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Supply chain in the airline industry

Supply chain in the airline industry

The Airline Industry Supply Chain is not a laughing matter. For it involves lots of investments on the part of the Airline Industry. Likewise, it involves lots of the client’s money that could be wasted on substandard services and work. In addition, there are many competitors in the industry that could wipe out a less qualified outfit. The communication styles that exist between various players along the supply chain are open, serious and feedback. First, the communication style that exists between various players along the supply chain is open.

Second, the communication style that exists between various players along the supply chain is serious.

Third, the communication style that exists between various players along the supply chain is feedback. While selecting the branding strategy by the officials it is always kept in mind that the direct marketing is at its optimum level and the supply chain and distribution system is always at its most advantageous position. In addition, there is always the potential to innovate new sister brands corresponding the local taste and priorities.

In the globalize era when most of the business organizations are involved in different business activities it has become inevitable for the firms to independently perform all the functions. Most of the companies do not operate their supply chain and rely on other firms to perform the multi-faceted tasks. The successful and efficient combination of the operations of these firms provides the company with the competitive edge in the market. (Cook, DeBree, and Feroleto, 2001). Lummus and Vokurka  (1999) points out towards the need for the managers to understand the performance of all the stake holding firms in the supply chain. According to (Pohlen, 2003), this insight in the performance of each firm will enable the managers to develop measures in order to fulfil the demands of the customers. The main task of the supply chain management is to develop a strategy which can cater the need of the customers and is aligned with the company objectives (Pohlen, 2003).

In this lieu it is important for the mangers to keep on measuring the performance of different parts of supply chain (Deloitte, 1999). It has been a proven fact that the improvement in the company’s performance cannot be undertaken with out improving the performance of its suppliers (Lummus, Vokurka, and Alber, 1999). The planning and information taking activities can be easily performed by the operations managers and senior executives it they have an up to date information regarding the performance of different supply chain firm and stake holders and the resources available to the firm.

Authors (La Londe and Masters 1994; Lambert, Stock, and Ellram 1998; Mentzer et al. 2001) regard a supply chain as a set of firms involved in the upstream and downstream flows of products, services, information, and/or finances.  Mentzer et al. (2001, p. 4) described a supply chain as “a set of three or more organizations directly linked by one or more of the upstream and downstream flows of products, services, finances, and information from a source to a customer.” Thus, the nature of a supply chain is comprehensive so that membership is not limited to a supplier, a manufacturer, and a distributor, but open to any firm that performs various flow-related services (Mentzer et al. 2001).

The notion of production management has been transformed from the manufacturing activities and has expanded to activities as purchasing, warehousing, transportation, and other operations from the procurement of raw materials through various activities until a product in available to the buyer. The notion includes the process of delivering the services to the customers with the products. With the changing time the aspects covered are increasing, the process now also includes R&D, value creation, marketing management, sales activities, accounting and finance.

The operation management model constitutes of inputs and outputs. The list of inputs include,

1.     customer needs

2.     Information

3.     Technology management

4.     Fixed assets of the business

5.     Human capital

6.     Variable assets related to transformation process.

This would be clarified if the supply chain of textile industry is taken into context. China entered the market timidly; a small nibble at the market but grew into a solid business. China flooded Europe with low cost shirts, pants, underwear, socks and shoes. But how can Chinese manufacturers of low cost product threat high fashion of Europe?

Ultra-cheap clothes, welcomed by consumers and retailers, undermine the fashion manufacturers, already challenged by the arrival of fast-fashion chains such as H&M and Zara, whose products are often made in the Far East. As Li Edelkoort, the respected fashion forecaster, warns, the Chinese whirlwind will flatten the fashion world as we know it and change radically its familiar landscape. “Everyone is putting eggs in one basket – China – and that is potentially devastating for our cultural heritage.” (Menkes, 2005)

While producers are struggling to keep under priced clothes from flooding the European market, designer label brands are waging another battle – against imitations, or “knockoffs”, as they are known in the trade. (Italian designers, 2005) Most of the fakes come from China or other Asian countries with the low labor costs and no concern for social services, welfare and pollution control.

Although the company is currently facing unprecedented challenges but these challenges can be faced only by innovation. These include the abolition of quantitative restrictions (quotas) which took place on 1st January 2005. These challenges are occurring in a period of marked slowdown in economic activity, which has a significant impact on sectors such as textiles and clothing. Furthermore, at the same time the Euro has shown a significant upward trend against the US dollar. All in all, every segment of textiles and clothing production, from spinning and weaving to garment make-up, has in one way or the other suffered from the impact of the developments of the last few years. (Textiles and clothing sector in the EU-25) The years 2001-2004 have been particularly difficult for the industry. After substantial falls in production and employment in the previous three years, it is estimated that in 2003 production fell by a further 4.4% and employment by 7.1% (EU-25, source: Eurostat). The trade deficit (EU-25) amounted to € 29.4 billion in 2003, the trade in textiles reaching a surplus of € 3.7 billion and the deficit in clothing € 33.1 billion.

