data.

Our research approach will be based on data collected from field site visits, a comprehensive mail survey, and on secondary sources of information. The purpose of the site visits will be to develop a better understanding of the issues faced by MRO suppliers and their associated paper mill partners, the supply chain initiatives that are being pursued, and the impact these initiatives are likely to have on long-term financial performance. The information gathered from these site visits will be useful in designing the mail survey, developing models to quantify the economic impact of various initiatives to improve supply chain performance, and validating these models.

The purpose of the mail survey is to gather more comprehensive information from a larger number of MRO suppliers and paper mills about their supply chain management practices. The business processes that will be explored through the survey instrument include product development, demand and capacity planning, sharing of information, order fulfillment, logistics, initiatives that have been implemented and/or are likely to be implemented, and the financial impact of various initiatives. The information gathered from the mail survey will provide the necessary data and insights to understand, describe, analyze, and recommend initiatives to improve the performance of the supply chain, and to develop a baseline against which the future performance can be compared. It will also allow us to develop economic models to project the operational and financial benefits from supply chain management initiatives. Moreover, based on the insights from the analysis of the survey data, we will make recommendations to improve supply chain performance that explicitly recognize the challenges associated with implementation of operational change, (see Carrillo and Gaimon, 2000; Swafford, Ghosh, and Murthy, 2000). When appropriate and depending on data availability, information from secondary sources will also be used to examine and analyze the structure and performance of various participants in the supply chain.

CURRENT STATUS & OVERVIEW OF THE FIELD

This research, while grounded in the area of operations management, is multi-disciplinary in the sense that it requires knowledge from different functional areas. In particular, beyond expertise in operations management (which specifically includes the analysis of supply chains in conjunction with managing a firm's production and delivery of good and services), knowledge in the domains of finance and accounting (to understand and develop the economic implications of supply chain performance), organizational theory (to assess the impact of organizational structures and incentives), information technology (to understand IT structures and linkages between the many participants in the supply chain), and psychometric theory (to develop a reliable and valid survey instrument) are needed. Previous and ongoing research by the faculty participants of this study demonstrates that they have considerable experience and the necessary skills to complete the proposed research. Moreover, this research will involve graduate students and will thereby enrich the pool of knowledge about the pulp and paper industry. Specifically, under close faculty supervision and guidance, graduate students will perform much of the data collection and initial analyses. It is likely that some of this research will be embedded into one or more doctoral students' Ph.D. theses.

References

Bensaou, M. 1999. "Portfolios of Buyer-Supplier Relationships", Sloan Management Review, Summer.

Cachon, G., M. Fischer. 1997. "Supply chain inventory management and the value of shared information". Working paper, Wharton School, University of Pennsylvania, Philadelphia, PA.

Carrillo, Janice, Cheryl Gaimon, "Improving Manufacturing Performance Through Process Change and Knowledge Creation," Management Science, Volume 46, No. 2, 2000.

Carrillo, Janice, Cheryl Gaimon, "Managing Knowledge-Based Core Capabilities Under Uncertainty," Working Paper, March 2001.

Davis-Blake, Alison, Brian Uzzi. 1993. "Determinants of Employment Externalization: A Study of Temporary Workers and Independent Contractors", Administrative Science Quarterly, 38, 195-223.

Fischer, M., A, Raman. 1996. "Reducing the cost of uncertainty through accurate response to early sales". Operations Research, 44, 87-99.

Fischer, M. 1997. "What is the right supply chain for your product?". Harvard Business Review, March-April, 105-116.

Galloway, J. 1994. Mapping Work Processes, Quality Press, Milwaukee, WI.

Gavirneni, S., R. Kapuscinski, S. Tayur. 1999. "Value of information in capacitated supply chains". Management Science, 45, 16-24.

Hendricks, K. B. and V. R. Singhal, 2000. "Supply Chain Glitches and Shareholder Value Destruction", Working Paper, Georgia Institute of Technology, Atlanta, GA, 30332.

Kapoor, V and Gupta, A. 1997. "Aggressive Sourcing : A Free-Market Approach", Sloan Management Review, Fall , p. 21-31.

Lee, H., P. Padamanabhan, S. Whang. 1997. "Information distortion in supply chain: The bullwhip effect". Management Science, 43, 546-558.

Lee, H., K. So., C. Tang. 2000. "The value of information sharing in a two-level supply chain". Management Science, 46, 626-643.

Lee, H., S. Whang. 1998. "Information Sharing in a supply chain". Research Paper No. 1549, Graduate School of Business, Stanford University, Stanford, CA.

McLean, S. 1999. "Finding Strategic Advantage through SCM", Pulp and Paper International, 41, no.10, 28-31.

McNutt, J. 2001. Personal communications.

Raman, A. 1997. "Module Overview: Coordinating and managing supply chains: Matching supply and demand". Harvard Business School, Boston, MA.

Shaw, Monica, 2000. "Supplier/mill teamwork key in achieving quality and cost goals", Pulp and Paper, March edition.

Swafford, P., Ghosh, S., Murthy, N. 2000. "A Model of Global Supply Chain Agility and it's Impact on Supply Chain Performance", Proceedings of the 2000 Decision Sciences Institute Conference, Orlando, FL.

Williamson, Mark. 1999. "Mills partner with seal manufacturers to reduce process costs, achieve ROI", Pulp and Paper, May edition.