European firms need to continue restructuring for the new textile world, where they must focus on quality and innovation, their only competitive advantages over China. For example, Italy’s Biella is spending €2.8m on a marketing campaign to promote “the art of excellence”. The need for innovation and excellence is also the best argument for the survival of Europe’s haute couture. (The sorry state of fashion, 2005)

On International level the EU is the second largest exporter of clothing with China on no.1 position.

a. How has globalization influenced the management of the production chain?

In order to effectively compete in the market the company decided to change the way in which goods were moved from Europe to North America-and at the same time dramatically expanded its distribution capabilities in the United States.

The end result of the company’s efforts is a new 170,000 square-foot distribution center strategically located in Groveport, Ohio, just outside of Columbus. Playing a prominent role in this facility are Hytrol conveyors, which facilitate the flow of merchandise from order receipt to shipping. The conveyorized operation efficiently handles current distribution needs. But just as importantly, it positions the company to support a sharp increase in order throughput anticipated in the very near future (Laura Ashley).

Porter introduced the concept of a value chain to help identify and evaluate potential sources of competitive advantage. A value chain desegregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation. Primary activities include the following: inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities cover the following: procurement, technology development, human resource management, and firm infrastructure. Essentially, the firm should analyze each one of the values creating activities mentioned above and create synergies among them. This will be a source of competitive advantage for the firm.

Thus, the following steps should be taken as presented by (Crosby, 1979) in order to improve the supply chain of the company at international level in the context of Airline industry player like RyanAir.

1.     Management Commitment: Top management must become convinced of the need for quality and must clearly communicate this to the entire company be written policy, starting that each person is expected to perform according to the requirement or cause the requirement to be officially changed to what the company and the customers really need.

2.     Quality improvement team: From a team composed of department heads to oversee improvements in their departments and in the company as a whole.

3.     Quality measurement: Establish measurements appropriate to every activity in order to identify areas in need of improvement.

4.     Cost of quality: Estimate the costs of quality in order to identify areas where improvements would be profitable.

5.     Quality awareness: Raise quality awareness among employees. They non-conformance.

6.     Corrective action: Take corrective action as a result of steps 3 and 4.

7.     Zero defects planning: From a committee to plan a program appropriate to the company and its culture.

8.     Supervisor training: All levels of management must be trained in how to implement their part of the quality improvement program.

9.     Zero defects day: Schedule a day to signal to employees that the company has a new standard.

10. Goal setting: Individuals must establish improvement goals for themselves and their groups.

11. Error causes removal: Employees should be encouraged to inform management of any problems that prevent them from performing error free work.

12. Recognition: Give public, non-financial appreciation to those who meet their quality goals or perform outstandingly.

13. Quality councils: Composed of quality professionals and team chairpersons, quality councils should meet regularly to share experiences, problems, and ideas.

14. Does it all over again: Repeat steps 1 to 13 in order to emphasize the never-ending process of quality improvement. (Ross, p. 6-7)

Management must participate in the quality program. A quality council must be established to develop a clear vision, set long-term goals, and direct the program. Quality goals are included in the business plan. An annual quality improvement program is established and involves input from the entire work force. Managers participate on quality improvement teams and also act as coaches to other teams.

Production management refers to all those activities necessary to manufacture products; it may also include purchasing, warehousing, transportation, and other operations. Operations management has a similar meaning, referring to activities necessary to produce and deliver a service as well as a physical product. It is important for the supply chain management to give importance to all of the above activities. Since a low level of performance from any part of supply chain can effect the whole process.  (Koontz and Weihrich, 1994; p.653) The method of operations research, which is the application of scientific methods to the study of alternatives in a problem situation to obtain a quantitative basis for arriving at the best solution, should be used. Other tools of production management such as linear programming inventory planning and control, the just-in time inventory system, and distribution logistics should be used to enhance the productivity of the Company. Other tools and techniques such as time-event inventory system, engineering, work simplification, quality circles, total quality management, and a variety of computer-aided approaches can also be used according to the need. (Koontz and Weihrich, 1994; p.653)

All these factors can be enumerated with the example of the case of RyanAir. The Ryan brothers publicized in the month of April 1986 that they were about to launch an air service between London and Dublin. This was the first time that their airline was about to face competition and steep rivalry from two fellow airlines that were operating on the same route. These airlines were British Airways and Aer Lingus. This was because this route was a very busy route and thus this Irish airline by the Ryan brothers was subjected to face difficult oppositions. The best possible strategy for countering this competition was based on a movement the supported a low cost economic fare structure. The £98 fare structure was to make money because the initial infrastructure of this airline lacked huge overhead costs generally incurred by an established airline company like British Airways and Aer Lingus. (Kar, 2006, 188)This was more relevant because the move of economic fare structure was based on the strategy that it was indented to make an entry into an already populated route of air service between London and Dublin with established competitors like British Airways and Aer Lingus. This was the best possible method of penetrating the market by luring the customers with extremely low fare. It is obvious that the £98 fare structure would yield profit because it would have two specific advantages along with being about 50% to 90% lower rate than its competitors.(Fletcher, 2003, 56-57) First, with the lower fare system the company was able to attract better amount of customers and thus was able to penetrate the market which is expectedly advantageous for the long run and secondly, with lower cost infrastructure like lower number of employees the company was able to sustain its position and plough back profit margin in a gradual manner. (Rivkin, 1986, 7) The cost advantage of this company can be enumerated as follows:

(Bhagavan, 2003, 18)

On the other hand it was surely proved to be costly for Aer Lingus and British Airways to retaliate against Ryanair’s entry into the market rather than accommodate it. The Ryanair was to make an entry with a recognizable stamp with their extremely low fare in the market of populated route of air service between London and Dublin surely it would be a challenge for company like British Airways and Aer Lingus to confront it. These present carriers were to respond in a positive approach to counter the advent of this new market entry. It is easily anticipated that the existing company were in a position to allow any substantial price cut to compete with this new entrant in the field of fare structure because Ryanair was already offering a rock bottom fare and price would not be made possible to drop further for British Airways and Aer Lingus. However, the existing companies British Airways and Aer Lingus were to cut prices at least for an eye wash to make a substantial impact on the customers’ impression. Never the less, even this eyewash was to prove costly because for long serving companies like British Airways it is obvious that the cost analysis and the fiscal balance would be demanding for the two companies. With a huge infrastructure and great number of employees it was certainly be difficult for these two companies to cope with the initial coup. (Lamb, 2004, 225-226)

The overall assessment of Ryanair’s launch strategy is clear and absolutely effective. Ryanair’s basic intention was to penetrate an already populated air market. This was risky but profitable if successful. Secondly, Ryanair was trying to access into the existing customer strata of Aer Lingus and British Airways. Thirdly, Ryanair was trying to create a new breed of passengers with its economy price structure. The fourth point enumerates that the new airline company Ryanair was confident enough about sustaining with this price structure. The fifth point could be enumerated as an aggressive market planning as Ryanair was trying to drive away the existing airline companies from having the prime market share of the industry that were already successful in the said field. Next it could be mentioned that Ryanair was looking for a long term market goal and thereby is ready to sacrifice short term profit. It is also true that the company Ryanair was looking for the business traveller section of the market segment which is logical for this specific route. Lastly it could be stated that Ryanair was scheduling itself as a point to point service provider which is logical for a low priced agency. (Lamb, 2004, 231-32)

At this point it would be relevant to mention the response of Aer Lingus and British Airways to counter the advent of Ryanair. Firstly, Aer Lingus and British Airways looked for a price cut to negate the advantage of Ryaair, next, these two companies advertised heavily and banked more on reliability, comfort and class along with incorporating extra services like better food or beverage for example. British Airways installed better security services and a virtually risk free flight for the passengers. British Airways also incorporated better mode of frequency of flight. Alongside these measures British Airways also provided loyalty rewards for the customers. (Dollard, 1999, 79-81)

But it was seen that in spite of huge amount of changes in part of infrastructure from the point of view of these two established airline, especially British Airways, Ryanair was proved to be undaunted by these facts and they became one of the most successful airline services of all time depending on their strategy of economic travel principals. The case study of Ryanair has become an icon for students and teachers alike and continues to be a successful model in the parameters of industrial and management success formulations. This specific case study remains to this day as a ground breaking approach in the world of business studies where a high valued industry like airline business is penetrated mainly on the aspects of low priced and economic fare structures. (Dos, 2006, 178)

Reference:

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Textiles and clothing sector in the EU-25, textile and Clothing industry in the Mediterranean zone

Last update: 16/02/2005, available from http://europa.eu.int/comm/enterprise/textile/euromed.htm

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